SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB

               |X| ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                     FOR THE FISCAL YEAR ENDED JUNE 30, 2005

                                       or

             |_| 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. Employer
   incorporation or organization)                   Identification Number)

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

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

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

                                     (None)

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

                          COMMON STOCK, $.001 PAR VALUE
                                (TITLE OF CLASS)

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes |X|  No |_|

Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B, is not contained in this form and no disclosure will be continued, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
the Form 10-KSB. |_|

Registrant's net revenues for the fiscal year ended June 30, 2005 were $663,325.

As of September 9, 2005, Registrant had 14,162,373 shares of its $.001 par value
Common Stock issued and outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

                                     (None)

Transitional Small Business Disclosure Format (Check one): Yes |_|; No |X|





                   TABLE OF CONTENTS AND CROSS REFERENCE SHEET

                                     PART I
                                                                            PAGE

Item 1    Business                                                             1
Item 2    Properties                                                          16
Item 3    Legal Proceedings                                                   16
Item 4    Submission of Matters to a Vote of Security Holders                 17

                                     PART II

Item 5    Market for Common Equity and Related Stockholder Matters            17
Item 6    Management's Discussion and Analysis and Plan of Operations         18
Item 7    Financial Statements                                                25
Item 8    Changes in and Disagreements with Accountants on Accounting
               and Financial Disclosure                                       25
Item 8A   Controls and Procedures                                             26


                                    PART III

Item 9    Directors, Executive Officers, Promoters and Control Persons;
               Compliance with Section 16(a) of the Exchange Act              26
Item 10   Executive Compensation                                              29
Item 11   Security Ownership of Certain Beneficial Owners and
               Management                                                     33
Item 12   Certain Relationships and Related Transactions                      33

                                     PART IV

Item 13   Exhibits and Reports on Form 8-K                                    34
Item 14   Principal Accountant Fees and Services                              35




                                     PART I

This Form 10KSB 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. (F/K/A NetSol  International,  Inc.  "NetSol" or the
"Company")  is  an  end-to-end   information   technology  ("IT")  and  business
consulting  services  provider for the lease and finance,  banking and financial
services  industries.  Since it was founded in 1997,  the Company has  developed
enterprise  solutions  that help  clients  use IT more  efficiently  in order to
improve their operations and profitability and to achieve business results.  The
Company's  focus has  remained  the lease and  finance,  banking  and  financial
services  industries.  The Company  operates on a global basis with locations in
the U.S.,  Europe,  and East Asia.  By utilizing its  worldwide  resources,  the
Company  believes it has been able to deliver high  quality,  cost-effective  IT
products and IT services.  The Company's  subsidiary,  NetSol  Technologies Pvt.
Ltd. ("NetSol PK") develops the majority of the software for the Company. NetSol
PK was the first  software  company in  Pakistan in 1998 to achieve the ISO 9001
accreditation  and was again the first  software  company in  Pakistan to obtain
Carnegie Mellon's Software Engineering  Institute ("SEI") Capable Maturity Model
("CMM") Level 4 assessment in 2004.

COMPANY BUSINESS MODEL

NetSol offers a broad spectrum of IT products and IT services  which  management
believes  deliver a high  return on  investment  for its  customers.  NetSol has
nearly perfected its delivery capabilities by continuously investing in maturing
its software development and Quality Assurance ("QA") processes. NetSol believes
its key  competitive  advantage is its ability to build high quality  enterprise
applications  using its offshore  development  facility in Lahore,  Pakistan.  A
major  portion of  NetSol's  revenues  are derived  from  exports in general and
LeaseSoft  in  particular.  The use of the facility in Pakistan as the basis for
software  development,  configuration  and  professional  services  represents a
cost-effective and economical cost arbitrage model that is based on the globally
acclaimed advantages of outsourcing and offshore development.  NetSol management
believes that the use of this model will only further benefit the Company in its
penetration of European, developed and developing country markets.

Achieving Software Maturity and Quality Assurance.

NetSol,  from the  outset,  invested  heavily  in  creating  a state of the art,
world-class software development capability. A series of QA initiatives resulted
in  both  ISO  9001  certification  as well as CMM  level  4  assessment.  These
assessments  solidify  NetSol's  project  delivery ability as well as permit the
Company to target market segments  consisting of organizations  and corporations
who prefer to work with software providers with a minimal of CMM Level 4 rating.
Achieving these CMM targets required dedication by all levels of the Company.

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



                                       1


The  Company  has  always  strived to  improve  quality  in every  aspect of its
business.  This quality drive, based on the Company's vision,  trickles from the
top to the lowest levels in the  organization.  The Company  believes that it is
this quality focus that enabled the Company's software  development  facility to
become the first ISO 9001 certified software development facility in Pakistan in
1998. This accomplishment  marked the beginning of the Company's continuing long
term program towards  achieving the higher  challenges of SW-CMM.  Thanks to the
dedication of the Company's employees,  it was the first to reach CMM level 4 in
Pakistan.

Professional Services

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 bespoke software  development,  software analysis
and design,  testing  services,  off shore as well as onsite  quality  assurance
services,  consultancy in quality engineering and process improvement  including
assistance in implementation of ISO and CMM quality standards,  Business Process
Reengineering,  Business Process Outsourcing, System Reengineering,  Maintenance
and support of existing  systems,  Technical  Research and Development,  Project
Management, Market Research and Project Feasibilities.

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

Systems  integration   encompasses  designing,   developing,   implementing  and
integrating complete information systems.

IT and management  consulting services include advising clients on the strategic
acquisition and utilization of IT and on business strategy,  operations,  change
management and business process reengineering.

The experience gained by the Company through its own software quality endeavors,
has enabled the Company to offer  consultancy  services in the areas of Software
Quality, Process Improvement,  ISO Certification and SW-CMM Implementation.  ISO
certification  and CMM  services  include,  but are not limited to: GAP Analysis
against the standard ISO/CMM;  Orientation Workshops; Guiding the Implementation
of the plan developed  after the GAP Analysis;  Training on Standard  Processes;
Process implementation support off-site and on-site;  assessment training;  and,
assistance  through the final assessment  (Certification  Audit for ISO). NetSol
was chosen by the  Pakistan  Software  Export  Board under the  direction of the
Ministry of Information  Technology and Telecommunication to provide consultancy
to local software houses.  Management believes this demonstrates that NetSol has
not only led the way in setting  standards for the IT industry in Pakistan,  but
is instrumental in assisting local companies to achieve quality standards.

LeaseSoft

The  Company  develops  advanced  software  systems  for the lease  and  finance
industries.  NetSol has developed  "LeaseSoft" a complete  integrated  lease and
finance package.

LeaseSoft,  a  robust  suite of four  software  applications,  is an  end-to-end
solution  for the  lease  and  finance  industry.  The four  applications  under
LeaseSoft have been designed and developed for a highly flexible setting and are
capable   of   dealing   with   multinational,    multi-company,    multi-asset,
multi-lingual, multi-distributor and multi-manufacturer environments.

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



                                       2


The constituent software applications are:


      o LeaseSoft Electronic Point of Sale (LeaseSoft.ePOS). LeaseSoft.ePOS is a
web-based  point of sale system for the use of  dealers,  brokers,  agents,  and
sales officers to initiate credit applications.  Although a web-based system, it
can be used with  equal  efficiently  on an  intranet.  Its real  ability  is to
harness  the  power of the  Internet to book sales.  LeaseSoft.ePOS users create
quotations and financing  applications  (Proposals)  for their  customers  using
predefined  financial products.  The application is submitted to the back office
system (such as LeaseSoft.CAP) for approval.  After analysis, the application is
sent back to the LeaseSoft.ePOS system with a final decision.


      o Credit  Application  Processing  System (CAP Formally  known as Proposal
Management System, PMS) LeaseSoft.CAP provides companies in the financial sector
an environment to handle the incoming credit applications from dealers,  agents,
brokers  and  the  direct  sales  force.  LeaseSoft.CAP   automatically  gathers
information from different  interfaces like credit rating  agencies,  evaluation
guides,  and contract  management  systems and scores the  applications  against
defined scorecards.  This mechanized workflow permits the credit team members to
make  their   decisions   more  quickly  and   accurately.   Implementation   of
LeaseSoft.CAP dramatically reduces application-processing time in turn resulting
in greater revenue  through higher number of  applications  finalized in a given
time.  LeaseSoft.CAP  reduces the  probability of a wrong decision thus,  again,
providing a concrete business value through minimizing the bad debt portfolio.

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

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

LeaseSoft  is a state  of the art  software  product  and is  available  on both
conventional  32 bit  architecture  hardware as well as high  performance 64 bit
computers.

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



                                       3


License fees can vary  generally  between  $100,000 up to $1,000,000 per license
depending upon the size and complexity of customer's business. There are various
attributes  which determine the level of complexity,  a few of which are: number
of contracts; size of the portfolio; business strategy of the company; number of
business  users;  and,  branch network of the customer.  The Company  recognizes
revenue   from   license   contracts   without   major   customization   when  a
non-cancelable,  non-contingent  license agreement has been signed,  delivery of
the software has occurred, the fee is fixed or determinable,  and collectibility
is probable.  However,  revenue from sale of licenses with major  customization,
modification,  and  development  is recognized  on percent of completion  basis.
Revenue from software  services includes fixed price contracts and is recognized
in accordance with the percentage of completion  method using the output measure
of "Unit of Work  Completed."  The annual  maintenance  fee, which usually is an
agreed upon  percentage of overall  monetary value of the  implementation,  then
becomes an ongoing revenue stream realized on a yearly basis.

As a marketing  strategy  NetSol is preparing a lighter  version of LeaseSoft to
target  companies with simpler  business  models.  LeaseSoft is highly  modular.
Hence  various  sets of  functionalities  can be  used  against  the  restricted
requirements  of the client.  The first  deployment  of this lighter  version is
currently being carried out in Maritius for Mauritius Commercial Bank.

Acquisition of CQ Systems Ltd., UK.

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

NetSol has an active  plan to  gradually  move some of the  software  production
activities  at CQ Systems to its  offshore  development  center in Lahore.  This
transition  is expected to last about twelve  months,  during which time most of
the quality  assurance,  documentation and some of the CQ products core software
development  activities would transition to Lahore.  While it is expected that a
gradual  reduction  in costs on a like for like basis at CQ  Systems  will occur
during the twelve month  transition  period,  the expected  growth in CQ Systems
business over the next eighteen  months,  may result in a personnel growth at CQ
Systems during that same period.

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

The  Asian  continent,  Australia  and New  Zealand,  from  the  perspective  of
LeaseSoft  marketing,  are  targeted  by  NetSol  Technologies  from its  Lahore
subsidiary and its newly opened offices in Beijing.  NetSol UK, both through its
base in London and its CQ  Systems  Ltd.  offices  located  in  Horsham,  United
Kingdom,  focuses  on the  European  market.  NetSol  UK has  also  appointed  a
representative in Denmark to further focus on Denmark as well as the neighboring
countries. The marketing for LeaseSoft in USA and Canada is carried out directly
by the Company. NetSol Technologies (Pvt.) Limited services and NetSol UK market
whenever and wherever required.

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


                                       4


Launch of NetSol CQ office in Beijing, China

As part of the same  strategy  and  focus on  marketing  LeaseSoft,  NetSol  has
recently  established a new sales office in Beijing,  China,  which will act not
only as the sales and  marketing  front for NetSol in the  People's  Republic of
China  but  also  act as the  liaison  office  for its  ongoing  operations  and
implementation  services for  DaimlerChrysler  Services and other clients in the
country.  The new Asia Pacific office is jointly managed by NetSol Technologies,
Inc. and its wholly owned U.K. subsidiary, CQ Systems Ltd.

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

      o     Breakthrough with Toyota in Thailand and China

      o     Breakthrough  in non-captive  finance as evidenced by agreement with
            Mauritius Commercial Bank in Mauritius

      o     It has been recognized as a Solution Blueprint by Intel Corporation.
            Intel has very stringent technical and market potential criteria for
            designating a solution as a "solution blueprint"

      o     Frame Agreement with DaimlerChrysler Services AG (DCS)

NetSol's Frame Agreement with DCS short lists LeaseSoft as a preferred  software
provider  for  managing  the  wholesale  and retail  side of leasing and finance
business of DCS.  DCS  supports the sales of  DaimlerChrysler  vehicles  through
financial services.

The current LeaseSoft client base includes  DaimlerChrysler Services (Australia,
Japan, New Zealand,  Singapore, South Korea, Thailand, China and Taiwan), Yamaha
Motors Finance  Australia,  Toyota Motors  Finance China,  Mercedes Benz Finance
Japan, Toyota Leasing Thailand and Mauritius Commercial Bank.

NetSol also maintains a LeaseSoft  specific  product  website  www.leasesoft.biz

Status of New Products and Services

InBanking(TM)

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

PTS was  originally  developed on two tier client  server  technologies  and was
designed to provide full process  automation and decision  support in the front,
middle and back  offices of  treasury  and  capital  markets  operations.  On an
internal review of PTS post  acquisition,  it was decided to re-write the system
within  .NET   technologies,   bringing   the  system  into  the  leading   edge
n-tier/browser-based   environment.   The  project  name  for  this  program  is
InBanking(TM),   and  the  Phase  One  deliverables   are  nearing   completion.
InBanking(TM) has more than 70 person years of development effort and $4 million
already invested.

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

InBanking(TM) provides NetSol with the significant opportunity to gain a sizable
share of the treasury,  capital markets and wholesale  banking systems  markets.
Following  a lull in the banking  solution  purchase  market,  caused by Y2K and
disasters such as 9/11, market analysts, such as Celent and IBS Publishing,  are
forecasting  significant  system  replacement  activity over the next few years,
particularly in the area of treasury management.



                                       5


NetSol is currently  and actively  seeking a small number of banks and financial
institutions to be pilot  development  partners for the final stage of the Phase
One development  program,  implementing  InBanking(TM) to support their specific
requirements.

TiG-NetSol

In November  2004, the Company  entered into a joint venture  agreement with The
Innovation Group ("TiG") whereby the TIG-NetSol (Pvt) Ltd., a Pakistani company,
now called Extended Innovation,  provides support services enabling TiG to scale
solution delivery  operations in key growth markets.  TiG-NetSol  operations are
centered in NetSol's IT Village in Lahore,  Pakistan, with a back up facility in
Bangalore,  India. NetSol owns 50.5 percent of the new venture,  with TiG owning
the remaining  49.5 percent.  The entities  share equally in the revenues of the
joint venture.  The outsourcing  model between TiG and NetSol involves  services
pertaining  to  business  analyses,  configuration,  testing,  software  quality
assurance (SQA), as well as, technical communication for TiG software. Initiated
with a 10 person  outsourcing  team in Lahore in February 2005, this arrangement
has  extended  to a 35 person  team in July 2005 with the  additional  resources
catering to the increased  influx of  outsourcing of  configuration  and testing
assignments  from TiG.  Backed up by a  dedicated  4Mbps  fiber  optic  link for
communication and  teleconferencing,  this arrangement will allow NetSol's human
resources to efficiently and effectively  respond to additional  outsourcing and
offshore configuration work.

Growth Through Acquisition and Alliances

In Mid-2004,  NetSol management identified mergers and acquisitions as potential
methods  of  capitalizing  on the  demand  of the  Company's  flagship  product,
LeaseSoft and assisting the Company in launching its treasury  banking  software
systems.  This,  together  with  the  visible  turnaround  in the  services  and
outsourcing  sectors in global markets,  led to a growth  strategy  encompassing
both organic growth and mergers and acquisitions.  While the calendar year 2004,
focused on  capitalizing  on organic  growth and  investing  in  building up the
Company's marketing and sales organization, the early part of 2005 saw a renewed
focus on mergers and  acquisitions.  In February  2005,  the Company  closed the
acquisition  of CQ  Systems  Ltd.,  a UK based  company.  With a client  network
reaching  across  Europe,  CQ  Systems  provides a  platform  for the  Company's
LeaseSoft products in the UK and continental Europe.

The Company continues to explore mergers and acquisition opportunities,  both in
the USA and  Europe.  Management  believes  that great value can be added to the
Company by  completing a series of  acquisitions  over the next five years.  The
model of  targeting  well  established,  profitable  product  companies,  within
NetSol's  domain,  management  believes,  has  proven  successful  with  the  CQ
acquisition. Management believes this model can be replicated over the next five
years.

Growth through Establishing Partners Network

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

Strategic Alliances

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

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



                                       6


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

With the recent  deregulation  of Pakistan's  telecommunications  sector and the
government's  desire to attract investors to the country,  while experiencing an
unprecedented increase in exports,  Pakistan is keen to build a solid technology
infrastructure  to support the growth expected over the next several years.  The
areas  within  Pakistan   expects  to  receive  major   information   technology
investments by the government are education, public sector automation,  railways
and the country's armed forces.

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


In June 2004, the Company  entered into a Frame  Agreement with  DaimlerChrysler
AG.  This  agreement,  which  serves  as a base  line  agreement  for use of the
LeaseSoft  products by  DaimlerChrysler  Services AG  companies  and  affiliated
companies,  represents  an  endorsement  of the  LeaseSoft  product line and the
capabilities of NetSol to worldwide  DaimlerChrysler  entities. This endorsement
has had a  tremendous  impact on our  perspective  customers,  it has helped our
sales  and  Business  Development  personnel  to market  and sell our  LeaseSoft
solution to blue chip customers around the world.

NetSol Akhter Pvt.  Ltd., a subsidiary of the Company with ownership of 50.1% by
the Company and 49.9% by Akhter  Group,  is a company  capitalizing  on the high
growth of the telecommunications  market in Pakistan. NetSol Akhter provides ISP
services  to clients in the three  major  cities of  Pakistan  and is looking to
expand its service  offerings.  NetSol  management  took this  strategic step to
maintain its focus in the core business of software development and IT services.

As a direct  result  of a delay  in the  PTCL  privatization,  the  state  owned
telecommunications monopoly,  NetSol-Akhter has faced delays in finalizing cross
network pricing and infrastructure  rollout.  However,  the recent completion of
the PTCL  privatization  process would  provide some much needed  impetus to the
rollout plans. A giant UAE based telecom group  (Eitesalat)  has acquired 26% of
PTCL for $2.6MN  and will be taking  over the  management  control of this state
owned telecom giant of Pakistan.



                                       7


Technical Affiliations

The Company  currently  has  technical  affiliations  as: a MicroSoft  Certified
Partner;  a member of the Intel Early Access Program;  and, an Oracle  Certified
Partner.

Marketing and Selling

The Marketing Program

NetSol management is optimistic that the Company will experience ever increasing
opportunities  for its products  offerings in 2006. The Company is  aggressively
growing  the  marketing  and  sales  organizations  in the  United  Kingdom,  in
conjunction with CQ Systems,  Ltd., in Pakistan and the USA. Management believes
that  the  year  2006  will  follow  2005 as a year for  continued  growth,  the
launching of footprints in new markets,  and penetration of established  markets
such as Asia Pacific and Europe.

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

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

The Markets

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

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

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

                                                               2005     2004
                                                               ----     ----

North American (NetSol USA)                                       2%      12%
Europe (CQ Systems, UK Ltd.)                                     24%       6%
Other International (Abraxas, NetSol Technologies Ltd.,          74%      82%
NetSol (Pvt.), Ltd., NetSol Connect (Pvt) Ltd.)

Total Revenues                                                  100%     100%


                                       8



Fiscal Year 2004-2005 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 PVT Ltd.

Our off  shore  development  facility  continues  to  perform  strongly  and has
enhanced its  capabilities and expanded its sales and marketing  activities.  In
May 2004,  NetSol  inaugurated  its newly  built  Technology  Campus in  Lahore,
Pakistan.  This was followed by a formal  inauguration  on March 4, 2005, by the
Prime Minister of Pakistan,  Shaukat Aziz. This state-of-the-art,  purpose-built
and fully dedicated IT and software  development  facility,  is the first of its
kind in Pakistan.  NetSol 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.  This  facility  currently  houses 400 employees and thus has
become the backbone of NetSol business model providing world class IT talent and
a cost arbitrage that is attractive to western customers.

The Lahore operation supports the worldwide customer base of the LeaseSoft suite
of  products  and all other  product  offerings.  NetSol has  continued  to lend
support to the Lahore subsidiary to further develop its quality  initiatives and
infrastructure.  The  development  facility in Pakistan,  being the engine which
drives  NetSol,  continues  to be the major  source of revenue  generation.  The
Pakistan  operation  contributed  53% of the 2005  revenues with $6.6 million in
revenues for the current year. This was accomplished primarily through export of
IT services and product licensed to the overseas  markets.  The total revenue of
NetSol Pakistan,  including the Pakistan domestic market, was $6.55 million with
a record profit of $3.3 million.

Seeking  to  take  further  advantage  of  the  bourgeoning  Pakistani  markets,
including the capital markets,  the Company listed NetSol  Technologies  Ltd. on
the Karachi Stock Exchange  ("KSE") in August 2005. The initial public  offering
of stock, of NetSol  Technologies  Ltd.,  together with the  pre-initial  public
offering private placement,  raised over $5.83 million. NetSol Technologies Ltd.
is listed on the KSE under the symbol  "NETSOL".  Trading of `NETSOL' on the KSE
commenced on August 26, 2005. The  successful  listing of the subsidiary in this
emerging capital  markets,  has increased  visibility in Pakistan  capturing the
interest  of both public and private  sectors  for new  business  opportunities.
Furthermore,  NetSol expects to leverage its position as one of the most reputed
software  developer's in Pakistan with a much improved  balance sheet to attract
major new projects and customers.

While available to support its product and services base on a world-wide  basis,
NetSol Tecnologies PVT Ltd.'s selling and marketing efforts are focused on Asia.
Using the distribution channels in Lahore, Beijing and many client sites, we are
consolidating the Australian office and merging it with the Lahore facility. The
existing  senior  management  from  Australia will now be directed by the Lahore
operation  which will serve the  Australian-New  Zealand  markets.  The  Company
expects to save nearly $250,000 by this initiative.

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

      o     DaimlerChrysler  Auto Finance China- Licensing and  customization of
            LeaseSoft CAP, CMS & WFS.

      o     Toyota  Leasing  Thailand  (TLT)  -  Licensing,   customization  and
            implementation of LeaseSoft CAP (formerly PMS), CMS & WFS.

      o     TLT is a volume  leader in captive  finance  companies  in Thailand.
            NetSol considers it a big strategic break as delivering successfully
            in Thailand will position NetSol to target Toyota Finance  companies
            around the world.

      o     Mercedes  Benz  Finance   Japan-Licensing   and   implementation  of
            LeaseSoft  WFS.

      o     Toyota  Motor  Finance  China-  Licensing  and   implementation   of
            LeaseSoft WFS.

      o     Mauritius  Commercial Bank,  Mauritius- Licensing and implementation
            of LeaseSoft CMS and  LeaseSoft  CAP.

      o     CMM Evaluation Consultancy Services for the Pakistan Software Export
            Board (PSEB).

As a part of  Ministry  of  Information  Technology's  efforts  for the  process
improvements in the operations of Pakistani software houses,  NetSol,  under the
auspices  of PSEB,  is  actively  undertaking  exercises  for these  consultancy
services for different  software  companies.  The key aspects of these  services
would be CMM1 introduction, gap analyses for ISO 9001:2000 compliant procedures,
CMM Level 2/3 pre-assessments,  consultancies, evaluations and tracking/analyses
of such  improvements.  The  clientele  for these NetSol  professional  services
includes:  DPS Islamabad,  Shaukat Khanum  Memorial Trust (SKMT) Lahore,  ProSol
Islamabad, GeoPac Islamabad, yEvolve Karachi, and Avanza Solutions, Karachi.



                                       9


Management  believes that NetSol has been  identified as a premium IT company in
Pakistan and with its matured products and services,  local demand is surging. A
few of the recently signed agreements in the private and public sectors are:

      o     Pakistan Administrative Staff College

      o     Government of Punjab (Motor Transport Management)

      o     Pakistan Software Export Board

      o     Ministry of Defense (multiple projects)

      o     All Pakistan Textiles Processing Mills Association (APTPMA)

      o     National  Assembly  and Senate of  Pakistan  (Electronic  Government
            Directorate)

      o     Prime  Minister of  Pakistan's  Secretariat  (Electronic  Government
            Directorate)

      o     Armed Forces Institute of Dentistry


There is a growing  domestic  business  in  Pakistan  for the IT and IT  enabled
services,  as stated above, and NetSol is strategically  positioned to support a
very stable and economically  beneficial pipeline to win many more and major new
projects in the public and private  sectors.  NetSol will continue to strengthen
its  position  as a dominant IT  solutions  provider  in this  explosive  growth
market.

NetSol IT Matrix (NITM) for Information Security and related services.

NetSol has entered into a joint venture agreement with IT Matrix,  Saudi Arabia,
for the provision of information  security and related consultancy  services for
the growing IT services  market in Pakistan.  Realizing the already  established
potential  of  information  security  strength  of  NetSol in  Pakistan  and the
capability/experience  of IT Matrix Saudi Arabia,  the  organizations  agreed to
form a new business  entity in Pakistan (NITM) to jointly pursue the information
security business.  IT Matrix is among the few companies in the region which has
built its Information  Security  solutions  integrating  hardware,  software and
services. It is currently the leading Information Security solutions provider in
the Kingdom of Saudi  Arabia,  with  corporate  offices in Riyadh and one branch
office in  Al-Khobar  (Easter  Province).  The company has  partnerships  with a
number of  leading  information  security  vendors in the world and is the first
company in the region to have built its IT security technologies with 100% local
development in Saudi Arabia.

The business  objectives of the joint venture will be to:  develop  intellectual
capital in the form of information security  technologies;  information security
professional   consultancy   services;   methodologies  for  implementation  and
maintenance;   information  security  training  and  educational  material  with
delivery mechanism and sales of information security consulting  services;  NITM
developed  information security  technologies;  support services for information
security  technology (people and processes);  information  security training and
education; and, 24x7 security surveillance centers.

NetSol Technologies UK Ltd

NetSol Technologies  Limited, the Company's UK subsidiary,  was formed in Fiscal
2003.  Located  in the heart of the City of  London,  one of the  world's  major
banking and finance  centers,  the company is  resourced  with  experts from the
financial services industry,  including its chairman, Ed Holmes, with experience
such as Group Executive Europe and chairman/CEO of Citibank  International Plc..
The UK subsidiary is responsible for the Company's  activities in the UK, Europe
and Middle East and includes the spearheading of the sales and marketing efforts
for  InBanking(TM),  NetSol's  treasury and  wholesale  banking  solution;  plus
ongoing marketing and sales of the LeaseSoft  portfolio of leasing solutions and
NetSol's range of on and off-shore IT services.

With the  acquisition  of CQ Systems,  Ltd.,  which is managed by NetSol UK, the
Company has added a complimentary suite of leasing products. CQ Systems Ltd. was
established in 1986 and provides  robust,  powerful,  scalable and safe contract
management and accounting  solutions for the installment  credit,  motor finance
and asset  finance  markets.  The  modules  provide  an  end-to-end  contractual
solution - from underwriting,  contract administration and accounting through to
asset disposal and re-marketing.  Today CQ has more than 55 banking, independent
and  captive  finance  house  clients in the UK,  Europe,  Africa and Asia.  The
revenue generated by CQ Systems from the date of acquisition (Feb 21 to June 30,
2005) was $2.3 million,  or 18% of the Company's total revenues.  The net income
before  tax  reported  for the same  period was about  $432,000.  In terms of CQ
Systems  stand alone  revenues  for year  2004-2005,  the  revenues  exceeded $6
million.



                                       10


Subsequent to the CQ Systems  acquisition,  it was decided to use NetSol UK as a
marketing arm of the Lahore  subsidiary and mergers and  acquisition  arm of the
Company.

Depending  solely  upon  organic  growth,  the UK company  produced  $688,000 in
revenue for the current  fiscal year or 5.53% of the Company's  total  revenues.
The net  income  was  reported  approximately  $159,900.  The main focus of this
entity is to market the array of banking and leasing  solutions  in the heart of
the financial district in London and the rest of Europe.

NetSol TIG, Joint Venture

As disclosed before,  the newly formed outsourcing joint ventures of NetSol with
a UK based IT solutions provider TIG, Plc. contributed approximately $448,000 in
revenue in just five  months or 3.6% of the  Company's  revenues.  The total net
profit was $250,000  before  adjusting  the minority  interest;  NetSol owns 51%
while TIG owns 49% of the JV.

NetSol Connect

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. As part of this Agreement,
NetSol  Connect  changed its name to NetSol  Akhter.  A change in the  ownership
structure  in  September  2003 and the  consolidation  and  readjustment  of the
revenue  model caused  revenue  reduction in fiscal year 2004 as compared to the
fiscal year 2003.  During the current fiscal year,  NetSol Connect steadily grew
its  presence in three cities  (Karachi,  Lahore and  Islamabad)  by acquiring a
small Internet online company called Raabta Online in early 2004. This created a
national  presence  for  wireless  broadband  business in key markets  that have
experienced  explosive  growth.   NetSol  Akhter 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.

Akhter,  one of the oldest  established  computer  companies  in the UK, is well
recognized as a provider of managed Internet services, integrated networks, both
local  area  networks  and wide  area  networks,  as well as  metropolitan  area
networks  within the UK. Akhter owned  proprietary  broadband  technologies  and
solutions  will provide  NetSol Connect a  technologically  strong  platform for
strengthening its telecommunications  infrastructure within Pakistan with a goal
of becoming a leading provider of broadband  Internet access to both residential
and commercial users.

The initial stage of the agreement  provides  NetSol with an investment of up to
$1 million in cash to launch a broadband  infrastructure in Karachi, the largest
business  hub in  Pakistan.  The  initial  infrastructure  will  provide a 155MB
backbone and a 5MB broadband to customer premises using a proprietary  broadband
technology  and an  infrastructure  consisting of 20 hubs.  After the successful
launch of the  initial  six-month  beta  program to  Karachi's  residential  and
commercial  customers,  additional  rollouts of the hubs are scheduled in Lahore
and Islamabad within a 12-month period.  The second  investment into the program
could  provide  up to $20  million  to create  the  first  Terabit  backbone  in
Pakistan.  This  will  allow  NetSol to  provide  data,  voice,  video and other
multi-media services to major cities within Pakistan.

NetSolConnect  Pvt Ltd. will continue to  aggressively  seek revenues to growth.
The revenue  contribution for  NetSolConnect  was $1.14 million or about 9.2% of
2005  revenues.  The total net loss was $27,422  before  adjusting  the minority
interest;

NetSol USA

In February  2005,  NetSol USA operations  were merged with the parent  company.
NetSol USA managed the successful  completion and implementation of projects for
a Seattle based software company,  Capital Stream.  This contract was awarded at
the end of 2003 and was completed in the middle of fiscal year 2005. With NetSol
USA focusing on consulting services in areas not necessarily compatible with the
NetSol  products and services  base,  and the  completion of the Capital  Stream
project  the  Company  elected  to  consolidate  the  Maryland  office  into the
Company's headquarters in Calabasas,  California. NetSol USA was responsible for
$295,000 in revenues or 2.4% of total revenues to the Company. The downsizing of
NetSol USA office would contribute to over $250,000 of annual savings.



                                       11


LeaseSoft Sales

LeaseSoft received a major recognition when  DaimlerChrysler  Services (DCS) AG,
Germany signed a global frame  agreement  with NetSol for  LeaseSoft.  Under the
terms of the open-ended global frame contract,  LeaseSoft is named as one of the
strategic, asset-based, finance software solutions for DCS.

Within the DCS locations,  the Global Frame  Agreement was  responsible  for the
following  additional  sales of  LeaseSoft  in the  year  ended  June 30,  2005:
licensing and  implementation of LeaseSoft PMS, CMS and WFS for  DaimlerChrysler
Auto Finance  China;  and,  Licensing  and  Implementation  of LeaseSoft WFS for
Mercedes Benz Finance Japan.

Other than DCS,  NetSol was also successful in entering into agreements with new
customers  in the  region.  A major  breakthrough  was Toyota  Leasing  Thailand
allowing NetSol to offer and provides services to another leader in the region's
automotive  markets.  This  arrangement  was later  extended to a second  Toyota
client in China (Toyota Motors Finance China (TMFCN)).  New customers  included:
licensing and  implementation  of WFS, CMS and PMS for Toyota Leasing  Thailand;
licensing and  implementation of LeaseSoft for Toyota Motors Finance China; and,
licensing and  implementation of LeaseSoft PMS and CMS for Mauritius  Commercial
Bank, Mauritius.

Technology Campus

The  Company  broke  ground for its  Technology  Campus in  January  2000 with a
three-phase  plan  of  completion.   Initially,   the  Company  anticipated  the
completion  of Phase One by fall 2001,  but due to the delay in  financing,  and
other macro and micro challenges facing the Company, the completion was delayed.
The  Technology  Campus  was  completed  in May 2004 and the  Lahore  operations
relocated  to the  facilities  in May 2004.  By  relocating  the  entire  Lahore
operation from its previously  leased premises to the Campus,  the Company saves
approximately $150,000 annually. The campus is currently capable of housing over
2,500 IT professionals in approximately  three acres of land. The campus site is
located in  Pakistan's  second  largest  city,  Lahore,  with  population of six
million.  An educational  and cultural  center,  the city is home to most of the
leading  technology  oriented  academia of Pakistan  including  names like LUMS,
NU-FAST & UET.  These  institutions  are also the source of quality IT resources
for  the  Company.  Lahore  is  a  modern  city  with  very  good  communication
infrastructure  and road network.  The  Technology  campus is located at about a
5-minute  drive  from  the  newly  constructed  advanced  and  high-tech  Lahore
International  Airport. This campus is the first purpose built software building
with state of the art technology and communications  infrastructure in Pakistan.
The Company has made this investment to attract contracts and projects from blue
chip customers from all over the world.

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  computer
sciences, programming,  mathematics, physics, engineering, and 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  shall  directly  contribute  to  the
organization  improvement  of various  engineering  processes and  procedures at
NetSol.



                                       12


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

Overall,  NetSol as a global IT company has over 25% female  employees  with the
biggest  concentration in our development  facility in Lahore. The Company is an
equal  opportunity  employer.  Being a successful  company with a well respected
name in the business  community,  NetSol  encourages  its  employees to actively
participate  and  contribute  to  charitable   contributions   for  catastrophic
tragedies such as Tsunami disaster and the Gulf Coast disaster caused by Katrina
Hurricane in the US.

There is  significant  competition  for  employees  with the skills  required to
perform the services we offer.  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, 2005, we had 530 full-time employees; comprised of 410 IT project
personnel in Pakistan,  UK and Australia  and 125 non-IT  personnel in Pakistan,
UK,  Australia  and US. This includes 40 employees in sales and marketing and 85
in general and administration. There are a total of five part-time employees and
the rest  are  full-time  employees.  None of our  employees  are  subject  to a
collective bargaining agreement.  Our telecom subsidiary  NetSolConnect has over
99 full time employees based in Karachi, Pakistan.


Competition

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

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

Customers

Some  of  the  customers  of  NetSol  include:   DaimlerChrysler   Services  AG;
DaimlerChrysler Asia Pacific - Singapore;  Mercedes Benz Finance - Japan; Yamaha
Motors Finance - Australia;  DaimlerChrysler  Services-Taiwan;  Debis  Portfolio
Systems - UK; DaimlerChrysler  Services - Australia;  DaimlerChrysler  Leasing -
Thailand;   DaimlerChrysler   Services  -  Korea;  UMF  Leasing  Singapore;  MCB
Mauritius;   Toyota  Leasing   Thailand;   Toyota  Motors  Finance  China;  and,
DaimlerChrysler  Services New Zealand.  In addition,  NetSol  provides  offshore
development  and customized IT solutions to blue chip customers such as Citibank
Pakistan,  DCD Holding UK, Toyota  Leasing  Thailand,  and Habib Allied Bank UK.
NetSol is also a strategic business partner for DaimlerChrysler  (which consists
of a group of many  companies),  which  accounts  for  approximately  20% of our
revenue.  No other individual client represents more than 10% of the revenue for
the fiscal year ended June 30, 2005.

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



                                       13


New Local Customers are as follows:

      o     Pakistan Administrative Staff College

      o     Government of Punjab (Motor Transport Management)

      o     Pakistan Software Export Board

      o     Ministry of Defense (multiple projects)

      o     All Pakistan Textiles Processing Mills Association (APTPMA)

      o     Prime  Minister of  Pakistan's  Secretariat  (Electronic  Government
            Directorate)

      o     National  Assembly  and Senate of  Pakistan  (Electronic  Government
            Directorate)

      o     Armed Forces Institute of Dentistry


The Internet

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

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

Operations

The  Company's  headquarters  are in  Calabasas,  California.  Nearly 80% of the
production and development is conducted at NetSol in Lahore, Pakistan. The other
20% of development is conducted in the Proximity  Development Center or "PDC" in
Horsham,  UK to cater to the UK and  European  customers.  The  majority  of the
marketing is conducted through NetSol Technologies, Pvt Ltd in Lahore, Pakistan,
NetSol UK, CQ Systems in the UK, and NetSol CQ in  Beijing,  China These are the
core  operating  companies  engaged in developing and marketing IT solutions and
software development and marketing.

NetSol UK, together with CQ Systems, 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.

A significant  portion of the software is developed in Pakistan.  Despite of the
global  unrest  due to the  Iraq  war and  international  terrorism,  as well as
economic  pressure due to skyrocketing  oil prices,  the economy of Pakistan has
made a positive  turn around.  The economy of Pakistan has grown to over 8.6% in
2005 and it is expected to sustain the same trend for years.  For the first time
in the history of Pakistan,  the foreign  exchange  reserve has  exceeded  $13.0
billion in  comparison  with just below $2.0  billion in 2000.  There has been a
massive surge in FDI or foreign  direct  investments  in Pakistan by foreigners.
These  investments  have  been  in  many  sectors,  to  name a  few:  industrial
infrastructure,  telecom,  oil & gas,  stock market and real  estate.  The stock
market in Pakistan is the most  bullish in the Asia  Pacific  region with market
growth over 600% year to date (Karachi Stock Exchange on October 18, 2001 was at
1,103 points vs. about 7,700 in recent times). Pakistan, now a close US ally, is
recognized by the western world as becoming very  conducive and  attractive  for
foreign   collaboration   and  investments.   The   breakthrough   `thawing'  of
relationships  between Pakistan and its biggest democratic neighbor,  India, has
stabilized the South East Asia region.  This  environment has raised the comfort
and confidence of foreign  investors and major US and European  corporations  to
enhance  their  businesses  in  Pakistan.  Due to many  strategic  measures  and
decisions by the government of Pakistan, the telecom sector has been privatized.
Several  new  foreign  telecom  giants  have made some  serious  investments  in
Pakistan.  The biggest  example is an U.A.E.  based Telecom  giant  `EITESALAAT'
which  acquired 26% or management  control of `PTCL' a government  owned telecom
company.  This reflects a true potential and tremendous growth  opportunities in
Pakistan.



                                       14


The Company is in an extremely  strong position to continue to use this offshore
model, which includes competitive price advantage to serve its customers. Due to
all major  improvements  economically,  politically and  regionally,  Pakistan's
perception is improving  drastically in recent months. A few major names such as
Microsoft,  Oracle, Cisco, Tata Consulting Services (India) and many other major
names have recently  signed  agreements  for  collaboration  and alliances  with
Pakistani companies. NetSol's few major successes achieved in 2005 were:

      *     A successful acquisition of CQ systems of UK
      *     A successful JV of NetSol and TIG to use offshore  development model
      *     A global frame agreement with Daimler Credit Services
      *     Adding blue chip customers such as Toyota Leasing Thailand.

Just recently Moody's  International  assessed  Pakistan as less vulnerable than
many  countries in the Asia  Pacific  region.  Also,  Standard & Poors rating on
Pakistan has been improved to positive.  The present  government has taken major
bold steps to attract new foreign investment and bolster the local economy.  The
confidence  of the local  investors and foreign  investors has been  undoubtedly
enhanced resulting in stronger demand of new listing in the stock markets.  Also
recently  the telecom  sector  received a boost when the IT ministry was able to
successfully  auction two new mobile phones licenses for a total of $592 million
to two European Telecom  conglomerates.  This was a landmark  development and it
simply  underscores the confidence and growing interest of foreign  companies in
investing in Pakistan.

Organization

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

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

Intellectual Property

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


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.




                                       15


ITEM 2 - PROPERTIES

Company Facilities

As of December  2003,  the Company's  headquarters  were moved from its previous
facility to one with approximately 1,919 rentable square feet and a monthly rent
of $3,933 per month.  The lease is a two-year and one-half  month lease expiring
in  December  2005.  The  Company's  current  facilities  are  located  at 23901
Calabasas Road, Suite 2072, Calabasas, CA, 91302.

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



Location/Approximate Square Feet                                Purpose/Use                              Monthly
Rental Expense
                                                                                                
Australia............................       1,140               Computer and General Office              $ 1,380

Beijing..............................         188               General Office                           $ 1,900

London (United Kingdom)..............         378               General Office                           $ 5,500

Horsham (CQ Systems).................       6,570               Computer and General Office              $10,989


The  Australia  lease is a three-year  lease that expires in September  2007 and
currently is rented at the rate of $1,380 per month.  The Beijing lease is a one
year lease that expires in June 2006.  The monthly rent is $2,280 per month with
the first two months free bringing the average monthly rent to $1,900 per month.
Our London, UK operations are currently  conducted in leased premises  operating
on a month-to-month  basis with current rental costs of approximately $5,500 per
month. The CQ System facilities,  located in Horsham, United Kingdom, are leased
until  June  23,  2011  for  an  annual  rent  of  (pound)75,000  (approximately
$131,871.15) with an early termination option in June 2006.

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

Lahore Technology Campus

The newly built  Technology  Campus was  inaugurated in Lahore,  Pakistan in May
2004.  This  facility  consists of 40,000  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  Pvt.  Ltd.  and is not
subject to any mortgages. The Company also signed a strategic alliance agreement
with the IT  ministry  of  Pakistan  to convert  the  technology  campus  into a
technology  park.  By this  agreement,  the IT ministry  has  invested  early 10
million Rupees (approximately $150,000) to install fiber optic lines and improve
the bandwidth for the facility.  NetSol has currently over 400 employees in this
new facility.

ITEM 3 - LEGAL PROCEEDINGS

On July 26,  2002,  NetSol  was  served  with a Request  for Entry of default by
Surrey Design Partnership Ltd. ("Surrey"). Surrey's complaint for damages sought
$288,743.41 plus interest at the rate of 10% above the Bank of England base rate
from January 12, 2002 until payment in full is received, plus costs. The parties
agreed to entry of a  Consent  Order  whereby  NetSol  agreed  to make  payments
according to a payment schedule.  NetSol made payments up to May of 2002 but was
unable to make payments  thereafter.  On September 25, 2002, the Company entered
into a  settlement  agreement  with Adrian  Cowler  ("Cowler"),  a principal  of
Surrey,  and  Surrey.  The  Company  agreed  to  pay  Cowler  (pound)218,000  or
approximately  $320,460 including interest,  which the Company has recorded as a
note payable in the consolidated financial statements.  The agreement called for
monthly   payments  of  (pound)3,000   per  month  until  March  2004  and  then
(pound)4,000  per  month  until  paid.  As of June 30,  2004,  the  balance  was
$146,516.  During the six months ended December 31, 2004, we paid  (pound)12,000
or  $21,997.  In December  2004,  the Company  reached an  agreement  to pay the
balance  in one  lump-sum  payment.  Cowler  agreed to accept  (pound)52,000  or
$103,371 as payment in full. This amount was paid in December 2004.



                                       16


On July 31, 2002, Herbert Smith, a law firm in England, which represented NetSol
in the Surrey matter filed claim for the sum of  approximately  $248,871  (which
represents the original debt and interest  thereon) in the High Court of Justice
Queen's Bench Division. On November 28, 2002, a Consent Order was filed with the
Court agreeing to a payment plan, whereby we paid $10,000 on execution, $4,000 a
month for one year and $6,000 per month  thereafter  until the debt is paid. The
balance  owing at March 31, 2005 was  $143,321.  In April 2005, an agreement was
reached with Herbert Smith  whereby they  accepted  $135,000 as payment in full.
This final installment of this compromised amount was paid in May 2005.


On March 3, 2004 Uecker and Associates,  Inc. as the assignee for the benefit of
the creditors of PGC Systems, Inc. formerly known as Portera Systems, Inc. filed
a request  for  arbitration  demanding  payment  from NetSol for the amounts due
under a software  agreement in the amount of $175,700.  A settlement was reached
by and between the Company  and  Portera on November  11, 2004  whereby  Portera
agreed to a  settlement  of any and all issues  related to the claim in exchange
for one time payment of $75,000 which was paid by December 3, 2004.



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

No  matters  were  submitted  to a vote of  security  holders  during the fiscal
quarter ending June 30, 2005.

                                     PART II

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

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

MARKET  INFORMATION  - Common stock of NetSol  Technologies,  Inc. is listed and
traded on NASDAQ Small Cap 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. Per share stock prices have been adjusted to reflect the 1 for
5 reverse stock split which occurred in August 2003.

                                    2004-2005         2003-2004
Fiscal
Quarter                           High     Low      High     Low
--------                         ------   ------   ------   ------
1st (ended September 30)           1.99     1.09     5.50     1.94
2nd (ended December 31)            2.71     1.14     3.16     2.05
3rd (ended March 31)               2.67     1.82     3.15     2.07
4th (ended June 30)                2.15     1.84     3.09     2.01


RECORD HOLDERS - As of September 9, 2005, the number of holders of record of the
Company's  common stock was 168. As of September 9, 2005,  there were 14,162,373
shares of common stock issued and outstanding.

DIVIDENDS - The Company has not paid  dividends  on its Common Stock in the past
and  does  not  anticipate  doing  so in the  foreseeable  future.  The  Company
currently intends to retain future earnings, if any, to fund the development and
growth of its business.




                                       17


SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLAN

The table shows information  related to our equity compensation plans as of June
30, 2005:



-------------------------------------------------------------------------- ------------------------------------
                                     Number of              Weighted-average          Number of securities
                                   securities to            exercise price of              remaining
                                     be issued                 outstanding               available for
                                        upon                options, warrants           future issuance
                                     exercise of               and rights                 under equity
                                     outstanding                                          compensation
                                      options,                                               plans
                                      warrants                                             (excluding
                                     and rights                                            securities
                                                                                          reflected in
                                                                                           column (a))
---------------------------------------------------------------------------------------------------------------
                                                                                 
    Equity Compensation             5,038,000(1)                $2.60(2)                  3,013,667(3)
     Plans approved by
     Security holders
---------------------------------------------------------------------------------------------------------------
    Equity Compensation                 None                      None                        None
   Plans not approved by
     Security holders
---------------------------------------------------------------------------------------------------------------
           Total                    5,038,000                   $2.60                     3,013,667
---------------------------------------------------------------------------------------------------------------

      (1)   Consists of 111,000 under the 2001 Incentive and Nonstatutory  Stock
            Option Plan;  1,139,500  under the 2002  Incentive and  Nonstatutory
            Stock Option Plan; 787,500 under the 2003 Incentive and Nonstatutory
            Stock  Option  Plan;  and  3,000,000  under the 2004  Incentive  and
            Nonstatutory Stock Option Plan.
      (2)   The weighted average of the options is $2.60.
      (3)   Represents 1,123,500 available for issuance under the 2003 Incentive
            and  Nonstatutory  Stock Option Plan; and,  1,890,167  available for
            issuance  under the 2004  Incentive  and  Nonstatutory  Stock Option
            Plan.

(b) RECENT SALES OF UNREGISTERED SECURITIES

During  the  fiscal  years  ended June 30,  2005 and 2004,  employees  exercised
options to acquire 890,110 and 1,067,309  shares of common stock in exchange for
a total exercise price of $1,114,733and $957,892, respectively.

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

The following  discussion is intended to assist in an  understanding of NetSol's
financial position and results of operations for the year ended June 30, 2005.

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.




                                       18


PLAN OF OPERATIONS

Management has set the following new goals for NetSol's next 12 months.

Initiatives and Investment to Grow Capabilities


      o     Achieve CMM Level 5 Accreditation in 2005-2006.

      o     Enhance   Software   Design,   Engineering   and  Service   Delivery
            Capabilities by increasing investment in training and development.

      o     Enhance  and  invest in R&D or between  7-10 % of yearly  budgets in
            financial,  banking and various other domains  within  NetSol's core
            competencies.

      o     Aggressively expand the sales and marketing  organization in all key
            locations by hiring senior and successful personnel.

      o     Recruit  additional senior level Managers both in Lahore,  China and
            UK to be able to  support  potential  new  customers  from the North
            American, Asia Pacific and European markets.

      o     Aggressively  exploit the booming  Chinese  market by  strengthening
            NetSol's presence in China.

      o     Launch  its  marketing  presence  in  the  US  markets  through  M&A
            activities in the domain of our core competencies.

      o     Embark on a  program  of  recruiting  the best  available  talent in
            Project and Program Management.

      o     Increase   Capex,   to  enhance   Communications   and   Development
            Infrastructure.

      o     Launch  new  business   development   initiatives  in  hyper  growth
            economies such as China and Eastern Europe.

      o     Create new  technology  partnership  with Oracle and  strengthen our
            relationship with Intel in Asia Pacific and in the USA.

      o     Aggressively market LeaseSoft especially in Asia Pacific, Europe and
            globally.

      o     Forge a partnership  with a US based telecom company for its telecom
            division  to  fully  exploit  the  explosive   market  potential  in
            Pakistan.


Top Line Growth through Investment in aggressively  marketing organically and by
mergers and acquisition ("M&A") activities:

      o     Launch LeaseSoft into new markets by assigning new, well-established
            companies as distributors in Europe, Asia Pacific and North America.

      o     Aggressive marketing in China for LeaseSoft and related services.

      o     Expand  relationships  with key customers in the US, Europe and Asia
            Pacific.

      o     Product Positioning through alliances and partnership.

      o     Joint Ventures.

      o     Direct Marketing of Services.

      o     Embark on roll up strategy by broadening M&A  activities  broadly in
            the software development domain.

      o     Enhance  the  sales and  marketing  organization  by hiring  new key
            executives in the US, UK and Asia.

      o     Effectively  position and marketing campaign for `Inbanking' or PTS.
            This is a potentially  big revenue  generator in the banking  domain
            for which NetSol has already invested significant time and resources
            towards completing the development of this application.

      o     Explore  new  diversified  opportunities  in the  areas of  Business
            process Outsourcing.

Funding and Investor Relations:

      o     Raise new capital from emerging  markets without or limited usage of
            NetSol  securities  to  further  strengthen  the  balance  sheet and
            capital resources.

      o     Attract long term  institutional  investors and partners both in the
            US and in Asia.

      o     Infuse new capital from potential exercise of outstanding investors'
            warrants  and  employees   options  for  business   development  and
            enhancement of infrastructures.

      o     Continuing to efficiently and prudently manage cash requirements and
            raise capital from the markets only as it deems absolutely necessary
            to execute the growth strategy.

      o     Enhance the visibility of company's stock to US based  institutional
            investors, funds and research analysts.


                                       19


Improving the Bottom Line:

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

      o     Grow process automation.

      o     Profit Centric Management Incentives.

      o     More local empowerment and P&L Ownership in each Country Office.

      o     Improve  productivity  at  the  development  facility  and  business
            development activities.

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

      o     Integrate  and  centralize  the  US   headquarters   and  Australian
            operations and improve the costs and bottom line.

Management  believes that NetSol is in a position to derive higher  productivity
based on current capital employed.

Management  continues to be focused on building its delivery  capability and has
achieved key  milestones  in that respect.  Key projects are being  delivered on
time and on budget,  quality initiatives are succeeding,  especially in maturing
internal  processes.  Management  believes that further leverage was provided by
the development `engine' of NetSol, which became CMM Level 2 in early 2002. In a
quest to continuously improve its quality standards,  NetSol reached CMM Level 3
assessment  in July 2003.  According  to the website of SEI of  Carnegie  Mellon
University, USA, only a few software companies in the world have announced their
assessment  of  level  3. As a result  of  achieving  CMM  level  4,  NetSol  is
experiencing  a growing  demand for its  products and  alliances  from blue chip
companies worldwide. NetSol is now aiming for CMM level 5, the highest CMM level
in the next year.  NetSol plans to further enhance its  capabilities by creating
similar  development  engines in other Southeast Asian countries with CMM levels
quality standards.  This would make NetSol much more competitive in the industry
and provide the capabilities for development in multiple locations. Increases in
the number of development  locations with these CMM levels of quality  standards
will provide  customers with options and flexibility  based on costs and broader
access to skills and technology.

MATERIAL TRENDS AFFECTING NETSOL

NetSol has identified the following material trends affecting NetSol

Positive trends:

      o     Outsourcing   of  services  and  software   development  is  growing
            worldwide.

      o     The Global IT budgets are  estimated to exceed $1.2 trillion in 2004
            and  beyond,   according   to  the   internal   estimates  of  Intel
            Corporation. About 50% of this IT budget would be consumed in the US
            market alone primarily on the people and processes.

      o     Cost  arbitrage,  labor costs still very  competitive and attractive
            when compared with India.

      o     Overall  economic  expansion  worldwide and explosive  growth in the
            merging markets specifically.

      o     Regional  stability  and  improving  political  environment  between
            Pakistan and India.

      o     Economic  turnaround  in Pakistan  including:  a steady  increase in
            gross domestic product;  much stronger dollar reserves,  which is at
            an all  time  high of  over  $13  billion;  stabilizing  reforms  of
            government and financial  institutions;  improved  credit ratings in
            the western  markets,  and  elimination of corruption at the highest
            level.

      o     Stronger  ties between the US and Pakistan  creating new  investment
            and trade opportunities.

      o     Robust growth in outsourcing globally and investment of major US and
            European corporations in the developing countries.

      o     Chinese economic boom leading to new market opportunities.

Negative trends:

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

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

      o     Skyrocketing oil prices and unfortunate affects of Hurricane Katrina
            on US economy.

      o     Continuous impact of Iraq war on US and global economy.




                                       20


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, 2005 and 2004, we estimated the allowance on net deferred tax assets to
be one hundred percent of the net deferred tax assets.

CASH RESOURCES

We were successful in improving our cash position by the end of our fiscal year,
June 30, 2005 with  $1,371,727 in cash worldwide and $205,480 in certificates of
deposit.  In  addition,  $1,114,733  was  injected by the exercise of options by
several employees in 2005.

CHANGE IN MANAGEMENT AND BOARD OF DIRECTORS

Chief Financial Officer

In July 2005,  Mr. Najeeb Ghauri  resigned from his position of Chief  Financial
Officer of the Company  retaining his position as Chairman of the Board under an
Executive capacity.  Ms. Tina Gilger a CPA and formerly the Company's controller
was appointed by the board of directors to replace Mr. Ghauri.




                                       21


Board of Directors

At the 2005 Annual  Shareholders  Meeting a seven member board was elected.  The
shareholders  voted for the following slate of directors:  Mr. Najeeb U. Ghauri,
Mr. Jim Moody,  Mr. Salim Ghauri,  Mr. Eugen Beckert,  Mr. Naeem U. Ghauri,  Mr.
Shahid Burki and Mr. Irfan Mustafa.  Mr. Mustafa resigned from the board in June
2005. Mr. Derek Soper was appointed by the board to replace Mr. Shabir  Randeree
who did not stand for re-election.

Committees

The Audit  committee is made up of Mr. Jim Moody as chairman,  Mr. Burki and Mr.
Beckert as members.  The  Compensation  committee  consists of Mr.  Burki as its
chairman  and Mr.  Soper and Mr.  Beckert as its  members.  The  Nominating  and
Corporate Governance Committee consists of Mr. Beckert as chairman and Mr. Moody
and Mr. Burki as members.




                                       22


RESULTS OF OPERATIONS

THE YEAR ENDED JUNE 30, 2005 COMPARED TO THE YEAR ENDED JUNE 30, 2004

Net  revenues for the year ended June 30, 2005 were  $12,437,653  as compared to
$5,749,062  for the year ended June 30, 2004.  Net revenues are broken out among
the subsidiaries as follows:



                                     2005              %          2004              %
                                 -----------                  -----------
                                                                      
Netsol USA                       $   295,725          2.38%   $   676,857         11.77%
Netsol Tech (1)                    6,557,031         52.73%     3,190,049         55.49%
Netsol Private (2)                   776,572          6.24%       483,788          8.42%
Netsol Connect                     1,143,616          9.19%       778,598         13.54%
Netsol UK                            687,620          5.53%       356,215          6.20%
Netsol-Abraxas Australia             217,470          1.75%       263,555          4.58%
CQ Systems                         2,311,345         18.58%            --          0.00%
Netsol-TiG                           448,274          3.60%            --          0.00%
                                 -----------   -----------    -----------   -----------
    Total Net Revenues           $12,437,653        100.00%   $ 5,749,062        100.00%
                                 ===========   ===========    ===========   ===========


      (1)   Refers to NetSol Technologies (Pvt.) Limited
      (2)   Refers to NetSol (Private) Limited

The total consolidated net revenue for fiscal year 2005 was $12,437,653 compared
to  $5,749,062  in fiscal year 2004.  This is a nearly 116% increase in revenue.
The increase is attributable to increased  sales,  the acquisition of CQ Systems
and the forming of the joint-venture with TiG.

The  fiscal  year ended June 30,  2005 was a very busy and  exciting  period for
NetSol  worldwide.  The  Company  added  a  few  major  new  customers  such  as
DaimlerChrysler in China, Japan, and New Zealand and Toyota Leasing Thailand and
China. In addition, many new customers were added in Pakistan in both the public
and private sectors. NetSol signed many new alliances and partnerships in fiscal
year 2005.  The most  significant  of all was the joint  venture with a UK based
company, The Innovation Group ("TiG").  NetSol owns 51% of this new entity while
TIG owns 49%. The partnership is designed to outsource the global IT projects of
TiG to NetSol in Pakistan.

NetSol made a significant  move by acquiring 100% of a UK based software company
CQ Systems Ltd. in February  2005.  The  acquisition  of CQ Systems has provided
NetSol a very strong and  seasoned  management  team with a mature,  profitable,
business.

NetSol's global frame agreement with DaimlerChrysler  Services ("DCS") qualifies
NetSol as a preferred vendor to DCS in 40 plus countries where DCS operates.  As
a direct result of the successful implementations of some of our current systems
with  DaimlerChrysler  and the  signing of the global  frame  agreement,  we are
noticing a  significant  increase in demand for  LeaseSoft.  Although  the sales
cycle for  LeaseSoft  is rather long,  we are  experiencing  a 100%  increase in
product  demonstration,  evaluation and assessment by blue chip companies in the
UK, Australia,  Japan, Europe, North America and Pakistan.  In fiscal year 2005,
NetSol raised the pricing of its LeaseSoft licenses  significantly due primarily
to a surge in demand.  In spring of 2005, one complete system was sold to Toyota
Leasing Thailand ("TLT") for nearly $2.3 million that includes over $1.2 million
for license fees.

A  number  of  large  leasing   companies   will  be  looking  to  renew  legacy
applications.  This places NetSol in a very strong position to capitalize on any
upturn in IT  spending by these  companies.  NetSol is well  positioned  to sell
several new  licenses in fiscal year 2006 that could  potentially  increase  the
sales and bottom line. As the Company sells more of these  licenses,  management
believes it is possible  that the margins  could  increase to upward of 70%. The
license  prices of these  products vary from $100,000 to an excess of $1,000,000
with  additional  charges for  customization  and maintenance of between 20%-30%
each year.

The gross profit was  $7,682,904  for year ended June 30, 2005 as compared  with
$3,049,387  for the same period of the previous  year.  This is a 152% increase.
The gross profit  percentage  was 62% for the current fiscal year and 53% in the
prior year.  While the cost of sales and the cost of  delivery of projects  have
both been reduced in the current year,  the Company  maintained all its delivery
commitments  and has won new business  from  existing and new  customers.  While
management  is striving  to  negotiate  better  pricing on new  agreements,  the
Company  has been  required  to react to  overall  general  economic  factors in
determining  its present  pricing  structure.  The gross profit  margin was also
improved due to improved  quality  standards such as achieving the assessment of
CMM Level 4 in 2004.



                                       23


Operating  expenses were $6,618,199 for the year ended June 30, 2005 as compared
to $5,757,405 for the year ended June 30, 2004.  During the years ended June 30,
2005 and 2004, the Company issued 188,972 and 48,613 restricted common shares in
exchange for services rendered, respectively. The Company recorded this non-cash
compensation  expense of $246,650  and $48,240 for the years ended June 30, 2005
and 2004, respectively.  Total professional service expense,  including non-cash
compensation,  was  $604,192  and $464,332 for the years ended June 30, 2005 and
2004,  respectively.  During the years ended June 30, 2005 and 2004, the Company
recorded  depreciation  and  amortization  expense of $1,564,562 and $1,240,792,
included  in this  increase  is the  addition  of the  completion  of the Lahore
facility.  Salaries and wages  expenses were  $2,022,183  and $1,493,252 for the
years ended June 30, 2005 and 2004, respectively,  or an increase of $528,931 or
35%.  The  addition  of the new  subsidiary,  CQ Systems  and the forming of the
joint-venture  with  TiG,  as well as an  increase  in  development,  sales  and
administration  employees  resulted  in  the  increase.  Approximately  250  new
employees  were added  throughout  the Company  during the current  fiscal year.
General and administrative expenses were $1,588,456 and $1,759,607 for the years
ended  June 30,  2005 and 2004,  respectively,  a  decrease  of  $171,151.  This
decrease  is due to  consolidation  of US  offices,  streamlining  of  corporate
overheads  and  reduction  of operating  expenses in the Lahore  facility due to
elimination of building rent. In the prior year, the general and  administrative
expense included  non-recurring expenses for moving both the headquarters office
and the Pakistan companies into the new facility,  $105,608 in costs for placing
the convertible  debenture and $122,500 for settlement of legal disputes.  Also,
the  Company  had to incur  extra  costs  for the  annual  shareholders  meeting
including  proxies  mailing and other  administrative  related  costs and travel
expenses.

Selling and marketing expenses increased to $782,488 for the year ended June 30,
2005 as compared to $253,701  for the year ended June 30, 2004,  reflecting  the
growing sales activity of the Company and the addition of the new subsidiary, CQ
Systems  and  the  joint-venture,   NetSol-TIG.   The  Company   wrote-off,   as
uncollectible,  bad debts of $13,118 and  $219,909,  during the years ended June
30, 2005 and 2004, respectively.

The income from operations in fiscal year 2005 was $1,064,705  compared to a net
loss from  operations  of  $2,708,018  in fiscal  year 2004.  Included  in these
amounts are non-cash  charges of depreciation and amortization of $1,564,562 and
$1,240,792,  settlement expenses of $43,200 and $122,500 and bad debt expense of
$13,118 and $219,909,  respectively. Net income in fiscal year 2005 was $663,325
compared to a net loss of  $2,577,058  in fiscal year 2004 or 125.74%  decrease.
The current fiscal year amount includes a net reduction of $111,073  compared to
an add-back of  $273,159  in the prior year for the 49.9%  minority  interest in
NetSol  Connect  and  NetSol-TiG  owned  by  another  party.  The  Company  also
recognized  non-recurring  expenses  including $209,848 and $137,230 expense for
the beneficial conversion feature on notes payable and convertible  debenture, a
gain  of $0  and  $104,088,  from  writing  off a  note  payable  in  one of the
subsidiaries  that had been paid  through the issuance of stock by the parent in
the prior year and, a gain of $404,136 and  $216,230  from the  settlement  of a
debt,  respectively.  In addition,  during the current  fiscal year, the Company
recorded  an expense  of  $255,130  for the fair  market  value of  options  and
warrants granted.  The net income per share was $0.06 in 2005 compared to a loss
of $0.33 in 2004. The total  weighted  average of shares  outstanding  basic was
11.6 million and diluted was 14.8 million  against basic and diluted 7.9 million
in 2004.


The net EBITDA income for fiscal 2005 was $2,454,164 compared to loss for fiscal
2004 of $1,029,751 after amortization and depreciation charges of $1,564,562 and
$1,240,792,  income  taxes of  $10,416  and  $76,638,  and  interest  expense of
$215,861 and 229,877, respectively. Although the net EBITDA income is a non-GAAP
measure of  performance we are providing it for the benefit of our investors and
shareholders to assist them in their decision-making process.


Liquidity And Capital Resources

The Company's cash position was $1,371,727 at June 30, 2005 compared to $871,161
at June 30, 2004.  In addition the Company had $205,480  compared to $391,403 in
certificates of deposit. The total cash position,  including the certificates of
deposits,  was $1,577,207 as of June 30, 2005 compared to $1,262,564  million as
of June 30, 2004.

Net cash  provided by  operating  activities  amounted to $243,872  for the year
ended June 30,  2005,  as compared  to used for  $1,770,591  for the  comparable
period last fiscal  year.  The decrease is mainly due to an increase in accounts
receivable and other assets offset by an increase in accounts payable.


Net cash used by investing  activities amounted to $4,697,488 for the year ended
June 30, 2005, as compared to providing  $3,406,964  for the  comparable  period
last fiscal year.  The  difference  lies primarily in the purchase of CQ Systems
and the related increase in intangible assets acquired.  During the prior fiscal
year, the Company had proceeds of $210,000 from the sale of a minority  interest
in the Company's  subsidiary NetSol Connect,  whereas in the current fiscal year
the Company received $178,521 of additional capital from the minority interests.
In  addition,  the  Company  had net  purchases  of property  and  equipment  of
$1,468,499  compared to $2,861,754 for the  comparable  period last fiscal year.
The majority of this reflects the  capitalized  costs of the Lahore  facility of
approximately $1.37 million and $2.32 million, respectively.


                                       24


Net cash provided by financing  activities amounted to $4,826,927 and $5,774,256
for years ended June 30, 2005, and 2004,  respectively.  The current fiscal year
included  the cash  inflow  of  $1,512,000  from the sale of  common  stock  and
$1,260,057  from the  exercising  of stock  options  and  warrants,  compared to
$1,848,750 and $1,445,392 in the prior year, respectively. In the current fiscal
year,  the  Company had net  proceeds  from loans of  $1,247,351  as compared to
$1,301,571  in the  comparable  period last year.  The Company  also  obtained a
$1,200,000  convertible  debenture  during the prior fiscal year. The short term
notes  acquired  during the  current  fiscal  year were  utilized to execute the
acquisition of CQ Systems.

As of June 30, 2005 the Company's  working capital  (current assets less current
liabilities)  totaled  $3,458,302  compared to $410,991 as of June 30,  2004,  a
increase of $3,047,311.  In the current fiscal year, the Company sold a total of
$1,512,000  of its  common  stock in private  placements.  In fiscal  2004,  the
Company raised capital from financing with Maxim Group of $1.85 million,  net of
expenses. In addition, $1.2 million in convertible debentures were issued during
the  prior  fiscal  year  and  approximately  $487,000  from the  exercising  of
warrants.  The Company has over $3.9  million in accounts  receivable  and $1.96
million in revenues in excess of billings. The Company plans on pursuing various
and feasible means of raising new funding to expand its infrastructure,  enhance
product  offerings  and beef up  marketing  and sales  activities  in  strategic
markets.  The strong growth in earnings and the signing of larger contracts with
Fortune 500  customers,  largely  depends on the  financial  strength of NetSol.
Generally, the bigger name clients and new prospects diligently analyze and take
into  consideration  a stronger  balance  sheet before  awarding big projects to
vendors.  Therefore,  NetSol would  continue  its effort to further  enhance its
financial resources in order to continue to attract large name customers and big
value contracts.

Management  expects to continue to improve its cash  position in the current and
future  quarters  due to the new  business  signed  up in the last  quarter.  In
addition,  the Company anticipates additional exercises of investor warrants and
employee stock options in the current and subsequent  quarters.  The Company has
consistently improved its cash position in last four quarters through investors'
exercise of warrants,  employee options  exercised,  private  placements and the
signing of new business. We anticipate this trend to continue in the current and
future quarters,  further  improving the cash resources and liquidity  position.
Management is committed to implementing  the growth  business  strategy that was
ratified by the board of directors in July 2005.  The company would  continue to
inject new  capital  towards  expansion,  grow sales and  marketing  and further
enhancement of delivery capabilities.

NetSol's Technology Campus in Lahore was completed in May 2004 and the staff was
relocated  into this new  building.  The Phase  One will  easily  hold up to 500
programmers, engineers and other related staff. NetSol has already experienced a
very positive  response to this move from the business  community,  our existing
customers and prospective new customers worldwide.  The completion of technology
campus  is  a  major  milestone  for  NetSol,   employees,   customers  and  the
shareholders.  Due to its recent  growth,  management  has  already  started the
planning of constructing a new phase by erecting  another  structure  behind the
current building.

Dividends and Redemption

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

ITEM 7. FINANCIAL STATEMENTS

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

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

Kabani & Company's report on NetSol's financial  statements for the fiscal years
ended June 30, 2004 and June 30,  2005,  did not  contain an adverse  opinion or
disclaimer  of opinion,  and was not  qualified  or modified as to  uncertainty,
audit scope, or accounting  principles,  except for a going concern  uncertainty
for June 30, 2004.

In connection  with the audit of NetSol's  financial  statements  for the fiscal
years  ended  June  30,  2004 and June 30,  2005  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.



                                       25


Saeed Kamran Patel & Co.'s report on NetSol's  Pakistan  subsidiaries  financial
statements  for the fiscal years ended June 30, 2004 and June 30, 2005,  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  Pakistan  subsidiaries  financial
statements for the fiscal years ended June 30, 2004 and June 30, 2005 there were
no disagreements,  disputes, or differences of opinion with Saeed Kamran Patel &
Co. on any matters of accounting  principles or practices,  financial  statement
disclosure,  or auditing  scope and  procedures,  which,  if not resolved to the
satisfaction  of Saeed Kamran Patel & Co. would have caused it to make reference
to the matter in its report.


ITEM 8A. CONTROLS AND PROCEDURES

Management,  under  the  supervision  and with the  participation  of the  chief
executive  officer and chief financial  officer,  conducted an evaluation of the
disclosure controls and procedures as defined in Rule 13a-15(e) as of the fiscal
quarter ended on June 30, 2005. Based upon that evaluation,  the Chairman, Chief
Financial  Officer and Chief  Executive  Officer  concluded  that our disclosure
controls and procedures are effective.

There has been no change that has materially  affected,  or is reasonably likely
to materially affect, these internal controls over financial reporting.

                                    PART III

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

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

Based  solely on copies of such forms  furnished as provided  above,  or written
representations that no Forms 5 were required,  the Company believes that during
the fiscal year ended June 30,  2005,  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,  except as  follows:  Eugen
Beckert who filed on  September  1, 2005;  and,  Shahid Javed Burki who filed on
August 19, 2005.



                                       26



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      Age    Position Held with the Registrant      Family Relationship
                          As an Officer
                          Or Director
----------------------------------------------------------------------------------------------------------------------------------
                                                                                       
Najeeb Ghauri             1997                    51     Director and  Chairman                 Brother to Naeem and Salim Ghauri
----------------------------------------------------------------------------------------------------------------------------------
Salim Ghauri              1999                    50     President and Director                 Brother to Naeem and Najeeb
                                                                                                Ghauri
----------------------------------------------------------------------------------------------------------------------------------
Naeem Ghauri              1999                    48     Chief Executive Officer, Director      Brother to Najeeb and Salim
                                                                                                Ghauri
----------------------------------------------------------------------------------------------------------------------------------
Tina Gilger               2005                    43     Chief Financial Officer                None
----------------------------------------------------------------------------------------------------------------------------------
Patti L. W. McGlasson     2004                    40     Secretary, Corporate Counsel           None
----------------------------------------------------------------------------------------------------------------------------------
Shahid Javed Burki        2000                    65     Director                               None
----------------------------------------------------------------------------------------------------------------------------------
Eugen Beckert             2001                    58     Director                               None
----------------------------------------------------------------------------------------------------------------------------------
Jim Moody                 2001                    68     Director                               None
----------------------------------------------------------------------------------------------------------------------------------
Derek Soper               2005                    67     Director                               None
----------------------------------------------------------------------------------------------------------------------------------


Business Experience of Officers and Directors:

NAJEEB U.  GHAURI has been a Director  of the Company  since  1997.  Mr.  Ghauri
served as the  Company's  Chief  Executive  Officer from 1999 to 2001 and as the
Chief Financial officer of the Company from 2001 to 2005.  Currently,  he is the
Chairman of the Company.  During his tenure as CEO, Mr.  Ghauri was  responsible
for managing the day-to-day  operations of the Company, as well as the Company's
overall growth and expansion plan. As the CFO of the Company,  Mr. Ghauri sought
financing for the Company as well as oversaw the day-to-day  financial  position
of the  Company.  Prior to  joining  the  Company,  Mr.  Ghauri  was part of the
marketing team of Atlantic  Richfield Company  ("ARCO"),  a Fortune 500 company,
from  1987-1997.   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 1983. Mr.
Ghauri  serves on the boards of the US Pakistan  Business  Council and  Pakistan
Human Development Fund, a non-profit organization.

SALIM GHAURI has been with the Company  since 1999 as the President and Director
of the Company.  Mr. Ghauri is also the CEO of NetSol  Technologies (Pvt.) Ltd.,
(F/K/A Network  Solutions  (Pvt.) Ltd.), a subsidiary of the Company  located in
Lahore, Pakistan. Mr. Ghauri received his Bachelor of Science degree in Computer
Science  from   University  of  Punjab  in  Lahore,   Pakistan.   Before  NetSol
Technologies (Pvt.) Ltd., Mr. Ghauri was employed with BHP in Sydney,  Australia
from  1987-1995,  where he commenced his employment as a consultant.  Mr. Ghauri
was the original founder of Network  Solutions,  Pvt. Ltd in Pakistan founded in
1996. Built under Mr. Ghauri's leadership Network Solutions (Pvt) Ltd. gradually
built a strong team of I/T  professionals  and  infrastructure  in Pakistan  and
became the first software house in Pakistan  certified as ISO 9001 and CMM Level
4 assessed.

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

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



                                       27


PATTI L. W. MCGLASSON joined NetSol as corporate 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.  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.

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

EUGEN  BECKERT was  appointed to the Board of Directors in August 2001 to fill a
vacancy and continues to serve on the Board.  A native of Germany,  Mr.  Beckert
has been with Mercedes-Benz AG/Daimler Benz AG since 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.  From 2001 to 2004, he served
as Vice  President  in the Japanese  company of DCS. Mr.  Beckert is currently a
Director for DaimlerChrysler and his office is now based in Stuttgart,  Germany.
Mr. Beckert is chairman of the Nominating and Corporate Governance Committee and
a member of the Audit and Compensation Committee.

JIM MOODY was  appointed to the Board of Directors in 2001.  Mr. Moody served in
the United States  Congress from  1983-1993  where he was a member of the Ways &
Means, Transportation and Public Woks committees.  Former Congressman Moody also
served on the subcommittees of Health, Social Security, Infrastructure and Water
Resources.  After his  tenure  with the U.S.  Congress,  he was  appointed  Vice
President and Chief  Financial  Officer of  International  Fund for  Agriculture
Development  in  Rome,  Italy  from  1995-1998  where  he  was  responsible  for
formulating and  administering  $50 million  operating budget in support of $500
million loan program as well as managing a $2.2 billion  reserve fund investment
portfolio. From 1998-2000,  former Congressman Moody served as the President and
CEO of InterAction,  a coalition of 165 U.S. based  non-profit  organizations in
disaster  relief,   refugee  assistance  and  economic  development  located  in
Washington,  D.C. From April 2000 to present, Former Congressman Moody serves as
a Financial Advisor to Morgan Stanley in Washington D.C. where he is responsible
for bringing  institutional,  business and high  net-worth  individual's  assets
under management.  Mr. Moody also represents Morgan Stanley on the ATC Executive
Board.  Mr. Moody  received his B.A. from  Haverford  College;  his M.P.A.  from
Harvard University and his Ph.D. in Economics from U.C.  Berkeley.  Mr. Moody is
the Chairman of the Audit Committee and a member of the Nominating and Corporate
Governance committee.

DEREK  SOPER was  appointed  to the Board of  Directors  in April 2005 to fill a
vacancy  left by the  departure  of Mr.  Shabir  Randeree.  Mr.  Soper  has both
established  and managed  many  finance and leasing  companies  around the world
including  Barclays Export and Finance  Company in 1971 followed,  over the next
ten years,  by the  acquisition  and  management of various  entities as part of
Barclays'  establishment of subsidiaries through Europe, North America and South
Africa.  From 1981 to 1991,  he was the director  responsible  for leasing,  tax
based products and structured finance with Kleinwort Benson. In 1991, he founded
AT&T  Capital's  Europe,  acting as its Chairman  until 1995.  During that time,
thirteen  subsidiary  companies were  established  across Europe.  Following the
establishment of the European  business of AT&T Capital,  he moved to Hong Kong,
as Chairman of the Asia Pacific  Region,  to establish  the company  presence in
that region of the world.  Following  retirement  from AT&T Capital in 1998, and
after  returning to the UK, he joined the Alta Group to establish their presence
in Europe.  Mr.  Soper sits on the  Business  Code of Conduct  Committee  of the
Finance and Leasing Association and is a past chairman of the association. He is
a fellow of the  Institute  of  Directors  and member of the  Equipment  Leasing
Association  of the USA and  Leaseurope  in  Brussels.  He is the  author of the
leasing  textbook  "The Leasing  Handbook"  published by McGraw Hill.  Mr. Soper
attended  Scarborough  College in  England.  He is a member of the  Compensation
Committee.




                                       28


ITEM 10-EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE AND OPTIONS

The  Summary  Compensation  Table shows  certain  compensation  information  for
services  rendered in all capacities  during each of the last three fiscal years
by the  executive  officers of the Company who  received  compensation  of or in
excess of $100,000  during the fiscal year ended June 30,  2005.  The  following
information for the officers  includes the dollar value of base salaries,  bonus
awards, the number of stock options granted and certain other  compensation,  if
any, whether paid or deferred.

                                                      SUMMARY COMPENSATION TABLE



----------------------------------------------------------------------------------------------------------------------------

                                                          Annual Compensation(1)         Long Term Compensation

----------------------------------------------------------------------------------------------------------------------------
                                                                                      Long Term            Securities
       Name and Principal Position         Fiscal Year    Salary          Bonus     Compensation      Underlying Options/
                                             Ended                                    Awards (2)            SARs (4)
                                                                                     Restricted
                                                                                     Stock Awards(3)
----------------------------------------------------------------------------------------------------------------------------
                                                                                          
Najeeb U. Ghauri, Chairman,,CFO (16),          2005        $250,000        -0-         -0-               500,000(10)
Director                                                                                                 500,000(11)

                                               2004        $200,000        -0-         -0-               50,000(5)
                                                                                                         50,000(6)
                                                                                                         25,000(7)
                                                                                                         20,000(8)
                                                                                                         30,000(9)

                                               2003        $120,000        -0-         -0-               -0-
----------------------------------------------------------------------------------------------------------------------------
Naeem Ghauri, CEO, Director                    2005        $280,000(12)    -0-         -0-               500,000(10)
                                                                                                         500,000(11)

                                               2004        $207,900        -0-         -0-               50,000(5)
                                                                                                         50,000(6)
                                                                                                         25,000(7)
                                                                                                         20,000(8)
                                                                                                         30,000(9)

                                               2003        $125,000        -0-         -0-               -0-
----------------------------------------------------------------------------------------------------------------------------
Salim Ghauri, President, Director              2005        $150,000        -0-         -0-               500,000(10)
                                                                                                         500,000(11)

                                               2004        $110,000        -0-         -0-               50,000(5)
                                                                                                         50,000(6)
                                                                                                         25,000(7)-
                                                                                                         20,000(8)
                                                                                                         30,000(9)

                                               2003        $100,000        -0-         -0-               -0-
----------------------------------------------------------------------------------------------------------------------------
Patti  L.  W.  McGlasson, Secretary,           2005        $100,000        $10,000
Corporate Counsel                              2004        $ 82,000                    5,000(13)         5,000(14)
                                                                                                         5,000(15)
                                                                                                         20,000(8)
                                                                                                         30,000(9)
----------------------------------------------------------------------------------------------------------------------------


                                       29


      (1)   Other than as stated, no officers received any bonus or other annual
            compensation  other than salaries during fiscal 2005 or any benefits
            other than those  available to all other employees that are required
            to be  disclosed.  These  amounts are not  inclusive  of  automobile
            allowances, where applicable.
      (2)   No officers received any long-term  incentive plan (LTIP) payouts or
            other payouts during fiscal years 2004, 2003 or 2002.
      (3)   All stock awards are shares of our Common Stock.
      (4)   All securities underlying options are shares of our Common Stock. We
            have not  granted any stock  appreciation  rights.  No options  were
            granted to the named executive officers in fiscal year 2003. Options
            are  reflected  in  post-reverse  split  numbers.  All  options  are
            currently  exercisable or may be exercised within sixty (60) days of
            the date of this prospectus and are fully vested.
      (5)   Includes  options to  purchase  50,000  shares of our  common  stock
            granted on January 1, 2004 at the exercise price of $2.21 per share.
            These  options must be  exercised  within five years after the grant
            date.
      (6)   Includes  options to  purchase  50,000  shares of our  common  stock
            granted on January 1, 2004 at the exercise price of $3.75 per share.
            These  options must be  exercised  within five years after the grant
            date.
      (7)   Includes  options to purchase  12,500  shares of our common stock at
            $5.00 per share.  These options must be exercised  within five years
            after the grant date.
      (8)   Includes  options to purchase  20,000  shares of our common stock at
            $2.65 per share.  These options must be exercised  within five years
            after the grant date.
      (9)   Includes  options to purchase  30,000  shares of our common stock at
            $5.00 per share.  These options must be exercised  within five years
            after the grant date.
      (10)  Includes  options to  purchase  500,000  shares of our common  stock
            granted on April 1, 2005 at the  exercise  price of $1.94 per share.
            25% of these  options  vest each  quarter  beginning  on the quarter
            ended June 30, 2005.  Options  must be  exercised  within five years
            after the grant date.
      (11)  Includes  options to  purchase  500,000  shares of our common  stock
            granted on April 1, 2005 at the  exercise  price of $2.91 per share.
            25% of these  options  vest each  quarter  beginning  on the quarter
            ended June 30, 2005.
      (12)  Mr. Ghauri salary is 160,000 British Pounds  Sterling.  The total in
            this table reflects a conversion rate of $1.75 per pound sterling.
      (13)  In May 2004, Ms. McGlasson  received 5,000 shares of common stock as
            a  performance  bonus arising out of her services as counsel for the
            Company.
      (14)  Includes  options to purchase  5,000  shares of common  stock at the
            exercise price of the lesser of the $2.30 or the market price of the
            shares on the date of exercise less $2.00.
      (15)  Includes  options to purchase  5,000  shares of common  stock at the
            exercise price of $3.00 per share.
      (16)  Mr. Ghauri served the Company as Chief Financial  Officer until July
            2005 whereby Ms. Tina Gilger was then appointed to the position.


                      OPTIONS GRANTS IN LAST FISCAL YEAR(1)

                                INDIVIDUAL GRANTS



-----------------------------------------------------------------------------------------------------------------------------
Name                      Number of Securities      Percentage of Total     Exercise or Base Price      Expiration Date
                           Underlying Options        Options Granted to             ($/Sh)
                                                  Employees in Fiscal Year
-----------------------------------------------------------------------------------------------------------------------------
                                                                                             
Naeem Ghauri                 (i) 500,000(2)                 25%                      $1.94              March 31, 2010
-----------------------------------------------------------------------------------------------------------------------------
                             (ii) 500,000(2)                                         $2.91              March 31, 2010
-----------------------------------------------------------------------------------------------------------------------------
Najeeb Ghauri                (i) 500,000(2)                 25%                      $1.94              March 31, 2010
-----------------------------------------------------------------------------------------------------------------------------
                             (ii) 500,000(2)                                         $2.91              March 31, 2010
-----------------------------------------------------------------------------------------------------------------------------
Salim Ghauri                 (i) 500,000(2)                 25%                      $1.94              March 31, 2010
-----------------------------------------------------------------------------------------------------------------------------
                             (ii) 500,000(2)                                         $2.91              March 31, 2010
-----------------------------------------------------------------------------------------------------------------------------

      (1)   There were no SAR grants in the last fiscal year.
      (2)   These options vest 25% per each quarter of service  commencing  June
            30, 2005 and are fully vested on March 31, 2006.



                                       30


         AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END
                               OPTION/SAR VALUES



----------------------------------------------------------------------------------------------------------------------------------
           Name                 Shares Acquired On      Value Realized (1) ($)    Number of Unexercised    Value of Unexercised
                                   Exercise (#)                                   Options/SARs at FY-end   In-The-Money atFY-end
                                                                                  (###) Exercisable(2)/    ($) Exercisable/(2)
                                                                                      Unexercisable         Unexercisable
----------------------------------------------------------------------------------------------------------------------------------
                                                                                               
Najeeb Ghauri, Chairman,     20,000                    $0.00                     650,000/750,000           $0.00/$0.00
CFO (3), Director
----------------------------------------------------------------------------------------------------------------------------------
Salim Ghauri, President      7,500                     $0.00                     650,000/750,000           $0.00/$0.00
Director
----------------------------------------------------------------------------------------------------------------------------------
Naeem Ghauri, CEO, Director  2,770                     $0.00                     610,000/750,000           $0.00/$0.00
----------------------------------------------------------------------------------------------------------------------------------
Patti L. W. McGlasson        10,000                    $0.00                     60,000/0.00               $0.00/$0.00
----------------------------------------------------------------------------------------------------------------------------------

      (1)   The closing price of the stock at the June 30, 2005, Fiscal Year End
            was $1.879.
      (2)   All options are  currently  exercisable.
      (3)   Mr. Ghauri served the Company as Chief Financial  Officer until July
            2005 whereby Ms. Tina Gilger was then appointed to the position.

EMPLOYMENT AGREEMENTS

Effective  January 1, 2004, we entered into an employment  agreement  with Naeem
Ghauri as our Chief Executive Officer. The agreement is for a base term of three
years,  and continues  thereafter on an at will basis until terminated by either
NetSol or Mr.  Ghauri.  The  agreement  provides for a yearly  salary of 110,000
pounds sterling. The agreement also provides for such additional compensation as
the Board of  Directors  determines  is proper in  recognition  of Mr.  Ghauri's
contributions and services to us. In addition, the agreement provides Mr. Ghauri
with  options to  purchase up to 100,000  shares of common  stock at an exercise
price of $2.21,  100,000  shares at an exercise price of $3.75 and 50,000 shares
at an exercise price of $5.00. These options vest at the rate of 25% per quarter
and are fully vested on December 31, 2004.  These options expire on December 31,
2008.  Mr. Ghauri also  received  options to purchase up to 20,000 shares at the
exercise  price of $2.65 per share and options to purchase  30,000 shares at the
exercise  price of $5.00 per  share.  These  options  vest  immediately  and are
exercisable  until  March  25,  2009.  Effective  April 1,  2005,  Mr.  Ghauri's
employment  agreement was amended to increase his salary to  (pound)160,000  per
annum (approximately  $280,000 per annum based on an exchange rate of 1.75) and,
to grant him options to purchase up to 500,000  shares at the exercise  price of
$1.94 per share and  options to purchase  up to 500,000  shares at the  exercise
price of $2.91 per share. These options vest 25% per quarter commencing with the
quarter ending June 30, 2005.

Effective  January 1, 2004, we entered into an employment  agreement with Najeeb
Ghauri as Chief  Financial  Officer.  The  agreement is for a base term of three
years,  and continues  thereafter on an at will basis until terminated by either
NetSol or Mr.  Ghauri.  The agreement  provides for a yearly salary of $200,000.
The agreement  also provides for such  additional  compensation  as the Board of
Directors determines is proper in recognition of Mr. Ghauri's  contributions and
services to us. In addition,  the agreement  provides Mr. Ghauri with options to
purchase up to 100,000  shares of common  stock at an  exercise  price of $2.21,
100,000  shares at an exercise  price of $3.75 and 50,000  shares at an exercise
price of $5.00.  These options vest at the rate of 25% per quarter and are fully
vested on December  31, 2004.  These  options  expire on December 31, 2008.  Mr.
Ghauri also  received  options to purchase up to 20,000  shares at the  exercise
price of $2.65 per share and options to purchase  30,000  shares at the exercise
price of $5.00 per share.  These options vest  immediately  and are  exercisable
until March 25, 2009. Effective April 1, 2005, Mr. Ghauri's employment agreement
was  amended to  increase  his salary to  $250,000  per annum and,  to grant him
options to  purchase  up to 500,000  shares at the  exercise  price of $1.94 per
share and optins to purchase up to 500,000 shares at the exercise price of $2.91
per share. These options vest 25% per quarter commencing with the quarter ending
June 30, 2005.

Effective  January 1, 2004, we entered into an employment  agreement  with Salim
Ghauri as the  President of NetSol and Chief  Executive  Officer of our Pakistan
subsidiary.  The  agreement  is for a base term of three  years,  and  continues
thereafter on an at will basis until terminated by either us or Mr. Ghauri.  The
agreement provides for a yearly salary of $110,000.  The agreement also provides
for such additional  compensation as the Board of Directors determines is proper
in recognition of Mr.  Ghauri's  contributions  and services to us. In addition,
the agreement  provides Mr. Ghauri with options to purchase up to 100,000 shares
of common  stock at an exercise  price of $2.21,  100,000  shares at an exercise
price of $3.75 and 50,000  shares at an exercise  price of $5.00.  These options
vest at the rate of 25% per quarter and are fully  vested on December  31, 2004.


                                       31


These options expire on December 31, 2008.  Mr. Ghauri also received  options to
purchase  up to  20,000  shares  at the  exercise  price of $2.65  per share and
options to  purchase  30,000  shares at the  exercise  price of $5.00 per share.
These  options  vest  immediately  and are  exercisable  until  March 25,  2009.
Effective  April 1, 2005,  Mr.  Ghauri's  employment  agreement  was  amended to
increase  his salary to $150,000 per annum and, to grant him options to purchase
up to 500,000  shares at the  exercise  price of $1.94 per share and  options to
purchase up to 500,000  shares at the exercise  price of $2.91 per share.  These
options vest 25% per quarter commencing with the quarter ending June 30, 2005.

Effective January 1, 2004, we entered into an employment agreement with Patti L.
W. McGlasson as legal counsel.  The agreement was amended  effective May 1, 2005
to provide for a yearly salary of $100,000.  As part of Ms. McGlasson's  initial
employment agreement,  she also received options to purchase up to 10,000 shares
of common stock at an exercise  price equal to the lesser of $2.30 or the market
price of the shares on the date of exercise  less $2.00.  These  options vest at
the  rate of 25% per  quarter  and are  exercisable  until  December  31,  2008.
Effective  March  26,  2004,  Ms.  McGlasson  was  elected  to the  position  of
Secretary.  In connection  with her role as Secretary,  Ms.  McGlasson  received
options  to  purchase  up to 10,000  shares of common  stock at $3.00 per share.
These  options  vest at the rate of 25% per  quarter and are  exercisable  until
December 31, 2008. Ms.  McGlasson also received options to purchase up to 20,000
shares at the exercise  price of $2.65 per share and options to purchase  30,000
shares at the exercise price of $5.00 per share.  These options vest immediately
and are exercisable until March 25, 2009.

All of the above  agreements  provide for certain paid benefits such as employee
benefit  plans and medical  care plans at such times as we may adopt  them.  The
agreements  also  provide  for  reimbursement  of  reasonable   business-related
expenses and for two weeks of paid  vacation.  The  agreements  also provide for
certain  covenants  concerning  non-competition,  non-disclosure,  indemnity and
assignment of intellectual  property rights. NetSol currently has four incentive
and nonstatutory  stock option plans in force for 2001, 2002, 2003 and 2004. All
options  under the 1997 and 1999 plans have either been  exercised or expired as
of June 30, 2004.

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  876,500
have been granted. The grant prices range between $1.00 and $5.00.

In March 2005, our  shareholders  approved the 2004 stock option plan. This plan
authorizes up to 5,000,000  options to purchase  common stock of which 3,109,833
have been granted. The grant prices range between $1.50 and $2.91.

COMPENSATION OF DIRECTORS

For the 2004  term,  Non-Management  members  of the Board of  Directors  of the
Company  receive cash  compensation  of $2,000 for each face to face meeting and
$1,000 for each board  teleconference  meeting  with a minimum  duration  of two
hours.  Each board member is to receive 2,000 shares of restricted  common stock
upon  completion of the 2004 term and options to purchase up to 20,000 shares at
the  exercise  price of $2.64 and options to acquire up to 30,000  shares at the
exercise  price  of $5.00  per  share.  The  options  vest  and are  exercisable
immediately.

For the 2004 term,  Management  members of the Board of Directors of the Company
receive no cash compensation for meeting attendance but are granted options to a
purchase  up to 20,000  shares at the  exercise  price of $2.64 and  options  to
acquire  up to 30,000  shares at the  exercise  price of $5.00  per  share.  The
options vest and are exercisable immediately.

For the 2005 term,  Management members of the Board of Directors of the Company,
which  includes  Mr.  Najeeb  Ghauri,   receive  no  compensation   for  meeting
attendance.   However,   non-management   members  of  the  Board  receive  cash
compensation  of $5,000 and options to purchase 25,000 shares of common stock at
the  exercise  price of $1.93 and options to acquire up to 25,000  shares at the
exercise price of $2.89. The options vest and are exercisable immediately.

All directors are entitled to reimbursement of approved business expenses.



                                       32


The Audit Committee  Chairman  receives $5,000 per quarter as earned,  and 5,000
shares of restricted common stock issuable upon completion of the 2005 term. The
Compensation Committee Chairman receives $4,000 per quarter as earned, and 5,000
shares of restricted common stock issuable upon completion of the 2005 term. The
Nominating  and Corporate  Governance  Chairman  receives  $3,000 per quarter as
earned,  and 5,000 shares of restricted common stock issuable upon completion of
the 2005 term. Each member of the Audit, Nominating and Corporate Governance and
Compensation Committee shall also receive $1,250 per meeting.

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  9,  2005,  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:

                                                                 Percentage
Name and                                 Number of              Beneficially
Address                                 Shares(1)(2)             owned(3)
                                        -----------             ------------

Najeeb Ghauri(4)                           1,162,650                8.21%
Naeem Ghauri(4)                            1,011,367                7.14%
Salim Ghauri(4)                            1,127,416                7.96%
Jim Moody(4)                                  98,000                    *
Eugen Beckert(4)                              89,000                    *
Shahid Javed Burki(4)                        100,000                    *
Derek Soper                                  100,000                    *
Tina Gilger                                   11,731                    *
Patti L. W. McGlasson(4)                      77,500                    *
Aqeel Karim Dhedhi(4)                      1,000,000                7.06%
All officers and directors                 3,777,664               26.67%
as a group (nine persons)

*   Less than one percent

      (1)   Except  as  otherwise  indicated,  the  Company  believes  that  the
            beneficial owners of 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  9,  2005  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.
      (3)   Percentage  ownership  is  based on  14,162,373  shares  issued  and
            outstanding  as  of  September  9,  2005.

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


ITEM 12-CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

In January 2004, we entered into employment agreements with Najeeb Ghauri, Naeem
Ghauri and Salim Ghauri.  These agreements are discussed in the section entitled
"Executive Compensation" beginning on page 31.

In March 2004, the board of directors  approved  compensation for service on the
board.  This  compensation  is  discussed in the  sections  entitled  "Executive
Compensation"  and  "Compensation  of  Directors"  beginning  on pages 31 and 32
respectively.

In July  2005,  the  board  approved  compensation  for  service  on the  Audit,
Compensation   and  Nominating  and  Corporate   Governance   Committees.   This
compensation is discussed in the sections  entitled  "Compensation of Directors"
beginning on page 32.



                                       33



                                     PART IV

ITEM 13 - EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits

     3.1    Articles  of  Incorporation  of  Mirage  Holdings,  Inc.,  a  Nevada
            corporation,  dated March 18,  1997,  incorporated  by  reference as
            Exhibit 3.1 to NetSol's  Registration  Statement No. 333-28861 filed
            on Form 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    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.*

     3.7    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.*

     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   Employment  Agreement,  dated January 1, 2004, by and between NetSol
            Technologies,  Inc.  and Naeem Ghauri  incorporated  by reference as
            Exhibit  10.1 to NetSol's  Quarterly  Report for the  Quarter  ended
            March 31, 2004 on Form 10Q-SB filed on May 12, 2004. *

     10.6   Employment  Agreement,  dated January 1, 2004, by and between NetSol
            Technologies,  Inc. and Najeeb Ghauri  incorporated  by reference as
            Exhibit  10.2 to NetSol's  Quarterly  Report for the  Quarter  ended
            March 31, 2004 on Form 10Q-SB filed on May 12, 2004.*

     10.7   Employment  Agreement,  dated January 1, 2004, by and between NetSol
            Technologies,  Inc.  and Salim Ghauri  incorporated  by reference as
            Exhibit  10.3 to NetSol's  Quarterly  Report for the  Quarter  ended
            March 31, 2004 on Form 10Q-SB filed on May 12, 2004.*

     10.8   Amendment  to  Employment  Agreement,  dated  April 1 ,2005,  by and
            between NetSol Technologies, Inc. and Naeem Ghauri.(1)

     10.9   Amendment  to  Employment  Agreement,  dated  April 1, 2005,  by and
            between NetSol Technologies, Inc. and Najeeb Ghauri.(1)

     10.10  Amendment  to  Employment  Agreement,  dated  April 1, 2005,  by and
            between NetSol Technologies, Inc. and Salim Ghauri.(1)

     10.11  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.*

     10.12  Lease  Agreement  between  Century  National  Insurance  Company and
            NetSol  Technologies,  Inc. dated December 15, 2003  incorporated by
            reference as Exhibit 99.1 to Form 8-K filed on December 24, 2003.*

     10.13  Frame  Agreement  by and  between  DaimlerChrysler  Services  AG and
            NetSol Technologies dated June 4, 2004*

     10.14  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.*

     10.18  Lease Agreement with Regus Business Services (Shanghai) Ltd.(1)

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



                                       34


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

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

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

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

*   Previously Filed

(1) Filed Herewith

(b) Reports on Form 8-K

      1)    On April 1,  2005,  the  Company  filed an  amended  current  report
            amending  its  previous  filing  regarding  the  aqcquisition  of CQ
            Systems,  Ltd. This amendment was made to attach  required pro forma
            and audited financial statements.

      2)    On April 21, 2005, the company filed a current report  including its
            press release  issued April 26, 2005 which  announced the results of
            the quarter ended March 31, 2005.


      3)    On April 27, 2005, the Company filed a current report  reporting the
            appointment  of  Derek  Soper  to the  board  of  directors  and the
            departure of Mr. Irfan Mustafa from the board.

      4)    On May 2, 2005, the Company filed an amendment to the current report
            filed April 21, 2005  indicating  that Mr. Soper was  replacing  Mr.
            Randeree  on  the  board  of  directors  and  not  Mr.  Mustafa  and
            indicating  that Mr.  Mustafa's  resignation  would be effective the
            earlier of his replacement or June 30, 2005.


      5)    On May 6, 2005,  the Company  filed a current  report  including its
            press  release  issued May 6, 2005 which  announced  the  results of
            March 31,  2005 and  revised  guidance  for the year  ended June 30,
            2005.


Item 14 Principal Accountant Fees and Services

Audit Fees


Kabani & Co.  audited the Company's  financial  statements  for the fiscal years
ended June 30, 2005 and June 30, 2004. The aggregate fees billed by Kabani & Co.
for the  annual  audit  and  review  of  financial  statements  included  in the
Company's Form 10-KSB or services that are normally provided by Kabani & Company
that are normally  provided by the  accountant in connection  with statutory and
regulatory  filings or engagements for the year ended June 30, 2004 was $40,000,
and for the year ended June 30, 2005 was $41,500.


Audit Related Fees


The aggregate fees billed by Kabani & Co. during fiscal 2005 including assurance
and related audit  services not covered in the preceding  paragraph was $46,500.
These "Audit  Related Fees" were  primarily for services in connection  with the
review  of  quarterly  financial  statements  and  the  Company's  filing  of  a
Registration  Statement and amendments  thereto on Form SB-2. The aggregate fees
billed by Kabani & Company  during fiscal 2004  including  assurance and related
audit services not covered in the preceding paragraph was $37,750.  These "Audit
Related  Fees" were  primarily  for services in  connection  with the  Company's
filing of a Registration Statement on Form SB-2.


Tax Fees


Tax fees for fiscal year 2004 were $22,000 and consisted of the  preparation  of
the Company's federal and state tax returns for the fiscal years 2001, 2002, and
2003. Tax fees for fiscal year 2005 were $14,000 and consisted of preparation of
the Company's federal and state tax returns for the fiscal years 2004.


All Other Fees


There were no other fees billed by Kabani & Co. or  services  rendered to NetSol
during the fiscal  years ended June 30, 2005 and 2004,  other than as  described
above.




                                       35


Pre-Approval Procedures


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


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

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

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

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

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

                                   SIGNATURES

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

                                            NetSol Technologies, Inc.

Date: September 14, 2005                    BY: /S/ NAEEM GHAURI
                                               ---------------------------------

                                               Naeem Ghauri
                                               CEO

Date: September 14, 2005                    BY:/S/ Tina Gilger
                                               ---------------------------------

                                               Tina Gilger
                                               Chief Financial Officer


                                       36


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

Date:  September 14, 2005                      BY: /S/ NAJEEB U. GHAURI
                                               ---------------------------------
                                                   Najeeb U. Ghauri
                                                   Director, Chairman

Date:  September 14, 2005                      BY: /S/ SALIM GHAURI
                                               ---------------------------------
                                                   Salim Ghauri
                                                   President,
                                                   Director

Date:  September 14, 2005                      BY: /S/ NAEEM GHAURI
                                               ---------------------------------
                                                   Naeem Ghauri
                                                   Director
                                                   Chief Executive Officer

Date:  September 14, 2005                      BY: /S/ JIM MOODY
                                               ---------------------------------
                                                   Jim Moody
                                                   Director

Date:  September 14, 2005                      BY: /S/ EUGEN BECKERT
                                               ---------------------------------
                                                   Eugen Beckert
                                                   Director

Date:  September 14, 2005                      BY: /S/ SHAHID JAVED BURKI
                                               ---------------------------------
                                                   Shahid Javed Burki
                                                   Director

Date:  September 14, 2005                      BY:/S/ DEREK SOPER
                                               ---------------------------------
                                                   Derek Soper
                                                   Director


                                       37



                   NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


Description                                                                 Page
-----------                                                                 ----

Report of Independent Registered Public Accounting Firm......................F-2

Auditor's Report to the Members..............................................F-3

Consolidated Balance Sheet as of June 30, 2005...............................F-6

Consolidated Statements of Operations for the Years
Ended June 30, 2005 and 2004.................................................F-4

Consolidated Statements of Stockholders' Equity for the Years
Ended June 30, 2005 and 2004.................................................F-5

Consolidated Statements of Cash Flows for the Years Ended
June 30, 2005 and 2004.......................................................F-7

Notes to Consolidated Financial Statements...................................F-9


                                      F-1


             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors
NetSol Technologies, Inc. and subsidiaries
Calabasas, California


We have audited the accompanying consolidated balance sheet of NetSol
Technologies, Inc. and subsidiaries as of June 30, 2005, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years ended June 30, 2005 and 2004. 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 did
not audit the financial statements of NetSol Technologies (PVT) Limited, NetSol
(PVT) Limited and NetSol Connect (PVT) Limited, whose statements reflect
combined total assets of approximately $10,904,416as of June 30, 2005 and
combined total net revenues of $8,477,219 and $4,452,435 for the years ended
June 30, 2005 and 2004, respectively. Those statements were audited by other
auditors whose reports have been furnished to us, and in our opinion, insofar as
it relates to the amounts included for NetSol Technologies (PVT) Limited, NetSol
(PVT) Limited and NetSol Connect (PVT) Limited, for the years ended June 30,
2005 and 2004, is based solely on the report of the other auditors.

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

In our opinion, based on our audits and the reports of other auditors, 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, 2005 and the results of its consolidated
operations and its cash flows for the years ended June 30, 2005 and 2004 in
conformity with accounting principles generally accepted in the United States of
America.



/s/ Kabani & Company, Inc.
CERTIFIED PUBLIC ACCOUNTANTS

Los Angeles, California
August 18, 2005


                                      F-2


                          INDEPENDENT AUDITOR'S REPORT

Board of Directors
NetSol Technologies, Inc. and subsidiaries
Calabasas, California

We have audited the balance sheet of TIG-NetSol (Private) Limited, a Pakistan
subsidiary of NetSol Technologies, Inc., as of June 30, 2005, and the related
statements of operations, and cash flows for the years ended June 30, 2005 and
2004. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, based on our audits, the financial statements referred to above
present fairly, in all material respects, the financial position of TIG-NetSol
(Private) Limited, a Pakistan subsidiaries of NetSol Technologies, Inc. as of
June 30, 2005 and the results of its consolidated operations and its cash flows
for the years ended June 30, 2005 and 2004 in conformity with accounting
principles generally accepted in the United States of America.


/s/ Saeed Kamran Patel & Co.
CHARTERED ACCOUNTANTS

Lahore, Pakistan
August 15, 2005



                          INDEPENDENT AUDITOR'S REPORT

Board of Directors
NetSol Technologies, Inc. and subsidiaries
Calabasas, California

We have audited the balance sheet of NetSol Connect (PVT) Limited, a Pakistan
subsidiary of NetSol Technologies, Inc., as of June 30, 2005, and the related
statements of operations, and cash flows for the years ended June 30, 2005 and
2004. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, based on our audits, the financial statements referred to above
present fairly, in all material respects, the financial position of the NetSol
Connect (PVT) Limited, a Pakistan subsidiaries of NetSol Technologies, Inc. as
of June 30, 2005 and the results of its operations and its cash flows for the
years ended June 30, 2005 and 2004 in conformity with accounting principles
generally accepted in the United States of America.


/s/ Saeed Kamran Patel & Co.
CHARTERED ACCOUNTANTS

Lahore, Pakistan
August 15, 2005



                          INDEPENDENT AUDITOR'S REPORT

Board of Directors
NetSol Technologies, Inc. and subsidiaries
Calabasas, California

We have audited the balance sheet of NetSol (PVT) Limited, a Pakistan subsidiary
of NetSol Technologies, Inc., as of June 30, 2005, and the related statements of
operations, and cash flows for the years ended June 30, 2005 and 2004. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, based on our audits, the financial statements referred to above
present fairly, in all material respects, the financial position of NetSol (PVT)
Limited, a Pakistan subsidiaries of NetSol Technologies, Inc. as of June 30,
2005 and the results of its consolidated operations and its cash flows for the
years ended June 30, 2005 and 2004 in conformity with accounting principles
generally accepted in the United States of America.


/s/ Saeed Kamran Patel & Co.
CHARTERED ACCOUNTANTS

Lahore, Pakistan
August 15, 2005



                          INDEPENDENT AUDITOR'S REPORT

Board of Directors
NetSol Technologies, Inc. and subsidiaries
Calabasas, California

We have audited the balance sheet of NetSol Technologies (PVT) Limited, a
Pakistan subsidiary of NetSol Technologies, Inc., as of June 30, 2005, and the
related statements of operations, and cash flows for the years ended June 30,
2005 and 2004. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, based on our audits, the financial statements referred to above
present fairly, in all material respects, the financial position of NetSol
Technologies (PVT) Limited, a Pakistan subsidiaries of NetSol Technologies, Inc.
as of June 30, 2005 and the results of its operations and its cash flows for the
years ended June 30, 2005 and 2004 in conformity with accounting principles
generally accepted in the United States of America.


/s/ Saeed Kamran Patel & Co.
CHARTERED ACCOUNTANTS

Lahore, Pakistan
August 15, 2005



                    NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEET
                                  JUNE 30, 2005



                                     ASSETS
                                                                                              
Current assets:
     Cash and cash equivalents                                                    $  1,371,727
     Certificates of deposit                                                           205,480
     Accounts receivable, net of allowance for doubtful accounts of $80,000          3,906,360
     Revenues in excess of billings                                                  1,958,950
     Other current assets                                                              931,344
                                                                                  ------------
         Total current assets                                                                        8,373,861
Property and equipment, net of accumulated depreciation                                              5,114,776
Intangibles:
     Product licenses, renewals, enhancedments, copyrights,
         trademarks, and tradenames, net                                             4,915,794
     Customer lists, net                                                             1,554,992
     Goodwill                                                                        1,166,611
                                                                                  ------------
         Total intangibles                                                                           7,637,397
                                                                                                  ------------
         Total assets                                                                             $ 21,126,034
                                                                                                  ============

                      LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
     Accounts payable and accrued expenses                                        $  2,927,233
     Current portion of notes and obligations under capitalized leases               1,089,192
     Billings in excess of revenues                                                    149,014
     Due to officers                                                                    47,636
     Deferred liability                                                                313,397
     Loans payable, bank                                                               389,089
                                                                                  ------------
         Total current liabilities                                                                   4,915,561

Obligations under capitalized leases, less current maturities                                          122,426
Convertible debenture                                                                                  138,175
                                                                                                  ------------
         Total liabilities                                                                           5,176,162
Minority interest                                                                                     700,320
Commitments and contingencies                                                                              --

Stockholders' equity:
     Common stock, $.001 par value; 25,000,000 share authorized;
         13,830,884 issued and outstanding                                              13,831
     Additional paid-in-capital                                                     46,610,747
     Treasury stock                                                                    (27,197)
     Accumulated deficit                                                           (30,318,988)
     Stock subscription receivable                                                    (616,650)
     Common stock to be issued                                                         108,500
     Other comprehensive loss                                                         (520,691)
                                                                                  ------------
         Total stockholders' equity                                                                 15,249,552
                                                                                                  ------------
         Total liabilities and stockholders' equity                                               $ 21,126,034
                                                                                                  ============


       See accompanying notes to these consolidated financial statements.


                                      F-3


                    NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS



                                                                  For the Years
                                                                  Ended June 30,
                                                              2005            2004
                                                          ------------    ------------
                                                                    
Net revenues                                              $ 12,437,653    $  5,749,062
Cost of revenues                                             4,754,749       2,699,675
                                                          ------------    ------------
Gross profit                                                 7,682,904       3,049,387

Operating expenses:
       Selling and marketing                                   782,488         253,701
       Depreciation and amortization                         1,564,562       1,240,792
       Impairment of assets                                         --         203,312
       Settlement costs                                         43,200         122,500
       Bad debt expense                                         13,118         219,909
       Salaries and wages                                    2,022,183       1,493,252
       Professional services, including non-cash
           compensation                                        604,192         464,332
       General and adminstrative                             1,588,456       1,759,607
                                                          ------------    ------------
           Total operating expenses                          6,618,199       5,757,405
                                                          ------------    ------------
Income (loss) from operations                                1,064,705      (2,708,018)
Other income and (expenses)
       Loss on sale of assets                                   (2,082)        (35,173)
       Beneficial conversion feature                          (209,848)       (137,230)
       Fair market value of options and warrants              (255,130)             --
       Gain on forgiveness of debt                             404,136         320,318
       Interest expense                                       (215,861)       (229,877)
       Other income and (expenses)                              (1,106)         16,401
       Income taxes                                            (10,416)        (76,638)
                                                          ------------    ------------
Income (loss) before minority interest in subsidiary           774,398      (2,850,217)
Minority interest in subsidiary (income)/loss                 (111,073)        273,159
                                                          ------------    ------------
Net income (loss)                                              663,325      (2,577,058)
Other comprehensive loss:
       Translation adjustment                                 (282,129)       (387,859)
                                                          ------------    ------------
Comprehensive income (loss)                               $    381,196    $ (2,964,917)
                                                          ============    ============
Net income (loss) per share:
       Basic                                              $       0.06    $      (0.33)
                                                          ============    ============
       Diluted                                            $       0.04    $      (0.33)
                                                          ============    ============
Weighted average number of shares outstanding:
       Basic                                                11,597,625       7,881,554
                                                          ============    ============
       Diluted                                              14,776,323       7,881,554
                                                          ============    ============


       See accompanying notes to these consolidated financial statements.

                                      F-4


                    NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                   FOR THE YEARS ENDED JUNE 30, 2004 AND 2005





                                                     Common Stock             Additional
                                                    -------------               Paid-in        Treasury
                                              Shares           Amount           Capital         Shares
                                           -----------------------------     ------------    -------------
                                                                                 
Balance at June 30, 2003                      5,757,175     $      5,756     $ 33,409,954    $          --

Issuance of common stock for cash             1,413,187            1,414        1,616,923
Issuance of common stock for services             3,613                4            8,996
Excercise of common stock options             1,067,309            1,068        1,369,484
Excercise of common stock warrants              390,000              390          487,110
Issuance of common stock in
   exchange for notes payable & interest        601,343              601        1,070,028
Issuance of common stock in
   exchange for settlement                       45,195               45          135,088
Issuance of common stock in
   exchange for purchase of Altiva              100,000              100             (100)
Issuance of common stock in
   exchange for purchase of Pearl                60,000               60          166,800
Issuance of common stock to directors
   in exchange for services                      45,000               45           39,195
Purchase of treasury shares                                                                     (21,457)
Beneficial conversion feature                        --               --          351,987
Fair market value of warrants issued                 --               --          230,413
Foreign currency translation adjustments             --               --               --
Net loss for the year                                --               --               --

                                           ------------     ------------     ------------    -------------
Balance at June 30, 2004                      9,482,822     $      9,483     $ 38,885,878    $     (21,457)
                                           ============     ============     ============    =============


                                                               Other
                                                               Compre-
                                              Stock            hensive                            Total
                                           Subscriptions       Income/        Accumulated      Stockholders'
                                            Receivable         (Loss)           Deficit          Equity
                                           -------------    -------------    -------------    ------------
                                                                                  
Balance at June 30, 2003                   $     (84,900)   $     149,297    $ (28,405,255)   $  5,074,852

Issuance of common stock for cash                                                                1,618,337
Issuance of common stock for services                                                                9,000
Excercise of common stock options               (248,750)                                        1,121,802
Excercise of common stock warrants                                                                 487,500
Issuance of common stock in
   exchange for notes payable & interest                                                         1,070,629
Issuance of common stock in
   exchange for settlement                                                                         135,133
Issuance of common stock in
   exchange for purchase of Altiva                                                                      --
Issuance of common stock in
   exchange for purchase of Pearl                                                                  166,860
Issuance of common stock to directors
   in exchange for services                                                                         39,240
Purchase of treasury shares                                                                        (21,457)
Beneficial conversion feature                                                                      351,987
Fair market value of warrants issued                                                               230,413
Foreign currency translation adjustments                        (387,859)                         (387,859)
Net loss for the year                                                         (2,577,058)       (2,577,058)
                                           -------------    -------------    -------------    ------------
Balance at June 30, 2004                   $    (333,650)   $    (238,562)   $ (30,982,313)   $  7,319,379
                                           =============    =============    =============    ============


                                    Continued

       See accompanying notes to these consolidated financial statements.

                                      F-5


                    NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - Continued
                   FOR THE YEARS ENDED JUNE 30, 2004 AND 2005



                                                        Common Stock            Additional
                                              ----------------------------       Paid-in         Treasury
                                                 Shares          Amount          Capital          Shares
                                              ------------    ------------    ------------    -------------
                                                                                  
Balance at June 30, 2004                         9,482,822           9,483    $ 38,885,878    $     (21,457)

Issuance of common stock for cash                1,477,619           1,478       1,540,022
Issuance of common stock for services              188,972             189         246,461
Excercise of common stock options                1,210,110           1,210       1,806,523
Excercise of common stock warrants                 145,162             145         290,179
Issuance of common stock in
      exchange for notes payable & interest        247,684             248         413,540
Issuance of common stock for
      conversion of convertible debentures         564,519             564       1,049,436
Additional shares issued for the
      purchase of PTS acquisition                   40,000              40          91,560
Issuance of common stock in
      exchange for purchase of CQ Systems          759,468             760       1,815,541
Issuance of common stock in
      exchange for accrued expenses                 34,528              34          49,934
Purchase of treasury shares                                                                      (51,704)
Issuance of treasury shares for debt                                                              45,964
Capital contribution from issuance of
      subsidiary stock on foreign exchange                                         859,223
Fair market value of warrants issued                    --              --         249,638
Fair market value of options issued                                                5,492
Cancellation of shares                            (320,000)           (320)       (692,680)
Foreign currency translation adjustments                --              --              --
Net income for the year                                 --              --              --

                                              ------------    ------------    ------------    -------------
Balance at June 30, 2005                        13,830,884    $     13,831    $ 46,610,747    $     (27,197)
                                              ============    ============    ============    =============




                                                                                 Other
                                                                                 Compre-
                                                   Stock                         hensive                            Total
                                              Subscriptions       Shares to      Income/        Accumulated      Stockholders'
                                                Receivable        be Issued      (Loss)           Deficit           Equity
                                              -------------    -------------   -------------    -------------    ------------
                                                                                                  
Balance at June 30, 2004                      $    (333,650)   $          --   $    (238,562)   $ (30,982,313)   $  7,319,379

Issuance of common stock for cash                  (138,000)         108,500                                        1,512,000
Issuance of common stock for services                                                                                 246,650
Excercise of common stock options                  (838,000)                                                          969,733
Excercise of common stock warrants                                                                                    290,324
Issuance of common stock in
      exchange for notes payable & interest                                                                           413,788
Issuance of common stock for
      conversion of convertible debentures                                                                          1,050,000
Additional shares issued for the
      purchase of PTS acquisition                                                                                      91,600
Issuance of common stock in
      exchange for purchase of CQ Systems                                                                           1,816,301
Issuance of common stock in
      exchange for accrued expenses                                                                                    49,968
Purchase of treasury shares                                                                                           (51,704)
Issuance of treasury shares for debt                                                                                   45,964
Capital contribution from issuance of
      subsidiary stock on foreign exchange                                                                            859,223
Fair market value of warrants issued                                                                                  249,638
Fair market value of options issued                                                                                     5,492
Cancellation of shares                              693,000                                                               --
Foreign currency translation adjustments                                          (282,129)                          (282,129)
Net income for the year                                                                            663,325            663,325

                                              -------------    -------------   -------------    -------------    ------------
Balance at June 30, 2005                      $    (616,650)   $     108,500   $    (520,691)   $ (30,318,988)   $ 15,249,552
                                              =============    =============   =============    =============    ============


       See accompanying notes to these consolidated financial statements.

                                      F-6


                    NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS



                                                                         For the Years
                                                                         Ended June 30,
                                                                     2005            2004
                                                                  -----------    -----------
                                                                           
Cash flows from operating activities:
       Net income (loss) from continuing operations               $   663,325    $(2,577,058)
       Adjustments to reconcile net income (loss) to net cash
            Provided by (used in) operating activities:
       Depreciation and amortization                                1,979,603      1,640,044
       Impairment of assets                                                --        203,312
       Gain on forgiveness of debt                                   (404,136)      (320,318)
       Loss on sale of assets                                           2,082         35,173
       Minority interest in subsidiary                                111,073       (273,159)
       Stock issued for settlement costs                                   --        135,133
       Stock issued for services                                      183,695          9,000
       Stock issued to directors for services                              --         39,240
       Fair market value of warrants and stock options granted        255,130             --
       Beneficial conversion feature                                  209,848        137,230
       Changes in operating assets and liabilities:
       (Increase) decrease in assets:
            Accounts receivable                                    (3,644,646)      (324,094)
            Other current assets                                   (1,587,132)      (409,708)
       Increase (decrease) in liabilities:
            Accounts payable and accrued expenses                   2,161,633        (65,386)
            Deferred liabilities                                      313,397             --
                                                                  -----------    -----------
       Net cash provided by (used in) operating activities            243,872     (1,770,591)
Cash flows from investing activities:
       Purchases of property and equipment                         (1,468,499)    (2,861,754)
       Sales of property and equipment                                 88,736         75,490
       Purchases of certificates of deposit                        (1,517,640)    (3,241,403)
       Proceeds from sale of certificates of deposit                1,703,563      2,850,000
       Increase in intangible assets                               (3,827,466)      (439,297)
       Proceeeds from sale of minority interest of subsidiary              --        200,000
       Capital investments in minority interest of subsidiary         178,521         10,000
       Cash brought in at acquisition                                 145,297             --
                                                                  -----------    -----------
       Net cash used in investing activities                       (4,697,488)    (3,406,964)
Cash flows from financing activities:
       Proceeds from sale of common stock                           1,512,000      1,848,750
       Proceeds from the exercise of stock options and warrants     1,260,057      1,445,392
       Capital contributed from sale of subsidiary stock              859,223             --
       Purchase of treasury shares                                    (51,704)       (21,457)
       Proceeds from loans                                          1,533,690      1,685,781
       Proceeds from convertible debenture                                 --      1,200,000
       Payments on capital lease obligations & loans                 (286,339)      (384,210)
                                                                  -----------    -----------
       Net cash provided by financing activities                    4,826,927      5,774,256
Effect of exchange rate changes in cash                               127,255         59,970
                                                                  -----------    -----------
Net increase in cash and cash equivalents                             500,566        656,671
Cash and cash equivalents, beginning of year                          871,161        214,490
                                                                  -----------    -----------
Cash and cash equivalents, end of year                            $ 1,371,727    $   871,161
                                                                  ===========    ===========



       See accompanying notes to these consolidated financial statements.

                                      F-7



                    NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                    Continued



                                                                                  For the Years
                                                                                  Ended June 30,
                                                                              2005            2004
                                                                         -------------   -------------
SUPPLEMENTAL DISCLOSURES:
                                                                                   
        Cash paid during the period for:
           Interest                                                      $     127,055   $     229,877
                                                                         =============   =============
           Taxes                                                         $      41,182   $      76,638
                                                                         =============   =============

NON-CASH INVESTING AND FINANCING ACTIVITIES:
       Common stock issued for services and compensation                 $     246,650   $       9,000
                                                                         =============   =============
       Common stock issued for conversion of note payable and interest   $     413,788   $     861,429
                                                                         =============   =============
       Common stock issued for legal settlement                          $          --   $     135,133
                                                                         =============   =============
       Common stock issued for acquisition of product license            $      91,600   $     166,860
                                                                         =============   =============
       Common stock issued for settlement of debt                        $      45,965   $     209,200
                                                                         =============   =============
       Common stock issued to directors for services                     $          --   $      39,240
                                                                         =============   =============
       Common stock issued for acquisition of subsidiary                 $   1,816,301   $          --
                                                                         =============   =============
       Common stock issued for conversion of debentures                  $   1,050,000   $          --
                                                                         =============   =============


       See accompanying notes to these consolidated financial statements.

                                      F-8


                    NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - BUSINESS AND CONTINUED OPERATIONS

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

During April 1999,  February 2000 and March 2000, the Company formed NetSol USA,
Inc., NetSol eR, Inc. and NetSol (PVT), Limited,  respectively,  as wholly owned
subsidiaries.


Business Combinations Accounted for Under the Purchase Method:

Network Solutions PVT, Ltd. and NetSol UK, Limited

On September  15, 1998 and April 17, 1999,  the Company  purchased  from related
parties, 51% and 49%,  respectively,  of the outstanding common stock of Network
Solutions PVT,  Ltd., a Pakistani  Company,  and 43% and 57% of the  outstanding
common stock of NetSol UK, Limited,  a United Kingdom Company,  for the issuance
of  938,000  restricted  common  shares  of the  Company  and cash  payments  of
$775,000,  for an aggregate purchase price of approximately $12.9 million. These
acquisitions  were accounted for using the purchase  method of  accounting,  and
accordingly,  the  purchase  price was  allocated  to the assets  purchased  and
liabilities  assumed  based  upon  their  estimated  fair  values on the date of
acquisition,   which  approximated   $300,000.   Included  in  the  accompanying
consolidated financial statements are other assets acquired at fair market value
consisting  of  product  licenses,   product  renewals,   product  enhancements,
copyrights,  trademarks,  trade  names  and  customer  lists.  At  the  date  of
acquisition,  the management of the Company allocated approximately $6.3 million
to these  assets,  based  on  independent  valuation  reports  prepared  for the
Company. The excess of the purchase prices over the estimated fair values of the
net assets acquired,  was recorded as goodwill, and was being amortized by using
the  straight-line  method from the date of each  purchase.  Effective  April 1,
2001,  the  management  determined  that the  remaining  useful  life of all its
acquired  intangible  assets to be  approximately  five years,  and accordingly,
accelerated  the  amortization  of these  intangibles.  During  June  2001,  the
management  decided  to  close  its  operations  in  the  United  Kingdom,   and
accordingly, the Company recognized a loss from impairment of various intangible
assets related to NetSol UK, as  recoverability  of these assets  (measured by a
comparison of the carrying  amount of an asset to future net cash flows expected
to be generated by the asset) seemed  highly  unlikely.  On March 18, 2002,  the
final  Winding-up Order was made relating to the liquidation of for NetSol UK on
the  petition  of a creditor in respect of services  supplied  presented  to the
Court.

Mindsources, Inc.

On August 13, 1999, the Company through its wholly owned subsidiary, NetSol USA,
Inc.  acquired 100% of the  outstanding  capital stock of  Mindsources,  Inc., a
Virginia and US based Company, through the issuance of 50,000 shares of Rule 144
restricted  common  shares of the Company  for an  aggregate  purchase  price of
approximately $1,260,000.  This acquisition was accounted for using the purchase
method of  accounting  under APB Opinion No. 16, and  accordingly,  the purchase
price was allocated to the assets  purchased and liabilities  assumed based upon
their  estimated  fair  values  as  determined  by  management  on the  date  of
acquisition,   which  approximated  $900,000.  The  management  of  the  Company
allocated the entire  purchase  price to customer lists  acquired,  and is being
amortized by using the  straight-line  method from the date of acquisition.  The
excess of the purchase  prices over the estimated  fair values of the net assets
acquired,  approximately  $360,000,  was  recorded  as  goodwill  and  is  being
amortized using the  straight-line  method from the date of purchase.  Effective
April 1, 2001, the management  determined that the remaining  useful life of all
its acquired  intangible assets to be approximately five years, and accordingly,
accelerated the amortization of these intangibles.



                                      F-9


                    NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Network Solutions Group Limited and Subsidiaries

On August 18, 1999, the Company  acquired 100% of the outstanding  capital stock
of Network Solutions Group Limited and  Subsidiaries,  a United Kingdom Company,
through the issuance of 31,000  shares of Rule 144  restricted  common shares of
the Company for an aggregate  purchase  price of  approximately  $940,000.  This
acquisition was accounted for using the purchase method of accounting  under APB
Opinion No. 16, and accordingly,  the purchase price was allocated to the assets
purchased and liabilities  assumed based upon their estimated fair values on the
date of acquisition, which approximated a deficit of $700,000. The management of
the Company allocated  approximately $600,000 to customer lists, which are being
amortized by using the  straight-line  method from the date of acquisition.  The
excess of the purchase  price over the  estimated  fair values of the net assets
acquired,  approximately  $1,040,000,  was recorded as  goodwill,  and was being
amortized by using the straight-line  method over the estimated useful life from
the date of acquisition. Effective April 1, 2001, the management determined that
the  remaining  useful  life  of  all  its  acquired  intangible  assets  to  be
approximately five years, and accordingly, accelerated the amortization of these
intangibles. During June 2001, the management decided to close its operations in
the  United  Kingdom,  and  accordingly,  the  Company  recognized  a loss  from
impairment  of  various   intangible  assets  related  to  these  entities,   as
recoverability  of these assets (measured by a comparison of the carrying amount
of an asset to future  net cash flows  expected  to be  generated  by the asset)
seemed highly unlikely.

Intereve Corporation

During March 2001, the Company acquired 100% of the outstanding capital stock of
Intereve  Corporation  for  an  aggregate  purchase  price  of  $245,000.   This
acquisition was accounted for using the purchase method of accounting  under APB
Opinion No. 16, and accordingly,  the purchase price was allocated to the assets
purchased and liabilities  assumed based upon their estimated fair values on the
date of  acquisition,  which  equaled to zero.  The  management  of the  Company
allocated the entire purchase price of $245,000 to customer  lists.  During June
2001,  the management  ceased  operations of this entity and  consequently,  the
Company  recognized  an  impairment  loss  of  $245,000  to  customer  list,  as
recoverability  of these assets (measured by a comparison of the carrying amount
of an asset to future  net cash flows  expected  to be  generated  by the asset)
seemed highly unlikely.

Altvia Corporation

On May 20, 2003, the Company  acquired 100% of the outstanding  capital stock of
Altvia  Technologies,  Inc. for an aggregate  purchase  price of $257,000.  This
acquisition was accounted for using the purchase method of accounting  under APB
Opinion No. 16, and accordingly,  the purchase price was allocated to the assets
purchased and liabilities  assumed based upon their estimated fair values on the
date of  acquisition,  which equaled to $257,000.  The management of the Company
allocated  $30,000 of the purchase price to customer lists & $23,688 to property
and  equipment.  The excess of the purchase price over the estimated fair values
of the net assets acquired of $203,312 was recorded as goodwill. During the year
ended June 30, 2004, the goodwill was impaired.

Pearl Treasury System Ltd

On October 14,  2003,  the Company  executed an  agreement  to acquire the Pearl
Treasury  System  Ltd, a United  Kingdom  company  ("Pearl").  This  acquisition
required  the  Company  to issue up to  60,000  shares  of  common  stock to the
shareholders of Pearl Treasury System,  Ltd. In addition,  during the year ended
June 30, 2005, an  additional  40,000 shares valued at $91,600 was issued to the
shareholders of Pearl for milestones reached in the development of the software.
After  acquisition,  all development  activities of Pearl Treasury  System,  now
called InBanking were transferred to NetSol UK; therefore, there are no separate
financial statements for Pearl. The total acquisition value of $258,460 has been
recorded as an  intangible  asset and is included in "product  licenses"  on the
accompanying consolidated financial statements.



                                      F-10


                    NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Raabta Online

During the quarter  ended  March 31,  2004,  the  Company's  subsidiary,  NetSol
Connect,  purchased  Raabta  Online,  a Pakistani  company,  for a cash price of
10,000,000  rupees or $173,500  representing  100% of the value of Raabta.  This
acquisition is expected to provide the Company with an established customer base
and  strong  technical  expertise.  The  purchase  price has been  allocated  to
property  and  equipment of the  acquired  entity.  All activity of the acquired
entity was absorbed by NetSol Connect after the acquisition.

CQ Systems

On January 19,  2005,  the Company  entered into an agreement to acquire 100% of
the issued and outstanding  shares of common stock of CQ Systems Ltd., a company
organized  under  the laws of  England  and  Wales.  The  acquisition  closed on
February  22,  2005.  The  initial  purchase  price  was   (pound)3,576,335   or
$6,730,382,  of which one-half was due at closing  payable in cash and stock and
the other half is due when the audited March 31, 2006  financial  statements are
completed.  On the closing date,  $1.7 million was paid and 681,965  shares were
issued to the shareholders of CQ, valued at $1,676,795 at an average share price
of $2.46 was recorded.  In addition,  the agreement  called for the  accumulated
retained  earnings  amounting to  (pound)423,711 or $801,915 of CQ Systems as of
the  closing  date to be paid to the  shareholders  in cash and stock.  In April
2005,  the  additional  cash of  (pound)350,000  or $662,410 was paid and 77,503
shares of the Company's  common stock valued at $139,505 were issued.  The total
amount paid at closing was $4,178,710.

Business Combinations Accounted for Under the Pooling of Interest Method:

Abraxas Australia Pty, Limited

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

Formation of Subsidiary:

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

During the period ended June 30, 2004, the Company formed a subsidiary in India,
NetSol  Technology  India,  Limited,  as a  wholly-owned  subsidiary  of  NetSol
Technologies,  Inc.  This entity is planned to serve as the main  marketing  and
delivery arm for services and products  sold and  delivered in India.  As of the
date of this report, no operations have begun with this entity.

Joint Venture:

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




                                      F-11


                    NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation:

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

Company name change:

Effective   February  8,  2002,  the  Company   changed  its  name  from  NetSol
International, Inc. to NetSol Technologies, Inc. The name change was approved by
a majority of shareholders at the Company's annual shareholders  meeting held on
January 25, 2002.

Business Activity:

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

Use of Estimates:

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

Effective  April 1, 2001, the management  determined  that the remaining  useful
life of all its acquired  intangible assets to be approximately  five years, and
accordingly,  accelerated the amortization of these intangibles.  This change in
estimate  increased the depreciation  and amortization  expense by approximately
$700,000 for the year ended June 30, 2002 and  $400,000  during the three months
ended June 30, 2001. Due to impairment  losses  recognized to  intangibles,  the
remaining net intangible balance of approximately $6,860,000 (including goodwill
of  $1,950,000)  at the date of change in estimation in 2001 has been  amortized
over the remaining life of 57 months. The Company evaluates,  on on-going basis,
the accounting  effect arising from the recently issued SFAS No. 142,  "Goodwill
and  Other  Intangibles"  which  became  effective  to the  Company's  financial
statements beginning July 1, 2002.

Cash and Cash Equivalents:

Equivalents

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

Concentration

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




                                      F-12


                    NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Accounts Receivable:

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

Revenues in excess of billings:

"Revenues in excess of billings" represent the total of the project to be billed
to the  customer  over the life of the project.  As each phase is completed  and
billed to the customer,  the  corresponding  percentage of completion  amount is
transferred from this account to "Accounts Receivable."

Property and Equipment:

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

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

Intangible Assets:

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

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



                                      F-13


                    NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Statement of Cash Flows:

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

Revenue Recognition:

The  Company  recognizes  its  revenue in  accordance  with the  Securities  and
Exchange  Commissions  ("SEC")  Staff  Accounting  Bulletin  No.  101,  "Revenue
Recognition in Financial  Statements" ("SAB 101") and The American  Institute of
Certified  Public  Accountants  ("AICPA")  Statement of Position  ("SOP")  97-2,
"Software  Revenue  Recognition," as amended by SOP 98-4 and SOP 98-9, SOP 81-1,
"Accounting for  Performance of  Construction-Type  and Certain  Production-Type
Contracts," and Accounting Research Bulletin 45 (ARB 45) "Long-Term Construction
Type Contracts." The Company's revenue recognition policy is as follows:

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

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

Fair Value:

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

Advertising Costs:

The Company expenses the cost of advertising as incurred.  Advertising costs for
the years ended June 30, 2005 and 2004 were $127,602 and $37,801, respectively.



                                      F-14


                    NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Net Loss Per Share:

Net loss per share is calculated  in accordance  with the Statement of financial
accounting  standards  No. 128 (SFAS No. 128),  "Earnings  per share." Basic net
loss per share is based  upon the  weighted  average  number  of  common  shares
outstanding.  Diluted  net loss 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 year ended June 30, 2005                   Net Income    Shares   Per Share
------------------------------------------------------------------------------------
                                                                     
Basic earnings per share:                           $  663,325   11,597,625   $0.06
      Net income available to common shareholders
Effect of dilutive securities
      Stock options                                               2,515,114
      Warrants                                                      663,584
                                                    ----------   ----------   -----
Diluted earnings per share                          $  663,325   14,776,323   $0.04
                                                    ==========   ==========   =====


The weighted average number of shares used to compute basic and diluted loss per
share is the same in these financial statements for the year ended June 30, 2004
since the effect of dilutive securities is anti-dilutive.

Reverse stock split:

On August 18, 2003, the Company  affected a 1 for 5 reverse  stock-split for all
the issued and outstanding  shares of common stock. All historical share and per
share amounts in the accompanying  consolidated  financial  statements have been
restated to reflect the 5:1 reverse stock split.

Other Comprehensive Income & Foreign Currency Translation:

SFAS 130 requires  unrealized  gains and losses on the  Company's  available for
sale  securities,   currency  translation   adjustments,   and  minimum  pension
liability,  which prior to adoption  were reported  separately in  stockholders'
equity, to be included in other comprehensive  income. The accounts of NetSol UK
and CQ Systems use  British  Pounds;  NetSol  Technologies  (Pvt)  Ltd.,  NetSol
Private, NetSol Connect, and TiG-Netsol use Pakistan Rupees; NetSol Abraxas uses
the Australian dollar as the functional currencies.  NetSol Technologies,  Inc.,
and NetSol Altvia, Inc., uses U.S. dollars as the functional currencies.  Assets
and  liabilities  are translated at the exchange rate on the balance sheet date,
and operating results are translated at the average exchange rate throughout the
period.  During  the year  ended June 30,  2005 and 2004,  comprehensive  income
included net  translation  loss of $282,129 and  $387,859,  respectively.  Other
comprehensive loss, as presented on the accompanying  consolidated balance sheet
in the stockholders' equity section amounted to $520,691 as of June 30, 2005.

Accounting for Stock-Based Compensation:

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

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



                                      F-15


                    NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Income Taxes:

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 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.

As of June 30, 2005, the Company had net federal and state  operating loss carry
forwards  expiring in various years through 2025. During the year ended June 30,
2005,  the  valuation  allowance  increased  by $651,617;  primarily  due to the
application  of the  current  year  net  loss  for the US  companies  to the net
operating  loss  carry  forward.  Deferred  tax  assets  resulting  from the net
operating  losses are reduced by a valuation  allowance,  when in the opinion of
management, utilization is not reasonably assured.

A summary at June 30, 2005 is as follows:



                                                          Federal          State                Total
                                                       ------------     ------------     ------------
                                                                  
Net operating loss carry forward - June 30, 2004       $ 22,479,286     $  9,503,419
Net loss                                                  3,245,957        3,245,957
                                                       ------------     ------------
    Net operating loss carry forward - June 30, 2005     25,725,243       12,749,376

Effective tax rate                                               32%               8%

                                                       ------------     ------------
Deferred tax asset                                        8,232,078        1,019,950        9,252,028
Valuation allowance                                      (6,672,078)        (629,950)      (7,302,028)
                                                       ------------     ------------     ------------
Net deferred tax asset                                    1,560,000          390,000        1,950,000

Deferred tax liability arising from
   non-taxable business combinations                      1,560,000          390,000        1,950,000
                                                       ------------     ------------     ------------
Net deferred tax liability                             $         (0)    $          0     $         (0)
                                                       ============     ============     ============


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

                                                         For the years
                                                         ended June 30,
                                                       2005          2004
                                                         %             %
Tax expense (credit) at statutory rate - federal           34           (34)
State tax expenses, net of federal tax                     (6)           (6)
Valuation allowance                                         -            16
Foreign tax rate differences                              (34)           18
Other                                                       7             6
                                                   ----------    ----------
Tax expense at actual rate                                  1           --
                                                   ==========    ==========

                                      F-16


                    NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Derivative Instruments:

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

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

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

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

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

On June 30, 2004, the Company evaluated the valuation of goodwill based upon the
performance and market value of NetSol USA. The Company  determined the goodwill
was impaired and recorded the  impairment  of $203,312 at June 30, 2004,  in the
accompanying consolidated financial statements.

Reporting segments:

Statement of financial  accounting standards No. 131, Disclosures about segments
of an  enterprise  and related  information  (SFAS No.  131),  which  superceded
statement of financial  accounting  standards  No. 14,  Financial  reporting for
segments of a business enterprise, establishes standards for the way that public
enterprises  report  information  about operating  segments in annual  financial
statements  and  requires  reporting  of selected  information  about  operating
segments  in interim  financial  statements  regarding  products  and  services,
geographic areas and major customers. SFAS No. 131 defines operating segments as
components  of an  enterprise  about which  separate  financial  information  is
available that is evaluated  regularly by the chief operating  decision maker in
deciding how to allocate  resources and in assessing  performances.  The Company
allocates  its resources and assesses the  performance  of its sales  activities
based upon geographic locations of its subsidiaries (see note 12).

                                      F-17


                    NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

New Accounting Pronouncements:

In March 2004, the Emerging  Issues Task Force  ("EITF")  reached a consensus on
Issue  No.  03-1,  "The  Meaning  of  Other-Than-Temporary  Impairment  and  its
Application  to Certain  Investments."  The EITF  reached a consensus  about the
criteria  that should be used to  determine  when an  investment  is  considered
impaired,  whether that impairment is other-than-temporary,  and the measurement
of an  impairment  loss and how that criteria  should be applied to  investments
accounted for under SFAS No. 115, "Accounting in Certain Investments in Debt and
Equity   Securities."  EITF  03-01  also  included   accounting   considerations
subsequent to the  recognition of  other-than-temporary  impairment and requires
certain  disclosures  about  unrealized  losses that have not been recognized as
other-than-temporary   impairments.   Additionally,   EITF  03-01  includes  new
disclosure  requirements  for  investments  that are  deemed  to be  temporarily
impaired.  In September  2004, the Financial  Accounting  Standards Board (FASB)
delayed  the  accounting  provisions  of EITF  03-01;  however,  the  disclosure
requirements remain effective for annual reports ending after June 15, 2004. The
Company believes that the adoption of this standard will have no material impact
on its financial statements.

In December 2004, the FASB issued FASB Statement No. 123R, "Share-Based Payment,
an Amendment of FASB Statement No. 123" ("FAS No. 123R").  FAS No. 123R requires
companies to recognize in the statement of operations the grant- date fair value
of stock options and other equity-based  compensation  issued to employees.  FAS
No. 123R is effective  beginning in the Company's  first quarter of fiscal 2006.
The Company is  evaluating  the  effects  adoption of SFAS 123R will have on its
financial statements.

In December  2004,  the FASB  issued  SFAS  Statement  No.  153,  "Exchanges  of
Non-monetary  Assets."  The  Statement  is an amendment of APB Opinion No. 29 to
eliminate the exception for non-monetary  exchanges of similar productive assets
and replaces it with a general  exception for exchanges of  non-monetary  assets
that do not have commercial substance. The Company believes that the adoption of
this standard will have no material impact on its financial statements.

In May  2005,  the FASB  issued  SFAS No.  154,  "Accounting  Changes  and Error
Corrections."  This  statement  applies to all  voluntary  changes in accounting
principle and requires  retrospective  application to prior  period's  financial
statements   of  changes  in   accounting   principle,   unless  this  would  be
impracticable.  This statement also makes a distinction  between  "retrospective
application"  of an  accounting  principle  and the  "restatement"  of financial
statements to reflect the  correction of an error.  This  statement is effective
for accounting  changes and corrections of errors made in fiscal years beginning
after December 15, 2005. The Company believes that the adoption of this standard
will have no material impact on its financial statements.

Reclassifications:

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

NOTE 3 - MAJOR CUSTOMERS

The Company is a strategic business partner for DaimlerChrysler  (which consists
of a group of many companies),  which accounts for  approximately 20% of revenue
for the fiscal  years  ended June 30,  2005 and 2004 and  Toyota  Motors  (which
consists of a group of many companies) accounts for approximately 35% of revenue
for the fiscal year ended June 30, 2005.  Accounts  receivable  at June 30, 2005
for these  companies was $539,761 and  $1,165,183.  No other  individual  client
represents more than 10% of the revenue for the fiscal years ended June 30, 2005
and 2004.


                                      F-18


                    NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4 - OTHER CURRENT ASSETS

Other current assets consist of the following as of June 30, 2005:

Prepaid Expenses                                             $        494,315
Advance Income Tax                                                    162,682
Employee Advances                                                      11,342
Security Deposits                                                      56,472
Other Receivables                                                     187,613
Other Asset                                                            18,920
                                                             ----------------
     Total                                                   $        931,344
                                                             ================

NOTE 5 - PROPERTY AND EQUIPMENT

Property and equipment, net, consist of the following at June 30, 2005:

Office furniture and equipment                              $         858,273
Computer equipment                                                  3,804,496
Assets under capital leases                                           623,008
Building                                                            2,930,258
Construction in process                                               424,991
Land                                                                  185,760
Autos                                                                 138,226
Improvements                                                          270,929
                                                            -----------------
      Subtotal                                                      9,235,941
Accumulated depreciation                                           (4,121,165)
                                                            -----------------
                                                            $       5,114,776
                                                            =================

For the years ended June 30, 2005 and 2004,  fixed  asset  depreciation  expense
totaled  $654,584 and $520,750,  respectively.  Of these  amounts,  $415,042 and
$355,954, respectively, are reflected as part of cost of goods sold. Accumulated
depreciation  and  amortization  for assets  under  capital  leases  amounted to
$363,433 and $335,156 at June 30, 2005 and 2004, respectively.

NOTE 6 - INTANGIBLE ASSETS

Intangible assets consist of the following at June 30, 2005:

                                      F-19


                    NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                       Product       Customer
                                       Licenses        Lists          Total
                                     -----------    -----------    -----------
Intangible asset - June 30, 2004     $ 5,450,357    $ 1,977,877    $ 7,428,234
Additions                              3,376,728      1,316,880      4,693,608
Effect of translation adjustment         (27,762)                      (27,762)
Accumulated amortization              (3,883,529)    (1,739,765)    (5,623,294)
                                     -----------    -----------    -----------
    Net balance - June 30, 2005      $ 4,915,794    $ 1,554,992    $ 6,470,786
                                     ===========    ===========    ===========

Amortization expense:
Year ended June 30, 2005             $   980,524    $   403,457    $ 1,383,981
Year ended June 30, 2004             $   803,629    $   315,665    $ 1,119,294

The above  amortization  expense  includes  amounts in "Cost of Goods  Sold" for
capitalized  software  development  costs of $58,961  and $43,298 for the fiscal
years ended June 30, 2005 and 2004, respectively.

At June 30, 2005 and 2004, product licenses, renewals, enhancements, copyrights,
trademarks,  and  tradenames,  included  unamortized  software  development  and
enhancement costs of $1,507,792 and $908,508,  respectively,  as the development
and  enhancement  is  yet to be  completed.  Software  development  amortization
expense  was  $94,682 and $97,744 for the years ended June 30, 2005 and June 30,
2004, respectively.

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



----------------------------------------------------------------------------------------------------
                                                       FISCAL YEAR ENDING
     Asset                 6/30/06      6/30/07      6/30/08      6/30/09      6/30/10      TOTAL
----------------------------------------------------------------------------------------------------
                                                                        
Product Licences         $1,271,996   $  591,872   $  591,872   $  576,799   $  375,463   $3,408,002
Customer Lists              551,204      301,454      263,376      263,376      175,583    1,554,993

                         ----------   ----------   ----------   ----------   ----------   ----------
                         $1,823,200   $  893,326   $  855,248   $  840,175   $  551,046   $4,962,995
                         ==========   ==========   ==========   ==========   ==========   ==========



NOTE 7 - DEBTS

NOTES PAYABLE

Notes payable consist of the following at June 30, 2005:

-------------------------------------------------------------------------
                               Balance at      Current         Long-Term
      Name                       6/30/05      Maturities      Maturities
-------------------------------------------------------------------------
A. Zaman Settlement            $   16,300      $   16,300     $       --
First Funding                         475             475             --
D&O Insurance                      49,688          49,688             --
Noon Group                        518,794         518,794             --
Gulf Crown                        259,397         259,397             --
Maxim Group                       100,000         100,000             --
Subsidiary Capital Leases         144,538         144,538             --
                               ----------      ----------     ----------
                               $1,089,192      $1,089,192     $       --
                               ==========      ==========     ==========

                                      F-20


                    NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


On  September  25, 2002 the Company  signed a settlement  agreement  with Adrian
Cowler  ("Cowler") and Surrey Design  Partnership Ltd. The Company agreed to pay
Cowler  (pound)218,000  pound sterling or  approximately  $320,460 USD including
interest, which the Company recorded as a note payable. The agreement called for
monthly  payments of  (pound)3,000  until March 2004 and then  (pound)4,000  per
month until paid. As of June 30, 2004, the balance was $146,516.  During the six
months ended December 31, 2004, the Company paid  (pound)12,000  or $21,997.  In
December 2004,  the Company  reached an agreement with Cowler to pay the balance
of the loan in one lump-sum  payment.  Cowler agreed to accept  (pound)52,000 or
$103,371  as  payment  in full.  As a result,  the  Company  recorded  a gain on
forgiveness  of debt  of  $21,148  in the  accompanying  consolidated  financial
statements.

In November 2002,  the Company signed a settlement  agreement with Herbert Smith
for (pound)171,733 or approximately  $248,871,  including interest.  The Company
agreed to pay $10,000 upon signing of the agreement, $4,000 per month for twelve
months, and then $6,000 per month until paid. The balance owing at June 30, 2003
was  $164,871.   During  the  year  ended  June  30,  2004,   the  Company  paid
(pound)41,044  or $73,000.  In addition,  the Company adjusted the amount due in
USD to reflect the change in exchange rates from when the settlement was reached
in 2002. As a result  $107,450 was recorded to translation  loss. As of June 30,
2004, the balance was $199,321. During the nine months ended March 31, 2005, the
Company paid $56,000. In April 2005, an agreement was reached with Herbert Smith
whereby  they  accepted  $110,000 as payment in full.  As a result,  the Company
recorded  a  gain  on  forgiveness  of  debt  of  $33,321  in  the  accompanying
consolidated financial statements.

In December 2001, as part of the winding up of Network Solutions Ltd. the parent
agreed to assume the note payable of one of the major creditors,  Barclay's Bank
PLC of (pound)130,000 or $188,500 USD. In November 2002, the parties agreed upon
a settlement  agreement whereby the Company would pay (pound)1,000 per month for
twelve  months and  (pound)2,000  per month  thereafter  until paid.  During the
fiscal year ended June 30, 2003, the Company paid approximately  (pound)2,000 or
$3,336.  The balance owing at June 30, 2003 was $185,164.  During the year ended
June 30, 2004,  the Company paid  (pound)66,000  or $69,421.  During the quarter
ended March 31,  2004,  the Company  entered into a  settlement  agreement  with
Barclay's whereby Barclay's agreed to accept (pound)69,000 or $79,098 as payment
in full. As a result the Company recorded a gain on the reduction of debt in the
amount of $99,146.  As of June 30, 2004,  (pound)60,000 or $62,500 has been paid
on the settlement  amount and the balance of (pound)9,000 or $16,598 was paid in
July, 2004.

In June 2002, the Company signed a settlement agreement with a former consultant
for payment of past services rendered.  The Company agreed to pay the consultant
a total of $75,000. The agreement calls for monthly payments of $1,500 per month
until paid.  The balance owing at June 30, 2004 was $26,300.  During the current
fiscal year the  Company  paid  $10,000.  As of June 30,  2005,  the balance was
$16,300.  The entire balance has been  classified as a current  liability in the
accompanying consolidated financial statements.

In January  2005,  the Company  renewed  its  director's  and officer  liability
insurance  for which the annual  premium is  $138,050.  In  February  2005,  the
Company arranged  financing with AFCO Credit  Corporation with a down payment of
$27,610 with the balance to be paid in monthly  installments.  The balance owing
as of June 30, 2005 was $49,688 and is classified as a current  liability in the
accompanying consolidated financials statements.

In October 2004, the Company renewed its  professional  liability  insurance for
which the annual premium is $5,944.  The Company has arranged for financing with
the insurance  company with a down payment of $1,853 and nine monthly payment of
$480 each.  During the six months ended March 31, 2005, the Company paid $4,529.
The  balance  owing at June 30,  2005 was $475 and is  classified  as a  current
liability in the accompanying consolidated financials statements.

In February 2005,  the Company  received a loan from a current  shareholder  Sir
Gulam Noon in the amount of $500,000. The note carries an interest rate of 9.75%
per annum and is due in one year.  The maturity date of the loan may be extended
at the option of the holder for an additional year. During the fiscal year ended
June 30, 2005, $18,794 of accrued interest was recorded for this loan.



                                      F-21


                    NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


In February 2005, the Company received a loan from Gulf Crown Investments in the
amount of $250,000.  The note carries an interest rate of 9.75% per annum and is
due in one year.  The maturity date of the loan may be extended at the option of
the holder for an additional  year.  During the fiscal year ended June 30, 2005,
$9,397 of accrued interest was recorded for this loan.

In February 2005,  the Company  received a loan from a current  shareholder  Dr.
Omar Atiq in the amount of $300,000.  The note  carries an interest  rate of 12%
per  annum and is due on April 4,  2005.  The  maturity  date of the loan may be
extended at the option of the holder.  During the quarter  ended June 30,  2005,
$150,000 cash was paid on the loan and 100,000  shares of the  Company's  common
stock was issued valued at $156,160 to pay the debt in full, including $7,453 of
accrued  interest  (see note 8). As a result,  the  Company  recorded  a gain on
forgiveness  of  debt  of  $1,293  in the  accompanying  consolidated  financial
statements.

In May 2005, the Company  received a loan from Maxim Group, LLC in the amount of
$250,000. The note carries an interest rate of 12% and is due July 25, 2005. The
note  called for  $150,000 to be paid with 80,214  shares the  Company's  common
stock and the balance of $100,000  to be paid in cash.  The market  value of the
shares  issued was $152,968  (see Note 8). As a result,  the Company  recorded a
loss on forgiveness of debt of $2,968 in the accompanying consolidated financial
statements.

In addition,  the various subsidiaries had current capital leases of $144,537 as
of June 30, 2005.

LOANS PAYABLE - BANK

The Company's Pakistan subsidiary,  NetSol Technologies  (Private) Ltd., has two
loans with a bank,  secured by the Company's assets.  These notes consist of the
following as of June 30, 2005:

     TYPE OF               MATURITY      INTEREST        BALANCE
      LOAN                  DATE           RATE            USD
-------------------------------------------------------------------

Export Refinance          Every 6 months       4%       $  367,401
Line of Credit            On Demand            8%           21,688
                                                         ----------
Total                                                    $  389,089
                                                         ==========

DUE TO OFFICERS

The officers of the Company  from time to time loan funds to the Company.  As of
June 30, 2004, the officers had loaned a total of $191,102, including $57,776 of
accrued interest and had accrued wages of $102,087. During the fiscal year ended
June 30, 2004, the officers  exercised options against the amounts owing to them
in the amount of  $275,973.  The balance  owing as of June 30, 2004 was $17,219.
During the current  fiscal  year,  two  officers  deferred the increase in their
wages for a total of $32,500. In addition, one officer exercised options against
the amounts owing in the amount of $2,083. The balance owing as of June 30, 2005
was $47,636.

NOTE 8 - STOCKHOLDERS' EQUITY

Initial Public Offering:



                                      F-22


                    NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


On September 15, 1998, the Company completed the sale of its minimum offering of
shares  in its  initial  public  offering  which  generated  gross  proceeds  of
$1,385,647 from the sale of 50,200 shares of common stock and 929,825  warrants,
each warrant to purchase one share of the Company's  common stock at an exercise
price of $6.50 for a term of five years. The remaining  unexercised  warrants of
51,890 expired on September 15, 2003.

Business Combinations:

Altvia Technologies, Inc.

On May 20, 2003, the Company issued 212,000 Rule 144 restricted common shares in
exchange  for all the assets and  certain  liabilities  of Altvia  Technologies,
Inc., a Delaware  corporation  in an Asset Purchase  Agreement.  The shares were
valued at the time of the purchase at $212,000 or $1.00 per share.

In February 2004, an additional  100,000 shares were issued to Altvia as part of
the purchase agreement for sales milestones achieved.

Pearl Treasury System Ltd

In October  2003,  the Company  entered  into an  agreement to acquire the Pearl
Treasury  System  Ltd, a United  Kingdom  company  ("Pearl").  This  acquisition
required  the  Company  to issue up to  60,000  shares  of  common  stock to the
shareholders of Pearl Treasury  System,  Ltd. The shares were valued at the time
of the  purchase at  $166,860 or $2.78 per share.  On  December  16,  2003,  the
initial shares of 41,700, valued at $115,968 due at the signing of the agreement
were issued by the Company.  In April 2004,  the  remaining  18,300  shares were
issued  upon the  completion  of the  software  delivery  warranties  valued  at
$50,892.  The shares  used to acquire  this asset were  issued in reliance on an
exemption  available from registration  under Regulation S of the Securities Act
of 1933, as amended.

In  January  2005,  certain  milestones,  set  forth  in the  purchase  and sale
agreement  by and between the  Company  and the former  owners,  were met in the
development of the Pearl. As such, the former owners of the product license were
due an  additional  40,000 shares of the  Company's  common  stock.  The Company
recorded an addition to the product licenses in the amount of $91,600.

CQ Systems, Inc.

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

Private Placements

In August 2004,  the Company sold 190,476  shares of the Company's  common stock
for $200,000 in a private  placement.  Of this amount  $91,500 had been received
during the year and a total of 87,143 shares were issued to the  purchaser.  The
remaining  balance  of  $108,500  or  103,333  shares are shown as "Shares to Be
Issued" on the accompanying financial statements.

During the quarter ended December 31, 2004, the Company sold 1,390,476 shares of
its common stock for $1,250,000 in private placement agreements.

In addition,  the Company  received  $170,500 as payment on stock  subscriptions
receivable during the fiscal year ended June 30, 2005.



                                      F-23


                    NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


In July 2003, the Company sold 1,026,824 shares of the Company's common stock in
a private  placement  transaction.  Maxim  Group,  LLC in New York  acted as the
placement agent for the transaction. The total funds raised were $1,215,000 with
approximately $102,950 in placement fees,  commissions,  and other expenses paid
from  the  escrow  of the  sale for a net of  $1,102,050.  An SB-2  registration
statement  was filed on October 15, 2003 to register  the shares for the selling
shareholders  in  this  transaction.   The  investors   included  12  individual
accredited investors with no prior ownership of the Company's common stock.

In May 2004, the Company sold 386,363 shares of the Company's  common stock in a
private  placement  transaction.  Maxim  Group,  LLC in New  York  acted  as the
placement agent for the  transaction.  The total funds raised were $850,000 with
approximately $103,300 in placement fees,  commissions,  and other expenses paid
from the escrow of the sale. In addition, the Company issued 243,182 warrants in
connection with the sale. The warrants expire in five years and have an exercise
price of $3.30 per share.  The warrants  were valued using the fair value method
at $230,413  or $1.41 per share and were  recorded  against the  proceeds of the
financing in the accompanying consolidated financial statements. Net proceeds of
the financing  were  $516,287.  The investors  included 9 individual  accredited
investors  with no prior  ownership of the Company's  common stock.  An SB-2 was
filed on June 15, 2004 to register these shares.

Services, Accrued Expenses and Payables

During the years ended June 30, 2005 and 2004,  the Company  issued  188,972 and
3,613  restricted  Rule 144 common  shares in exchange  for  services  rendered,
respectively.  The Company  recorded  an expense of $246,650  and $9,000 for the
years  ended June 30,  2005 and 2004,  respectively.  Compensation  expense  was
calculated  based upon the fair  market  value of the freely  trading  shares as
quoted on NASDAQ through 2005 and 2004, over the service period.

In November  2004,  the Company  entered into an agreement with a vendor whereby
the Company issued the vendor 20,000 shares valued at $22,968 for the payment of
outstanding invoices in the amount of $16,052. As a result, the Company recorded
a gain on settlement of debt in the amount of $6,916.

During the year ended June 30, 2005,  the Company  issued  14,528  shares of the
Company's common stock for accrued expenses valued at $27,000.

In February  2003, the Board of Directors and officers were granted the right to
receive 5,000 shares of the Company's  common stock if certain  conditions  were
met during  their 2003 - 2004 term of office.  These  conditions  were met and a
total of 45,000  restricted Rule 144 common shares were issued in June 2004. The
shares were  valued at the fair market  value at the date of grant of $39,240 or
$0.87 per share.

Issuance of shares for Conversion of Debt and Settlement of Litigation

During the year ended  June 30,  2005,  nineteen  of the  convertible  debenture
holders elected to convert their notes into common stock. The total of the notes
converted was  $1,050,000  and the Company  issued  564,519 shares of its common
stock to the note holders.

During the year ended June 30, 2005, a total of 180,214  shares of the Company's
common stock valued at $309,128 were issued for the payment of two notes payable
of $300,000  plus  $7,453 (see Note 7). In  addition,  67,470  shares  valued at
$104,660 were issued to pay the debts of a subsidiary.

During the year ended June 30, 2004, a total of 123,350  shares of the Company's
common  stock,   valued  at  $209,200,   were  issued  to  three   investors  as
reimbursement for debts of the Company paid by the investors. In addition, three
convertible  notes  payable of $850,000  plus $11,429 of interest was  converted
into 477,993 shares of the Company's common stock.



                                      F-24


                    NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


During the year ended June 30, 2004,  the Company issued 45,195 shares of common
stock valued at $135,135 in settlement of litigation.

Options and Warrants Exercised

During the year ended June 30, 2005, the Company issued  1,210,110 shares of its
common stock for the exercise of options valued at $1,807,733.  Of these shares,
320,000 shares valued at $693,000 were cancelled.  The Company received $969,733
in cash from the  exercise of these  options and  recorded  "Stock  Subscription
Receivable" in the amount of $145,000.

During the year ended June 30, 2004, the Company issued  1,067,309 shares of its
common stock upon the  exercise of stock  options  valued at  $957,892;  of this
amount $290,000 was included in "Stock Subscription Receivable" in the accompany
consolidated financial statements.

During the years ended June 30, 2005 and 2004,  the Company  issued  145,162 and
390,000  shares of its common  stock upon the  exercise  of  warrants  valued at
$290,324and $487,500, respectively.

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.

At June 30,  2004,  the Company had  receivables  from three  employees  and one
investor for options exercised  totally  $290,000.  The total receivable at June
30, 2004, was $333,650.

During the year ended June 30, 2005, the Company recorded $874,500 in receivable
and collected $561,500.  In addition,  a purchaser  (consultant)  decided not to
complete the agreed purchase and therefore  20,000 shares were cancelled and the
related value of $30,000 was reversed from the receivable  account.  The balance
of the receivable at June 30, 2005 was $616,650.

Treasury Stock

During the year ended June 30, 2004, the Company  purchased 10,000 shares of its
common stock on the open market for $21,457 as treasury shares.

During the year ended June 30, 2005, the Company  purchased 30,000 shares of its
common stock on the open market for $51,704.  The Company  issued  24,004 of its
treasury  shares valued at $45,964 in settlement of a debt.  The balance at June
30, 2005 was $27,197.

Common Stock Purchase Warrants and Options

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

Common stock purchase options and warrants consisted of the following as of June
30, 2005:

                                      F-25


                    NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




                                                                                   Exercise          Exercise
                                                 Options           Price           Warrants           Price
                                             --------------    --------------   --------------    --------------
                                                                                      
Outstanding and exercisable, June 30, 2004        1,862,277    $0.75 to $5.00          693,182    $0.50 to $5.00
      Granted                                     3,994,833    $0.75 to $5.00          282,260    $         3.30
      Exercised                                    (809,110)   $0.75 to $2.21         (145,162)   $         2.00
      Expired                                       (10,000)   $         1.00         (175,000)
                                             --------------                     --------------
Outstanding and exercisable, June 30, 2005        5,038,000                           655,280


During the year ended June 30, 2005, 3,596,333 options were granted to employees
of the company and are fully  vested and expire ten years from the date of grant
unless the  employee  terminates  employment,  in which case the options  expire
within 30 days of their  termination.  An expense of $5,492 was recorded for the
granting of these options.

During the year ended June 30, 2004, 2,087,578 options were granted to employees
and  officers of the company and are fully  vested and expire ten years from the
date of grant  unless  the  employee  terminates  employment,  in which case the
options expire within 30 days of their  termination.  In addition,  on March 26,
2004,  250,000  option  shares  were  granted  to the  members  of the  Board of
Directors. These options vest over a period of two years.

In  compliance  with FAS No. 148,  the Company has elected to continue to follow
the  intrinsic  value  method  in  accounting  for  its   stock-based   employee
compensation  plan  as  defined  by APB  No.  25 and  has  made  the  applicable
disclosures below.

Had the Company  determined  employee stock based  compensation  cost based on a
fair value  model at the grant date for its stock  options  under SFAS 123,  the
Company's  net  earnings  per share  would have been  adjusted  to the pro forma
amounts for years ended June 30, 2005 and 2004 as follows:



                                                        2005             2004
                                                   -------------    -------------
                                                              
Net income (loss) - as reported                    $     663,325    $  (2,577,058)
Stock-based employee compensation expense,
     included in reported net loss, net of tax                --               --

Total stock-based employee compensation
     expense determined under fair-value-based
     method for all rewards, net of tax               (4,533,825)      (3,158,130)

                                                   -------------    -------------
Pro forma net loss                                 $  (3,870,500)   $  (5,735,188)
                                                   =============    =============

Earnings per share:
     Basic, as reported                                     0.06            (0.33)
     Diluted, as reported                                   0.04            (0.33)

     Basic, pro forma                                      (0.33)           (0.73)
     Diluted, pro forma                                    (0.03)           (0.73)


                                      F-26


                    NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

                                              2003                    2004
        Expected life (years)                 10 years                10 years
        Risk-free interest rate               3.25%                   3.25%
        Dividend yield                        -                       -
        Volatility                            100%                    114%

During the year ended June 30, 2005,  nineteen debenture holders converted their
notes into common stock. As part of the conversion, warrants to purchase a total
of 282,260 common shares were issued to the note holders. The warrants expire in
five years and have an  exercise  price of $3.30 per share.  The  warrants  were
valued  using the fair value  method at $249,638  and ranged  between  $0.69 and
$0.92  per share and  recorded  the  expense  in the  accompanying  consolidated
financial statements.  The Black-Scholes option pricing model used the following
assumptions:

        Risk-free interest rate                  3.25%
        Expected life                            5 years
        Expected volatility                      82%
        Dividend yield                            0%

During the year ended June 30,  2004,  the Company  issued  243,182  warrants in
connection  with the sale of stock  under a  private  placement  agreement.  The
warrants expire in five years and have an exercise price of $3.30 per share. The
warrants  were valued using the fair value method at $230,413 or $1.41 per share
and were  recorded  against the proceeds of the  financing  in the  accompanying
consolidated  financial statements.  The Black-Scholes option pricing model used
the following assumptions:


        Risk-free interest rate                  3.25%
        Expected life                            5 years
        Expected volatility                      100%
        Dividend yield                            0%


NOTE 9 - INCENTIVE AND NON-STATUTORY STOCK OPTION PLAN

The 1997 Plan

On April 1, 1997,  the Company  adopted an  Incentive  and  Non-statutory  Stock
Option Plan (the "1997 Plan") for its  employees and  consultants  under which a
maximum  of 100,000  options  may be granted  to  purchase  common  stock of the
Company. Two types of options may be granted under the Plan: (1) Incentive Stock
Options  (also known as  Qualified  Stock  Options)  which may only be issued to
employees  of the Company and  whereby the  exercise  price of the option is not
less than the fair market  value of the common stock on the date it was reserved
for issuance  under the Plan; and (2)  Non-statutory  Stock Options which may be
issued to either  employees  or  consultants  of the  Company  and  whereby  the
exercise  price of the option is less than the fair  market  value of the common
stock on the date it was reserved for issuance under the plan. Grants of options
may be made to  employees  and  consultants  without  regard to any  performance
measures.  All options  listed in the summary  compensation  table  ("Securities
Underlying  Options")  were issued  pursuant to the Plan.  An  additional  4,000
Incentive Stock Options were issued to a non-officer-stockholder of the Company.
All options  issued  pursuant to the Plan vest over an 18 month  period from the
date of the grant per the  following  schedule:  33% of the options  vest on the
date which is six months from the date of the grant;  33% of the options vest on
the date which is 12 months  from the date of the grant;  and 34% of the options
vest on the date  which is 18 months  from the date of the  grant.  All  options
issued pursuant to the Plan are nontransferable and subject to forfeiture.



                                      F-27


                    NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


During  the year  ended  June 30,  2004,  all  outstanding  options in this plan
expired.

The 1999 Plan

On May 18, 1999, the Company enacted an Incentive and Non-statutory Stock Option
Plan (the "1999 Plan") for its employees,  directors and consultants under which
a maximum of  1,000,000  options may be granted to purchase  common stock of the
Company. Two types of options may be granted under the Plan: (1) Incentive Stock
Options  (also known as  Qualified  Stock  Options)  which may only be issued to
employees  of the Company and  whereby the  exercise  price of the option is not
less than the fair market  value of the common stock on the date it was reserved
for issuance  under the Plan; and (2)  Non-statutory  Stock Options which may be
issued to either  employees  or  consultants  of the  Company  and  whereby  the
exercise  price of the option is less than the fair  market  value of the common
stock on the date it was reserved for issuance under the plan. Grants of options
may be made to  employees,  directors  and  consultants  without  regard  to any
performance   measures.   All   options   issued   pursuant   to  the  Plan  are
nontransferable and subject to forfeiture.

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

During  the year  ended  June 30,  2004,  all  outstanding  options in this plan
expired.


The 2001 Plan

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

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

The number and exercise  prices of options  granted  under the 2001 Plan for the
years ended June 30, 2005 and 2004 are as follows:

                                      F-28


                    NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




                                                                        Exercise                     Exercise
                                                         2005             Price        2004            Price
                                                      ----------------------------   ---------------------------
                                                                                      
Outstanding and exercisable, beginning of year             269,777  $0.75 to $2.50       398,408  $0.25 to $1.25
      Granted                                              484,000  $0.75 to $2.50       635,913  $0.75 to $2.50
      Exercised                                           (632,777) $0.75 to $2.50      (764,544) $0.25 to $1.25
      Expired                                              (10,000)          -                -          -
                                                      ------------                   -----------
Outstanding and exercisable, end of year                   111,000  $0.75 to $2.50       269,777  $0.75 to $2.50


The 2002 Plan

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

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

The number and weighted  average  exercise  prices of options  granted under the
2002 Plan for the year ended June 30, 2005 and 2004 are as follows:



                                                                        Exercise                     Exercise
                                                         2005             Price        2004            Price
                                                      ----------------------------   ---------------------------
                                                                                    
Outstanding and exercisable, beginning of year         1,142,500  $0.75 to $2.50        93,600          -
      Granted                                             14,500  $1.00 to $5.00     1,351,665  $0.75 to $2.50
      Exercised                                          (17,500) $0.75 to $2.50      (302,765) $0.25 to $1.25
      Expired                                                 -          -                 -          -
                                                      ----------                    ----------
Outstanding and exercisable, end of year               1,139,500  $0.75 to $5.00     1,142,500  $0.75 to $2.50


                                      F-29


                    NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


The 2003 Plan

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

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

The number and weighted  average  exercise  prices of options  granted under the
2003 Plan for the year ended June 30, 2005 and 2004 are as follows:



                                                                  Exercise                         Exercise
                                                     2005           Price            2004            Price
                                                 ----------------------------     ---------------------------
                                                                                   
Outstanding and exercisable, beginning of year        450,000           -                 -            -
      Granted                                         386,500    $1.00 to $5.00      450,000    $2.64 to $5.00
      Exercised                                       (49,000)   $1.00 to $1.35           -           -
      Expired                                              -           -                  -           -
                                                 ------------                     ----------
Outstanding and exercisable, end of year              787,500    $1.00 to $5.00      450,000      $2.64 to $5.00


The 2004 Plan

In March 2005, the Company enacted an Incentive and  Non-statutory  Stock Option
Plan (the "2004 Plan") for its employees and  consultants  under which a maximum
of 5,000,000 options may be granted to purchase restricted Rule 144 common stock
of the  Company.  Two types of  options  may be  granted  under  the  Plan:  (1)
Incentive  Stock Options (also known as Qualified  Stock Options) which may only
be issued to  employees  of the Company and  whereby the  exercise  price of the
option is not less than the fair market value of the common stock on the date it
was reserved for issuance  under the Plan; and (2)  Non-statutory  Stock Options
which may be issued  to either  employees  or  consultants  of the  Company  and
whereby the  exercise  price of the option is less than the fair market value of
the common stock on the date it was reserved for issuance under the plan. Grants
of  options  may be made to  employees  and  consultants  without  regard to any
performance   measures.   All   options   issued   pursuant   to  the  Plan  are
nontransferable and subject to forfeiture.

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



                                      F-30


                    NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


The number and weighted  average  exercise  prices of options  granted under the
2004 Plan for the year ended June 30, 2005 are as follows:

                                                                      Exercise
                                                    2005                Price
                                                 -------------------------------
Outstanding and exercisable, beginning of year               -           -
      Granted                                        3,109,833   $1.50 to $2.91
      Exercised                                       (109,833)           $1.50
      Expired                                                -           -
                                                 --------------
Outstanding and exercisable, end of year             3,000,000   $1.50 to $2.91

NOTE 10 - CONVERTIBLE DEBENTURE

On March 24, 2004, the Company entered into an agreement with several  investors
for a Series A  Convertible  Debenture  (the "Bridge  Loan")  whereby a total of
$1,200,000 in debentures  were  procured  through Maxim Group,  LLC. The Company
received a net of $1,049,946 after placement expenses. The beneficial conversion
feature of the debenture  was valued at $252,257.  The Company has recorded this
as a  contra-account  against the loan balance and is amortizing  the beneficial
conversion  feature  over the life of the loan.  During the years ended June 30,
2005 and 2004, the Company  amortized  $37,500 and $202,932,  respectively.  The
unamortized balance at June 30, 2005 was $11,825.

During the year ended  June 30,  2005,  nineteen  of the  convertible  debenture
holders elected to convert their notes into common stock. The total of the notes
converted was  $1,050,000  and the Company  issued  564,519 shares of its common
stock to the note holders. The net balance at June 30, 2005, was $138,175.

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

In  addition,  each  debenture  holder is  entitled  to  receive  at the time of
conversion  warrants equal to one-half of the total number of shares issued. The
total number of warrants that may be granted is 322,582.  The warrants expire in
five years and have an exercise price of $3.30 per share.  The fair value of the
warrants will be calculated and recorded using the  Black-Scholes  method at the
time of granting,  when the debenture is  converted.  During the year ended June
30, 2005, nineteen debenture holders converted their notes into common stock. As
part of the  conversion,  warrants to purchase a total of 282,260  common shares
were issued to the note  holders.  The warrants were valued using the fair value
method at $249,638.  The expense was recorded in the  accompanying  consolidated
financial statements.

NOTE 11 - COMMITMENTS AND CONTINGENCIES

Leases

In December 2003, the moved its headquarters  from its previous  facility to one
with  approximately  1,919 rentable square feet and a monthly rent of $3,934 per
month.  The term of the lease is for two years and expires on December 31, 2005.
A security deposit of $3,934 was made and is included in other current assets in
the accompanying consolidated financial statements.



                                      F-31


                    NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


The facilities in Maryland were on a month-to-month  basis rented at the rate of
$1,200 per month.  In July 2004 the  Maryland  office moved to a new location to
one with approximately  1,380 rentable square feet and a monthly rent of $2,530.
The term of the  lease is for  three  years  and  expires  on June 30,  2007.  A
security  deposit of $2,530 was made and is included in other current  assets in
the accompanying consolidated financial statements.

The  Australia  lease is a three-year  lease that expires in September  2007 and
currently is rented at the rate of $1,380 per month. UK operations are currently
conducted in leased premises  operating on a  month-to-month  basis with current
rental costs of approximately  $5,500 per month.  Our London,  UK operations are
currently conducted in leased premises operating on a month-to-month  basis with
current  rental  costs  of  approximately   $5,500  per  month.  The  CQ  System
facilities,  located in Horsham,  United Kingdom, are leased until June 23, 2011
for an annual rent of (pound)75,000  (approximately  $131,871.15)  with an early
termination option in June 2006. In June 2005, the Company opened a sales office
in Beijing,  China.  The Beijing  lease is a one year lease that expires in June
2006.  The  monthly  rent is $2,280  per month  with the first two  months  free
bringing the average monthly rent to $1,900 per month.

Upon expiration of its leases, the Company does not anticipate any difficulty in
obtaining  renewals or alternative  space. Rent expense amounted to $290,610 and
$220,261 for the years ended June 30, 2005 and 2004, respectively.

Lahore Technology Campus

The newly built  Technology  Campus was  inaugurated in Lahore,  Pakistan in May
2004.  This  facility  consists of 40,000  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  Pvt.  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  would invest  nearly 10
million Rupees (approximately $150,000) to install fiber optic lines and improve
the  bandwidth for the facility.  NetSol has relocated  over 250 employees  into
this new facility.

Employment Agreements

Effective January 1, 2004, the Company entered into an employment agreement with
Naeem Ghauri as Chief  Executive  Officer.  The  agreement is for a base term of
three years,  and continues  thereafter on an at will basis until  terminated by
either  NetSol or Mr.  Ghauri.  The  agreement  provides for a yearly  salary of
110,000  pounds  sterling.  The  agreement  also  provides  for such  additional
compensation  as the Board of Directors  determines is proper in  recognition of
Mr.  Ghauri's  contributions  and  services to the  Company.  In  addition,  the
agreement  provides Mr. Ghauri with options to purchase up to 100,000  shares of
common stock at an exercise price of $2.21,  100,000 shares at an exercise price
of $3.75 and 50,000 shares at an exercise price of $5.00.  These options vest at
the rate of 25% per quarter and are fully  vested on December  31,  2004.  These
options  expire on  December  31,  2008.  Mr.  Ghauri also  received  options to
purchase  up to  20,000  shares  at the  exercise  price of $2.65  per share and
options to  purchase  30,000  shares at the  exercise  price of $5.00 per share.
These  options  vest  immediately  and are  exercisable  until  March 25,  2009.
Effective  April 1, 2005,  Mr.  Ghauri's  employment  agreement  was  amended to
increase  his salary to  (pound)160,000  per annum  (approximately  $280,000 per
annum based on an  exchange  rate of 1.75) and, to grant him options to purchase
up to 500,000  shares at the  exercise  price of $1.94 per share and  options to
purchase up to 500,000  shares at the exercise  price of $2.91 per share.  These
options vest 25% per quarter commencing with the quarter ending June 30, 2005.

Effective January 1, 2004, the Company entered into an employment agreement with
Najeeb Ghauri as Chief  Financial  Officer.  The agreement is for a base term of
three years,  and continues  thereafter on an at will basis until  terminated by
either  NetSol or Mr.  Ghauri.  The  agreement  provides for a yearly  salary of
$200,000.  The agreement also provides for such  additional  compensation as the
Board  of  Directors  determines  is  proper  in  recognition  of  Mr.  Ghauri's
contributions and services to the Company.  In addition,  the agreement provides
Mr.  Ghauri with options to purchase up to 100,000  shares of common stock at an
exercise price of $2.21, 100,000 shares at an exercise price of $3.75 and 50,000
shares at an exercise price of $5.00.  These options vest at the rate of 25% per
quarter and are fully  vested on December  31,  2004.  These  options  expire on
December 31, 2008.  Mr.  Ghauri also  received  options to purchase up to 20,000
shares at the exercise  price of $2.65 per share and options to purchase  30,000
shares at the exercise price of $5.00 per share.  These options vest immediately
and are exercisable until March 25, 2009.  Effective April 1, 2005, Mr. Ghauri's
employment  agreement  was amended to increase  his salary to $250,000 per annum
and, to grant him options to purchase up to 500,000 shares at the exercise price
of $1.94 per share and options to purchase up to 500,000  shares at the exercise
price of $2.91 per share. These options vest 25% per quarter commencing with the
quarter ending June 30, 2005.



                                      F-32


                    NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Effective January 1, 2004, the Company entered into an employment agreement with
Salim Ghauri as the President and Chief Executive Officer the Company's Pakistan
subsidiary.  The  agreement  is for a base term of three  years,  and  continues
thereafter  on an at will basis  until  terminated  by either the Company or Mr.
Ghauri.  The agreement  provides for a yearly salary of $110,000.  The agreement
also  provides  for such  additional  compensation  as the  Board  of  Directors
determines is proper in recognition of Mr. Ghauri's  contributions  and services
to the Company.  In addition,  the agreement provides Mr. Ghauri with options to
purchase up to 100,000  shares of common  stock at an  exercise  price of $2.21,
100,000  shares at an exercise  price of $3.75 and 50,000  shares at an exercise
price of $5.00.  These options vest at the rate of 25% per quarter and are fully
vested on December  31, 2004.  These  options  expire on December 31, 2008.  Mr.
Ghauri also  received  options to purchase up to 20,000  shares at the  exercise
price of $2.65 per share and options to purchase  30,000  shares at the exercise
price of $5.00 per share.  These options vest  immediately  and are  exercisable
until March 25, 2009. Effective April 1, 2005, Mr. Ghauri's employment agreement
was  amended to  increase  his salary to  $150,000  per annum and,  to grant him
options to  purchase  up to 500,000  shares at the  exercise  price of $1.94 per
share and optins to purchase up to 500,000 shares at the exercise price of $2.91
per share. These options vest 25% per quarter commencing with the quarter ending
June 30, 2005.

Effective January 1, 2004, the Company entered into an employment agreement with
Patti L. W.  McGlasson as legal  counsel.  The  agreement  provides for a yearly
salary of $82,000.  Ms. McGlasson also received options to purchase up to 10,000
shares of common stock at an exercise  price equal to the lesser of $2.30 or the
market  price of the shares on the date of exercise  less $2.00.  These  options
vest at the rate of 25% per quarter and are exercisable until December 31, 2008.
Effective  March  26,  2004,  Ms.  McGlasson  was  elected  to the  position  of
Secretary.  In connection  with her role as Secretary,  Ms.  McGlasson  received
options  to  purchase  up to 10,000  shares of common  stock at $3.00 per share.
These  options  vest at the rate of 25% per  quarter and are  exercisable  until
December 31, 2008. Ms.  McGlasson also received options to purchase up to 20,000
shares at the exercise  price of $2.65 per share and options to purchase  30,000
shares at the exercise price of $5.00 per share.  These options vest immediately
and are exercisable until March 25, 2009.

All of the above agreements  provide for certain  Company-paid  benefits such as
employee  benefit  plans and medical care plans at such times as the Company may
adopt  them.  The  agreements  also  provide  for  reimbursement  of  reasonable
business-related  expenses and for two weeks of paid  vacation.  The  agreements
also provide for certain covenants concerning  non-competition,  non-disclosure,
indemnity and assignment of intellectual property rights.

Litigation

Herbert  Smith,  a  former  attorney  representing  the  Company,   commenced  a
collection proceeding against the Company in the High Court of Justice,  Queen's
Bench Division, on July 31, 2002, claiming the Company owed a sum certain to it.
The Company had signed an  engagement  letter dated  October 18,  2000.  Herbert
Smith ("HS") was hired to proceed  against  Surrey  Design  Partnership  Ltd. HS
claimed the Company owed 171,733 pounds sterling or approximately  $248,871 USD.
This sum includes  interest in the amount of 8% per annum and had been  recorded
as a note payable on the  accompanying  consolidated  financial  statements (see
note 7). On November 28, 2002, a Consent Order was filed with the Court agreeing
to a payment plan, whereby the Company is to pay $10,000 USD upon signing of the
agreement,  $4,000 USD a month for one year and $6,000 USD, per month thereafter
until the debt is paid.  During  the years  ended  June 30,  2005 and 2004,  the
Company paid $166,000 and $73,000.  In April 2005, an agreement was reached with
Herbert Smith  whereby they  accepted  $110,000 as payment in full. As a result,
the  Company  recorded  a  gain  on  forgiveness  of  debt  of  $33,321  in  the
accompanying consolidated financial statements.



                                      F-33


                    NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


On January 29, 2002, the Company reached a settlement with Adrian Cowler and The
Surrey Design Partnership  Limited, the former owners of Network Solutions Group
Limited  ("NSGL").  The  settlement  had the following  terms;  I) NetSol to pay
50,000  pounds  sterling;  II) 3,000  pounds  sterling  to be paid for 24 months
beginning  31, March 2002;  III) 4,000 pounds  sterling to be paid for 24 months
beginning  March 31, 2004; IV) NetSol to release  155,000  shares in escrow;  V)
650,000  144  shares  to be issued to  Surrey  Design.  NetSol  made some of the
payments  and  issued  all the  shares.  On June 11,  2002,  Plaintiff  filed an
enforcement  of judgment in California  Superior Court of Los Angeles to enforce
the  judgment.  A request  for Entry of Default was filed on July 30,  2002.  On
September 10, 2002 NetSol filed its Opposition to Plaintiff's  request for Entry
of Judgment and on  September  16,  2002,  Plaintiff  filed its Motion to Strike
NetSol's  Opposition.  On  September  25,  2002,  the Company and Surrey  Design
entered  into an  Agreement to Stay  Enforcement  of Judgment.  The terms of the
Agreement  included (i) NetSol to pay 25,000 pounds  sterling upon  execution of
this  Agreement;  (ii) By February  20, 2003,  NetSol to pay an addition  25,000
pounds sterling; (iii) From October 31, 2002 to February 28, 2003, NetSol to pay
3,000 pounds  sterling;  and (iv) from March 31, 2003 for a period of 24 months,
NetSol to pay 4,000 pounds sterling.  The settlement amount had been recorded in
the accompanying  consolidated  financial statements as a note payable (see note
7). During the years ended June 30, 2005 and 2004, the Company paid $125,368 and
$86,857.  In December 2004, the Company  reached an agreement with Cowler to pay
the  balance  of the loan in one  lump-sum  payment.  Cowler  agreed  to  accept
(pound)52,000 or $103,371 as payment in full. As a result,  the Company recorded
a gain on  forgiveness  of  debt of  $21,148  in the  accompanying  consolidated
financial statements.

On March 27, 2003,  Arab  Commerce Bank ("ACB") filed a complaint in the Supreme
Court of the State of New York (Index No. 600709/03)  seeking damages for breach
of a Note  Purchase  Agreement  and Note.  ACB alleged that NetSol did not issue
stock in a timely manner in December 2000 resulting in  compensatory  damages in
the amount of $146,466.72.  The litigation arises out of a transaction from late
1999 in which Arab Commerce Bank invested  $100,000 in the Company's  securities
through a private  placement.  ACB claimed that the removal of the legend on its
shares of common stock longer than contractually required. During this purported
delay, the market value of the Company's common shares  decreased.  Essentially,
the ACB  complaint  sought  the lost value of its  shares.  In the event ACB was
unable to collect the amount sought,  the complaint  requested that NetSol repay
the  principal  sum of the Note of $100,000  and  interest at the rate of 9% per
annum based on the  maturity  date of December  10,  2000.  This matter has been
settled pursuant to the terms of a settlement agreement whereby NetSol agreed to
issue to ACB shares of common  stock of the  Company  equal in value to $100,000
plus $39,178 of interest as of the effective date of the agreement.  On December
16, 2003, the Company  issued 34,843 shares of its common stock in  satisfaction
of the  principal  amount due. On February 6, 2004,  the Company  issued  10,352
shares of its common stock for the accrued interest.

On March 3, 2004, Uecker and Associates, Inc. as the assignee for the benefit of
the creditors of PGC Systems,  Inc. f.k.a.  Portera Systems Inc. filed a request
for arbitration demanding payment from the Company for the amounts due under the
agreement in the amount of $175,700.  On March 31,  2004,  the Company  filed an
Answering Statement to the Request of Uecker & Associates denying each and every
allegation  contained  in the Claim  filed by Uecker &  Associates  and  stating
NetSol's affirmative defenses. There was an administrative  conference scheduled
with the case manager of the American Arbitration Association on March 17, 2004.
An  arbitrator  has been  selected  and the  parties  are  selecting  dates  for
arbitration in this matter.  A settlement was reached by and between the Company
and Portera on November 11, 2004 whereby  Portera  agreed to a settlement of any
and all issues  related to the claim in exchange for one time payment of $75,000
which was paid by December 3, 2004.



                                      F-34


                    NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


On June 24, 2004,  the Company  reached a settlement  agreement  with,  Brobeck,
Phelger,  et al, a vendor,  for amounts in dispute.  The vendor agreed to accept
$108,500 as payment in full to be paid in three  installments  totaling  $54,250
and one payment of $54,250 to be paid either in cash or in the Company's  common
stock.  As of June 30, 2004,  the Company  recorded a gain of $102,119  from the
settlement of this debt in the accompanying  consolidated  financial statements.
In  September  2004,  the Company  issued  24,004 of Treasury  Shares  valued at
$45,965 (see Note 8), as a result the Company recorded a gain of $8,285 from the
settlement of this debt in the accompanying consolidated financial statements.

On May 12, 2004, Merrill Corporation served an action against NetSol for account
stated,  common counts, open book account and unjust enrichment alleging amounts
due of $90,415.33  together with interest  thereon from August 23, 2001. On June
24, 2004,  the parties  reached a  settlement  agreement.  The vendor  agreed to
accept  $75,450 as payment in full to be paid $10,450 at the time of signing the
agreement and the balance in five monthly  installments of $13,000.  The Company
recorded a gain of $14,965 from the settlement of this debt in the  accompanying
consolidated  financial statements.  During the fiscal year ended June 30, 2005,
the monthly installments were paid as agreed.

NOTE 12 - SEGMENT AND GEOGRAPHIC AREAS

The  following  table  presents a summary of operating  information  and certain
year-end balance sheet information for the years ended June 30, 2005 and 2004:



                                      F-35


                    NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


                                                2005            2004
 Revenues from unaffiliated customers:
      North America                         $    295,725    $    676,857
      International                           12,141,928       5,072,205
                                            ------------    ------------
         Consolidated                       $ 12,437,653    $  5,749,062
                                            ============    ============

Operating income (loss):
      North America                         $ (2,810,508)   $ (3,452,920)
      International                            3,875,213         744,902
                                            ------------    ------------
         Consolidated                       $  1,064,705    $ (2,708,018)
                                            ============    ============

Identifiable assets:
      North America                         $  6,373,169    $  4,309,332
      International                           14,752,865       7,668,716
                                            ------------    ------------
         Consolidated                       $ 21,126,034    $ 11,978,048
                                            ============    ============

Depreciation and amortization:
      North America                         $  1,324,098    $  1,080,498
      International                              240,464         160,294
                                            ------------    ------------
         Consolidated                       $  1,564,562    $  1,240,792
                                            ============    ============

Capital expenditures:
      North America                         $         --    $     55,986
      International                            1,468,499       2,805,768
                                            ------------    ------------
         Consolidated                       $  1,468,499    $  2,861,754
                                            ============    ============

NOTE 13 - MINORITY INTEREST IN SUBSIDIARY

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.  On  signing  of this  Agreement,  the  Shareholders  agreed to make the
following investment in the Company against issuance of shares of Connect.

           Akhter                          US$  200,000
           The Company                     US$   50,000

During the quarter ended  September 30, 2003, the funds were received by Connect
and a minority  interest of $200,000 was  recorded  for Akhter's  portion of the
subsidiary.  During  the  quarter  ended  December  31,  2003,  Akhter  paid  an
additional $10,000 to the Company for this purchase.  Per the agreement,  it was
anticipated  that Connect  would  require a maximum of $500,000 for expansion of
its  business  from  each  partner.  Akhter  was to meet the  initial  financial
requirements  of the Connect  until  November 1, 2003.  As of December 31, 2004,
both NetSol and Akhter had injected the majority of their committed cash to meet
the  expansion  requirement  of the  company.  As of June 30,  2005,  a total of
$751,356 had been transferred to Connect, of which $410,781 was from Akhter.



                                      F-36


                    NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


For the years ended June 30,  2005 and 2004,  the  subsidiary  had net losses of
$27,422 and $689,000,  respectively, of which $13,684 and $273,159 respectively,
was recorded against the minority interest. The balance of the minority interest
at June 30, 2005 was $323,938.

NetSol-TiG:

In December  2004,  NetSol forged a new and a strategic  relationship  with a UK
based  public  company  TIG Plc.  A new  Joint  Venture  was  signed  by the two
companies  to create a new  company,  TiG NetSol Pvt Ltd.  ("NetSol-TiG"),  with
50.1%  ownership by NetSol  Technologies,  Inc. and 49.9%  ownership by TiG. The
agreement  anticipates  TiG's  technology  business to be outsourced to NetSol's
offshore  development  facility.  Both  companies,  according to this agreement,
would  invest a total of $1  million  or  $500,000  each in next few  months for
infrastructure,  dedicated  personnel  and  systems  in the  NetSol IT campus in
Lahore.

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

For the year ended June 30, 2005, the subsidiary had net income of $250,013,  of
which $124,756 was recorded  against the minority  interest.  The balance of the
minority interest at June 30, 2005 was $376,382.

NOTE 14 - GAIN ON SETTLEMENT OF DEBT

In September 2004, the Company  transferred 24,004 of its treasury shares valued
at $45,965 to Brobeck Phleger & Harrison, LLP, in exchange of debt, as part of a
settlement agreement. The Company recorded a gain of $8,285 on the settlement.

During  the  quarter  ended  September  30,  2004,  the  Company  evaluated  the
liabilities of its  discontinued  operations and determined  that $41,989 was no
longer  payable.  The  Company  recorded  a gain of  $41,989  as a result of the
write-off of these liabilities from its financial statements.

In October 2004,  the Company  reached an agreement  with a vendor to settle the
amounts  owing.  The vendor  agreed to accept  $29,642 as payment in full.  As a
result, the Company recorded a gain on forgiveness of debt of $11,029.

In  December  2004,  the  Company  reached an  agreement  with Cowler to pay the
balance owing on the loan in one lump-sum payment (see note 7). Cowler agreed to
accept  (pound)52,000  or $103,371 as payment in full. As a result,  the Company
recorded a gain on forgiveness of debt of $21,148.

During the quarter  ended  December 31, 2004, a former  officer of Abraxas,  the
Company's  Australian  subsidiary,  agreed to forgive amounts accrued to him for
long-term service leave prior to the Company's  acquisition in 1999. The amounts
accrued  were  during  the  period  of 1984 to 1999.  As a result,  the  Company
recorded a gain on forgiveness of debt of $139,549.

In February  2005,  the Company  reached an  agreement  with a former  vendor to
settle amounts owing. The vendor agreed to accept $27,580 as payment in full. As
a result, the Company recorded a gain on forgiveness of debt of $27,581.

In April 2005,  the Company  reached an agreement  with Herbert Smith to pay the
balance owing on the loan in one lump-sum  payment (see note 7). Smith agreed to
accept $135,000 as payment in full. As a result,  the Company recorded a gain on
forgiveness of debt of $33,321.



                                      F-37



                    NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


In June 2005,  the Company  reached an agreement  with a former vendor to settle
amounts  owing.  The vendor  agreed to accept  $3,000 as  payment in full.  As a
result, the Company recorded a gain on forgiveness of debt of $1,958.

In May 2005,  the Company  issued  shares of its common stock as payment for two
notes  payable  and  accrued  interest  (see note 7). As a result,  the  Company
recorded a net loss on forgiveness of debt of $1,675.

During the year ended June 30,  2005,  the Company  wrote-off  old  invoices for
services  under the statute of  limitations.  The vendors had not  contacted the
Company in over four years and the original services were in dispute at the time
they were rendered.  As a result,  the Company recorded a gain on forgiveness of
debt of $120,951.

NOTE 15 - ACQUISITION OF CQ SYSTEMS

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

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

The initial purchase price was (pound)3,576,335 or $6,730,382, of which one-half
was due at closing  payable in cash and stock and the other half is due when the
audited March 31, 2006 financial statements are completed.  On the closing date,
$1.7 million was paid and 681,965 shares were issued to the  shareholders of CQ,
valued  at  $1,676,795  at an  average  share  price of $2.46  (see  note 8) was
recorded.  In  addition,  the  agreement  called  for the  accumulated  retained
earnings amounting to (pound)423,711 or $801,915 of CQ Systems as of the closing
date to be paid to the  shareholders  in cash  and  stock.  In April  2005,  the
additional cash of  (pound)350,000 or $662,410 was paid and 77,503 shares of the
Company's common stock valued at $139,505 were issued.  The total amount paid at
closing was $4,178,710.

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



                                      F-38


                    NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Purchase Price Allocation:
Purchase Price                             $    7,532,297
Less contingent consideration                  (3,353,587)
                                           --------------
   Net purchase price                      $    4,178,710
                                           ==============

Net tangible assets                        $      984,420
Intangible Assets:
  Product License                               2,190,807
  Customer Lists                                1,316,880
Deferred liability                               (313,397)
                                           --------------
  Net purchase price                       $    4,178,710
                                           ==============

The following is the proforma financial  information of the Company assuming the
transaction had been consummated at the beginning of the fiscal years ended June
30, 2004 and 2005:

                                                           For the years
                                                           Ended June 30,
                                                     2005               2004

Statement of Operations:
Revenues                                       $   15,910,061    $   10,389,715
Cost of Sales                                       6,684,419         4,533,669
                                               --------------    --------------
Gross Profit                                        9,225,642         5,856,046

Operating Expenses                                  7,974,393         8,354,927
                                               --------------    --------------
Income (loss) from operations                       1,251,249        (2,498,881)

Other income and (expenses)                          (337,346)         (357,018)
                                               --------------    --------------
Income (loss) before minority interest                913,903        (2,855,899)
Minority interest in subsidiary                      (111,073)          273,159
                                               --------------    --------------
Net Income (loss)                              $      802,830    $   (2,582,740)
                                               ==============    ==============


Earnings Per Share:
     Basic                                     $         0.07    $        (0.30)
     Diluted                                   $         0.05    $        (0.30)


NOTE 16 - SUBSEQUENT EVENTS

On July 31, 2005, the Company  entered into an agreement with Butura  Properties
to terminate the lease on the Maryland office space before the lease expiration.
The Company was  required to pay $23,000 for accrued  rent of $7,590 and $15,410
in early  termination  fees.  In addition,  the  security  deposit of $2,530 was
forfeited.

In  August  2005,  the  Company  listed  its  wholly-owned  subsidiary,   NetSol
Technologies  Ltd. on the Karachi Stock  Exchange  ("KSE").  The initial  public
offering of stock, of NetSol  Technologies  Ltd.,  together with the pre-initial
public  offering   private   placement,   raised  over  $5.83  million.   NetSol
Technologies  Ltd.  is listed on the KSE under the symbol  "NETSOL".  Trading of
`NETSOL' on the KSE commenced on August 26, 2005.


                                      F-39