UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)
x Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2008

¨ For the transition period from __________ to __________

Commission file number: 0-22773

NETSOL TECHNOLOGIES, INC.
(Exact name of small business issuer as specified in its charter)

NEVADA
 
95-4627685
(State or other Jurisdiction of
 
(I.R.S. Employer NO.)
Incorporation or Organization)
   

23901 Calabasas Road, Suite 2072, Calabasas, CA 91302
(Address of principal executive offices) (Zip Code)

(818) 222-9195 / (818) 222-9197
(Issuer's telephone/facsimile numbers, including area code)

Indicate by check mark whether the issuer: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the issuer 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 a check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check One):

Large Accelerated Filer ¨
Accelerated Filer ¨
Non-Accelerated Filer x

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

Yes ¨ No x

The issuer had 26,493,987 shares of its $.001 par value Common Stock and 1,920 shares of Series A 7% Cumulative Convertible Preferred Stock issued and outstanding as of November 11, 2008.
 


NETSOL TECHNOLOGIES, INC.

INDEX

   
Page No.
     
PART I.
FINANCIAL INFORMATION
 
     
Item 1.
Financial Statements
 
     
 
Consolidated Unaudited Balance Sheet as of September 30, 2008 and
 
 
Audited Balance Sheet as of June 30, 2008
3
     
 
Comparative Unaudited Consolidated Statements of Operations
 
 
for the Three Months Ended September 30, 2008 and 2007
4
     
 
Comparative Unaudited Consolidated Statements of Cash Flow
 
 
for the Three Months Ended September 30, 2008 and 2007
5
     
 
Notes to the Unaudited Consolidated Financial Statements
7
     
Item 2.
Management's Discussion and Analysis or Plan of Operation
24
     
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
33
     
Item 4.
Controls and Procedures
33
     
PART II.
OTHER INFORMATION
 
     
Item 1.
Legal Proceedings
33
     
Item 2.
Unregistered Sales of Equity and Use of Proceeds
33
     
Item 3.
Defaults Upon Senior Securities
34
     
Item 4.
Submission of Matters to a Vote of Security Holders
34
     
Item 5.
Other Information
34
     
Item 6.
Exhibits
34

Page 2


NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

   
As of 9/30/08
 
As of 6/30/08
 
   
(Unaudited)
 
(Audited)
 
       
(Restated)
 
ASSETS
             
Current assets:
             
Cash and cash equivalents
 
$
9,778,690
 
$
6,275,238
 
Certificates of deposit
   
106,949
   
-
 
Accounts receivable, net of allowance for doubtful accounts
   
13,886,153
   
10,988,888
 
Revenues in excess of billings
   
12,099,722
   
11,053,042
 
Other current assets
   
2,118,275
   
2,406,407
 
 Total current assets
   
37,989,789
   
30,723,575
 
Property and equipment, net of accumulated depreciation
   
8,324,257
   
9,176,780
 
Other assets, long-term
   
981,957
   
1,866,437
 
Intangibles:
             
Product licenses, renewals, enhancements, copyrights,
             
 trademarks, and tradenames, net
   
9,988,525
   
10,837,856
 
Customer lists, net
   
1,559,101
   
1,732,761
 
Goodwill
   
9,439,285
   
9,439,285
 
 Total intangibles
   
20,986,911
   
22,009,902
 
 Total assets
 
$
68,282,914
 
$
63,776,694
 
               
LIABILITIES AND STOCKHOLDERS' EQUITY
             
Current liabilities:
             
Accounts payable and accrued expenses
 
$
3,123,928
 
$
4,116,659
 
Current portion of loans and obligations under capitalized leases
   
4,133,872
   
2,280,110
 
Other payables - acquisitions
   
103,226
   
846,215
 
Unearned revenues
   
4,037,556
   
3,293,728
 
Due to officers
   
-
   
184,173
 
Dividend to preferred stockholders payable
   
33,876
   
33,508
 
Cash dividend to minority shareholders of subsidiary
   
315,889
   
-
 
Loans payable, bank
   
2,559,509
   
2,932,551
 
 Total current liabilities
   
14,307,856
   
13,686,944
 
Obligations under capitalized leases, less current maturities
   
267,358
   
332,307
 
Convertible notes payable
   
6,000,000
   
-
 
Long term loans; less current maturities
   
296,698
   
411,608
 
 Total liabilities
   
14,871,912
   
14,430,859
 
Minority interest
   
7,136,565
   
7,857,969
 
Commitments and contingencies
   
-
   
-
 
               
Stockholders' equity:
             
Preferred stock, 5,000,000 shares authorized;
             
 1,920; 4,130 issued and outstanding
   
1,920,000
   
1,920,000
 
Common stock, $.001 par value; 95,000,000 shares authorized;
             
 26,219,770; issued and 26,051,274 outstanding as of 9/30/08
   
26,220
       
 25,545,482 issued and 25,525,886 outstanding as of 6/30/08
         
25,545
 
Additional paid-in-capital
   
76,657,363
   
74,950,286
 
Treasury stock (168,496; 19,596 shares)
   
(321,008
)
 
(35,681
)
Accumulated deficit
   
(32,048,738
)
 
(33,071,702
)
Stock subscription receivable
   
(708,904
)
 
(600,907
)
Common stock to be issued
   
392,737
   
1,048,249
 
Other comprehensive loss
   
(5,643,233
)
 
(2,747,924
)
 Total stockholders' equity
   
40,274,437
   
41,487,866
 
 Total liabilities and stockholders' equity
 
$
62,282,914
 
$
63,776,694
 
 
See accompanying notes to these unaudited consolidated financial statements.
 
Page 3

 
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES 
CONSOLIDATED STATEMENTS OF OPERATIONS 

   
For the Three Months
 
   
Ended September 30,
 
   
2008
 
2007
 
Net Revenues:
   
(Unaudited
)
 
(Unaudited
)
License fees
 
$
2,529,808
 
$
1,903,552
 
Maintenance fees
   
1,593,734
   
1,583,420
 
Services
   
5,177,425
   
5,166,265
 
Total revenues
   
9,300,967
   
8,653,237
 
Cost of revenues:
             
Salaries and consultants
   
2,640,713
   
2,321,030
 
Travel
   
485,936
   
266,828
 
Repairs and maintenance
   
106,665
   
114,154
 
Insurance
   
32,839
   
38,645
 
Depreciation and amortization
   
551,325
   
258,907
 
Other
   
751,068
   
387,891
 
Total cost of revenues
   
4,568,546
   
3,387,455
 
Gross profit
   
4,732,421
   
5,265,782
 
Operating expenses:
             
Selling and marketing
   
969,518
   
832,493
 
Depreciation and amortization
   
480,208
   
464,647
 
Bad debt expense
   
-
   
2,439
 
Salaries and wages
   
979,254
   
907,879
 
Professional services, including non-cash compensation
   
306,886
   
160,050
 
General and adminstrative
   
868,117
   
678,573
 
Total operating expenses
   
3,603,983
   
3,046,081
 
Income from operations
   
1,128,438
   
2,219,701
 
Other income and (expenses)
             
Loss on sale of assets
   
(165,738
)
 
(32,223
)
Interest expense
   
(203,892
)
 
(233,804
)
Interest income
   
27,941
   
33,863
 
Gain on foreign currency exchange rates
   
2,007,882
   
55,986
 
Fair market value of options issued
   
(117,300
)
 
-
 
Other income
   
16,454
   
55,961
 
Total other expenses
   
1,565,347
   
(120,217
)
Net income before minority interest in subsidiary
   
2,693,785
   
2,099,484
 
Minority interest in subsidiary (restated 2007)
   
(1,629,761
)
 
(1,152,107
)
Income taxes
   
(7,182
)
 
(32,441
)
Net income (restated 2007)
   
1,056,842
   
914,936
 
Dividend required for preferred stockholders
   
(33,876
)
 
(71,157
)
Net income (loss) applicable to common shareholders (restated 2007)
   
1,022,966
   
843,779
 
Other comprehensive income (loss):
             
Translation adjustment
   
(2,895,310
)
 
162,403
 
Comprehensive income (restated 2007)
 
$
(1,872,344
)
$
1,006,182
 
               
Net income per share (restated 2007):
             
Basic
 
$
0.04
 
$
0.04
 
Diluted
 
$
0.04
 
$
0.04
 
Weighted average number of shares outstanding
             
Basic
   
26,307,175
   
21,425,235
 
Diluted
   
28,029,442
   
22,844,361
 
 
See accompanying notes to these unaudited consolidated financial statements.
 
Page 4

 
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES 
CONSOLIDATED STATEMENTS OF CASH FLOWS 
(UNAUDITED)

   
For the Three Months
 
   
Ended Sept 30,
 
   
2008
 
2007
 
Cash flows from operating activities:
             
Net income (restated 2007)
 
$
1,056,842
 
$
914,936
 
Adjustments to reconcile net income to net cash
             
(used in) provided by operating activities:
             
Depreciation and amortization
   
1,031,533
   
723,554
 
Provision for uncollectible accounts
   
-
   
-
 
Loss on sale of assets
   
165,738
   
32,223
 
Minority interest in subsidiary (restated 2007)
   
1,629,761
   
1,152,107
 
Stock issued for services
   
33,163
   
-
 
Fair market value of warrants and stock options granted
   
207,000
   
24,320
 
Changes in operating assets and liabilities:
             
Increase in accounts receivable
   
(3,942,317
)
 
(353,500
)
Increase in other current assets
   
(1,960,129
)
 
(1,080,375
)
Decrease in accounts payable and accrued expenses
   
(259,967
)
 
(1,130,337
)
Net cash (used in) provided by operating activities
   
(2,038,376
)
 
282,928
 
Cash flows from investing activities:
             
Purchases of property and equipment
   
(930,058
)
 
(745,901
)
Sales of property and equipment
   
40,900
   
85,076
 
Payments of acquisition payable
   
(742,989
)
 
(879,007
)
Purchase of treasury stock
   
(285,328
)
 
-
 
Short-term investments held for sale
   
(113,738
)
 
-
 
Increase in intangible assets
   
(689,544
)
 
(841,312
)
Net cash used in investing activities
   
(2,720,757
)
 
(2,381,144
)
Cash flows from financing activities:
             
Proceeds from sale of common stock
   
150,000
   
250,000
 
Proceeds from the exercise of stock options and warrants
   
520,569
   
903,499
 
Purchase of subsidary stock in Pakistan
   
(250,000
)
 
-
 
Proceeds from convertible notes payable
   
6,000,000
   
-
 
Proceeds from bank loans
   
1,768,212
   
2,444,291
 
Payments on bank loans
   
(75,732
)
 
(25,110
)
Bank overdraft
   
257,502
   
-
 
Payments on capital lease obligations & loans - net
   
(121,418
)
 
(692,353
)
Net cash provided by financing activities
   
8,249,133
   
2,880,327
 
Effect of exchange rate changes in cash
   
13,451
   
44,966
 
Net increase in cash and cash equivalents
   
3,503,451
   
827,077
 
Cash and cash equivalents, beginning of period
   
6,275,239
   
4,010,164
 
Cash and cash equivalents, end of period
 
$
9,778,690
 
$
4,837,241
 
 
See accompanying notes to the unaudited consolidated financial statements.
 
Page 5

 
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES 
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED) 

   
For the Three Months
 
   
Ended September 30,
 
   
2008
 
2007
 
SUPPLEMENTAL DISCLOSURES:
             
Cash paid during the period for:
             
Interest
 
$
177,087
 
$
48,326
 
Taxes
 
$
2,400
 
$
76,762
 
               
NON-CASH INVESTING AND FINANCING ACTIVITIES:
             
Stock issued for the payment of dividends to Preferred Shareholders
 
$
33,508
 
$
-
 
Stock issued for the conversion of Preferred Stock
 
$
-
 
$
330,000
 
 
See accompanying notes to the unaudited consolidated financial statements.
 
Page 6

 
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES 
 
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 
 
NOTE 1 - BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION 
 
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.
 
The consolidated condensed interim financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading.
 
These statements reflect all adjustments, consisting of normal recurring adjustments, which, in the opinion of management, are necessary for fair presentation of the information contained therein. It is suggested that these consolidated condensed financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s annual report on Form 10-KSB for the year ended June 30, 2008. The Company follows the same accounting policies in preparation of interim reports. Results of operations for the interim periods are not indicative of annual results.
 
The accompanying consolidated financial statements include the accounts of the Company and its 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”), and its majority-owned subsidiaries, NetSol Technologies, Ltd.(“NetSol PK”), NetSol Connect (Pvt), Ltd. (“Connect”), TIG-NetSol (Pvt) Limited (“NetSol-TIG”), and NetSol Omni (Private) Limited (“Omni”). All material inter-company accounts have been eliminated in the consolidation.
 
For comparative purposes, prior year’s consolidated financial statements have been reclassified to conform to report classifications of the current year.
 
NOTE 2 - USE OF ESTIMATES: 
 
The preparation of financial statements in conformity with generally accepted accounting principles in the United States 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.
 
NOTE 3 - NEW ACCOUNTING PRONOUNCEMENTS:
 
In December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in Consolidated Financial Statements”. This Statement amends ARB 51 to establish accounting and reporting standards for the non-controlling (minority) interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a non-controlling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. SFAS No. 160 is effective for the Company’s fiscal year beginning October 1, 2009. Management is currently evaluating the effect of this pronouncement on its consolidated financial statements.
 
In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations”. This Statement replaces SFAS No. 141, Business Combinations. This Statement retains the fundamental requirements in Statement 141 that the acquisition method of accounting (which Statement 141 called the purchase method) be used for all business combinations and for an acquirer to be identified for each business combination. This Statement also establishes principles and requirements for how the acquirer: a) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree; b) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and, c) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS No. 141(R) will apply prospectively to business combinations for which the acquisition date is on or after Company’s fiscal year beginning October 1, 2009. While the Company has not yet evaluated this statement for the impact, if any, that SFAS No. 141(R) will have on its consolidated financial statements, the Company will be required to expense costs related to any acquisitions after September 30, 2009.
 
Page 7

 
In March, 2008, the FASB issued FASB Statement No. 161, “Disclosures about Derivative Instruments and Hedging Activities”. The new standard is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance, and cash flows. It is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The new standard also improves transparency about the location and amounts of derivative instruments in an entity’s financial statements; how derivative instruments and related hedged items are accounted for under Statement 133; and how derivative instruments and related hedged items affect its financial position, financial performance, and cash flows. FASB Statement No. 161 achieves these improvements by requiring disclosure of the fair values of derivative instruments and their gains and losses in a tabular format. It also provides more information about an entity’s liquidity by requiring disclosure of derivative features that are credit risk–related. Finally, it requires cross-referencing within footnotes to enable financial statement users to locate important. Based on current conditions, the Company does not expect the adoption of SFAS 161 to have a significant impact on its results of operations or financial position.

In May 2008, FASB issued SFASB No.162, “The Hierarchy of Generally Accepted Accounting Principles”. The pronouncement mandates the GAAP hierarchy reside in the accounting literature as opposed to the audit literature. This has the practical impact of elevating FASB Statements of Financial Accounting Concepts in the GAAP hierarchy. This pronouncement will become effective 60 days following SEC approval. The Company does not believe this pronouncement will impact its financial statements.
 
In May 2008, FASB issued SFASB No. 163, “Accounting for Financial Guarantee Insurance Contracts-an interpretation of FASB Statement No. 60”. The scope of the statement is limited to financial guarantee insurance (and reinsurance) contracts. The pronouncement is effective for fiscal years beginning after December 31, 2008. The Company does not believe this pronouncement will impact its financial statements.
 
NOTE 4 – EARNINGS/(LOSS) PER SHARE:
 
“Earnings per share” is calculated in accordance with the Statement of financial accounting standards No. 128 (SFAS No. 128), “Earnings per share”. Basic net income per share is based upon the weighted average number of common shares outstanding. Diluted net income per share is based on the assumption that all dilutive convertible shares and stock options were converted or exercised. Dilution is computed by applying the treasury stock method. Under this method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period.
 
The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations:
 
For the three months ended September 30, 2008 
 
Net Income
 
Shares
 
Per Share
 
Basic earnings per share:
 
$
1,022,966
   
26,307,175
 
$
0.04
 
Dividend to preferred shareholders
   
33,876
             
Net income available to common shareholders
                   
Effect of dilutive securities
                   
Stock options
         
853,766
       
Warrants
         
519,745
       
Convertible Preferred Shares
   
  
   
348,755
   
  
 
Diluted earnings per share
 
$
1,056,842
   
28,029,441
 
$
0.04
 

 For the three months ended September 30, 2007 
 
Net Income
 
Shares
 
Per Share
 
Basic earnings per share:
 
$
843,779
   
21,425,235
 
$
0.04
 
Dividend to preferred shareholders
   
71,157
             
Net income available to common shareholders
                   
Effect of dilutive securities
                   
Stock options
         
657,399
       
Warrants
         
387,279
       
Convertible Preferred Shares
   
  
   
374,448
   
  
 
Diluted earnings per share
 
$
914,936
   
22,844,361
 
$
0.04
 
 
Page 8

 
NOTE 5 - FOREIGN CURRENCY:  
 
The accounts of NetSol UK and NTE use the British Pound; NetSol PK, Connect, Omni, and NetSol-TiG use Pakistan Rupees; and Abraxas uses the Australian dollar as the functional currencies. NetSol Technologies, Inc., and subsidiary, NTNA, use the U.S. dollar as the functional currency. Assets and liabilities are translated at the exchange rate on the balance sheet date, and operating results are translated at the average exchange rate throughout the period. Accumulated translation losses are classified as an item of accumulated other comprehensive loss in the stockholders’ equity section of the consolidated balance sheet and were $5,643,233 as of September 30, 2008. During the three months ended September 30, 2008 and 2007, comprehensive gain (loss) in the consolidated statements of operations included translation loss of $2,895,310 and gain of $162,403, respectively.
 
NOTE 6 - OTHER CURRENT ASSETS
 
Other current assets consist of the following:
 
   
As of 9/30/08
 
As of 6/30/08
 
   
(Unaudited)
 
(Audited)
 
Prepaid Expenses
 
$
751,837
 
$
825,640
 
Advance Income Tax
   
337,791
   
356,843
 
Employee Advances
   
65,473
   
133,954
 
Security Deposits
   
218,964
   
244,409
 
Advance Rent
   
182,749
   
211,828
 
Tender Money Receivable
   
258,878
   
293,943
 
Other Receivables
   
298,925
   
335,493
 
Other Assets
   
3,658
   
4,297
 
               
Total
 
$
2,118,275
 
$
2,406,407
 

NOTE 7 - PROPERTY AND EQUIPMENT

Property and equipment, net, consist of the following:

   
As of 9/30/08
 
As of 6/30/08
 
   
(Unaudited)
 
(Audited)
 
Office furniture and equipment
 
$
938,272
 
$
1,224,340
 
Computer equipment
   
7,707,941
   
9,043,307
 
Assets under capital leases
   
1,381,764
   
1,511,311
 
Building
   
2,532,968
   
2,902,142
 
Land
   
1,526,697
   
925,210
 
Autos
   
214,329
   
245,855
 
Improvements
   
308,568
   
413,175
 
Subtotal
   
14,610,539
   
16,265,340
 
Accumulated depreciation
   
(6,286,282
)
 
(7,088,560
)
   
$
8,324,257
 
$
9,176,780
 

For the three months ended September 30, 2008 and 2007, fixed asset depreciation expense totaled $402,949 and $318,077, respectively. Of these amounts, $272,266 and $202,955, respectively, are reflected as part of cost of goods sold.
 
Page 9

 
NOTE 8 - INTANGIBLE ASSETS:
 
Intangible assets consist of product licenses, renewals, enhancements, copyrights, trademarks, trade names, customer lists and goodwill. The Company evaluates intangible assets, goodwill and other long-lived assets for impairment, at least on an annual basis and whenever events or changes in circumstances indicate that the carrying value may not be recoverable from its estimated future cash flows. Recoverability of intangible assets, other long-lived assets and, goodwill is measured by comparing their net book value to the related projected undiscounted cash flows from these assets, considering a number of factors including past operating results, budgets, economic projections, market trends and product development cycles. If the net book value of the asset exceeds the related undiscounted cash flows, the asset is considered impaired, and a second test is performed to measure the amount of impairment loss. Potential impairment of goodwill has been evaluated in accordance with SFAS No. 142.
 
As part of intangible assets, the Company capitalizes certain computer software development costs in accordance with SFAS No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed.” Costs incurred internally to create a computer software product or to develop an enhancement to an existing product are charged to expense when incurred as research and development expense until technological feasibility for the respective product is established. Thereafter, all software development costs are capitalized and reported at the lower of unamortized cost or net realizable value. Capitalization ceases when the product or enhancement is available for general release to customers.
 
The Company makes on-going evaluations of the recoverability of its capitalized software projects by comparing the amount capitalized for each product to the estimated net realizable value of the product. If such evaluations indicate that the unamortized software development costs exceed the net realizable value, the Company writes off the amount by 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.
 
Product licenses and customer lists were comprised of the following:
 
   
Product Licenses
 
Customer Lists
 
Total
 
Intangible assets - June 30, 2007 - cost
 
$
14,511,208
 
$
5,451,094
 
$
19,962,302
 
Additions
   
4,481,077
   
-
   
4,481,077
 
Effect of translation adjustment
   
(381,578
)
 
-
   
(381,578
)
Accumulated amortization
   
(7,772,851
)
 
(3,718,333
)
 
(11,491,184
)
Net balance - June 30, 2008 (Audited)
 
$
10,837,856
 
$
1,732,761
 
$
12,570,617
 
                     
Intangible assets - June 30, 2008 - cost
 
$
18,992,284
 
$
5,451,094
 
$
24,443,378
 
Additions
   
649,969
   
-
   
649,969
 
Effect of translation adjustment
   
(1,515,830
)
 
-
   
(1,515,830
)
Accumulated amortization
   
(8,137,898
)
 
(3,891,993
)
 
(12,029,891
)
Net balance - September 30, 2008 (Unaudited)
 
$
9,988,525
 
$
1,559,101
 
$
11,547,626
 
                     
Amortization expense:
                   
Quarter ended September 30, 2008
 
$
454,924
 
$
173,661
 
$
628,585
 
Quarter ended September 30, 2007
 
$
231,816
 
$
173,661
 
$
405,477
 

The above amortization expense includes amounts in “Cost of Goods Sold” for capitalized software development costs of $279,060 and $55,952 for the quarters ended September 30, 2008 and 2007, respectively.

At September 30, 2008 and 2007, product licenses, renewals, enhancements, copyrights, trademarks, and tradenames, included unamortized software development and enhancement costs of $8,877,364 and $6,615,515, respectively, as the development and enhancement is yet to be completed. Software development amortization expense was $279,060 and $55,952for the quarters ended September 30, 2008 and 2007, respectively.
 
Page 10

 
Amortization expense of intangible assets over the next five years is as follows:
 
 FISCAL YEAR ENDING
 
Asset
 
9/30/09
 
9/30/10
 
9/30/11
 
9/30/12
 
9/30/13
 
TOTAL
 
Product Licences
 
$
1,563,423
 
$
1,235,468
 
$
831,739
 
$
525,066
 
$
113,873
 
$
4,269,569
 
Customer Lists
   
694,644
   
541,008
   
323,449
   
-
   
-
   
1,559,101
 
                                       
   
$
2,258,067
 
$
1,776,476
 
$
1,155,188
 
$
525,066
 
$
113,873
 
$
5,828,670
 
 
There were no impairments of the goodwill asset during the periods ended September 30, 2008 and 2007.

NOTE 9 – OTHER ASSETS – LONG TERM

During the year ended June 30, 2007, NetSol PK agreed to lease a facility from the owner of the adjacent land agreed to build an office to the Company’s specifications and the Company agreed to help pay for the development of the land in exchange for discounted rent for the next three years. As of June 30, 2008, the Company has paid a total of 26,156,725pkr or approximately $383,530 in connection with this agreement. Of this amount, 14,446,675pkr or approximately $211,828 has been classified as current, representing one-year of rental payments, and 3,570,000pkr or approximately $52,346 shown as long-term assets. As of September 30, 2008, the balance on this account was $182,749, all of which has been classified as current, representing one-year of rental payments. During the quartered ended September 30, 2008, 3,736,675pkr or approximately $50,449 was expensed.

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. The balance for advance for Capital-Work-In-Progress was $191,899.

In September 2008, 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 valued at $155,880.

As of September 30, 2008, one of the Company’s subsidiaries has classified two of its accounts receivable as long-term amounting to $634,178 at present value net of discount of $100,027. The discount was calculated using a rate of 8.25% and a time period of two years as the collection is expected by the fiscal year ended June 30, 2010.

Total other assets, long term as of September 30, 2008 was $981,957.

NOTE 10 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consist of the following:
 
   
As of 9/30/08
 
As of 6/30/08
 
   
(Unaudited)
 
(Audited)
 
Accounts Payable
 
$
1,213,526
 
$
1,468,491
 
Accrued Liabilities
   
1,526,325
   
2,099,693
 
Accrued Payroll
   
1,320
   
2,203
 
Accrued Payroll Taxes
   
57,790
   
176,916
 
Interest Payable
   
147,917
   
158,627
 
Deferred Revenues
   
49,296
   
72,240
 
Taxes Payable
   
127,754
   
138,489
 
               
Total
 
$
3,123,928
 
$
4,116,659
 

Page 11

 
NOTE 11 - DEBTS
 
A) LOANS AND LEASES PAYABLE
 
Notes payable consist of the following:
 
 
 
Balance at
 
Current
 
Long-Term
 
Name
 
9/30/08
 
Maturities
 
Maturities
 
   
(Unaudited)
         
D&O Insurance
 
$
10,465
 
$
10,465
 
$
-
 
E&O Insurance
   
7,179
   
7,179
   
-
 
Habib Bank Line of Credit
   
3,220,537
   
3,220,537
   
-
 
Bank Overdraft Facility
   
324,101
   
324,101
   
-
 
HSBC Loan
   
600,943
   
304,245
   
296,698
 
Subsidiary Capital Leases
   
534,703
   
267,345
   
267,358
 
                     
   
$
4,697,928
 
$
4,133,872
 
$
564,056
 

Name
 
6/30/08
 
Maturities
 
Maturities
 
   
(Audited)
         
D&O Insurance
 
$
41,508
 
$
41,508
 
$
-
 
E&O Insurance
   
28,518
   
28,518
   
-
 
Habib Bank Line of Credit
   
1,501,998
   
1,501,998
   
-
 
Bank Overdraft Facility
   
84,952
   
84,952
   
-
 
HSBC Loan
   
739,428
   
327,820
   
411,608
 
Subsidiary Capital Leases
   
627,621
   
295,314
   
332,307
 
                     
   
$
3,024,025
 
$
2,280,110
 
$
743,915
 
 
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 $1,023,850 was converted into a loan payable with a maturity of three years. The interest rate is 7.5% with monthly payments of £15,558 or approximately $31,858. The Parent has guaranteed payment of the loan in the event the subsidiary should default on it. During the year ended June 30, 2008, £155,585 or approximately $307,384 was paid on the principal of this note and £27,784 or approximately $52,310 was paid in interest. The loan outstanding as of June 30, 2008 was £370,567 or $739,428; of this amount $327,820 is classified as current maturities and $411,608 as long-term debt. During the quarter ended September 30, 2008, £39,924 or approximately $75,732 was paid on the principal of this note and £6,751 or approximately $12,806 was paid in interest. The loan outstanding as of September 30, 2008 was £330,642 or $600,943; of this amount $304,245 is classified as current maturities and $296,698 as long-term debt.
 
In January 2008, the Company renewed its directors’ and officers’ (“D&O”) liability insurance for which the annual premium is $102,585. The Company arranged financing with AFCO Credit Corporation with a down payment of $10,584 with the balance to be paid in nine monthly installments of $10,584 each. The balance owing as of June 30, 2008 and September 30, 2008 was $41,508 and $10,465.
 
In January 2008, the Company purchased an Errors and Omissions (“E&O”) liability insurance for an annual premium of $69,783. The Company arranged financing with AFCO Credit Corporation with a down payment of $7,213 with the balance to be paid in nine monthly installments of $7,213 each. The balance owing as of June 30, 2008 and September 30, 2008 was $28,518 and $7,179.
 
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. During the year ended June 30, 2008, $1,510,595 was drawn down on this line of credit and $12,629 was repaid. The interest rate on this account is variable and was 4.571% at June 30, 2008. Interest paid during the year ended June 30, 2008 was $4,032 and the balance was $1,501,998. During the quarter ended September 30, 2008, the Company increased the line of credit and an additional $1,768,211 was drawn down and $49,672 was repaid and $24,060 of interest was paid. The interest rate as of September 30, 2008 was 5.3% and the balance was $3,220,537.
 
Page 12

 
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 interest rate is 3.25% per year over the Bank’s sterling Base Rate, which is currently 5%, for an effective rate of 8.25%. As of June 30, 2008, the subsidiary had used £42,574 or approximately $84,952. During the quarter ended September 30, 2008, the subsidiary had made additional draws on this account and the balance was $324,101.

CAPITAL LEASE OBLIGATIONS

The Company leases various fixed assets under capital lease arrangements expiring in various years through 2012. The assets and liabilities under capital leases are recorded at the lower of the present value of the minimum lease payments or the fair value of the asset. The assets are depreciated over the lesser of their related lease terms or their estimated useful lives and are secured by the assets themselves. Depreciation of assets under capital leases is included in depreciation expense for the three months ended September 30, 2008 and 2007.

Following is the aggregate minimum future lease payments under capital leases as of September 30, 2008:

Minimum Lease Payments
       
Due FYE 9/30/09
 
$
326,114
 
Due FYE 9/30/10
   
209,851
 
Due FYE 9/30/11
   
85,702
 
Due FYE 9/30/12
   
5,355
 
Due FYE 9/30/13
   
2,928
 
Total Minimum Lease Payments
   
629,950
 
Interest Expense relating to future periods
   
(95,247
)
Present Value of minimum lease payments
   
534,703
 
Less: Current portion
   
(267,345
)
Non-Current portion
 
$
267,358
 

Following is a summary of fixed assets held under capital leases:

   
As of 9/30/08
 
As of 6/30/08
 
   
(Unaudited)
 
(Audited)
 
Computer Equipment and Software
 
$
842,163
 
$
895,235
 
Furniture and Fixtures
   
56,055
   
62,054
 
Vehicles
   
342,769
   
392,727
 
Building Equipment
   
140,777
   
161,295
 
               
Total
   
1,381,764
   
1,511,311
 
Less: Accumulated Depreciation
   
(645,928
)
 
(653,643
)
Net
 
$
735,836
 
$
857,668
 
 
Page 13

 
B) BANK LOAN
 
The Company’s Pakistan subsidiary, NetSol Technologies (Private) Ltd., has one loan with a bank, secured by the Company’s assets. The note consists of the following:
 
For the three months ended September 30, 2008:
     
TYPE OF
 
MATURITY
 
INTEREST
 
BALANCE
 
LOAN
 
DATE
 
RATE
 
USD
 
               
Export Refinance
   
Every 6 months
   
7.50
%
$
2,559,509
 
                     
Total
             
$
2,559,509
 

For the year ended June 30, 2008:
         
TYPE OF
 
MATURITY
 
INTEREST
 
 BALANCE 
 
LOAN
 
DATE
 
RATE
 
 USD 
 
               
Export Refinance
   
Every 6 months
   
7.50
%
$
2,932,551
 
                     
Total
             
$
2,932,551
 
 
C) OTHER PAYABLE – ACQUISITION

McCue Systems – (now NetSol Technologies North America Inc.)

As of September 30, 2008, Other Payable – Acquisition consists of total payments of $103,226 due to the shareholders of McCue Systems.
 
On June 30, 2006, the acquisition with McCue Systems, Inc. (“McCue”) closed (see Note 20). As a result, the first installment consisting of $2,117,864 cash and 958,213 shares of the Company’s restricted common stock was recorded. During the fiscal year ended June 30, 2007, $2,059,413 of the cash portion of was paid to the McCue shareholders and in July 2006 the stock was issued. In June 2007, the second installment on the acquisition consisting of $903,955 in cash and 408,988 shares of the Company’s restricted common stock became due and was recorded. In July and August 2007, $879,007 of the cash was paid. In June 2008, the third and final installment became due, consisting of $762,816 in cash and 345,131 shares of the Company’s restricted common stock. The cash portion is shown as “Other Payable – Acquisition” and the stock portion is shown in “Shares to be issued” on these consolidated financial statements. The balance at June 30, 2008 was $846,215. Of this amount, $104,452 represents the few remaining McCue shareholders that have not been located as of the date of this report. In July 2008, 335,604 of the shares were issued and $741,763 in cash was paid in July and August 2008. In addition, one of the shareholders that previously hadn’t been located was found during the quarter and 554 shares were issued and $1,225 was paid to them.

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, 2008 was $184,173. In July 2008, the officers exercised 98,358 options against the amounts owed to them of $179,738. The remaining balance of $4,436 was due to an officer of Omni, who is no longer an officer, this amount was reclassified to accounts payable. The balance due to officers as of September 30, 2008 was $0.

Page 14

 
NOTE 12 – DIVIDEND PAYABLE
 
PREFERRED SHAREHOLDERS
 
The Company has issued Series A 7% Cumulative Convertible Preferred Stock under which dividends are payable (see Note 13). The dividend is to be paid quarterly, either in cash or stock at the Company’s election. The dividend for the three months ended September 30, 2008 totaled $33,876. This amount is payable and is reflected in these consolidated financial statements. This amount was paid with the issuance of 19,217 shares of the Company’s common stock on October 9, 2008.

SUBSIDIARY DIVIDEND

During the quarter ended September 30, 2008, the Company’s subsidiary NetSol Tech PK declared a 10% cash dividend valued at 59,737,495 Pakistan Rupees (“pkr”) or approximately $764,493. Of this amount, the Company is due 35,053,962 pkr or approximately $448,604. The balance due to the minority holders is approximately $315,889 and is reflected on these unaudited consolidated financial statements as dividend payable.

NOTE 13 – CONVERTIBLE NOTES PAYABLE

On July 23, 2008, the Company entered into a Convertible Note with two investors with a total value of $6,000,000. The note matures in 3 years and has an interest rate of 7% per annum that is payable semi-annually. The note can be converted into common shares at a conversion rate of $3.00 per share. The fair market value of the shares at the date of signing was $2.90; therefore, no beneficial conversion feature expense was recorded on the transaction. No warrants were issued in connection with this note. The Convertible Note contains full-ratchet anti-dilution protection.  However, despite this protection, at no time shall the Company issue shares as part of a conversion or other event contained in the Convertible Note where the resulting issuance would require issuance in violation of Nasdaq rules.

During the quarter ended September 30, 2008, interest was accrued in the amount of $79,397 on these notes.

NOTE 14 - STOCKHOLDERS’ EQUITY:
 
EQUITY TRANSACTIONS
 
PREFERRED STOCK
 
On October 30, 2006, the convertible notes payable (see note 12) were converted into 5,500 shares of Series A 7% Cumulative Convertible Preferred Stock. The preferred shares are valued at $1,000 per share or $5,500,000. The preferred shares are convertible into common stock at a rate of $1.65 per common share. The total shares of common stock that can be issued under these Series A Preferred Stock is 3,333,333. On January 19, 2007, the Form S-3 statement to register the underlying common stock and related dividends became effective. As of June 30, 2008 a total of 3,580 of the preferred shares had been converted into 2,169,694 shares of the Company’s common stock. As of September 30, 2008, there were 1,920 shares of preferred stock outstanding.

During the three months ended September 30, 2008, the Company issued 13,107 shares of the Company’s common stock valued at $33,508 as payment of the dividends due for the quarter ended June 30, 2008.

The Series A Convertible Preferred Stock carries certain liquidation and preferential rights. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, before any distribution of assets of the Corporation can be made to or set apart for the holders of Common Stock, the holders of Convertible Preferred Stock shall be entitled to receive payment out of such assets of the Corporation in an amount equal to $1,000 per share of Convertible Preferred Stock then outstanding, plus any accumulated and unpaid dividends thereon (whether or not earned or declared) on the Convertible Preferred Stock. In addition, the Convertible Preferred Stock ranks senior to all classes and series of Common Stock and existing preferred stock and to each other class or series of preferred stock established hereafter by the Board of Directors of the Corporation, with respect to dividend rights, redemption rights, rights on liquidation, winding-up and dissolution and all other rights in any manner, whether voluntary or involuntary.
 
Page 15

 
BUSINESS COMBINATIONS
 
McCue Systems, Inc.

In June 2006, the Company completed the acquisition of McCue Systems, Inc. In June 2008, the third and final installment became due for the acquisition and the Company recorded 345,131 shares to be issued valued at $890,437 on these consolidated financial statements. During the quarter ended September 30, 2008, 336,158 shares were issued as payment on the acquisition. A total of 46,704 shares valued at $88,325 are shown in “Shares to Be Issued” in these consolidated financial statements representing McCue Systems shareholders that have not been located as of this date.

PRIVATE PLACEMENTS

In July 2008, the Company sold 100,000 shares of the Company’s restricted common stock to an employee for $250,000. These shares are shown in “Shares to be Issued” in the accompanying consolidated financial statements. The Company received $150,000 of this by September 30, 2008 and the remainder is shown as “Subscription Receivable.”

OPTIONS AND WARRANTS EXERCISED

During the quarter ended September 30, 2008, the Company issued 253,508 shares of its common stock for the exercise of options valued at $444,493.

During the quarter ended September 30, 2008, the Company issued 51,515 shares of its common stock for the exercise of warrants valued at $99,424.

SERVICES, ACCRUED EXPENSES, AND PAYABLES

In October 2006, the Company entered into an agreement with an employee whereby the Company agreed to issue a total of 35,000 shares of the Company’s restricted common stock valued at $132,650; vesting over one year on a quarterly basis. During the year ended June 30, 2008, 17,500 shares were vested and issued valued at $66,324were issued to the employee. During the quarter ended September 30, 2008, 8,750 became vested and are shown as “Shares to be Issued” in these consolidated financial statements.

In June 2008, the Company entered into an agreement with a consultant whereby the Company agreed to issue a total of 20,000 shares of the Company’s restricted common stock valued at $56,600 for services rendered. As of June 30, 2008, the stock had not been issued and was shown in “Stock to be Issued”. In July 2008, these shares were issued.
 
STOCK SUBSCRIPTION RECEIVABLE

Stock subscription receivable represents stock options exercised and issued that the Company has not yet received the payment from the purchaser as they were in processing when the quarter ended.

The balance at June 30, 2008 was $600,907. During the quarter ended September 30, 2008, $150,000 was collected and $257,997 of new receivables were issued. The balance at September 30, 2008 was $708,904.

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. During the quarter ended September 30, 2008, the Company purchased an additional 148,900 shares on the open market valued at $285,327. The balance as of September 30, 2008 was $321,008.

COMMON STOCK PURCHASE WARRANTS AND OPTIONS

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

Page 16


Common stock purchase options and warrants consisted of the following as of September 30, 2008:
 
           
Aggregated
 
       
Exercise
 
Intrinsic
 
   
 # shares 
 
Price
 
Value
 
Options:
                   
Outstanding and exercisable, June 30, 2007
   
7,102,363
 
$0.75 to $5.00
 
$
129,521
 
Granted
   
20,000
 
$1.60
       
Exercised
   
(869,938
)
$0.75 to $2.55
       
Expired
   
(180,000
)
$0.75
       
Outstanding and exercisable, June 30, 2008
   
6,072,425
 
$0.75 to $5.00
 
$
1,717,608
 
Granted
   
1,900,000
 
$1.65 to $3.90
       
Exercised*
   
(271,008
)
$0.75 to $2.50
       
Expired
   
-
           
Outstanding and exercisable, September 30, 2008
   
7,701,417
 
$0.75 to $5.00
 
$
129,521
 
                   
Warrants:
                 
Outstanding and exercisable, June 30, 2007
   
3,002,725
 
$1.65 to $5.00
 
$
58,091
 
Granted
   
378,788
 
$1.65
       
Exercised
   
(1,269,199
)
$1.65 to $3.30
       
Expired
   
(120,000
)
$2.50 to $5.00
       
Outstanding and exercisable, June 30, 2008
   
1,992,314
 
$1.65 to $5.00
 
$
1,206,095
 
Granted
   
-
           
Exercised
   
(51,515
)
$1.93
       
Expired
   
-
           
Outstanding and exercisable, September 30, 2008
   
1,940,799
 
$1.65 to $3.70
 
$
58,091
 
 
* Includes 17,500 options exercised but not issued and are included as part of shares to be issued as of September 30, 2008.
 
Following is a summary of the status of options and warrants outstanding at September 30, 2008:

Exercise Price
 
Number
Outstanding
and
Exercisable
 
Weighted
Average
Remaining
Contractual
Life
 
Weighted
Ave
Exericse
Price
 
OPTIONS:
                   
$0.01 - $0.99
   
14,000
   
3.33
   
0.75
 
$1.00 - $1.99
   
2,032,417
   
6.81
   
1.88
 
$2.00 - $2.99
   
3,655,000
   
7.06
   
2.67
 
$3.00 - $5.00
   
2,000,000
   
8.10
   
4.04
 
                     
Totals
   
7,701,417
   
7.26
   
2.81
 
                     
WARRANTS:
                   
$1.00 - $1.99
   
1,476,137
   
3.20
   
1.79
 
$3.00 - $5.00
   
464,662
   
0.90
   
3.31
 
                     
Totals
   
1,940,799
   
2.65
   
2.15
 
 
Page 17

 
Options:
 
During the quarter ended September 30, 2007, 20,000 options were granted to two officers with an exercise price of $1.60 per share and an expiration date of ten years, vesting immediately. Using the Black-Scholes method to value the options, the Company recorded $24,320 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
   
4.5%
 
Expected life
   
10 years
 
Expected volatility
   
65%
 

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:

Risk-free interest rate
   
7.00%
 
Expected life
   
.25 years
 
Expected volatility
   
106%
 

During the quarter ended September 30, 2008, it was determined that the bonus provisions of three officers’ employee agreements had been met and accordingly a total of 1,800,000 options were granted to the officers. Of these, 600,000 options have an exercise price of $2.62 and 1,200,000 options have an exercise price of $3.90. All of these options have an expiration date of ten years and vest over 24 months. During the quarter ended September 30, 2008, the Company recorded $117,300 for the amount vested in compensation expense for these options in the accompanying consolidated financial statements.

The Black-Scholes option pricing model used the following assumptions:

Risk-free interest rate
   
7.00%
 
Expected life
   
10 years
 
Expected volatility
   
100%
 

Warrants:

There were no warrants issued or granted during the quarter ended September 30, 2008 and 2007.

 NOTE 15 - SEGMENT INFORMATION

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 different operational issues and strategies due 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 the consolidation. The following table presents a summary of operating information and certain balance sheet information for the three months ended September 30:
 
Page 18

 
   
2008
 
2007
 
Revenues from unaffiliated customers:
             
North America
 
$
1,552,709
 
$
1,073,611
 
Europe
   
1,637,106
   
1,664,916
 
Asia - Pacific
   
6,111,152
   
5,914,710
 
 Consolidated
 
$
9,300,967
 
$
8,653,237
 
               
Operating income (loss):
             
Corporate headquarters
 
$
(1,029,851
)
$
(840,877
)
North America
   
33,973
   
59,923
 
Europe
   
79,482
   
251,996
 
Asia - Pacific
   
2,044,834
   
2,748,659
 
 Consolidated
 
$
1,128,438
 
$
2,219,701
 
               
Net income (loss) after taxes and before minority interest:
             
Corporate headquarters
 
$
(1,235,346
)
$
(990,184
)
North America
   
24,808
   
60,635
 
Europe
   
62,155
   
265,388
 
Asia - Pacific
   
3,834,986
   
2,731,204
 
 Consolidated
 
$
2,686,603
 
$
2,067,043
 
               
Identifiable assets:
             
Corporate headquarters
 
$
20,668,792
 
$
14,090,706
 
North America
   
3,200,402
   
1,791,231
 
Europe
   
6,267,986
   
5,010,230
 
Asia - Pacific
   
38,145,734
   
32,014,633
 
 Consolidated
 
$
68,282,914
 
$
52,906,800
 
               
Depreciation and amortization:
             
Corporate headquarters
 
$
350,598
 
$
350,347
 
North America
   
92,891
   
36,386
 
Europe
   
187,322
   
64,357
 
Asia - Pacific
   
400,722
   
272,464
 
 Consolidated
 
$
1,031,533
 
$
723,554
 
               
Capital expenditures:
             
Corporate headquarters
 
$
1,019
 
$
4,189
 
North America
   
4,867
   
50,033
 
Europe
   
54,172
   
19,079
 
Asia - Pacific
   
870,000
   
672,600
 
 Consolidated
 
$
930,058
 
$
745,901
 
 
Net revenues by our various products and services provided are as follows:

   
For the Three Months
 
   
Ended September 30,
 
   
2008
 
2007
 
Licensing Fees
 
$
2,529,808
 
$
1,903,552
 
Maintenance Fees
   
1,593,734
   
1,583,420
 
Services
   
5,177,425
   
5,166,265
 
Total
 
$
9,300,967
 
$
8,653,237
 
 
Page 19

 
NOTE 16 - MINORITY INTEREST IN SUBSIDIARY
 
The Company had minority interests in several of its subsidiaries. The balance of the minority interest consists of the following:

SUBSIDIARY
 
MIN INT
BALANCE AT
9/30/08
 
MIN INT
BALANCE AT
6/30/08
 
   
(Unaudited)
 
(Audited)
 
PK Tech
 
$
5,578,665
 
$
6,309,918
 
NetSol-Innovation
   
1,455,587
   
1,365,855
 
Connect
   
102,313
   
182,196
 
               
Total
 
$
7,136,565
 
$
7,857,969
 

NetSol PK

In August 2005, the Company’s wholly-owned subsidiary, NetSol Technologies (Pvt), Ltd. (“NetSol PK”) became listed on the Karachi Stock Exchange in Pakistan. The Initial Public Offering (“IPO”) sold 13,986,000 shares of the subsidiary to the public thus reducing the Company’s ownership by 39.42%. Net proceeds of the IPO were $4,890,224. As a result of the IPO, the Company is required to show the minority interest of the subsidiary on the accompanying consolidated financial statements. The minority interest percentage as of June 30, 2008 and September 30, 2008 is 41.32%.

For the three months ended September 30, 2008 and 2007, the subsidiary had net income of $3,252,708 and $2,009,037, of which $1,359,240 and $837,148, respectively, was recorded against the minority interest. The balance of the minority interest at September 30, 2008 was $5,578,665.

In September 10, 2008, the subsidiary’s board of directors authorized a 10% cash bonus dividend to all its stockholders as of that date. The net value of cash issued to minority holders was $315,889. As of September 30, 2008, the dividend had not been paid out and the minority interest portion is shown as a “Dividend Payable” on the accompanying consolidated financial statements.

NetSol-Innovation (formerly known as NetSol-TiG):

In December 2004, NetSol forged a new and a strategic relationship with a UK based public company TiG Plc. A Joint Venture was established by the two companies to create a new company, TiG NetSol Pvt Ltd. (“NetSol-TiG”), during the year ended June 30, 2008, the name was changed to NetSol-Innovation (Private) Limited, (“NetSol-Innovation”) with 50.1% ownership by NetSol Technologies, Inc. and 49.9% ownership by TiG. The agreement anticipates TiG’s technology business to be outsourced to NetSol’s offshore development facility.

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

For the three months ended September 30, 2008 and 2007, the subsidiary had net income of $628,470 and $701,829, of which $276,511 and $314,123 was recorded against the minority interest, respectively. The balance of the minority interest at September 30, 2008 was $1,455,587.

NetSol Connect:

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

As of June 30, 2005, a total of $751,356 had been transferred to Connect, of which $410,781 was from Akhter. In June 2006, a total of $40,000 cash was distributed to each partner as a return of capital.
 
Page 20

 
For the three months ended September 30, 2008 and 2007, the subsidiary had net loss of $12,003 and $1,674, respectively, of which $5,989 and $835 respectively, was recorded against the minority interest. The balance of the minority interest at September 30, 2008 was $102,313.

NOTE 17 – ACQUISITION OF McCUE SYSTEMS (now NetSol Technologies North America Inc.)

On May 6, 2006, the Company entered into an agreement to acquire 100% of the issued and outstanding stock of with McCue Systems, Inc. (“McCue”), a California corporation. The acquisition closed on June 30, 2006. The initial purchase price was estimated at $8,471,455 of which one-half was due at closing payable in cash and stock. The other half is due in two installments over the next two years based on revenues after the audited December 31, 2006 and 2007 financial statements are completed. On the closing date, $2,117,864 payable and 958,213 shares to be issued valued at $1,628,979, adjusted for the market value at closing, was recorded. In July 2006, $2,057,227 in cash was paid and 930,781 of the shares were issued.

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

In June 2008, the third and final installment for the purchase of McCue Systems was determined based on the audited revenues for the twelve month period ending December 31, 2007. Based on the earn-out formula in the purchase agreement, $1,525,632 was due in cash and stock, of which $762,816 is due in cash and 345,131 shares were due. On July 3, 2008, 335,604 shares of the 345,131 shares due of the Company’s restricted common stock were issued to the shareholders of McCue Systems. The balance represents shareholders of McCue Systems that haven’t been located as of this date. In July and August 2008, $737,868 of the cash portion was paid to the shareholders. As a result of the final payment the Company recorded an addition of $1,653,254 to goodwill.

NOTE 18 – RESTATEMENT

On November 5, 2008, the management of NetSol Technologies, Inc. (the “Company”) concluded after reviewing the pertinent facts, that the previously issued financial statements contained in the Company's annual Report on Form 10-KSB for the year ended June 30, 2008 should be restated due primarily to computational errors in connection with the allocation of appropriate amounts to minority interest in the statement of operations and calculation of minority interest ownership.

Our management determined that the financial statements included therein overstated amount of our reported net income for the year ended June 30, 2008 by approximately $2,229,824.

The Company filed its restated financial statements for the year ended June 30, 2008 with the Securities and Exchange Commission on November 10, 2008. As a result of the restatement, the Company determined that the previously issued interim financial statements for the three months ended September 30, 2007 should be restated. The net income for the three months ended September 30, 2007 was overstated by $877,188.
 
Page 21

 
The effect of the restatement is shown below:

   
As reported
6/30/08
 
As Restated
6/30/08
 
BALANCE SHEET:
             
Minority Interest
 
$
6,866,514
 
$
7,857,969
 
               
Additional Paid-in Capital
 
$
76,456,697
 
$
74,950,286
 
               
Accumulated Deficit
   
(32,067,003
)
 
(33,071,702
)
               
Other comprehensive loss
   
(4,267,579
)
 
(2,747,923
)

   
As reported
9/30/07
 
As Restated
930/07
 
           
STATEMENT OF OPERATIONS:
             
Net income (loss) before
             
minority interest in subsidiary
 
$
2,099,484
 
$
2,099,484
 
Minority interest in subsidiary
   
(274,919
)
 
(1,152,107
)
Income taxes
   
(32,441
)
 
(32,441
)
Net income (loss)
   
1,792,124
   
914,936
 
Dividend required for
             
preferred stockholders
   
(71,157
)
 
(71,157
)
Net income (loss) applicable
             
to common shareholders
 
$
1,720,967
 
$
843,779
 
               
Net income (loss) per share:
             
Basic
 
$
0.08
 
$
0.04
 
Diluted
 
$
0.08
 
$
0.04
 
Weighted average number
             
of shares outstanding
             
Basic
   
21,425,235
   
21,425,235
 
Diluted
   
22,844,361
   
22,844,361
 
               
STATEMENT OF CASH FLOWS:
             
Net Income
 
$
903,794
 
$
914,936
 
               
Minority Interest in subsidary
 
$
274,919
 
$
1,152,107
 
               
Net cash used in operating activities
 
$
(526,688
)
$
282,928
 

NOTE 19 - SUBSEQUENT EVENTS

On October 31, 2008, the Company entered into an agreement to purchase 100% of the member shares of Ciena Solutions, LLC, a California limited liability corporation. Under the terms of the agreement, the Company will pay a deposit of $350,000 to the two members for the purchase with the full purchase price to be determined based on the performance of the new entity over the next four years. No assets or liabilities will be picked up by the Company at the acquisition, only the rights to the existing contracts. As the effects of this transaction are immaterial to the Company overall, no pro forma information is provided.
 
Page 22

 
The total Purchase Price is to be the total of the Initial Consideration and the Deferred Consideration. The Initial Consideration was Three Hundred Fifty Thousand Dollars ($350,000). The Deferred Consideration to be the Consideration After Fiscal Year 1, the Consideration After Fiscal Year 2, the Consideration After Fiscal Year 3 and, the Consideration After Fiscal Year 4; provided, however, that under no circumstances may the total number of NetSol Shares issued to Sellers (including those shares issued as part of the Initial Consideration and those shares issued which would be considered aggregated with those issued pursuant to this Agreement according to NASDAQ rules) exceed 19% of the issued and outstanding shares of common stock of NetSol, less treasury shares, on the date of the Closing. In the event NetSol is not permitted to issue as part of the Deferred Consideration, shares of common stock equal in value to 50% of the Deferred Consideration, NetSol may issue such amount as is permitted and the remainder in cash. Each Fiscal Year shall be measured from July 1 to June 30 with Fiscal Year 1 being the period from July 1, 2008 to June 30, 2009.

Deferred Consideration is to be calculated as follows:

 
1)
after the conclusion of fiscal year 1, the consideration will be comprised of 25% of the lesser of Ciena’s Earnings Before Interest, Tax, Depreciation and Amortization (“EBIDTA”) for Year 1 multiplied by 4.5 or the Gross Revenue of Ciena for Year 1 multiplied by .75 less those capitalized costs incurred by NetSol and/or its subsidiaries for the benefit of Ciena. All numbers shall be based on audited Fiscal Year 1 financial statements. Payments are to be made; a) 50% in restricted common stock of NetSol at the 30 day volume weighted average price (“VWAP”) in the 30 days preceding the end of Fiscal Year 1; and b) 50% in U.S. Dollars.
 
2)
Consideration after the conclusion of the second full year of operations, July 1, 2009 to June 30, 2010 (“Fiscal Year 2”) will be comprised of 25% of the lesser of: Ciena’s EBIDTA Year 2 multiplied by 4.5 or the Gross Revenue of Ciena for Fiscal Year 2 multiplied by .75 less those capitalized costs incurred by NetSol and/or its subsidiaries for the benefit of Ciena and less three hundred fifty thousand dollars ($350,000). If the consideration is a negative number, that negative number shall carry-over to the pay-out for Fiscal Year 3. All numbers shall be based on the audited Fiscal Year 2financial statements. Payment are to be made; a) 50% shall be payable in restricted common stock of NetSol at the 30 day VWAP as of June 30, 2010, in accordance with the VWAP Calculation, and; b) 50% in U.S. Dollars.
 
3)
Consideration after the conclusion of the third full year of operations from July 1, 2010 to June 30, 2011 (“Fiscal Year 3”) will be comprised of 25% of the lesser of: Ciena’s EBIDTA for Fiscal Year 3 multiplied by 4.5 or the Gross Revenue of Ciena for Year 3 multiplied by .75 less those capitalized costs incurred by NetSol and/or its subsidiaries for the benefit of Ciena and less any carry-over from Fiscal Year 2. All numbers shall be based on the audited Fiscal Year 3 financial statements. Payment will be made; a) 50% shall be payable in restricted common stock of NetSol at the 30 day VWAP as of June 30, 2011 calculated in accordance with the VWAP Calculation, and; b) 50% in U.S. Dollars.
 
4)
Consideration after the conclusion of the fourth full year of operations from July 1, 2011 to June 30, 2012 (“Fiscal Year 4”) will be comprised of 25% of the lesser of: Ciena’s EBIDTA for Fiscal Year 4 multiplied by 4.5 or the Gross Revenue of Ciena for Year 4 multiplied by .75 less those capitalized costs incurred by NetSol and/or its subsidiaries for the benefit of Ciena and less any carry-over from Fiscal Years 2 and 3. All numbers shall be based on the audited Fiscal Year 4 financial statements. Payment will be made; a) 50% shall be payable in restricted common stock of NetSol at the 30 day VWAP as of June 30, 2011 calculated in accordance with the VWAP Calculation, and; b) 50% in U.S. Dollars.
 
Page 23

 
Item 2. Management's Discussion and Analysis Or Plan Of Operation
 
The following discussion is intended to assist in an understanding of the Company's financial position and results of operations for the quarter ending September 30, 2008.

Forward-Looking Information

This report contains certain forward-looking statements and information relating to the Company that is based on the beliefs of its 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 the Company or its management, are intended to identify forward-looking statements. These statements reflect management's current view of the Company 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 incorrect, actual results may vary materially from those described in this report as anticipated, estimated or expected. The Company'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 the Company'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 ultimately is built. The Company does not intend to update these forward-looking statements.

INTRODUCTION

NetSol Technologies, Inc. (“NetSol” or the “Company”) (NasdaqCM: NTWK) (DIFX: NTWK) is a US worldwide provider of global business services and enterprise application solutions. NetSol uses its BestShoring™ practices and highly-experienced resources in analysis, development, quality assurance, and implementation to deliver high-quality, cost-effective solutions. Organized into specialized practices, these product and services offerings include portfolio management systems for the financial services industry, 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 with operating headquarters in the San Francisco Bay Area. NetSol also has operations and/or offices in: Horsham, United Kingdom; Sydney and Adelaide, Australia; Beijing, China; Lahore, Islamabad, Rawalpindi and Karachi, Pakistan; and, Bangkok, Thailand.

In today’s highly competitive marketplace, business executives with labor or services-centric budgetary responsibilities are not just encouraged but are, 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 has initiated the strategic evolution of it business offerings that is a BestShoring™ solutions strategy. BestShoring ™ is simply defined as 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 BestSolution™” 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 into the 21st century, providing value added Solutions for Global Business Services through a win-win partnership, rather than the traditional outsourced vendor framework. Our focus “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 Sydney 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”.
 
Page 24

 
Information technology services are valuable only if they fulfill the business strategy and project objectives set forth by the customer. NetSol’s expert consultants have the technical knowledge and business experience to ensure the optimization of the development process in alignment with basic business principles. The Company offers a broad array of professional services to clients in the global commercial markets and specializes in the application of advanced and complex IT enterprise solutions to achieve its customers' strategic objectives. Its service offerings include IT Consulting & Services; NetSol Defense Division; Business Intelligence, Information Security, Outsourcing Services and Software Process Improvement Consulting; maintenance and support of existing systems; and, project management.
 
In addition to NetSol Global Business Services, our product offerings are centered around the NetSol Financial Suite (“NSF”) of products and components. The NetSol Financial Suite includes our flagship global solution, LeaseSoft. LeaseSoft, a robust suite of four software applications, is an end-to-end solution for the lease and finance industry covering the complete leasing and finance cycle starting from quotation origination through end of contract. The four software applications under LeaseSoft have been designed and developed for a highly flexible setting and are capable of dealing with multinational, multi-company, multi-asset, multi-lingual, multi-distributor, multi-manufacturer, and multi-taxation environments. Each application is a complete solution 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. LeaseSoft is a result of more than eight years of effort resulting in an industry leading and awarding winning product Applications. NetSol recently added LeaseSoft Fleet Management System (FMS). The Company has already signed an agreement for FMS with a major automotive company in the Asia Pacific region. As with our service offerings, LeaseSoft is complementary to and can be used with all of our regionally developed solutions such as LeasePak in North America and LeaseSoft Asset in Europe.
 
Beyond LeaseSoft, the NetSol Financial Suite 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 and services offerings include: inBanking, which provides full process automation and decision support in the front, middle and back offices of treasury and capital markets operations; LeaseSoft Portals and Modules through our European operations; LeasePak 6.0b of our LeasePak product suite; enterprise wide information systems, such as or LRMIS, MTMIS and Hospital Management Systems; Accounting Outsourcing Services, and, the NetSol Technology Institute, our specialized career and technology program.

To further bolster NetSol’s Solutions capabilities, in October 2008, NetSol acquired Ciena Solutions, a preferred SAP and Business Objects integration firm. This acquisition expands 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, Ciena also has developed proprietary intellectual property in the form of designs and source code focused on enhancing SAP-centric procurement activities.

PLAN OF OPERATIONS

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

 
·
Expand sales and marketing activities in China. In addition to the Beijing office, we anticipate launching new sales and support offices in at least 1-2 more cities in China.
 
Page 25

 
 
·
Grow NetSol in the newest region in the UAE and Gulf states. Initially, a small virtual office is being set up in Dubai area that could roll into a bigger and stand alone presence in the area.
 
·
Globalization and diversification of development and programming capabilities, not limited to Southeast Asia but exploration of emerging economies in Central and South America to support the NTNA business.
 
·
Most strategic goal in 2009 is to establish the NTNA business by expanding the existing operations. The move from a smaller office in Burlingame to our global operating headquarters in Emeryville, California is a major event in NetSol history. We hope to use this location as a springboard for global business and valuation for Netsol consistent with our stated vision.
 
·
Actively explore both opportunistic and synergistic alliances and partnerships in Americas and Europe.
 
·
Improve the quality of hiring of senior management personnel in key locations. Further build a stronger middle management resource pool to deliver and execute the growth and earnings envisioned by the management.
 
·
Introduce and market, within the context of the NetSol Financial Suite the LeaseSoft modules of WSF and CAPS in the US market.
 
·
Grow into new business verticals including healthcare, insurance, and banking in the US and European markets. The launch of Global Business Services through these verticals is an important goal in 2009.
 
·
Enhance software design, engineering and service delivery capabilities by increasing investment in training.
 
·
Continue to invest in research and development in an amount between 7-10% of yearly budgets in both new developments and domains within NetSol’s core competencies.
 
·
NetSol technology campus to become much more cost efficient, enhanced productivity and services to global clients and partners.

Top Line Growth through Investment in organic marketing activities. NetSol marketing activities will continue to:

 
·
Prompt organic expansion in North America market by expanding the sales and marketing team.
 
·
Diversify in new verticals of services in North America such as insurance, healthcare, public sectors.
 
·
Continue sales momentum and pipeline of LeaseSoft in APAC, Europe and now in the Americas.
 
·
Further extending services offerings to existing 30 plus US customers.
 
·
Penetrate further into the Chinese market by adding new locations.
 
·
Effectively enter the UAE and regional markets for LeaseSoft, augmentation and services.
 
·
Further penetrate in Australian market in captive and non-captive sectors.
 
·
Fully leverage NetSol’s reputable name in the UK and European markets within banking, leasing and insurance sectors.
 
· 
Grow new business through joint ventures and alliances. 

Funding and Investor Relations:
 
 
·
Add breadth and depth to the investor base in the US and Middle East/UAE region by aggressively presenting in various investors forums and analysts meetings.
 
·
IR/PR to expand media reach in 2009. NetSol has been interviewed by Fox Business Network, Nasdaq site and many print publications in 2008.
 
·
NetSol to present in NASDAQ OMX sponsored investors’ forum in Dubai-UAE.
 
·
Expand the investor ownership in the UAE market to generate increased trading volumes on the NASDAQ Capital Market and the DIFX exchanges.
 
·
Preserve cash position and enhance collections for AR’s to strengthen cash flow position.
 
·
Continue to present NetSol in every strategic and important forums to create awareness and offer valued proposition.
 
Improving the Bottom Line:

 
·
Grow top-line, enhance gross profit margins to 55 – 60% by leveraging our low-cost development facilities and Best Shoring model.
 
·
Generate much higher revenues per developer and service group, enhance productivity and lower cost per employee overall.
 
·
Consolidate subsidiaries and integrate and combine entities to reduce overheads and employ economies of scale.
 
·
Continue to review costs at every level to consolidate and enhance operating efficiencies.
 
Page 26

 
 
·
Grow process automation and leverage the best practices of CMMi level 5.
 
·
Cost efficient management of every operation and continue further consolidation to improve bottom line.
 
·
Initiated steps to consolidate some of the new lines of services businesses to improve both operating and net margins.
 
·
Sign up new offshore focused JVs with UAE based financial and telecom groups.

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, NetSol is frequently assessed to maintain its CMMi Level 5 quality certification. We believe that the CMMi standards achievement is 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 a key to NetSol overall sustainability and success. In 2008 NetSol PK became ISO 27001 certified, a global standard and a set of best practices for Information Security Management.

MATERIAL TRENDS AFFECTING NETSOL

NetSol has identified the following material trends affecting NetSol

Positive trends:

 
·
Robust worldwide shift towards cost redundancies, economies of scale and labor arbitrage.
 
·
The most challenging 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.
 
·
New trends in the most emerging and newest markets. There has been a noticeable new demand of leasing and financing solutions as a result of new buying habits and patterns in the Middle East, Eastern Europe and Central America.
 
·
The overall leasing and finance industry in North America has steadily grown to over $260 billion despite the subprime crises, partly due to the resulting lack of cash liquidity.
 
·
The levy of Indian IT sector excise tax of 35% (NASSCOM) on software exports is very positive for NetSol. In Pakistan there is a 15 year tax holiday on IT exports of services. There are 10 more years remaining on this tax incentive.
 
·
Cost arbitrage, labor costs still very competitive and attractive when compared with India. Pakistan is significantly under priced for IT services and programmers as compared to India.
 
·
Chinese market is strong and wide open for NetSol’s ‘niche’ products and services. NetSol is gaining a solid traction in this market.

Negative trends:
.
 
·
Overall slump in world markets, curtailing IT and spending budgets.
 
·
Worry of an expanding and unending credit crunch in the world economies due to financial and banking sector failures.
 
·
Overall decline of auto sales due to higher oil prices and inflationary pressure.
 
·
The disturbance in Middle East, Afghanistan and Pakistan borders. Due to 9/11 events and global war on terrorism, the travel advisory of Americans travel restrictions to Pakistan continue. In addition, travel restrictions to the US and more stringent immigration laws are causing delays in travel to the US.
 
·
Negative perception and image created by extremism and terrorism in the South Asian region.
 
·
Unstable economic and political environment in Pakistan and the current volatility of Pakistan’s capital markets.
 
·
Global recession and slowed economic environment across is tangibly affecting almost every sector and industry.
 
·
Resulting auto sales decline worldwide and most challenging times for credit and finance related business has caused curtailed spending and revised budgets.
 
·
Lack of liquidity in practically every market and economy has shaken up the confidence of consumers, thus less spending.
 
·
An economic turnaround may take 2 years or more worldwide.
 
Page 27

 
CRITICAL ACCOUNTING POLICIES

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

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

INCOME TAXES

We recognize deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax bases of assets and liabilities. Deferred income taxes are reported using the liability method. Deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets generated by the Company or any of its subsidiaries are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Deferred tax assets resulting from the net operating losses are reduced in part by a valuation allowance. We regularly review our deferred tax assets for recoverability and establish a valuation allowance based upon historical losses, projected future taxable income and the expected timing of the reversals of existing temporary differences. During the fiscal years ended June 30, 2008 and 2007, we estimated the allowance on net deferred tax assets to be one hundred percent of the net deferred tax assets.

Page 28


CHANGES IN FINANCIAL CONDITION

Quarter Ended September 30, 2008 as compared to the Quarter Ended September 30, 2007:

Net revenues and income for the quarter ended September 30, 2008 and 2007 are broken out among the subsidiaries as follows:

   
2008
 
2007
 
   
Revenue
  %   
Net Income
 
Revenue
  %   
Net Income
 
Corporate headquarters
 
$
-
   
0.00
$
(1,235,346
)
$
-
   
0.00
$
(990,184
)
                                       
North America:
                                     
Netsol Tech NA
   
1,552,709
   
16.69
%
 
24,808
   
1,073,611
   
12.41
%
 
60,635
 
     
1,552,709
   
16.69
%
 
24,808
   
1,073,611
   
12.41
%
 
60,635
 
                                       
Europe:
                                     
Netsol UK
   
-
   
0.00
%
 
(124,894
)
 
129,725
   
1.50
%
 
3,985
 
Netsol Tech Europe
   
1,637,106
   
17.60
%
 
187,049
   
1,535,191
   
17.74
%
 
261,403
 
     
1,637,106
   
17.60
%
 
62,155
   
1,664,916
   
19.24
%
 
265,388
 
                                       
Asia-Pacific:
                                     
Netsol Tech (PK)
   
4,666,795
   
50.18
%
 
3,252,708
   
4,516,008
   
52.19
%