SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-K/A





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


EXCHANGE
ACT OF 1934





FOR
THE FISCAL YEAR ENDED JUNE 30, 2010





or





o TRANSITION 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
              (I.R.S.
      Employerincorporation
      or organization)
              Identification
      Number)





23901
Calabasas Road, Suite 2072,


Calabasas,
CA 91302


(Address
of principal executive offices) (Zip code)





(818)
222-9195


(Issuer's
telephone number including area code)





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





COMMON
STOCK, $.001 PAR VALUE


THE
NASDAQ CAPITAL MARKET





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined by
Rule 405 of the Securities Act.


Yes  ̈ No
x





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Exchange Act. Yes o No x





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the 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
x
No  ̈





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes x No  ̈





Indicate
by check mark if  disclosure of delinquent filers in response to Item
405 of Regulation S-K(§229.405) is not contained herein, and will not 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-K
or any amendment to this Form 10-K.





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act (Check one):





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





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).  Yes  ̈ No
x





The
aggregate market value of the Common Stock held by non-affiliates of the
registrant was approximately $24,096,750 based upon the closing price of the
stock as reported on NASDAQ Capital Market ($0.73 per share) on June 30, 2010,
the last business day of the registrant’s fiscal year.  As of September 6,
2010, there were 40,205,421 shares of common stock outstanding and no shares of
its Preferred Stock issued and outstanding.





DOCUMENTS
INCORPORATED BY REFERENCE





(None)





ANNUAL
REPORT


PURSUANT
TO SECTION 13 OR 15(d) OF THE


SECURITIES
ACT OF 1934





EXPLANATORY
NOTE




This Form
10-K/A amends the Annual Report on Form 10-K of NetSol Technologies, Inc. (the
“Company”) for the year ended June 30, 2010 (the “Original Filing”), filed on
September 9, 2010, and as amended in  a Form 10-K/A filed on September
14, 2010.




Except
where indicated in this amendment, this Form 10-K/A continues to describe the
Company as of the date of the Original Filing, and does not update disclosures
to reflect events that occurred after the date of the Original Filing.
Accordingly, this Amendment should be read in conjunction with the Original
Filing and with our other filings made with the Securities and Exchange
Commission subsequent to the filing of the Original Filing, including any
amendments to those filings.





TABLE
OF CONTENTS AND CROSS REFERENCE SHEET





PAGEPART
      IItem
      1
                        Business
                        1Item
      2
                        Properties
                        23Item
      3
                        Legal
      Proceedings
                        23PART
      IIItem
      4
                        Market
      for Common Equity, Related Stockholder Matters and Issuer Purchases of
      Equity Securities
                        24Item
      5
                        Selected
      Financial Data
                        25Item
      6
                        Management's
      Discussion and Analysis and Plan of Operations
                        26Item
      6A
                        Quantitative
      and Qualitative Disclosures about Market Risk
                        40Item
      7
                        Financial
      Statements and Supplementary Data
                        40Item
      8
                        Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
                        40Item
      8A(T)
                        Controls
      and Procedures
                        40Item
      8B
                        Other
      Information
                        41PART
      IIIItem
      9
                        Directors,
      Executive Officers and Corporate Governance
                        41Item
      10
                        Executive
      Compensation
                        45Item
      11
                        Security
      Ownership of Certain Beneficial Owners and Management
      and Related Stockholder Matters
                        59Item
      12
                        Certain
      Relationships and Related Transactions, and Director
      Independence
                        60Item
      13
                        Principal
      Accountant Fees and Services
                        60PART
      IVItem
      14
                        Exhibits
      and Financial Statement Schedules
                        62







PART
I





This Form
10 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”) (NasdaqCM: NTWK) (NasdaqDubai:
NTWK) is a worldwide provider of IT solutions to the global financing and
leasing industry, with world class enterprise software and
services.  As a CMMI level 5 company, a distinction shared by few
companies worldwide, NetSol uses its BestShoring® practices and
highly-experienced resources in analysis, development, quality assurance, and
implementation to deliver high-quality, cost-effective solutions. The Company is
organized into two main revenue areas, consisting of its enterprise solutions
(NetSol Financial Solutions “NFSTM”) for the global financing and leasing
industry and its portfolio of IT based global business services
(“GBS”).  NetSol’s GBS offerings include portfolio management systems
for the financial services industry and, consulting, custom development, systems
integration, and technical services for the global healthcare, insurance, real
estate and technology markets.  NetSol's commitment to quality is
demonstrated by its achievement of the ISO 9001, ISO 279001, and SEI (Software
Engineering Institute, Carnegie Mellon University, USA) CMMI (Capability
Maturity Model) Level 5 assessments, a distinction shared by fewer than 100
companies worldwide. NetSol’s clients include Fortune 500 manufacturers, global
automakers, financial institutions, technology providers, and governmental
agencies.





Founded
in 1996, NetSol is headquartered in Calabasas, California. NetSol also has
operations and/or offices in: Horsham, United Kingdom; Alameda, California, USA;
Beijing, China; Lahore, Islamabad and Karachi, Pakistan; Adelaide, Australia;
and Bangkok, Thailand.





OUR
BUSINESS





In
today’s highly competitive marketplace, business executives with labor or
services-centric budgetary responsibilities are not just encouraged but, in
fact, obliged to engage in “Make or Buy” decision process when contemplating how
to support and staff new development, testing, services support and delivery
activities.  The Company business offerings are aligned as a
BestShoring® solutions strategy.  Simply defined, BestShoring® is
NetSol Technologies’ ability to draw upon its global resource base and construct
the best possible solution and price for each and every
customer.  Unlike traditional outsourcing offshore vendors, NetSol
draws upon an international workforce and delivery capability to ensure a
“BestShoring® delivers BestSolutionTM” approach.





NetSol
combines domain expertise, not only with lowest cost blended rates from its
design centers and campuses located around the world, but also with the
guarantee of localized program and project management while minimizing any
implementation risk associated with a single service center.  Our
BestShoring® approach, which we consider a unique and cost effective global
development model, is leading the way, providing value added solutions for
Global Business ServicesTM through a win-win partnership, rather than the
traditional outsourced vendor framework.  Our focus on “Solutions”
serves to ensure the most favorable pricing while delivering in-depth domain
experience.  NetSol currently has locations in Bangkok, Beijing,
Lahore, London, the San Francisco Bay Area, and Adelaide to best serve its
clients and partners worldwide.  This provides NetSol customers with
the optimum balance of subject matter expertise, in-depth domain experience, and
cost effective labor, all merged into a scalable solution.  In this
way, “BestShoring® delivers BestSolutionTM”.





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,
Independent System Review, Outsourcing Services and Software Process Improvement
Consulting; maintenance and support of existing systems; and, project
management.


1




In
addition to services, our product offerings are fashioned to provide a Best
Product for Best Solution model.  Our offerings include our flagship
global solution, NetSol Financial Suite (NFSTM). NFSTM, a robust suite of five
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 five software applications under NFSTM
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.  NFSTM is
a result of more than eight years of effort resulting in over 60 modules grouped
in five comprehensive applications. These five 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
NetSol Financial SuiteTM also includes LeasePak.  LeasePak provides the
leasing technology industry with 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.  In terms of scalability, NetSol Technologies North America
offers the basic product as well as a collection of highly specialized add on
modules for systems, portfolios and accrual methods for virtually all sizes and
complexities of operations. 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.





Our
product offerings and services also include: LeaseSoft Portals and Modules
through our European operations; LeasePak 6.0b of our NFSTM product suite;
enterprise wide information systems, such as or LRMIS, MTMIS and Hospital
Management Systems; Accounting Outsourcing Services, and, NetSol Technology
Institute, our specialized career and technology program in
Pakistan.





To
further bolster NetSol’s Solutions capabilities, in October 2008, NetSol
acquired Ciena Solutions, a preferred SAP and Business Objects integration firm.
The Ciena Solutions practice is now integrated into our wholly owned subsidiary,
NetSol Technologies North America, Inc.  This acquisition expanded
NetSol’s domain and subject matter expertise to include integration and
consulting services for:


·
            SAP
      R/3 System deployments


·
            NetWeaver


·
            Exchange
      Infrastructure Portals


·
            MySAP
      Business Suite


·
            Supplier
      Relationship Management Module


·
            Client
      Relationship Management Module


·
            SAP/Business
      Objects Products and related
Services





In
addition to this expansion of SAP-centric integration consulting and services,
this practice has developed proprietary intellectual property in the form of
designs and source code focused on enhancing SAP-centric procurement
activities.





The
introduction of a major new product, smartOCITM, has emerged from this
integration.  smartOCITM is a new search engine technology developed by
NetSol which provides corporate buyers and shoppers a simple and intuitive user
interface to search multiple supplier catalogs simultaneously within the SAP SRM
application.  The launch of smartOCITM at the SAP SAPPHIRE Conference
in Orlando, Florida, targeting approximately 1,000 SAP SRM platform customers
has the strengthened NetSol’s presence in the global SAP Services
market.




The
Company continues its efforts to reduce redundancy and cohesively present
services and product operations on a global basis. This consolidation enables
the Company to coordinate and streamline product, service and marketing while
taking further advantage of the cost arbitrage offered by our highly trained,
highly productive, Pakistani resources.  This consolidation follows
the successful integration of the operations acquired in the United Kingdom and
the San Francisco Bay Area in California and facilitates the use of these
regional offices as platforms for presenting an expanding services offering,
relying on the experience and resources in Pakistan and our product offerings in
North America and Europe.


2


While the
Company follows a global strategy for sales and delivery of its portfolio of
solutions and services, it continues to maintain regional offices in the San
Francisco Bay area, California for North America and the parent headquarters in
Calabasas, California; Horsham, United Kingdom, for Europe; and, our “center of
excellence” operation in Lahore, Pakistan for Asia Pacific. The Company
continues to maintain services or products and specific sales offices in
Australia, China, Thailand and Pakistan and in any other country on an as needed
basis.





Our
Services





Global
Business 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’s Global Business Services (GBS)TM 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. GBSTM includes IT
Consulting & Services; NetSol Defense Division; Business Intelligence,
Independent System Review (ISR); Information Security, Outsourcing Services and
Software Process Improvement Consulting; maintenance and support of existing
systems; and project management.





As part
of the Company’s GBSTM strategy, each subsidiary adheres to the BestShoring®
provides BestSolutionsTM model.  Each subsidiary expounds on that model
by providing services unique to their client base.  The development of
solutions for clients has resulted in the development of vertical offerings
catering to various industries and accordingly, diversifying NetSol’s
offerings.  As an example, these verticals have been used successfully
in Pakistan to provide services for the Motor Transport Management System, Land
Record Management System, Legislature, Healthcare, computer based
trainings/e-Learning, E Government and Defense.





Business
Intelligence (BI) solution providers must have both the capability to service BI
customers using its own resources but also service the customers’ international
affiliates.  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,
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 needs 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.





Independent
System Review (ISR) is a key emerging service area for NetSol.  In
delivering high quality independent review of software systems running, or under
deployment, at client sites, NetSol leverages its rich quality assurance
experience in customization and implementation, as well as application
development in finance and other domains.  It employs a range of
automated quality assurance tools in providing independent assurance to
customers regarding the reliability and performance of their new software
systems.  The actual testing may be performed both onsite and offsite
for the clients.





An ever
growing awareness of highly publicized IT Security problems, coupled with
greater demands by international business partners, has led the movement of
companies world-wide towards compliance with internationally recognized
Information Security Systems standards.  Information Systems Security
or Information Assurance applies to all systems in all departments of an
organization whether on a computer disk, paper or in the heads of
employees.  Information Security services is provided by NetSol’s
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).  INFOSEC services
include:  managed security services; BS-7799/ISO 27001 Consultancy,
Information Security Assessment, Penetration Testing and Vulnerability
Assessment; Disaster Recovery Planning; and, Secure Network
Design.    The INFOSEC group has launched a new project,
Secure Pakistan.  The project aims to secure critical information,
while in storage or in transfer, from theft.  Secure Pakistan is
developing IT service labs for forensic investigation, CERT (Computer Emergency
Response Team), 24/7 security surveillance, and cyber crime awareness
training.    INFOSEC is partnered with global giants
including IBM Internet Security Systems and Kaspersky Labs.  The
Company hopes to extend its INFOSEC offerings to the Middle East through its
Atheeb NetSol joint venture in Saudi Arabia.




3




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.  The services include: consultancy, facilitation services
and implementation support for CMMI appraisal, all of these activities are
broadly developed under the guidelines of SEI based CMMI processes as well as
the information security consulting practices.  Currently, NetSol is
amongst the few companies authorized by Pakistan Software Export Board (PSEB)
for CMMI and BS7799/ISO 27001 consulting practices in Pakistan.





Our most
successful outsourcing model has been our joint venture with Innovation Group
plc (previously referred to as “TiG”), known as NetSol Innovation Pvt. Ltd
(“NetSol-Innovation).  The Extended Innovation model is discussed on
page 13 of this report.  We are parlaying the success of
NETSOL-INNOVATION into our new joint venture with Atheeb Group for the Middle
Eastern market.  The Atheeb joint venture is discussed on page
13.





The
NetSol Defense Division (NDD) was founded in 2005 to take advantage of its
coordination with the Pakistani Defense Sector.  NDD specializes in
providing solutions for improvement and optimization of operations of the
defense and military forces.  With a unique blend of experienced and
highly skilled IT specialists and managers, and most importantly the domain
experts from the Defense Sector itself, NDD has the critical task of ensuring
that the solutions provided are focused and need-specific to the requirements,
as well as the technological advancements, in the sector around the
globe.  Operating through the NDD R&D Lab, which is strategically
located in Rawalpindi, for closer coordination with various defense
organizations stakeholders and to establish an operations center and simulation
lab, NDD is involved in R&D activities, as well as project management for
various on-going and potential projects.





Our
Products





NetSol
Financial SuiteTM





The
Company develops advanced software systems for the lease and finance industries.
In addition to services, our product offerings are fashioned to provide a Best
Product for Best SolutionTM model.  Our offerings include our flagship
global solution, NetSol Financial Suite (“NFS”)TM, a robust suite of five
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 Company’s over eight years of effort
resulted in over 60 modules grouped in five comprehensive
applications.  The five software applications under NFSTM 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. When used together, they fully automate the
entire leasing / financing cycle.




The constituent software
applications are:




·           Point
of Sale (POS).  POS is a front office processing system for companies
in the financial sector.  It provides a quotation system which also
incorporates a simulation for all kinds of financial products using a built-in
loan calculation.  POS includes a proposal module which gathers all
the required information from the customer in order to create finance or leasing
contracts.  POS boasts a document management module which manages all
the documents required in making the contract, such as bank statements and
identity information.  POS incorporates a workflow engine that ensures
smooth transition of tasks and streamlines the processes. POS can work as an
independent web-based system for all types of financial institutions including,
but not limited to banks and finance companies.





·           Credit
Application Processing System (CAP). 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 automated workflow permits the credit team members to
make their decisions more quickly and accurately. Implementation of CAP
dramatically reduces application-processing time in turn resulting in greater
revenue through higher number of applications finalized in a given time. CAP
reduces the probability of a wrong decision thus, again, providing a concrete
business value through minimizing the bad debt portfolio. 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
CAP. It can be run from any PC with normal specifications, which is a key
benefit for clients.




·           Contract
Management System (CMS).  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. 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 CMS provides business functionality for all areas that are required to
run an effective, efficient and customer oriented lease and finance
business.


4




·           Wholesale
Finance System (WFS).  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.  A separate online add-on module, Dealer &
Auditor Access System (DAS), allows dealers to view their outstanding limits and
current asset-wise balances through an interface with the finance
company.  WFS consists of the following four
modules:  Credit Request Management Module (CRM); Loan Management
Module (LMS); Stock Auditing Module (SAS); and Billing & Settlement Module
(B&S).




·           Fleet
Management System (FMS).  FMS is designed to efficiently handle all
fleet management needs.  FMS is easily integrated with CMS 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.




Implementation
Process





The
implementation process normally spans 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 team goes
to the client site to study the client’s business and functional requirements
and maps them against the existing functionality available in NFSTM. With the
maturing of our products, free requirement studies tend to yield few, if any
gaps.  The development cycle that follows the gaps analysis takes
place through our development facility in Lahore.   The highly
parameterized NFSTM solutions are configured to meet the clients’
requirements.    This is followed by thorough testing, which
takes place at our development facility, although some of these steps may also
be carried out at the clients’ locations.  Based on successful
testing, the system is installed at the client’s site.  When required,
this involves migration of data from an older system to the NFSTM
database.  Successful installation is followed by user and
administration training.  Both functional and business users are
involved.  After training, user acceptance testing is conducted, where
client’s nominated staff, along with NetSol consultants, tests the system
against business requirements.   Upon acceptance, the system is
then considered ready for normal business use. NFSTM provides mission critical
software solutions, and the entire business operations of our clients hinge on
successful 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. NetSol’s
involvement in all of the above steps is priced to bring value to our customers
and increase our profitability from our interactions.





Pricing
and Revenue Streams





The
company’s NFSTM revenue streams occur through the following three main
areas:  product licensing, implementation related services, and
maintenance and support related services.  License fees can vary
generally between $500,000 to 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 customer; 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 collectability is probable.  However, revenue from
sale of licenses with major customization, modification, and development is
recognized on a percent of completion basis.  Implementation related
services, including gap analysis, user acceptance testing (UAT) and data
migration (where required) are recognized in accordance with the percentage of
completion method.  Maintenance and support related services are then
provided on a continued 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.


5





Growth
Prospects for NFSTM





As a
marketing strategy, NetSol is developing lighter solutions with NFSTM to target
companies with simpler business models. NFSTM is highly modular.  Hence
various sets of functionalities can be used against the restricted requirements
of the client.  NetSol has also provided the option of using NFSTM on
subscription and pay per use bases to those organizations that are small in size
or have small turnover.





An
important component of the growth strategy for NFSTM is to extend its customer
base to include newer geographic markets. Al Amthal Leasing provided an
excellent entry into the Middle East market.  The Company is planning
to build on this step in a major way through its Saudi Arabia joint venture,
Atheeb NetSol Ltd. After the completion of the entity formation in May 2010, the
newly appointed management of the joint venture have started to market the
business offerings in the Kingdom of Saudi Arabia (“KSA”). The company has a
first year strategy to focus on NFSTM global customers that have a presence in,
or are based in, KSA. This is a young market for leasing and financing market
and NetSol is potentially the only IT company with expertise in this
space.





In its
existing markets, NFSTM is already establishing itself as a leading product
catering to the business needs of major blue chip companies. Its current client
base includes Mercedes Benz Financial Services (Australia, Japan, New Zealand,
Singapore, South Korea, Thailand, China and Taiwan), Yamaha Motors Finance
Australia, Toyota Motors Finance China, Toyota Leasing Thailand, Finlease
Commercial Bank of Mauritius, CNH Capital Australia, Fiat Automotive Finance
China, Dongfeng Nissan Auto Finance China, Nissan Financial Services Australia,
BMW Financial Services in China, Volvo Automotive Finance China, EFG Euro Bank
Greece and Al Amthal Leasing Saudi Arabia and Minsheng Bank Corp
China.





In
addition to the confidence of its customers, the product has also won a major
regional award, the Asia Pacific ICT Alliance Award for the best financial
application for the year 2007. This prestigious award is testimony to the
maturity and quality of NFSTM.





Our
Operations





Asia
Pacific





NETSOL
PK





Our
off-shore development center, and indeed the center of the Company’s services
and software operations, is headed by Salim Ghauri, Director, former President
of NetSol and current Chief Executive Officer of NetSol Technologies Limited
(“NetSol PK”) (the Company’s Pakistan subsidiary).  The Asian
continent, Australia/New Zealand, and the Middle East, from the perspective of
NFSTM marketing, are targeted by NetSol Technologies from its Lahore subsidiary,
its offices in 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 focus solely on software development and engineering.





This
year, NetSol PK has continued to provide 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.  Its clients
include private as well as public sector enterprises.





Global
Business Services





As part
of the Company’s Global Business ServicesTM strategy, each subsidiary adheres to
the BestShoring® provides BestSolutionsTM model.  While NetSol PK is
the center of the Company’s global services offerings, the services provided by
NetSol PK further expound on that model and other services unique to NetSol
PK.  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.   Over the past
four years, NetSol PK has been actively involved in the e-government domain
helping federal and provincial governments of Pakistan and other public sector
organizations.  Major projects include:  Electronic Credit
Information Bureau; Office Automation of the National Assembly & Senate and
Prime Minister’s Secretariat; such turn-key solutions as the Automation of the
Hajj wing, and, Automation of the Karachi Patent Office.  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, Healthcare, computer based trainings/e-Learning,
E Government and Defense.


6





Products





In
addition to NFSTM, which has a global reach, NetSol PK has developed several
products for use in Pakistan for the purpose of automating the country’s vital
processes.  While developed for this particular market, the products
may be used in other countries or for other customers.





LRMIS





In an
agricultural country like Pakistan, land is the primary source of revenue. Land
records are currently maintained manually so there is no consistency, accuracy
and timely availability of the required record. According to a joint report by
National Database and Registration Authority (NADRA), Pakistan and World Food
Program (WFP), Pakistan, this existing land revenue management system is more
than two hundred years old and is not fulfilling the changing demands of time
and new local governance system of devolution properly.





A well
planned solution requires easy identification, access, smooth data entry and
complete tracking of the entered transactions. With the growth and usage of "e"
in contemporary business practices, new challenges have emerged in managing
secure access to the authentic data and e-resources, which are scattered across
a wide range of internal and external computing systems. This challenge needs
quick address in today's competitive economic scenario wherein intellectual and
knowledge capital directly translates into exponential growth for the
country.





NetSol’s
LRMIS is a thin, client web based solution and developed after thorough
evaluations of existing manual system and client/user needs, detailed system
analysis and process flow definition. It ensures that only authentic employees
and individuals can access the application on the privileged areas assigned by
the administrator over the internet/Intranet. NetSol has obtained the pilot
project for LRMIS, a World Bank funded initiative. NetSol PK has been actively
pursuing new projects in various provinces through public tendering process and
will report when they become material.





NetSol
understands the power of information and complexity of land record system and
the user/client needs. For this purpose, NetSol provides its LRMIS by combining
technical, operational and domain expertise with proven approaches of analysis,
plan, design and implementation to provide an effective solution using
IT-enablement in a field where its need its hugely felt.





MTMIS





A few
years ago, NetSol PK took the initiative to invest into the Motor Transport
domain (“MTMIS”_. Starting with a small implementation, today NetSol has
multiple implementations in several parts of the country with ample
opportunities available in the future. MTMIS is a customized application
envisioned and developed wholly by NetSol as an end-to-end solution of citizens’
vehicles security and information management. Project implementations include
the Provinces of Punjab, AJK and NWFP alongside Islamabad Capital Territory.
Future opportunities exist in Baluchistan and Sindh for this solution. The
system has provision for onsite access to the traffic police records via PDAs
and smart cards, onsite verification of any vehicle’s environmental friendly
status and road side authorization of driver licenses.





It is
significant to note that while in developed countries the elements of the system
lie in “islands of data” under  various authorities and geographical
domains and have been linked together to create the central data warehouse; the
NetSol solution is the first concept and proven practical solution for the
emerging and developing countries. It enables an approach, which seeks to
introduce and implement the different elements or modules as an integrated and
total solution, in which modules have been clearly designed to work
independently but enmesh and provide the complete management and administration
environment.





HOSPITAL
MANAGEMENT INFORMATION SYSTEM.





The
global healthcare industry is growing at a fast rate and is one of the areas
that have the most urgent need of automation. NetSol understands this need and
has developed a strategic collaboration with Shaukat Khanum Memorial Cancer
Hospital & Research Center, Lahore as part of a long term commitment for IT
development in the global Health Sector.


7





Our
system is designed to provide the capability to overlay, analyze, design and
reengineer the core of the healthcare processes with a business process
management (BPM) suite, encompassing the rules and responsibilities in a manner
which facilitates change, new rules, process variations, and scale of
deployment, best summarize our combined approach.





NetSol
regularly works to fulfill its role as a technology partner of the Shaukat
Khanum Memorial Cancer Hospital & Research Centre for a solution that will
act as an automated, secure and integrated solution for any hospitals’ clinical,
financial and management needs. First implementation is currently underway for a
hospital for the armed forces.  NetSol’s system includes a clinical
module (including outpatient and inpatient management, physician and order
management, pharmacy management, radiology, nuclear medicine, pathology and
operation theater management); an administrative module; a financial module;
and, a research module.





Corporate
Social Responsibility





NetSol
believes it should give back to the community and employees as much as
possible.  Therefore, approximately six programs have been established
either in Pakistan or on a global basis to achieve this goal.





Pakistan
Flood Relief. - - The devastation and long lasting effects of the recent Monsoon
floods in Pakistan, the worse in 80 years, has resulted in the establishment of
a fund raising effort both in Pakistan and by our employees
worldwide.  The program permits our employees to pledge up to 2% of
their salary, through direct salary deduction each month, to relief
efforts.  NetSol has committed to matching these contributions up to
the percentages stated and to commit all funds to relief and rescue agencies
operating in affected areas. Most of the NetSol PK employees have signed up for
this program. Senior company executives have committed as much as 10% of their
salaries to this cause.  Employees in countries which provide tax
benefits for charitable contributions also have the opportunity to donate
through recognized tax-exempt relief agencies with company matching
contributions.





Literacy
Program--NetSol has launched a “Literacy Program” to educate low paid illiterate
employees of the organization. The main objective of this program is to enable
these resources to acquire basic reading, writing and arithmetic skills. The
first phase of the plan is nearing completion with astounding accomplishments;
the people who could not even write a single word are now able to write complete
letters within a span of 6 months. This initiative has been extremely successful
and NetSol intends to further support this program.





Noble
Cause Fund--A noble cause fund has been established to meet medical and
education expenses of the children of the low paid employees. NetSol employees
voluntarily contribute a fixed amount every month to the fund and the Company
matches the employee subscriptions with an equivalent amount contribution. A
portion of this fund is utilized to support social needs of certain institutions
and individuals, outside NetSol.





Day Care
Facility--NetSol’s human resources are its key assets and thus the company takes
numerous steps to ensure the provision of basic comforts to its employees. In
Pakistan, the provision of outside pre-school child care is a
rarity.  Recently, a Child Day Care facility has been created in close
proximity to the work premises equipped with the necessary essential staff and
equipment. Married female employees are offered the opportunity to entrust
complete care of their young ones to a trained and experienced staff. Child day
care allows female employees to pay unhindered focused attention to work
requirements while their child remains safe and comfortable. The premises and
environment are neat and clean with all basic needs fulfilled to ensure complete
care of the children.





Preventative
Health Care Program--In addition to the comprehensive out-patient and in-patient
medical benefits, preventive health care has also been introduced. This phased
program focuses on vaccination of our employees against Hepatitis – A/B,
Tetanus, Typhoid and Flu, etc. This is a regular annual immunization program to
keep employees healthy.





NetSol
Corporate University-- NetSol Corporate University (“NCU”) was established for
developing human resources at NetSol. A need was felt to further develop and
retain the talent at hand through strategic learning interventions to respond to
growing competition and challenges.





The
mission of NCU is:


§
            To
      discover, develop, and deploy the talent at
  NetSol


§
            To
      nurture leadership in people and
processes


§
            To
      explore and develop capable backups for positions critical to
      organizational continuity


8





NetSol
office in Beijing, China





As part
of our growth strategy and in view of the desire to better serve our markets,
NetSol established a sales office in Beijing, China.  This office is
both a sales and marketing location and a liaison office for the Company’s
ongoing operations and implementation services for Daimler Financial Services,
BMW and other clients in the country.  The office is managed by NetSol
PK.  While western markets have suffered tremendously due to the
severe recession, the Chinese markets have held up.  Due to the
growing demand for NetSol’s NFSTM offering in China, we have hired local Chinese
staff in addition to the Pakistani staff to support the demand
surge.





NetSol
Bangkok, Thailand





To
further strengthen our presence in the Asia-Pacific market, and to provide
exclusive services to our clients, the Company recently formed an Amity Treaty
Company in Thailand with an office in Bangkok.  This support office’s
core responsibilities are to enhance business through targeting potential
customers and providing technical support to the Company’s existing clients in
Thailand.





The
Americas





NETSOL
TECHNOLOGIES NORTH AMERICA, INC.





The
operational assets of NetSol Technologies North America, Inc. (“NTNA”) were
initially integrated into the Company in 2006 as a result of the acquisition of
McCue Systems, Inc. The division has been restructured and reorganized both at
the management and business levels with several new senior sales and marketing
personnel replacing less senior personnel in the third and fourth quarters of
2009.  The US subsidiary is headed by Mr. Imran Haider, COO. He has
been with NetSol for over 8 years with an internationally proven track record in
sales, marketing, and project and client relations management. Mr. Haider is a
domain expert in NetSol core business offerings. NTNA is a very significant
component of the global NetSol Group. In the wake of the recent recession, we
embarked on strategic restructuring of NTNA. The successful concept of global
delivery capabilities was implemented in NTNA to best leverage NetSol’s
BestShoring®. This integration coupled with the optimum utilization of technical
teams in NTNA and globally, makes us better equipped to provide best results to
our clients worldwide with improved gross margins.





The NTNA
sales and marketing efforts have been combined with the global sales group. This
approach has brought new dimension and business visibility to the entire sales
and marketing organization. This further strengthens the cross selling and
global resource mobilization to better serve our customers anywhere in the
world.





NTNA
provides client requirement-based solutions across multiple technology
practices, in both the public and private sectors, with the largest practice
being the leasing technology vertical. NTNA offers 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.  NTNA’s product, LeasePak, can
be configured to run on HP-UX, SUN/Solaris or Linux, as well as for Oracle and
Sybase users.  For scalability, NTNA offers LeasePak 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 Nissan Motor
Acceptance Corporation, Nissan Renault Finance Mexico, Hyundai Capital of
America, JP Morgan/Chase Equipment Finance, Key Equipment Finance Group, City
National Bank, Terex Financial Services, Provident National Corporation., IBM
Global Finance, Cisco System Capital, Marshall & Ilsley Equipment Finance
Company, Bank of Tokyo-Mitsubishi &  UFJ Group, Baxter Health
Care, Bank Of Hawaiian, Gordon Flesch Company, First Hawaiian Bank, Ford Motor
Credit, Yamaha Motor Corporation, JK Capital and Volkswagen Credit.





Global
Business Services





NTNA has
released a full suite of Global Business ServicesTM outsourcing services and
customized development solutions, initially focused on the North American
equipment finance technology market. The services offering leverage 30 plus
years of equipment leasing and lending experience. While the division has long
offered NTNA customers a range of business process engineering services, the new
offering package expands the menu of available services to meet market needs.
Offered services 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 Global
Business ServicesTM 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.


9


In
leveraging the Company’s global footprint, blue chip customer base and
BestShoring® initiatives, we believe NTNA provides an integrated North American
presence to our global offering of software and services based solutions 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.





To
further bolster NetSol’s Solutions capabilities, in October 2008, NetSol
acquired Ciena Solutions, a preferred SAP and Business Objects integration firm.
The Ciena Solutions practice is now integrated into our wholly owned subsidiary,
NetSol Technologies North America, Inc.  This acquisition expanded
NetSol’s domain and subject matter expertise to include integration and
consulting services for:


·
            SAP
      R/3 System deployments


·
            NetWeaver


·
            Exchange
      Infrastructure Portals


·
            MySAP
      Business Suite


·
            Supplier
      Relationship Management Module


·
            Client
      Relationship Management Module


·
            SAP/Business
      Objects Products and related
Services





In
additional to this expansion of SAP-centric integration consulting and Services,
this practice has developed proprietary intellectual property in the form of
designs and source code focused on enhancing SAP-centric procurement
activities.





smartOCITM





The
introduction of a major new product, smartOCITM, has emerged from this SAP
integration.  smartOCITM is a new search engine technology developed by
NetSol which provides corporate buyers and shoppers a simple and intuitive user
interface to search multiple supplier catalogs simultaneously within the SAP SRM
application.  The launch of smartOCITM at the SAP SAPPHIRE Conference
in Orlando, Florida, targeted approximately 1,000 SAP SRM platform customers,
strengthening NetSol’s presence in the global markets for SAP
Services.





NFSTM
- LeasePak





As part
of NetSol’s Financial Suite (NFS) TM of products, NTNA has and continues to
develop the LeasePak Productivity modules as an additional companion set of
products to operate in conjunction with the LeasePak licensed
software.  LeasePak handles every aspect of the lease or loan
lifecycle, origination, booking, payments, customer service, collections,
midterm adjustments, and end-of-term options. LeasePak provides tracking modules
to manage critical stages of the lifecycle, allowing users to process work using
fully customizable queues. LeasePak includes an extensive collection of reports
including origination and portfolio management; transaction, general ledger, and
detail balance accounting; property, sales, and use tax; and asset financial
management. 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 early
2010, LeasePak 6.2A was released for general availability and has gone into
production.   LeasePak has 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, Link IT
streamlines application integration and reduces version-maintenance
overhead.  The integrated document generation for LeasePak Doc IT
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. LeasePak's mPower module is a gateway that enables brokers,
dealers, vendors and remote salespeople to utilize LeasePak’s origination
functionality via the web.  mPower users can have web access to
LeasePak functions, via specially designed screens.





With the
release of LeasePak 6.2A, users have new options for navigation and
reporting.  New capabilities have been incorporated into the
product:  Business Development Module which streamlines the exchange
of aggregated finance contract portfolios between LeasePak users; Commercial
Lending Module which adds core functionality for the management of commercial
loans; and, Asset Focus Module which provides new options for users to enhance
asset accounting and reporting options.


10





New
Functionality in LeasePak 6.2A can be categorized into 3 groups:





Enhancement
Base System:   LaunchPad for LeasePak, Customizable
Lease/Lessee  Summary Screen, LeasePak Password Security Enhancements,
Tax Rate Override Enhancement, Historical General Ledger Names/Numbers, Asset
Cost Recalculation, Increased Number of General Ledger Accounts, Remaining
Payments Count , Prepayment of Suspended and Matured Leases, Multi-Asset
Maintenance & Redesign Enhancement, Redesign UCC portion of U0230, Multi-
Lease Insurance Maintenance, Leases accrual reversals utility, LP Utility to
Generate Lease Level Forecasting Report, Lease Accrual Utility.





Enhancement
- Modules:    Interest Bearing Loan Module, Batch
Application Module, Vertex Subscribers, Commercial Loan Module, Sales Tax on
Assessments, Workflow Tracking Modules, Collections Module, Workflow Tracking
Modules, Cost Per Use Module, Enhanced Payments, Batch Payments, Off Lease
Billing Module, Base System, Electronic A/R (PAP/ACH), Recurring Charge Payment
Schedule Module, Batch Assessments.





New
Modules:    Asset Focus Module, Client Based Billing, Unused
Funds Fee, Like Kind Exchange and Relationship Tree.





NFSTM
- Wholesale Finance System (WFS)





NFSTM -
WFS - DAS is an excellent software solution for finance companies and dealer
bodies to manage Floorplan Financing. This software has been doing very well in
the Asia Pacific region and as a matter of fact is the market leader in the
Floorplan financing space in People’s Republic of China. In 2009-2010, NetSol
successfully launched NFS-WFS software in North America. Its first
implementation went live at Nissan Renault Finance Mexico in November 2009. The
solution is successfully running the business of the organization.  As
part of the project, and after being put in production, NetSol also enhanced the
software in many areas to address North American requirements. With the first
NFS-WFS site up and successfully running, NetSol will be eagerly marketing and
selling this new offering in North and South America.





NFSTM -
WFS - WholeSale Finance System can be broken down into four
modules.





Credit
Request Management: The CRM module allows defining of credit limits for
different asset categories for each dealer. CRM also allows monitoring the
variation in credit limits. Loans are approved within the defined credit limits.
These limits can be revised as per the change in requirements.





Loan
Management System: LMS starts from capturing new stock (Asset) information and
ends at the sale of a particular asset. Loan approval, payment to supplier, sale
of the unit, discounts on dealer margins, tax, repayment, adjustment and
cancellation are all a part of the LMS module.





Billing
& Settlement: The billing process covers the processing of various types of
invoices, such as daily invoices, monthly invoices and on demand billing. The
settlement process provides the flexibility to settle receipt selectively or
automatically. Accounts receivable is also managed though this
module.





Stock
Audit Scheduling: This module helps to maintain an up-to-date status of units on
any given dealers floor plan. Auditors are provided the latest stock list
through the system and are required to check each stock physically. SAS
facilities exporting dealer stick list to MS excel and also uploading audit
results to the system.





NFSTM -
DAS - Dealer & Auditor Management System. DAS is a web based which can be
used in conjunction with WFS or any third party wholesale finance system. The
system can be broken down by the type of user accessing the system.





Dealer
Access:  The dealer access category allows dealers to perform a number
of tasks including, viewing their Wholesale summary, Invoices, Stock List,
Credit Status, Curtailments, Receipts, Settlement status, Asset Transfer Status
and New Stock Status.





Distributor
Access: The distributor access category facilitates distributors to view each
dealers, Wholesale stock situation, Outstanding invoices, Credit limit status,
Account receivable and Units on a dealer’s Floor plan.


11





Auditor
Access: The auditor access category facilitates auditors to: schedule, conduct
and view audits, audit results can be entered in the system and accessed for
viewing, cross- checking and editing purposes.





Europe





NETSOL
TECHNOLOGIES EUROPE, LTD.





Headed by
Naeem Ghauri as Director and President, NetSol Technologies Europe, Ltd (“NTE”)
has been an integral part of the Company since February 2005 when NetSol
acquired 100% of CQ Systems Ltd., an IT products and service company based in
the UK.  This acquisition provides NetSol with access to a broad
European customer base using IT solutions complementary to NetSol’s LeaseSoft
product. NetSol has leveraged NTE’s knowledge base and strong presence in the
Asset Finance market to launch LeaseSoft in the UK and continental
Europe.  Under Mr. Ghauri’s leadership as head of Global Sales, NTE’s
strong sales and marketing capability is being maximized as the coordinator of
global sales.





Products





NTE’s
recent LeaseSoft win with a major European bank is a strong vindication of our
strategy to leverage our global expertise to develop and market regional
solutions while successfully servicing our clients’ specific needs. Our
LeaseSoft solutions, with enhanced business coverage for the European markets,
are geared to provide a quick return on investment to our clients as well as
generate a new revenue driver for the group. The new European LeaseSoft
multi-product portfolio has gathered strong initial traction, in a relatively
short time, and reflects the growing strength of our product and customer
presence in Europe.





A part of
NTE’s successful 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 the NTE product suite and most of the quality assurance,
documentation and some of the NTE products core software development activities
have been transitioned to Lahore.  NTE 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.





Like all
NetSol companies, NTE 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 NTE came from products
which did not exist when the company 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.  NTE’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 NTE has
implemented.





In
addition to offering all NetSol products, NTE products include: 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 outbound 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; and, Evolve- launched to provide an entry level
software package for own book brokerages and small to medium size
funders.





NTE has
recently performed significant updates on the core product and customer systems
to ensure compliance with the onerous CCA2006 legislation.  NTE has
further implemented significant development enhancements, including a major
development for the collections module with significant automation of the
arrears handling and collections.


12





Organic
Growth, Alliances and Joint Ventures





Outsourcing
Services-NetSol-Innovation





In
November 2004, the Company entered into a joint venture agreement with the
Innovation Group (formerly referred to as TiG) NetSol-Innovation (Pvt) Ltd.,
(“NetSol-Innovation”), a Pakistani company, provides support services enabling
the Innovation Group to scale solution delivery operations in key growth
markets. NetSol-Innovation 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 the Innovation Group and
NetSol involves services pertaining to business analyses, configuration,
testing, software quality assurance (SQA), technical communication as well as
project management for development software for the Innovation
Group.  Today, NetSol has developed extensive expertise across the
insurance domain and has become a center of excellence.





Initiated
with a 10 person outsourcing team in Lahore in February 2005, this arrangement
has extended to 100 persons with the additional resources catering to the
increased influx of outsourcing of configuration and testing assignments from
the Innovation Group. Prominent Innovation Group’s customers being serviced from
Lahore include JM Family Enterprises USA, 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 allows NetSol's
human resources to efficiently and effectively respond to additional outsourcing
and offshore configuration work.





NetSol
Atheeb Group, Ltd.





NetSol
has forged a new joint venture with the Atheeb Group, a very established and
diversified business conglomerate based in Riyadh, Saudi Arabia whereby NetSol
owns 51% and Atheeb own 49% of the joint venture. Atheeb Group was established
in 1985 in Kingdom of Saudi Arabia and is operating in several business sectors
in the Middle East.  The Atheeb NetSol Limited joint venture focuses
on market development opportunities around penetrating the software engineering
arena in key business sectors such as telecommunications, defense, and finance,
among others. Atheeb NetSol Limited will leverage the strength of Atheeb’s local
presence in key geographies where Atheeb is operating as well as supporting
private, public and governmental customer business activities. NetSol will
provide best practices project management and the comprehensive delivery
capabilities of its CMMI Level 5 certified Center of Excellence for software
engineering, research and development, as well as customer support and
training.




Growth
through Establishing Partner Networks




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.





NetSol is
a member of the world’s largest equipment leasing association, the Equipment
Leasing and Finance Association of North America, or ELFA.  Boasting
more than 1,000 members, the ELFA is a strong presence in the $250 billion North
American market.





While not
a current focus, the Company will 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; provide
additional, and cost effective development hubs, 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 our recent acquisitions.  Management believes this
model can be replicated over the next three years.


13


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
      Microsoft Gold Partner


·
              IBM
      Business Partner


·
              Sun
      Microsystems


·
              HP
      DSPP Partner


·
              Daimler
      Financial Services


·
              Innovation
      Group PLC UK


·
              GE


·
              Software
      Engineering Institute


·
              Kaspersky
      Lab


·
              SAP


·
              Business
      Objects


·
              IBM-Internet
      Security System


·
              REAL
      Consulting


·
              Intel
      Solutions Blueprint





U.S. and
UK partners include Neptune Software, plc; Real Consulting; Field Solutions;
Group 88 and Lease Dimensions.





Daimler
Financial Services (“DFS”) 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 PK are
supporting DFS companies in seven different countries in Asia and this list can
increase as other DFS companies from other countries may also opt for
LeaseSoft.  In July 2008, the Company entered into a new Frame
Agreement with Daimler Financial Services AG (“DFS”) for the Asia Pacific and
Africa region.  This agreement, which serves as a base line agreement
for use of the LeaseSoft products by DFS companies and affiliated companies,
represents an endorsement of the LeaseSoft product line and the capabilities of
NetSol to worldwide DFS entities. This continued 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 DFS and has served as a marketing source which has resulted
in agreements with companies such as Toyota and BMW.





NTE’s
strategic relationship with Field Solutions provided the Company with the
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.





Technical
Affiliations





The
Company currently has technical affiliations such 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 and services offerings in 2010 and
beyond.  The Company is aggressively growing the marketing and sales
organizations in the United Kingdom, in conjunction with NTE, in Pakistan with
NetSol PK and, with NTNA in the Americas.  The calendar year 2009 was
the most turbulent year for the US and global economies due to the severe
recession.   NetSol plans to invest in its marketing efforts to
make the most of renewed prospects emerging from last year’s
recession.    The Company has used this downturn to its
advantage by expanding sales and marketing operations in the US, China, Middle
East and Asia.  Significant progress has been made in branding NetSol
as one company worldwide with a uniform image and recognition. 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,
software solutions and business process outsourcing.  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.


14





Although
a few planned initiatives were abandoned due to decline in sales, selective 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 few years,
the number of solutions 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 NTNA
and NTE brands to the Company as a whole.





Our
dedicated marketing personnel, within the geographical 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.





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 the Asia Pacific region. NetSol took the initiative as the first US
NASDAQ listed company to dual list on the NASDAQ Dubai exchange in Dubai.
Although UAE markets suffered the impact of recession, this move was primarily
to introduce NetSol to the potential of the most capitalized Middle Eastern
countries. By design, NetSol has increased its brand recognition in one of the
most vibrant and dynamically growing regions.





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 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 LeasePak and LeaseSoft in USA
and Canada is carried out directly by the North American division.





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


15


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











2010
                
                
                2009Asia
      Pacific Region (NetSol PK, NetSol-Innovation,  Connect,
      Thailand, Abraxas)
                
                
                70.82
                %
                
                
                64.90
                %Europe
      (NTE, UK Ltd.)
                
                
                13.88
                %
                
                
                14.69
                %North
      America (NetSol Technologies, Inc., NTNA)
                
                
                15.30
                %
                
                
                20.41
                %Total
      Revenues
                
                
                100.00
                %
                
                
                100.00
                %





Fiscal
Year 2009-2010 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.  (“NetSol PK”)





Our
off-shore development facility continues to perform strongly and has enhanced
its capabilities and expanded its sales and marketing activities. The Lahore
operation supports the worldwide customer base of the NFSTM 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 programming and development facility in Pakistan, being the
engine which drives NetSol worldwide, continues to be the major source of
revenue generation.  NetSol PK contributed
$21.40 million in revenues for the current year with a net profit of $11.14
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
PK’s selling and marketing efforts are focused on Asia Pacific, China and the
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.   Business offices in Bangkok, Thailand and Australia
have been added in order to provide business and technical support for the
Company’s customers.





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





·
            10
      new implementation contracts signed during the
  year.


·
            New
      names in the customer list also include Minsheng Bank, China, Volvo
      Automotive Finance China, SANY Corporation China, GMAC China and
      GAC-Sofinco China.





Its
current client base includes, but is not limited to, Mercedes Benz Financial
Services (Australia, Japan, New Zealand, Singapore, South Korea, Thailand, China
and Taiwan), Yamaha Motors Finance Australia, Toyota Motors Finance China,
Toyota Leasing Thailand, Finlease Commercial Bank of Mauritius, CNH Capital
Australia, Fiat Automotive Finance China, Dongfeng Nissan Auto Finance China,
Nissan Financial Services Australia, BMW Financial Services in China, BMW Japan,
Volvo Automotive Finance China, EFG Eurobank Greece, Al Amthal Leasing Saudi
Arabia, GAC-Sofinco China, SANY Corporation China, GMAC China and Minsheng Bank
Corp.  China.


16


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.





NetSol
Technologies Europe, Ltd. (“NTE”)





In
February 2005, NetSol acquired 100% of CQ Systems Ltd., (now NetSol Technologies
Europe, Ltd. “NTE”) 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.





NTE’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
the NTE product suite and most of the quality assurance, documentation and some
of the company’s products core software development activities have been
transitioned to Lahore.  NTE 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.





The
combined NTE group contributed approximately $5.11 million in revenues during
the current fiscal year or13.88% of the Company’s revenues.  The total
net profit was, approximately, $804,350.





A few of
NTE’s recent accomplishments include:





·
            Delivery
      of a rapid implementation solution of the LeaseSoft product to Aldemore
      Bank plc, a private equity backed new UK bank focused on servicing the UK
      SME market with a wide range of financial
  solutions


·
            Went
      live at Centanary Rural Development Bank in Uganda with our Evolve
      product, this being the first live client of the collaboration between NTE
      and Neptune Software plc in the African
region.


·
            Implemented
      the Contract Management System with a major bank in
    Thailand.


·
            Implemented
      the Wholesale Finance System with Channel Finance in the
      Netherlands.





NetSol
Technologies North America (“NTNA”)





NTNA
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.  NTNA customers include such
companies as Hyundai, Nissan Motors Acceptance Corp, Nissan Renault Finance
Mexico, JP Morgan/Chase, KeyCorp Leasing, City National Bank, Terex Corp.,
National City Capital Corp., ORIX, and Volkswagen Credit.





NTNA
contributed approximately $5.63 million in revenues during the current fiscal
year or 15.30% of the Company’s revenues.  The total net profit was,
approximately, $35,174.





NetSol-Innovation





In
November 2004, the Company entered into a joint venture agreement with the
Innovation Group (formerly referred to as TiG), NetSol-Innovation (Pvt) Ltd.
(“NetSol-Innovation”), a Pakistani company, provides support services enabling
the Innovation Group to scale solution delivery operations in key growth
markets. NetSol-Innovation 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 the Innovation Group and
NetSol involves services pertaining to business analyses, configuration,
testing, software quality assurance (SQA), technical communication as well as
project management for development software for the Innovation
Group.  Today, NetSol has developed extensive expertise across the
insurance domain and has become a center of excellence.





NetSol-Innovation
contributed approximately $2.21 million in revenue during the current fiscal
year or 6.01% of the Company’s revenues. The total net profit was,
approximately, $498,799 before adjusting for the 49.9% minority interest in
earnings.


17


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.  Following the end of this fiscal year, NetSol acquired Akhter
Group’s 49.9% interest for $180,000 cash, resulting in NetSol Connect becoming a
wholly owned subsidiary of NetSol.  With this move, management expects
to expand our business offering to participate in the local public sector and to
further rebuild the telecom business. As a cost saving step, we have now closed
down NetSol’s Karachi, Pakistan office and combined the operations with the
NetSol Connect operation and premises.





NetSol
Connect (Pvt) Ltd. will continue to seek to grow revenues. The revenue
contribution for NetSol Connect during the current fiscal year was $542,521 or
about 1.48% of revenues.  The total net loss was $17,752 before
adjusting the minority interest in losses.





NTPK
(Thailand) Co. Limited





NetSol
formed a company under the laws of Thailand, NTPK (Thailand) Company Limited, as
an Amity Treaty Company. While formally completed during the quarter ended March
31, 2010, registration of the Company was recorded retroactively to the date of
submission of all final documents, or December 18, 2009. The Company was formed
with an initial contribution of 4 million baht or $123,258.





NTPK
Thailand contributed approximately $1.8 million in revenue during the current
fiscal year or 4.89% of the Company’s revenues. The total net profit was,
approximately, $1.71 million.





Technology
Campus





Due to
the Company’s global 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. To date, the initial
piling work has been completed with construction expected to be completed within
two years.





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 former Prime Minister of Pakistan H.E. Shaukat Aziz on March
4, 2005. 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.  During the current fiscal year, NetSol PK
needed to expand its space due to its growth.  It has made
arrangements with the owner of the adjacent land 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.In addition, NetSol PK has
begun work on building a new building behind the current one.  The
enhancement of infra-structure is necessary to meet the company’s growth in
local and international business.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 high-quality communication, solid infrastructure and a
well-laid out road network. The Technology campus is located a very short
distance from the newly constructed advanced and modern 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.


18


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.  Management believes that its employees are the most
invaluable asset of NetSol.





Overall,
NetSol as a global IT company has over 20% 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 anywhere in the globe.





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, 2010, we had 732 full-time employees and 11 part-time employees;
comprised of 572 IT project and technical personnel in Pakistan, UK, Australia,
China, Thailand and US; and 171 non-IT personnel in Pakistan, UK, Australia and
US.  The non-IT personnel include 16 employees in management, 47
employees in sales and marketing, 29 employees in accounting, 16 in customer
support, and 63 in general and administration.  None of our employees
are subject to a collective bargaining agreement. Our telecom subsidiary, NetSol
Connect, has 48 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, dominates 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.





In the
LeaseSoft business space, the barriers to entry are getting higher. The products
are getting more cutting edge while 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.


19


In the
case of NFSTM, we compete chiefly against leading suppliers of IT solutions to
the financial industry, including names such as Fimasys, International Decision
Systems (IDS), Data Scan, CHP Consulting, 3i Infotech, Finnone and Nucleus
Software.





In the IT
based business services areas, we compete with both smaller local firms and many
global IT services providers, including names such as Wipro, InfoSys, Satyam
Infoway, HCL and TCS (Tata Consulting).





Our
competition is based primarily 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: Mercedes Benz Financial Services (Australia,
Japan, New Zealand, Singapore, South Korea, Thailand, China and Taiwan), Yamaha
Motors Finance Australia, Toyota Motors Finance China, Toyota Leasing Thailand,
Finlease Commercial Bank Mauritius, CNH Capital Australia, Fiat Automotive
Finance China, Dongfeng Nissan Auto Finance China, BMW Financial Services China,
BMW Japan, Al Amthal Leasing Saudi Arabia, GMAC China, SANY Corporation China,
GAC Sofinco, China and Minsheng Bank Corp China. Volkswagen Credit U.S. &
Canada; Hyundai Motor Finance; Keycorp Leasing; Chase Equipment Finance;
National City Commercial Credit; City National Bank; and, Terex
Corporation  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-Innovation contributes to
about 6.01% of NetSol’s revenues. NetSol is also a strategic business partner
for Daimler (which consists of a group of many companies), which accounts for
approximately 8.57% of our revenue. Toyota Motors (which consists of a group of
many companies) accounts for approximately 4.51% of our revenues. Nissan Auto
Finance (which consists of a group of many companies) accounts for approximately
7.21% of our revenues.  However no single client represents more than
10% of the revenue for the fiscal year ended June 30, 2010.





As
compared to the previous year, NetSol PK has gone a step further by providing
consultancy services to private and public sector 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 the Officer of the Prime Minister
Secretariat, Ministry of Health and Establishment Division.  As
compared to the previous year, NetSol PK was able to execute a number of
services contracts within the local Pakistani public and defense
sectors.  In 2009, NetSol PK continued to make strides in the land
recording sector by winning two pilot projects in different cities of
Pakistan.  This year also, NetSol was able to secure a major defense
sector hospital for its HMIS solution.  Our clients include private as
well as public sector enterprises.  The NetSol service portfolio has
now diversified into a comprehensive supply chain management solution, video
security & surveillance initiative, HR solutions, financial management
system, BPR services, consultancy services, application development turnkey
project offerings, solutions engineering and systems integration initiatives. An
example of recent services projects by NetSol PK include:





●
            Armed
      Forces Institute of Cardiology (AFIC) with
HMIS


●
            State
      Bank e-CIB Project renewal


●
            Grievance
      Management System for the Prime Minister
  Secretariat


●
            Khyber-Pakhtoonkhwa
      (KPK) Transport Departments Management
System


●
            Khyber-Pakhtoonkhwa
      (KPK) Legislative & Assembly
Automation


20





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 maintains two
corporate websites, www.NetSoltech.com and www.NetSolpk.com for its Global and
Pakistani audience, respectively. 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, as part of providing ongoing
support and maintenance services. More details can be found on
http://www.netsolhelp.com.





Through
the company’s web sites, its customers, both existing and potential, and
investors can access a wide range of information about its product offerings,
and support and technical matters.





Corporate
Structure





The
Company's corporate headquarters are in Calabasas, California.  Nearly
70% of the programming and development is carried out at NetSol’s technology
campus in Lahore, Pakistan. The other 30% of development is conducted in the
Proximity Development Center or "PDC" in Horsham, UK, Beijing, China and the
U.S. development facility located in the San Francisco Bay Area of California.
This signifies the ‘BestShoring®’ model by providing the best services at the
most efficient pricing model. The marketing effort is shared and coordinated
between the primary divisions operating at NetSol PK. in Lahore, Pakistan;
NetSol UK, NTE in the UK; and NTNA in the U.S.  US marketing
operations are conducted through the parent and NTNA.  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 NTE, 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.  NTNA, together with the parent, supports all of the North
American customers.





While
political unrest continues to challenge Pakistan, World Bank reports rank
Pakistan as the 60th country
in the ease of doing business ahead of both China and India. According to the
A.T. Kearney, Global Service Location Index 2009, Pakistan remains among the top
20 Off-Shoring IT destinations.





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 has seen noticeable demand from APAC and UAE region to use NetSol PK
development infrastructure that offers competitive price and technology
advantage to serve its customers.





A few of
NetSol’s major successes achieved in 2009-2010 were:





•
            Executing
      a successful joint venture agreement with Atheeb
  Group


•
            Further
      expansion in the China market by adding new
  customers


•
            Certification
      of our smartOCITM by SAP for integration into SAP
    applications


•
            First
      Chinese Bank customer, Minsheng Bank
Corp.


•
            Recertification
      of CMMi Level 5 accreditation by the successful completion of an audit
      commenced in the 4th
      quarter by Carnegie Mellon University certified
    consultants.


•
            Completely
      restructured the management and infrastructure of
  NTNA


•
            Launched
      NetSol Thai, a new subsidiary in
Thailand


•
            Globally
      integrated the delivery capabilities with NetSol PK, while streamlining
      and securing the data in UK location as an emergency response
      plan.





From the
point of view of the interests of our foreign partners and customers in NetSol,
Pakistan remains a safe place to do business. The specific successes achieved
from the acquisitions of CQ Systems (NTE) and McCue Systems (NTNA) endorses the
fact that Pakistan is a safe place to do business when compared to many other
troubled spots in the globe. Our best and proven business case is the NetSol -
Innovation Group joint venture. This 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 Innovation Group in the UK
with world class service from NetSol Pakistan, enhancing the client’s
productivity at much more attractive prices.  Under any geo-political
challenges, the Company is quite prepared in any contingency to use alternate
development facilities located in Beijing (China), Horsham (UK) and Alameda,
California (USA).


21





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, China and the Middle East, 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
has effectively achieved a seamless transition and integration of NTE and NTNA
with NetSol’s 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 NFS logo and product name have been copyrighted and trademark registered in
Pakistan.   The NetSol logo and BestShoring® name has been
registered with the U.S. Patent and Trademark Office.  The Company
intends to trademark and copyright its intellectual property as necessary and in
the appropriate jurisdictions.





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.


22


ITEM
2 - PROPERTIES





Company
Facilities





The
Company’s corporate 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 $4,317.75. The
lease is a two-year lease expiring in December 2011.





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





Location/Approximate
                    
                    Square
      Feet
                    
                    Purpose/Use
                    
                    Monthly
      Rental ExpenseAlameda,
      CA
                    
                    
                    4,298
                    
                    Computer
      & General Office
                    
                    $
                    6,876Beijing,
      China
                    
                    
                    1,413
                    
                    General
      Office
                    
                    $
                    4,210Horsham,
      UK (NetSol Europe)
                    
                    
                    6,570
                    
                    Computer
      and General Office
                    
                    $
                    12,528NetSol
      PK (Karachi Office)
                    
                    
                    1,883
                    
                    General
      Office
                    
                    $
                    1,474NetSol
      PK (Islamabad Office)
                    
                    
                    4,502
                    
                    General
      Office & Guest House
                    
                    $
                    2,513Bangkok,
      Thailand
                    
                    
                    634
                    
                    Computer
      and General Office
                    
                    $
                    2,610





The
Beijing lease is a two year lease that expires in August 2011. The monthly rent
is approximately $4,210 (RMB 29,050) per month.  The Bangkok lease is
a one year lease with monthly rent of $765 (THB 26,100). The NetSol Europe
facilities, located in Horsham, United Kingdom, are leased until June 23, 2011
for an annual rent of £75,000 (approximately $123,750). NTNA recently relocated
to the Alameda, California location.  The Alameda lease is a three
year lease with monthly rent of $6,876.  The NetSol Karachi lease is a
3 year lease and is rented at the rate of $1,474 per month approximately. The
NetSol Islamabad lease is a 15 year lease that expires on August 31, 2016 and
currently is rented at the rate of $2,513 per month approximately.





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





Lahore
Technology Campus





The
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 nearly 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, costing and
budgeting, graphics, technical communication & procurement departments into
these cottages.





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.


23


PART
II





ITEM
4 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITY





(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.





2009-2010
                                
                                
                                2008-2009FiscalQuarter
                                
                                High
                                
                                
                                Low
                                
                                
                                High
                                
                                
                                Low1st
      (ended September 30)
                                
                                
                                1.17
                                
                                
                                
                                .56
                                
                                
                                
                                3.40
                                
                                
                                
                                1.702nd
      (ended December 31)
                                
                                
                                1.23
                                
                                
                                
                                .75
                                
                                
                                
                                1.86
                                
                                
                                
                                .573rd
      (ended March 31)
                                
                                
                                1.09
                                
                                
                                
                                .80
                                
                                
                                
                                1.08
                                
                                
                                
                                .224th
      (ended June 30)
                                
                                
                                .95
                                
                                
                                
                                .70
                                
                                
                                
                                .75
                                
                                
                                
                                .29





Common
stock of NetSol Technologies, Inc. is also listed and traded on the NasdaqDubai
Market under the ticker symbol “NTWK” since June 16, 2008.





RECORD
HOLDERS - As of September 6, 2010, the number of holders of record of the
Company's common stock was 233. As of September 6, 2010, there were 40,205,421
shares of common stock issued and outstanding and no shares of preferred 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,
2010:





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
                  
                  
                  12,470,236
                  (1)
                  
                  $
                  1.54
                  (2)
                  
                  
                  1,869,413
                  (3)Equity
      Compensation
                    Plans
      not approved by
                    Security
      holders
                  
                  None
                  
                  
                  None
                  
                  
                  NoneTotal
                  
                  
                  12,470,236
                  
                  
                  $
                  1.54
                  
                  
                  
                  1,869,413





(1)
            Consists
      of 8,000 under the 2001 Incentive and Nonstatutory Stock Option Plan;
      872,000 under the 2002 Incentive and Nonstatutory Stock Option Plan;
      475,000 under the 2003 Incentive and Nonstatutory Stock Option Plan;
      3,030,275 under the 2004 Incentive and Nonstatutory Stock Option Plan; and
      3,321,642 under the 2005 Incentive and Nonstatutory Stock Option
      Plan.


(2)
            The
      weighted average of the options is
$2.16.


(3)
            Represents
      344,659 available for issuance under the 2003 Incentive and Nonstatutory
      Stock Option Plan; 51,754 available for issuance under the 2004 Incentive
      and Nonstatutory Stock Option Plan; 1,075,000 available for issuance under
      the 2005 Incentive and Nonstatutory Stock Option Plan and 398,000
      available for issuance under the 2008 Incentive and Nonstatutory Stock
      Option Plan.


24





(b)
RECENT SALES OF UNREGISTERED SECURITIES





In April
2010, the Company issued 80,000 rule 144 shares to consultants are part of their
compensation in exchange for their services and not for resale to the
public.  The valuation was determined on the date the Agreement was
signed.  These shares were issued in reliance on an exemption from
registration available under section 4(2) of the Securities Act of 1933, as
amended.  The consultant is a public relations company for technology
companies and has been operating in the same business for a number of years and
would be considered a sophisticated investor.  The consultant had
direct access to NetSol’s financial and business materials and is able to assess
any risks that may related to the Company’s securities.





In April
2010, the Company issued 30,000 rule 144 shares to outside board members as part
of the their compensation for serving on the board of directors for the
2009-2010 term. The shares were issued in reliance on an exemption from
registration available under section 4(2) of the Securities Act of 1933, as
amended.  All board members have direct and continuous access to the
Company’s financial and business materials and filings and are able to identify
any risks that may be related to the shares.  In addition, the board
members have continuous and direct contact with the senior executives of the
Company and may clarify any questions that they may have surrounding the shares
issued as part of the compensation.





In April
2010, the Company issued 187,500 rule 144 shares to three named executive
officers as part of their executive compensation package approved by the
Company’s compensation committee. The shares were issued in reliance on an
exemption from registration available under section 4(2) of the Securities Act
of 1933, as amended.  All of the executive employees in this
transaction have direct knowledge, experience and access to the Company’s
financial and business information.  The executives are all accredited
investors and can bear the economic risk of the issued securities, if
any.





In June
2010, the Company issued 322,788 shares as part of a conversion of Note issued
in 2009 to Solomon Strategic Holdings, Ltd.  The shares underlying the
note were held over six months and are exempt from registration as available
under Regulation S of the Securities Act of 1933, as amended.  The
investor is a sophisticated, accredited and non-US investor and otherwise
qualifies under the exemption.





In June
2010, the Company issued 322,778 shares as part of a conversion of Note issued
in 2009 to the Tail Wind Fund Ltd.  The shares underlying the note
were held over six months and are exempt from registration as available under
Regulation S of the Securities Act of 1933, as amended.  The investor
is a sophisticated accredited and non-US investor, and otherwise qualifies under
the exemption.





In June
2010, the Company issued 163,576 shares as part of a conversion of Note issued
in 2009 to Tail Wind Advisory Management Ltd.  The shares underlying
the note were held over six months and are exempt from registration as available
under Regulation S of the Securities Act of 1933, as amended.  The
investor is a sophisticated accredited and non-US investor, and otherwise
qualifies under the exemption.





In June
2010, the Company issued 14,881 rule 144 shares to an employee as part of his
compensation package.  The shares were issued in reliance on an
exemption from registration available under section 4(2) of the Securities Act
of 1933, as amended.  The employee has direct access to the Company’s
business plans as well as all senior executives of the Company who may clarify
any questions he may have surrounding any financial or business issues of the
Company.  Finally, the employee is an accredited investor and can bear
the economic risk of the issued securities, if any.





ITEM 5 – SELECTED FINANCIAL
DATA





The
Company, as a Smaller Reporting Company, is not required to provide the
information required by this section.


25





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,
2010.





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.





Management
undertook major steps to counter the deep effect of global recession, such
as:





o
            In
      2009-2010, to enhance productivity and cost efficiencies, the concept of
      Global Delivery Model has been implemented.   Without
      moving the source codes of US products or UK products to Lahore, Pakistan,
      we have integrated the local developers / engineers / programming
      resources with PK technology group teams. This model would eventually
      create much stronger band width for customers worldwide but also have the
      same interfacing local management available for regional clients. In
      essence, the concept of BestShoring® model is effectively being
      executed.





o
            The
      global delivery model would further streamline the cost base as well as
      optimum utilization of NetSol Center of Excellence, CMMI Level 5
      technology campus and translate into better and more competitive pricing
      modules for our customers.





o
            Revamped
      sales organization from several departments into one group. The newly
      created global sales organization under one president of global sales,
      centrally headquartered in the UK, would provide much improved visibility
      and traction in all key markets worldwide. In addition to achieving
      critical mass and visibility the regional sales heads have been created to
      directly report to President Group
Sales.





o
            Key
      senior and middle management personnel were relocated in China, USA and UK
      to best leverage the talent across the globe and cost
      rationalization.





o
            Substantially
      reduced office costs by relocating NTNA staff from Emeryville, California
      to Alameda, California by entering a new office lease that will save
      nearly $1.0 million in annual rent and maintenance
    expenses.





o
            Engaged
      RedChip Companies, Inc. to lead its investor relations programs. RedChip’s
      highly professional team, who specialize in the capital market space, was
      engaged to strengthen our public relations and assist in building strong
      relationships with current and prospective
  investors.





o
            Some
      marketing and new project activities had to be slowed down due to the poor
      economy but the most strategic new product development and research and
      development activities has increased. Management’s vision is that a one
      product global solution is the key initiative that will place NetSol in
      the next level of critical mass solutions
  providers.




26


Business
Development Activities:





·
            NetSol
      launched a long term strategy in 2008 to get NetSol brand and name
      recognition in UAE and GCC States by a dual listing on DIFX (now the
      NASDAQ DUBAI exchange). Management believes that the signing of a joint
      venture agreement with a very well established Saudi Arabian business
      conglomerate represents a major break-through for the
      Company.  The joint venture is a relationship between NetSol
      Technologies, Inc. and the Atheeb Group of the Kingdom of Saudi Arabia
      (“KSA”). NetSol owns 51% and Atheeb owns 49% of the newly created Atheeb
      NetSol, Ltd. to be based in Riyadh, Saudi Arabia. Atheeb has been in
      operation since 1985 and has major businesses in defense, public works,
      telecom, financial, transportation and agriculture. By partnering with
      Atheeb through a joint venture, NetSol gains access to not only major
      local projects in key sectors but also to regional economies in GCC
      states, Central Asia and Africa. The influence and reputation of Atheeb in
      the KSA and regional markets is compelling, and NetSol expects to benefit
      handsomely in coming years. The joint venture will fully utilize NetSol
      PK’s Lahore based center of excellence, CMMI Level 5 technology
      campus.





·
            The
      acquisition of Ciena Solutions for SAP services has been effectively
      integrated with NetSol’s operation. Our new SAP services and offerings are
      being marketed to our existing US based clients and new markets to
      establish a key new vertical.   The US clients list
      includes a major energy utility company in California. Additionally, we
      believe a majority of NetSol global clients could benefit from SAP
      services and solutions. The Company is beta testing its product, SMART
      OCI, a search engine to expand its SAP product portfolio. The practice was
      recently awarded SAP PartnerEdge status as an SAP services
      partner.





·
            By
      expanding into the Americas, NetSol sees a strong opportunity to establish
      its brand recognition and create critical mass in the
      Americas.   Despite the recession and consolidations in the
      U.S., NetSol has embarked on an aggressive strategy to reposition and
      rebrand NetSol for the U.S markets. For example, NetSol is strategically
      rolling out offerings of the NetSol Financial SuiteTM to our global auto
      manufacturers, whether captive or non-captive, in the North and South
      American markets.   NetSol sees a new market in Mexico,
      Brazil, Costa Rica and many countries in Latin America as both mature and
      emerging markets are ripe for our flagship NFSTM applications. NetSol added
      two new global customers to the Americas in Nissan’s North America and
      Mexican operations. In addition, NTNA is experiencing new enhancement and
      orders from a few existing clients in North America, reflecting confidence
      in our US team.





·
            Management
      envisions a major growth in the Chinese market as China continues to have
      strong economic indicators amongst the major industrial countries. Auto
      sales in China have surpassed that of the US in numbers of unit sold.
      China continues to maintain a GDP rate of 8-9% in 2010, while some of the
      western markets are struggling with their economy. China’s market offers a
      tremendous opportunity to NetSol as being the leader in leasing and
      finance soft ware applications space. China is now the globe’s second
      largest economic power and its auto and banking sectors are growing at a
      dynamic pace, unlike the western markets. We are expanding the Beijing
      office and adding local staff. Our current ten multi-national customers in
      China have begun to expand their relationship with NetSol. We recently
      signed a few new deals with a few multinational auto companies and
      Minsheng Bank, one of the largest in China Management anticipates that the
      NFSTM products will demonstrate a noted break through with Chinese
      companies in coming months.





·
            The
      European economy has shown serious decline and the severe impact of
      consolidation and budget cuts have started to intensely affect our
      business there. The European markets are expected to remain sluggish and
      we will hold off any further investment until next year. However, it
      appears that decisions made by some European nations signal economic
      recovery in the major European
economies.





·
            We
      expect top line growth through investment in organic marketing
      activities.




27


NetSol
marketing activities will continue to:





·
            Encourage
      organic revenue growth in the Chinese market in the automobile, banking,
      manufacturing and captive leasing
sectors.


·
            Expand
      the Beijing office with new local Chinese staff and senior business
      development and project management
teams.


·
            Further
      penetrate the Asia Pacific markets by selling NetSol offerings in the key
      and robust markets of Australia, New Zealand, Singapore, Thailand, South
      Korea and, Japan.


·
            Expand
      Thailand operations with the aim of making it a second hub, after China. A
      few senior business development teams have been mobilized and relocated in
      Thailand to support the new business development efforts in the APAC
      region.


·
            While
      consolidating the development and sales teams, further build and expand in
      the North America market.  As the most mature and largest market
      for the Company’s solutions, North America will remain key to new revenue
      in the coming years.  NetSol’s existing product line including
      LeasePak and its modules will remain as a primary offering to support our
      existing customers.


·
            NetSol
      SAP practice will enhance the revenue and add new customers for SAP
      consulting service, staffing & proprietary bolt-on software
      offerings.


·
            Expand
      and support the new and innovative road map of more capable and robust
      solutions to the existing 30 plus US
customers.


·
            Increase
      marketing activities by participating in major forums such as ELFA (the
      Equipment Leasing & Finance Association) in North America and many
      other selected international forums to grow NetSol business and
      image.


·
            Test
      market NFSTM new generation products with key global
    customers.


·
            Expand
      and win new customers in the Middle Eastern markets through a recently
      formed joint venture with Atheeb Group in the KSA. This will include
      sectors in leasing, banking, defense and public
  areas.


·
            Optimize
      Lahore’s center of excellence in emerging and growing markets in Middle
      East.


·
            Grow
      new revenues in public and defense sectors in
  Pakistan.





Funding
and Investor Relations:





Management
anticipates, but there is no guaranty, that as the price of the Company’s shares
of common stock will rise, as quoted on the Nasdaq Capital Market, and
that:





·
            Officers
      may exercise options that are currently in the
  money;


·
            Company
      may look to raise new capital through debt or common stock offerings with
      friends of family investors which will be held for long term investment
      and require no payment of placement
fees.


·
            Exercise
      of warrants by major fund
investors.





Investor
Relations efforts will include:





·
            Newly
      hired IR and PR firm will play a major part in expanding the new retail
      and institutional  investors
base


·
            Telling
      the NetSol story to sell side analysts, funds, portfolio managers and
      financial media


·
            Aggressively
      position NetSol in front of major investors’ conferences and road shows to
      be organized by RedChip and other major
  institutions.


·
            Push
      strategy with US mainstream media to build NetSol image and a ‘Niche’
      business offering.


·
            Founding
      management’s aim to continue to invest in the company is anticipated to
      display such management’s belief in NetSol’s potential to new
      investors.


·
            Aggressively
      enhance the visibility and liquidity in NASDAQDUBAI exchange through road
      shows and Middle East focused investors’
  conferences.




Improving
the Bottom Line:





Management
believes an essential improvement to the bottom line will be the successful
completion of the acquisition of NTNA and NTE by NetSol PK. This acquisition
completes the full integration of the entities resulting in improved operating
costs. Additionally, the acquisition, which is accomplished by NetSol PK with
the issuance of new shares of common stock of NetSol PK to the Company, will
increase the Company’s ownership percentage of NetSol PK from 58% to
77%.  This change decreases the minority interest thus positively
impacting the earnings per share.


28


This
integration is anticipated to:





·
            Improve
      pricing and fee structures.


·
            Continue
      consolidation and reevaluating operating margins as ongoing
      activities.


·
            Streamline
      further cost of goods sold to improve gross margins to historical levels
      over 60%, as sales ramp up.


·
            Generate
      higher revenues per employee, enhance productivity and lower cost per
      employee.


·
            Optimize
      the utilization of NetSol PK resources, infrastructure, processes and
      disciplines to maximize the bottom-line and fully leverage the cost
      arbitrage.


·
            Grow
      process automation and leverage the best practices of CMMI level 5. Global
      delivery concept and integration will further improve both gross and net
      margins.


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


·
            Reduced
      General and Administrative expense and expenses of marketing
      programs.


·
            Retire
      Debt to reduce the interest cost significantly and to make every effort to
      avoid any one time charges.





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.





In a
quest to continuously improve its quality standards, CMMI level companies are
reassessed every three years by independent consultants under the standards of
the Carnegie Mellon University to maintain its CMMI Level 5 quality
certification.  As required, NetSol was reassessed in 2010 and was
successfully recertified as CMMI Level 5.  We believe that the CMMI
standards are a key reason in NetSol’s demand surge worldwide. We remain
convinced that this trend will continue for all NetSol offerings promoting
further beneficial alliances and increasing the number and quality of our global
customers.  The quest for quality standards is imperative to NetSol’s
overall sustainability and success.  In 2008, NetSol became ISO 27001
certified, a global standard and a set of best practices for Information
Security Management.





MATERIAL
TRENDS AFFECTING NETSOL





Management
has identified the following material trends affecting NetSol.





Positive
trends:





·
            The
      global recession and consolidations have opened doors for low cost
      solution providers such as NetSol. The BestShoring® model of NetSol is a
      catalyst in today’s environment.





·
            The
      global economic pressures and recession has shifted IT processes and
      technology to utilize both offshore and onshore solutions providers, to
      control the costs and improve ROIs.





·
            China
      has become the second largest economy and has grown to over 9% GDP a year
      while other industrial nations have declined or grown
      marginally.


·
            China’s
      automobile and banking sectors have been unaffected by the global meltdown
      and in fact have outgrown all other economies with their recent automobile
      sales statistics.


·
            China
      sold 58 cars per 1,000 people as compared to 900 cars per 1,000 in the
      USA. There is a tremendous opportunity for NetSol’s penetration in China’s
      burgeoning leasing and finance market for
  NetSol.


·
            The
      surviving IT companies, such as NetSol, with price advantage and a global
      presence, will gain further momentum as economic indicators turn positive.
      The bigger customers and targeted verticals are much more cost conscious
      and are seeking a better rate of return on investments in IT services.
      NetSol has an edge due to its BestShoring® model and proven track record
      of delivery and implementations
worldwide.


·
            NetSol
      has never lost a product customer despite the recent severe recession. The
      dependency of our blue chip clients on NetSol solutions has further
      elevated new enhancements and services orders in the
  US.





·
            Improved
      outlook and earnings of bell weather technology companies in USA,
      reflecting the turnaround of this sector after
  recession.


·
            The
      aid and support of trade in Pakistan from countries like the US, China,
      Saudi Arabia and other western and friendly countries seems to be growing
      recently. This will positively affect NetSol, local employees and
      customers worldwide. Pakistan has every potential to rise up as the plans
      for energy, power, agriculture and infrastructures (including 12 new dams
      to be built by Chinese companies) create a much better outlook and growth
      for Pakistan.


29





·
            US
      AID and many other western agencies are diligently assisting the Pakistani
      people to improve literacy, education, poverty alleviation and healthcare
      programs. These initiatives will necessarily result in more graduates in
      science and technology areas.


·
            Global
      opportunities to diversify delivery capabilities in new emerging economies
      that offer geopolitical stability and low cost IT resources reducing
      dependency upon Lahore technology
campus.


·
            Our
      global multi-national clients have continued to pursue deeper
      relationships in newer regions and countries. This reflects our customers’
      dependencies and satisfaction with our NetSol Financial Suite of
      products.


·
            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 7 more years remaining on this tax
      incentive.





Negative
trends:





·
            Geo
      political unrest due to extremism in the regions of Pakistan and
      Afghanistan.


·
            The
      worst flooding disaster in Pakistan due to heavy monsoon rainfall has
      affected more than 20 million people. The rebuilding of the affected areas
      will distract the government of Pakistan and
      major   resources will be diverted to deal with the
      aftermath of this disaster.  Accordingly, management expects
      delays in major public and defense
projects.


·
            The
      emergence of many smaller players offering IT solutions in China has
      resulted in competition on pricing.


·
            The
      sluggish European market, due to debt crisis, could lead to our European
      business suffering.


·
            Dramatic
      and deep global recession has created a serious decline in business
      spending causing significant budget cuts for many of the Company’s target
      verticals.


·
            Tightened
      liquidity and credit restrictions in consumer spending has either delayed
      or reduced spending on business solutions and systems squeezing IT budgets
      and elongating decision making
cycles.


·
            Tighter
      internal processes and budgets will cause delays in the receivables from
      few clients.


·
            Challenged
      US auto sectors, banking and retail sectors, thus resulting in longer
      sales and closing cycles.


·
            Anticipated
      worsening US deficit and rise in inflation in coming years would further
      put stress on consumers and business
spending.


·
            Unrest
      and growing war in Afghanistan could increase the migration of both
      refugees and extremists to Pakistan, thus creating domestic and regional
      challenges.





CRITICAL
ACCOUNTING POLICIES





Our
financial statements and accompanying notes are prepared in accordance with
accounting principles generally accepted in the United States (“U.S. GAAP”).
Preparing financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenue,
and expenses. These estimates and assumptions are affected by management’s
application of accounting policies. Critical accounting policies for us include
revenue recognition and multiple element arrangements, intangible assets,
software development costs, and goodwill.





REVENUE
RECOGNTION





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
collectability is probable. Revenue from the sale of licenses with major
customization, modification, and development is recognized on a percentage of
completion method. Revenue from the implementation of software is recognized on
a percentage of completion method.


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.


30


MULTIPLE
ELEMENT ARRANGEMENTS





We enter
into multiple element revenue arrangements in which a customer may purchase a
number of different combinations of software licenses, consulting services,
maintenance and support, as well as training and development (multiple-element
arrangements).


VSOE of
fair value for each element is based on the price for which the element is sold
separately. We determine the VSOE of fair value of each element based on
historical evidence of our stand-alone sales of these elements to third-parties
or from the stated renewal rate for the elements contained in the initial
software license arrangement. When VSOE of fair value does not exist for any
undelivered element, revenue is deferred until the earlier of the point at which
such VSOE of fair value exists or until all elements of the arrangement have
been delivered. The only exception to this guidance is when the only undelivered
element is maintenance and support or other services, then the entire
arrangement fee is recognized ratably over the performance period.





INTANGIBLE
ASSETS





Intangible
assets consist of product licenses, renewals, enhancements, copyrights,
trademarks, trade names, and customer lists. Intangible assets with finite lives
are amortized over the estimated useful life and are evaluated for impairment at
least on an annual basis and whenever events or changes in circumstances
indicate that the carrying value may not be recoverable. We assess
recoverability by determining whether the carrying value of such assets will be
recovered through the undiscounted expected future cash flows. If the future
undiscounted cash flows are less than the carrying amount of these assets, we
recognize an impairment loss based on the excess of the carrying amount over the
fair value of the assets.





SOFTWARE
DEVELOPMENT COSTS





Costs
incurred to internally develop computer software products or to enhance an
existing product are recorded as research and development costs and expensed
when incurred 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.





GOODWILL





Goodwill
represents the excess of the aggregate purchase price over the fair value of the
net assets acquired in a purchase businesses combination. Goodwill is reviewed
for impairment on an annual basis, or more frequently if events or changes in
circumstances indicate that the carrying amount of goodwill may be impaired. The
goodwill impairment test is a two-step test. Under the first step, the fair
value of the reporting unit is compared with its carrying value (including
goodwill). If the fair value of the reporting unit is less than its carrying
value, an indication of goodwill impairment exists for the reporting unit and
the enterprise must perform step two of the impairment test (measurement). Under
step two, an impairment loss is recognized for any excess of the carrying amount
of the reporting unit’s goodwill over the implied fair value of that goodwill.
The implied fair value of goodwill is determined by allocating the fair value of
the reporting unit in a manner similar to a purchase price allocation. The
residual fair value after this allocation is the implied fair value of the
reporting unit goodwill. Fair value of the reporting unit is determined using a
discounted cash flow analysis. If the fair value of the reporting unit exceeds
its carrying value, step two does not need to be performed.




The
company does impairment testing of the goodwill on an annual basis at the
balance sheet date i.e., June 30th. In
addition to our annual internal impairment testing, the Company retains the
services of an independent valuation specialist to validate our
findings.




The
source of the Company’s goodwill relates to the acquisition of three companies
namely NetSol PK Tech, CQ Systems, UK and McCue Systems, USA. NetSol PK Tech
operates in the Asia Pacific region; CQ Systems (currently NetSol Technologies
Europe Limited) operates in Europe; and McCue Systems (currently NetSol
Technologies North America, Inc.) operates in the North American region. All
these geographies are considered as different reporting units (segments).
Goodwill arising from the acquisition of these companies has been allocated to
their respective geographical segments to which they relate. While identifying
reporting units/ segments, the Company takes into consideration the reports
reviewed by the CEO (chief operating decision maker). As our financial reports
are analyzed on this regional basis, we have defined this as segment reporting
for purposes of goodwill impairment testing. Reporting unit wise detail of
goodwill as of June 30, 2010 and 2009 is given below:


31




Reporting Units
                  
                  2010
                  
                  
                  2009Asia
      Pacific
                  
                  $
                  1,303,372
                  
                  
                  $
                  1,303,372Europe
                  
                  
                  3,471,813
                  
                  
                  
                  3,471,813North
      America
                  
                  
                  4,664,100
                  
                  
                  
                  4,664,100Total
                  
                  $
                  9,439,285
                  
                  
                  $
                  9,439,285




There was
no impairment of goodwill for the years ended June 30, 2010 and 2009. A number
of factors are taken into consideration while calculating the fair value of the
reporting units. These factors include the projected after tax earnings of the
reporting unit, industry price earnings ratio and a reasonable discount rate to
arrive at the actual fair value of the reporting unit.




As the
fair value of all reporting units substantially exceeded the carrying values, no
impairment was identified in the consolidated financial statements. The
following table sets forth the percentage by which the fair value exceeds the
carrying value for all reporting units as on June 30, 2010:




Reporting Units
                  
                  Percentage by which fair
                    value exceeds carrying valueAsia
      Pacific
                  
                  
                  92.78
                  %Europe
                  
                  
                  62.28
                  %North
      America
                  
                  
                  15.3
                  %




CASH
RESOURCES




We were
successful in improving our cash position by the end of our fiscal year, June
30, 2010 with $4.08 million in cash worldwide. In addition, $892,009 was
injected by the exercise of options and sale of equity in
2010.


32


CHANGE
IN MANAGEMENT AND BOARD OF DIRECTORS





Board of
Directors





At the
2010 Annual Shareholders Meeting the Company’s current seven member board stood
for election.  As a quorum at this meeting was not achieved, and
according to the bylaws of the Company, the current slate retains its positions
as directors until the next meeting.  The board of directors is made
up of:   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. 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.


33


RESULTS
OF OPERATIONS





THE
YEAR ENDED JUNE 30, 2010 COMPARED TO THE YEAR ENDED JUNE 30, 2009





Net
revenues for the year ended June 30, 2010 were $36,779,897 as compared to
$26,448,177 for the year ended June 30, 2009.   Net revenues are
broken out among the subsidiaries as follows:


2010
                                
                                
                                2009Revenue
                                
                                
                                %
                                
                                
                                Revenue
                                
                                
                                %North
      America:NTNA
                                
                                $
                                5,627,277
                                
                                
                                
                                15.30
                                %
                                
                                $
                                5,396,693
                                
                                
                                
                                20.40
                                %5,627,277
                                
                                
                                
                                15.30
                                %
                                
                                
                                5,396,693
                                
                                
                                
                                20.40
                                %Europe:Netsol
      UK
                                
                                
                                -
                                
                                
                                
                                0.00
                                %
                                
                                
                                -
                                
                                
                                
                                0.00
                                %NTE
                                
                                
                                5,105,434
                                
                                
                                
                                13.88
                                %
                                
                                
                                3,886,337
                                
                                
                                
                                14.69
                                %5,105,434
                                
                                
                                
                                13.88
                                %
                                
                                
                                3,886,337
                                
                                
                                
                                14.69
                                %Asia-Pacific:Netsol
      Tech (PK)
                                
                                
                                21,397,724
                                
                                
                                
                                58.18
                                %
                                
                                
                                13,265,196
                                
                                
                                
                                50.16
                                %EI
                                
                                
                                2,210,357
                                
                                
                                
                                6.01
                                %
                                
                                
                                3,098,353
                                
                                
                                
                                11.71
                                %Netsol
      Connect
                                
                                
                                542,521
                                
                                
                                
                                1.48
                                %
                                
                                
                                673,256
                                
                                
                                
                                2.55
                                %Netsol-Abraxas
      Australia
                                
                                
                                96,583
                                
                                
                                
                                0.26
                                %
                                
                                
                                128,342
                                
                                
                                
                                0.49
                                %Netsol-Thailand
                                
                                
                                1,800,000
                                
                                
                                
                                4.89
                                %
                                
                                
                                
                                
                                
                                
                                0.00
                                %26,047,185
                                
                                
                                
                                70.82
                                %
                                
                                
                                17,165,147
                                
                                
                                
                                64.90
                                %Total
                                
                                $
                                36,779,897
                                
                                
                                
                                100.00
                                %
                                
                                $
                                26,448,177
                                
                                
                                
                                100.00
                                %




34


The
following table sets forth the items in our consolidated statement of operations
for the years ended June 30, 2010 and 2009 as a percentage of
revenues.





For the YearEnded June 30,2010
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  2009%
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  %Net
      Revenues:License
      fees
                                                  
                                                  $
                                                  14,157,107
                                                  
                                                  
                                                  
                                                  38.49
                                                  %
                                                  
                                                  $
                                                  4,786,332
                                                  
                                                  
                                                  
                                                  18.10
                                                  %Maintenance
      fees
                                                  
                                                  
                                                  7,047,936
                                                  
                                                  
                                                  
                                                  19.16
                                                  %
                                                  
                                                  
                                                  6,499,419
                                                  
                                                  
                                                  
                                                  24.57
                                                  %Services
                                                  
                                                  
                                                  15,574,853
                                                  
                                                  
                                                  
                                                  42.35
                                                  %
                                                  
                                                  
                                                  15,162,426
                                                  
                                                  
                                                  
                                                  57.33
                                                  %Total
      revenues
                                                  
                                                  
                                                  36,779,897
                                                  
                                                  
                                                  
                                                  100.00
                                                  %
                                                  
                                                  
                                                  26,448,177
                                                  
                                                  
                                                  
                                                  100.00
                                                  %Cost
      of revenues:Salaries
      and consultants
                                                  
                                                  
                                                  8,164,148
                                                  
                                                  
                                                  
                                                  22.20
                                                  %
                                                  
                                                  
                                                  9,787,965
                                                  
                                                  
                                                  
                                                  37.01
                                                  %Travel
                                                  
                                                  
                                                  843,626
                                                  
                                                  
                                                  
                                                  2.29
                                                  %
                                                  
                                                  
                                                  1,334,879
                                                  
                                                  
                                                  
                                                  5.05
                                                  %Repairs
      and maintenance
                                                  
                                                  
                                                  256,997
                                                  
                                                  
                                                  
                                                  0.70
                                                  %
                                                  
                                                  
                                                  370,487
                                                  
                                                  
                                                  
                                                  1.40
                                                  %Insurance
                                                  
                                                  
                                                  140,496
                                                  
                                                  
                                                  
                                                  0.38
                                                  %
                                                  
                                                  
                                                  174,761
                                                  
                                                  
                                                  
                                                  0.66
                                                  %Depreciation
      and amortization
                                                  
                                                  
                                                  2,298,092
                                                  
                                                  
                                                  
                                                  6.25
                                                  %
                                                  
                                                  
                                                  2,214,211
                                                  
                                                  
                                                  
                                                  8.37
                                                  %Other
                                                  
                                                  
                                                  2,163,689
                                                  
                                                  
                                                  
                                                  5.88
                                                  %
                                                  
                                                  
                                                  3,316,031
                                                  
                                                  
                                                  
                                                  12.54
                                                  %Total
      cost of revenues
                                                  
                                                  
                                                  13,867,048
                                                  
                                                  
                                                  
                                                  37.70
                                                  %
                                                  
                                                  
                                                  17,198,334
                                                  
                                                  
                                                  
                                                  65.03
                                                  %Gross
      profit
                                                  
                                                  
                                                  22,912,849
                                                  
                                                  
                                                  
                                                  62.30
                                                  %
                                                  
                                                  
                                                  9,249,843
                                                  
                                                  
                                                  
                                                  34.97
                                                  %Operating
      expenses:Selling
      and marketing
                                                  
                                                  
                                                  2,222,841
                                                  
                                                  
                                                  
                                                  6.04
                                                  %
                                                  
                                                  
                                                  3,115,883
                                                  
                                                  
                                                  
                                                  11.78
                                                  %Depreciation
      and amortization
                                                  
                                                  
                                                  1,609,854
                                                  
                                                  
                                                  
                                                  4.38
                                                  %
                                                  
                                                  
                                                  1,973,997
                                                  
                                                  
                                                  
                                                  7.46
                                                  %Bad
      debt expense
                                                  
                                                  
                                                  442,804
                                                  
                                                  
                                                  
                                                  1.20
                                                  %
                                                  
                                                  
                                                  2,393,685
                                                  
                                                  
                                                  
                                                  9.05
                                                  %Salaries
      and wages
                                                  
                                                  
                                                  3,026,275
                                                  
                                                  
                                                  
                                                  8.23
                                                  %
                                                  
                                                  
                                                  3,443,390
                                                  
                                                  
                                                  
                                                  13.02
                                                  %Professional
      services, including non-cash compensation
                                                  
                                                  
                                                  900,125
                                                  
                                                  
                                                  
                                                  2.45
                                                  %
                                                  
                                                  
                                                  1,215,939
                                                  
                                                  
                                                  
                                                  4.60
                                                  %Lease
      abandonment charges
                                                  
                                                  
                                                  867,583
                                                  
                                                  
                                                  
                                                  2.36
                                                  %
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  0.00
                                                  %General
      and adminstrative
                                                  
                                                  
                                                  4,115,658
                                                  
                                                  
                                                  
                                                  11.19
                                                  %
                                                  
                                                  
                                                  3,590,118
                                                  
                                                  
                                                  
                                                  13.57
                                                  %Total
      operating expenses
                                                  
                                                  
                                                  13,185,141
                                                  
                                                  
                                                  
                                                  35.85
                                                  %
                                                  
                                                  
                                                  15,733,012
                                                  
                                                  
                                                  
                                                  59.49
                                                  %Income
      (loss) from operations
                                                  
                                                  
                                                  9,727,708
                                                  
                                                  
                                                  
                                                  26.45
                                                  %
                                                  
                                                  
                                                  (6,483,169
                                                  )
                                                  
                                                  
                                                  -24.51
                                                  %Other
      income and (expenses)Loss
      on sale of assets
                                                  
                                                  
                                                  (224,741
                                                  )
                                                  
                                                  
                                                  -0.61
                                                  %
                                                  
                                                  
                                                  (404,820
                                                  )
                                                  
                                                  
                                                  -1.53
                                                  %Interest
      expense
                                                  
                                                  
                                                  (1,478,474
                                                  )
                                                  
                                                  
                                                  -4.02
                                                  %
                                                  
                                                  
                                                  (1,294,293
                                                  )
                                                  
                                                  
                                                  -4.89
                                                  %Interest
      income
                                                  
                                                  
                                                  261,296
                                                  
                                                  
                                                  
                                                  0.71
                                                  %
                                                  
                                                  
                                                  291,030
                                                  
                                                  
                                                  
                                                  1.10
                                                  %(Loss)
      gain on foreign currency exchange transactions
                                                  
                                                  
                                                  (66,919
                                                  )
                                                  
                                                  
                                                  -0.18
                                                  %
                                                  
                                                  
                                                  2,371,487
                                                  
                                                  
                                                  
                                                  8.97
                                                  %Gain
      on sale of subsidiary shares
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  0.00
                                                  %
                                                  
                                                  
                                                  351,522
                                                  
                                                  
                                                  
                                                  1.33
                                                  %Share
      of net loss from equity investment
                                                  
                                                  
                                                  (67,494
                                                  )
                                                  
                                                  
                                                  -0.18
                                                  %
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  0.00
                                                  %Beneficial
      conversion feature
                                                  
                                                  
                                                  (1,867,787
                                                  )
                                                  
                                                  
                                                  -5.08
                                                  %
                                                  
                                                  
                                                  (40,277
                                                  )
                                                  
                                                  
                                                  -0.15
                                                  %Other
      income (expense)
                                                  
                                                  
                                                  56,571
                                                  
                                                  
                                                  
                                                  0.15
                                                  %
                                                  
                                                  
                                                  (931,253
                                                  )
                                                  
                                                  
                                                  -3.52
                                                  %Total
      other income (expenses)
                                                  
                                                  
                                                  (3,387,548
                                                  )
                                                  
                                                  
                                                  -9.21
                                                  %
                                                  
                                                  
                                                  343,396
                                                  
                                                  
                                                  
                                                  1.30
                                                  %Net
      income (loss) before non-controlling interest in subsidiary and income
      taxes
                                                  
                                                  
                                                  6,340,160
                                                  
                                                  
                                                  
                                                  17.24
                                                  %
                                                  
                                                  
                                                  (6,139,773
                                                  )
                                                  
                                                  
                                                  -23.21
                                                  %Income
      taxes
                                                  
                                                  
                                                  (53,943
                                                  )
                                                  
                                                  
                                                  -0.15
                                                  %
                                                  
                                                  
                                                  (91,132
                                                  )
                                                  
                                                  
                                                  -0.34
                                                  %Non-controlling
      interest
                                                  
                                                  
                                                  (4,892,097
                                                  )
                                                  
                                                  
                                                  -13.30
                                                  %
                                                  
                                                  
                                                  (1,816,143
                                                  )
                                                  
                                                  
                                                  -6.87
                                                  %Net
      income (loss) attributable to NetSol
                                                  
                                                  
                                                  1,394,120
                                                  
                                                  
                                                  
                                                  3.79
                                                  %
                                                  
                                                  
                                                  (8,047,048
                                                  )
                                                  
                                                  
                                                  -30.43
                                                  %





We note
that the total consolidated net revenue for fiscal year 2010 was $36,779,897 as
compared to $26,448,177 in fiscal year 2009. This represents  a 39%
increase in revenue.  Maintenance fee revenue increased 8% from
$6,499,419 to $7,047,936. Revenue from services, which includes consulting and
implementation, increased 3% from $15,162,426 to $15,574,853.  The
activity for NetSol’s new license sales for NFSTM also improved significantly.
License revenue increased by 196% from $4,786,332 in 2009 to $14,157,107 in
2010. This shows reliability of customers on our flagship product "NetSol
Financial SuiteTM".





Due to
the unprecedented and worldwide recession in 2008, a majority of the deals in
pipeline were either parked or delayed by the expected and existing customers
due to reduction in IT budgets. This delay also resulted in low license and
services revenue in the year 2009. However, beginning in fiscal year 2010, those
deals along with others were converted into contracts resulting in increased
license revenue. Besides this, by 2009, our flagship product "NetSol Financial
SuiteTM" has been established as a mature product for the Asia Pacific regional
market and we have seen a remarkable increase in enquires creating demand for
the product in the region. After the 2008 financial meltdown, we are seeing
increased demand for our product in the leasing and financial sector. During the
last two years we have built a very healthy pipeline which is translating into
more license sales.


35




Due to
the revision in our pricing policy, NFSTM license value in APAC is in the range
of $1.0 to $2.0 million, without factoring in services maintenance and
implementation fees.  Normally, NetSol negotiates 15-20% 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.





The gross
profit was $22,912,846 for year ended June 30, 2010, as compared with $9,249,843
for the same period of the previous year.  This is a 148%
increase.  The gross profit percentage was 62% for the current fiscal
year and 35% in the prior year.   The cost of sales was
$13,867,048 in the current year compared to $17,198,334 in the prior year. The
decrease in cost of sales is mainly due to cost rationalization measures taken
by the company.





Operating
expenses were $13,185,141 for the year ended June 30, 2010, as compared to,
$15,733,012 for the year ended June 30, 2009, a decrease of 18% from the prior
year.  The decrease is mainly attributable to reduction is salaries
and provision for doubtful debts. Depreciation and amortization expense amounted
to $1,609,854- and $1,973,997 for the year ended June 30, 2010 and 2009,
respectively.  Combined salaries and wage costs were $3,026,275 and
$3,443,390 for the comparable periods, respectively, or a decrease of $417,115
from the corresponding period last year. General and administrative expenses
were $4,115,658 and $3,590,118 for the years ended June 30, 2010 and 2009,
respectively, an increase of $525,540 or 15%. As a percentage of sales, these
expenses were 11% in the current year compared to 14% in the prior year.The increase in costs is
due to the expansion of Beijing and Bangkok sales offices, launching activities
of a new joint venture in Saudi Arabia, severance and settlements with a few
employees in the UK, Pakistan and USA, and increased travel and other expenses
that supporting a large workforce entail.





Selling
and marketing expenses reduced to $2,222,841 for the year ended June 30, 2010 as
compared to $3,115,883 for the year ended June 30, 2009.  As a
percentage of sales, these expenses were 6% in the current year compared to
11.8% in the prior year.  The Company provided for certain doubtful
debts of $442,804 and $2,393,685, during the years ended June 30, 2010 and 2009,
respectively.





Income
from operations in fiscal year 2010 was $9,727,708 compared to a loss of
$6,483,169 in fiscal year 2009. As a percentage of sales, net income from
operations was 26% in the current year compared to a loss of 25% in the prior
period.





Net
income in fiscal year 2010 was $1,394,120 compared to a loss of $8,047,048 in
fiscal year 2009.During the years
ended June 30, 2010 and 2009, the Company was required to pay a cash dividend to
the preferred stockholders of $NIL- and $134,400.  The current fiscal
year amount includes a net reduction for the minority interest in earnings of
$4,892,097 compared to a reduction of $1,816,143 in the prior year for the 49.9%
minority interest in NetSol Connect and NetSol Innovation, and the 42.04%
minority interest in NetSol PK. The net earnings per share, basic and diluted,
was $0.05 and $0.04 in 2010 compared to a net loss, basic and diluted, of $0.30
in 2009.





The net
EBITDA income was $6,834,483 compared to loss of $2,473,415 after amortization
and depreciation charges of $3,907,946 and $4,188,208, income taxes of $53,943
and $91,132, and interest expense of $1,478,474 and $1,294,293
respectively.  The EBITDA income per share, basic & diluted was
$0.20 and $0.18 as compared to EBITDA loss of $.09 basic and diluted in the year
ago period. Although the net EBITDA income is a non-GAAP measure of income, 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.


36


Quarterly
Results of Operations for the quarter ended June 30, 2010 and June 30,
2009





Net
revenues for the quarter ended June 30, 2010 and 2009 are broken out among the
subsidiaries as follows:





2010
                                
                                
                                2009Revenue
                                
                                
                                %
                                
                                
                                Revenue
                                
                                
                                %North
      America:Netsol
      Tech NA
                                
                                $
                                1,270,200
                                
                                
                                
                                11.87
                                %
                                
                                $
                                1,351,643
                                
                                
                                
                                19.72
                                %1,270,200
                                
                                
                                
                                11.87
                                %
                                
                                
                                1,351,643
                                
                                
                                
                                19.72
                                %Europe:Netsol
      UK
                                
                                
                                -
                                
                                
                                
                                0.00
                                %
                                
                                
                                -
                                
                                
                                
                                0.00
                                %Netsol
      Tech Europe
                                
                                
                                799,402
                                
                                
                                
                                7.47
                                %
                                
                                
                                546,704
                                
                                
                                
                                7.98
                                %799,402
                                
                                
                                
                                7.47
                                %
                                
                                
                                546,704
                                
                                
                                
                                7.98
                                %Asia-Pacific:Netsol
      Tech (PK)
                                
                                
                                7,172,319
                                
                                
                                
                                67.00
                                %
                                
                                
                                4,126,774
                                
                                
                                
                                60.22
                                %Netsol-Innovation
                                
                                
                                511,288
                                
                                
                                
                                4.78
                                %
                                
                                
                                631,236
                                
                                
                                
                                9.21
                                %Netsol
      Connect
                                
                                
                                126,106
                                
                                
                                
                                1.18
                                %
                                
                                
                                131,175
                                
                                
                                
                                1.91
                                %Netsol-Abraxas
      Australia
                                
                                
                                20,745
                                
                                
                                
                                0.19
                                %
                                
                                
                                65,648
                                
                                
                                
                                0.96
                                %Netsol-Thailand
                                
                                
                                805,000
                                
                                
                                
                                7.52
                                %
                                
                                
                                -
                                
                                
                                
                                0.00
                                %8,635,458
                                
                                
                                
                                80.67
                                %
                                
                                
                                4,954,833
                                
                                
                                
                                72.30
                                %Total
                                
                                $
                                10,705,060
                                
                                
                                
                                100.00
                                %
                                
                                $
                                6,853,180
                                
                                
                                
                                100.00
                                %


37


The
following table presents our unaudited quarterly results of operations for the
quarters ended June 30, 2010 and 2009.  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 MonthsEnded June 30,2010
                                              
                                              
                                              
                                              
                                              
                                              2009%
                                              
                                              
                                              
                                              
                                              
                                              %Net
      Revenues:License
      fees
                                              
                                              $
                                              4,641,770
                                              
                                              
                                              
                                              43.36
                                              %
                                              
                                              $
                                              1,283,700
                                              
                                              
                                              
                                              18.73
                                              %Maintenance
      fees
                                              
                                              
                                              1,720,084
                                              
                                              
                                              
                                              16.07
                                              %
                                              
                                              
                                              1,727,900
                                              
                                              
                                              
                                              25.21
                                              %Services
                                              
                                              
                                              4,343,206
                                              
                                              
                                              
                                              40.57
                                              %
                                              
                                              
                                              3,841,580
                                              
                                              
                                              
                                              56.06
                                              %Total
      revenues
                                              
                                              
                                              10,705,060
                                              
                                              
                                              
                                              100.00
                                              %
                                              
                                              
                                              6,853,180
                                              
                                              
                                              
                                              100.00
                                              %Cost
      of revenues:Salaries
      and consultants
                                              
                                              
                                              1,990,180
                                              
                                              
                                              
                                              18.59
                                              %
                                              
                                              
                                              2,135,294
                                              
                                              
                                              
                                              31.16
                                              %Travel
                                              
                                              
                                              232,283
                                              
                                              
                                              
                                              2.17
                                              %
                                              
                                              
                                              341,589
                                              
                                              
                                              
                                              4.98
                                              %Repairs
      and maintenance
                                              
                                              
                                              76,911
                                              
                                              
                                              
                                              0.72
                                              %
                                              
                                              
                                              80,051
                                              
                                              
                                              
                                              1.17
                                              %Insurance
                                              
                                              
                                              27,553
                                              
                                              
                                              
                                              0.26
                                              %
                                              
                                              
                                              39,371
                                              
                                              
                                              
                                              0.57
                                              %Depreciation
      and amortization
                                              
                                              
                                              647,415
                                              
                                              
                                              
                                              6.05
                                              %
                                              
                                              
                                              598,358
                                              
                                              
                                              
                                              8.73
                                              %Other
                                              
                                              
                                              279,263
                                              
                                              
                                              
                                              2.61
                                              %
                                              
                                              
                                              1,107,766
                                              
                                              
                                              
                                              16.16
                                              %Total
      cost of revenues
                                              
                                              
                                              3,253,605
                                              
                                              
                                              
                                              30.39
                                              %
                                              
                                              
                                              4,302,429
                                              
                                              
                                              
                                              62.78
                                              %Gross
      profit
                                              
                                              
                                              7,451,454
                                              
                                              
                                              
                                              69.61
                                              %
                                              
                                              
                                              2,550,751
                                              
                                              
                                              
                                              37.22
                                              %Operating
      expenses:Selling
      and marketing
                                              
                                              
                                              550,307
                                              
                                              
                                              
                                              5.14
                                              %
                                              
                                              
                                              636,374
                                              
                                              
                                              
                                              9.29
                                              %Depreciation
      and amortization
                                              
                                              
                                              267,907
                                              
                                              
                                              
                                              2.50
                                              %
                                              
                                              
                                              497,716
                                              
                                              
                                              
                                              7.26
                                              %Bad
      debt expense
                                              
                                              
                                              233,200
                                              
                                              
                                              
                                              2.18
                                              %
                                              
                                              
                                              (26,973
                                              )
                                              
                                              
                                              -0.39
                                              %Salaries
      and wages
                                              
                                              
                                              811,515
                                              
                                              
                                              
                                              7.58
                                              %
                                              
                                              
                                              745,859
                                              
                                              
                                              
                                              10.88
                                              %Professional
      services, including non-cash compensation
                                              
                                              
                                              350,647
                                              
                                              
                                              
                                              3.28
                                              %
                                              
                                              
                                              338,187
                                              
                                              
                                              
                                              4.93
                                              %General
      and adminstrative
                                              
                                              
                                              849,398
                                              
                                              
                                              
                                              7.93
                                              %
                                              
                                              
                                              896,667
                                              
                                              
                                              
                                              13.08
                                              %Total
      operating expenses
                                              
                                              
                                              3,062,974
                                              
                                              
                                              
                                              28.61
                                              %
                                              
                                              
                                              3,087,830
                                              
                                              
                                              
                                              45.06
                                              %Income
      (loss) from operations
                                              
                                              
                                              4,388,481
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              (537,079
                                              )
                                              
                                              
                                              -7.84
                                              %Other
      income and (expenses)Loss
      on sale of assets
                                              
                                              
                                              (10,221
                                              )
                                              
                                              
                                              -0.10
                                              %
                                              
                                              
                                              (96,564
                                              )
                                              
                                              
                                              -1.41
                                              %Interest
      expense
                                              
                                              
                                              (314,981
                                              )
                                              
                                              
                                              -2.94
                                              %
                                              
                                              
                                              (327,547
                                              )
                                              
                                              
                                              -4.78
                                              %Interest
      income
                                              
                                              
                                              27,096
                                              
                                              
                                              
                                              0.25
                                              %
                                              
                                              
                                              44,423
                                              
                                              
                                              
                                              0.65
                                              %(Loss)
      gain on foreign currency exchange transactions
                                              
                                              
                                              (257,414
                                              )
                                              
                                              
                                              -2.40
                                              %
                                              
                                              
                                              549,733
                                              
                                              
                                              
                                              8.02
                                              %Gain
      on sale of subsidiary shares
                                              
                                              
                                              -
                                              
                                              
                                              
                                              0.00
                                              %
                                              
                                              
                                              351,522
                                              
                                              
                                              
                                              5.13
                                              %Share
      of net loss from equity investment
                                              
                                              
                                              (43,510
                                              )
                                              
                                              
                                              -0.41
                                              %
                                              
                                              
                                              -
                                              
                                              
                                              
                                              0.00
                                              %Beneficial
      conversion feature
                                              
                                              
                                              (515,815
                                              )
                                              
                                              
                                              -4.82
                                              %
                                              
                                              
                                              (23,052
                                              )
                                              
                                              
                                              -0.34
                                              %Other
      income (expense)
                                              
                                              
                                              (94,426
                                              )
                                              
                                              
                                              -0.88
                                              %
                                              
                                              
                                              21,229
                                              
                                              
                                              
                                              0.31
                                              %Total
      other income (expenses)
                                              
                                              
                                              (1,209,271
                                              )
                                              
                                              
                                              -11.30
                                              %
                                              
                                              
                                              519,744
                                              
                                              
                                              
                                              7.58
                                              %Net
      income (loss) before non-controlling interest in subsidiary and income
      taxes
                                              
                                              
                                              3,179,209
                                              
                                              
                                              
                                              29.70
                                              %
                                              
                                              
                                              (17,335
                                              )
                                              
                                              
                                              -0.25
                                              %Income
      taxes
                                              
                                              
                                              (5,337
                                              )
                                              
                                              
                                              -0.05
                                              %
                                              
                                              
                                              (11,501
                                              )
                                              
                                              
                                              -0.17
                                              %Non-controlling
      interest
                                              
                                              
                                              (1,657,004
                                              )
                                              
                                              
                                              -15.48
                                              %
                                              
                                              
                                              (843,904
                                              )
                                              
                                              
                                              -12.31
                                              %Net
      income (loss) attributable to NetSol
                                              
                                              
                                              1,516,869
                                              
                                              
                                              
                                              14.17
                                              %
                                              
                                              
                                              (872,740
                                              )
                                              
                                              
                                              -12.73
                                              %




38


Liquidity
and Capital Resources





We note
that the Company's cash position was $4,075,546 at June 30, 2010 compared to
$4,403,762 at June 30, 2009.   Further, we note that the
Company’s current assets, as of June 30, 2010, totaled $33,354,816 and were 46%
of total assets, an increase of 16% from $28,792,129, an increase of 16% from
$28,792,129 or  or 46% of total assets as of June 30,
2009.  As of June 30, 2010, the Company's working capital (current
assets less current liabilities) totaled $13,127,033 compared to $11,398,413 as
of June 30, 2009, an increase of $1,728,620. As of June 30, 2010, the Company
had $12,280,331 million in accounts receivable and $9,477,278 million in
revenues in excess of billings.  Net cash provided by operating
activities amounted to $8,669,710 for the year ended June 30, 2010, as compared
to $1,231,588 for the year ended June 30, 2009.





The
increase is mainly due to an increase in both net profits of the company,
accounts receivable and other current assets. The increase in the overall
revenues of the company is due to the signing of new deals that have resulted in
an increase in accounts receivables and other current assets, including revenues
in excess of billings. The average collection cycle for accounts receivables
ranges between three to six months from the date of invoicing. Payments are
usually received within the due dates. The average days sales outstanding for
the year ended June 30, 2010 was 122 days as compared with 157 days in fiscal
year 2009. This decrease is a result of better collection efforts by the Company
during the current year.




We note
that net cash used in investing activities amounted to $10,216,790 for the year
ended June 30, 2010, as compared to $9,434,284 for the year ended June 30, 2009.
The difference is primarily a result of the capitalization ofintangible
assets and an increase in purchases of fixed assets. Please note that the
Company had purchases of property and equipment of $2,986,495 compared to
$2,093,618 for the comparable period last fiscal year.




We note
that nNet
cash provided by financing activities amounted to $1,708,837 and $6,571,516 for
years ended June 30, 2010, and 2009, respectively.  The current fiscal
year included the cash inflow of $854,509 from the sale of common stock and
$71,250 from the exercising of stock options and warrants, compared to $712,770
and $563,929 in the prior year, respectively.  Additionally, the
Company generated $3.5 million from the issuance of convertible
notes.  As of June 30, 2010 the convertible notes payable, net of the
associated beneficial conversion feature amounted to $7,083,204 out of which
$3,017,096 will be payable in fiscal 2011 and the balance of $4,066,108 due in
July 2011.




In the
current fiscal year, the Company had $4,540,971 in proceeds from bank loans, and
net capital leases payments of $4,328,700 as compared to $3,843,541 in proceeds
from bank loans, and net capital leases payments of $539,497 in the comparable
period last year.  The Company operates in a range of geographical
regions of the world through its various subsidiaries. These subsidiaries have
financial arrangements from various financial institutions to meet both their
short and long term funding requirements. These loans will become due at
different maturity dates the detail of which is given in Note No. 12 of the
annexed financial statements. The Company and all of its subsidiaries are in
compliance with our financial covenant arrangements. The Company’s subsidiary,
NetSol PK, has a term finance facility from Askari Bank to finance the
construction of a new building. The total amount of the facility is Rs.
200,000,000 or approximately $2,327,476 which is secured by the first of Rs. 580
million of land, building, and equipment of the Company. The Company has used
only Rs. 100 million ($1,163,738 approximately) of this facility as on June 30,
2010 and the balance of Rs. 100 million is available depending upon the
financial requirements of the Company.




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.   A 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.




As a
growing and dynamic company, we will continue our organic growth strategy in
selective markets. While we have scaled down any major capital expenditures,
there will be 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 anticipate having
the need for working capital of $4.0 to $6.0 million for overall expansion plans
that would involve continued R&D, new product development, business
development activities and infrastructure enhancements.


39





Management
intends to further improve the accounts receivable collections process from our
customers. In addition, we expect that significant executive and employee stock
options exercises as a substantial amount of these options are in the money. The
Company will explore injections of new capital from strategic investors, as the
most feasible and viable source of new capital.  Some of the joint
ventures partners could be amongst the strategic investors to strengthen our
balance sheet. Management is very aware of the need to continue to reduce both
short term and long term liabilities while continuously improving cash flow and
net cash position. Management remains very committed and focused to
strengthening overall assets and will employ all of the above mentioned tools
and such others as may become available to achieve these goals.





Dividends
and Redemption





It has
been the Company's policy to invest earnings in the growth of the Company rather
than distribute earnings as common stock 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
6A.          QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK





As a
small business issuer, the Company is not required to provide the disclosures
set forth in this item.





ITEM
7.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA





The
Consolidated Financial Statements that constitute Item 8 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, Inc.’s report on NetSol’s financial statements for the fiscal
years ended June 30, 2009 and June 30, 2010, 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, 2009 and June 30, 2010 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(T).  CONTROLS AND PROCEDURES




Evaluation
of Disclosure Controls and Procedures





It is the
responsibility of our management to establish, maintain, and monitor disclosure
controls and procedures that are designed to ensure that information required to
be disclosed in our reports filed or submitted under the Securities Exchange Act
of 1934 are recorded, processed, summarized, and reported within the time
periods specified in the Securities and Exchange Commission rules and forms.
Additionally, these disclosure controls include controls and procedures that are
designed to accumulate and communicate the information required to be disclosed
to our company’s Chief Executive Officer and Chief Financial Officer, allowing for
timely decisions regarding required disclosures. As of the end of the period
covered by this report, our management carried out an evaluation, under the
supervision and with the participation of the Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures pursuant to Exchange Act Rule
13a-15(f).  Based upon that evaluation, the Chairman, Chief Financial
Officer and Chief Executive Officer concluded that our disclosure controls and
procedures were ineffective in that they failed to detect that we had omitted
the conclusion regarding Disclosure Controls and Procedures and Management’s
Report on Internal Control over Financial Reporting in the initial
10-K.




Management’s
Report on Internal Control over Financial Reporting




Our
management has the responsibility to establish and maintain adequate internal
controls over our financial reporting, as defined in Rule 13a-15(f) under the
Securities and Exchange Act of 1934. Our internal controls are designed to
provide reasonable assurance regarding the reliability of our financial
reporting and the preparation of our external financial statements in accordance
with generally accepted accounting principles (GAAP).


40




Due to
inherent limitations of any internal control system, management acknowledges
that there are limitations as to the effectiveness of internal controls over
financial reporting and therefore recognize that only reasonable assurance can
be gained from any internal control system. Accordingly, our internal control
system may not detect or prevent material misstatements in our financial
statements and projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the policies or procedures
may deteriorate.




Under the
supervision and participation of management, including the Chief Executive
Officer and Chief Financial Officer, we have performed an assessment of the
effectiveness of our internal controls over financial reporting as of June 30,
2010. This assessment was based on the criteria established in Internal
Control-Integrated Framework, issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on our assessment, we believe
that as of June 30, 2010, the Company’s internal control over financial
reporting is effective based on that criteria.




This
annual report does not include an attestation report of our registered public
accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by our registered public
accounting firm pursuant to rules of the SEC that permit us to provide only
management’s report in this annual report.




Changes
in Internal Control over Financial Reporting




There
have been no significant changes in our internal controls over financial
reporting during our fourth fiscal quarter ended July 3, 2010 that have
materially affected, or are reasonable likely to materially affect, the
Company’s internal control over financial reporting (as defined in Exchange Act
Rules 13a – 15(f) and 15d – 15(f)).





ITEM
8B.  OTHER INFORMATION





None.


PART
III





ITEM
9.  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE





Section
16(a) Beneficial Ownership Reporting Compliance





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 such forms were required, the Company believes that
during the fiscal year ended June 30, 2010, 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.


41


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
                              
                              55
                              
                              Director
      and  Chairman
                              
                              Brother
      to Naeem and Salim GhauriSalim
      Ghauri
                              
                              1999
                              
                              54
                              
                              President
      and Director
                              
                              Brother
      to Naeem and Najeeb GhauriNaeem
      Ghauri
                              
                              1999
                              
                              52
                              
                              Chief
      Executive Officer, Director
                              
                              Brother
      to Najeeb and Salim GhauriBoo-Ali
      Siddiqui
                              
                              2009
                              
                              36
                              
                              Chief
      Financial Officer
                              
                              NonePatti
      L. W. McGlasson
                              
                              2004
                              
                              45
                              
                              Secretary,
      General Counsel
                              
                              NoneShahid
      Javed Burki
                              
                              2000
                              
                              71
                              
                              Director
                              
                              NoneEugen
      Beckert
                              
                              2001
                              
                              63
                              
                              Director
                              
                              NoneMark
      Caton
                              
                              2002
                              
                              60
                              
                              Director
                              
                              NoneAlexander
      Shakow
                              
                              2007
                              
                              73
                              
                              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 founder of
NetSol Technologies, Inc. He was responsible for NetSol listing on
NASDAQ in 1999, the NetSol subsidiary listing on KSE (Karachi Stock
Exchange) in 2005, and the NetSol listing on the NASDAQ Dubai exchange in 2008.
  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.   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 five 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
1981.   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 of Pakistan Human Development Fund, a
non-profit organization, a partnership with UNDP to promote literacy, health
services and poverty alleviation in Pakistan. Mr. Ghauri has participated in
NASDAQ opening and/or closing bell ceremonies in 2006, 2008 and
2009.  The Nominating Committee determined that Mr. Ghauri’s long term
experience with the Company and his direct experience with capital markets and
investment community makes him qualified to serve on our Board of
Directors.




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.  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. Under his leadership, NetSol PK has become the
leading IT company and is known as an IT Icon in the region.  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.  The Nominating Committee determined that Mr. Ghauri’s
capacity as Chief Executive of our largest subsidiary, his knowledge of our
products, as well as his unique knowledge of the Asia Pacific and Pakistan
markets makes him qualified to serve as a member of our Board of
Directors.


42





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. He is also the director of the Global Sales group.
While instrumental in numerous transactions, his most significant contribution
to the revenue of the Company was his role in closing the TiG NetSol Joint
Venture in 2005.  Prior to joining the Company, Mr. Ghauri was Project
Director for Mercedes-Benz Finance Ltd., 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
Technologies Europe, Ltd., a subsidiary of the Company.  The
Nominating Committee determined that Mr. Ghauri’s experience in auto finance, a
significant portion of our revenues, and his experience in developing new
business opportunities and relationships for the Company makes him qualified to
serve on our Board of Directors.




BOO-ALI
SIDDIQUI Mr. Siddiqui has served as NetSol's Chief Financial Officer since April
2009.  He also serves as the Chief Financial Officer and Company Secretary
of NetSol Technologies Ltd. managing the finances of all companies in the Asia
group since 2005. Prior to joining NetSol, he served as Deputy Registrar of
Companies for the Securities & Exchange Commission of Pakistan (SECP) and as
Senior Manager, Audit and Tax, for Ehtisham & Co., Chartered Accountants.
Mr. Siddiqui holds a Bachelor of Commerce from Hailey College of Commerce,
Lahore, University of The Punjab, Pakistan, is a Fellow Member of both the
Institute of Chartered Secretaries & Managers (FICS) and the Pakistan
Institute of Public Finance Accountants (FPA), and is an Associate Member of the
Institute of Chartered Accountants of Pakistan (ACA). He completed his four
years articleship from Ford Rhodes Sidat Hyder & Company a renowned
accounting firm in Pakistan representing Ernest Young
International,




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. 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.  The Nominating Committee determined that Mr. Beckert’s
experience in auto finance related IT, specifically as CIO for Debis Financial
Services, together with his status as an independent director under Nasdaq rules
makes him qualified to serve on our Board of Directors.





SHAHID
JAVED BURKI was appointed to the Board of Directors in February
2003.  Before joining the World Bank in 1974 he was a member of the
Civil Service of Pakistan. He had a distinguished career with the World Bank
from 1974 to 1999 where he held a number of senior positions including Chief of
Policy Planning (1974-1981); Director of International Relations Department
(1981-87); Director of China Department (1987-94); and Vice President of Latin
America and the Caribbean Region (1994-99). Upon taking early retirement from
the Bank, he took up the position of Chief Executive Officer of EMP Financial
Advisors, a consulting company linked with the Washington based EMP Global, a
private equity firm and worked there until 2005. He is currently Chairman the
Institute of Public Policy, a think tank associated with the Beacon house
National University, Lahore, Pakistan. He also spends some time each year as
Senior Visiting Research Fellow at the Institute of South Asian Studies,
National Singapore University. In 1996-97 he took leave of absence from the
World Bank to take up the position of Finance Minister of Pakistan. Mr. Burki
was educated at Government College, Lahore from where he received M.Sc. in
Physics; at Oxford University as a Rhodes Scholar from where he received M.A.
(Hons) in Economics; at Harvard University as a Mason Fellow from where he
received M.P.A. and also studied for Ph.D. in Economics (not completed). In
1997, he received a Diploma in Advanced Management from Harvard University’s
Business School.  Mr. Burki has authored several books and articles on
development issues including Study of Chinese Communes
(Harvard University Press, 1969); Pakistan Under Bhutto(Macmillan, 1990); Changing Perceptions, Altered
Reality: Pakistan’s Economy Under Musharraf, 1999-2006 (Oxford University
Press, 2007). He is currently working on a book, Changing Asia to be published
later this year by Routledge, London.  Mr. Burki is a chairman of the
Audit Committee and a member of the Compensation and Nominating and Corporate
Governance Committees.  Mr. Burki is the Company’s Financial Expert on
the Audit Committee.  The Nominating Committee believes that Mr.
Burki’s vast experience as an economist and entrepreneur with specialization on
the Asia Pacific markets, his status as our financial expert and, finally, his
status as an independent director under Nasdaq rules makes him qualified to
serve on our Board of Directors.


43





MARK
CATON joined the board of directors in 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.  The Nominating
Committee believes that Mr. Caton’s understanding of the US IT market, his
experience in human resources related issues and his status as an independent
director under Nasdaq rules qualifies him to serve on our Board of
Directors.





ALEXANDER
SHAKOW was elected to 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  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 for 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, Who’s Who in the WorldandWho’s Who in
Finance and Business.  Mr. Shakow is a member of the Audit,
Compensation and Nominating and Corporate Governance Committees.The Nominating Committee
believes that Mr. Shakow’s extensive experience as an economist with focus on
the Asia Pacific region as well as his status as an independent director under
Nasdaq rules makes him qualified to serve on our Board of
Directors.





CORPORATE
GOVERNANCE





Corporate
Governance.




Code of Ethics.




The
Company adopted on July 2, 2004, as amended and restated on July 22, 2007, a
Code of Ethics applicable to every officer, director and employee of the
Company, including, but not limited to the Company’s principal executive
officer, principal financial officer, principal accounting officer or
controller, or persons performing similar functions.




Audit
Committee




The
Company has an audit committee whose members are the independent directors of
the Company, specifically, Mr. Beckert, Mr. Burki, Mr. Caton and Mr. Shakow. Mr.
Burki is the current acting chairman of the audit committee.




Audit
Committee Financial Expert.




The
Company has identified its audit chairperson, Mr. Shahid Javed Burki as its
audit committee financial expert. Mr. Burki is an independent board member as
the term is defined in the Nasdaq Listing Rules. Mr. Burki’s experience as
Finance Minister of Pakistan, Chief Executive Officer of EMP Financial Advisors,
his various roles at the World Bank, and his tenure as both a audit committee
member and chair for the Company, provides him with an understanding of
generally accepted accounting principles and financial reporting. Additionally,
this experience provides an ability to assess the general application of
accounting principles in connection with the accounting for estimates, accruals
and reserves; experience analyzing financial statements that were comparable in
the breadth and complexity of issues that can be reasonably expected to be
raised by the Company’s financial statements; an understanding of internal
control over financial reporting; and an understanding of audit committee
functions.


44




ITEM
10-EXECUTIVE COMPENSATION





Compensation
Discussion and Analysis




NetSol
Technologies’ Named Executive Officers, a group comprised of the Chief Executive
Officer, the Chief Financial Officer, and three other executive officers in the
2009-2010 fiscal year, are the following individuals:





Najeeb
      Ghauri
                Chief
      Executive OfficerSalim
      Ghauri
                President
      of Asia Pacific and Middle East OperationsNaeem
      Ghauri
                President
      of European OperationsBoo
      Ali
                Chief
      Financial OfficerPatti
      L. W. McGlasson
                Secretary
      and General Counsel





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,





•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.


45




2010
Executive Compensation Components




For the
fiscal year ended June 30, 2010, 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. During the 2010
fiscal year, each executive officer, with the exception of the Chief Financial
Officer whose tenure began in Fiscal 2009, received an upward adjustment to his
or her base salary to correct for the voluntary decrease in base salary agreed
to by each executive officer during the 2009 fiscal year. The Chief Financial
Officer’s base salary was adjusted in the 2010 fiscal year based on his
performance for the Company during his first year of service.




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 2010, none of the named executives were awarded cash
bonuses.   The Compensation Committee determined to forgo the
grant of cash bonuses during the fiscal year ended June 2010 because, while the
Company was experiencing an easing of the effects of the recession, cash bonuses
could have a negative impact on the Company’s desire to maintain cash
reserves.




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, certain non-executive
employees, and directors who join us may be awarded stock awards and/or 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. Such
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.




During
the fiscal year ended June 30, 2010, the Company adjusted the overall
compensation of the named executives to reconcile the reduction in salaries
during the previous fiscal year and first half of the fiscal year ended June 30,
2010.  Equity incentives determined by the Fair Market Value of our
common stock on the grant date were provided to the executives as an adjustment
of their overall compensation while taking in to account the need to continue to
incentivize the executive to build value in the organization. Each executive’s
stock award was based on an analysis of the Compensation Committee of an
appropriate overall cash compensation for each individual taking into account
their position and compensation at similarly situated companies.  Each
executive’s stock award was based on a desired overall compensation cash value
less the base salary as approved by the Compensation Committee.


46




Perquisites
and Other Personal Benefits




We
provide named executive officers with perquisites and other personal benefits
that we 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.




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 with a written employment
agreement 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, CEO of NetSol Technologies, Ltd. and CEO of NetSol
Technologies Europe, Ltd.  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 cannot 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.






Our Chief
Financial Officer has an employment agreement that provides, 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 second month 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 two
months from the date of termination.  Provided, however, if such
benefits cannot 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 cannot 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.


47




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 is generally fully deductible for federal income tax
purposes.




Accounting
for Stock-Based Compensation




Commencing
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).




Summary
Compensation




The
following table shows the compensation for the fiscal year ended June 30, 2010
and June 30, 2009, 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 PrinciplePosition
                                                  
                                                  Fiscal
                                                    Year
                                                    Ended
                                                  
                                                  Salary($)
                                                  
                                                  
                                                  Bonus($)
                                                  
                                                  
                                                  Stock
                                                    Awards
                                                    ($) (1)
                                                  
                                                  
                                                  Option
                                                    Awards($)
                                                  
                                                  
                                                  All Other
                                                    Compensation
                                                    ($)
                                                  
                                                  
                                                  Total ($)Najeeb
      Ghauri
                                                  
                                                  2010
                                                  
                                                  $
                                                  315,000
                                                  
                                                  
                                                  $
                                                  -
                                                  
                                                  
                                                  $
                                                  99,375
                                                  
                                                  
                                                  $
                                                  94,772
                                                  
                                                  
                                                  $
                                                  70,981
                                                  (2)
                                                  
                                                  $
                                                  580,128CEO
      & Chairman
                                                  
                                                  2009
                                                  
                                                  $
                                                  272,265
                                                  
                                                  
                                                  $
                                                  -
                                                  
                                                  
                                                  $
                                                  -
                                                  
                                                  
                                                  $
                                                  58,290
                                                  
                                                  
                                                  $
                                                  36,000
                                                  
                                                  
                                                  $
                                                  366,555Naeem
      Ghauri
                                                  
                                                  2010
                                                  
                                                  $
                                                  225,000
                                                  
                                                  
                                                  $
                                                  -
                                                  
                                                  
                                                  $
                                                  99,375
                                                  
                                                  
                                                  $
                                                  66,340
                                                  
                                                  
                                                  $
                                                  27,000
                                                  (3)
                                                  
                                                  $
                                                  417,715President
      EMEA Region
                                                  
                                                  2009
                                                  
                                                  $
                                                  200,000
                                                  
                                                  
                                                  $
                                                  -
                                                  
                                                  
                                                  $
                                                  -
                                                  
                                                  
                                                  $
                                                  40,802
                                                  
                                                  
                                                  $
                                                  25,686
                                                  
                                                  
                                                  $
                                                  266,488Salim
      Ghauri
                                                  
                                                  2010
                                                  
                                                  $
                                                  212,500
                                                  
                                                  
                                                  $
                                                  -
                                                  
                                                  
                                                  $
                                                  99,375
                                                  
                                                  
                                                  $
                                                  66,340
                                                  
                                                  
                                                  $
                                                  9,918
                                                  (4)
                                                  
                                                  $
                                                  388,133President
      APAC Region
                                                  
                                                  2009
                                                  
                                                  $
                                                  175,000
                                                  
                                                  
                                                  $
                                                  -
                                                  
                                                  
                                                  $
                                                  -
                                                  
                                                  
                                                  $
                                                  40,802
                                                  
                                                  
                                                  $
                                                  -
                                                  
                                                  
                                                  $
                                                  215,802Boo-Ali
      Siddiqui
                                                  
                                                  2010
                                                  
                                                  $
                                                  75,000
                                                  
                                                  
                                                  $
                                                  -
                                                  
                                                  
                                                  $
                                                  9,000
                                                  
                                                  
                                                  $
                                                  -
                                                  
                                                  
                                                  $
                                                  -
                                                  (4)
                                                  
                                                  $
                                                  84,000Chief
      Financial Officer
                                                  
                                                  2009
                                                  
                                                  $
                                                  15,000
                                                  
                                                  
                                                  $
                                                  -
                                                  
                                                  
                                                  $
                                                  6,400
                                                  
                                                  
                                                  $
                                                  -
                                                  
                                                  
                                                  $
                                                  -
                                                  
                                                  
                                                  $
                                                  21,400Dan
      Lee
                                                  
                                                  2010
                                                  
                                                  $
                                                  -
                                                  
                                                  
                                                  $
                                                  -
                                                  
                                                  
                                                  $
                                                  -
                                                  
                                                  
                                                  $
                                                  -
                                                  
                                                  
                                                  $
                                                  -
                                                  (4)
                                                  
                                                  $
                                                  -Chief
      Financial Officer
                                                  
                                                  2009
                                                  
                                                  $
                                                  58,333
                                                  
                                                  
                                                  $
                                                  -
                                                  
                                                  
                                                  $
                                                  13,340
                                                  
                                                  
                                                  $
                                                  -
                                                  
                                                  
                                                  $
                                                  4,245
                                                  
                                                  
                                                  $
                                                  75,918Tina
      Gilger
                                                  
                                                  2010
                                                  
                                                  $
                                                  -
                                                  
                                                  
                                                  $
                                                  -
                                                  
                                                  
                                                  $
                                                  -
                                                  
                                                  
                                                  $
                                                  -
                                                  
                                                  
                                                  $
                                                  -
                                                  (4)
                                                  
                                                  $
                                                  -Chief
      Financial Officer
                                                  
                                                  2009
                                                  
                                                  $
                                                  70,360
                                                  
                                                  
                                                  $
                                                  5,000
                                                  
                                                  
                                                  $
                                                  -
                                                  
                                                  
                                                  $
                                                  -
                                                  
                                                  
                                                  $
                                                  -
                                                  
                                                  
                                                  $
                                                  75,360Patti
      L. W. McGlasson
                                                  
                                                  2010
                                                  
                                                  $
                                                  122,747
                                                  
                                                  
                                                  $
                                                  -
                                                  
                                                  
                                                  $
                                                  7,200
                                                  
                                                  
                                                  $
                                                  -
                                                  
                                                  
                                                  $
                                                  23,594
                                                  (5)
                                                  
                                                  $
                                                  153,541Secretary,
      General Counsel
                                                  
                                                  2009
                                                  
                                                  $
                                                  124,289
                                                  
                                                  
                                                  $
                                                  5,000
                                                  
                                                  
                                                  $
                                                  17,200
                                                  
                                                  
                                                  $
                                                  -
                                                  
                                                  
                                                  $
                                                  -
                                                  
                                                  
                                                  $
                                                  146,489





(1)The stock was awarded as
compensation and sign up bonus to the officers.  Therefore, no expense
was recognized in the consolidated financial statements.


(2)  Consists
of $36,000 and $36,000 paid for automobile and travel allowance, $8,379 and $Nil
on account of life insurance and $26,602 and $32,151 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, 2010 and 2009,
respectively.


(3)  Consists
of $24,000 and $22,790 paid for automobile and travel allowance and $3,000 and
$2,896 paid for private medical insurance premiums paid by the Company for the
fiscal years ended June 30, 2010 and 2009, respectively.


(4)  The
amount paid to the officer was in aggregate less than $10,000 for the fiscal
years ended June 30, 2010 and 2009, respectively.


(5)  Consists
of $8,500 paid for automobile allowance and $15,094 paid for medical and dental
insurance premiums for participation in the health insurance program for the
fiscal year ended June 30, 2010. The amount paid to the officer was in aggregate
less than $10,000 for the fiscal years ended June 30, 2009.


48




Grants
of Plan-Based Awards




Mr.
Najeeb Ghauri, Mr. Naeem Ghauri and Mr. Salim Ghauri pursuant to the terms of
their employment agreement were entitled for bonus based on the performance of
the Company for the fiscal year ended June 30, 2008. Mssrs. Ghauri waived all
rights to bonuses and options pursuant to the terms of their employment
agreements in response to the economic downturn of late 2008.




Mr.
Najeeb Ghauri, Mr. Naeem Ghauri and Mr. Salim Ghauri were granted, in February
2009, 750,000, 525,000 and 525,000 options, respectively, to acquire shares of
common stock of the Company. The options vest quarterly and were approved by the
Compensation Committee as an incentive for Messrs. Ghauri in light of the agreed
reduction of salary in early 2009.  Ms. McGlasson was granted 20,000
shares of common stock of the Company in early 2009 as an incentive for Ms.
McGlasson in light of the agreed reduction of salary.




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 and Mr.
Siddiqui’s employment agreement with the Company were the result of negotiations
between our Chief Executive Officer and the employees 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 (the “CEO Agreement”). The CEO Agreement was
amended effective January 1, 2008 and again January 1, 2010.  Pursuant
to the CEO Agreement, as amended, 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, 2012.
The term of employment automatically renews for 36 additional months unless
notice of intent to terminate is received by either party at least 6 months
prior to the end of the term.  Under the CEO Agreement,
Mr. Ghauri is entitled to an annualized base salary of $375,000 and 250,000
shares of common stock which are granted 25% on a quarterly basis following each
3 months of service, and is eligible for annual bonuses at the discretion of the
Compensation Committee.  Pursuant to the terms of the amendment, Mr.
Ghauri was entitled to the following bonuses.  A bonus of One Hundred
Thirty Three Thousand Dollars ($133,000) is payable upon achieving the minimum
bonus benchmark of: company-wide revenue of $30,000,000 for the fiscal year
2009-2010; and, earnings per share of $0.05 (the “Minimum Bonus
Benchmark”).  An additional bonus may be earned if an “accelerator
goal” is achieved.  The bonus is accelerated to a total of Two Hundred
Thousand Dollars ($200,000) if revenue of $33,000,000 is attained together with
earnings per share of $0.10.




Mr. Ghauri
is entitled to participate in the Company's stock option plans, is entitled to
three weeks of paid vacation per calendar year, is to receive a car allowance
totaling $3,000 per month for the term of the CEO Agreement, and the Company
shall pay premiums not to exceed $16,600 (or $4,150 quarterly) for life
insurance for the Executive.




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.


49




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 the
Company’s 10-KSB for the fiscal year ended June 30, 2007.  The above
summary of the First Amendment is qualified in its entirety by reference to the
full text of the Amendment, a copy of which was filed as an exhibit to the
Company’s 10-KSB for the fiscal year ended June 30, 2008.  The above
summary of the Second Amendment is qualified in its entirety by reference to the
full text of the Amendment, a copy of which was filed as an exhibit to the
Company’s 10-Q for the fiscal year ended December 31, 2009.




Employment
Agreement with Naeem Ghauri




Effective
January 1, 2007, the Company entered into an Employment Agreement with our
President of NetSol Technologies Europe, Ltd. and Chief Executive Officer of
EMEA, Naeem Ghauri (the “President EMEA Agreement”). The President EMEA
Agreement was amended effective January 1, 2008 and again effective January 1,
2010.  Pursuant to the Employment Agreement, as amended, the Company
agreed to employ Mr. Ghauri as its President of the EMEA region from the
date of the President EMEA Agreement through December 31, 2012. The term of
employment automatically renews for 36 additional months unless notice of intent
to terminate is received by either party at least 6 months prior to the end of
the term. Under the President EMEA Agreement, Mr. Ghauri is entitled to an
annualized base salary of $250,000, 250,000 shares of common stock which are
granted 25% on a quarterly basis following each 3 months of service, and is
eligible for annual bonuses at the discretion of the Compensation
Committee.  A bonus of One Hundred Thirty Three Thousand Dollars
($133,000) is payable upon achieving the minimum bonus benchmark of:
company-wide revenue of $30,000,000 for the fiscal year 2009-2010; and, earnings
per share of $0.05 (the “Minimum Bonus Benchmark”).  An additional
bonus may be earned if an “accelerator goal” is achieved.  The bonus
is accelerated to a total of Two Hundred Thousand Dollars ($200,000) if revenue
of $33,000,000 is attained together with earnings per share of
$0.10.




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 the Company’s 10-KSB for the fiscal year ended June 30,
2007.  The above summary of the Amendment is qualified in its entirety
by reference to the full text of the Amendment, a copy of which was filed as an
exhibit to the Company’s 10-KSB for the fiscal year ended June 30,
2008.   The above summary of the Second Amendment is qualified in
its entirety by reference to the full text of the Amendment, a copy of which was
filed as an exhibit to the Company’s 10-Q for the fiscal year ended December 31,
2009.


50




Employment
Agreement with Salim Ghauri




Effective
January 1, 2007, the Company entered into an Employment Agreement with our
President of NetSol Technologies, Ltd., our wholly owned subsidiary in Lahore,
Pakistan and Chief Executive Officer of the APAC Region, Mr. Salim Ghauri (the
“President APAC Agreement”). The President APAC Agreement was amended effective
January 1, 2008 and again January 1, 2010.  Pursuant to the President
APAC Agreement, as amended, 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, 2012. The term of
employment automatically renews for 36 additional months unless notice of intent
to terminate is received by either party at least 6 months prior to the end of
the term.





Under the
President APAC 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, 250,000 shares of common stock which are granted 25% on
a quarterly basis following each 3 months of service, and is eligible for annual
bonuses at the discretion of the Compensation Committee.  A bonus of
One Hundred Thirty Three Thousand Dollars ($133,000) is payable upon achieving
the minimum bonus benchmark of: company-wide revenue of $30,000,000 for the
fiscal year 2009-2010; and, earnings per share of $0.05 (the “Minimum Bonus
Benchmark”).  An additional bonus may be earned if an “accelerator
goal” is achieved.  The bonus is accelerated to a total of Two Hundred
Thousand Dollars ($200,000) if revenue of $33,000,000 is attained together with
earnings per share of $0.10.





The
Company retained the right to increase the base compensation as it deems
necessary. Mr. Ghauri agreed to a 20% decrease in his salary from April 1 to
June 30, 2009.  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 the Company’s 10-KSB for the fiscal year ended June 30,
2007.  The above summary of the Amendment is qualified in its entirety
by reference to the full text of the Amendment, a copy of which was filed as an
exhibit hereto. The above summary of the Second Amendment is qualified in its
entirety by reference to the full text of the Amendment, a copy of which was
filed as an exhibit to the Company’s 10-Q for the fiscal year ended December 31,
2009.




Employment
Agreement with Boo-Ali Siddiqui




Effective
April 1, 2010, the Company entered into an Employment Agreement with our Chief
Financial Officer, Mr. Boo-Ali Siddiqui. Pursuant to the Employment Agreement
between Ms. Siddiqui and the Company (the "CFO Agreement"), the Company
agreed to employ Mr. Siddiqui as its CFO from the date of the CFO Agreement
through March 31, 2011. According to the terms of the CFO Agreement, the term of
the agreement automatically extends for an additional thirty day periods unless
notice of intent to terminate is received by either party at least two weeks
prior to the end of the term. Under the CFO Agreement, Mr. Siddiqui is
entitled to an annualized base salary of $84,000 and is eligible for annual
bonuses at the discretion of the Chief Executive Officer.  Mr.
Siddiqui shall also receive a total of 50,000 shares of common stock to be
granted in 25% tranches upon each completion of a quarter of service during the
term of his CFO Agreement.


51




The CFO
Agreement also includes provisions respecting severance, non-solicitation,
non-competition, and confidentiality obligations. Pursuant to the CFO 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 2 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 2 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 CFO 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 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 CFO Agreement by the Company. Under the CFO 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 CFO
Agreement by Mr. Siddiqui.




The above
summary of the CFO Agreement is qualified in its entirety by reference to the
full text of the CFO Agreement, a copy of which was filed as an exhibit to the
Company’s 10-Q for the quarter ended December 31, 2009.




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 March
31, 2012. According to the terms of the General Counsel Agreement, the term of
the agreement automatically extends for an additional one year periods unless
notice of intent to terminate is received by either party at least 6 months
prior to the end of the term. Under the General Counsel Agreement,
Ms. McGlasson was entitled to an annualized base salary of $130,000, 40,000
shares of common stock to be granted in 25% tranches after each quarter of
service, and is eligible for annual bonuses at the discretion of the Chief
Executive Officer.  In addition, Ms. McGlasson is entitled to
participate in the Company's stock option plans and, is entitled to four weeks
of paid vacation per calendar year.




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
her to perform any act which is illegal, including the commission of a crime or
act of moral turpitude, or a material breach of the General Counsel Agreement by
the Company. Under the General Counsel Agreement, Cause includes conviction of
crime involving moral turpitude, failure to perform her 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.




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.  The above summary is also qualified in
its entirety by reference to the full text of the Amendment to the General
Counsel Agreement, a copy of which was filed as an exhibit to the Company’s 10-Q
for the quarter ended March 31, 2010.


52




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, 2010, the last day of our fiscal year, to each of
the individuals named in the Summary Compensation Table.




NAME
                                                                                    
                                                                                    NUMBER OF
                                                                                      SECURITIES
                                                                                      UNDERLYING
                                                                                      OPTIONS (#)
                                                                                      EXERCISABLE
                                                                                    
                                                                                    
                                                                                    NUMBER OF
                                                                                      SECURITIES
                                                                                      UNDERLYING
                                                                                      OPTIONS (#)
                                                                                      UNEXERCISABLE
                                                                                    
                                                                                    
                                                                                    OPTION
                                                                                      EXERCISE
                                                                                      PRICE ($)
                                                                                    
                                                                                    OPTION
                                                                                      EXPIRATION
                                                                                      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
                                                                                    
                                                                                    4/1/15167,214
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    1.83
                                                                                    
                                                                                    6/2/16250,000
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    2.50
                                                                                    
                                                                                    6/2/16750,000
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    0.65
                                                                                    
                                                                                    2/12/19Naeem
      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
                                                                                    
                                                                                    4/1/15217,214
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    1.83
                                                                                    
                                                                                    6/2/16250,000
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    2.50
                                                                                    
                                                                                    6/2/16525,000
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    0.65
                                                                                    
                                                                                    2/12/19Salim
      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
                                                                                    
                                                                                    4/1/15217,214
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    1.83
                                                                                    
                                                                                    6/2/16250,000
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    2.50
                                                                                    
                                                                                    6/2/16525,000
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    0.65
                                                                                    
                                                                                    2/12/19Boo-Ali
      Siddiqui
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    1/0/00Patti
      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
                                                                                    
                                                                                    7/7/1510,000
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    1.60
                                                                                    
                                                                                    7/23/17




53




Option
Exercises and Stock Vested




No
options were exercised and consequently no stock was issued to any officer of
the company.




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 andunused 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 onetime 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, 2010, 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
                      REASONBase
      Salary
                    
                    $
                    1,125,000
                    
                    
                    $
                    -
                    
                    
                    $
                    1,125,000Bonus
                    
                    
                    -Salary
      Multiple Pay-out
                    
                    
                    897,000Bonus
      or Revenue One-time Pay-Out
                    
                    
                    367,799Net
      Cash Value of Options
                    
                    
                    4,648,302Total
                    
                    $
                    7,038,101
                    
                    
                    $
                    -
                    
                    
                    $
                    1,125,000




54




Naeem
Ghauri, President EMEA




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 onetime 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, 2010, 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
                      REASONBase
      Salary
                    
                    $
                    750,000
                    
                    
                    $
                    -
                    
                    
                    $
                    750,000Bonus
                    
                    
                    -Salary
      Multiple Pay-out
                    
                    
                    598,000Bonus
      or Revenue One-time Pay-Out
                    
                    
                    367,799Net
      Cash Value of Options
                    
                    
                    4,618,552Total
                    
                    $
                    6,334,351
                    
                    
                    $
                    -
                    
                    
                    $
                    750,000




Salim
Ghauri, President APAC




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 onetime 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.


55




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, 2010, 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
                            REASONBase
      Salary
                          
                          $
                          750,000
                          
                          
                          $
                          -
                          
                          
                          $
                          750,000Bonus
                          
                          
                          -Salary
      Multiple Pay-out
                          
                          
                          598,000Bonus
      or Revenue One-time Pay-Out
                          
                          
                          367,799Net
      Cash Value of Options
                          
                          
                          4,643,552Total
                          
                          $
                          6,359,351
                          
                          
                          $
                          -
                          
                          
                          $
                          750,000




Boo-Ali
Siddiqui, Chief Financial Officer




In the
event that Mr. Siddiqui 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 onetime payment equal to the
product of 2.99 and his salary during the preceding 6 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 six (6) months (the “Change of Control
Termination Payment”).




The
following table summarizes the potential payments to Mr. Siddiqui assuming
his employment with us was terminated or a change of control occurred on June
30, 2010, 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
                            REASONBase
      Salary
                          
                          $
                          14,000
                          
                          
                          $
                          -
                          
                          
                          $
                          14,000Bonus
                          
                          
                          -Salary
      Multiple Pay-out
                          
                          
                          125,580Bonus
      or Revenue One-time Pay-Out
                          
                          
                          98,190Net
      Cash Value of Options
                          
                          
                          -Total
                          
                          $
                          237,770
                          
                          
                          $
                          -
                          
                          
                          $
                          14,000




56




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 onetime 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, 2010, 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
                      REASONBase
      Salary
                    
                    $
                    130,000
                    
                    
                    $
                    -
                    
                    
                    $
                    130,000Bonus
                    
                    
                    -Salary
      Multiple Pay-out
                    
                    
                    371,624Bonus
      or Revenue One-time Pay-Out
                    
                    
                    183,899Net
      Cash Value of Options
                    
                    
                    326,800Total
                    
                    $
                    1,012,324
                    
                    
                    $
                    -
                    
                    
                    $
                    130,000




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, 2010, other than Najeeb Ghauri,
Naeem Ghauri and Salim Ghauri who are executives and directors.




NAME
                  
                  FEES
                    EARNED
                    OR PAID
                    IN CASH
                    ($)
                  
                  
                  SHARES
                    AWARDS
                    ($) (1)
                  
                  
                  TOTAL
                    ($)Eugen
      Beckert
                  
                  
                  21,288
                  
                  
                  
                  15,275
                  
                  
                  
                  36,563Shahid
      Javed Burki
                  
                  
                  26,612
                  
                  
                  
                  15,275
                  
                  
                  
                  41,887Mark
      Caton
                  
                  
                  23,950
                  
                  
                  
                  15,275
                  
                  
                  
                  39,225Alexander
      Shakow
                  
                  
                  15,075
                  
                  
                  
                  15,275
                  
                  
                  
                  30,350




(1)
            During
      the fiscal year ended June 30, 2010, 17,500 shares were issued to each
      independent director valuing
$15,275


57




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, 2010.




BOARD ACTIVITY
                  
                  CASH
                    PAYMENTSBoard
      Member Fee
                  
                  $
                  39,000Committee
      Membership
                  
                  $
                  15,975Chairperson
      for Audit Committee
                  
                  $
                  13,312Chairperson
      for Compensation Committee
                  
                  $
                  10,650Chairperson
      for Nominating and Corporate Governance Committee
                  
                  $
                  7,988




Members
of our Board of Directors are also eligible to receive stock option or stock
award 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,
2010, the Chairman of the Compensation Committee was
Mr.  Caton.  There were no other members of the committee
during the fiscal year ended June 30, 2010. All current members of the
Compensation Committee are "independent directors" as defined under the NASDAQ
Listing Rules. None of these individuals were at any time during the fiscal year
ended June 30, 2010, or at any other time, an officer or employee of the
Company.




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 1,655,341
have been granted.  The grant prices range between $0.72 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 4,948,246
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 3,925,000
have been granted.  The grant prices range between $1.70 and
$2.55.





In June
2008, our shareholders approved the 2008 Equity incentive plan.  This
plan authorizes up to 1,000,000 grants and/or options of common stock of which
602,000 have been granted. The grant prices range between $0.32 and
$1.85.


58


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 6, 2010, 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:





PercentageNajeeb
      Ghauri (3)
                    
                    
                    4,077,823
                    
                    
                    
                    10.14
                    %Naeem
      Ghauri (3)
                    
                    
                    3,253,682
                    
                    
                    
                    8.09
                    %Salim
      Ghauri (3)
                    
                    
                    3,294,116
                    
                    
                    
                    8.19
                    %Eugen
      Beckert (3)
                    
                    
                    278,900
                    
                    
                    
                    *Shahid
      Javed Burki (3)
                    
                    
                    265,000
                    
                    
                    
                    *Mark
      Caton (3)
                    
                    
                    57,700
                    
                    
                    
                    *Alexander
      Shakow (3)
                    
                    
                    50,273
                    
                    
                    
                    *Patti
      McGlasson (3)
                    
                    
                    165,500
                    
                    
                    
                    *Boo-Ali
      Siddiqui (3)
                    
                    
                    32,500
                    
                    
                    
                    *The
      Tail Wind Fund Ltd.(5)(6)
                    
                    
                    3,822,192
                    
                    
                    
                    9.51
                    %Newland
      Capital Management LLC(7)
                    
                    
                    3,405,414
                    
                    
                    
                    8.47
                    %All
      officers and directorsas
      a group (nine persons)
                    
                    
                    11,475,494
                    
                    
                    
                    28.54
                    %





*  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 7, 2010,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, 2,474,277; Mr. Naeem Ghauri, 2,309,377; Mr. Salim Ghauri,
2,145,191; Mr. Eugen Beckert, 135,000; Mr. Shahid Burki, 150,000; and Ms. Patti
McGlasson, 110,000.





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





(4)  Shares
issued and outstanding as of September 6, 2010 were 40,205,421.





(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) and as reported in their
Form 13G/A filed February 12, 2010, The Tail Wind Fund Ltd. (“Tail Wind”) may be
deemed to beneficially own a total of 7,355,432 shares of Common Stock,
including: 650,467 shares  of Common Stock held by Tail Wind;
12,854,143 shares of Common Stock issuable upon conversion of $1,800,000 in
principal amount of  NetSol’s Convertible Notes due July 10, 2010
(“2009 Notes”) issued to TWF at a conversion price of $0.63 (without any
interest accrual), 793,650 shares of Common Stock issuable upon exercise of
warrants issued to TWF on June 29, 2007, 793,650 shares of Common Stock issuable
upon exercise of warrants issued to TWF on October 29, 2007, and 2,260,522
shares of Common Stock issuable upon conversion of $1,424,128.86 in principal
amount of NetSol’s Convertible Notes due July 31, 2011 issued to Tail Wind on
July 23, 2008 at a conversion of $.63 (without any interest
accrual).





Subject
to the ownership limitation, TWAM may be deemed to beneficially own a total of
7,988,807 shares of Common Stock (the “TWAM Shares”), including the Tail Wind
shares, which it may be deemed to beneficially own in its capacity as the
investment manager for Tail Wind, and 876,192 shares of Common Stock issuable
upon conversion of $633,375 in principal amount of NetSol’s Convertible Notes
due July 31, 2011 issued to TWAM on July 23, 20008 at a conversion price of
$0.63 (without any interest accrual).


59


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 disclaims beneficial ownership of any
and all shares of Common Stock that would cause Tail Wind's beneficial ownership
to exceed the Ownership Limitation.  In accordance with the Ownership
Limitation, Tail Wind, based upon 35,436,277 shares of common stock outstanding
(as of February 5, 2010), Tail Wind beneficially owns 3,822,192 shares of Common
Stock and disclaims beneficial ownership of 3,533,240 and TWAM disclaims
beneficial ownership of 4,166,615 shares of Common Stock.





(7)
Pursuant to a form 13G/A filed on February 16, 2010 and relying upon the
authenticity of the information contained therein, the following persons have
shared voting power over 3,405,414 shares of common stock of the
Company:  Newland Capital Management, LLC (as to 3,405,414 shares),
Newland Master Fund, Ltd. (as to 3,405,414), Newland Offshore Fund, Ltd. (as to
2,904,818 shares), Ken Brodkowitz (as to 3,405,414 shares) and Michael Vermut
(as to 3,405,414 shares).  Newland Capital Management, LLC, Ken
Brodkowitz and Michael Vermut  with addresses c/o Newland Capital
Management LLC, 350 Madison Avenue, 11th Floor,
New York, New York, 10017; Newland Master Fund, Ltd. and Newland Offshore Fund,
Ltd., addresses are c/o Goldman Sachs (CAYMAN) Trust, Limited, P.O. Box 896,
Gardenia Court, Suite 3307, 45 Market St., Camana Bay, Cayman Islands
KY1-1103.





ITEM
12-CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.





In May
2008, 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
53.





ITEM
13 PRINCIPAL ACCOUNTANT FEES AND SERVICES




Audit
Fees




Kabani
& Co. audited the Company’s financial statements for the fiscal years ended
June 30, 2010 and June 30, 2009. The aggregate fees billed by
Kabani & Co. for the annual audit and review of financial statements
included in the Company’s Form 10 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,
2010 was $165,000 and for the year ended June 30, 2009 was
$112,500.




Audit
Related Fees




The
aggregate fees billed by Kabani & Co. during fiscal 2010 including
assurance and related audit services not covered in the preceding paragraph was
$Nil. These “Audit Related Fees” were primarily for services in connection with
the review of quarterly financial statements. The aggregate fees billed by
Kabani & Company during fiscal 2009 including assurance and related audit
services not covered in the preceding paragraph was $7,500.  These
“Audit Related Fees” were primarily for services in connection with the review
of quarterly financial statements.




Tax
Fees




Tax fees
for fiscal year 2010 were $15,000 and consisted of the preparation of the
Company’s federal and state tax returns for the fiscal years
2009.  Tax fees for fiscal year 2009 were $12,500 and consisted of the
preparation of the Company’s federal and state tax returns for the fiscal year
2008.




All
Other Fees




There
were no other fees billed by Kabani & Co. or services rendered to
NetSol during the fiscal years ended June 30, 2010 and 2009, 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:


60




(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.


61





PART
IV





ITEM
14 - EXHIBITS AND REPORTS ON FORM 8-K





(a)Exhibits3.1
                      
                      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 filed as Exhibit
      3.5 to NetSol’s Annual Report for the fiscal year ended June 30, 2007 on
      Form 10-KSB.*3.7
                      
                      Amendment
      to Articles of Incorporation dated May 12, 2008 (1)*3.8
                      
                      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.*3.9
                      
                      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
      Company Stock 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
                      
                      Company
      2008 Equity Incentive Plan incorporated by reference as Annex A to
      NetSol’s Definitive Proxy Statement filed May 28,
2008.*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.*10.11.
                      
                      Employment
      Agreement by and between the Company and Najeeb Ghauri dated January 1,
      2007 filed as Exhibit 10.11 to the Company’s Annual Report filed on Form
      10-KSB for the year ended June 30, 2007.*10.12
                      
                      Employment
      Agreement by and between the Company and Naeem Ghauri dated January 1,
      2007 filed as Exhibit 10.11 to the Company’s Annual Report filed on Form
      10-KSB for the year ended June 30, 2007.*10.13
                      
                      Employment
      Agreement by and between the Company and Salim Ghauri dated January 1,
      2007 filed as Exhibit 10.11 to the Company’s Annual Report filed on Form
      10-KSB for the year ended June 30, 2007.*10.14
                      
                      Employment
      Agreement by and between the Company and Tina Gilger dated August 1, 2007
      filed as Exhibit 10.11 to the Company’s Annual Report filed on Form 10-KSB
      for the year ended June 30, 2007.*10.15
                      
                      Amendment
      to Employment Agreement by and between Company and Najeeb Ghauri dated
      effective January 1,
2007.*


62





10.16
                
                Amendment
      to Employment Agreement by and between Company and Naeem Ghauri dated
      effective January 1, 2007.  *10.17
                
                Amendment
      to Employment Agreement by and between Company and Salim Ghauri dated
      effective January 1,*10.18
                
                Lease
      Agreement by and between McCue Systems, Inc. and Sea Breeze 1 Venture
      dated April 29, 2003*.10.19
                
                Amendment
      to Lease Agreement by and between McCue Systems, Inc. and Sea Breeze 1
      Venture dated June 25, 2007 filed as Exhibit 10.19 to the Company’s Annual
      Report filed on Form 10-KSB for the year ended June 30, 2007.
      *10.20
                
                Lease
      Agreement by and between NetSol Pvt Limited and Civic Centres Company
      (PVT) Limited dated May 28, 2001 incorporated by this reference as Exhibit
      10.23 to NetSol’s Annual Report on form 10-KSB dated September 18,
      2006.*10.21
                
                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.*10.22
                
                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.*10.23
                
                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.*10.24
                
                Tenancy
      Agreement by and between NetSol Technologies, Ltd. and Beijing Lucky
      Goldstar Building Development Co. Ltd. dated June 26, 2007 filed as
      Exhibit 10.21 to the Company’s Annual Report filed on Form 10-KSB for the
      year ended June 30, 2007.*10.25
                
                Company
      2005 Stock Option Plan incorporated by reference as Exhibit 99.1 to
      NetSol’s Definitive Proxy Statement filed on March 3,
    2006.*10.26
                
                Company
      2004 Stock Option Plan incorporated by reference as Exhibit 99.1 to
      NetSol’s Definitive Proxy Statement filed on February 7,
      2005.*10.27
                
                Working
      area sublease by and between NetSol Technologies, Ltd. and Toyota Leasing
      (Thailand) Co. Ltd., dated June 21, 2007 filed as Exhibit 10.24 to the
      Company’s Annual Report filed on Form 10-KSB for the year ended June 30,
      2007.*10.28
                
                Lease
      Agreement by and between NetSol Technologies, Inc. and NetSol Technologies
      North America, Inc. and NOP Watergate LLC dated April 3,
      2008.*10.29
                
                Lease
      Amendment Number Three by and between NetSol Technologies, Inc. and
      Century National Properties, Inc. dated December 12, 2007.
    *10.30
                
                Rent
      Agreement by and between Mr. Tahir Mehmood Khan and NetSol Technologies
      Ltd. Dated January 21, 2008. *10.31
                
                Amendment
      to Employment Agreement by and between Company and Najeeb Ghauri dated
      effective January 1, 2010. *10.32
                
                Amendment
      to Employment Agreement by and between Company and Naeem Ghauri dated
      effective January 1, 2010.*10.33
                
                Amendment
      to Employment Agreement by and between Company and Salim Ghauri dated
      effective January 1, 2010.*10.34
                
                Lease
      Amendment No. 4 by and between NetSol Technologies, Inc. and Century
      National Properties, Inc. dated October 7, 2009.(1)10.35
                
                Office
      Lease by and between NetSol Technologies North America, Inc. and Legacy
      Partners I Alameda Mariner Loop, LLC dated November 27,
      2009.(1)10.36
                
                Amendment
      to Employment Agreement by and between Company and Patti L. W. McGlasson
      dated effective April 1, 2010.*10.37
                
                Employment
      Agreement by and between Company and Boo-Ali Siddiqui dated effective
      April 1, 2010.*21.1
                
                A
      list of all subsidiaries of the Company*23.1
                
                Consent
      of Kabani & 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


63





SIGNATURES





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





NetSol
      Technologies, Inc.Date:
      January 31, 2011
                BY:
                /S/ NAJEEB GHAURINajeeb
      GhauriChief
      Executive OfficerDate:  January
      31, 2011
                BY:
                /S/ Boo-Ali SiddiquiBoo-Ali
      SiddiquiChief
      Financial OfficerPrincipal
      Accounting Officer


64


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:
      January 31, 2011
                  BY:
                  /S/ NAJEEB U. GHAURINajeeb
      U. GhauriChief
      Executive OfficerDirector,
      ChairmanDate:  January
      31, 2011
                  BY:
                  /S/BOO-ALI SIDDIQUIBoo-Ali
      SiddiquiChief
      Financial OfficerPrincipal
      Accounting OfficerDate:  January
      31, 2011
                  BY:
                  /S/ SALIM GHAURISalim
      GhauriPresident,
      APACDirectorDate:  January
      31, 2011
                  BY:
                  /S/ NAEEM GHAURINaeem
      GhauriPresident,
      EMEADirectorDate:  January
      31, 2011
                  BY:
                  /S/ EUGEN BECKERTEugen
      BeckertDirectorDate:  January
      31, 2011
                  BY:
                  /S/ SHAHID JAVED BURKIShahid
      Javed BurkiDirectorDate:  January
      31, 2011
                  BY:
                  /S/ MARK CATONMark
      CatonDirectorDate:  January
      31, 2011
                  BY:
                  /S/ ALEXANDER SHAKOWAlexander
      ShakowDirector




65




NETSOL
TECHNOLOGIES, INC. AND SUBSIDIARIES





INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS




Description
                                          
                                          PageReport
      of Independent Registered Public Accounting Firm
                                          
                                          F-2Consolidated
      Balance Sheets as of June 30, 2010 and 2009
                                          
                                          F-3Consolidated
      Statements of Operations and Comprehensive Losses for the Years Ended June
      30, 2010 and 2009
                                          
                                          F-4Consolidated
      Statements of Stockholders’ Equity for the Years EndedJune 30,
      2010 and 2009
                                          
                                          F-5Consolidated
      Statements of Cash Flows for the Years Ended June 30, 2010 and
      2009
                                          
                                          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 sheets of NetSol Technologies,
Inc. and subsidiaries as of June 30, 2010 and 2009, and the related consolidated
statements of operations and comprehensive losses, stockholders’ equity and cash
flows for each of years in the two-year period then ended. 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. The company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits 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, 2010 and 2009 and the results
of its consolidated operations and comprehensive loss, stockholder’s equity and
cash flows for each of years in the two-year period then ended in conformity
with accounting principles generally accepted in the United States of
America.









Los
Angeles, CA


September
9, 2010


F-2




NETSOL
TECHNOLOGIES, INC. AND SUBSIDIARIES
  Consolidated
Balance Sheets
  As of
June 30, 2010 and 2009


2010
                                  
                                  
                                  2009ASSETSCurrent
      assets:Cash
      and cash equivalents
                                  
                                  $
                                  4,075,546
                                  
                                  
                                  $
                                  4,403,762Restricted
      Cash
                                  
                                  
                                  5,700,000
                                  
                                  
                                  
                                  5,000,000Accounts
      receivable, net of allowance for doubtful accounts
                                  
                                  
                                  12,280,331
                                  
                                  
                                  
                                  11,394,844Revenues
      in excess of billings
                                  
                                  
                                  9,477,278
                                  
                                  
                                  
                                  5,686,277Other
      current assets
                                  
                                  
                                  1,821,661
                                  
                                  
                                  
                                  2,307,246Total
      current assets
                                  
                                  
                                  33,354,816
                                  
                                  
                                  
                                  28,792,129Investment
      under equity method
                                  
                                  
                                  200,506
                                  
                                  
                                  
                                  -Property and equipment,
      net of accumulated depreciation
                                  
                                  
                                  9,472,917
                                  
                                  
                                  
                                  9,186,163Other
      assets
                                  
                                  
                                  -
                                  
                                  
                                  
                                  204,823Intangibles:Product
      licenses, renewals, enhancements, copyrights, trademarks, and tradenames,
      net
                                  
                                  
                                  19,002,081
                                  
                                  
                                  
                                  13,802,607Customer
      lists, net
                                  
                                  
                                  666,575
                                  
                                  
                                  
                                  1,344,019Goodwill
                                  
                                  
                                  9,439,285
                                  
                                  
                                  
                                  9,439,285Total
      intangibles
                                  
                                  
                                  29,107,941
                                  
                                  
                                  
                                  24,585,911Total
      assets
                                  
                                  $
                                  72,136,180
                                  
                                  
                                  $
                                  62,769,026LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable and accrued expenses
                                  
                                  $
                                  4,890,921
                                  
                                  
                                  $
                                  5,106,266Due
      to officers
                                  
                                  
                                  10,911
                                  
                                  
                                  
                                  -Current
      portion of loans and obligations under capitalized leases
                                  
                                  
                                  7,285,773
                                  
                                  
                                  
                                  6,207,830Other
      payables - acquisitions
                                  
                                  
                                  103,226
                                  
                                  
                                  
                                  103,226Unearned
      revenues
                                  
                                  
                                  2,545,314
                                  
                                  
                                  
                                  3,473,228Deferred
      liability
                                  
                                  
                                  47,066
                                  
                                  
                                  
                                  -Dividend
      to preferred stockholders payable
                                  
                                  
                                  -
                                  
                                  
                                  
                                  44,409Convertible
      notes payable , current portion
                                  
                                  
                                  3,017,096
                                  
                                  
                                  
                                  -Loans
      payable, bank
                                  
                                  
                                  2,327,476
                                  
                                  
                                  
                                  2,458,757Total
      current liabilities
                                  
                                  
                                  20,227,783
                                  
                                  
                                  
                                  17,393,716Obligations under capitalized
      leases,less current maturities
                                  
                                  
                                  204,620
                                  
                                  
                                  
                                  1,090,901Convertible
      notes payable less current maturities
                                  
                                  
                                  4,066,109
                                  
                                  
                                  
                                  5,809,508Long term loans;less
      current maturities
                                  
                                  
                                  727,336
                                  
                                  
                                  
                                  1,113,832Lease
      abandonment liability; long term
                                  
                                  
                                  867,583
                                  
                                  
                                  
                                  -Total
      liabilities
                                  
                                  
                                  26,093,431
                                  
                                  
                                  
                                  25,407,957Commitments
      and contingenciesStockholders'
      equity:Preferred
      stock,  5,000,000 shares authorized;Nil;
      1,920 issued and outstanding as of 2010 and 2009,
    respectively
                                  
                                  
                                  -
                                  
                                  
                                  
                                  1,920,000Common
      stock, $.001 par value; 95,000,000 shares authorized; 37,103,396
      &30,046,987
      issued and outstanding as of 2010 & 2009, respectively
                                  
                                  
                                  37,104
                                  
                                  
                                  
                                  30,047Additional
      paid-in-capital
                                  
                                  
                                  86,002,648
                                  
                                  
                                  
                                  78,198,523Treasury
      stock
                                  
                                  
                                  (396,008
                                  )
                                  
                                  
                                  (396,008
                                  )Accumulated
      deficit
                                  
                                  
                                  (39,859,030
                                  )
                                  
                                  
                                  (41,253,152
                                  )Stock
      subscription receivable
                                  
                                  
                                  (2,007,960
                                  )
                                  
                                  
                                  (842,619
                                  )Common
      stock to be issued
                                  
                                  
                                  239,525
                                  
                                  
                                  
                                  220,365Other
      comprehensive loss
                                  
                                  
                                  (8,396,086
                                  )
                                  
                                  
                                  (6,899,397
                                  )Non-controlling
      interest
                                  
                                  
                                  10,422,557
                                  
                                  
                                  
                                  6,383,310Total
      stockholders' equity
                                  
                                  
                                  46,042,749
                                  
                                  
                                  
                                  37,361,069Total
      liabilities and stockholders' equity
                                  
                                  $
                                  72,136,180
                                  
                                  
                                  $
                                  62,769,026




F-3


NETSOL
TECHNOLOGIES, INC. AND SUBSIDIARIES




Consolidated
Statements of Operations and Comprehensive loss




As
of June 30, 2010 and 2009




For
      the YearEnded
      June 30,2010
                              
                              
                              2009Net
      Revenues:License
      fees
                              
                              $
                              14,157,107
                              
                              
                              $
                              4,786,332Maintenance
      fees
                              
                              
                              7,047,936
                              
                              
                              
                              6,499,419Services
                              
                              
                              15,574,853
                              
                              
                              
                              15,162,426Total
      revenues
                              
                              
                              36,779,897
                              
                              
                              
                              26,448,177Cost
      of revenues:Salaries
      and consultants
                              
                              
                              8,164,148
                              
                              
                              
                              9,787,965Travel
                              
                              
                              843,626
                              
                              
                              
                              1,334,879Repairs
      and maintenance
                              
                              
                              256,997
                              
                              
                              
                              370,487Insurance
                              
                              
                              140,496
                              
                              
                              
                              174,761Depreciation
      and amortization
                              
                              
                              2,298,092
                              
                              
                              
                              2,214,211Other
                              
                              
                              2,163,689
                              
                              
                              
                              3,316,031Total
      cost of revenues
                              
                              
                              13,867,048
                              
                              
                              
                              17,198,334Gross
      profit
                              
                              
                              22,912,849
                              
                              
                              
                              9,249,843Operating
      expenses:Selling
      and marketing
                              
                              
                              2,222,841
                              
                              
                              
                              3,115,883Depreciation
      and amortization
                              
                              
                              1,609,854
                              
                              
                              
                              1,973,997Bad
      debt expense
                              
                              
                              442,804
                              
                              
                              
                              2,393,685Salaries
      and wages
                              
                              
                              3,026,275
                              
                              
                              
                              3,443,390Professional
      services, including non-cash compensation
                              
                              
                              900,125
                              
                              
                              
                              1,215,939Lease
      abandonment charges
                              
                              
                              867,583
                              
                              
                              
                              -General
      and adminstrative
                              
                              
                              4,115,658
                              
                              
                              
                              3,590,118Total
      operating expenses
                              
                              
                              13,185,141
                              
                              
                              
                              15,733,012Income
      (loss) from operations
                              
                              
                              9,727,708
                              
                              
                              
                              (6,483,169
                              )Other
      income and (expenses)Loss
      on sale of assets
                              
                              
                              (224,741
                              )
                              
                              
                              (404,820
                              )Interest
      expense
                              
                              
                              (1,478,474
                              )
                              
                              
                              (1,294,293
                              )Interest
      income
                              
                              
                              261,296
                              
                              
                              
                              291,030(Loss)
      gain on foreign currency exchange transactions
                              
                              
                              (66,919
                              )
                              
                              
                              2,371,487Gain
      on sale of subsidiary shares
                              
                              
                              -
                              
                              
                              
                              351,522Share
      of net loss from equity investment
                              
                              
                              (67,494
                              )
                              
                              
                              -Beneficial
      conversion feature
                              
                              
                              (1,867,787
                              )
                              
                              
                              (40,277
                              )Loss
      on extingusihment of debt
                              
                              
                              -
                              
                              
                              
                              (1,000,000
                              )Other
      income (expense)
                              
                              
                              56,571
                              
                              
                              
                              68,747Total
      other income (expenses)
                              
                              
                              (3,387,548
                              )
                              
                              
                              343,396Net
      income (loss) before non-controlling interest in subsidiary and income
      taxes
                              
                              
                              6,340,160
                              
                              
                              
                              (6,139,773
                              )Income
      taxes
                              
                              
                              (53,943
                              )
                              
                              
                              (91,132
                              )Non-controlling
      interest
                              
                              
                              (4,892,097
                              )
                              
                              
                              (1,816,143
                              )Net
      income (loss) attributable to NetSol
                              
                              
                              1,394,120
                              
                              
                              
                              (8,047,048
                              )Other
      comprehensive income (loss):Translation
      adjustment
                              
                              
                              (1,496,687
                              )
                              
                              
                              (4,151,474
                              )Comprehensive
      income (loss)
                              
                              $
                              (102,567
                              )
                              
                              $
                              (12,198,522
                              )Net
      income (loss) per share:Basic
                              
                              $
                              0.04
                              
                              
                              $
                              (0.30
                              )Diluted
                              
                              $
                              0.04
                              
                              
                              $
                              (0.30
                              )Weighted
      average number of shares outstandingBasic
                              
                              
                              34,516,428
                              
                              
                              
                              26,937,500Diluted
                              
                              
                              37,796,745
                              
                              
                              
                              27,031,087




F-4


NETSOL
TECHNOLOGIES, INC. AND SUBSIDIARIES




Consolidated
Statements of Stockholders’ Equity




As
of June 30, 2010 and 2009




OtherStock
                              
                              
                              
                              
                              
                              Compre-Additional
                              
                              
                              
                              
                              
                              Sub-
                              
                              
                              
                              
                              
                              hensive
                              
                              
                              
                              
                              
                              Non
                              
                              
                              TotalPreferred Stock
                              
                              
                              Common Stock
                              
                              
                              Paid-in
                              
                              
                              Treasury
                              
                              
                              scriptions
                              
                              
                              Shares to
                              
                              
                              Income/
                              
                              
                              Accumulated
                              
                              
                              Controling
                              
                              
                              Stockholders'Shares
                              
                              
                              Amount
                              
                              
                              Shares
                              
                              
                              Amount
                              
                              
                              Capital
                              
                              
                              Shares
                              
                              
                              Receivable
                              
                              
                              be
      Issued
                              
                              
                              (Loss)
                              
                              
                              Deficit
                              
                              
                              Interest
                              
                              
                              EquityBalance
      at June 30, 2008 -restated
                              
                              
                              1,920
                              
                              
                              $
                              1,920,000
                              
                              
                              
                              25,545,482
                              
                              
                              $
                              25,545
                              
                              
                              $
                              74,950,286
                              
                              
                              $
                              (35,681
                              )
                              
                              $
                              (600,907
                              )
                              
                              $
                              1,048,249
                              
                              
                              $
                              (2,747,924
                              )
                              
                              $
                              (33,071,702
                              )
                              
                              $
                              7,837,970
                              
                              
                              
                              49,325,836Excercise
      of common stock options
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              594,008
                              
                              
                              
                              594
                              
                              
                              
                              629,899
                              
                              
                              
                              
                              
                              
                              
                              (181,747
                              )
                              
                              
                              15,759
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              464,505Excercise
      of common stock warrants
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              51,515
                              
                              
                              
                              52
                              
                              
                              
                              99,372
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              99,424Common
      stock issued for:Cash
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              2,965,000
                              
                              
                              
                              2,965
                              
                              
                              
                              699,840
                              
                              
                              
                              
                              
                              
                              
                              (59,965
                              )
                              
                              
                              69,930
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              712,770Services
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              522,500
                              
                              
                              
                              523
                              
                              
                              
                              393,143
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              (46,849
                              )
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              346,817Payment
      of dividend on preferred stock
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              32,324
                              
                              
                              
                              32
                              
                              
                              
                              67,352
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              67,384Common
      stock issued in exhange for:Purchase
      of Pk Tech shares
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              (250,000
                              )
                              
                              
                              (250,000
                              )Purchase
      of McCue Systems
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              336,158
                              
                              
                              
                              336
                              
                              
                              
                              866,388
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              (866,724
                              )
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              -Purchase
      of Treasury Shares
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              (360,327
                              )
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              (360,327
                              )Fair
      market value of options issued
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              261,472
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              261,472Finance
      costs of capital raised
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              230,769
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              230,769Foreign
      currency translation adjusts
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              (4,151,474
                              )
                              
                              
                              
                              
                              
                              
                              (2,272,055
                              )
                              
                              
                              (6,423,529
                              )Dividend
      to:preferred  stock
      holders
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              (134,400
                              )
                              
                              
                              
                              
                              
                              
                              (134,400
                              )non
      controlling interest
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              (748,748
                              )
                              
                              
                              (748,748
                              )Net
      income for the year
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              (8,047,048
                              )
                              
                              
                              1,816,143
                              
                              
                              
                              (6,230,905
                              )Balance
      at June 30, 2009
                              
                              
                              1,920
                              
                              
                              $
                              1,920,000
                              
                              
                              
                              30,046,987
                              
                              
                              $
                              30,047
                              
                              
                              $
                              78,198,522
                              
                              
                              $
                              (396,008
                              )
                              
                              $
                              (842,619
                              )
                              
                              $
                              220,365
                              
                              
                              $
                              (6,899,399
                              )
                              
                              $
                              (41,253,150
                              )
                              
                              $
                              6,383,310
                              
                              
                              $
                              37,361,070




F-5


NETSOL
TECHNOLOGIES, INC. AND SUBSIDIARIES




Consolidated
Statements of Stockholders' Equity




For
the years ended June 30, 2010 and 2009




OtherStock
                      
                      
                      
                      
                      
                      Compre-Additional
                      
                      
                      
                      
                      
                      Sub-
                      
                      
                      
                      
                      
                      hensive
                      
                      
                      
                      
                      
                      Non
                      
                      
                      TotalPreferred Stock
                      
                      
                      Common Stock
                      
                      
                      Paid-in
                      
                      
                      Treasury
                      
                      
                      scriptions
                      
                      
                      Shares to
                      
                      
                      Income/
                      
                      
                      Accumulated
                      
                      
                      Controling
                      
                      
                      Stockholders'Shares
                      
                      
                      Amount
                      
                      
                      Shares
                      
                      
                      Amount
                      
                      
                      Capital
                      
                      
                      Shares
                      
                      
                      Receivable
                      
                      
                      be
      Issued
                      
                      
                      (Loss)
                      
                      
                      Deficit
                      
                      
                      Interest
                      
                      
                      EquityBalance
      at June 30, 2009
                      
                      
                      1,920
                      
                      
                      $
                      1,920,000
                      
                      
                      
                      30,046,987
                      
                      
                      $
                      30,047
                      
                      
                      $
                      78,198,522
                      
                      
                      $
                      (396,008
                      )
                      
                      $
                      (842,619
                      )
                      
                      $
                      220,365
                      
                      
                      $
                      (6,899,399
                      )
                      
                      $
                      (41,253,150
                      )
                      
                      $
                      6,383,310
                      
                      
                      
                      37,361,069Excercise
      of common stock options
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      423,000
                      
                      
                      
                      423
                      
                      
                      
                      276,937
                      
                      
                      
                      
                      
                      
                      
                      (153,750
                      )
                      
                      
                      (52,360
                      )
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      71,250Excercise
      of common stock warrants
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      -Common
      stock issued for:Cash
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      2,541,929
                      
                      
                      
                      2,542
                      
                      
                      
                      1,933,488
                      
                      
                      
                      
                      
                      
                      
                      (1,011,591
                      )
                      
                      
                      (69,930
                      )
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      854,509Services
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      932,812
                      
                      
                      
                      933
                      
                      
                      
                      659,302
                      
                      
                      
                      
                      
                      
                      
                      -
                      
                      
                      
                      141,450
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      801,684Conversion
      of convertible note
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      3,095,240
                      
                      
                      
                      3,096
                      
                      
                      
                      1,946,904
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      1,950,000Payment
      of interest on convertible note
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      63,428
                      
                      
                      
                      63
                      
                      
                      
                      39,897
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      39,961Fair
      market value of options issued
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      803,508
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      803,508Redemption
      of preferred stock
                      
                      
                      (1,920
                      )
                      
                      
                      (1,920,000
                      )
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (1,920,000
                      )Recognition
      of beneficial conversion feature
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      2,144,089
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      2,144,089Foreign
      currency translation adjusts
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (1,496,687
                      )
                      
                      
                      -
                      
                      
                      
                      (852,852
                      )
                      
                      
                      (2,349,539
                      )Net
      income for the year
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      1,394,120
                      
                      
                      
                      4,892,097
                      
                      
                      
                      6,286,217Balance
      at June 30, 2010
                      
                      
                      -
                      
                      
                      $
                      -
                      
                      
                      
                      37,103,396
                      
                      
                      $
                      37,104
                      
                      
                      $
                      86,002,648
                      
                      
                      $
                      (396,008
                      )
                      
                      $
                      (2,007,960
                      )
                      
                      $
                      239,525
                      
                      
                      $
                      (8,396,086
                      )
                      
                      $
                      (39,859,030
                      )
                      
                      $
                      10,422,557
                      
                      
                      $
                      46,042,749




F-6




NETSOL
TECHNOLOGIES, INC. AND SUBSIDIARIES
  Consolidated
Statements of Cash Flows
  For
The Year Ended June 30, 2010 and 2009


For
      the yearEnded
      June 30,2010
                    
                    
                    2009Cash
      flows from operating activities:Net
      income (loss)
                    
                    $
                    6,286,217
                    
                    
                    $
                    (6,230,905
                    )Adjustments
      to reconcile net income (loss) to net cash provided by operating
      activities:Depreciation
      and amortization
                    
                    
                    3,907,945
                    
                    
                    
                    4,188,208Provision
      for bad debts
                    
                    
                    442,804
                    
                    
                    
                    2,393,685Gain
      on sale of subsidiary shares in Pakistan
                    
                    
                    -
                    
                    
                    
                    (351,522
                    )Loss
      on foreign currency exchange transaction
                    
                    
                    4,144
                    
                    
                    
                    -Share
      of net loss from investment under equity method
                    
                    
                    67,494
                    
                    
                    
                    -Loss
      on sale of assets
                    
                    
                    224,741
                    
                    
                    
                    404,820Stock
      issued for notes payable and related interest
                    
                    
                    39,960
                    
                    
                    
                    -Stock
      issued for services
                    
                    
                    801,684
                    
                    
                    
                    346,817Fair
      market value of warrants and stock options granted
                    
                    
                    803,508
                    
                    
                    
                    261,472Beneficial
      conversion feature
                    
                    
                    1,867,787
                    
                    
                    
                    40,277Changes
      in operating assets and liabilities:Increase/
      decrease in accounts receivable
                    
                    
                    (1,316,995
                    )
                    
                    
                    (4,679,496
                    )Increase/
      decrease in other current assets
                    
                    
                    (3,701,022
                    )
                    
                    
                    3,740,567Increase/
      decrease in long-term assets
                    
                    
                    -
                    
                    
                    
                    43,889Increase/
      decrease in accounts payable and accrued expenses
                    
                    
                    (758,557
                    )
                    
                    
                    1,073,775Net
      cash provided by operating activities
                    
                    
                    8,669,710
                    
                    
                    
                    1,231,588Cash
      flows from investing activities:Purchases
      of property and equipment
                    
                    
                    (2,986,495
                    )
                    
                    
                    (2,093,618
                    )Sales
      of property and equipment
                    
                    
                    641,484
                    
                    
                    
                    65,096Payments
      of acquisition payable
                    
                    
                    -
                    
                    
                    
                    (742,989
                    )Investment
      under equity method
                    
                    
                    (268,000
                    )
                    
                    
                    -Increase
      in intangible assets
                    
                    
                    (7,603,779
                    )
                    
                    
                    (6,662,774
                    )Net
      cash used in investing activities
                    
                    
                    (10,216,790
                    )
                    
                    
                    (9,434,284
                    )Cash
      flows from financing activities:Proceeds
      from sale of common stock
                    
                    
                    854,509
                    
                    
                    
                    712,770Proceeds
      from the exercise of stock options and warrants
                    
                    
                    71,250
                    
                    
                    
                    563,929Purchase
      of subsidary stock in Pakistan
                    
                    
                    -
                    
                    
                    
                    (281,347
                    )Proceeds
      from sale of subsidiary stock
                    
                    
                    -
                    
                    
                    
                    558,535Purchase
      of treasury stock
                    
                    
                    -
                    
                    
                    
                    (360,328
                    )Proceeds
      from convertible notes payable
                    
                    
                    3,500,000
                    
                    
                    
                    6,000,000Redemption
      of preferred stock
                    
                    
                    (1,920,000
                    )
                    
                    
                    -Restricted
      cash
                    
                    
                    (700,000
                    )
                    
                    
                    (5,000,000
                    )Dividend
      Paid
                    
                    
                    (43,828
                    )
                    
                    
                    (33,508
                    )Bank
      overdraft
                    
                    
                    (7,008
                    )
                    
                    
                    159,551Proceeds
      from bank loans
                    
                    
                    4,540,971
                    
                    
                    
                    3,843,541Payments
      on bank loans
                    
                    
                    (258,358
                    )
                    
                    
                    947,870Payments
      on capital lease obligations & loans - net
                    
                    
                    (4,328,700
                    )
                    
                    
                    (539,497
                    )Net
      cash provided by financing activities
                    
                    
                    1,708,837
                    
                    
                    
                    6,571,516Effect
      of exchange rate changes in cash
                    
                    
                    (489,973
                    )
                    
                    
                    (240,296
                    )Net
      increase in cash and cash equivalents
                    
                    
                    (328,216
                    )
                    
                    
                    (1,871,477
                    )Cash
      and cash equivalents, beginning of year
                    
                    
                    4,403,762
                    
                    
                    
                    6,275,238Cash
      and cash equivalents, end of year
                    
                    $
                    4,075,546
                    
                    
                    $
                    4,403,762




F-7


NETSOL
TECHNOLOGIES, INC. AND SUBSIDIARIES




Consolidated
Statements of Cash Flows




For the
years ended June 30, 2010 and 2009




2010
                
                
                2009SUPPLEMENTAL
      DISCLOSURES:Cash
      paid during the period for:Interest
                
                $
                1,420,559
                
                
                $
                1,243,878Taxes
                
                $
                117,808
                
                
                $
                12,819NON-CASH
      INVESTING AND FINANCING ACTIVITIES:Common
      stock issued for acquisition of 100% of subsidiary
                
                
                
                
                
                $
                866,724Stock
      issued for the payment of dividends to Preferred
    Shareholders
                
                $
                -
                
                
                $
                67,384Bonus
      stock dividend issued by subsidiary to minority holders
                
                $
                -
                
                
                $
                615,549Stock
      issued for the conversion of Notes Payable
                
                $
                1,950,000
                
                
                $
                -Purchase
      of property and equipment under capital lease
                
                $
                98,866
                
                
                $
                1,260,710


F-8


NETSOL
TECHNOLOGIES, INC. AND SUBSIDIARIES




Notes
To Consolidated Financial Statements




June
30, 2010 and 2009




NOTE
1 – ORGANIZATION AND DESCRIPTION OF BUSINESS




NetSol
Technologies, Inc. and subsidiaries(collectively, 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.




During
fiscal year 2010, the Company formed a new subsidiary company under the laws of
Thailand, NTPK (Thailand) Company Limited, as an Amity Treaty Company (“NTPK
Thailand”). While formally completed during the quarter ended March 31, 2010,
registration of the Company was recorded retroactively to the date of submission
of all final documents, or December 18, 2009. The Company was formed with an
initial contribution of 4 million baht or $123,258.




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




NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES




(A)
            Principles
      of Consolidation




The
accompanying consolidated financial statements include the accounts of NetSol
Technologies, Inc. and subsidiaries (collectively, the “Company”) as
follows:




Wholly-owned
Subsidiaries


NetSol
Technologies North America, Inc. (“NTNA”)


NetSol
Technologies Limited (“NetSol UK”)


NetSol-Abraxas
Australia Pty Ltd. (“Abraxas”)


NetSol
Technologies Europe Limited (“NTE”)


NTPK
(Thailand) Co. Limited (“NTPK Thailand”)




Majority-owned
Subsidiaries


NetSol
Technologies, Ltd. (“NetSol PK”)


NetSol
Innovation (Private) Limited (“NetSol Innovation”)


NetSol
Connect (Private), Ltd. (“Connect”)




The
Company consolidates any variable interest entities of which it is the primary
beneficiary, as defined. Equity investments through which we exercise
significant influence over but do not control the investee and are not the
primary beneficiary of the investee’s activities are accounted for using the
equity method. Investments through which we are not able to exercise significant
influence over the investee and which do not have readily determinable fair
values are accounted for under the cost method. All material inter-company
accounts have been eliminated in the consolidation.


F-9


NETSOL
TECHNOLOGIES, INC. AND SUBSIDIARIES




Notes
To Consolidated Financial Statements




June
30, 2010 and 2009




(B)
            Basis
      of Presentation




The
accompanying consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America (“US
GAAP”) and pursuant to the rules and regulations of the Securities and Exchange
Commission (“SEC”).




(C)
            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.




(D)
            Cash
      and Cash Equivalents and Cash
Concentrations




For
purposes of the consolidated 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. 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.




(E)
            Restricted
      Cash




The
Company has certificates of deposits (“CD”s) in various configurations and
maturity dates with Habib American Bank. A portion of these CDs are restricted
as collateral to secure outstanding balances on an existing line of credit, and
become unrestricted to the extent that they are not required for
collateralization purposes. As of June 30, 2010 the outstanding balance on the
line of credit was $5,677,533, with a corresponding restriction to the CD
balances. The line of credit has a maximum available balance of
$5,700,000.




(F)
            Allowance
      for Doubtful Accounts




The
Company maintains an allowance for doubtful accounts for estimated losses
inherent in its accounts receivable portfolio. In establishing the required
allowance, management regularly reviews the composition of accounts receivable
and analyzes customer credit worthiness, customer concentrations, current
economic trends and changes in customer payment patterns. Reserves are recorded
primarily on a specific identification basis. Account balances are charged off
against the allowance after all means of collection have been exhausted and the
potential for recovery is considered remote. As of June 30, 2010 and 2009, the
Company had recorded allowance for doubtful accounts of $2,525,009 and
$2,504,714, respectively.




(G)
            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.”


(continued)
 F-10


NETSOL
TECHNOLOGIES, INC. AND SUBSIDIARIES




Notes
To Consolidated Financial Statements




June
30, 2010 and 2009




(H)
            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 ten years.




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 as incurred.




(I)
            Impairment
      of Long-Lived Assets




The
Company tests long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable through the estimated undiscounted cash flows expected to result
from the use and eventual disposition of the assets. Whenever any such
impairment exists, an impairment loss will be recognized for the amount by which
the carrying value exceeds the fair value.




(J)
            Intangible
      Assets




Intangible
assets consist of product licenses, renewals, enhancements, copyrights,
trademarks, trade names, and customer lists. Intangible assets with finite lives
are amortized over the estimated useful life and are evaluated for impairment at
least on an annual basis and whenever events or changes in circumstances
indicate that the carrying value may not be recoverable. We assess
recoverability by determining whether the carrying value of such assets will be
recovered through the undiscounted expected future cash flows. If the future
undiscounted cash flows are less than the carrying amount of these assets, we
recognize an impairment loss based on the excess of the carrying amount over the
fair value of the assets.




(K)
            Software
      Development Costs




Costs
incurred to internally develop computer software products or to enhance an
existing product are recorded as research and development costs and expensed
when incurred 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.


(continued)
 F-11


NETSOL
TECHNOLOGIES, INC. AND SUBSIDIARIES




Notes
To Consolidated Financial Statements




June
30, 2010 and 2009




(L)
            Goodwill




Goodwill
represents the excess of the aggregate purchase price over the fair value of the
net assets acquired in a purchase businesses combination. Goodwill is reviewed
for impairment on an annual basis, or more frequently if events or changes in
circumstances indicate that the carrying amount of goodwill may be impaired. The
goodwill impairment test is a two-step test. Under the first step, the fair
value of the reporting unit is compared with its carrying value (including
goodwill). If the fair value of the reporting unit is less than its carrying
value, an indication of goodwill impairment exists for the reporting unit and
the enterprise must perform step two of the impairment test (measurement). Under
step two, an impairment loss is recognized for any excess of the carrying amount
of the reporting unit’s goodwill over the implied fair value of that goodwill.
The implied fair value of goodwill is determined by allocating the fair value of
the reporting unit in a manner similar to a purchase price allocation. The
residual fair value after this allocation is the implied fair value of the
reporting unit goodwill. Fair value of the reporting unit is determined using a
discounted cash flow analysis. If the fair value of the reporting unit exceeds
its carrying value, step two does not need to be performed.




(M)
            Fair
      Value of Financial Instruments




Fair
value is the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the
measurement date. Assets and liabilities measured at fair value are categorized
based on whether or not the inputs are observable in the market and the degree
that the inputs are observable. The categorization of financial assets and
liabilities within the valuation hierarchy is based upon the lowest level of
input that is significant to the fair value measurement.




The
Company's financial instruments primarily consist of cash and cash equivalents,
accounts receivable, and accounts payable.




As of the
balance sheet dates, the estimated fair values of the financial instruments were
not materially different from their carrying values as presented on the balance
sheet. This is primarily attributed to the short maturities of these
instruments.




(N)
            Revenue
      Recognition




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
collectability is probable. Revenue from the sale of licenses with major
customization, modification, and development is recognized on a percentage of
completion method. Revenue from the implementation of software is recognized on
a percentage of completion method.


(continued)
 F-12


NETSOL
TECHNOLOGIES, INC. AND SUBSIDIARIES




Notes
To Consolidated Financial Statements




June
30, 2010 and 2009




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.




(O)
            Multiple
      Element Arrangements




We enter
into multiple element revenue arrangements in which a customer may purchase a
number of different combinations of software licenses, consulting services,
maintenance and support, as well as training and development (multiple-element
arrangements).




VSOE of
fair value for each element is based on the price for which the element is sold
separately. We determine the VSOE of fair value of each element based on
historical evidence of our stand-alone sales of these elements to third-parties
or from the stated renewal rate for the elements contained in the initial
software license arrangement. When VSOE of fair value does not exist for any
undelivered element, revenue is deferred until the earlier of the point at which
such VSOE of fair value exists or until all elements of the arrangement have
been delivered. The only exception to this guidance is when the only undelivered
element is maintenance and support or other services, then the entire
arrangement fee is recognized ratably over the performance period.




Net
revenues by our various products and services provided for the year ended June
30, 2010 and 2009 are as follows:




2010
                    
                    
                    2009Licensing
      Fees
                    
                    $
                    14,157,107
                    
                    
                    $
                    4,786,332Maintenance
      Fees
                    
                    
                    7,047,936
                    
                    
                    
                    6,499,419Services
                    
                    
                    15,574,853
                    
                    
                    
                    15,162,426Total
                    
                    $
                    36,779,897
                    
                    
                    $
                    26,448,177




(P)
            Unearned
      Revenue




Unearned
revenue represents billings in excess of revenue earned on contracts and are
recognized on a pro-rata basis over the life of the contract. Unearned revenue
was $2,545,314 and $3,473,228 as of June 30, 2010 and June 30, 2009
respectively.




(Q)
            Advertising
      Costs




The
Company expenses the cost of advertising as incurred. Advertising costs for the
years ended June 30, 2010 and 2009 were $227,045 and $420,846
respectively.




(R)
            Share-Based
      Compensation




The
Company measures stock-based compensation cost at the grant date based on the
fair value of the award and recognize it as expense over the applicable vesting
period of the stock award (generally four to five years) using the straight-line
method.


(continued)
 F-13


NETSOL
TECHNOLOGIES, INC. AND SUBSIDIARIES




Notes
To Consolidated Financial Statements




June
30, 2010 and 2009




(S)
            Income
      Taxes




Income
taxes are accounted for under the asset and liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date. A
valuation allowance is provided for deferred tax assets if it is more likely
than not these items will either expire before the Company is able to realize
their benefits, or that future deductibility is uncertain.




(T)
            Foreign
      Currency Translation




Assets
and liabilities recorded in foreign currencies are translated at the exchange
rate on the balance sheet date. Revenue and expenses are translated at average
rates of exchange prevailing during the year. Translation adjustments resulting
from this process are recorded to other comprehensive income.




(U)
            Statement
      of Cash Flows




The
Company's cash flows from 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.




(V)
            Segment
      Reporting




The
Company defines operating segments as components 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 on geographic locations of its subsidiaries (see
Note 18).




(W)
            Subsequent
      Events




Management
has evaluated subsequent events through September 9, 2010, the date of issuance
of these consolidated financial statements.




(X)
            New
      Accounting Pronouncements




In August
2009, the Financial Accounting Standards Board (“FASB”) amended guidance related
to the measurement of liabilities at fair value, which was effective upon
issuance. These amendments clarify that in circumstances in which a quoted price
in an active market for the identical liability is not available, we are
required to use the quoted price of the identical liability when traded as an
asset, quoted prices for similar liabilities, or quoted prices for similar
liabilities when traded as assets. If these quoted prices are not available, we
are required to use another valuation technique, such as an income approach or a
market approach. The adoption of these amendments did not have a material impact
on the Company’s consolidated financial statements.


(continued)
 F-14


NETSOL
TECHNOLOGIES, INC. AND SUBSIDIARIES




Notes
To Consolidated Financial Statements




June
30, 2010 and 2009




In
October 2009, the FASB amended guidance related to revenue recognition that will
be effective for the Company beginning July 1, 2010. Under the new guidance on
arrangements that include software elements, tangible products that have
software components that are essential to the functionality of the tangible
product will no longer be within the scope of the software revenue recognition
guidance, and software-enabled products will now be subject to other relevant
revenue recognition guidance. Additionally, the FASB amended guidance on revenue
arrangements with multiple deliverables that are outside the scope of the
software revenue recognition guidance. Under the new guidance, when vendor
specific objective evidence or third party evidence for deliverables in an
arrangement cannot be determined, a best estimate of the selling price is
required to separate deliverables and allocate arrangement consideration using
the relative selling price method. The new guidance includes new disclosure
requirements on how the application of the relative selling price method affects
the timing and amount of revenue recognition. The adoption of these amendments
is not expected to have a material impact on the Company’s consolidated
financial statements.




In
December 2009, the FASB amended guidance related to fair value measurements and
Disclosures, which was effective beginning the 2nd quarter
of the Company’s 2010 fiscal year, December 31, 2009. These amendments prescribe
new disclosures and clarify certain existing disclosure requirements related to
fair value measurements. The objective of the amendments was to improve these
disclosures and, thus, increase the transparency in financial reporting. The
adoption of these amendments did not have a material impact on the Company’s
consolidated financial statements.




In
February 2010, the FASB amended guidance related to disclosure of subsequent
events, which was effective upon issuance. These amendments prescribe that
entities that are SEC filers are required to evaluate subsequent events through
the date that the financial statements are issued. The adoption of these
amendments did not have a material impact on the Company’s consolidated
financial statements.




NOTE
3 – EARNINGS PER SHARE




Basic
earnings per share is computed based on the weighted average number of shares of
common stock outstanding during the period. Diluted earnings per share is
computed based on the weighted average number of shares of common stock plus the
effect of dilutive potential common shares outstanding during the period using
the treasury stock method. Dilutive potential common shares include outstanding
stock options, warrants, and stock awards.


(continued)
 F-15


NETSOL
TECHNOLOGIES, INC. AND SUBSIDIARIES




Notes
To Consolidated Financial Statements




June
30, 2010 and 2009




The
components of basic and diluted earnings per share as of June 30, 2010 and 2009
were as follows:




For the year ended June 30, 2010
                          
                          Net Income
                          
                          
                          Shares
                          
                          
                          Per ShareBasic
      (loss) per share:
                          
                          $
                          1,394,120
                          
                          
                          
                          34,516,428
                          
                          
                          $
                          0.04Dividend
      to preferred shareholders
                          
                          
                          -Interest
      on Convertible Notes
                          
                          
                          -Net
      income available to common shareholdersEffect
      of dilutive securities*Stock
      options
                          
                          
                          
                          
                          
                          
                          566,857Warrants
                          
                          
                          
                          
                          
                          
                          2,713,460Convertible
      Notes
                          
                          
                          
                          
                          
                          
                          -Diluted
      (loss) per share
                          
                          $
                          1,394,120
                          
                          
                          
                          37,796,745
                          
                          
                          $
                          0.04For the year ended June 30, 2009
                          
                          Net Loss
                          
                          
                          Shares
                          
                          
                          Per ShareBasic
      (loss) per share:
                          
                          $
                          (8,181,448
                          )
                          
                          
                          26,937,500
                          
                          
                          $
                          (0.30
                          )Dividend
      to preferred shareholders
                          
                          
                          134,400Net
      income available to common shareholdersEffect
      of dilutive securities*Stock
      options
                          
                          
                          
                          
                          
                          
                          -Warrants
                          
                          
                          
                          
                          
                          
                          -Convertible
      Preferred Shares
                          
                          
                          
                          
                          
                          
                          -Diluted
      (loss) per share
                          
                          $
                          (8,047,048
                          )
                          
                          
                          26,937,500
                          
                          
                          $
                          (0.30
                          )





* As
there was a loss for the year ended June 30, 2009, these securities were
anti-dilutive and basic and diluted
loss per share was the same




NOTE
4 – MAJOR CUSTOMERS




During
fiscal year ended June 30, 2010, there were no customers who represented 10% or
more of the Company’s total revenue.




The
Company is a strategic business partner for Daimler Financial Services (which
consists of a group of many companies), which accounts for approximately 8.57%
& 4% of revenue, Toyota Motors (which consists of a group of many companies)
accounts for approximately 4.51% & 5% of revenue, and Nissan (which consists
of a group of many companies) accounts for approximately 7.21% & 6% of
revenue for the fiscal year ended June 30, 2010 and 2009, respectively. Accounts
receivable at June 30, 2010 for these companies was $1,902,499, $690,125 and
$732,061.


(continued)
 F-16


NETSOL
TECHNOLOGIES, INC. AND SUBSIDIARIES




Notes
To Consolidated Financial Statements




June
30, 2010 and 2009




NOTE
5 – OTHER CURRENT ASSETS




Other
current assets consist of the following at June 30, 2010 and 2009:




2010
                  
                  
                  2009Prepaid
      Expenses
                  
                  $
                  237,702
                  
                  
                  $
                  316,437Advance
      Income Tax
                  
                  
                  422,028
                  
                  
                  
                  262,703Employee
      Advances
                  
                  
                  57,113
                  
                  
                  
                  18,698Security
      Deposits
                  
                  
                  131,229
                  
                  
                  
                  173,095Advance
      Rent
                  
                  
                  -
                  
                  
                  
                  261,993Tender
      Money Receivable
                  
                  
                  252,826
                  
                  
                  
                  294,211Other
      Receivables
                  
                  
                  535,981
                  
                  
                  
                  527,959Other
      Assets
                  
                  
                  184,782
                  
                  
                  
                  452,150Total
                  
                  $
                  1,821,661
                  
                  
                  $
                  2,307,246




NOTE
6 – PROPERTY AND EQUIPMENT




Property
and equipment, net, consist of the following at June 30, 2010 and
2009:




2010
                  
                  
                  2009Office
      furniture and equipment
                  
                  $
                  1,041,326
                  
                  
                  $
                  1,069,156Computer
      equipment
                  
                  
                  8,038,033
                  
                  
                  
                  6,975,575Assets
      under capital leases
                  
                  
                  1,838,217
                  
                  
                  
                  2,058,075Building
                  
                  
                  2,314,080
                  
                  
                  
                  2,446,564Land
                  
                  
                  562,109
                  
                  
                  
                  1,466,601Capital
      work in progress
                  
                  
                  1,925,207
                  
                  
                  
                  756,945Autos
                  
                  
                  744,586
                  
                  
                  
                  308,925Improvements
                  
                  
                  163,365
                  
                  
                  
                  170,973Subtotal
                  
                  
                  16,626,923
                  
                  
                  
                  15,252,814Accumulated
      depreciation
                  
                  
                  (7,154,005
                  )
                  
                  
                  (6,066,651
                  )$
                  9,472,917
                  
                  
                  $
                  9,186,163




For the
years ended June 30, 2010 and 2009, depreciation expense totaled $1,513,998 and
$1,784,077, respectively. Of these amounts, $1,068,642 and $1,240,171 are
reflected as part of cost of revenues as of June 30, 2010 and 2009,
respectively.




The
Company’s capital work in progress consists of ongoing enhancements to its
facilities and infrastructure as necessary to meet the Company’s expected
long-term growth needs. The Company recorded capitalized interest of $127,790
and 332,646 as of June 30, 2010 and 2009, respectively.




Due to
development work in the area in which the Company’s Lahore office is located,
the Government of Punjab expropriatedland from NetSol PK in 2010 for
use in the construction of transportation routes. The Company has recorded a
corresponding loss on sale of land of $225,879 during the year ended June 30,
2010.




Assets
acquired under capital leases were $1,838,217 and $2,058,075 as of June 30, 2010
and 2009, respectively. Accumulated amortization related to those leases was
$621,567 and $443,992 for the years ended June 30, 2010 and 2009,
respectively.


(continued)
 F-17


NETSOL
TECHNOLOGIES, INC. AND SUBSIDIARIES




Notes
To Consolidated Financial Statements




June
30, 2010 and 2009




NOTE
7 – INTANGIBLE ASSETS




Intangible
assets consist of the following at June 30, 2010 and 2009:




Product Licenses
                          
                          
                          Customer Lists
                          
                          
                          TotalIntangible
      assets - June 30, 2008 - cost
                          
                          $
                          18,992,284
                          
                          
                          $
                          5,451,094
                          
                          
                          $
                          24,443,378Additions
                          
                          
                          6,050,047
                          
                          
                          
                          352,963
                          
                          
                          
                          6,403,010Effect
      of translation adjustment
                          
                          
                          (1,880,317
                          )
                          
                          
                          -
                          
                          
                          
                          (1,880,317
                          )Accumulated
      amortization
                          
                          
                          (9,359,407
                          )
                          
                          
                          (4,460,038
                          )
                          
                          
                          (13,819,445
                          )Net
      balance - June 30, 2009
                          
                          $
                          13,802,607
                          
                          
                          $
                          1,344,019
                          
                          
                          $
                          15,146,626Intangible
      assets - June 30, 2009 - cost
                          
                          $
                          25,042,331
                          
                          
                          $
                          5,804,057
                          
                          
                          $
                          30,846,388Additions
                          
                          
                          7,652,707
                          
                          
                          
                          -
                          
                          
                          
                          7,652,707Effect
      of translation adjustment
                          
                          
                          (2,734,235
                          )
                          
                          
                          -
                          
                          
                          
                          (2,734,235
                          )Accumulated
      amortization
                          
                          
                          (10,958,723
                          )
                          
                          
                          (5,137,482
                          )
                          
                          
                          (16,096,205
                          )Net
      balance - June 30, 2010
                          
                          $
                          19,002,080
                          
                          
                          $
                          666,575
                          
                          
                          $
                          19,668,655Weighted
      average amortization period
                          
                          
                          7.58
                          
                          
                          
                          5.00
                          
                          
                          
                          7.16Amortization
      expense for:Year
      ended June 30, 2010
                          
                          $
                          1,716,504
                          
                          
                          $
                          677,444
                          
                          
                          $
                          2,393,948Year
      ended June 30, 2009
                          
                          $
                          1,662,424
                          
                          
                          $
                          741,705
                          
                          
                          $
                          2,404,129




(A)
            Product
      Licenses




Product
licenses include original license issue, renewals, enhancements, copyrights,
trademarks, and trade names. Product licenses included unamortized software
development and enhancement costs of $13,888,516.




(B)
            Customer
      Lists




On
October 31, 2008, the Company entered into an agreement to purchase the rights
to the customer list of Ciena Solutions, LLC, a California limited liability
company (“Ciena”). Under the terms of the agreement, the total consideration for
these rights included an initial payment of $350,000 (plus interest of $2,963),
and deferred consideration to be paid in cash and the Company’s common stock
based on the operational results of Ciena, and certain other factors, over a
four-year fiscal period. Each fiscal period is measured from July 1 to June 30
with fiscal period one being the period from July 1, 2008 to June 30, 2009. No
other assets or liabilities were acquired by the Company as a result of this
transaction.




As a
result of operational losses of Ciena in the first two fiscal periods, 2009 and
2010, respectively, the first two annual deferred consideration installment
payments were determined to be zero.




(C)
            Amortization




Software
development amortization expense was $1,229,450 and $974,040 for the years ended
June 30, 2010 and June 30, 2009, respectively, and is recorded in cost of
revenues.


(continued)
 F-18


NETSOL
TECHNOLOGIES, INC. AND SUBSIDIARIES




Notes
To Consolidated Financial Statements




June
30, 2010 and 2009




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




FISCAL YEAR ENDINGAsset
                      
                      6/30/11
                      
                      
                      6/30/12
                      
                      
                      6/30/13
                      
                      
                      6/30/14
                      
                      
                      6/30/15
                      
                      
                      Thereafter
                      
                      
                      TOTALProduct
      Licences
                      
                      $
                      1,313,465
                      
                      
                      $
                      933,642
                      
                      
                      $
                      701,635
                      
                      
                      $
                      480,982
                      
                      
                      $
                      404,327
                      
                      
                      $
                      15,168,030
                      
                      
                      $
                      19,002,081Customer
      Lists
                      
                      
                      501,140
                      
                      
                      
                      69,872
                      
                      
                      
                      69,872
                      
                      
                      
                      25,691
                      
                      
                      
                      -
                      
                      
                      
                      
                      
                      
                      
                      666,575$
                      1,814,605
                      
                      
                      $
                      1,003,514
                      
                      
                      $
                      771,507
                      
                      
                      $
                      506,673
                      
                      
                      $
                      404,327
                      
                      
                      $
                      15,168,030
                      
                      
                      $
                      19,668,656




NOTE
8 – GOODWILL




Goodwill
represents the excess of the aggregate purchase price over the fair value of the
net assets acquired in prior period businesses combinations. Goodwill is
comprised of the following amounts as of June 30, 2010 and 2009:




2010
                        
                        
                        2009Asia
      Pacific
                        
                        $
                        1,303,372
                        
                        
                        $
                        1,303,372Europe
                        
                        
                        3,471,813
                        
                        
                        
                        3,471,813North
      America
                        
                        
                        4,664,100
                        
                        
                        
                        4,664,100Total
                        
                        $
                        9,439,285
                        
                        
                        $
                        9,439,285




There was
no impairment of goodwill for the years ended June 30, 2010 and
2009.




NOTE
9 – OTHER ASSETS




During
the fiscal year ended June 30, 2009, our North American operations moved its
location from Burlingame to Emeryville. As part of the lease agreement, the
Company was required to pay two months of rental payments as a security deposit.
The security deposit was utilized by the landlord against non-payment of rent by
the Company. The deposit was not replenished and accordingly, there was no
security deposit balance as on June 30, 2010.




NOTE
10 – INVESTMENT UNDER EQUITY METHOD




On April
10, 2009, the Company entered into an agreement to form a joint venture with the
Atheeb Trading Company, a member of the Atheeb Group (“Atheeb”). The joint
venture entity Atheeb NetSol Saudi Company Ltd. is a company organized under the
laws of the Kingdom of Saudi Arabia. The venture was formed with an initial
capital contribution of $268,000 by the Company and $266,930 by Atheeb with a
profit sharing ratio of 50.1:49.9, respectively. The final formation of the
company was completed on March 7, 2010. The joint venture was accounted for as
an equity method investment as the Company has not established control over the
affairs of Atheeb NetSol Saudi Company Ltd. due to its minority representation
on the board of directors.




The
Company's investment in equity for the year ended June 30, 2010 is as
follows:




2010Initial
      investment in Atheeb at cost
                  
                  $
                  268,000Net
      loss for the period
                  
                  
                  (134,719
                  )The
      Company's share (50.1%)
                  
                  
                  (67,494
                  )Total
      Investment in equity
                  
                  $
                  200,506




(continued)
 F-19


NETSOL
TECHNOLOGIES, INC. AND SUBSIDIARIES




Notes
To Consolidated Financial Statements




June
30, 2010 and 2009




NOTE
11 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES




Accounts
payable and accrued expenses consist of the following as of June 30, 2010 and
2009:




2010
                  
                  
                  2009Accounts
      Payable
                  
                  $
                  1,321,212
                  
                  
                  $
                  1,654,974Accrued
      Liabilities
                  
                  
                  2,369,153
                  
                  
                  
                  1,757,282Accrued
      Payroll
                  
                  
                  158,392
                  
                  
                  
                  8,152Accrued
      Payroll Taxes
                  
                  
                  299,908
                  
                  
                  
                  487,180Interest
      Payable
                  
                  
                  602,614
                  
                  
                  
                  985,911Deferred
      Revenues
                  
                  
                  6,472
                  
                  
                  
                  16,388Taxes
      Payable
                  
                  
                  133,169
                  
                  
                  
                  196,379Total
                  
                  $
                  4,890,921
                  
                  
                  $
                  5,106,266




NOTE
12 – DEBTS




(A)
            Loans
      and Leases Payable




Notes and
leases payable consist of the following at June 30, 2010 &
2009:




Current
                              
                              
                              Long-TermName
                              
                              2010
                              
                              
                              Maturities
                              
                              
                              MaturitiesD&O
      Insurance
                              
                              $
                              12,122
                              
                              
                              $
                              12,122
                              
                              
                              $
                              -E&O
      Insurance
                              
                              
                              7,046
                              
                              
                              
                              7,046Habib
      Bank Line of Credit
                              
                              
                              5,677,533
                              
                              
                              
                              5,677,533
                              
                              
                              
                              -Bank
      Overdraft Facility
                              
                              
                              202,712
                              
                              
                              
                              202,712
                              
                              
                              
                              -HSBC
      Loan
                              
                              
                              43,306
                              
                              
                              
                              43,306
                              
                              
                              
                              -Term
      Finance Facility
                              
                              
                              1,163,738
                              
                              
                              
                              436,402
                              
                              
                              
                              727,336Subsidiary
      Capital Leases
                              
                              
                              1,111,271
                              
                              
                              
                              906,651
                              
                              
                              
                              204,620Lease
      abandonment liability
                              
                              
                              867,583
                              
                              
                              
                              -
                              
                              
                              
                              867,583$
                              9,085,311
                              
                              
                              $
                              7,285,773
                              
                              
                              $
                              1,799,538Current
                              
                              
                              Long-TermName
                              
                              2009
                              
                              
                              Maturities
                              
                              
                              MaturitiesD&O
      Insurance
                              
                              $
                              31,288
                              
                              
                              $
                              31,288
                              
                              
                              $
                              -E&O
      Insurance
                              
                              
                              22,656
                              
                              
                              
                              22,656
                              
                              
                              
                              -Habib
      Bank Line of Credit
                              
                              
                              4,966,597
                              
                              
                              
                              4,966,597
                              
                              
                              
                              -Bank
      Overdraft Facility
                              
                              
                              229,883
                              
                              
                              
                              229,883
                              
                              
                              
                              -HSBC
      Loan
                              
                              
                              330,667
                              
                              
                              
                              292,542
                              
                              
                              
                              38,125Term
      Finance Facility
                              
                              
                              1,229,379
                              
                              
                              
                              153,672
                              
                              
                              
                              1,075,707Subsidiary
      Capital Leases
                              
                              
                              1,602,093
                              
                              
                              
                              511,192
                              
                              
                              
                              1,090,901$
                              8,412,563
                              
                              
                              $
                              6,207,830
                              
                              
                              $
                              2,204,733




(continued)
 F-20


NETSOL
TECHNOLOGIES, INC. AND SUBSIDIARIES




Notes
To Consolidated Financial Statements




June
30, 2010 and 2009




The
Company finances Directors’ and Officers’ (“D&O”) liability insurance as
well as Errors and Omissions (“E&O”) liability insurance, for which the
total balances are renewed on an annual basis and as such are recorded in
current maturities. The interest rate on the insurance financing was 5.95% as of
June 30, 2010 and 2009. Interest paid during the year-ended June 30, 2010 and
2009 was nominal.




In April
2008, the Company entered into an agreement with Habib American Bank to secure a
line of credit to be collateralized by Certificates of Deposit held at the bank.
The interest rate on this line of credit is variable and was 3.23% and 4.57% as
of June 30, 2010 and 2009, respectively. Interest paid during the year ended
June 30, 2010 and 2009 was $123,496 and $194,988, respectively.




During
the year ended June 30, 2008, the Company’s subsidiary, NTE entered into an
overdraft facility with HSBC Bank plc whereby the bank would cover any
overdrafts up to £200,000. The annual interest rate is 3.25% over the bank’s
sterling base rate, which was 5.00% and 5.00% as of June 30, 2010 and 2009,
respectively.




In August
2007, the Company’s subsidiary, NetSol UK, entered into an agreement with HSBC
Bank whereby the line of credit outstanding of £500,000 or approximately
$785,500 was converted into a loan payable with a maturity of three years. The
interest rate is 7.5% with monthly payments of £14,436 or approximately $21,757.
The Parent has guaranteed payment of the loan in the event the subsidiary should
default. Interest paid during the year ended June 30, 2010 and 2009 was $4,133
and $53,310, respectively.




The
Company’s subsidiary, NetSol PK, entered into a term finance facility from
Askari Bank to finance the construction of a new building. The total amount of
the facility is Rs. 200,000,000 or approximately $2,327,476 (secured by the
first of Rs. 580 million over the land, building and equipment of the company).
The interest rate is 3% above the six-month Karachi Inter Bank Offering Rate. As
on June 30, 2009, the subsidiary had used Rs. 100,000,000 or approximately
$1,229,379 of which $1,075,707 was shown as long term liabilities and the
remainder of $153,672 as current maturity. As of the year ended June 30, 2010,
the Company has used Rs. 100,000,000 or approximately $1,163,738 of which
$727,336 is shown as long term liabilities and the remainder of $436,402 as
current maturity.




The
Company leases various fixed assets under capital lease arrangements expiring in
various years through 2014. 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 years ended June 30, 2010 and
2009.


(continued)
 F-21


NETSOL
TECHNOLOGIES, INC. AND SUBSIDIARIES




Notes
To Consolidated Financial Statements




June
30, 2010 and 2009




Following
is the aggregate minimum future lease payments under capital leases as of June
30, 2010 and 2009:




2010
                      
                      
                      2009Minimum
      Lease PaymentsDue
      FYE 6/30/10
                      
                      
                      
                      
                      $
                      545,992Due
      FYE 6/30/11
                      
                      $
                      941,406
                      
                      
                      
                      505,004Due
      FYE 6/30/12
                      
                      
                      189,155
                      
                      
                      
                      432,545Due
      FYE 6/30/13
                      
                      
                      27,481
                      
                      
                      
                      201,490Due
      FYE 6/30/14
                      
                      
                      
                      
                      
                      
                      176,512Due
      FYE 6/30/15
                      
                      
                      
                      
                      
                      
                      -Total
      Minimum Lease Payments
                      
                      
                      1,158,042
                      
                      
                      
                      1,861,543Interest
      Expense relating to future periods
                      
                      
                      (46,771
                      )
                      
                      
                      (259,450
                      )Present
      Value of minimum lease payments
                      
                      
                      1,111,271
                      
                      
                      
                      1,602,093Less:  Current
      portion
                      
                      
                      (906,651
                      )
                      
                      
                      (511,192
                      )Non-Current
      portion
                      
                      $
                      204,620
                      
                      
                      $
                      1,090,901




Following
is a summary of fixed assets held under capital leases as of June 30, 2010 and
2009:




2010
                        
                        
                        2009Computer
      Equipment and Software
                        
                        $
                        473,033
                        
                        
                        $
                        607,394Furniture
      and Fixtures
                        
                        
                        830,942
                        
                        
                        
                        733,277Vehicles
                        
                        
                        232,026
                        
                        
                        
                        310,021Building
      Equipment
                        
                        
                        302,216
                        
                        
                        
                        407,383Total
                        
                        
                        1,838,217
                        
                        
                        
                        2,058,075Less:  Accumulated
      Depreciation
                        
                        
                        (621,567
                        )
                        
                        
                        (443,992
                        )Net
                        
                        $
                        1,216,650
                        
                        
                        $
                        1,614,083




In 2008,
the Company’s subsidiary, NTNA, had acquired an office space in Emeryville on a
long term lease. However, due to the unprecedented recession experienced in
2009, the company decided to vacate the office space and terminate the lease in
October 2009. The Company recorded a lease abandonment charge of $1,076,347 in
the quarter-ended December 31, 2009. However, the office space was leased by
another company during the quarter-ended March 31, 2010 and the lease
abandonment charge was reduced by $208,765 to $867,583 as of June 30, 2010. The
liability as of June 30, 2010 was determined using fair value level 2
methodology and assumptions.


(continued)
 F-22


NETSOL
TECHNOLOGIES, INC. AND SUBSIDIARIES




Notes
To Consolidated Financial Statements




June
30, 2010 and 2009




(B)
            Loans
      Payable – Bank




The
Company’s subsidiary, NetSol Technologies Limited, has a loan with a bank,
secured by the Company’s assets. This loan consists of the following as of June
30, 2010 & June 30, 2009:




For the year ended June 30, 2010:TYPE OF
                                              
                                              MATURITY
                                              
                                              INTEREST
                                              
                                              
                                              BALANCELOAN
                                              
                                              DATE
                                              
                                              RATE
                                              
                                              
                                              USDExport
      Refinance
                                              
                                              Every
      6 months
                                              
                                              
                                              8.50
                                              %
                                              
                                              $
                                              2,327,476Total
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              $
                                              2,327,476For the year ended June 30, 2009:TYPE OF
                                              
                                              MATURITY
                                              
                                              INTEREST
                                              
                                              
                                              BALANCELOAN
                                              
                                              DATE
                                              
                                              RATE
                                              
                                              
                                              USDExport
      Refinance
                                              
                                              Every
      6 months
                                              
                                              
                                              7.50
                                              %
                                              
                                              $
                                              2,458,757Total
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              $
                                              2,458,757




(C)
            Other
      Payable – Acquisition




On June
30, 2006, the Company acquired McCue Systems, Inc. (“McCue”), a California
corporation (subsequently renamed as NetSol Technologies North America, Inc.)
The total purchase price was $7,080,385, including $3,784,635 of cash and
1,712,332 shares of the Company’s common stock. Of the total purchase price, the
accompanying consolidated financial statements include certain amounts payable
to McCue shareholders that have not been located as of the date of this
report.




As of the
year-ended June 30, 2010 and 2009, the remaining cash due of $103,226 is shown
as “Other Payable – Acquisition” and the remaining stock to be issued of 46,704
shares at an average price of $1.89 is shown in “Shares to be issued” in the
accompanying consolidated financial statements. Amounts payable represent the
remaining McCue shareholders that have not been located as of the date of this
report




(D)
            Due
      to Officers




The
officers of the Company, from time to time, loan funds to the Company. The
balance due to officers as of June 30, 2009 and June 30, 2010 was Nil and
$10,911 respectively.




(continued)
 F-23


NETSOL
TECHNOLOGIES, INC. AND SUBSIDIARIES




Notes
To Consolidated Financial Statements




June
30, 2010 and 2009




NOTE
13 – CONVERTIBLE NOTE PAYABLE




The net
outstanding balance of convertible notes as of June 30, 2010 and 2009 is as
follows:




IssueDate
                                      
                                      Balance net of BCF@
                                        6/30/10
                                      
                                      
                                      Current
                                        Portion
                                      
                                      
                                      Long Term
                                      
                                      Maturity
                                        DateJul-08
                                      
                                      
                                      4,066,108
                                      
                                      
                                      
                                      
                                      
                                      
                                      4,066,108
                                      
                                      Jul-11Aug-09
                                      
                                      
                                      1,517,096
                                      
                                      
                                      
                                      1,517,096
                                      
                                      
                                      
                                      
                                      
                                      Aug-10Mar-10
                                      
                                      
                                      1,500,000
                                      
                                      
                                      
                                      1,500,000
                                      
                                      
                                      
                                      
                                      
                                      Mar-11Total
                                      
                                      
                                      7,083,204
                                      
                                      
                                      
                                      3,017,096
                                      
                                      
                                      
                                      4,066,108




For the
year-ended June 30, 2010 and 2009, total interest accrued on convertible notes
was $375,510 and $309,027, respectively.




Principle
commitments related to the convertible notes for the next five years is as
follows:




FYE
      6/30/11
                        
                        $
                        3,017,096FYE
      6/30/12
                        
                        
                        4,066,108FYE
      6/30/13
                        
                        
                        -




(A)
            2008
      Convertible Debt




In July
2008, the Company issued $6,000,000 of 7% convertible debt maturing in 3 years
(the “2008 Notes”), with a conversion price of $3.00 per share.




In
January 2009, the 2008 Notes were amended to remove certain anti-dilution
protection provisions and participation rights in future filings in exchange for
a reduction in the conversion rate to $0.78, and $1,000,000 in cash, payable to
the debt holders in 4 quarterly installments. Pursuant to the terms of the
amendment, the Company recorded a beneficial conversion feature (“BCF”) in the
amount of $230,769 which is being amortized as a component of interest expense
over the maturity period. The related liability of $1,000,000 was recorded as a
component of interest expense for the year-ended June 30, 2009.




In August
2009, the Company amended the 2008 Notes by reducing the conversion rate to
$0.63, and recorded an additional BCF of $715,518, which is being amortized as a
component of interest expense over the maturity period.




During
the year-ended June 30, 2010, Holders of the 2008 Notes elected to convert
principal and interest due thereon into a total of 2,513,112 shares of common
stock. These conversions reduced the total principal of the 2008 Notes to
$4,450,000.




(B)
            2009
      Convertible Debt




In August
2009, the Company issued $2,000,000 of 9% convertible debt maturing in 1 year
(the “2009 Notes”) with a conversion price of $0.63 per share, in exchange for
the redemption of preferred shares outstanding. The associated BCF of $1,428,571
is being amortized as a component of interest expense through
maturity.


(continued)
 F-24


NETSOL
TECHNOLOGIES, INC. AND SUBSIDIARIES




Notes
To Consolidated Financial Statements




June
30, 2010 and 2009




During
the year-ended June 30, 2010, Holders of the 2009 Notes elected to convert
principal and interest due thereon into a total of 645,556 shares of common
stock. This conversion reduced the total principal of the 2009 Notes to
$1,600,000.




(C)
            2010
      Convertible Debt




In March
2010, the Company issued $1,500,000 of 8% convertible debt maturing in 1 year
(the “2010 Notes”), with a conversion price of $1.15 per share. The maturity
date of these notes may be extended an additional year upon agreement of both
parties.




NOTE
14 – 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”).




Consolidated
pre-tax income as of June 30, 2010 and 2009 consists of the
following:




2010
                      
                      
                      2009US
      operations
                      
                      $
                      (7,570,321
                      )
                      
                      $
                      (7,980,279
                      )Foreign
      operations
                      
                      
                      8,964,441
                      
                      
                      
                      24,363$
                      1,394,120
                      
                      
                      $
                      (7,955,916
                      )




The
components of the provision for income taxes as of June 30, 2010 and 2009 are as
follows:




Current:
                    
                    2010
                    
                    
                    2009Federal
                    
                    $
                    -
                    
                    
                    $
                    -State
      and Local
                    
                    
                    -
                    
                    
                    
                    -Foreign
                    
                    
                    53,944
                    
                    
                    
                    91,132DeferredFederal
                    
                    
                    -
                    
                    
                    
                    -State
      and Local
                    
                    
                    -
                    
                    
                    
                    -Foreign
                    
                    
                    -
                    
                    
                    
                    -Provision
      for income taxes
                    
                    $
                    53,944
                    
                    
                    $
                    91,132




A
reconciliation of taxes computed at the statutory federal income tax rate to
income tax expense (benefit) as of June 30, 2010 and 2009 is as
follows:


(continued)
 F-25


NETSOL
TECHNOLOGIES, INC. AND SUBSIDIARIES




Notes
To Consolidated Financial Statements




June
30, 2010 and 2009




2010
                
                
                
                
                
                2009Income
      taxes (benefit) at statutory rate
                
                $
                564,632
                
                
                
                34.0
                %
                
                $
                (2,705,011
                )
                
                
                34.0
                %State
      income taxes, net of federal tax benefit
                
                
                20,137
                
                
                
                1.2
                %
                
                
                (607,577
                )
                
                
                7.6
                %Foreign
      earnings taxed at different rates
                
                
                (2,552,712
                )
                
                
                -153.7
                %
                
                
                82,829
                
                
                
                -1.0
                %Change
      in valuation allowance for deferred tax assets
                
                
                864,867
                
                
                
                52.1
                %
                
                
                3,191,993
                
                
                
                -40.1
                %Non-deductible
      expenses
                
                
                1,157,020
                
                
                
                69.7
                %
                
                
                111,780
                
                
                
                -1.4
                %Other,
      net
                
                
                -
                
                
                
                0.0
                %
                
                
                17,098
                
                
                
                -0.2
                %Provision
      for income taxes
                
                $
                53,944
                
                
                
                3.2
                %
                
                $
                91,132
                
                
                
                -1.1
                %




Deferred
income tax assets and liabilities as of June 30, 2010 and 2009 consist of tax
effects of temporary differences related to the following:




Deferred
      tax asset:
                      
                      2010
                      
                      
                      2009Other
                      
                      $
                      81,191
                      
                      
                      $
                      93,297Intangible
      assets
                      
                      
                      (333,365
                      )
                      
                      
                      (681,026
                      )Net
      operating loss carryforwards
                      
                      
                      11,581,920
                      
                      
                      
                      11,052,609Net
      deferred tax assets
                      
                      
                      11,329,746
                      
                      
                      
                      10,464,880Valuation
      allowance for deferred tax assets
                      
                      
                      (11,329,746
                      )
                      
                      
                      (10,464,880
                      )Net
      deferred tax assets
                      
                      $
                      -
                      
                      
                      $
                      -




(A)
            United
      States of America




The
Company has established a full valuation allowance as management believes it is
more likely than not that these assets will not be realized in the future. The
valuation allowance increased by $864,867 for the year ended June 30, 2010
mainly due to adjusting the Company's net operating loss carry forwards for the
current year operating loss.




At June
30, 2010, federal and state net operating loss carry forwards were $29,276,610
and $9,478,138 respectively. Federal net operating loss carry forwards begin to
expire in 2020, while state net operating loss carry forwards begin to expire in
2015. Due to both historical and recent changes in the capitalization structure
of the Company, the utilization of net operating losses may be limited pursuant
to section 382 of the Internal Revenue Code.




As of
June 30, 2010, the Company does not have any unrecognized tax benefits related
to various federal and state income tax matters. The Company will recognize
accrued interest and penalties related to unrecognized tax benefits in income
tax expense.




The
Company is subject to U.S. federal income tax, as well as various state and
foreign jurisdictions. The Company is currently open to audit under the statute
of limitations by the federal and state jurisdictions for the years ending June
30, 2007 through 2010. The Company does not anticipate any material amount of
unrecognized tax benefits within the next 12 months.


(continued)
 F-26


NETSOL
TECHNOLOGIES, INC. AND SUBSIDIARIES




Notes
To Consolidated Financial Statements




June
30, 2010 and 2009




The
cumulative amount of undistributed earnings of foreign subsidiaries that the
Company intends to permanently invest and upon which no deferred US income taxes
have been provided is $21,653,787 as of June 30, 2010. The additional US income
tax on unremitted foreign earnings, if repatriated, would be offset in part by
foreign tax credits. The extent of this offset would depend on many factors,
including the method of distribution, and specific earnings distributed. The
Company is currently focusing its marketing efforts on the Asia Pacific region
where strategic capital investment is planned to be financed by undistributed
earnings of foreign subsidiaries. The Company’s capital investment strategies
include a geographical focus such that reinvestment of these earnings will occur
outside of the United States, and thus not subject to respective repatriation
tax implications. At this stage, it is not practicable to estimate the amount of
additional taxes that might be payable upon repatriation of foreign
earnings.




(B)
            Pakistan




As of
June 30, 2010 the Company's Pakistan subsidiaries had net operating loss carry
forwards which can be carried forward six years to offset future taxable income.
The deferred tax assets for the Pakistan subsidiaries at June 30, 2010 consists
mainly of net operating loss carry forwards in which the Company established a
full valuation allowance as the management believes it is more likely than not
that these assets will not be realized in the future.




2010
                    
                    
                    2009Net
      operating loss carry forward
                    
                    $
                    734,117
                    
                    
                    $
                    629,068Total
      deferred tax assets
                    
                    
                    256,941
                    
                    
                    
                    220,174Less
      : valuation allowance
                    
                    
                    (256,941
                    )
                    
                    
                    (220,174
                    )Net
      deferred tax assets
                    
                    $
                    -
                    
                    
                    $
                    -




(C)
            United
      Kingdom




As of
June 30, 2010 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 UK Subsidiaries at June 30, 2010
consists mainly of net operating loss carry forwards in which the Company
established a full valuation allowance as the management believes it is more
likely than not that these assets will not be realized in the
future.




2010
                  
                  
                  2009Net
      operating loss carry forward
                  
                  $
                  1,776,880
                  
                  
                  $
                  2,677,974Total
      deferred tax assets
                  
                  
                  533,064
                  
                  
                  
                  803,392Less
      : valuation allowance
                  
                  
                  (533,064
                  )
                  
                  
                  (803,392
                  )Net
      deferred tax assets
                  
                  $
                  -
                  
                  
                  $
                  -




(continued)
 F-27


NETSOL
TECHNOLOGIES, INC. AND SUBSIDIARIES




Notes
To Consolidated Financial Statements




June
30, 2010 and 2009




NOTE
15 – STOCKHOLDERS’ EQUITY




(A)
            Preferred
      Stock




The
Company had issued Series A 7% Cumulative Convertible Preferred Stock under
which dividends were payable. The dividend was to be paid quarterly, either in
cash or stock at the Company’s election. On August 18, 2009, the Company
redeemed all outstanding shares of Preferred Stock (1,920 shares). The amount of
dividend payable as of June 30, 2010 and 2009 was Nil and $44,409
respectively.




(B)
            Treasury
      Stock




On March
24, 2008, the Company announced that it had authorized a stock repurchase
program permitting the Company to repurchase up to 1,000,000 of its shares of
common stock over the next 6 months. The shares are to be repurchased from time
to time in open market transactions or privately negotiated transactions in the
Company's discretion. During the year ended June 30, 2008, the Company had
repurchased a total of 13,600 shares on the open market valued at $25,486. The
balance as of June 30, 2008 was $35,681. In September 2008, the stock repurchase
plan was extended an additional 6 months. During the year ended June 30, 2009,
the Company purchased an additional 208,900 shares on the open market valued at
$360,328. The balance as of June 30, 2009 and June 30, 2010 was $396,008. The
stock repurchase plan expired on March 24, 2009.




(C)
            Shares
      Issued for Services to Related
Parties




During
the year ended June 30, 2010 and 2009, the Company issued a total of 187,500 and
20,000 shares of restricted common stock for services rendered by the officers
of the company. The issuances were approved by both the compensation committee
and the board of directors. These shares were valued at the fair market value of
$163,125 and 6,400, as of June 30, 2010 and 2009, respectively.




During
the year ended June 30, 2010 and 2009, the Company issued a total of 90,000 and
60,000 shares of restricted common stock for services rendered by the
independent members of the Board of Directors as part of their board
compensation. The issuances were approved by both the compensation committee and
the board of directors. These shares were valued at the fair market value of
$78,900 and $57,400, as of June 30, 2010 and 2009, respectively.




During
the year ended June 30, 2010 and 2009, the Company issued a total of 139,881 and
122,500 shares of its common stock to employees as required according to the
terms of their employment agreements valued at $130,500 and $183,265,
respectively.




An
additional 14,000 shares of restricted common stock was issued to employees as a
year-end bonus for services performed in 2009. Subsequent to the close of the
quarter ended December 31, 2009, 500 shares of these bonus shares were canceled,
resulting in a total issuance of 13,500 shares.


(D)
              Share-Based
      Payment Transactions
  During
the year ended June 30, 2010 and 2009, the Company issued a total of 501,931 and
320,000 shares of its common stock for provision of services to unrelated
consultants valued at $275,019 and $146,600, respectively.




(continued)
 F-28


NETSOL
TECHNOLOGIES, INC. AND SUBSIDIARIES




Notes
To Consolidated Financial Statements




June
30, 2010 and 2009




(E)
            Employee
      Stock Purchase Agreement




Pursuant
to the original terms of the Employee Stock Purchase Agreements (“ESPA”),
employees were able to purchase unregistered shares of stock at $0.20 per share
as approved by the board of directors. The agreements were subsequently amended
in September 2009 to adjust the issue price as the closing bid price on the date
prior to the execution of each employee agreement. To accomplish this, the
employees who had already purchased shares under the ESPA were given the option
to either adjust the consideration by decreasing the number of shares purchased
to match the adjusted issue price, or by paying more money. The balance of stock
subscriptions receivable at June 30, 2010 and 2009 was $2,007,960 and $842,619,
respectively.




The
Company sold a total of 2,544,929 and 2,765,000 shares to employees as of June
30, 2010 and 2009, respectively, under the original ESPA.




NOTE
16 – INCENTIVE AND NON-STATUTORY STOCK OPTION PLAN




Common
stock purchase options and warrants consisted of the following as of June 30,
2010:




OPTIONS:
                          
                          
                          
                          
                          Exercise
                          
                          
                          AggregatedIssued by the Company
                          
                          # shares
                          
                          
                          Price
                          
                          
                          Intrinsic ValueOutstanding
      and exercisable, June 30, 2008
                          
                          
                          6,072,425
                          
                          
                          $
                          0.75
      to $5.00
                          
                          
                          $
                          1,717,608Granted
                          
                          
                          2,351,500
                          
                          
                          $
                          0.30
      to $1.65Exercised
                          
                          
                          (717,008
                          )
                          
                          $
                          0.30
      to $2.50Expired
                          
                          
                          -Outstanding
      and exercisable, June 30, 2009
                          
                          
                          7,706,917
                          
                          
                          $
                          0.30
      to $5.00
                          
                          
                          $
                          -Granted
                          
                          
                          300,000
                          
                          
                          $
                          0.75Exercised
                          
                          
                          (300,000
                          )
                          
                          $
                          0.75Expired
                          
                          
                          -Outstanding
      and exercisable, June 30, 2010
                          
                          
                          7,706,917
                          
                          
                          $
                          0.30 to $5.00
                          
                          
                          $
                          146,047WARRANTS:Outstanding
      and exercisable, June 30, 2008
                          
                          
                          1,992,314
                          
                          
                          $
                          1.65
      to $3.70
                          
                          
                          $
                          1,206,095Granted
                          
                          
                          -Exercised
                          
                          
                          (51,515
                          )
                          
                          $
                          1.93Expired
                          
                          
                          (163,182
                          )
                          
                          $
                          2.20 to $3.30Outstanding
      and exercisable, June 30, 2009
                          
                          
                          1,777,617
                          
                          
                          $
                          1.65
      to $3.70
                          
                          
                          $
                          -Granted
                          
                          
                          3,274,682
                          
                          
                          $
                          0.31Exercised
                          
                          
                          -Expired
                          
                          
                          (288,980
                          )
                          
                          $
                          3.30Outstanding
      and exercisable, June 30, 2010
                          
                          
                          4,763,319
                          
                          
                          $
                          0.63 to $3.70
                          
                          
                          $
                          1,698,387




(continued)
 F-29


NETSOL
TECHNOLOGIES, INC. AND SUBSIDIARIES




Notes
To Consolidated Financial Statements




June
30, 2010 and 2009




The
average life remaining on the options and warrants as of June 30, 2010 is as
follows:




Exercise Price
                            
                            Number
                              Outstanding
                              and
                              Exercisable
                            
                            
                            Weighted
                              Average
                              Remaining
                              Contractual
                              Life
                            
                            
                            Weighted
                              Ave
                              Exericse
                              PriceOPTIONS:$0.01
      - $0.99
                            
                            
                            1,806,000
                            
                            
                            
                            8.48
                            
                            
                            
                            0.65$1.00
      - $1.99
                            
                            
                            2,045,917
                            
                            
                            
                            5.08
                            
                            
                            
                            1.88$2.00
      - $2.99
                            
                            
                            3,055,000
                            
                            
                            
                            4.79
                            
                            
                            
                            2.69$3.00
      - $5.00
                            
                            
                            800,000
                            
                            
                            
                            3.81
                            
                            
                            
                            4.24Totals
                            
                            
                            7,706,917
                            
                            
                            
                            5.63
                            
                            
                            
                            2.16WARRANTS:$0.31
      - $1.99
                            
                            
                            4,750,819
                            
                            
                            
                            4.47
                            
                            
                            
                            0.54$3.00
      - $5.00
                            
                            
                            12,500
                            
                            
                            
                            1.26
                            
                            
                            
                            3.70Totals
                            
                            
                            4,763,319
                            
                            
                            
                            4.46
                            
                            
                            
                            0.55




All
options and warrants granted are vested and are exercisable as of June 30,
2010.




(A)
            Incentive
      and Non-Statutory Stock Option Plan




The
Company maintains several Incentive and Non-Statutory Stock Option Plans
(“Plans”) for its employees and consultants. Options granted under these Plans
to an employee of the Company become exercisable over a period of no longer than
ten (10) years and no less than twenty percent (20%) of the shares are
exercisable annually. Options are not exercisable, in whole or in part, prior to
one (1) year from the date of grant unless the Board specifically determines
otherwise, as provided.




Two types
of options may be granted under these Plans: (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.




Options




During
the quarter ended September 30, 2008, the Company granted 100,000 options to an
employee with an exercise price of $1.65 per share and an expiration date of 3
months, vesting immediately. Using the Black-Scholes method to value the
options, the Company recorded $89,700 in compensation expense for these options
in the accompanying consolidated financial statements. The Black-Scholes option
pricing model used the following assumptions:


(continued)
 F-30


NETSOL
TECHNOLOGIES, INC. AND SUBSIDIARIES




Notes
To Consolidated Financial Statements




June
30, 2010 and 2009




Risk-free
      interest rate
                    
                    
                    7.0
                    %Expected
      life
                    
                    0.25
      yearsExpected
      volatility
                    
                    
                    106
                    %




During
the quarter ended March 31, 2009, the Company granted 45,000 options to two
employees with an exercise price of $0.75 per share and an expiration date of 3
months, vesting immediately. Using the Black-Scholes method to value the
options, the Company recorded $8,100 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
                    
                    
                    1.0
                    %Expected
      life
                    
                    0.25
      yearsExpected
      volatility
                    
                    
                    141
                    %




During
the quarter-ended March 31, 2009, the Company granted 1,800,000 options to three
officers in exchange for an agreement to reduce total compensation. Such options
vest quarterly over a ten-year period. A non-cash stock compensation charge of
$699,300 and $139,893 is recorded during for the years ended June 30, 2010 and
2009, respectively. The Black-Scholes option pricing model used the following
assumptions:




Risk-free
      interest rate
                    
                    
                    3.8
                    %Expected
      life
                    
                    10
      yearsExpected
      volatility
                    
                    
                    138
                    %




During
the quarter ended June 30, 2009, the Company granted 23,000 options to four
employees with an exercise price of $0.32 per share and an expiration date of 4
months, vesting immediately. Using the Black-Scholes method to value the
options, the Company recorded $1,879 in compensation expense for these options
in the accompanying consolidated financial statements. The Company also granted
250,000 options to four employees with an exercise price of $0.3 per share and
an expiration date of 3 months, vesting immediately. Using the Black-Scholes
method to value the options, the Company recorded $18,000 in compensation
expense for these options in the accompanying consolidated financial statements.
The Company also granted 100,000 options to one employee with an exercise price
of $0.45 per share and an expiration date of 3 months, vesting immediately.
Using the Black-Scholes method to value the options, the Company recorded $4,100
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
                    
                    
                    1.13
                    %Expected
      life
                    
                    0.25
      to 0.33 yearsExpected
      volatility
                    
                    56%
      to 99
                    %




During
the quarter ended December 31, 2009, the Company granted 250,000 options to two
employees with an exercise price of $0.75 per share and an expiration date of 1
year, vesting immediately. Using the Black-Scholes method to value the options,
the Company recorded $71,238 in compensation expense for these options in the
accompanying consolidated financial statements. The Black-Scholes option pricing
model used the following assumptions:


(continued)
 F-31


NETSOL
TECHNOLOGIES, INC. AND SUBSIDIARIES




Notes
To Consolidated Financial Statements




June
30, 2010 and 2009




Risk-free
      interest rate
                    
                    
                    1.56
                    %Expected
      life
                    
                    1
      yearExpected
      volatility
                    
                    
                    56
                    %




During
the quarter ended June 30, 2010, the Company granted 50,000 options to two
employees with an exercise price of $0.75 per share and an expiration date of 1
month, vesting immediately. Using the Black-Scholes method to value the options,
the Company recorded $3,652 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
                    
                    
                    1.08
                    %Expected
      life
                    
                    1
      monthExpected
      volatility
                    
                    
                    39
                    %




Warrants




During
2010, the Company amended the terms of warrant agreements associated with common
stock issued in October, 2007. Pursuant to the terms of the amendment, the
exercise price was reduced to $0.31 from $0.63, resulting in a corresponding
increase in the number of shares of common stock underlying the warrants by
3,274,682.




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. 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 25,000 warrants vested are exercisable until October 10,
2011 and all non-vested warrants were cancelled at the time of the agreement
termination. During the quarter ended March 31, 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 during the year ended June 30,
2007. 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
                    %




In
October 2007, the investors exercised the “green shoe” clause and as a result,
the Company sold 757,576 shares of the Company’s common stock valued at
$1,250,000. In addition, and as part of the agreement, the investors were
granted 378,788 warrants with an exercise price of $1.65 that expire in five
years.


(continued)
 F-32


NETSOL
TECHNOLOGIES, INC. AND SUBSIDIARIES




Notes
To Consolidated Financial Statements




June
30, 2010 and 2009




(B)
            Equity
      Incentive Plan




In May
2008, the shareholders approved the 2008 Equity Incentive Plan (the “2008 Plan”)
which provides for the grant of equity-based awards, including options, stock
appreciation rights, restricted stock awards or performance share awards or any
other right or interest relating to shares or cash, to eligible participants.
The aggregate number of shares reserved and available for award under the 2008
Plan is 1,000,000 (the Share Reserve). The 2008 Plan contemplates the issuance
of common stock upon exercise of options or other awards granted to eligible
persons under the 2008 Plan. Shares issued under the 2008 Plan may be both
authorized and unissued shares or previously issued shares acquired by the
Company. Upon termination or expiration of an unexercised option, stock
appreciation right or other stock-based award under the 2008 Plan, in whole or
in part, the number of shares of common stock subject to such award again become
available for grant under the 2008 Plan. Any shares of restricted stock
forfeited as described below will become available for grant. The maximum number
of shares that may be granted to any one participant in any calendar year may
not exceed 500,000 shares. All options issued pursuant to the Plan are
nontransferable and subject to forfeiture.




Stock
Options




Options
granted under the 2008 Plan are not generally transferable and must be exercised
within 10 years, subject to earlier termination upon termination of the option
holder's employment, but in no event later than the expiration of the option's
term. The exercise price of each option may not be less than the fair market
value of a share of the Company’s common stock on the date of grant (except in
connection with the assumption or substitution for another option in a manner
qualifying under Section 424(a) of the Internal Revenue Code of 1986, as amended
(the Code). Incentive stock options granted to any participant who owns 10% or
more of the Company’s outstanding common stock (a Ten Percent Shareholder) must
have an exercise price equal to or exceeding 110% of the fair market value of a
share of our common stock on the date of the grant and must not be exercisable
for longer than five years. Options become vested and exercisable at such times
or upon such events and subject to such terms, conditions, performance criteria
or restrictions as specified by the Committee. The maximum term of any option
granted under the 2008 Plan is ten years, provided that an incentive stock
option granted to a Ten Percent Shareholder must have a term not exceeding five
years.




Performance
Awards




Under the
2008 Plan, a participant may also be awarded a "performance award," which means
that the participant may receive cash, stock or other awards contingent upon
achieving performance goals established by the Committee. The Committee may also
make "deferred share" awards, which entitle the participant to receive our stock
in the future for services performed between the date of the award and the date
the participant may receive the stock. The vesting of deferred share awards may
be based on performance criteria and/or continued service with our Company. A
participant who is granted a "stock appreciation right" under the Plan has the
right to receive all or a percentage of the fair market value of a share of
stock on the date of exercise of the stock appreciation right minus the grant
price of the stock appreciation right determined by the Committee (but in no
event less than the fair market value of the stock on the date of grant).
Finally, the Committee may make "restricted stock" awards under the 2008 Plan,
which are subject to such terms and conditions as the Committee determines and
as are set forth in the award agreement related to the restricted stock. As of
June 30, 2010, 602,000 shares have been issued under this plan.


(continued)
 F-33


NETSOL
TECHNOLOGIES, INC. AND SUBSIDIARIES




Notes
To Consolidated Financial Statements




June
30, 2010 and 2009




NOTE
17 – COMMITMENTS AND CONTINGENCIES




(A)
            Leases




The
Company’s headquarters is located in California in approximately 1,919 rentable
square feet and a rent of $4,318 per month. The term of the lease is for two
years and expires on December 31, 2011. 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 month to month lease and is rented at the rate of $1,380
per month. The Beijing lease is a two year lease that expires in August 2011.
The monthly rent is $4,210 per month. The Bangkok lease is a one year lease with
monthly rent of $2,610. The NetSol Europe facilities, located in Horsham, United
Kingdom, are leased until June 23, 2011 for an annual rent of £75,000
(approximately $123,750). NTNA recently relocated to Alameda, California
location. The Alameda lease is a three year lease with monthly rent of
$6,876.




The
NetSol Karachi lease is a 3 year lease that expires on December 4, 2011 and
currently is rented at the rate of $1,474 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 $2,513 per month.




Upon
expiration of its leases, the Company does not anticipate any difficulty in
obtaining renewals or alternative space. Rent expense amounted to $994,280 and
$1,615,038 for the years ended June 30, 2010 and 2009,
respectively.




The total
annual lease commitment for the next five years is as follows:




FYE
      6/30/11
                    
                    $
                    445,390FYE
      6/30/12
                    
                    
                    197,968FYE
      6/30/13
                    
                    
                    85,457FYE
      6/30/14
                    
                    
                    -




(B)
            Litigation




The
Pakistan subsidiary of the Company, NetSol PK had entered into an agreement with
Raseen Technologies LLC ("Raseen"), an Abu Dhabi based company to establish a
new joint venture (“JV”) in Pakistan for providing services to telecom sector.
Based on that understanding, the Company spent $367,164 for capital equipment
and various expenses in preparation for the delivery of services to be provided
relative to the operations of the JV. The non-capital related expenditures were
recorded as other assets in accordance with the agreement, which provides that
all expenditures were to be reimbursed by the JV to the corresponding company
upon achievement of positive cash flows.




Subsequent
to the execution of the agreement, and previous to the incorporation of the JV,
Raseen terminated its participation without cause, as defined. The Company has
filed a civil suit against Raseen in the civil court of Lahore, Pakistan for the
recovery of the JV-related expenditures disbursed. As a result of the litigation
on this matter, and the inherent uncertainty of any recovery, the Company has
recorded a loss as of the year-ended June 30, 2010 in the amount of $237,104,
which is the total of non-capital related expenditures. The capital assets
purchased are computer equipment, as well as furniture and fixtures that are
currently being utilized and accordingly depreciated by the Company for use in
the normal course of operations.


(continued)
 F-34


NETSOL
TECHNOLOGIES, INC. AND SUBSIDIARIES




Notes
To Consolidated Financial Statements




June
30, 2010 and 2009




As of
June 30, 2010 and 2009, to the best knowledge of the Company’s management and
counsel, there is no material litigation pending or threatened against the
Company.




NOTE
18 – SEGMENT INFORMATION AND GEOGRAPHIC AREAS




The
Company has identified three global regions or segments for its products and
services; North America, Europe, and Asia-Pacific. Our reportable segments are
business units located in different global regions. Each business unit provides
similar products and services; license fees for leasing and asset-based
software, related maintenance fees, and implementation and IT consulting
services. Separate management of each segment is required because each business
unit is subject to operational issues and strategies unique to their particular
regional location. We account for intercompany sales and expenses as if the
sales or expenses were to third parties and eliminate them in
consolidation.


(continued)
 F-35


NETSOL
TECHNOLOGIES, INC. AND SUBSIDIARIES




Notes
To Consolidated Financial Statements




June
30, 2010 and 2009




The
following table presents a summary of operating information and certain year-end
balance sheet information for the years ended June 30, 2010 and
2009:




2010
                                
                                
                                2009Revenues
      from unaffiliated customers:North
      America
                                
                                $
                                5,627,277
                                
                                
                                $
                                5,396,693Europe
                                
                                
                                5,105,434
                                
                                
                                
                                3,886,337Asia
      - Pacific
                                
                                
                                26,047,185
                                
                                
                                
                                17,165,147Consolidated
                                
                                $
                                36,779,897
                                
                                
                                $
                                26,448,177Operating
      income (loss):Corporate
      headquarters
                                
                                $
                                (4,713,914
                                )
                                
                                
                                (4,368,531
                                )North
      America
                                
                                
                                67,133
                                
                                
                                
                                (1,768,487
                                )Europe
                                
                                
                                872,249
                                
                                
                                
                                (2,389,652
                                )Asia
      - Pacific
                                
                                
                                13,502,240
                                
                                
                                
                                2,043,501Consolidated
                                
                                $
                                9,727,708
                                
                                
                                $
                                (6,483,169
                                )Net
      income (loss) after taxes and before minority interest:Corporate
      headquarters
                                
                                $
                                (7,605,495
                                )
                                
                                $
                                (5,729,110
                                )North
      America
                                
                                
                                35,174
                                
                                
                                
                                (1,875,944
                                )Europe
                                
                                
                                804,350
                                
                                
                                
                                (2,425,085
                                )Asia
      - Pacific
                                
                                
                                13,052,188
                                
                                
                                
                                3,890,366Consolidated
                                
                                $
                                6,286,217
                                
                                
                                $
                                (6,139,773
                                )Identifiable
      assets:Corporate
      headquarters
                                
                                $
                                17,598,812
                                
                                
                                $
                                18,051,615North
      America
                                
                                
                                2,073,111
                                
                                
                                
                                2,938,573Europe
                                
                                
                                3,237,702
                                
                                
                                
                                3,796,544Asia
      - Pacific
                                
                                
                                49,226,555
                                
                                
                                
                                37,982,294Consolidated
                                
                                $
                                72,136,180
                                
                                
                                $
                                62,769,026Depreciation
      and amortization:Corporate
      headquarters
                                
                                $
                                1,166,797
                                
                                
                                $
                                1,434,372North
      America
                                
                                
                                539,176
                                
                                
                                
                                485,142Europe
                                
                                
                                658,591
                                
                                
                                
                                623,738Asia
      - Pacific
                                
                                
                                1,543,382
                                
                                
                                
                                1,644,956Consolidated
                                
                                $
                                3,907,946
                                
                                
                                $
                                4,188,208Capital
      expenditures:Corporate
      headquarters
                                
                                $
                                -
                                
                                
                                $
                                1,020North
      America
                                
                                
                                41,569
                                
                                
                                
                                113,781Europe
                                
                                
                                104,922
                                
                                
                                
                                53,636Asia
      - Pacific
                                
                                
                                2,840,005
                                
                                
                                
                                1,925,181Consolidated
                                
                                $
                                2,986,495
                                
                                
                                $
                                2,093,619




(continued)
 F-36


NETSOL
TECHNOLOGIES, INC. AND SUBSIDIARIES




Notes
To Consolidated Financial Statements




June
30, 2010 and 2009




Geographic
Information




Disclosed
in the table below is geographic information for each country that comprised
greater than five percent of our total revenues for fiscal 2010 and
2009.




June
      30, 2010
                
                
                June
      30, 2009Revenue
                
                
                Long-lived Assets
                
                
                Revenue
                
                
                Long-lived AssetsChina
                
                $
                11,500,798
                
                
                $
                45,570
                
                
                $
                4,392,279
                
                
                $
                54,684Thailand
                
                
                4,975,571
                
                
                
                179,125
                
                
                
                1,362,749
                
                
                
                -USA
                
                
                5,805,502
                
                
                
                6,524,366
                
                
                
                5,396,693
                
                
                
                8,190,837UK
                
                
                5,937,566
                
                
                
                5,125,867
                
                
                
                6,984,690
                
                
                
                5,849,396Pakistan
                
                
                1,994,993
                
                
                
                26,701,773
                
                
                
                2,629,049
                
                
                
                19,673,740Australia
                
                
                1,066,013
                
                
                
                4,158
                
                
                
                1,916,766
                
                
                
                3,417Other
      Countries
                
                
                5,499,454
                
                
                
                -
                
                
                
                3,765,951
                
                
                
                -Total
                
                $
                36,779,897
                
                
                $
                38,580,858
                
                
                $
                26,448,177
                
                
                $
                33,772,074




NOTE
19 – NON-CONTROLLING INTEREST IN SUBSIDIARY




The
Company had non-controlling interests in several of its subsidiaries. The
balance of non-controlling interest as of June 30, 2010 and 2009 was as
follows:




SUBSIDIARY
                          
                          Non Controlling
                            Interest %
                          
                          
                          Non-Controlling
                            Interest 2010NetSol
      PK
                          
                          
                          42.04
                          %
                          
                          $
                          9,133,392NetSol-Innovation
                          
                          
                          49.90
                          %
                          
                          
                          1,291,057Connect
                          
                          
                          49.90
                          %
                          
                          
                          (1,891
                          )Total
                          
                          
                          
                          
                          
                          $
                          10,422,557SUBSIDIARY
                          
                          Non Controlling
                            Interest %
                          
                          
                          Non-Controlling
                            Interest 2009NetSol
      PK
                          
                          
                          42.04
                          %
                          
                          $
                          5,128,185NetSol-Innovation
                          
                          
                          49.90
                          %
                          
                          
                          1,235,805Connect
                          
                          
                          49.90
                          %
                          
                          
                          19,320Total
                          
                          
                          
                          
                          
                          $
                          6,383,310




(A)
            NetSol
      Technologies, Limited (“NetSol PK”)




For the
fiscal years ended June 30, 2010 and 2009, NetSol Technologies Ltd. (“NetSol
PK”) had net income of $11,300,445 and $3,329,683. The related non-controlling
interest was $4,750,707 and $1,387,110, respectively.




In April,
2009, NetSol PK issued 6,223,209 shares of common stock to the company in
fulfillment of an outstanding loan balance of $1,879,672 provided by the
Company.


(continued)
 F-37


NETSOL
TECHNOLOGIES, INC. AND SUBSIDIARIES




Notes
To Consolidated Financial Statements




June
30, 2010 and 2009




During
the fiscal year-ended June 2009, the Company disposed of 3,132,255 shares of
NetSol PK in the open market with a value of $558,536. A net gain of $351,522 is
recorded as “Other Income” in the accompanying consolidated financial
statements. As a result of the sale, the corresponding non-controlling interest
increased from 41.32% to 42.04%.




(B)
            NetSol
      Innovation (Private) Limited (“NetSol
  Innovation”)




For the
fiscal years ended June 30, 2010 and 2009, NetSol Innovation (Private) Limited
(“NetSol Innovation”) had net income of $301,098 and $1,033,457. The related
non-controlling interest was $150,248 and $515,695, respectively.




During
the fiscal year-ended June 2009, NetSol Innovation declared a cash dividend of
$874,817, of which the Company’s interest was $441,958. The dividend was paid
during the quarter-ended December 31, 2008. The amount attributable to the
minority holders was $432,859 and is reflected in the accompanying consolidated
financial statements.




(C)
            NetSol
      Connect (“Connect”)




For the
fiscal years ended June 30, 2010 and 2009, NetSol Connect (Private), Ltd.
(“Connect”) had net loss of $17,752 and $173,671. The related non-controlling
interest was $8,858 and $86,662, respectively.




NOTE
20 – SUBSEQUENT EVENTS




(A)
            Acquisitions




On or
about May 24, 2010, the board of directors of the Company initiated discussions
to consider the acquisition of two of its wholly-owned subsidiaries, NetSol
Technologies North America, Inc. (“NTNA”), and NetSol Technologies Europe
Limited (“NTE”) by its majority-owned subsidiary, NetSol Technologies, Ltd.
(“NetSol PK”) in exchange for shares of common stock of NetSol PK. The number of
shares to be issued to the Company is to be based on a third party valuation of
the acquired subsidiaries. On August 25, 2010, the shareholders of NetSol PK
approved the acquisition. Upon the contingent approval of the Securities &
Exchange Commission (“SEC”) of Pakistan and other required regulatory approvals,
the board of directors of the Company will provide a final, review and approval
of the transaction. Based on receipt of the third-party valuation, it is
anticipated that this transaction will result in the issuance of an additional
61,046,778 shares of common stock of NetSol PK, increasing the Company’s
percentage ownership of NetSol PK from 57.96% as of June 30, 2010 to 76.43%. The
Company anticipates these transactions to close on or about December
2010.




Effective
July 1, 2010, the Company closed a transaction whereby the Company acquired
49.9% of the shares of NetSol Connect (Private), Ltd. (“Connect”) from the sole
non-controlling interest shareholder in exchange for total consideration of
$180,000. The transaction results in the 100% of the ownership of
Connect.




The
respective impact of this transaction is inconsequential to the Company’s
consolidated financial statements, and as such, proforma financial information
is not presented.


(continued)
 F-38


NETSOL
TECHNOLOGIES, INC. AND SUBSIDIARIES




Notes
To Consolidated Financial Statements




June
30, 2010 and 2009




(B)
            Equity
      Transactions




The
Company issued a total of 210,000 shares of common stock to employees as
required according to the terms of their employment agreements valued at
$151,200. These shares were included in ‘Shares to be issued’ as of June 30,
2010.




The
Company issued a total of 30,000 shares of restricted common stock for services
rendered by the independent members of the Board of Directors as part of their
board compensation. The issuances were approved by both the compensation
committee and the board of directors.




The
Company converted a total balance of $43,591 of principal and interest on the
2008 Notes into 69,192 shares of common stock. This conversion resulted in a
remaining principal balance of $456,754 of this Issue.




The
Company converted a total balance of $1,646,400 of principal and interest on the
2009 Notes into 2,613,333 shares of common stock. This conversion resulted in
the extinguishment of this Issue.




Employees
of the Company exercised options to acquire 187,500 shares of common stock
valued at $121,875.




Effective
August 3, 2010, the board of directors of the Company amended the conversion
price of the 2010 Notes from $1.15 per share to $.85 per share.


(continued)
 F-39