Edgar Filing: NETSOL TECHNOLOGIES INC

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 17, 2005

REGISTRATION NO. 333-116512
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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POST-EFFECTIVE AMENDMENT TO

FORM SB-2

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

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NETSOL TECHNOLOGIES, INC.
(Name of small business issuer in its charter)

Nevada 2834 95-4627685
(State or Other Jurisdiction (Primary Standard (IRS Employer
of Incorporation Industrial Classification Identification Number)
or Organization) "SIC" Code Number)

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23901 Calabasas Road, Suite 2072
Calabasas, CA 91302
Phone: (818) 222-9195
Fax: (818) 222-9197
(Address including the zip code & telephone number including area
code, of registrant's principal executive office)

NAEEM GHAURI
CHIEF EXECUTIVE OFFICER
NETSOL TECHNOLOGIES, INC.
23901 Calabasas Road, Suite 2072
Calabasas, CA 91302
Phone: (818) 222-9195
Fax: (818) 222-9197

(Name, address, including zip code, and telephone number, including area code,
of agent for service)

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COPIES TO:

PATTI L. W. MCGLASSON
MALEA FARSAI
GENERAL COUNSEL
NETSOL TECHNOLOGIES, INC.
23901 Calabasas Road, Suite 2072
Calabasas, CA 91302
Phone: (818) 222-9195
Fax: (818) 222-9197

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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration
Statement.

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CALCULATION OF REGISTRATION FEE

Proposed
Number of Maximum Proposed
Shares to be Offering Maximum Amount of
Title of Each Class of Registered Price Per Aggregate Registration
Securities to be Registered (1)(2) Share (1)(2) Offering Price Fee
--------------------------- ------ ------------ -------------- ---
Shares of Common Stock,
$.001 par value 481,557 $ 2.20 $ 1,059,425.40 $ 124.69

$.001 par value, underlying warrants
and convertible debentures (3) 1,235,469 $ 2.20 $ 2.718,031.80 $ 319.91

TOTAL 1,717,026 $ 3,777,457.20 $ 444.60

(1) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457(c).

(2) Pursuant to Rule 416 under the Securities Act of 1933, as amended, there
are also being registered such additional shares of common stock as may
become issuable pursuant to anti-dilution provisions of the warrants.

(3) 590,308 of the shares are issuable upon exercise of the warrants and
645,161 of the shares upon conversion of the convertible debentures

If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X ]

If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering.
[ ] ------------------

If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.
[ ] ------------------

If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.
[ ] ------------------

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.

THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THE
SELLING STOCKHOLDERS MAY NOT SELL THE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN
OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.

SUBJECT TO COMPLETION, DATED FEBRUARY 17, 2005

PROSPECTUS

1,717,026 SHARES OF COMMON STOCK
OF
NETSOL TECHNOLOGIES, INC.

This prospectus relates to the offering for resale of NetSol Technologies, Inc.
common stock by certain selling stockholders, who will use this prospectus to
resell their shares of common stock. The shares of common stock being offered
include: shares of common stock acquired by the selling stockholders in a
private placement of such shares by NetSol; shares of common stock underlying
convertible debentures and warrants acquired by the selling stockholders in a
NetSol private placement. Such warrants and convertible debentures have not been
exercised or converted. In addition, certain shares of common stock were
acquired by selling stockholders in settlement of litigation against NetSol and
in exchange for settlement of a tax liability due by our subsidiary located in
Pakistan. A number of shares underlying warrants were acquired pursuant to a
placement agent agreement with the warrant holder. In this prospectus, we
sometimes refer to the common stock as the securities. In this prospectus, the
terms "NetSol," "we," or "us" will each refer to NetSol Technologies, Inc.

We will not receive any proceeds from sales of the shares of common stock by the
selling stockholders.

Our common stock is traded on the NASDAQ SmallCap Market under the symbol
"NTWK". The closing price of our common stock on February 14, 2005 was $2.20.

We will bear all expenses, other than selling commissions and fees, in
connection with the registration and sale of the shares being offered by this
prospectus.

INVESTING IN OUR SECURITIES INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 3

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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

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February 17, 2005

TABLE OF CONTENTS

SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS 1

PROSPECTUS SUMMARY 1

RISK FACTORS 4

USE OF PROCEEDS 8

SELLING STOCKHOLDERS 9

PLAN OF DISTRIBUTION 12

LEGAL PROCEEDINGS 15

DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS 16

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 18

DESCRIPTION OF SECURITIES 19

DISCLOSURE OF COMMISSION POSITION OF INDEMNIFICATION FOR
SECURITIES ACT LIABILITIES 19

DESCRIPTION OF BUSINESS 20

MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF OPERATIONS 33

DESCRIPTION OF PROPERTY 51

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 51

MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 52

EXECUTIVE COMPENSATION 53

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE 57

WHERE YOU CAN FIND MORE INFORMATION 57

FINANCIAL STATEMENTS F-1
EXHIBITS 59
UNDERTAKING 61

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Some of the statements under "Prospectus Summary," "Risk Factors," "Management's
Discussion and Analysis of Financial Condition and Plan of Operation," and
"Description of Business" in this prospectus are forward-looking statements.
These statements involve known and unknown risks, uncertainties, and other
factors that may cause our or our industry's actual results, levels of activity,
performance, or achievements to be materially different from any future results,
levels of activity, performance, or achievements expressed or implied by
forward-looking statements. Such factors include, among other things, those
listed under "Risk Factors" and elsewhere in this prospectus.

In some cases, you can identify forward-looking statements by terminology such
as "may," "will," "should," "expects," "plans," "anticipates," "believes,"
"estimates," "predicts," "potential," "proposed," "intended," or "continue" or
the negative of these terms or other comparable terminology. You should read
statements that contain these words carefully, because they discuss our
expectations about our future operating results or our future financial
condition or state other "forward-looking" information. There may be events in
the future that we are not able to accurately predict or control. Before you
invest in our securities, you should be aware that the occurrence of any of the
events described in these risk factors and elsewhere in this prospectus could
substantially harm our business, results of operations and financial condition,
and that upon the occurrence of any of these events, the trading price of our
securities could decline and you could lose all or part of your investment.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, growth rates,
levels of activity, performance, or achievements. We are under no duty to update
any of the forward-looking statements after the date of this prospectus to
conform these statements to actual results.

PROSPECTUS SUMMARY

The following summary contains basic information about NetSol and this
prospectus. Because it is a summary, it does not contain all of the information
that you should consider before investing in our securities. For a more complete
understanding of the risks associated with investing in us, you should read the
entire prospectus carefully, including the "Risk Factors" starting on page 4.

We are an end-to-end information technology ("IT") and business consulting
services provider for the lease and finance, banking and financial services
industries. We operate on a global basis with locations in the U.S., Europe,
East Asia and Asia Pacific. We help our clients identify, evaluate, and
implement technology solutions to meet their most critical business challenges
and maximize their bottom line. Our products include sophisticated software
applications for the asset-based lease and finance industry. By utilizing our
worldwide resources, we believe we are able to deliver high quality,
cost-effective IT services, ranging from consulting and application development
to systems integration and outsourcing. We have achieved the ISO 9001 and SEI
(Software Engineering Institute) Capable Maturity Model ("CMM") Level 3
certifications. Additionally, through our IP Backbone, located in Karachi,
Pakistan, we offer a package of wireless broadband services, which include
high-speed Internet access, support and maintenance.

Our subsidiary, Network Technologies Pvt. Ltd., a Pakistan Limited
Company, ("NetSol PK"), develops the majority of our software. NetSol PK was the
first company in Pakistan to achieve the ISO 9001 and SEI CMM Level 4 software
development assessment. As maintained by the SEI, maturity levels measure the
maturity of a software company's methodology that in turn ensures enhanced
product quality resulting in faster project turn-a-round and a shortened time to
market.

During recent years, we have focused on developing software applications
for the leasing and financial service industries. In late 2002, we launched a
new suite of software products under the name LeaseSoft. The LeaseSoft suite is
comprised of four major integrated asset based leasing/financing software
applications. The suite, consisting of a Credit Application Creation System
(LeaseSoft.CAC), a Credit Application Processing System (LeaseSoft.CAP), a
Contract Activation & Management System (LeaseSoft.CAM) and a Wholesale Finance
System (LeaseSoft.WFS), whether used alone or together, provides the user with
an opportunity to address specific sub-domains of the leasing/financing cycle
from the credit approval process through the tracking of the finance contract
and asset.

We recently acquired Pearl Treasury System Ltd., a United Kingdom company.
Pearl Treasury Systems has developed the PTS system for use by financial
institutions and customers. The system is designed to seamlessly handle foreign
exchange and money market trading, trading in derivative products, risk
management, credit control, pricing and various interfaces for rate feeds, with
one system platform. The system platform, modular in design, also allows
financial institutions to purchase only the modules they require. The PTS system
was developed over five years with a $4 million investment by a group of
visionaries in the U.K. This group completed nearly 80% of the product and
needed a stronger development and business partner who could take over
completion and marketing. With the acquisition, NetSol believes

we have become that partner. The PTS, now called "TRAPEZE," is nearing
completion and we expect a demonstration prototype to be launched in August
2004. In anticipation of this launch, we have hired a senior sales executive and
other sales staff to plan the marketing efforts in the United Kingdom.

On January 27, 2005, we entered into an agreement to acquire 100% of the
issued and outstanding shares of CQ Systems Ltd., a company organized under the
laws of England and Wales ("CQ"). CQ provides sophisticated accounting and
administrative software, along with associated services, to leasing and finance
companies located in Europe, Asia and Africa. The products include software
modules for asset finance, consumer finance, motor finance, general finance and
insurance premium finance. The modules provide an end-to-end contractual
solution - from underwriting, contract administration and accounting, through
asset disposal and remarketing. Customers include notable European companies
such as Scania Finance GB, DaimlerChrysler Services, Broadcastle PLC, Bank of
Scotland Equipment Finance and Deutsche Leasing Ltd. The acquisition of CQ is
subject to certain closing conditions including our receipt of $2.0 million in
funding to pay the cash portion of the purchase price.

We market our software products worldwide to companies primarily in the
automobile finance, leasing and banking industries. In February 2003, we
successfully implemented our LeaseSoft.CAM for Daimler Chrysler Singapore and
received a fee in excess of $2 million. Some of our other customers include:
Mercedes Benz Finance - Japan; Yamaha Motors Finance - Australia; Tung-Yang
Leasing Company Taiwan; Debis Portfolio Systems - UK; DaimlerChrysler Services -
Australia; DaimlerChrysler Leasing - Thailand; DaimlerChrysler Services - Korea;
UMF Leasing Singapore; and, DaimlerChrysler Services New Zealand. In addition,
NetSol provides offshore development and customized I/T solutions to blue chip
customers such as Citibank Pakistan, DCD Holding UK and Habib Allied Bank UK.
With the acquisition of Altvia Technologies, Inc. (now NetSol USA) in June 2003,
we believe we acquired, as clients, some of the most well known higher education
and telecommunications associations based on the east coast of the United
States. We are also a strategic business partner for DaimlerChrysler Services
AG, which consists of a group of many companies, including some of the ones
referred to above. We have recently added a few new customers such as TIG of the
United Kingdom, AMF of Australia, Capital Stream from the United States and a
few other in the US and Asia. Additionally, new strategic relationships were
formed with Intel Pakistan and Hyundai IT of Korea

We were incorporated under the laws of the State of Nevada on March 18,
1997. Our principal executive offices are located at 23901 Calabasas Road, Suite
2072, Calabasas, California 91302. Our telephone phone number is (818) 222-9195
and our website address is http://www.netsoltek.com.

This prospectus relates to the offering for resale of NetSol Technologies,
Inc. common stock by the selling stockholders named in this prospectus, who will
use this prospectus to resell their shares of common stock. The shares of common
stock consist of shares of common stock, shares of common stock underlying
convertible debentures and shares of common stock underlying warrants which were
acquired by the selling stockholders in private placements and, those shares of
common stock underlying warrants issued to the placement agent as compensation
for services provided to NetSol in the aforementioned private placements, shares
of common stock issued to a shareholder as settlement of litigation against
NetSol, and shares issued to a selling stockholder who was issued shares in
exchange for the settlement of a tax liability owed by our subsidiary located in
Pakistan.. We will not receive any proceeds from sales of our common stock by
the selling stockholders. For further information about the selling
stockholders, see "Selling Stockholders."

THE OFFERING

Common This prospectus relates to the offering of 1,717,026 shares of
Stock our common stock, which may be sold from time to time by the
Offered selling stockholders named in this prospectus. Of the total
amount offered, 645,161 shares of common stock are issuable upon
the conversion of convertible debentures sold by NetSol in a
private placement in March 2004 and 322,581 shares of common stock
are issuable to such selling stockholders upon the exercise of
warrants issued in connection with that placement; 386,362 shares
of common stock were issued in a private placement which closed in
May 2004, and 193,182 shares of common stock are issuable to the
selling stockholders upon the exercise of warrants issued in
connection with the private placement. Maxim Group LLC served as
NetSol's placement agent in connection with such private placements
and, its nominee, Maxim Partners, was issued warrants to purchase
up to 74,545 shares of common stock in connection with their
services. 50,000 shares of common stock were acquired by an
individual non-U.S. resident investor in exchange for the payment
of a tax liability owed by our Pakistani subsidiary. 45,195 shares
of common stock were acquired by a selling stockholder in a
settlement agreement between NetSol and the selling stockholder
entered into in October 2003. The shares of our common stock are
being registered to permit the selling stockholders to sell the
shares from time to time in the public market. The selling
stockholders will determine the timing and amount of any sale.

Common We had 12,409,155 shares of common stock issued and
Stock outstanding Stock as of outstanding February 11, 2005.
outstanding

Use of We will not receive any of the proceeds from sale of shares of
Proceeds common stock offered by the selling stockholders.

Trading Our common stock is currently listed on the NASDAQ SmallCap Market
Market under the trading symbol "NTWK."

Risk Investment in our common stock involves a high degree of risk.
Factors You hould carefully consider the information set forth in the
"Risk Factors" section of this prospectus as well as other
information set forth in this prospectus, including our financial
statements and related notes.

RISK FACTORS

An investment in our securities is extremely risky. You should carefully
consider the following risks, in addition to the other information presented in
this prospectus, before deciding to buy our securities. If any of the following
risks actually materialize, our business and prospects could be seriously harmed
and, as a result, the price and value of our securities could decline and you
could lose all or part of your investment. The risks and uncertainties described
below are intended to be the material risks that are specific to us and to our
industry.

RISKS RELATED TO OUR BUSINESS

We May Have Difficulty Raising Needed Capital in the Future, Which Could
Significantly Harm Our Business.

We will require additional financing in order to support further expansion,
develop new or enhanced services or products, respond to competitive pressures,
acquire complementary businesses or technologies or take advantage of
unanticipated opportunities. Our ability to arrange such financing in the future
will depend in part upon the prevailing capital market conditions, as well as
our business performance. There can be no assurance that we will be successful
in our efforts to arrange additional financing on satisfactory terms. If
additional financing is raised by the issuance of our securities, control of
NetSol may change and stockholders may suffer additional dilution. If adequate
funds are not available, or are not available on acceptable terms, we may not be
able to take advantage of opportunities, or otherwise respond to competitive
pressures and remain in business.

We Have Received A "Going Concern" Footnote From Our Auditors Indicating That
There Is Substantial Doubt As To Whether We Can Remain In Business.

In a footnote to our audit report dated June 30, 2004, Kabani & Company,
Certified Public Accountants, our auditors, indicated that there was substantial
doubt as to our ability to continue as a "going concern." Our ability to
continue as a "going concern" is attributable to the Company's historical
operating losses and the amount of capital which we project we need to satisfy
liabilities existing at that time and in order to achieve profitable operations.
For the year ended June 30, 2004, we continued to experience a negative cash
flow from consolidated operations, and projected that we will need certain
additional capital to enable us to continue operations at our current level
beyond the near term. Effective February 8, 2005, our auditors indicated their
intention to no longer include the going concern footnote in our financial
statements. Our auditors cited the increased revenues as the reason for
excluding the footnote. We cannot assure you that we will be able to continue to
generate sufficient revenues or raise sufficient funds to continue our
operations, or that our auditors will not issue another "going concern" opinion.
Our failure to raise sufficient additional funds, either through additional
financing or continuing operations, will have a material adverse effect on our
business and financial condition and we may be forced to curtail operations.

We Will Require Additional Financing; We May Not Achieve Profitability; We
Anticipate Continued Losses; Current Liabilities Exceed Current Assets.

As of the fiscal year ended June 30, 2004, we had a negative working capital of
$10,447 and as of December 31, 2004, we had a positive working capital of
$3,026,718. We have current short-term bank notes of $392,699 due within six
months. We had a net loss of $2,137,506 in fiscal 2003, a net loss of $2,969,975
in fiscal 2004, and a net income of $44,334 for the six months ended December
31, 2004. In addition, we continue to operate at a deficit on a monthly basis,
which is not expected to change in the foreseeable future, even with the
implementation of our current business plan. See "Management's Discussion and
Analysis and Plan of Operations" on page 30 of this prospectus for further
information about our current business plan. Notwithstanding that we raised
$2,050,000 in March through May 2004, we may need to raise additional funds in
the amount of at least $2.0 million to continue operations and to expand and
invest in the growth of our business for the next year. Additionally, we will
require a minimum of $2,000,000 to close the acquisition of CQ Systems Ltd. We
cannot assure you that we can sustain or increase profitability. If revenues
grow slower than we anticipate, or if operating expenses exceed our expectations
or cannot be adjusted accordingly, our business, results of operations and
financial condition will be materially and adversely affected. Although we have
improved our financials steadily in last few quarters, no assurance can be given
that we will continue to improve our financial condition.

We May Not Be Able To Realize The Benefits Of Our Strategic Plan.

As discussed in "Description of Business" starting on page 39, after the
restructuring undertaken in fiscal year 2002 and fiscal year 2003, we have
undertaken a business plan designed to optimize this restructuring. Although our
management is confident about our ability to realize some benefits from the
restructuring, the level of benefits to be realized could be affected by a
number of factors including, without limitation: (a) our ability to raise
sufficient funds; (b) our ability to continue to operate as planned without
further stockholder hostile takeover attempts; (c) our ability to prosper given
the current uncertainty in the US technology industry; and, (d) our ability to
react effectively to the global political and business effects of the political
events around the world and particularly in Pakistan.

We Depend Heavily On A Limited Number Of Client Projects And The Loss Of Any
Such Projects Would Adversely Affect Our Operating Results.

As of the fiscal year ended June 30, 2004, and the six months ended December 31,
2004, we derived approximately 20% and 18%, respectively, of our net revenues
from DaimlerChrysler (which consists of a group of companies and clients).
DaimlerChrysler consists of a number of companies, each of which are uniquely
different customers and none of which represents greater than 10% of our net
revenues. We continue to enhance our relationship with DaimlerChrysler to
provide software and support services to them on a global basis. This may
increase our reliance on DaimlerChrysler as a revenue source. We also have other
significant clients whose business is critical to our success. The loss of any
of our principal clients for any reason, including as a result of the
acquisition of that client by another entity, could have an adverse effect on
our business, financial condition and results of operations.

If Any Of Our Clients Terminate Their Contracts With Us, Our Business Could Be
Adversely Affected.

Many of our clients have the ability to cancel certain of their contracts with
us with limited advance notice and without significant penalty. Any such
termination could result in a loss of expected revenues related to that client's
project. A cancellation or a significant reduction in the scope of a large
project could have a material adverse effect on our business, financial
condition and results of operations.

If We Are Unable To Protect Our Proprietary Software, Our Business Could Be
Adversely Affected.

Our success as a company depends, in part, upon our work product being deemed
proprietary software, along with other intellectual property rights. While both
the LeaseSoft and NetSol trade names and marks are copyrighted and trademarked
in Pakistan, and we have filed an application for the registration of the
inBanking trademark with the U.S. Patent and Trademark office, we have not
registered any trademarks or filed any copyrights in any other jurisdictions. We
rely on a combination of nondisclosure and other contractual arrangements, and
common law intellectual property, trade secret, copyright and trademark laws to
protect our proprietary rights. As a matter of course, we generally enter into
confidentiality agreements with our employees, and require that our consultants
and clients enter into similar agreements. We also limit access to our
proprietary information. There can be no assurance that these steps will be
adequate to deter misappropriation of proprietary information or that we will be
able to detect unauthorized use and take appropriate steps to enforce our
intellectual property rights. In addition, although we believe that our services
and products do not infringe on the intellectual property rights of others,
there can be no assurance that infringement claims will not be asserted against
us in the future, or that if asserted, any such infringement claim will be
successfully defended. The cost of defending any such suit will have a negative
impact, even if ultimately successful. A successful claim against us could
materially adversely affect our business, financial condition and results of
operations. If NetSol cannot protect its proprietary information, others could
copy our software and compete with us in providing both software and services.

We May Not Have The Right To Resell Or Reuse Software Developed For Specific
Clients.

A portion of our business involves the development of software for specific
client engagements. Ownership of these solutions is the subject of negotiation
and is frequently assigned to the client, although we may retain a license for
certain uses. Some clients have prohibited us from marketing the software
developed for them for specified periods of time or to specified third parties.
There can be no assurance that our clients will not demand similar or other
restrictions in the future. Issues relating to the ownership of and rights to
use our software solutions can be complicated and there can be no assurance that
potential disputes will not affect our ability to resell or reuse these software
solutions. While we have not incurred such expense in the past, limitations on
our ability to resell or reuse software solutions could require us to incur
additional expenses to develop new solutions for future projects.

International Expansion Of Our Business Could Result In Financial Losses Due To
Changes In Foreign Political And Economic Conditions Or Fluctuations In Currency
And Exchange Rates.

We expect to continue to expand our international operations. As well as the two
offices in the United States, we currently have offices in Pakistan, the UK and
Australia. Additionally, we have entered into an agreement to acquire CQ Systems
Ltd., a company organized and located in England. In fact, approximately 90% of
our revenue is generated by non-U.S. sources. Our international operations are
subject to other inherent risks, including:

o political uncertainty in Pakistan and the Southeast Asian Region,
particularly in light of the United States' war on terrorism and the
Iraq war;

o recessions in foreign countries;

o fluctuations in currency exchange rates, particularly the weakness
of the U.S. dollar and the effect this may have on U.S. off-shore
technology spending;

o difficulties and costs of staffing and managing foreign operations;

o reduced protection for intellectual property in some countries;

o political instability or changes in regulatory requirements or the
potential overthrowing of the current government in certain foreign
countries;

o U.S. imposed restrictions on the import and export of technologies;
and,

o U.S. imposed restrictions on the issuances of business and travel
visas to foreign workers primarily those from Middle Eastern or East
Asian countries.

We Are Controlled By and Are Dependent On Our Key Personnel.

Our management is currently controlled and operated by various members of the
Ghauri family. Our success will depend in large part upon the continued services
of those individuals including Messrs. Salim Ghauri, Najeeb Ghauri and Naeem
Ghauri. The death or loss of the services of any one of them or of any one or
more of our other key personnel could have a material adverse effect on our
business, financial condition and results of operations. We do not have key man
life insurance on these individuals. In addition, if one or more of our key
employees resigns to join a competitor or to form a competing company, the loss
of such personnel and any resulting loss of existing or potential clients to any
such competitor could have a material adverse effect on our business, financial
condition and results of operations. In the event of the loss of any key
personnel, there can be no assurance that we will be able to prevent the
unauthorized disclosure or use of our technical knowledge, practices or
procedures by such personnel. We entered into employment agreements with Messrs.
Salim, Najeeb and Naeem Ghauri effective January 1, 2004, for a period of three
(3) years. Messrs. Salim, Najeeb and Naeem Ghauri have non-competition and
anti-raid clauses in their employment agreements with us.

Certain Of Our Management Team Have Relationships Which May Potentially Result
In Conflicts Of Interests.

In fiscal year 2003, certain of our management team loaned funds to our company
for operating costs. Similar transactions occurred in fiscal year 2004. While
these transactions were approved by the board of directors, and we deem such
transactions to be fair in their terms, and such transactions have not resulted
in the management team choosing personal gain over company gain, such
transactions constitute a potential conflict of interest between our management
members' personal interest and the interest of our company in that management
could be motivated to repay debts owed to the management team rather than using
that money for NetSol growth. See "Certain Relationships and Related
Transactions" on page 39 for information about relationships between our
officers and/or directors which could result in a Conflict of Interest.

We Face Significant Competition In Markets That Are New And Rapidly Changing.

The markets for the services we provide are highly competitive. We principally
compete with strategy consulting firms, Internet professional services firms,
systems integration firms, software developers, technology vendors and internal
information systems groups. Many of the companies that provide services in the
markets we have targeted have significantly greater financial, technical and
marketing resources than we do, have greater name recognition and generate
greater revenues. Potential customers may also have in house employees that can
compete with or replace us. In addition, there are relatively low barriers to
entry into these markets and we expect to continue to face competition from new
entrants into these same markets. We believe that the principal competitive
factors in these markets include:

o our ability to integrate strategy, experience modeling, creative
design and technology services;

o quality of service, speed of delivery and price;

o industry knowledge;

o sophisticated project and program management capability; and,

o Internet technology expertise and talent.

We believe that our ability to compete also depends on a number of competitive
factors outside our control, including:

o ability of our competitors to hire, retain and motivate professional
staff;

o development by others of Internet services or software that is
competitive with our solutions; and

o extent of our competitors' responsiveness to client needs.

There can be no assurance that we will be able to compete successfully in these
markets.

We May Not Be Able to Successfully Implement Our Acquisition Strategy

NetSol has announced the execution of a definitive agreement to acquire 100% of
the issued and outstanding shares of CQ Systems Ltd.. While a definitive
agreement has been executed, the definitive agreement is not scheduled to close
until the later of 45 days from the execution date (ie.March 5, 2005), or within
15 days of approval of the acquisition by the shareholders of the Company if
required by the rules of the NASDAQ stock market. Consideration for the shares
of CQ is paid in part by restricted shares of common stock of NetSol. Such
issuance will result in a dilution to our current shareholders. Part of the
consideration is in cash. The acquisition cannot close, and will be terminated
unless an extension is agreed to by CQ and NetSol, should we be unable to
acquire at least $2 million in cash by the closing date. While NetSol intends to
close the transaction as stated in the definitive agreement, there is no
guarantee that: (i) such acquisition will close or that should such acquisition
close that there will be NetSol will have sufficient funds available to provide
capital to CQ; (ii) NetSol will realize the benefits of such acquisition even if
consummated; (iii) such acquisition and the operation of CQ will not use the
time and attention of our management distracting them from their other duties;
(iv) NetSol will be able to acquire sufficient cash in a timely manner to
consummate such acquisition; and, that (v) such acquisition will not exceed the
anticipated costs.

RISKS RELATED TO INVESTING IN THIS OFFERING

Our Stock Price Has Historically Been Volatile; Our Stock Price After This
Offering Will Be Subject To Market Factors.

The trading price of our common stock has historically been volatile. The future
trading price of our common stock could be subject to wide fluctuations in
response to:

o quarterly variations in operating results and achievement of key
business metrics;

o changes in earnings estimates by securities analysts, if any;

o any differences between reported results and securities analysts'
published or unpublished expectations;

o announcements of new contracts or service offerings by NetSol or
competitors;
7

o market reaction to any acquisitions, joint ventures or strategic
investments announced by NetSol or competitors;

o demand for our services and products;

o changes of shares being sold pursuant to Rule 144 or upon exercise
of the warrants; and,

o general economic or stock market conditions unrelated to NetSol's
operating performance.

Potential Future Sales Pursuant To Rule 144 May Have A Depressive Effect On The
Trading Price Of Our Securities.

Certain shares of common stock presently held by officers, directors and certain
other stockholders are "restricted securities" as that term is defined in Rule
144, promulgated under the Act. Under Rule 144, a person (or persons whose
shares are aggregated) who has satisfied a one year holding period, may, under
certain circumstances sell within any three month period a number of shares
which does not exceed the greater of 1% of the then outstanding shares of common
stock, or the average weekly trading volume during the four calendar weeks prior
to such sale. Rule 144 also permits, under certain circumstances, including a
two-year holding period, the sale of shares by a person without any quantity
limitation. Such holding periods have already been satisfied in many instances.
Therefore, actual sales or the prospect of sales of such shares under Rule 144
in the future may depress the prices of our common stock.

Provisions of Our Bylaws Hinder Change in Control.

Our bylaws contain provisions that prevent actions being taken by shareholders
by written consent. Shareholders actions may only be taken at special meetings
called in accordance with our bylaws. Our bylaws limits the manner and timing of
calling such meetings by shareholders. These provisions may effectively prevent
shareholders from changing board composition and or management in a swift
manner.

USE OF PROCEEDS

We will not receive any of the proceeds from the offering of common stock for
sale by the selling stockholders. Proceeds received by us as a result of the
exercise of the warrants by the selling stockholders will be used for working
capital purposes.

SELLING STOCKHOLDERS

The following table and notes set forth the name of each selling stockholder,
the nature of any position, office, or other material relationship, if any,
which the selling stockholder has had, within the past three years, with NetSol
or with any of our predecessors or affiliates, the amount of shares of NetSol
common stock that are beneficially owned by such stockholder, the amount to be
offered for the stockholder's account and the amount to be owned by such selling
stockholder upon completion of the offering.

Number of Shares
of
NetSol Common Number of Shares of
Stock Number of NetSol Common
Beneficially Shares of Stock to be
Owned Prior NetSol Common Beneficially Owned
Name of Selling to the Stock Being Upon Completion of
Stockholder(1) Offering(1) Offered Hereby(1) the Offering (1)(2)
-------------- ----------- ----------------- -------------------

Maxim Partners, 155,545 74,545 0
LLC (3)

Natalie L. Khur 78,410(4) 78,410 0
Revocable
Trust(4)

Richard E. Kent 285,190(5) 285,190 0
& Lara T. Kent

Alfonse M 148,826(6) 148,826 0
D'Amato Defined
Benefit Plan(6)

Jay Youngerman & 40,908(7) 40,908 0
Toni Youngerman

Girish C Shah 34,090(9) 34,090 0
IRA (8)

Douglas 34,090(9) 34,090 0
Friedenberg IRA
Standard/SEP DTD
04/16/01(10)

Fred Arena 34,090(9) 34,090 0

Grossman Family 51,136(11) 51,136 0
Trust (11)

Hugh Brook 34,090(9) 34,090 0

Michael K. Harley 40,323(12) 40,323 0

W. R. Savey 40,323(12) 40,323 0

Robert Stranczek 40,323(12) 40,323 0

The Viney 120,967(13) 120,967 0
Settlement
Number 1 (13)

Ronald K. Marks 40,323(12) 40,323 0

Leonard Carinci 40,323(12) 40,323 0

Peter J 40,323(12) 40,323 0
Jegou(14)

Joseph Marotta & 40,323(12) 40,323 0
Nancy J. Marotta

D.G. Fountain 40,323(12) 40,323 0

Lee A 40,323(12) 40,323 0
Pearlmutter
Revocable Trust
U/A dated
10/9/92 as
amended 2/28/96
(15)

Wayne Saker 40,323(12) 40,323 0

Donald Asher 40,323(12) 40,323 0
Family Trust
dated 7/11/01
(16)

Jeffrey Grodko 40,323(12) 40,323 0

Emeric R 20,161(17) 20,161 0
Holderith

John O'Neal 20,161(17) 20,161 0
Johnston trust
u/a DTD 5/17/93
(18)

Judith Barclay 40,323(12) 40,106 0

Allen W. Coburn 20,161(17) 20,161 0
& Maureen B
Coburn

John C. Moss 20,161(17) 20,161 0
Landing 40,323(12) 40,323 0
Wholesale Group
Defined Benefit
Plan(19)

Jerold Weigner & 40,323(12) 40,323 0
Lilli Weigner

Mohammed Iqbal 50,000(20) 50,000 0

ACB Ltd.(21) 45,195(21) 45,195 0

TOTAL 1,798,026 1,717,026 0

(1) 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 such securities.

(2) None of the Selling Stockholders has held an employment, officer or
director position with NetSol within the past three years. Assuming that
all shares being registered hereby will be sold, all debentures will be
converted and all warrants will be exercised, no selling stockholder will
hold a percentage interest in the shares of NetSol in excess of 1 percent
at the completion of the offering.

(3) Maxim Partners LLC owns 98% of Maxim Group LLC, a registered broker
dealer. MJR Holdings LLC owns 72% of Maxim Partners LLC. Mike Rabinowitz
is the principal manager of MJR Holdings and has principal voting and
dispositive power with respect to the securities owned by Maxim Partners
LLC. The number of shares beneficially owned include 74,545 warrants to
acquire common stock which are being registered hereby and warrants to
acquire 81,000 shares of common stock previously registered which were
issued as compensation to Maxim Partners, as nominee of Maxim Group, for
services provided to NetSol in its July 2003 private placement.

(4) Adam Kuhr, as trustee, is the beneficial owner of the Natalie L. Kuhr
Revocable Trust. The shares of common stock consist of 52,273 shares of
common stock and 26,137 shares of common stock underlying warrants
acquired in the May 2004 placement.

(5) Consisting of 190,127 shares of common stock of which 136,364 shares were
acquired in the May 2004 placement and 53,763 shares issuable upon
conversion of the principal dollar amount of its convertible debenture;
and, 95,063 shares of common stock underlying warrants of which 68,182 are
shares of common stock underlying warrants issued in the May 2004
placement and 26,881 are shares of common stock underlying warrants issued
in connection with the March 2004 private placement of convertible
debentures.

(6) Alfonse M. D'Amato is the beneficial owner of the Alfonse M. D'Amato
Defined Benefit plan. The shares of common stock consist of 99,217 shares
of common stock of which 45,454 shares were acquired in the May 2004
placement and 53,763 shares are issuable upon conversion of the principal
dollar amount of its convertible debenture; and, 49,609 shares of common
stock underlying warrants of which 22,727 shares of common stock underly
warrants issued in the May 2004 placement and 26,882 are shares of common
stock underlying warrants issued in connection with the March 2004 private
placement of convertible debentures.

(7) Consisting of 27,272 shares of common stock and 13,636 shares of common
stock underlying warrants acquired in the May 2004 private placement.

(8) Girish C. Shah is the beneficial owner of the Girish C. Shah IRA.

(9) Consisting of 22,727 shares of common stock and 11,363 shares of common
stock underlying warrants acquired in the May 2004 private placement.

(10) Douglas Friedenberg is the beneficial owner of the Douglas Friedenberg IRA
Standard/SEP DTE 04/16/01.

(11) Raphael Z. Grossman, as trustee, is the beneficial owner of the Grossman
Family Trust. The shares of common stock consist of 34,091 shares of
common stock and 17,045 shares of common stock underlying warrants
acquired in the May 2004 private placement.

(12) Consisting of 26,882 shares of common stock issuable upon conversion of
the principal dollar amount of its debenture and 13,441 shares of common
stock underlying warrants issued in connection with the March 2004
placement of convertible debentures.

(13) John Viney, as trustee, is the beneficial owner of the Viney Settlement
Number 1. Shares of common stock consist of 80,645 shares of common stock
issuable upon the conversion of the principal dollar amount of its
debenture and 40,332 shares of common stock underlying warrants issued in
connection with the March 2004 placement of convertible debentures.

(14) Peter J. Jegou is the beneficial holder of 26,882 shares issuable upon the
conversion of the principal dollar amount of his convertible debenture and
13,441 shares underlying warrants issued in connection with the March 2004
placement of convertible debentures.

(15) Lee A. Pearlmutter, as trustee, is the beneficial owner of the Lee A.
Pearlmutter Revocable Trust dated 10/9/92 as Amended 2/28/96.

(16) D.S. Asher, as trustee, is the beneficial owner of the Donald Asher Family
Trust.

(17) Consisting of 13,441 shares issuable upon conversion of the principal
dollar amount of its convertible debenture and 6,720 shares underlying
warrants issued in connection with the March 2004 placement of convertible
debentures.

(18) John O'Neal Johnston, as trustee, is the beneficial owner of the John
O'Neal Johnston Trust U/A DTD 05/17/93.

(19) Andrew Bellow Jr. is the beneficial owner of the Landing Wholesale Group
Defined Benefit Plan.

(20) Mr. Iqbal received his shares in a share purchase agreement whereby he
received 50,000 shares in exchange for satisfying a tax liability of
NetSol's Pakistani subsidiary. This agreement required NetSol to register
the shares of common stock in this offering.

(21) Tony De Nazareth, as managing director, is the beneficial owner of ACB
Ltd.

Certain selling stockholders shall receive their shares upon conversion of
convertible debentures which were offered to such stockholders in a private
placement of Series A 10% Convertible Debentures in March 2004. This private
placement resulted in the issuance of convertible debentures with a principal
value of $1,200,000. The debentures bear interest at the rate of 10% per annum
payable in common stock or cash, which at the option of NetSol will be paid in
cash upon conversion. The debentures are convertible at the rate of $1.86
principal value per share. Each debenture holder also received a warrant to
purchase fifty percent (50%) of the number of shares of common stock issuable at
conversion at the exercise price of $3.30 per share. These warrants may be
exercised until May 2009.

Certain of the selling stockholders received their shares in a private placement
of shares of common stock and warrants to acquire common stock in May 2004 in
which we sold 386,362 shares at $2.20 per share and warrants to acquire up to
193,182 shares of common stock at an exercise price of $3.30 per share. The
warrants may be exercised until May 2009.

The Company has offered, to each of the warrant holders who acquired their
warrants in the Debenture offering and in the May 2004 private placement, the
opportunity to exercise such warrants at the reduced price of $2.00 per share.
Such option is available until March 17, 2005 and requires such warrant holders
to provide both the exercise notice and the full exercise price to the Company
prior to that date. Any warrants not exercised by that date shall revert to the
$3.30 per share exercise price.

Pursuant to the placement agent agreements by and between NetSol and Maxim Group
LLC, Maxim Partners LLC, as nominee of Maxim Group LLC, received, as part of the
compensation for their services, warrants to purchase up to 74,545 shares of our
common stock at an exercise price of $2.20 per share. These warrants may be
exercised until May 2009.

Mr. Mohammed Iqbal received his shares pursuant to a share purchase agreement in
March 2004 whereby he paid $100,000 to the Pakistani taxing authorities to
satisfy the tax liability of our Pakistan subsidiary.

ACB, Ltd., formerly, Arab Commerce Bank, received its shares as part of a
settlement of a complaint against NetSol. The complaint sought damages for
breach of a note purchase agreement and note. The terms of the settlement
agreement required NetSol to issue to ACB shares of common stock of the Company
equal in value to $100,000 plus interest as of the effective date of the
agreement. The complaint was dismissed by virtue of this settlement on November
3, 2003. On December 16, 2003, 34,843 shares of the Company's common stock
valued at $100,000 were issued pursuant to the terms of the agreement. On
February 6 2004, NetSol issued an additional 10,352 shares valued at $35,135 as
interest due under the settlement agreement. The terms of the settlement
agreement require NetSol to register ACB Ltd's shares herein.

Because the selling stockholders may, under this prospectus, sell all or some
portion of their NetSol common stock, only an estimate can be given as to the
amount of NetSol common stock that will be held by the selling stockholders upon
completion of the offering. In addition, the selling stockholders identified
above may have sold, transferred or otherwise disposed of all or a portion of
their NetSol common stock after the date on which they provided information
regarding their shareholdings.

PLAN OF DISTRIBUTION

Selling stockholders may offer and sell, from time to time, the shares of our
common stock covered by this prospectus. The term selling stockholders includes
donees, pledgees, transferees or other successors-in-interest selling securities
received after the date of this prospectus from a selling stockholder as a gift,
pledge, partnership distribution or other non-sale related transfer. The selling
stockholders will act independently of us in making decisions with respect to
the timing, manner and size of each sale. Sales may be made on one or more
exchanges or in the over-the-counter market or otherwise, at prices and under
terms then prevailing or at prices related to the then current market price or
in negotiated transactions. The selling stockholders may sell their securities
by one or more of, or a combination of, the following methods:

o purchases by a broker-dealer as principal and resale by the
broker-dealer for its own account pursuant to this prospectus;

o ordinary brokerage transactions and transactions in which the broker
solicits purchasers;

o block trades in which the broker-dealer so engaged will attempt to
sell o the securities as agent but may position and resell a portion
of the block as principal to facilitate the transaction;

o an over-the-counter sale;

o in privately negotiated transactions; and,

o in options transactions.

The shares of our common stock will be listed, and may be traded, on the NASDAQ
Small Cap Market under the symbol "NTWK". In addition, the selling stockholders
may sell pursuant to Rule 144 under the Securities Act or pursuant to an
exemption from registration. We have received confirmation from all selling
stockholders that they do not have any short positions and have reviewed
Regulation M.

To the extent required, we may amend or supplement this prospectus to describe a
specific plan of distribution. In connection with distributions of the
securities or otherwise, the selling stockholders may enter into hedging
transactions with broker-dealers or other financial institutions. In connection
with those transactions, broker-dealers or other financial institutions may
engage in short sales of shares of our common stock in the course of hedging the
positions they assume with selling stockholders. The selling stockholders may
also sell shares of our common stock short and redeliver the securities to close
out their short positions. The selling stockholders may also enter into option
or other transactions with broker-dealers or other financial institutions that
require the delivery to the broker-dealer or other financial institution of
securities offered by this prospectus, which securities the broker-dealer or
other financial institution may resell pursuant to this prospectus, as
supplemented or amended to reflect the transaction. The selling stockholders may
also pledge securities to a broker-dealer or other financial institution, and,
upon a default, the broker-dealer or other financial institution, may affect
sales of the pledged securities pursuant to this prospectus, as supplemented or
amended to reflect the transaction.

In effecting sales, broker-dealers or agents engaged by the selling stockholders
may arrange for other broker-dealers to participate. Broker-dealers or agents
may receive commissions, discounts or concessions from the selling stockholders
in amounts to be negotiated immediately prior to the sale.

In offering the securities covered by this prospectus, the selling stockholders
and any broker-dealers who execute sales for the selling stockholders may be
treated as "underwriters" within the meaning of the Securities Act in connection
with sales. Any profits realized by the selling stockholders and the
compensation of any broker-dealer may be treated as underwriting discounts and
commissions.

The selling stockholders and any other person participating in a distribution
will be subject to the Securities and Exchange Act of 1934, as amended (the
"Exchange Act"). The Exchange Act rules include, without limitation, Regulation
M, which may limit the timing of purchases and sales of any of the securities by
the selling stockholders and other participating persons. In addition,
Regulation M may restrict the ability of any person engaged in the distribution
of the securities to engage in market-making activities with respect to the
particular security being distributed for a period of up to five business days
prior to the commencement of the distribution. This may affect the marketability
of the securities and the ability of any person or entity to engage in
market-making activities with respect to the securities. We have informed the
selling stockholders that the anti-manipulation rules of the SEC, including
Regulation M promulgated under the Exchange Act, may apply to their sales in the
market.

Additionally, we have informed the selling stockholders involved in the private
placements, through the offering documents of the following Telephone
Interpretation in the SEC Manual of Publicly Available Telephone Interpretations
(July 1997):

A.65. Section 5

An issuer filed a Form S-3 registration statement for a secondary offering
of common stock, which is not yet effective. One of the selling
shareholders wanted to do a short sale of common stock "against the box"
and cover the short sale with registered shares after the effective date.
The issuer was advised that the short sale could not be made before the
registration statement becomes effective, because the shares underlying
the short sale are deemed to be sold at the time such sale is made. There
would, therefore, be a violation of Section 5 if the shares were
effectively sold prior to the effective date.

The selling stockholder have represented and warranted that he/she/it had
complied with all applicable provisions of the Act, the rules and regulations
promulgated by the SEC thereunder, including Regulation M, and the applicable
state securities laws.

We will make copies of this prospectus available to the selling stockholders for
the purpose of satisfying the prospectus delivery requirements of the Securities
Act, which may include delivery through the facilities of the NASDAQ Small Cap
Market pursuant to Rule 153 under the Securities Act. We have agreed to
indemnify the selling stockholders against certain liabilities, including those
arising under the Securities Act, and to contribute to payments the selling
stockholders may be required to make in respect of such liabilities. The selling
stockholders may indemnify any broker-dealer that participates in transactions
involving the sale of the securities against certain liabilities, including
liabilities arising under the Securities Act.

At the time a particular offer of securities is made, if required, a prospectus
supplement will be distributed that will set forth the number of securities
being offered and the terms of the offering, including the name of any
underwriter, dealer or agent, the purchase price paid by any underwriter, any
discount, commission and other item constituting compensation,

any discount, commission or concession allowed or reallowed or paid to any
dealer, and the proposed selling price to the public.

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.

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. As of
December 31, 2004, the balance due was 97,682 pounds sterling or $168,321.

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.

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. NetSol
entered into a settlement agreement with Merrill Corporation in exchange for a
dismissal of the action with prejudice, to be filed after receipt of the final
payment by NetSol to Merrill on or before October 31, 2004. Under the terms of
the settlement agreement, we paid $10,450 at the time of settlement and have
agreed to pay $52,000 in installments of $13,000 per month commencing on July
30, 2004. This matter was paid in full with the final settlement on November 30,
2004.

DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS

The following table sets forth the names and ages of the current directors and
executive officers of NetSol, the principal offices and positions with NetSol
held by each person and the date such person became a director or executive
officer of NetSol. The Board of Directors elects the executive officers
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 NetSol are as follows:

Year First
Elected As an
Officer Position Held with the Family
Name Or Director Age Registrant Relationship
---- ----------- --- ---------- ------------

Najeeb Ghauri 1997 50 Chief Financial Officer, Brother to Naeem
Director and Chairman and Salim Ghauri

Salim Ghauri 1999 49 President and Director Brother to Naeem
and Najeeb Ghauri

Naeem Ghauri 1999 47 Chief Executive Officer Brother to Najeeb
and Director and Salim Ghauri

Patti L. W. 2004 39 Secretary None
McGlasson

Irfan Mustafa 1997 53 Director None

Shahid Javed 2000 65 Director None
Burki

Eugen Beckert 2001 58 Director None

Jim Moody 2001 68 Director None

Shabir Randeree 2003 43 Director None

Business Experience of Officers and Directors:

NAJEEB U. GHAURI has been a Director of NetSol since 1997. Mr. Ghauri served as
NetSol's CEO from 1999-2001. Currently, he is the Chief Financial Officer and
Chairman of NetSol. During his tenure as CEO, Mr. Ghauri was responsible for
managing the day-to-day operations of NetSol, as well as NetSol's overall growth
and expansion plan. As the CFO of NetSol, Mr. Ghauri seeks financing for NetSol
as well as oversees the day-to-day financial position of NetSol. Prior to
joining NetSol, 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. Mr. Ghauri is the Chairman of the Board of Directors.

SALIM GHAURI has been with NetSol since 1999 as the President and Director of
NetSol. Mr. Ghauri is also the CEO of NetSol Technologies (Pvt.) Ltd., (F/K/A/
Network Solutions (Pvt.) Ltd.), a wholly owned subsidiary of NetSol 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 NetSol's CEO since August 2001. Mr. Ghauri has been a
Director of NetSol since 1999. Mr. Ghauri serves as the Managing Director of
NetSol (UK) Ltd., a wholly owned subsidiary of NetSol located in London,
England. Under Mr. Ghauri's direction, Pearl Treasury System Ltd. was acquired
and NetSol's entered into the banking and financial arenas. Prior to joining
NetSol, 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.

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 law at Vogt & Resnick, law corporations, 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 Laws in Transnational Business from the University
of the Pacific, McGeorge School of Law, in 1991 and 1993 respectively.

IRFAN MUSTAFA has been a Director of NetSol since the inception of NetSol in
April 1997. Mr. Mustafa has an M.B.A. from IMD (formerly Imede), Lausanne,
Switzerland (1975); an M.B.A. from the Institute of Business Administration,
Karachi, Pakistan (1974); and a B.S.C. in Economics, from Punjab University,
Lahore, Pakistan (1971). Mr. Mustafa began his 14-year career with Unilever, Plc
where he was one of the youngest senior management and board members. Later, he
was employed with Pepsi International from 1990 to 1997 as a CEO in Pakistan,
Bangladesh, Sri Lanka and Egypt. He spent two years in the US with Pepsi in
their Executive Development Program from 1996-97. Mr. Mustafa was relocated to
Dubai as head of TRICON (now YUM Restaurant Services Group, Inc.) Middle East
and North African regions. Pepsi International spun off TRICON in 1997. Mr.
Mustafa has been a strategic advisor to NetSol from its inception and has played
a key role in every acquisition by NetSol. His active participation with NetSol
management has helped NetSol to establish a stronger presence in Pakistan. Mr.
Mustafa is a member of NetSol's Compensation and Audit Committees.

EUGEN BECKERT was appointed to the Board of Directors in August 2001. 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 2004, he acted as director of Processes and
Systems (CIO) for Financial Services of DaimlerChrysler in Asia-Pacific. Mr.
Beckert is currently a Vice President 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 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 Works committees. 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, 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.
Since April 2000, Congressman Moody has served as a Financial Advisor to Morgan
Stanley in Alexandria, VA 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. Based on Mr.
Moody's experience, the board of directors has determined that Mr. Moody is
qualified to act as NetSol's audit committee financial expert. Mr. Moody is an
independent director.

SHAHID JAVED BURKI was appointed to the Board of Directors in February 2003. Mr.
Burki is also a member of the Audit and Compensation Committees. 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 the
Chairman of and a member of the Compensation Committee.

SHABIR RANDEREE, was appointed to the Board of Directors in February 2003. Mr.
Randeree is a Group Managing Director of DCD London and Mutual Plc, a position
he has held since 1990. DCD L&M is the UK arm of the DCD Group. The DCD Group,
with offices in the UK, United States, UAE, India and South Africa has core
businesses in finance, property and investments. From 1988 to 1990, Mr. Randeree
served as Managing Director of Warranty Limited, a business initiated to provide
an alternate approach to international trade finance and real estate investments
in the U.K. From 1986 to 1988, Mr. Randeree was Sales and Financial Director of
Dominion Clothing Distributors Limited. Mr. Renderee received his B.A. in 1984
in Accounting and Finance from Kingston University in Surrey and his M.B.A. in
1985 from Schiller International University in London. Mr. Renderee is a
director of various U.K. companies including: Bradensbury Park Hotel Ltd.;
Collins Leisure Ltd.; DCD Factors PLC; DCD Properties Ltd.; Pelham Incorporated
Ltd.; Redbush Tea Company Ltd.; Wimbledon Bear Company Ltd.; Tarhouse Management
Ltd.; Thornbury Estates Ltd.; and; the Support Store Ltd. He is a trustee and
advisor to various educational trusts and Director of Albarka Bank Limited of
South Africa. Mr. Randeree has, for personal reasons and not as a result of any
disagreement with the Company, declined to stand for election to the board of
directors for the 2005 term.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information regarding the beneficial
ownership of NetSol's Common Stock, our only class of outstanding voting
securities as of February 11, 2005, by (i) each person who is known to NetSol to
own beneficially more than 5% of the outstanding Common Stock with the address
of each such person, (ii) each of NetSol'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) 902,650 7.27%
Naeem Ghauri (4) 761,367
6.14%
Irfan Mustafa (4) 113,838 *
Salim Ghauri (4) 877,416 7.07%
Jim Moody (4) 87,000 *
Eugen Beckert (4) 179,000 *
Shahid Javed Burki (4) 93,000 *
Shabir Randeree (4)(5) 525,000 4.23%
Patti L. W. McGlasson (4) 75,000 *

All officers and directors
as a group (nine persons) 3,614,271 29.13%

* Less than one percent

(1) Except as otherwise indicated, NetSol believes that the beneficial owners of
the common stock listed in this table, 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 February 11, 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 12,409,155 shares issued and outstanding at
February 11, 2005.

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

(5) As managing director of DCD Holdings Ltd.

DESCRIPTION OF SECURITIES

The selling stockholders are offering for sale shares of our common stock, par
value $0.001 per share. We only have one class of common stock. Our capital
stock consists of 45,000,000 shares of common stock, par value $.001 per share
and 5,000,000 shares of preferred stock, $.001 par value. No shares of preferred
stock have been issued. The terms and rights of the preferred shares may be set
by the board of directors at their discretion. Each share of common stock is
entitled to one vote at annual or special stockholders meetings. There are no
pre-emption rights. We have never declared or paid any dividends on our common
stock or other securities and we do not intend to pay any cash dividends with
respect to our common stock in the foreseeable future. For the foreseeable
future, we intend to retain any earnings for use in the operation of our
business and to fund future growth. The terms of the warrant agreements between
the selling stockholders and NetSol contain standard anti-dilution protections.

EXPERTS

The audited financial statements for our company as of the year ended June 30,
2004, and the unaudited financial statements for our company as of the six
months ended December 31, 2004 included in this prospectus are reliant on the
reports of Kabani & Company, Inc., independent certified public accountants, as
stated in their reports therein, upon the authority of that firm as experts in
auditing and accounting.

The audited financial statements for CQ Systems Ltd as of the year ended March
31, 2004 and March 31, 2003 included in this prospectus are reliant on the
reports of CMB Partnership, as stated in their reports therein, upon the
authority of that firm as experts in auditing and accounting.

Malea Farsai, Esq., counsel for our Company, has passed on the validity of the
securities being offered hereby.

Kabani & Company, Inc. was not hired on a contingent basis, nor will it receive
a direct of indirect interest in the business of the issuer. Neither Kabani &
Company, Inc. nor its principals are, or will be, a promoter, underwriter,
voting trustee, director, officer or employee of NetSol. CMB Partnership was not
hired on a contingent basis by CQ, nor will it receive a direct or indirect
interest in the business of issuer. Neither CMB Partnership nor its principals
are, or will be, a promoter, underwriter, voting trustee, director, officer or
employee of NetSol. Malea Farsai, Esq. is an employee of NetSol. She has
received, as part of her compensation with NetSol, options to purchase and
grants of shares of common stock. As of February 14, 2005, Ms. Farsai is the
holder of 55,120 shares of common stock of NetSol and options to purchase 29,000
shares of common stock at the exercise price of $.75 per share. These options
expire on February 16, 2007. Ms. Farsai also holds options to purchase 10,000
shares at $2.05 per share and 10,000 shares at an exercise price of $4.00 per
share, both expiring in February 2009. Ms. Farsai is not nor is it intended that
she will be a promoter, underwriter, voting trustee, director or officer of
NetSol.

DISCLOSURE OF COMMISSION POSITION OF
INDEMNIFICATION FOR SECURITIES ACTLIABILITIES

We have indemnified each member of the board of directors and our executive
officers to the fullest extent authorized, permitted or allowed by law. Insofar
as indemnification for liabilities arising under the Securities Act of 1933 (the
"Act") may be permitted to directors, officers and controlling persons of the
small business issuer pursuant to the foregoing provisions, or otherwise, the
small business issuer has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable.

For the purpose of determining any liability under the Act, each post-effective
amendment that contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.

DESCRIPTION OF BUSINESS

GENERAL

NetSol Technologies, Inc. (f/k/a NetSol International, Inc.) ("NetSol") is an
end-to-end information technology ("I/T") and business consulting services
provider for the lease and finance, banking and financial services industries.
Since we were founded in 1997, we have developed enterprise solutions that help
clients use I/T more efficiently in order to improve their operations and
profitability and to achieve business results. Our focus has remained the lease
and finance, banking and financial services industries. We operate on a global
basis with locations in the U.S., Europe, East Asia and Asia Pacific. By
utilizing our worldwide resources, we believe we have been able to deliver high
quality, cost-effective I/T services. NetSol Technologies Pvt. Ltd. ("NetSol
PK") develops the majority of the software for us. NetSol PK was the first
company in Pakistan to achieve the ISO 9001 accreditation. In 2004, we also
obtained the Carnegie Mellon's Software Engineering Institute ("SEI") Capable
Maturity Model ("CMM") Level 4 assessment. According to the SEI website, the CMM
is a model for judging the maturity of the software process of an organization
and for identifying the key practices that are required for the maturity of
these processes. The software CMM has been developed by the software community
with stewardship by the SEI. There are only a few software companies worldwide
that have achieved SEI CMM Level 3 as of April 2003. NetSol obtained SEI CMM
Level 2 assessment in 2002. According to the SEI website,
www.sei.cmu/sema/pdf/sw-cmm/2003apr.pdf, the CMM levels developed by SEI in
conjunction with the software industry are the highest levels of recognition for
quality and best practices a software company can achieve.

COMPANY BUSINESS MODEL

Our business model has evolved over the past six years. NetSol now offers a
broad spectrum of I/T products and I/T services that deliver a high return on
investment for its customers. NetSol has perfected its delivery capabilities by
continuously investing in 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. In fact, over 80% of NetSol's revenue is generated in US
Dollars and 80% of its overhead is incurred in Rupees, providing NetSol with a
distinct cost arbitrage business model.

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 have
delivered to NetSol the ISO 9001 certification as well as the CMM level 4
assessment. Achieving this CMM level 4 required dedication at all our corporate
levels.

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
integrable 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.

We have always strived to improve quality in every aspect of our business. This
quality drive, based on our vision, trickles from the top to the lowest levels
in the organization. We believe that it is this quality focus that enabled our
software development facility to become the first ISO 9001 certified software
development facility in Pakistan in 1999. This accomplishment marked the
beginning of our 3-year program towards achieving the higher challenges of CMM
(Software Engineering Institute).

The first step of the program was to launch a dedicated "Quality Engineering"
team mandated with software process improvement and achieving CMM ratings. The
department was provided every facility, from overseas training to complete
commitment of higher management, to enable it to achieve the desired goals. Our
management also made sure that everybody in NetSol was committed to achieving
CMM. The whole organization went through a comprehensive transformation cycle.
The process included, but was not limited to, the hiring and training of key
personnel in the U.S.
20

and Pakistan, and following the standards and processes designed and instituted
by the SEI. The extreme focus and a major team effort resulted in a CMM level 2
assessment in March 2002. We were the first in Pakistan to achieve this
distinction. While proud of this accomplishment, all our levels continued to
strive towards CMM level 3. The quality-engineering department in specific, and
we in general, started implementing Level 3 Key Processes Areas ("KPAs") in a
methodical and structured manner. There were training programs conducted by
in-house personnel, local experts and foreign consultants on various topics
related to defining goals, processes, interpreting KPAs and implementing them.
This focus and commitment resulted in us achieving the CMM Level 3 in 16 months
compared to the world average of 21 months. Upon passing the rigorous, nearly
two week final assessment, conducted by Rayney Wong, SEI CMM Lead Assessor from
Xerox Singapore Software Centre, Fuji Xerox Asia Pacific Pte. Ltd., our
development facility was granted the CMM Level 3. This is notable in that,
according to SEI CMM-CBA IPI and SPA Appraisal Results, Maturity Profile April
2003, there are only 164 software development facilities in the world with
software -CMM Level 3 ratings. In December 2004, we achieved SEI CMM level 4
certification. The Company's intention is to pursue CMM Level 5 (SEI's hightest
maturity level) by 2006.

Professional Services.

We offer a broad array of professional services to clients in the global
commercial markets and specialize in the application of advanced and complex I/T
enterprise solutions to achieve its customers' strategic objectives. Our 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 systems 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.

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

The experience gained by us through its own software quality endeavors, has
enabled us 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
has been 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.

LeaseSoft

We also develop advanced software systems for the asset based lease and finance
industries. We have 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. 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. It is a web-based system and, though
it can be used with equal efficiency on an intranet, the 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, contract management systems and scores the applications against defined
scorecards. All of this is done in a mechanized workflow culminating with credit
team members making 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 is also an excellent tool to reduce 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 also provides interfaces with company banks and accounting systems.
LeaseSoft.CAM also effectively maintains details of all business partners that
do business with NetSol including, but not limited to, customers, dealers,
debtors, guarantors, insurance companies and banks. A number of leasing
consultants have provided their business knowledge to make this product a most
complete lease and finance product. NetSol's LeaseSoft.CAM 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.

Typically, NetSol's sales cycle for these products ranges between two to five
months. We derive our 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.

License fees can vary generally between $100,000 up to $1,000,000 per license
depending upon the size of the customer and the complexity of the customer's
business. The revenue for the license and the customization flows in several
phases and could take from six months to two years before its is fully
recognized as income in accordance with generally accepted accounting
principles. 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.

NetSol manages this sale cycle 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.

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

Status of New Products and Services

Effective October 14, 2003, we acquired Pearl Treasury System Ltd., in exchange
for the issuance of up to 60,000 shares of common stock of NetSol. With this
acquisition, we have expanded our menu of software into banking and other
financial areas.

Pearl Treasury System (PTS)- inBanking(TM)

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 market operations. On internal
review of PTS by its founder, Noel Thurlow and NetSol's banking specialists post
acquisition, it was decided to re-write the system with in the .NET
technologies, bringing the system into the n-tier/browser based environment. 70%
of the Phase One deliverable is completed. This multi-tier architectural design
enables PTS, now inBanking(TM) to permit further development beyond treasury and
capital markets. inBanking(TM) is modular and can therefore be implemented as
solutions for, example, front office trading, middle office credit or market
risk, or back office settlement. In the past, NetSol has developed and marketed
smaller banking solutions to Citibank in Pakistan. While there are no
assurances, Management hopes to couple the sophistication of PTS with its own
experience in developing and marketing banking solutions to our advantage.

Growth Through Acquisition

On January 17, 2005, we entered into an agreement to acquire CQ Systems Ltd., a
private company organized under the laws of England and Wales and located
outside London. CQ Systems provides sophisticated accounting and administrative
software, along with associated services, to leasing and finance companies
located in Europe, Asia and Africa. The products include software modules for
asset finance, consumer finance, motor finance, general finance and insurance
premium finance. The modules provide an end-to-end contractual solution - from
underwriting, contract administration and accounting, through asset disposal and
remarketing. Customers include notable European companies such as Scania Finance
GB, DaimlerChrysler Services, Broadcastle PLC, Bank of Scotland Equipment
Finance and Deutsche Leasing Ltd. There is no guaranty that the acquisition will
benefit NetSol or that the agreement with be consummated. Regardless of whether
this agreement is consummated, NetSol has expended substantial management time
in this transaction and shall incur costs related to due diligence and audit
costs both of which could otherwise be used to benefit NetSol. Consummation of
the transaction could result in dilution to existing stockholders.

Like the above-identified acquisition, we will continue to explore merger and
acquisition opportunities, which will benefit us by providing market
opportunities or economies of scale.

Strategic Alliances

LeaseSoft is recognized as 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. Through
this strong relationship, NetSol has been invited by Intel in China and in San
Francisco to present and introduce the company's core product line to a global
market.

DaimlerChrysler Services Asia Pacific has established "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.

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 expected to receive major information technology
investments by the government are education, public sector automation, railways
and the country's armed forces.

NetSol Connect, Pvt. Ltd., a wholly owned IP backbone and broadband subsidiary
of the Company, has recently forged a partnership with UK based computer
company, Akhter Computers of U.K. Pursuant to this agreement, NetSol has
retained control of the Company with ownership of 50.1% to Akhter's 49.9%. This
alliance is designed to permit NetSol to benefit from the potentially high
growth of the telecommunications market by bringing in new technology, new
resources and capital while permitting NetSol to focus on its core competencies
of developing and marketing software. NetSol Akhter acquired, for cash, another
small internet connectivity business named Raabta Online in Pakistan. This
acquisition expands the presence of NetSol Akhter's connectivity business to at
least three major cities of Pakistan.

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.

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,
provides support services enabling TiG to scale solution delivery operations in
key growth markets. TiG-NetSol will build a "Center Of Excellence" in NetSol's
IT Village in Lahore, Pakistan, with a full back up facility in Bangalore,
India. NetSol owns 50.5 percent of the new venture, with TiG owning the
remaining 49.5 percent.

Technical Affiliations

We currently have 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 extremely optimistic that the Company will experience huge
opportunities for its products offerings in 2005. The Company is aggressively
growing the marketing and sales organizations in the United Kingdom, Australia,
Pakistan and the USA. Management believes that the year 2005 will be a year for
some landmark growth and launching footprints in new markets, while penetrating
in the established markets such as Asia Pacific and Europe.

While affiliations and partnering result 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. With the US technology market
slow down, NetSol marketing teams are concentrating on the overseas markets with
gradual and cautious entry into the US market.

We generally enter into written commitment letters with clients at or around the
time it commences work on a project. These commitment letters typically
contemplate that NetSol and the client will subsequently enter into a more
detailed agreement, although the client's obligations under the commitment
letter are not conditioned upon the execution of the latter agreement. These
written commitments and subsequent agreements contain varying terms and
conditions and we do not generally believe it is appropriate to characterize
them as consisting of backlog. In addition, because these written commitments
and agreements often provide that the arrangement can be terminated with limited
advance notice or penalty, we do not believe the projects in process at any one
time are a reliable indicator or measure of expected future revenues.

The Markets

NetSol provides its services primarily to clients in global commercial
industries. In the global commercial area, our service offerings are marketed to
clients in a wide array of industries including, automotive: chemical;
tiles/ceramics; Internet marketing; software; medical; banks; U.S. higher
education and telecommunication associations and, financial services.

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

During the last two fiscal years ended June 30, 2004, NetSol's revenue mix by
major markets was as follows:

2004 2003
---- ----

North American (NetSol USA) 12% 15%
Europe (NetSol Technologies, UK Ltd.) 6% 5%
Other International (Abraxas, NetSol Technologies Pvt. Ltd., 82% 80%
NetSol Pvt., Ltd., NetSol Connect)

Total Revenues 100% 100%

Fiscal Performance Overview

We have effectively expanded our development base and technical capabilities by
training our programmers to provide customized I/T solutions in many other
sectors and not limiting ourselves to the lease and finance industry. We believe
that the offshore development concept has been successful as evidenced by
several companies in India, which according to the recent statistics by the
Indian I/T agency, NASSCOM, showed software exports exceeding $11 billion in
2003-2004 and $9.5 billion in the year 2002-2003 as opposed to $7 billion in
2001.

NetSol Technologies PVT Ltd.

Our subsidiary in Pakistan 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
is state of the art, purpose-built and fully dedicated IT and software
development facility, is 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
would invest nearly Rs 10.0MN (approximately $150,000) to install fiber optic
lines and improve the bandwidth for the facility. NetSol has relocated its
entire staff of over 250 employees into this facility. As a result of the TiG
joint venture, space in the facility is being developed for a dedicated use to
this project.

The Lahore operation supports our 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 major initiative in this area is the final stage of phase 1
of the development of the technology campus. The development facility in
Pakistan, being the engine, which drives NetSol, continues to be the major
source of revenue generation. The Pakistan operation has contributed nearly 55%
of 2004, with $3,190,000 in revenues for the current year. This was accomplished
primarily through export of I/T Services and product licensed to the overseas
markets. The total revenue of NetSol Pakistan, including the Pakistan domestic
market, was $3.67 million with profit of $1.63 million.

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

DaimlerChrysler Leasing Thailand (DCLT) - Licensing and customization of
LeaseSoft.CMS This was the significant break since CMS is the largest of the
four applications from the LeaseSoft suit. DCLT till now had been using other
products under LeaseSoft but now with implementation of CMS, end to end assets
side business of DCLT will be on LeaseSoft.

Toyota Leasing Thailand (TLT) - Licensing, customization and implementation of
LeaseSoft.CAP TLT is a volume leader in captive finance companies in Thailand
and it has chosen NetSol's LeaseSoft.CAP to automate the credit evaluation
process. The project is currently under way and looking at the NetSol expertise
in Leasing and Finance TLT has also shown very keen interest in NetSol's
LeaseSoft.WFS to power its wholesale finance business. NetSol also considers it
a big strategic break as once delivering successfully in Thailand NetSol will be
in a very good position to target Toyota Finance companies around the world.

CMM Evaluation Consultancy Services for 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 Pakistan Software Export Board, would be undertaking an exercise for
these consultancy services for different software companies. The key aspects of
these services would be CMM introduction, gap analyses for ISO 9001:2000
compliant procedures, CMM Level 2 pre-assessments, evaluations and
tracking/analyses of such improvements.

NetSol has been identified as a premium I/T company in Pakistan. 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 Software Process Improvement Services for NADRA. (National Database
Registration Authority of Pakistan)

o MM Training Workshops as consultants for PSEB (Pakistan Software Export
Board ).

o Credit MIS & FIS for PRSP (Punjab Rural Support Program)

o Electronic Credit Information Bureau for State Bank of Pakistan

o Punjab Portal

o Consultancy & Automation of Pakistan Administrative Staff College

The growing domestic business in Pakistan, as stated above is valued over tens
of millions rupees or hundreds of thousands of US dollars. NetSol has a very
strong pipeline to win many more and major new projects in the public and
private sectors. NetSol will continue to strive to become the most dominant IT
solutions providers in this explosive growth market.

NetSol Technologies UK Ltd

We launched our United Kingdom subsidiary in Fiscal 2003. The UK subsidiary is
responsible for the Company's activities in the UK, Europe and Middle East and
include the spearheading of the sales and marketing efforts for inBanking(TM),
NetSol's new 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 I/T services.

Depending solely upon organic growth, the UK company produced $356,000 in
revenue for the current fiscal year or 6% of the Company's total revenues. 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. In May 2004, NetSol announced the signing of an agreement to develop new
software programs for The Innovation Group ("TiG"), a provider of profit
improvement solutions to the insurance industry. This relationship was further
bolstered by the relationship consummated in November 2004 with TiG to form
TiG-NetSol Pvt.

Most recently, the UK operations entered into agreements with DCD Group UK, TiG
and Habib Allied Bank in the UK. The revenue contribution for NetSol UK was
$357,000 or about 6.2% of the revenues of 2004.

While there is no guaranty that the transaction with be consummated, the
proposed acquisition of CQ Systems Ltd. with further provide a platform for the
LeaseSoft suite of products in the UK and Europe.

NetSol-Abraxas

The Australian market continues to be active as NetSol maintains its customers
such as Yamaha Motors, GMAC Australia, St. George Bank, DaimlerChrysler Finance
in New Zealand, and Volvo Australia. We continue to pursue new customers and new
business from its existing customers for its core product lines.

We recently signed an agreement with Australian Motor Finance Pty Ltd., which
provides credit to automobile consumers with either very little credit history
or minor credit problems. Under the terms of this agreement, NetSol will design
and implement a point of sale system for AMF's wholesale funding initiatives and
permits NetSol to participate in transaction-based revenue sharing. We signed
Yamaha Motors in Australia and DaimlerChrysler Finance in New Zealand as new
customers of the LeaseSoft suite. There are a number of new prospects that are
in varying degrees of the decision-making process. The Australian subsidiary
contributed 5% of our revenues in fiscal year 2004, with $264,000 in revenues.

NetSol CONNECT-NetSol Akhter

In August 2003, NetSol entered into an agreement with United Kingdom based
Akhtar Group PLC (Akhtar). Under the terms of the agreement, Akhtar Group
acquired 49.9 percent of our subsidiary, Pakistan based NetSol Connect PTV Ltd.,
an Internet service provider (ISP) in Pakistan. As part of this Agreement,
NetSolCONNECT changed its name to NetSol Akhter. As part of this Agreement,
NetSolCONNECT 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 from as compared to
the fiscal year 2003. However, of late, NetSol Connect has steadily grown its
presence in tri cities (Karachi, Lahore and Islamabad.) The company acquired 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. The telecom sector in Pakistan has a potential
market size exceeding $100Million. NetSol Connect with its new laser and
wireless technologies has a potential to become a major brand in Pakistan.

NetSol CONNECT was launched in early 2000 in Karachi, Pakistan's largest city.
Prior to NetSol CONNECT's technology being brought to Karachi, the concept of
high speed "ISP" backbone infrastructure was new in Pakistan. NetSol was the
first company to turn such concept into reality. In the past two years, NetSol
CONNECT has become the second largest high speed and fast access ISP in Karachi.
NetSol believes the ISP space is still in its infancy and the growth prospects
are extremely good. By the end of Fiscal year 2002, the direct membership was
over 40,000 subscribers. The main competitor of NetSol CONNECT has a subscriber
base in the range of 40,000-50,000 in Karachi and has been in business for over
7 years. The partnership with Akhtar Computers is designed to rollout the
services of connectivity and wireless to the Pakistani national market. This
subsidiary contributed 14% of the revenues in fiscal year 2004, with $779,000 in
revenues.

Akhtar, 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's 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.

NetSol Akhter Pvt Ltd. shall continue to aggressively seek revenues to growth.

NetSol USA

In May 2003, NetSol acquired the assets of Altvia Technologies, Inc. ("Altvia").
Altvia provided NetSol an experienced management team familiar with the offshore
software development model. From 2000-2003, Altvia maintained an offshore
development team in Islamabad, Pakistan. Altvia's clients included major
member-based higher education and telecommunications trade associations in the
Washington, D.C. and Baltimore area. The acquisition allows NetSol to extend its
business presence in the United States, specifically in the high-growth,
greater-Washington, D.C. market. NetSol USA functions as the service provider
for the US based customers both in the consulting services area as well as
project management. The office provides greater access to the emerging East
Coast markets. In the last fiscal year, NetSol USA signed agreements with
Capital Stream, a Washington based software developer specializing in software
to financial sectors. The revenue generated in fiscal year 2004 from Capital
Stream and other US based customers was in excess of $675,00. NetSol USA
represented 12% of total, or $677,000, 2004 revenues.

LeaseSoft Sales

LeaseSoft received a major recognition when DaimlerChrysler Services (DCS) AG,
Germany signed a global frame agreement with NetSol for LeaseSoft. Under terms
of the open-ended global frame contract, LeaseSoft is named as one of the
strategic, asset-based, finance software solutions for DCS. In addition to its
LeaseSoft product suite, NetSol could also provide DCS with a range of
fixed-rate, contractual professional and IT services, which are also covered by
the frame agreement. NetSol's professional services will include product
customization, implementation, technical support, ongoing maintenance and
upgrades. The company's technology and consulting services will include project
management, systems analysis and business process reengineering.

LeaseSoft is establishing itself as a dependable and preferred system in the
niche market of asset based lease and finance. In 2003-2004, NetSol was able to
sell a number of LeaseSoft licenses in Asia, details of which are as follows:

LeaseSoft.CAP DaimlerChrysler Leasing Thailand ("DCLT"). DCLT was already using
LeaseSoft.WFS for managing their wholesale finance business and as soon as they
decided to aggressively follow retail side leasing in Thailand they opted for
NetSol's Credit Application Processing System. LeaseSoft.CAP was successfully
implemented at DCLT and is enabling DCLT to process larger numbers of
applications per given period of time while simultaneously providing the
functionalities to reduce the probability of default per approved loan. After
the successful implementation of LeaseSoft.CAP, DCLT has opted for LeaseSoft.CMS
to power their complete operations on retail side financing.

LeaseSoft.CAP at Toyota Leasing Thailand (TLT). Toyota Leasing Thailand opted
for LeaseSoft.CAP to automate the credit approval cycle through an objective
point score based approval system implemented through a highly intensive
workflow. TLT is a volume leader in Captive Finance companies in Thailand and
getting TLT as LeaseSoft customer means that NetSol has best of both worlds in
Thailand, i.e., DaimlerChrysler Leasing Thailand serving the Elite and prestige
class as well as TLT the volume leaders in the country. This implementation is
based on Oracle and Linux and was completed in January 2005. After the
successful implementation of LeaseSoft.CAP, TLT has opted for a customized
LeaseSoft module for use in Thailand.

LeaseSoft.WFS Version upgrade at DaimlerChrysler Leasing Thailand (DCLT). .DCLT
was using LeaseSoft.WFS version 3.2. However, the new 4.1 version had enhanced
features and to make use of the new functionality set DCLT upgraded their
version to the latest one.

NetSol also completed the on going implementation of LeaseSoft.WFS at
DaimlerChrysler Services Korea. A peculiar aspect of this implementation is that
it is an off site implementation where by the users sit and use the system in
Korea where as the system in reality is hosted in Singapore.

Technology Campus

We broke ground for our Technology Campus in January 2000 with a three-phase
plan of completion. Initially, we anticipated the completion of Phase One by
fall 2001, but due to the delay in financing, and other challenges we faced, the
completion was delayed. However, Phase One is complete and the Lahore operation
began moving into the Technology Campus in May 2004. By relocating the entire
Lahore operation from its current leased premises to the Campus, we will save
approximately $150,000 annually. As the only technology campus of its size in
Pakistan, NetSol's move into its Campus received statewide news coverage. Once
fully operational and completed, the campus is expected to house over 2,500 I/T
professionals in approximately three acres of land. The campus site is located
in Pakistan's second largest city, Lahore, with a population of six million. An
educational and cultural center, the city is home to most of the leading
technology oriented academia of Pakistan including names like LUMS, NU-FAST and
UET. These institutions are also the source of quality I/T resources for us.
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 will be the first purpose built software building with state of the art
technology and communications infrastructure in Pakistan. We have made this
investment to attract contracts and projects from blue chip customers from all
over the world.

Employees

We believe we have developed a strong corporate culture that is critical to our
success. Our 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. Almost 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, we
have 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 I/T professionals
living overseas.

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 stock options during very difficult
times for us. Management believes that its employees are the most valuable asset
of NetSol.

There is significant competition for employees with the skills required to
perform the services we offer. We believe that we have been successful in our
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, 2004, we had 294 full-time employees; comprised of 195 I/T
project personnel, 55 employees in general and administration and 44 employees
in sales and marketing. There are 8 employees in the United States, 270
employees in Pakistan, 6 in Australia and 10 in the United Kingdom. None of our
employees are subject to a collective bargaining agreement.

Competition

Neither a single company nor a small number of companies dominate the I/T market
in the space in which we compete. 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 our competitors are International Decisions Systems, Inc., McCue
Systems, EDW, Data Scan, Inc., KPMG, CresSoft Pvt Ltd., Kalsoft, Systems
Limited, Cybernet Pvt. Ltd. and SouthPac Australia. 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; Tung-Yang Leasing Company Taiwan; Debis Portfolio
Systems - UK; DaimlerChrysler Services - Australia; DaimlerChrysler Leasing -
Thailand; DaimlerChrysler Services - Korea; UMF Leasing Singapore; and,
DaimlerChrysler Services New Zealand. In addition, NetSol provides offshore
development and customized I/T solutions to blue chip customers such as Citibank
Pakistan, DCD Holding UK, TIG Plc in UK and, Habib Allied Bank UK. With the
Altvia acquisition, NetSol has acquired, as clients, some of the most well known
higher education and telecommunications associations based in the United States.
NetSol is also a strategic business partner for DaimlerChrysler Services (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, 2004.

As compared to the previous year, NetSol (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 Quality Assurance, Business Process
Re-engineering and CMM consultancy services to organizations so as to improve
their quality of operations and services. 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 offering portfolio of NetSol has now
diversified into a comprehensive supply chain of end to end services and
solutions catering to BPR, consultancies, applications development, engineering
as well as other supporting processes

New Local Customers are as follows:

o Pakistan Administrative Staff College

o Punjab Portal Government of Punjab

o Punjab Rural Support Program

o Pakistan Software Export Board

o NADRA

o Pakistan Air War College

o State Bank of Pakistan

The Internet

We are committed to regaining and extending the advantages of our 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 us. We receive 150,000 hits per month to
www.netsoltek.com. We also maintain a product specific website for LeaseSoft at
www.leasesoft.biz.

Through our Web sites, customers, potential customers and investors can access a
wide range of information about our product offerings, can configure and
purchase systems on-line, and can access volumes of support and technical
information about us.

Operations

Our headquarters are in Calabasas, California. Nearly 90% of the production and
development is conducted at NetSol PK in Lahore, Pakistan. The other 10% of
development is conducted in the Proximity Development Center or "PDC" in
Adelaide, Australia. The majority of the marketing is conducted through NetSol
USA, NetSol Abraxas Australia, and NetSol UK. These are the core operating
companies engaged in developing and marketing IT solutions and software
development and market.

NetSol UK services and supports the clients in the UK and Europe. NetSol PK
services and supports the customers in the Asia and South Asia regions.

A significant portion of our software is developed in Pakistan. Despite global
unrest, regional tension and downturn in the US markets, the economy of Pakistan
is bouncing back. 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. The stock market in Pakistan is the most bullish in the Asia
Pacific region with market growth over 300% year to date (Karachi Stock Exchange
on October 18, 2001 was at 1,103 points vs. 5,500 points on May 20, 2004).
Pakistan, now a close US ally, is recognized by the western world as becoming a
very conducive and attractive country for foreign collaboration and investments.
We believe that we are in a strong position to continue to use this offshore
model, which includes competitive price advantage, to serve our customers. Just
recently Moody's International assessed Pakistan as less vulnerable than many
countries in the Asia Pacific region. Also, Standard & Poor's rating on Pakistan
has been improved to positive. The present government has taken major bold steps
to attract new foreign investment and bolster the local economy. Foreign Direct
Investment exceeded $900 million, a record high, in 2004. The trend continues to
grow steadily. The US dollar reserves of State Bank of Pakistan have shot up
over $13 billion from less than $1 billion in 2000. Overall, the economy of
Pakistan is experiencing substantial growth as demonstrated by the record high
6.1% growth of the gross domestic product in 2004. The confidence of the local
investors and foreign investors has been undoubtedly enhanced resulting in
stronger demand of new listing in the stock markets. Most recently the telecom
sector received a boost when the I/T 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.

NetSol USA functions as the service provider for US based customers both in the
consulting services area as well as in the project management. In addition, the
Maryland office provides greater access to the emerging markets on the East
Coast. NetSol USA is exploring opportunities for marketing alliances with local
companies to further enhance its marketing capabilities.

Organization

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

Our success, in the near term, will depend, in large part, on our ability to:
(a) minimize additional losses in our operations; (b) raise funds for continued
operations and growth; and, (c) enhance and streamline sales and marketing
efforts in the United States, Asia Pacific region, Pakistan, 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, we anticipate to be able to continue to improve operating
results at its core by reducing costs and improving gross margins.

Intellectual Property

We rely upon a combination of nondisclosure and other contractual arrangements,
as well as common law trade secret, copyright and trademark laws to protect our
proprietary rights. We enter into confidentiality agreements with our employees,
generally require our consultants and clients to enter into these agreements,
and limits access to and distribution of our proprietary information. The NetSol
logo and name, as well as the LeaseSoft logo and product name have been
copyrighted and trademark registered in Pakistan. An application has been filed
in the US Patent and Trademark Office for the trademark "inBanking".

Governmental Approval and Regulation

Our current 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 we maintain subsidiaries and conduct
operations. Pakistani law allows a 15-year tax holiday on exports of I/T
products and services. There are no State Bank restrictions on profits and
dividends repatriation. Accordingly, foreign-based companies are free to invest
safely in Pakistan and at the same time transfer their investment out of
Pakistan without any approvals or notices. 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.

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, 2004
and the quarter and six months ending December 31, 2004.

Forward-Looking Information.

This report contains certain forward-looking statements and information relating
to NetSol that is based on the beliefs of its management as well as assumptions
made by and information currently available to its management. When used in this
report, the words "anticipate", "believe", "estimate", "expect", "intend",
"plan", and similar expressions as they relate to 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
incorrect, 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 ultimately is built. NetSol
does not intend to update these forward-looking statements.

PLAN OF OPERATIONS

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

Initiatives and Investment to Grow Capabilities

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

o Enhance and invest in R&D or between 5-7% of yearly budgets in
financial, banking and various other domains within NetSol's core
competencies.

o Recruit additional senior level Managers both in Lahore and
Bangalore facilities to be able to support potential new customers
from the North American and European markets.

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

o Expansion of the last two remaining floors to add new personnel to
the Lahore Technology Campus.

o Increase Capex, to enhance Communications and Development
Infrastructure.

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

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

o Aggressive marketing strategy in local government and private
sectors in Pakistan.

o Ramping up the telecom sectors through its majority owned subsidiary
NetSol Akhter, and injecting needed capital.

o Aggressive new business development activities in the UK and
European markets through organic growth, new alliances and mergers
and acquisitions.

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

o Launch LesaseSoft into new markets by assigning new,
well-established companies as distributors in Europe, Asia Pacific
including Japan.

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

o Product Positioning through alliances, joint ventures and
partnership.

o Direct Marketing of Services.

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

o Effectively position and marketing campaign for inBanking. 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.

With these goals in mind, we have entered in to the following arrangements:

CQ Systems Ltd. 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
is projected to close during the first quarter of 2005. CQ Systems' business
model complements the Company's growth strategy. CQ Systems' product offering is
synergistic to that of the Company, as it has an established and balanced mix of
recurring revenue flow from the European marketplace, and a strong foothold with
a comparable target audience. The Company believes the acquisition will
facilitate considerable growth within the European marketplace as we blend and
expand our product offering by leveraging our offshore technology infrastructure
to contain costs and improve margins.

TiG Joint Venture. In December 2004, NetSol forged a new and strategic
relationship with a UK based public company, TiG Plc. A joint venture was formed
by the two companies to create a new company, TiG NetSol Pvt. Ltd., with 50%
ownership by the Company and 49.9% ownership by TiG. The creation of this joint
venture will provide new revenues for NetSol as TiG plans to outsource its
development load to NetSol through this joint venture. According to recent
figures of TiG, they have approximate revenue of over $120 million of which
approximately $50 million of that revenue is generated from technology business.
Both companies anticipate a significant size of TiG's technology business to be
outsourced to NetSol's offshore development facility in the next few years. Both
companies, according to this agreement, will invest a total of $1 million or
$500,000 each for infrastructure, dedicated personnel and system in the NetSol
IT campus in Lahore. At least two floors in the campus are being dedicated for
this partnership in Lahore.

LeaseSoft Distributors. NetSol is also very active in appointing key
distributors in South East Asia and in Europe for its LeaseSoft products. As
soon as we have signed these agreements, the shareholders will be notified
through press release.

DaimlerChrysler. NetSol signed a global frame agreement with DaimlerChrysler,
Germany, for LeaseSoft products and services that now expands the market to over
60 countries. DaimlerChrysler as a group represents the largest customer for
NetSol. Since the signing of the global frame agreement in summer 2004, NetSol
has sold a few new LeaseSoft licenses to some new markets and new customers such
as Toyota Leasing Thailand and Mauritius Commercial Bank.

Intel Corporation. NetSol forged what management believes to be a very important
and strategic alliance with Intel Corporation to develop a blueprint that would
give broader exposure and introduction to NetSol's LeaseSoft products to a
global market. NetSol recently attended major events in China and in San
Francisco through its Intel relationship, which was designed to connect and
introduce NetSol to Intel partners worldwide.

Funding and Investor Relations.

o We continue to explore various means and the most cost efficient
methods to inject new capital for the explosive growth we are
experiencing. With this in mind, the Company has entered into an
agreement with AKD Securities to conduct a pre-IPO and IPO of the
shares of common stock of NetSol Technologies Ltd., its subsidiary
located in Lahore, Pakistan on the Karachi Stock Exchange (KSE).

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

o NetSol has engaged Westrock Advisors LLC, in New York for new
investor relations and company coverage. Just recently, they
initiated and distributed research coverage of NetSol with a "buy"
rating.

Improving the Bottom Line.

o Continue to review costs at every level.

o Discontinue any programs, projects or offices that are not producing
desirable and positive results.

o Consistently improving quality standards and work to achieve CMM
Level 5 by sometime in 2006.

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 Improve prices of all our product offerings to improve gross margins
while maintaining competitiveness.

After streamlining key operations, Management believes that NetSol is in a
position to derive higher productivity based on current capital employed.
Nonetheless, as the business ramps up, management anticipates the need to hire
additional personnel.

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 4
assessment in December 2004.. 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 Burgeoning Chinese markets and economic boom.

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 Major turnarounds in the telecom sector as new opportunities are
arising due to privatization, new incentives, reduction of bandwidth
prices and tariffs.

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 The potential impact of higher U.S. interest rates including, but
not limited to, fear of inflation that may drive down IT budgets and
spending by U.S. companies.

o Higher oil prices worldwide may slow down the global economy causing
delays in new orders and reduction in budges.

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 tax able temporary differences.
Temporary differences are the differences between the reported amount of assets
and liabilities and their tax bases. 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. 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 fiscal year 2004-2005, we estimate the
allowance on net deferred tax assets to be one hundred percent of the net
deferred tax assets.

CHANGE IN MANAGEMENT AND BOARD OF DIRECTORS

Board of Directors

At the 2004 Annual Shareholders Meeting an eight member board was elected. The
shareholders voted in an overwhelming majority for the new slate of directors.
The board now consists of Mr. Najeeb U. Ghauri, Mr. Jim Moody, Mr. Salim Ghauri,
Mr. Eugen Beckert, Mr. Naeem U. Ghauri, Mr. Shahid Burki, Mr. Irfan Mustafa and,
Mr. Shabir Randeree.

Committees

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

NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
PRO-FORMA FINANCIAL STATEMENTS
JUNE 30, 2004
(UNAUDITED)

The following unaudited Pro-Forma Statement of Financial Conditions and
Statement of Operations has been derived from the audited consolidated financial
statements of NetSol Technologies, Inc. ("NetSol") as of June 30, 2004 and the
audited financial statements of CQ Systems Limited (a UK corporation) ("CQ
Systems") as of March 31, 2004. The unaudited Pro Forma Statement of Financial
Conditions and Statement of Operations reflect the 100% acquisition of CQ
Systems by NetSol under a stock purchase agreement. The Company has accounted
for the acquisition under the purchase method of accounting for business
combinations. These pro-forma statements assumes the acquisition was consummated
as of July 1, 2003, the beginning of NetSol Technologies fiscal year.

The estimated purchase price is (pound)3,561,094 or $6,677,052 of which one-half
is due in cash and shares of NetSol's common stock at closing. The other half is
due within one year, no interest accrues on the outstanding balance. The
estimated purchase price is based on the March 31, 2004 audited financial
statements of CQ Systems. The final purchase price will be adjusted either up or
down when the audited March 31, 2005 financial statements are completed.

The Pro-Forma Statement of Financial Conditions and Statement of Operations
should be read in conjunction with the Consolidated Financial Statements of
NetSol, related Notes to the financial statements, and the Financial Statements
of CQ Systems. The Pro-Forma statements do not purport to represent what the
Company's financial condition and results of operations would actually have been
if the acquisition of CQ Systems had occurred on the date indicated or to
project the Company's results of operations for any future period or date. The
Pro-Forma adjustments, as described in the accompanying data, are based on
available information and the assumptions set forth in the notes below, which
management believes are reasonable.

NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
CONSOLIDATED PRO-FORMA STATEMENT OF FINANCIAL CONDITIONS
FOR THE PERIOD ENDED JUNE 30, 2004
(UNAUDITED)

NetSol CQ Systems
as of 6/30/04 as of 3/31/04 Pro Forma Pro Forma
(Historical) (Historical) Adjustment Combined
--------------- ---------------- --------------- -----------------

ASSETS

Current Assets $ 3,563,501 $ 2,337,549 $ - $ 5,901,050
Property & equipment, net 4,203,580 260,517 - 4,464,097
Intangible assets, net 3,990,688 - 5,755,690 (1) 9,746,378

--------------- ---------------- --------------- -----------------
Total assets $ 11,757,769 $ 2,598,066 $ 5,755,690 $ 20,111,525
=============== ================ =============== =================

LIABILITIES & STOCKHOLDERS' EQUITY

Current liabilities $ 3,573,948 $ 1,600,914 $ - $ 5,174,862
Obligations under capitalized leases,
less current maturities 27,604 70,424 - 98,028
Deferred tax - 5,366 - 5,366
Notes payable 89,656 - 3,338,526 (1) 3,428,181
Convertible debenture 937,500 - - 937,500

--------------- ---------------- --------------- -----------------
Total liabilities 4,628,708 1,676,704 3,338,526 9,643,937

Stockholders' equity;
Common stock 9,483 159,210 (158,528) (1) 10,165
Additional paid in capital 39,164,034 - 3,337,844 (1) 42,501,878
Stock subscription receivable (497,559) - - (497,559)
Treasury stock (21,457) - - (21,457)
Other comprehensive income (loss) (150,210) 138,784 (138,784) (1) (150,210)
Accumulated earnings (deficit) (31,375,230) 623,368 (623,368) (1) (31,375,230)

--------------- ---------------- --------------- -----------------
Total stockholders' equity 7,129,061 921,362 2,417,164 10,467,587

--------------- ---------------- --------------- -----------------
Total liabilities and stockholders' equity $ 11,757,769 $ 2,598,066 $ 5,755,690 $ 20,111,524
=============== ================ =============== =================

NOTES:

(1) Elimination of Common stock and accumulated earnings of CQ Systems before
the acquisition and to record the purchase of CQ Systems by NetSol.

NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
CONSOLIDATED PRO-FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 2004
(UNAUDITED)

NetSol CQ Systems
as of 6/30/04 as of 3/31/04 Pro Forma Pro Forma
(Historical) (Historical) Adjustment Combined
---------------- ---------------- --------------- -----------------

Net Revenue $ 5,749,062 $ 4,640,653 $ - $ 10,389,715 -

Cost of revenue 2,656,377 1,833,994 - 4,490,371

---------------- ---------------- --------------- -----------------
Gross profit 3,092,685 2,806,659 - 5,899,344

Operating expenses 6,028,055 1,895,988 - 7,924,043

---------------- ---------------- --------------- -----------------
Income (loss) from operations (2,935,370) 910,671 - (2,024,699)

Other income and (expenses) (307,764) (214,819) - (522,583)

---------------- ---------------- --------------- -----------------
Income (loss) from continuing operations (3,243,134) 695,852 - (2,547,282)

Minority interest in subsidiary 273,159 - - 273,159

---------------- ---------------- --------------- -----------------
Net income (loss) (2,969,975) 695,852 - (2,274,123)

Other comprehensive income (loss):
Translation adjustment (299,507) 110,837 - (188,670)

---------------- ---------------- --------------- -----------------
Comprehensive income (loss) $ (3,269,482) $ 806,689 $ - $ (2,462,793)
================ ================ =============== =================

EARNINGS PER SHARE

Weighted -average number of
shares outstanding 8,563,518 100,000 8,663,518
================ ================ =================

Income (loss) per share $ (0.35) $ 6.96 $ (0.26)
================ ================ =================

NOTES:

(1) Loss per share data shown above are applicable for both primary and fully
diluted.
(2) Weighted-average number of shares outstanding for the combined entity
includes all shares for the acquisition of 681,964 shares as if
outstanding as of July 1, 2003.

NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
PRO-FORMA FINANCIAL STATEMENTS
JUNE 30, 2003
(UNAUDITED)

The following unaudited Pro-Forma Statement of Financial Conditions and
Statement of Operations has been derived from the audited consolidated financial
statements of NetSol Technologies, Inc. ("NetSol") as of June 30, 2003 and the
audited financial statements of CQ Systems Limited (a UK corporation) ("CQ
Systems") as of March 31, 2003. The unaudited Pro Forma Statement of Financial
Conditions and Statement of Operations reflect the 100% acquisition of CQ
Systems by NetSol under a stock purchase agreement. The Company has accounted
for the acquisition under the purchase method of accounting for business
combinations. These pro-forma statements assumes the acquisition was consummated
as of July 1, 2002, the beginning of NetSol Technologies fiscal year.

NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
CONSOLIDATED PRO-FORMA STATEMENT OF FINANCIAL CONDITIONS
FOR THE PERIOD ENDED JUNE 30, 2003
(UNAUDITED)

NetSol CQ Systems
as of 6/30/03 as of 3/31/03 Pro Forma Pro Forma
(Historical) (Historical) Adjustment Combined
---------------- ---------------- --------------- ----------------

ASSETS

Current Assets $ 1,774,553 $ 1,470,485 $ - $ 3,245,038
Property & equipment, net 2,037,507 197,481 - 2,234,988
Intangible assets, net 4,930,191 - 6,157,715 (1) 11,087,905

---------------- ---------------- --------------- ----------------
Total assets $ 8,742,251 $ 1,667,966 $ 6,157,715 $ 16,567,931
================ ================ =============== ================

LIABILITIES & STOCKHOLDERS' EQUITY

Current liabilities $ 3,533,614 $ 1,139,770 $ - $ 4,673,384
Obligations under capitalized leases,
less current maturities 7,111 8,330 15,441
Deferred tax - 1,892 1,892
Notes payable 126,674 - 3,338,526 (1) 3,465,199

---------------- ---------------- --------------- ----------------
Total liabilities 3,667,399 1,149,992 3,338,526 8,155,916

Stockholders' equity;
Common stock 5,757 159,210 (159,892) (1) 5,075
Additional paid in capital 33,409,953 - 3,337,844 (1) 36,747,797
Stock subscription receivable (84,900) (84,900)
Other comprehensive income (loss) 149,297 27,947 (27,947) (1) 149,297
Accumulated earnings (deficit) (28,405,255) 330,816 (330,816) (1) (28,405,255)

---------------- ---------------- --------------- ----------------
Total stockholders' equity 5,074,852 517,973 2,819,189 8,412,014

---------------- ---------------- --------------- ----------------
Total liabilities and stockholders' equity $ 8,742,251 $ 1,667,965 $ 6,157,715 $ 16,567,930
================ ================ =============== ================

NOTES:
(1) Elimination of Common stock and accumulated earnings of CQ Systems before
the acquisition and to record the purchase of CQ Systems by NetSol.

NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
CONSOLIDATED PRO-FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 2003
(UNAUDITED)

NetSol CQ Systems
as of 6/30/03 as of 3/31/03 Pro Forma Pro Forma
(Historical) (Historical) Adjustment Combined
---------------- ---------------- --------------- ----------------

Net Revenue $ 3,745,386 $ 3,821,892 $ - $ 7,567,278

Cost of revenue 1,778,993 1,654,608 - 3,433,601

---------------- ---------------- --------------- ----------------
Gross profit 1,966,393 2,167,284 - 4,133,677

Operating expenses 4,434,643 2,013,685 - 6,448,328

---------------- ---------------- --------------- ----------------
Income (loss) from operations (2,468,250) 153,599 - (2,314,651)

Other income and (expenses) (147,331) (34,560) - (181,891)

---------------- ---------------- --------------- ----------------
Income (loss) from continuing operations (2,615,581) 119,039 - (2,496,542)

Gain from discontinuation of a subsidiary 478,075 - - 478,075

---------------- ---------------- --------------- ----------------
Net income (loss) (2,137,506) 119,039 - (2,018,467)

Other comprehensive income (loss):
Translation adjustment (380,978) 70,997 - (309,981)

---------------- ---------------- --------------- ----------------
Comprehensive income (loss) $ (2,518,484) $ 190,036 $ - $ (2,328,448)
================ ================ =============== ================

EARNINGS PER SHARE

Weighted -average number of
shares outstanding 5,194,167 100,000 5,294,167
================ ================ ================

Income (loss) per share $ (0.41) $ 1.19 $ (0.38)
================ ================ ================

NOTES:

(1) Loss per share data shown above are applicable for both primary and fully
diluted.
(2) Weighted-average number of shares outstanding for the combined entity
includes all shares issued for the acquisition of 681,964 as if
outstanding as of July 1, 2002.

NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
PRO-FORMA FINANCIAL STATEMENTS
DECEMBER 31, 2004
(UNAUDITED)

The following unaudited Pro-Forma Statement of Financial Conditions and
Statement of Operations have been derived from the unaudited consolidated
financial statements of NetSol Technologies, Inc. ("NetSol") for the six months
ending December, 2004 and the unaudited financial statements of CQ Systems
Limited (a UK corporation) ("CQ Systems") for the nine months ending December
31, 2004. The unaudited Pro Forma Statement of Financial Conditions and
Statement of Operations reflect the 100% acquisition of CQ Systems by NetSol
under a stock purchase agreement. The Company has accounted for the acquisition
under the purchase method of accounting for business combinations. These
pro-forma statements assumes the acquisition was consummated as of July 1, 2003,
the beginning of NetSol Technologies fiscal year.

NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
CONSOLIDATED PRO-FORMA STATEMENT OF FINANCIAL CONDITIONS
FOR THE PERIOD ENDED DECEMBER 31, 2004
(UNAUDITED)

NetSol CQ Systems
as of 12/31/04 as of 12/31/04 Pro Forma Pro Forma
(Historical) (Historical) Adjustment Combined
--------------- ---------------- --------------- ----------------

ASSETS

Current Assets $ 5,554,445 $ 1,976,412 $ - $ 7,530,857
Property & equipment, net 4,276,307 339,525 - 4,615,832
Intangible assets, net 3,560,468 - 5,902,547 (1) 9,463,015

--------------- ---------------- --------------- ----------------
Total assets $ 13,391,220 $ 2,315,937 $ 5,902,547 $ 21,609,704
=============== ================ =============== ================

LIABILITIES & STOCKHOLDERS' EQUITY

Current liabilities $ 2,527,727 $ 1,411,187 $ - $ 3,938,915
Obligations under capitalized leases,
less current maturities 56,910 124,803 - 181,713
Deferred tax - 5,442 - 5,442
Notes payable - - 3,338,526 (1) 3,338,525
Convertible debenture 112,500 - - 112,500

--------------- ---------------- --------------- ----------------
Total liabilities 2,697,137 1,541,432 3,338,526 7,577,095
Minority Interest 99,752 - - 99,752

Stockholders' equity;
Common stock 12,254 159,210 (158,528) (1) 12,936
Additional paid in capital 43,350,274 - 3,337,844 (1) 46,688,118
Common stock to be issued 254,800 - - 254,800
Stock subscription receivable (1,375,642) - - (1,375,642)
Treasury stock (27,197) - - (27,197)
Other comprehensive income (loss) (323,619) 157,028 (157,028) (1) (323,619)
Accumulated earnings (deficit) (31,296,539) 458,267 (458,267) (1) (31,296,539)

--------------- ---------------- --------------- ----------------
Total stockholders' equity 10,594,331 774,505 2,564,021 13,932,857

--------------- ---------------- --------------- ----------------
Total liabilities and stockholders' equity $ 13,391,220 $ 2,315,937 $ 5,902,547 $ 21,609,704
=============== ================ =============== ================

NOTES:
(1) Elimination of Common stock and accumulated earnings of CQ Systems before
the acquisition and to record the purchase of CQ Systems by NetSol.

NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
CONSOLIDATED PRO-FORMA STATEMENT OF OPERATIONS
FOR THE PERIOD ENDED DECEMBER 31, 2004
(UNAUDITED)

NetSol CQ Systems
as of 12/31/04 as of 12/31/04 Pro Forma Pro Forma
(Historical) (Historical) Adjustment Combined
---------------- ---------------- --------------- -----------------

Net Revenue $ 4,781,532 $ 3,493,978 $ - $ 8,275,510

Cost of revenue 1,580,620 191,835 - 1,772,455

---------------- ---------------- --------------- -----------------
Gross profit 3,200,912 3,302,143 - 6,503,055

Operating expenses 2,757,165 3,228,496 - 5,985,661

---------------- ---------------- --------------- -----------------
Income (loss) from operations 443,747 73,647 - 517,394

Other income and (expenses) (379,314) 28,566 - (350,748)

---------------- ---------------- --------------- -----------------
Income (loss) from continuing operations 64,433 102,213 - 166,646

Minority interest in subsidiary 14,259 - - 14,259

---------------- ---------------- --------------- -----------------
Net income (loss) 78,692 102,213 - 180,905

Other comprehensive income (loss):
Translation adjustment (173,409) 18,244 - (155,165)

---------------- ---------------- --------------- -----------------
Comprehensive income (loss) $ (94,717) $ 120,457 $ - $ 25,740
================ ================ =============== =================

EARNINGS PER SHARE

Weighted -average number of
shares outstanding 10,755,918 100,000 10,855,918
================ ================ =================

Income (loss) per share $ 0.01 $ 1.02 $ 0.02
================ ================ =================

NOTES:
(1) Loss per share data shown above are applicable for primary
(2) Weighted-average number of shares outstanding for the combined entity
includes all shares issued for the acquisition of 681,964 shares as if
outstanding as of July 1, 2003.

RESULTS OF OPERATIONS

The Year Ended June 30, 2004 Compared To The Year Ended June 30, 2003

Net revenues for the year ended June 30, 2004 were $5,749,062 as compared to
$3,745,386 for the year ended June 30, 2003. Net revenues are broken out among
the subsidiaries as follows:
2004 2003
---- ----
Netsol USA $ 676,857 $ 508,868
Netsol Tech (1) 3,190,049 1,315,413
Netsol Private 483,788 265,599
Netsol Connect 778,598 1,185,162
Netsol UK 356,215 83,737
Netsol-Abraxas Australia 263,555 386,607
----------- -----------
Total Net Revenues $ 5,749,062 $ 3,745,386
=========== ===========

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

The total consolidated net revenue for fiscal year 2004 was $5,749,062 as
compared to $3,745,386 in fiscal year 2003. This is a nearly 53% increase in
revenue. The increase is attributable to new orders of licenses and an increase
in services business, including additional maintenance work.

NetSol has made significant progress in new customer acquisition. All of the
Company's owned subsidiaries have signed contracts with new customers. In the
current quarter, NetSol, as a group, has signed five new customers. All of the
new relationships would add to the top line over the next six months as well as
contributing to revenue growth. The Company added a few new customers such as,
Capital Stream in USA, Cal Portland Cement in USA, Habib Allied Bank, DCD Group,
enhancement in the Yamaha Motors project, DaimlerChrysler New Zealand and a few
local customers in the Pakistan region. NetSol continues to nurture and grow its
relationship with its existing customers, both in sales of new product licenses
and professional services.

Its U.S. subsidiary, NetSol USA, has created a growing niche in the
"not-for-profit" business space in the Washington D. C. area. The Washington
D.C. area office continues to sign new business for both its Knowledge Base
Product and Professional services.

NetSol UK continues its business development activities and has seen good
traction in its sales pipeline. The UK office recently signed a major new
customer in the insurance business. The relationship with this publicly traded
UK company has the potential to bring significant new recurring revenues to the
subsidiary. NetSol UK has ongoing relationships with Habib Allied Bank and DCD
Group. These relationships are bringing recurring revenues and are expected to
continue in the near term.

As a direct result of the successful implementations of some of our current
systems with DaimlerChrysler, we are noticing an increasing 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 and Pakistan. The
crown jewel of our product line "CMS' ("Contract Management System") which was
sold to three companies of DaimlerChrysler Asia Pacific Region in 2001 for a
combined value in excess of two million dollars was implemented and delivered to
customers in 2003. 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 I/T spending by these companies. NetSol is well positioned to
sell several new licenses in fiscal year 2004 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 $500,000 with
additional charges for customization and maintenance of between 20%-30% each
year. The Company, in parallel, has developed banking applications software to
boost its product line and these systems were sold to Citibank and Askari Banks
in Pakistan in 2002. New customers in the banking sector are also growing and
the Company expects substantial growth in this area in the coming year.

The gross profit was $3,092,685 for year ended June 30, 2004 as compared with
$1,966,393 for the same period of the previous year. This is a 57% increase. The
gross profit percentage has increased modestly to approximately 54% in the
current fiscal year from approximately 53%. 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 3 in 2003.

Operating expenses were $6,028,055 for the year ended June 30, 2004 compared to
$4,434,643 for the year ended June 30, 2003. During the years ended June 30,
2004 and 2003, we issued 48,613 and 93,400 restricted common shares,
respectively, in exchange for services rendered. We recorded this non-cash
compensation expense of $48,240 and $39,200 for the years ended June 30, 2004
and 2003, respectively. Total professional service expense, including non-cash
compensation, was $464,332 and $272,447 for the years ended June 30, 2004 and
2003, respectively. During the years ended June 30, 2004 and 2003, we recorded
depreciation and amortization expense of $1,714,745 and $1,576,890 included in
this increase is the addition of the completed Lahore facility. Salaries and
wages expenses were $1,493,252 and $934,383 for the years ended June 30, 2004
and 2003, respectively or an increase of $558,869 or 60%. The addition of new
management level employees and consultants from the Altvia acquisition and new
employees at our UK subsidiary, as well as an increase in sales and
administration employees resulted in the increase. In addition, key officers
were given a pay raise effective January 1, 2004, the first in the Company's
history. Two of the officers have agreed to take the incremental compensation
against exercising options granted to them. General and administrative expenses
were $1,759,607 and $956,644 for the years ended June 30, 2004 and 2003,
respectively, an increase of $802,963. In the current year, the general and
administrative expenses includes non-recurring expenses form 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 executing the
reverse split of its common stock through the proxy process, annual shareholders
meeting including proxies mailing and other administrative related costs and
travel expenses increased by approximately $105,934.

Selling and marketing expenses increased to $253,701 for the year ended June 30,
2004 as compared to $76,136 for the year ended June 30, 2003, reflecting the
growing sales activity of the Company. The Company wrote-off, as uncollectible,
bad debts of $219,909 and $415,384, during the years ended June 30, 2004 and
2003, respectively.

The loss from operations in fiscal year 2004 was $2,935,370 which is a 19%
increase from $2,468,250 in fiscal year 2003. Included in this amount is are
non-cash charges of depreciation and amortization of $1,714,754, settlement
expenses of $122,500 and bad debt expense of $219,909. Net losses from continued
operations in fiscal year 2004 was $2,969,975 compared to $2,615,851 in fiscal
year 2003 or 14% increase. The current fiscal year amount includes $273,159
add-back for the 49.9% minority interest in NetSol Connect owned by another
party. The Company also recognized non-recurring expenses including $137,230
expense for the beneficial conversion feature on notes payable and convertible
debenture, a gain of $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 $216,230 from the settlement of a debt, an expense
for the fair market value of warrants issued of $230,413, and placement fees for
the debenture of $105,608. The net loss per share was $0.38 in 2004 compared to
$0.47 in 2003. The total weighted average of shares outstanding basic and
diluted was 7.9 million against 4.5 million in 2003.

The Company's cash position was $871,161 at June 30, 2004 compared to $214,490
at June 30, 2003. In addition the Company had $391,403 in certificates of
deposit, of which $121,163 is being used as collateral for the financing of the
directors' and officers' liability insurance. The total cash position, including
the certificates of deposits, was $1,260,000 million as of June 30, 2004.

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 December 2003. The company would continue
to inject new capital towards expansion, grow sales and marketing and further
enhancement of delivery capabilities. However, management is committed to
ensuring the most efficient and cost effective means of raising capital and
utilization.

Quarter Ended December 31, 2004 as compared to the Quarter Ended December 31,
2003:

Net revenues for the quarter ended December 31, 2004 were $2,723,227 as compared
to $1,208,345 for the quarter ended December 31, 2003. Net revenues are broken
out among the subsidiaries as follows:

2004 2003
---- ----
Netsol USA $ 103,985 3.82% $ 127,152 10.52%
Netsol Tech 1,827,001 67.09% 705,299 58.37%
Netsol Private 164,696 6.05% 35,102 2.90%
Netsol Connect 289,886 10.64% 157,188 13.01%
Netsol UK 276,806 10.16% 113,823 9.42%
Netsol-Abraxas Australia 60,853 2.23% 69,781 5.77%
----------- ----------- ----------- -----------
Total Net Revenues $ 2,723,227 100.00% $ 1,208,345 100.00%
=========== =========== =========== ===========

This reflects an increase of $1,514,882 or 125.37% in the current quarter as
compared to the quarter ended December 30, 2003. The increase is attributable to
new orders of licenses and an increase in services business, including
additional maintenance work. The Company's biggest revenue growth was achieved
in all three of its Pakistan based subsidiaries, which generated sales both
domestically and internationally. The Company has experienced solid and
consistent demand for IT services in the domestic sectors of Pakistan. The
export licenses of LeaseSoft and maintenance related services surged primarily
due to the most recent endorsement by our biggest customer DaimlerChrysler of
Germany. NetSol and DaimlerChrysler signed a global frame agreement that added
new revenues and assisted in acquiring new customers such as Toyota Leasing
Thailand and Mauritius Commercial Bank. The impressive growth in revenue is also
attributed to several domestic contracts won in the second half of 2004 in
Pakistan.

Our telecom company, NetSol Akhter, added its 50th new corporate customer in
Pakistan whose customers include, but are not limited to: AKD Securities,
Reuters and, Marriot Hotels. The subsidiary is now EBITDA positive along with
very strong and consistent bottom-line of the main subsidiary NetSol
Technologies, Ltd.

The U.S. subsidiary has been fully integrated with the parent company to reduce
costs NetSol USA has been managing several projects with Seattle based Capital
Stream since November 2003. While the Capital Stream project generated strong
revenue since its inception, it is now at the final stage of completion.

NetSol UK continues its business development activities and has seen good
traction in its sales pipeline. NetSol UK added a very strategic new customer
TiG ("The Innovation Group"), a publicly listed UK company. We believe our
relationship with TiG will yield significant new recurring revenues to the
subsidiary. NetSol UK has ongoing relationships with Habib Allied Bank and DCD
Group. These relationships are bringing recurring revenues and are expected to
continue in the near term.

As a direct result of the successful implementations of some of our current
systems with DaimlerChrysler, we are noticing an increasing 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 and Pakistan. The
crown jewel of our product line "CMS' ("Contract Management System") which was
sold to three companies of DaimlerChrysler Asia Pacific Region in 2001 for a
combined value in excess of two million dollars was implemented and delivered to
customers in 2003. Based on ELA, (Equipment and Leasing Association of N.
America) the size of the world market for the leasing and financing industry is
in excess of $500 billion of which the software sector represents over a billion
dollars. 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 2005 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 $500,000 with additional
charges for customization and maintenance of between 20%-30% each year. The
Company, in parallel, has developed banking applications software to boost its
product line and these systems were sold to Citibank and Askari Banks in
Pakistan in 2002. New customers in the banking sector are also growing and the
Company expects substantial growth in this area in the coming year.

The gross profit was $1,894,254 in the quarter ending December 31, 2004 as
compared with $718,009 for the same quarter of the previous year for an increase
of $1,176,245. The gross profit percentage has increased to approximately 69% in
the quarter ended December 31, 2004 from approximately 59% for the quarter ended
December 31, 2003. In comparison to the prior quarter ended September 30, 2004,
the cost of sales increased approximately $77,326, revenues increased $664,922,
and an overall increase of 6% in gross profit.

Operating expenses were $1,484,906for the quarter ending December 31, 2004 as
compared to $1,304,524, for the corresponding period last year. The increase is
selling and marketing expenses and salaries is due to the expansion of our
selling efforts. The Company has streamlined its operations by consolidation,
divestment and enhanced operating efficiencies. Depreciation and amortization
expense amounted to $424,648 and $411,228 for the quarter ended December 31,
2004 and 2003, respectively. Combined salaries and wage costs were $447,984 and
$278,909 for the comparable periods, respectively, or an increase of $169,075
from the corresponding period last year.

Selling and marketing expenses were $135,352 and $27,465, in the quarter ended
December 31, 2004 and 2003, respectively, reflecting the growing sales activity
of the Company. The Company wrote-off as uncollectible bad debts of $0 in the
current quarter compared to $41,188 for the comparable prior period in the prior
year. Professional services expense increased to $140,971 in the quarter ended
December 31, 2004, from $84,288 in the corresponding period last year.

Income from operations was $409,348 compared to a loss of $586,515 for the
quarters ended December 31, 2004 and 2003, respectively. This represents a
decrease of $995,863 for the quarter compared with the comparable period in the
prior year. This is directly due to reduction of operational expenses and
improved gross margins.

Net income was $44,335 compared to net losses of $566,175 for the quarters ended
December 31, 2004 and 2003, respectively. This is an increase of 108% compared
to the prior year. The net EBITDA income was $469,942 compared to loss of
$209,292 after amortization and depreciation charges of $424,648 and $411,228
respectively. The add-back for the 49.9% minority interest in NetSol Connect
owned by another party was $(809) compared to $58,029. During the current
quarter, the Company also recognized an expense of $194,416 for the beneficial
conversion feature on convertible debentures, an expense of $221,614 for the
fair market value of warrants issued and a gain of $139,367 from the settlement
of a debt. Net income per share, basic and diluted, was $0.00 for the quarter
ended December 31, 2004 as compared with a loss per share of $0.08 for the
corresponding period last year.

Six Month Period Ended December 31, 2003 as compared to the Six Month Period
Ended December 31, 2002:

Net revenues for the six months ended December 31, 2004 were $4,781,532 as
compared to $2,180,957 for the six months ended December 31, 2003. Net revenues
are broken out among the subsidiaries as follows:

2004 2003
---- ----
Netsol USA $ 274,119 5.73% $ 207,500 9.51%
Netsol Tech 2,940,860 61.50% 1,252,196 57.41%
Netsol Private 467,505 9.78% 95,681 4.39%
Netsol Connect 558,220 11.67% 301,400 13.82%
Netsol UK 449,067 9.39% 181,697 8.33%
Netsol-Abraxas Australia 91,761 1.92% 142,483 6.53%
----------- ----------- ----------- -----------
Total Net Revenues $ 4,781,532 100.00% $ 2,180,957 100.00%
=========== =========== =========== ===========

This reflects an increase of $2,600,575 or 119.24% in the current six months as
compared to the six months ended December 31, 2003. The increase is attributable
to new orders of licenses and an increase in services business, including
additional maintenance work. The Company's biggest revenue growth was achieved
in all three of its Pakistan based subsidiaries and its UK based subsidiary,
which generated sales both domestically and internationally. The Company has
experienced solid and consistent demand for IT services in the domestic sectors
of Pakistan. The export licenses of LeaseSoft and maintenance related services
surged primarily due to the most recent endorsement by our biggest customer
DaimlerChrysler of Germany. NetSol and DaimlerChrysler signed a global frame
agreement that added new revenues and assisted in acquiring new customers such
as Toyota Leasing Thailand and Mauritius Commercial Bank.

Our telecom company, NetSol Akhter, added its 50th new corporate customer in
Pakistan whose customers include, but are not limited to: AKD Securities,
Reuters and, Marriot Hotels.

NetSol USA has been managing several projects with Seattle based Capital Stream
since November 2003.

As a direct result of the successful implementations of some of our current
systems with DaimlerChrysler, we are noticing an increasing 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 and Pakistan. The
crown jewel of our product line "CMS' ("Contract Management System") which was
sold to three companies of DaimlerChrysler Asia Pacific Region in 2001 for a
combined value in excess of two million dollars was implemented and delivered to
customers in 2003. Based on ELA, (Equipment and Leasing Association of N.
America) the size of the world market for the leasing and financing industry is
in excess of $500 billion of which the software sector represents over a billion
dollars. 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 2005 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 $500,000 with additional
charges for customization and maintenance of between 20%-30% each year. The
Company, in parallel, has developed banking applications software to boost its
product line and these systems were sold to Citibank and Askari Banks in
Pakistan in 2002. New customers in the banking sector are also growing and the
Company expects substantial growth in this area in the coming year.

The gross profit was $3,200,912 for the six months ending December 31, 2004 as
compared with $1,057,795 for the same period of the previous year. The gross
profit percentage has increased 10.53% to 66.94% in the current fiscal year from
56.41% for the six months ended December 31, 2003. The increase in gross profit
margins is due to repeat sales of some licenses to new customers and to existing
customers.

Operating expenses were $2,757,165 for the six-month period ending
December 31, 2004 as compared to $2,646,857, for the corresponding period last
fiscal year for an increase of $110,308. The increase is mainly due to the
increased sales activities of the Company. The Company has streamlined its
operations by consolidation, divestment and enhanced operating efficiencies.
Depreciation and amortization expense amounted to $838,473 and $824,029 for the
six-month period ended December 31, 2004 and December 31, 2003, respectively.
Combined salaries and wage costs were $795,221 and $594,449 for the six month
period ended December 31, 2004 and 2003, respectively, or an increase of
$200,772 from the corresponding period last year.

Selling and marketing expenses increased to $254,700 in the six-month period
ended December 31, 2004 as compared to $46,687 in the six-month period ended
December 31, 2003. This reflects the Company's expanding sales and marketing
efforts. The Company wrote-off as uncollectible bad debts of $0 and $93,506 for
the six months ended December 31, 2004 and 2003, respectively. Professional
services expense increased to $255,305 in the six-month period ended December
31, 2004, from $239,702 in the corresponding period last year.

Income from continued operations was $443,747 compared to loss of $1,416,613 for
the six months ended December 31, 2004 and 2003, respectively. This represents
an increase of $1,860,360 for the six-month period compared to the prior year.
This is directly due to reduction of operational expenses and improved gross
margins.

Net income was $78,692 for the six months ended December 31, 2004 compared to
net loss of $1,434,525 for the six months ended December 31, 2003. This is an
increase of 105.49% compared to the prior year. The net EBITDA income was
$919,637 compared to loss of $695,299 after amortization and depreciation
charges of $838,473 and $824,029 respectively. The add-back for the 49.9%
minority interest in NetSol Connect owned by another party was $14,259compared
to $93,338. During the current six months, the Company also recognized an
expense of $231,916 for the beneficial conversion feature on convertible
debentures, an expense of $249,638 for the fair market value of warrants issued
and a gain of $189,641 from the settlement of a debt. Net income per share,
basic and diluted, was $0.01 for the six months ended December 31, 2004 as
compared with a loss per share of $0.20 for the corresponding period last year.

Going Concern Qualification

Our independent auditors have included an explanatory paragraph in their report
on the June 30, 2004 consolidated financial statements discussing issues which
raise substantial doubt about our ability to continue as a "going concern." The
going concern qualification is attributable to our historical operating losses,
and the amount of capital which we project our needs to satisfy existing
liabilities and achieve profitable operations. In positive steps, we have closed
down our loss generating businesses, and continue to evaluate and implement cost
cutting measures at every entity level. For the year ended June 30, 2004, we
continued to experience a negative cash flow from consolidated operations, and
projects that it will need certain additional capital to enable it to continue
operations at its current level beyond the near term. We believe that certain of
this needed capital will result from the successful collection of our accounts
receivable balances as projects are completed during the coming fiscal year. We
believe we can raise additional funds though private placements of its common
stock. Effective February 8, 2005, our auditors informed us that they would no
longer include a going concern explanatory paragraph in our financials. This
decision was based on the improved financials of the Company during the first
two quarters of the 2004-2005 fiscal years.

Liquidity And Capital Resources

We were successful in improving our cash position by the end of our fiscal year,
June 30, 2004. In addition, $957,892 was injected by the exercise of options by
several employees in 2004.

The Company's cash position was $488,110 at December 31, 2004 compared to
$557,206 at December 31, 2003. In addition the Company had $550,000 in
certificates of deposit. The total cash position, including the certificates of
deposits, was $998,110 as of December 31, 2004.

Net cash used for operating activities amounted to $1,464,697 for the six months
ended December 31, 2004, as compared to $1,920,238 for the comparable period
last fiscal year. The decrease is mainly due to an increase in net income as
well as an increase in prepaid expenses and accounts receivable. In addition,
the Company experienced a decrease of $763,065 in its accounts payable and
accrued expenses.

Net cash used by investing activities amounted to $550,877 for the six months
ended December 31, 2004, as compared to $62,696 for the comparable period last
fiscal year. The difference lies primarily in the purchase of property and
equipment during the current fiscal year. The Company had net purchases of
property and equipment of $380,598 compared to net sales of $14,380 for the
comparable period last fiscal year. During the current fiscal year, an
additional $287,797 was infused into the Company's minority interest in the
Company's subsidiary NetSol Connect.

Net cash provided by financing activities amounted to $1,573,593 and $2,339,910
for the six months ended December 31, 2004, and 2003, respectively. The current
fiscal period included the cash inflow of $1,512,000 compared to $1,102,049 from
issuance of equity and $343,900 compared to $814,350 from the exercising of
stock options and warrants. In the current fiscal period, the Company had net
payments on loans and capital leases of $230,603 as compared to net proceeds of
$423,511 in the comparable period last year.

The 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. During the
current fiscal period, management reduced the current liabilities significantly
by paying down these obligations. Management anticipates receiving proceeds from
option exercises in the coming months and will continue to explore the best
possible means and terms to raise new capital. Management is confident of being
able to strengthen its cash position and further improve the liquidity position.
Management is committed to implementing the growth business strategy that was
ratified by the board of directors in December 2003. The Company would continue
to inject new capital towards expansion, growing sales and marketing and further
enhancement of delivery capabilities. However, management is committed to
ensuring the most efficient and cost effective means of raising capital and
utilization.

Dividends and Redemption

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

DESCRIPTION OF PROPERTY

Company Facilities

As of December 2003, we moved from our corporate headquarters in California to
one with approximately 1,919 rentable square feet and a monthly rent of
$3,933.95. The lease is a two-year and one-half month lease expiring in December
2005. Our current facilities are located at 23901 Calabasas Road, Suite 2072,
Calabasas, California, 91302.

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

Location/Approximate Monthly Rental
Square Feet Purpose/Use Expense

Australia........... 1,140 Computer and General Office $1,380

United Kingdom...... 378 General Office $5,500

Maryland............ 1,380 General Office $2,530

The Australian lease is a three-year lease that expires in September 2007. It 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 $3,000 per month. The facilities in Maryland are leased for a
three year term expiring in June 2007. The monthly rent is $2,530 per month.

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

Lahore Technology Campus

Our 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 a 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. 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 would invest nearly Rs 10.0MN
(approximately $150,000) to install fiber optic lines and improve the bandwidth
for the facility. NetSol has relocated its entire staff of over 250 employees
into this new facility.

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 53.

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 53 and 56
respectively.

In July 2004, the board approved compensation for service on the Audit,
Compensation and Nominating and Corporate Governance Committees. This
compensation is discussed in sections entitled "Compensation of Directors"
beginning on page 56.

The Company's management believes that the terms of these transactions are no
less favorable to us than would have been obtained from an unaffiliated third
party in similar transactions. All future transactions with affiliates will be
on terms no less favorable than could be obtained from unaffiliated third
parties, and will be approved by a majority of the disinterested directors.

MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

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

The table shows the high and low intra-day prices of our 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.

2002-03 2003-04 2004-05
------- ------- -------
High Low High Low High Low
---- --- ---- --- ---- ---
1st (ended .80 .35 5.50 1.94 1.99 1.09
September 30)

2nd (ended 1.30 .25 3.16 2.05 2.71 1.14
December 31)

3rd (ended 1.24 .75 3.15 2.07 -- --
March 31)

4th (ended 3.50 .95 3.09 2.01 -- --
June 30)

RECORD HOLDERS - As of February 11, 2005, the number of holders of record of our
common stock was 178. As of February 11, 2005, there were 12,409,155 shares of
common stock issued and outstanding.

DIVIDENDS - We have not paid dividends on its Common Stock in the past and do
not anticipate doing so in the foreseeable future. We currently intend to retain
future earnings, if any, to fund the development and growth of its business.

EXECUTIVE COMPENSATION

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 NetSol who received compensation of, or in excess
of, $100,000 during the fiscal year ended June 30, 2004. 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.

Annual
Compensation(1) Long Term Compensation
--------------- ----------------------
Long Term
Compenstation ecurities
Awards (2) nderlying
Fiscal Year Restricted Stock Options
Name and Principal Position Ended Salary Bonus Awards (3) SARs (4)
--------------------------- ----- ------ ----- ---------- --------

Najeeb U. Ghauri, Chief Financial 2004 $200,000 -0- -0- 50,000(5)
Officer, Chairman, Director 50,000(6)
25,000(7)
20,000(8)
30,000(9)

2003 $120,000 -0- -0- -0-

2002 $100,000 -0- -0- 85,000(10)
100,000(11)
20,000(12)

Naeem Ghauri, CEO, Director 2004 $207,900(13) -0- -0- 50,000(5)
50,000(6)
25,000(7)
20,000(8)
30,000(9)
$125,000
2003 -0- -0- -0-

$100,000
2002 -0- -0- 70,000(14)
100,000(11
20,000(12)
Salim Ghauri, President, Director 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-

2002 $100,000 70,000(14)
-0- -0- 100,000(11)
20,000(12)

Patti L. W. McGlasson, Secretary, 2004 $82,000 -0- 5,000(15) 5,000(16)
Corporate Counsel 5,000(17)
20,000(8)
30,000(9)

(1) No officers received any bonus or other annual compensation other than
salaries during fiscal 2004 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 85,000 shares of our common stock granted on
February 16, 2002 at the exercise price of $.75 per share. Options must be
exercised within five years after the grant date.

(11) Includes options to purchase 100,000 shares of our common stock granted on
February 16, 2002 at the exercise price of $1.25 per share.

(12) Includes options to purchase 200,000 shares of our common stock granted on
February 16, 2002 at the exercise price of $2.50 per share.

(13) Mr. Ghauri salary is 110,000 British Pounds Sterling. The total in this
table reflects a conversion rate of 1.89 dollars per pound.

(14) Includes options to purchase 70,000 shares of our common stock granted on
February 16, 2002 at the exercise price of $.75 per share. Options must be
exercised within five years after the grant date.

(15) 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.

(16)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.

(17) Includes options to purchase 5,000 shares of common stock at the exercise
price of $3.00 per share.

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

Number of Unexercised Value of unexercised
Options/SARs at in-the-money at
fiscal year end (##) fiscal year end
Shares Acquired on Value Realized Exercisable (2) / ($)Exercisable(2)/
Name Exercise (#) (1) ($) Unexercisable Unexercisable
---- ------------ ------- ------------- -------------

Najeeb Ghauri, CFO , 87,223 $ 0.00 150,000/150,000 $2,000/$0.00
Director , Chairman

Salim Ghauri, President, 67,777 $ 0.00 155,000/155,000 $2,000/$0.00
Director

Naeem Ghauri, CEO, Director 51,557 $ 0.00 1500,000/155,000 $$2,000/$0.00

Patti L. W. McGlasson, 2,500 $ 0.00 60,000/10,000 $525/$1,050
Secretary
Corporate Counsel

(1) The closing price of the stock at the June 30, 2004, Fiscal Year End was
$2.21.
(2) All options are currently exercisable.

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 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 January 1, 2004, we entered into an employment agreement with Salim
Ghauri as the President and Chief Executive Officer 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. 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 January 1, 2004,
we 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 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 two incentive
and nonstatutory stock option plans in force for 2001, 2002 and 2003 and two
other plans from 1997 and 1999. No options have been issued under the 1997 and
1999 plans in the past two fiscal years.

The 2001 plan authorizes the issuance of up to 2,000,000 options to purchase
common stock of which 1,985,000 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 1,418,000 options have been granted. The grant prices
range between $2.21 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 450,000
have been granted. The grant prices range between $2.64 and $5.00.

COMPENSATION OF DIRECTORS

For the 2003 term, Directors of the Company receive any cash compensation of
$750 for attendance in person at a board meeting and are entitled to
reimbursement of their reasonable expenses incurred in attending Directors'
Meetings. Upon the full completion of the 2003 term, each director received
7,000 shares of restricted common stock. In addition, the Company granted each
of its directors the following S-8 registered options: (a) 10,000 stock options,
exercise price of $0.75, vested quarterly; and (b) 20,000 stock options,
exercise price of $2.50 vesting quarterly.

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.

All directors are entitled to reimbursement of approved business expenses.

The Audit Committee Chairman shall receive $1,100 per month, and 5,000 shares of
restricted common stock issuable upon completion of the 2004 term. The chairs of
the Nominating and Corporate Governance and Compensation Committee receives
5,000 shares of restricted common stock upon completion of service for the 2004
term. Each member of the Audit, Nominating and Corporate Governance and
Compensation Committee shall also receive 4,000 shares of common stock.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS

Kabani & Company's report on NetSol's financial statements for the fiscal years
ended June 30, 2003 and June 30, 2004, 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.

In connection with the audit of NetSol's financial statements for the fiscal
years ended June 30, 2003 and June 30, 2004 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.

WHERE YOU CAN FIND MORE INFORMATION

We have filed with the Securities and Exchange Commission a registration
statement on Form SB-2 under the Securities Act, and the rules and regulations
promulgated thereunder, with respect to the common stock offered hereby. This
prospectus, which constitutes a part of the registration statement, does not
contain all of the information set forth in the registration statement and the
exhibits thereto. Statements contained in this prospectus as to the contents of
any contract or other document that is filed as an exhibit to the registration
statement are not necessarily complete and each such statement is qualified in
all respects by reference to the full text of such contract or document. For
further information with respect to us and the common stock, reference is hereby
made to the registration statement and the exhibits thereto, which may be
inspected and copied at the principal office of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549, and copies of all or any part thereof may
be obtained at prescribed rates from the Commission's Public Reference Section
at such addresses. Also, the Commission maintains a World Wide Web site on the
Internet at http://www.sec.gov that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission.

We are in compliance with the information and periodic reporting requirements of
the Exchange Act and, in accordance therewith, will file periodic reports, proxy
and information statements and other information with the Commission. Such
periodic reports, proxy and information statements and other information will be
available for inspection and copying at the principal office, public reference
facilities and Web site of the Commission referred to above.

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, 2004	F-6

Consolidated Statements of Operations for the Years Ended June 30, 2004 and 2003	F-7

Consolidated Statements of Stockholders’ Equity for the Years Ended June 30, 2004 and 2003	F-8

Consolidated Statements of Cash Flows for the Years Ended June 30, 2004 and 2003	F-10

Notes to Consolidated Financial Statements	F-12


	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, 2004, and the related consolidated statements of operations, stockholders’ equity and cash flows for the years ended June 30, 2004 and 2003. 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 Network Technologies (PVT) Limited, NetSol (PVT) Limited and NetSol Connect (PVT) Limited, whose statements reflect combined total assets of approximately $7,173,282 as of June 30, 2004 and combined total net revenues of $4,452,435 and $2,766,174 for the years ended June 30, 2004 and 2003, 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 Network Technologies (PVT) Limited for the years ended June 30, 2004 and 2003, 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 audits 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, 2004 and the results of its consolidated operations and its cash flows for the years ended June 30, 2004 and 2003 in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As shown in the financial statements, the Company has an accumulated deficit, has negative cash flows from operations, and has a net working capital deficit. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of these uncertainties.

/s/ Kabani & Company, Inc.

CERTIFIED PUBLIC ACCOUNTANTS

Huntington Beach, California

August 2, 2004


	F-2


	F-3


	F-4

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES


	F-5

NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 2004

ASSETS
Current assets:
Cash and cash equivalents	$	871,161
Certificates of deposit		391,403
Accounts receivable, net of allowance for doubtful accounts of $80,000		951,994
Revenues in excess of billings		951,905
Other current assets		397,038
Total current assets					3,563,501
Property and equipment, net of accumulated depreciation					4,203,580
Intangibles:
Product licenses, renewals, enhancedments, copyrights,
trademarks, and tradenames, net		2,409,859
Customer lists, net		641,569
Goodwill, net		939,260
Total intangibles					3,990,688
Total assets				$	11,757,769

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	2,207,823
Current portion of notes and obligations under capitalized leases		803,813
Billings in excess of revenues		103,451
Loans payable, bank		458,861
Total current liabilities					3,573,948
Obligations under capitalized leases, less current maturities					27,604
Notes payable					89,656
Convertible debenture					937,500
Total liabilities					4,628,708
Minority interest					—
Contingencies					—

Stockholders' equity:
Common stock, $.001 par value; 25,000,000 share authorized;
9,482,822 issued and outstanding		9,483
Additional paid-in-capital		39,164,034
Treasury stock		(21,457	)
Accumulated deficit		(31,375,230	)
Stock subscription receivable		(497,559	)
Other comprehensive loss		(150,210	)
Total stockholders' equity					7,129,061
Total liabilities and stockholders' equity				$	11,757,769

See accompanying notes to these consolidated financial statements


	F-6

NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

	For the Year
	Ended June,
	2004			2003

Net revenues	$	5,749,062		$	3,745,386
Cost of revenues		2,656,377			1,778,993
Gross profit		3,092,685			1,966,393

Operating expenses:
Selling and marketing		253,701			76,136
Depreciation and amortization		1,714,754			1,576,890
Settlement costs		122,500			202,759
Bad debt expense		219,909			415,384
Salaries and wages		1,493,252			934,383
Professional services, including non-cash
compensation		464,332			272,447
General and adminstrative		1,759,607			956,644
Total operating expenses		6,028,055			4,434,643
Loss from operations		(2,935,370	)		(2,468,250	)
Other income and (expenses)
Loss on sale of assets		(35,173	)		(5,464	)
Beneficial conversion feature		(137,230	)		—
Gain on forgiveness of debt		320,318			—
Fair market value of warrants issued		(230,413	)		—
Interest expense		(172,101	)		(135,243	)
Other income and (expenses)		(53,165	)		(6,624	)
Loss from continuing operations		(3,293139	)		(2,615,581	)
Minority interest in subsidiary		273,159			—
Gain from discontinuation of a subsidiary		—			478,075
*Net loss*		(2,969,975	)		(2,137,506	)
Other comprehensive loss:
Translation adjustment		(299,507	)		(380,978	)
Comprehensive loss	$	(3,269,482	)	$	(2,518,484	)

Net loss per share - basic and diluted:
Continued operations	$	(0.41	)	$	(0.58	)
Discontinued operations	$	—		$	0.11
Net loss	$	(0.38	)	$	(0.47	)

Weighted average number
of shares outstanding - basic and diluted*		7,881,554			4,512,203


*The basic and diluted net loss per share has been retroactively restated to effect a 5:1 reverse stock split on August 18, 2003

See accompanying notes to these consolidated financial statements


	F-7

NETSOL TECHNOLOGIES INC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE YEARS ENDED JUNE 30, 2003 AND 2004

					Additional		Stock			Other						Total
	Common Stock*				Paid-in		Subscriptions			Comprehensive			Accumulated			Stockholders'
	Shares		Amount		Capital		Receivable			Income/(Loss)			Deficit			Equity
Balance at June 30, 2002		3,865,593		3,865		31,807,110		(43,650	)		530,275			(26,267,749	)		6,029,851
Common stock sold through private placements		471,853		472		371,997											372,469
Issuance of common stock in exchange for services		90,400		90		50,776											50,866
Issuance of common stock in exchange for accrued compensation		115,000		115		107,385											107,500
Excercise of common stock options		790,900		791		707,609											708,400
Excercise of common stock warrants		60,000		60		35,940											36,000
Issuance of common stock in exchange for notes payable		111,429		111		40,889											41,000
Issuance of common stock in exchange for settlement		40,000		40		49,960											50,000
Issuance of common stock in exchange for purchase of Altiva		212,000		212		211,788											212,000
Common stock options granted for services		—		—		26,500											26,500
Common stock receivable		—		—				(41,250	)								(41,250	)
Foreign currency translation adjustments		—		—							(380,978	)					(380,978	)
Net loss for the year		—		—										(2,137,506	)		(2,137,506	)

Balance at June 30, 2003		5,757,175	$	5,756	$	33,409,954	$	(84,900	)	$	149,297		$	(28,405,255	)	$	5,074,852

Continued

See accompanying notes to these consolidated financial statements.


	F-8

NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY - Continued
FOR THE YEARS ENDED JUNE 30, 2003 AND 2004

					Additional						Stock			Other						Total
	Common Stock*				Paid-in			Treasury			Subscriptions			Comprehensive			Accumulated			Stockholders'
	Shares		Amount		Capital			Shares			Receivable			Income/(Loss)			Deficit			Equity
Balance at June 30, 2003		5,757,175		5,756		33,409,954			—			(84,900	)		149,297			(28,405,255	)		5,074,852
Issuance of common stock for cash		1,413,187		1,414		1,847,336															1,848,750
Issuance of common stock in exchange for services		3,613		4		8,996															9,000
Excercise of common stock options		1,067,309		1,068		1,369,484						(412,659	)								957,893
Excercise of common stock warrants		390,000		390		487,110															487,500
Issuance of common stock in exchange for notes payable & interest		601,393		601		1,070,628															1,070,629
Issuance of common stock in exchange for settlement		45,195		45		135,088															135,133
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															166,860
Issuance of common stock to directors in exchange for services		45,000		45		39,195															39,240
Purchase of treasury shares									(21,457	)											(21,457	)
Beneficial conversion feature		—		—		399,730															399,730
Fair market value of warrants issued		—		—		230,413															230,413
Foreign currency translation adjustments		—		—		—									(299,507	)					(299,507	)
Net loss for the year		—		—		—												(2,969,975	)		(2,969,975	)

Balance at June 30, 2004		9,482,822	$	9,483	$	39,164,034		$	(21,457	)	$	(497,559	)	$	(150,210	)	$	(31,375,230	)	$	7,129,061

See accompanying notes to these consolidated financial statements.


	F-9

NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS


	For the Year
	Ended June 30,
	2004			2003
Cash flows from operating activities:
Net loss from continuing operations	$	(2,969,975	)	$	(2,137,506	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		2,070,708			1,576,890
Provision for uncollectible accounts					80,000
Gain on discontinued operations					(478,075	)
Gain on forgiveness of debt		(320,318	)		—
Loss on sale of assets		35,173			5,464
Minority interest in subsidiary		(273,159	)		—
Stock issued for settlement costs		135,133			50,000
Stock issued for services		9,000			39,200
Stock issued to directors for services		39,240
Fair market value of warrants and stock options granted		230,413			26,500
Beneficial conversion feature		137,230			—
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable		(324,094	)		464,634
Other current assets		(416,780	)		(585,145	)
Other assets		—			(347,743	)
Decrease in liabilities:
Accounts payable and accrued expenses		(65,386	)		(874,734	)
Net cash used in operating activities		(1,712,815	)		(2,180,515	)
Cash flows from investing activities:
Purchases of property and equipment		(2,861,754	)		(127,822	)
Sales of property and equipment		75,490			92,271
Purchases of certificates of deposit		(3,241,403	)		—
Proceeds from sale of certificates of deposit		2,850,000			714,334
Increase in intangible assets - development costs		(439,297	)		—
Proceeeds from sale of minority interest of subsidiary		210,000			—
Net cash provided (used in) by investing activities		(3,406,964	)		678,783
Cash flows from financing activities:
Proceeds from sale of common stock		1,848,750			365,219
Proceeds from the exercise of stock options		1,445,392			845,566
Purchase of treasury shares		(21,457	)		—
Proceeds from loans		1,628,005			351,868
Proceeds from convertible debenture		1,200,000			—
Payments on capital lease obligations & loans		(384,210	)		(132,972	)
Net cash provided by financing activities		5,716,480			1,429,681
Effect of exchange rate changes in cash		59,970			199,627
Net increase in cash and cash equivalents		656,671			127,576
Cash and cash equivalents, beginning of year		214,490			86,914
Cash and cash equivalents, end of year	$	871,161		$	214,490

See accompanying notes to these consolidated financial statements.


	F-10

NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

Continued

	For the Year
	Ended June 30,
	2004		2003
SUPPLEMENTAL DISCLOSURES:
Cash paid during the year for:
Interest	$	172,101	$	135,243
Taxes	$	76,638	$	10,344

NON-CASH INVESTING AND FINANCING ACTIVITIES:
Common stock issued for services and compensation	$	9,000	$	39,200
Common stock issued for conversion of note payable and interest	$	861,429	$	25,000
Common stock issued for legal settlement	$	135,133	$	50,000
Common stock issued for acquisition of product license	$	166,860	$	—
Common stock issued for settlement of debt	$	209,200	$	—
Common stock issued to directors for services	$	39,240	$	—
Stock options granted in exchange for services received	$	—	$	26,500
Common stock issued for acquisition of subsidiary	$	—	$	212,000

See accompanying notes to these consolidated financial statements.


	F-11

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 m arket 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-12

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.

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. The financial statements of Pearl are insignificant to the consolidated financials, and therefore, have not been presented. The total acquisition value of $166,860 has been recorded as an intangible asset and is included in "product licenses" on the accompanying consolidated financial statements.


	F-13

NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Raabta Online

During the quarter ended March 31, 2004, the Company’s subsidiary, NetSolCONNECT, 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. The financial statements of Raabta are insignificant to the consolidated financials, and therefore, have not been presented.

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 serves 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.


	F-14

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., NetSol (Pvt), Limited, NetSol Technologies Limited, NetSol-Abraxas Australia Pty Ltd., NetSol Altvia, Inc., and its majority-owned subsidiary, NetSol Connect (Pvt), Ltd., 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 becomes effec tive 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.

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.


	F-15

NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Property and Equipment:

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

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

Intangible Assets:

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

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

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

Going Concern:

The Company’s consolidated financial statements are prepared using the accounting principles generally accepted in the United States of America applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. As of June 30, 2004, the Company had an accumulated deficit of $31,375,230 and a working deficit of approximately $10,000. Without realization of additional capital, it would be unlikely for the Company to continue as a going concern. This factor raises substantial doubt about the Company's ability to continue as a going concern.


	F-16

NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Management recognizes that the Company must generate additional resources to enable it to continue operations. In the current year, the Company realized a significant increase in net revenues of nearly 53%. Management is taking steps to continue comparable revenue increases in the next fiscal year. Management also continuing to pursue cost cutting measures at every entity level. Additionally, management’s plans also include the sale of additional equity securities and debt financing from related parties and outside third parties. However, of course, no assurance can be guaranteed that the Company will be successful in raising additional capital or continue the current growth trend in net revenues. Further, there can be no assurance, assuming the Company successfully raises additional equity, that the Company will achieve profitability or positive cash flow. If management is unable to raise additional capital and expected significant revenues do not result in positive cash flow, the Company will not be able to meet its obligations and may have to cease operations.

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 as amended by SOP 98-4 and SOP 98-9. The Company’s revenue recognition policy is as follows:

License Revenue. The Company recognizes revenue from license contracts when a non-cancelable, non-contingent license agreement has been signed, the software product has been delivered, no uncertainties exist surrounding product acceptance, fees from the agreement are fixed and determinable and collection is probable. 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. If no such objective evidence exists, revenues from the arrangements are not recognized until the entire arrangement is completed and accepted by the customer. Once the amount of the revenue for each element is determined, the Company recognizes revenues as each element is completed and accepted by the customer. For arrangements that require significant production, modification or customization of software, the entire arrangement is accounted for by the percentage of completion method, in conformity with Accounting Research Bulletin ("ARB") No. 45 and SOP 81-1.


	F-17

NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Services Revenue. Revenue from consulting services is recognized as the services are performed for time-and-materials contracts and contract accounting is utilized for fixed-price 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, 2004 and 2003 were $253,701 and $76,136, respectively.

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 weighted average number of shares used to compute basic and diluted loss per share is the same in these financial statements 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, Limited use British Pounds, NetSol Technologies (Pvt) Ltd., NetSol (Pvt), Ltd., and NetSol Connect Pvt, Ltd. use Pakistan Rupees, NetSol Abraxas Australia Pty, Ltd. 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, 2004 and 2003, comprehensive income included net translation loss of $299,507 and $380,978, respectively. Other comprehensive loss, as presented on the accompanying consolidated balance sheet in the stockholders’ equity section amounted to $150,210 as of June 30, 2004.


	F-18

NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

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, 2004, the Company had net federal and state operating loss carry forwards expiring in various years through 2024. During the year ended June 30, 2004, the valuation allowance increased by $1,186,800; primarily due 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, 2004 is as follows:

	Federal			State			Total
Net operating loss carry forward	$	19,104,500		$	12,179,500
Effective tax rate		32	%		8	%
Deferred tax asset		6,113,440			974,360			7,087,800
Valuation allowance		(4,553,440	)		(584,360	)		(5,137,800	)
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	$	—		$	—		$	—


	F-19

NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

	June 30,			June 30,
	2004			2003

Tax expense (credit) at statutory rate-federal		(32	)%		(32	)%
State tax expense net of federal tax		(8	)		(8	)
Permanent differences		1			1
Valuation allowance		39			39
Tax expense at actual rate		—			—

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.

As of June 30, 2004, the Company determined the fair value of goodwill was equal to its carrying value.


	F-20

NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO 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 (Note 13).

New Accounting Pronouncements:

In March 2003, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure." This Statement amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company does not expect to adopt SFAS No. 123. The proforma information regarding net loss and loss per share, pursuant to the requirements of FASB 123 for the year end June 30, 2004 has been presented in Note 9.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity, ("SFAS No. 150"). SFAS No. 150 establishes standards for how an issuer classifies and measurers in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. In accordance with SFAS No. 150, financial instruments that embody obligations for the issuer are required to be classified as liabilities. SFAS No. 150 shall be effective for financial instruments entered into or modified after May 31, 2003, and otherwise shall be effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS 150 does not have a material effect on the earnings or financial position of the Company.

In December 2003, the Financial Accounting Standards Board (FASB) issued a revised Interpretation No. 46, "Consolidation of Variable Interest Entities" (FIN 46R). FIN 46R addresses consolidation by business enterprises of variable interest entities and significantly changes the consolidation application of consolidation policies to variable interest entities and, thus improves comparability between enterprises engaged in similar activities when those activities are conducted through variable interest entities. The Company does not hold any variable interest entities


	F-21

NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Reclassifications:

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

NOTE 3 - MAJOR CUSTOMERS

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 years ended June 30, 2004 and 2003. No other individual client represents more than 10% of the revenue for the fiscal year ended June 30, 2004 and 2003.

NOTE 4 - OTHER CURRENT ASSETS

Other current assets consist of the following as of June 30, 2004:

Prepaid Expenses	$	228,479
Advance Income Tax		79,302
Employee Advances		21,759
Security Deposits		15,267
Other Receivables		42,097
Other		10,134

Total	$	397,038

NOTE 5 - PROPERTY AND EQUIPMENT

Property and equipment, net, consist of the following at June 30, 2004:

Office furniture and equipment	$	491,397
Computer equipment		2,131,891
Web-site development		167,305
Assets under capital leases		535,142
Building		1,096,639
Construction in process		1,835,436
Land		178,578
Autos		61,712
Improvements		197,391
Subtotal		6,695,491
Accumulated depreciation and amortization		(2,491,911	)
	$	4,203,580


	F-22

NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended June 30, 2003 and 2002, fixed asset depreciation and amortization expense totaled $520,750 and $474,596, respectively. Of these amounts, $355,954 and $287,235, respectively, are reflected as part of cost of goods sold. Accumulated depreciation and amortization for assets under capital leases amounted to $335,156 and $372,623 at June 30, 2004 and 2003, respectively.

NOTE 6 - INTANGIBLE ASSETS

Intangible assets consist of the following at June 30, 2004:

	Product Licenses			Customer Lists			Goodwill			Total
Intangible asset - June 30, 2003	$	4,894,838		$	1,977,877		$	2,153,311		$	9,026,026
Additions		650,677			—			—			650,677
Effect of translation adjustment		(4,298	)		—			—			(4,298	)
Accumulated amortization		(3,131,357	)		(1,336,308	)		(1,214,052	)		(5,681,717	)
Net balance - June 30, 2004	$	2,409,860		$	641,569		$	939,259		$	3,990,688

Amortization expense:
Year ended June 30, 2004	$	803,629		$	315,665		$	430,664		$	1,549,958
Year ended June 30, 2003	$	726,630		$	316,015		$	393,388		$	1,436,033

At June 30, 2004 and 2003, product licenses, renewals, enhancements, copyrights, trademarks, and tradenames, included unamortized software development and enhancement costs of $908,508 and $562,659, respectively, as the development and enhancement is yet to be completed.

Effective July 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets," ("SFAS 142"). SFAS 142 requires that goodwill no longer be amortized and that it be assessed for impairment on an annual basis. The Company is evaluating any accounting effect, if any, arising from the recently issued SFAS No. 142, "Goodwill and Other Intangibles" on the Company's financial position or results of operations.

NOTE 7 - CERTIFICATE OF DEPOSIT HELD AS COLLATERAL

In April 2004, the Company renewed its Directors and Officers Insurance and as part of the financing agreement was required to purchase a Certificate of Deposit (“CD”) for $121,163 as collateral for the financing. The CD is held until the loan for the insurance has been paid. This amount is included in the Certificates of Deposit on the accompanying balance sheet.


	F-23

NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8 - DEBTS

NOTES PAYABLE

Notes payable consist of the following at June 30, 2004:

	Balance at		Current		Long-Term
Name	6/30/04		Maturities		Maturities
A. Cowler Settlement		146,516		65,160		81,356
H. Smith Settlement		199,321		199,321		—
Barclay's Settlement		16,598		16,598		—
A. Zaman Settlement		26,300		18,000		8,300
D&O Insurance		58,942		58,942		—
Subsidiary capital leases		35,064		35,064		—
Subsidiary notes payable		410,728		410,728		—

		893,469		803,813		89,656

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 £218,000 pound sterling or approximately $320,460 USD including interest, which the Company has recorded as a note payable in the accompanying consolidated financial statements. The agreement calls for monthly payments of £3,000 until March 2004 and then £4,000 per month until paid. The balance as of June 30, 2003, was $185,424. During the year ended June 30, 2004, the Company paid £60,445 or $86,857 and accrued $23,788 in interest. 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 $24,161 was recorded to translation loss. As of June 30, 2004, the balance was $146,516. Of this amount, $65,160 has been classified as a current liability and $81,356 as long-term liability in the accompanying financial statements.

In November 2002, the Company signed a settlement agreement with Herbert Smith for £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 £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. The entire balance has been classified as current and is included in "Current maturities of notes and obligations under capitalized leases" 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 £130,000 or $188,500 USD. In November 2002, the parties agreed upon a settlement agreement whereby the Company would pay £1,000 per month for twelve months and £2,000 per month thereafter until paid. During the fiscal year ended June 30, 2003, the Company paid approximately £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 £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 £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, £60,000 or $62,500 has been paid on the settlement amount with the balance of £9,000 or $16,598 due by July 2, 2004. The entire balance has been classified as current and is included in "Current maturities of notes and obligations under capitalized leases" in the accompanying consolidated financial statements.

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, 2003 was $53,300.


	F-24

NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

During the current fiscal year the Company paid $22,000. As of June 30, 2004, the balance was $26,300, of this amount $18,000 has been classified as a current liability in the accompanying consolidated financial statements.

In January 2004, the Company renewed its director’s and officer liability insurance for which the annual premium is $167,000. In April 2004, the Company arranged financing with AFCO Credit Corporation with a down payment of $50,100 with the balance to be paid in monthly installments. As part of this financing agreement, the Company is required to hold a certificate of deposit in the amount of $121,163 as collateral, Note 7).

As part of the purchase of Altvia in May 2003, the Company was required to pay $45,000 as a note payable. During the six months ended December 31, 2003, the Company paid the entire balance of $45,000.

On August 20, 2003, the Company entered into a loan agreement with an accredited non-U.S. investor. Under the terms of the loan, the Company borrowed $500,000 from the investor. The note has an interest rate of 8% per annum. The note was due on a date that is one hundred (120) days from the issuance date. In the event of default by the Company only, the principal of the note is convertible into shares of common stock at $1.75 per share. As the conversion price per share was less than the20-day average market value of the stock, the Company recorded an expense of $96,207 for the beneficial conversion feature of the note. The convertible debenture was issued in reliance on an exemption available from registration under Regulation S of the Securities Act of 1933, as amended. On December 16, 2003, the note holder converted the note into 285,715 shares of the Company’s common stock.

A former officer of NetSol USA loaned funds to the subsidiary totaling $104,088. The loan was due-on-demand, carried no interest and was unsecured. This amount was written-off from the Company’s books and a gain was recognized.

On December 24, 2003, the Company entered into a loan agreement with an accredited non-U.S. investor. Under the terms of the loan, the Company borrowed $250,000 from the investor. The note has an interest rate of 6% per annum. The note is due six months from the issuance date. On January 1, 2004, the agreement was modified to include a conversion feature to the note. In the event of default by the Company only, the principal of the note is convertible into shares of common stock at $1.85 per share, and 100,000 warrants at the exercise price of $3.00 which expire one year from the conversion date, and 100,000 warrants at an exercise price of $5.00 per share which expire six months from the conversion date. The convertible debenture was issued in reliance on an exemption available from registration under Regulation S of the Securities Act of 1933, as amended. As the conversion price per share is more the than 20-day average market price, no beneficial conversion feature expense will be recorded. During the quarter ended March 31, 2004, the loan was converted into 135,135 shares of the Company’s common stock.

On December 17, 2003, the Company entered into a loan agreement with an accredited non-U.S. investor, Sovereign Holdings. Under the terms of the loan, the Company borrowed $100,000 from the investor. The note has an interest rate of 6% per annum. The note is due on a date that is six months from the issuance date. In the event of default by the Company only, the note is convertible into shares of common stock at $1.95 per share, and 51,282 warrants at the exercise price of $3.25 per share which expire one year from the conversion date. The note was issued in reliance on an exemption available from registration under Regulation S of the Securities Act of 1933, as amended. On March 24, 2004, the loan was converted into 51,282 shares of the Company’s common stock. In June 2004, an addition 5,861 shares of the Company’s common stock were issued for interest valued at $11,429.

In addition, the various subsidiaries had current capital leases of $35,064 and long-term notes of $473,887 as of June 30, 2004.

The current maturity of notes payable, including capital lease obligations, is as follows:

Year ending June 30, 2005	$	803,813	(current)
Year ending June 30, 2006		73,460	(long-term)
Year ending June 30, 2007		16,196	(long-term)

Total	$	893,469


	F-25

NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

LOANS PAYABLE - BANK

The Company’s Pakistan subsidiary, NetSol Technologies (Private) Ltd., has three loans with a bank, secured by the Company’s assets. These notes consist of the following as of June 30, 2004:

TYPE OF	MATURITY		INTEREST			BALANCE
LOAN	DATE		RATE			USD

Export Refinance		Every 6 months		4	%	$	334,190
Term Loan		April 20, 2005		10	%		38,989
Line of Credit		On Demand		8	%		85,682

Total						$	458,861

NOTE 9 - STOCKHOLDERS’ EQUITY

Initial Public Offering:

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. Proforma financial statements are not presented, as the net assets and the operations of Altvia Technologies, Inc. were insignificant prior to the merger.

An additional 100,000 shares were issued to Altvia in February 2004 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. Proforma financial statements are not presented, as the net assets and the operations of Pearl were insignificant prior to the merger.


	F-26

NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Private Placements

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 expense paid from the escrow of the sale for a net of $746,700. 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. 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 recorded the expense in the accompanying consolidated financial statements.

During the year ended June 30, 2003, the Company sold 459,770 shares of common stock for $365,219 through private placement offerings pursuant to Rule 506 of Regulation D of the Securities and Exchange Act of 1933. The private placements were intended to be exempt from the registration provisions of the Securities and Exchange Commission Act of 1933 under Regulation D.

Services

During the years ended June 30, 2004 and 2003, the Company issued 3,613 and 93,400 restricted Rule 144 common shares in exchange for accrued compensation and services rendered, respectively. The Company recorded compensation expense of $9,000 and $39,200 for the years ended June 30, 2004 and 2003, respectively. Compensation expense was calculated based upon the fair market value of the freely trading shares as quoted on NASDAQ through 2004 and 2004, over the service period.

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, 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 (see Note 8).

During the year ended June 30, 2003, the outstanding balance of $25,000 in debt was converted into 71,429 restricted Rule 144 common shares.

During the year ended June 30, 2004 and 2003, the Company issued 45,195 and 40,000 shares of common stock in settlement of litigation, respectively. The shares were valued at $135,135 and $50,000, respectively.


	F-27

NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Options and Warrants Exercised

During the years ended June 30, 2004 and 2003, the Company issued 1,067,309 and 954,983 shares of its common stock upon the exercise of stock options valued at $957,892 and $809,566, respectively; of this amount $290,000 is has not been received as of June 30, 2004 and is included in Stock Subscription Receivable in the accompany consolidated financial statements. The exercise price ranged from $0.75 and $1.50 per share.

During the years ended June 30, 2004 and 2003, the Company issued 390,000 and 60,000 shares of its common stock upon the exercise of warrants valued at $487,500 and $36,000, 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.

The balance at June 30, 2003 was $84,900, of this $41,250 was received in the quarter ended September 30, 2003.

During the year ended June 30, 2004, four officers of the Company had exercised options with receivables valued at $207,559. Interest is being accrued on these loans at 6% per annum and was $7,071 at June 30, 2004.

At June 30, 2004, the Company had receivables from three employees and one investor for options exercised totally $290,000.

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.

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, 2004:


				Exercise		Options and			Exercise
	Options			Price		Warrants			Price
Outstanding and exercisable, June 30, 2003		1,132,898			$.75 to $5.00		840,000			$0.50 to $5.00
Granted		2,337,578			$1.00 to $5.00		243,182			$2.20 to $3.30
Exercised		(1,067,309	)		$0.75 to $2.50		(390,000	)		$0.50 to $1.75
Expired		(640,890	)		$7.20 to $24.75		—
Outstanding and exercisable, June 30, 2004		1,762,277					693,182

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.


	F-28

NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 year ended June 30, 2003 as follows:

Net loss - as reported	$	(2,969,975	)
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		(2,859,750	)

Pro forma net loss	$	(5,829,725	)

Earnings per share:
Basic and diluted, as reported		(0.38	)
Basic and diluted, pro forma		(0.74	)

In addition, 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 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	100%
Dividend yield	0%

NOTE 10 - 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-29

NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The number and exercise prices of options granted under the 1997 Plan for the years ended June 30, 2004 and 2003 are as follows:

				Exercise				Exercise
	2004			Price		2003		Price
Outstanding and exercisable, beginning of year		9,000		$	7.20		9,000	$	7.20
Granted		—			—		—		—
Exercised		—			—		—		—
Expired		(9,000	)	$	7.20		—		—
Outstanding and exercisable, end of year		—					9,000	$	7.20

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.

The number and exercise prices of options granted under the 1999 Plan for the year ended June 30, 2004 and 2003 are as follows:

				Exercise				Exercise
	2004			Price		2003		Price
Outstanding and exercisable, beginning of year		631,890		$	24.75		631,890	$	24.75
Granted		—			—		—		—
Exercised		—			—		—		—
Expired		(631,890	)	$	24.75		—		—
Outstanding and exercisable, end of year		—					631,890	$	24.75

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


	F-30

NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

The number and exercise prices of options granted under the 2001 Plan for the years ended June 30, 2004 and 2003 are as follows:

				Exercise					Exercise
	2004			Price		2003			Price
Outstanding and exercisable, beginning of year		398,408		$	0.75 to $2.50		887,908		$	0.25 to $1.25
Granted		555,913		$	0.75 to $2.50		389,083		$	0.75 to $2.50
Exercised		(764,544	)	$	0.75 to $2.50		(878,583	)	$	0.25 to $1.25
Expired		—			—		—			—
Outstanding and exercisable, end of year		189,777		$	0.75 to $2.50		398,408		$	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.


	F-31

NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The number and weighted average exercise prices of options granted under the 2002 Plan for the year ended June 30, 2004 and 2003 are as follows:

				Exercise					Exercise
	2004			Price		2003			Price
Outstanding and exercisable, beginning of year		93,600		$	0.75 to $2.50		—			—
Granted		1,331,665		$	1.00 to $5.00		170,000		$	0.75 to $2.50
Exercised		(302,765	)	$	0.75 to $2.50		(76,400	)	$	0.25 to $1.25
Expired		—			—		—			—
Outstanding and exercisable, end of year		1,122,500		$	0.75 to $5.00		93,600		$	0.75 to $2.50

The 2003 Plan

In March 2004, 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.

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

			Exercise
	2004		Price
Outstanding and exercisable, beginning of year		—		—
Granted		450,000	$	2.64 to $5.00
Exercised		—		—
Expired		—		—
Outstanding and exercisable, end of year		450,000	$	2.64 to $5.00


	F-32

NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11 - 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. In addition, the beneficial conversion feature of the debenture was valued at $300,000. 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. The net balance at June 30, 2004, is $937,500.

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. The debentures are to be converted at the rate of $1.86 and are automatically converted on the closing of at least $2,200,000 in additional financing (the "Qualified Financing"), inclusive of the Bridge Loan.

NOTE 12 - COMMITMENTS AND CONTINGENCIES

Leases

The Company entered in to a lease agreement for its corporate office in the US beginning September 23, 2002. The term of the lease is on month-to-month basis with either party entitled to terminate it after February 20, 2003. 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 previous location had a monthly rent of $2,993 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.

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 $3,000 per month.

Upon expiration of its leases, the Company does not anticipate any difficulty in obtaining renewals or alternative space. Rent expense amounted to $220,261 and $215,000 for the years ended June 30, 2004 and 2003, respectively.


	F-33

NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 its 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 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 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 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.


	F-34

NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 has been recorded as a note payable on the accompanying consolidated financial statements (see note 8). 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, 2004 and 2003 the Company paid $73,000 and $26,000, respectively on this note.

On May 23, 2002, Allied Interstate Inc. filed a lawsuit for breach of contract, open book account, account stated, and reasonable value against the Company. Allied was assigned the claim from SuperNet AG, a subsidiary of NetSol which was acquired from Florian Zgunea and Leonard Metcsh in Frankfurt Germany in May 2000. After almost two years, SuperNet failed to produce any revenues and the Company’s board of directors agreed with the management to sell back SuperNet to Florian and Leonard and divest itself from the ISP business in Germany. The price of $120,000 was agreed upon and $40,000 was wired to Florian and Leo. Subsequently, the proxy battle with Shareholders Group LLC ensued whereby a Receiver was in place until August 2001. Once the Company’s management was placed back in control, discussion with Florian and Leo commenced. Again, the Company agreed to make four payments of $80,000 and a promise to cooperate by providing all the books and records of SuperNet to the Company. In August 2001, the Company sent another payment of $20,000 as agreed upon. However, soon thereafter, the Company received an electronic correspondence from Florian that if the Company wanted all the books and records full payment was to be made. The Company did not make full payment and obtained books and records from alternate sources. Allied’s position is that the Company breached its agreement with Florian and Leo, the Company’s position is that because they refused to provided access to the books and records, they breached a covenant of the Agreement. The parties agreed on a settlement and on May 5, 2003, Florian and Leo were issued 160,000 and 40,000, respectively, shares of the Company’s restricted Rule 144 stock, with a total value of $50,000 in settlement of this claim.

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 has been recorded in the accompanying consolidated financial statements as a note payable (see Note 8). During the years ended June 30, 2004 and 2003, the Company paid $86,857 and $76,248.


	F-35

NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO 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. The Company intends to vigorously defend itself in this matter and reach a favorable resolution.

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. The Company recorded a gain of $102,119 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.

In addition, the Company and its subsidiaries have been named as a defendant in legal actions arising from its normal operations, and from time-to-time, are presented with claims for damages arising out of its actions. The Company anticipates that any damages or expenses it may incur in connection with these actions, individually and collectively, will not have a material adverse effect on the Company.


	F-36

NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 13 - 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, 2004 and 2003:

	2004			2003
Revenues from unaffiliated customers:
North America	$	676,857		$	508,868
International		5,072,205			3,236,518
Consolidated	$	5,749,062		$	3,745,386

Operating loss:
North America	$	(3,680,272	)	$	(2,644,712	)
International		744,902			176,462
Consolidated	$	(2,935,370	)	$	(2,468,250	)

Identifiable assets:
North America	$	4,089,053		$	4,689,560
International		7,668,713			4,052,691
Consolidated	$	11,757,766		$	8,742,251

Depreciation and amortization:
North America	$	1,511,162		$	1,440,686
International		203,592			136,204
Consolidated	$	1,714,754		$	1,576,890

Capital expenditures:
North America	$	55,986		$	23,688
International		2,805,768			127,822
Consolidated	$	2,861,754		$	151,510

NOTE 14 - MINORITY INTEREST IN SUBSIDIARY

In August 2003, the Company entered into an agreement with United Kingdom based Akhtar Group PLC ("Akhtar"). Under the terms of the agreement, Akhtar Group acquired 49.9 percent of the Company’s subsidiary; Pakistan based NetSol Connect PVT Ltd. ("NC"), an Internet service provider ("ISP"), in Pakistan through the issuance of additional NC shares. As part of this Agreement, NC changed its name to NetSol Akhtar. The new partnership with Akhtar 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 NC.


	F-37

NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

During the quarter ended September 30, 2003, the funds were received by NC and a minority interest of $200,000 was recorded for Akhtar’s portion of the subsidiary. During the quarter ended December 31, 2003, Akhtar paid an additional $10,000 to the Company for this purchase. For the year ended June 30, 2004, the subsidiary had net losses of $689,000, of which $273,159 was recorded against the minority interest. The balance of the minority interest at June 30, 2004 was $0.

Per the agreement, it was envisaged that NC would require a maximum $500,000 for expansion of its business. Akhtar was to meet the initial financial requirements of the Company until November 1, 2003. As of June 30, both NetSol and Akhtar had injected the majority of their committed cash to meet the expansion requirement of the company.

The following is the proforma financial information of the Company assuming as if the transaction was consummated from the beginning of the fiscal year ended June 30, 2003:

	2003
Statements of operations:

Net loss before allocation of minority shareholders		(2,116,818	)

Minority allocation		(8,041	)

Net Loss		($2,124,859	)

Basic and diluted loss per share		($0.09	)

Balance Sheet items as of June 30, 2003:

Total assets	$	8,932,251

Shareholders' equity	$	5,264,852

NOTE 15 - SUBSEQUENT EVENTS

On August 18, 2004, two holders of the convertible debenture gave the Company notice they were converting their notes into the Company’s common stock. A total of $100,000 in notes were converted into 53,764 shares of the Company’s common stock and 26,882 warrants were issued.

F-38




                              NETSOL TECHNOLOGIES,
                              INC. AND SUBSIDIARIES

                 CONSOLIDATED BALANCE SHEET -- DECEMBER 31, 2004
                                   (UNAUDITED)





                                               ASSETS

Current assets:
     Cash and cash equivalents                                                $    488,110
     Certificates of deposit                                                       550,000
     Accounts receivable, net of allowance for doubtful accounts of $80,000      1,679,126
     Revenues in excess of billings                                              2,324,715
     Other current assets                                                          512,494
                                                                              ------------
        Total current assets                                                                   $ 5,554,445
Property and equipment, net of accumulated depreciation                                          4,276,307
Intangibles:
     Product licenses, renewals, enhancedments, copyrights,
        trademarks, and tradenames, net                                          2,352,804
     Customer lists, net                                                           483,736
     Goodwill, net                                                                 723,928
                                                                                              ------------
        Total intangibles                                                                        3,560,468
                                                                                              ------------
        Total assets                                                                          $ 13,391,220
                                                                                              ============

                        LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
     Accounts payable and accrued expenses                                    $  1,638,752
     Current portion of notes and obligations under capitalized leases             267,846
     Billings in excess of revenues                                                228,430
     Loans payable, bank                                                           392,699
                                                                                              ------------
        Total current liabilities                                                                2,527,727
Obligations under capitalized leases, less current maturities                                       56,910
Convertible debenture                                                                              112,500
                                                                                              ------------
        Total liabilities                                                                        2,697,137
Minority interest                                                                                   99,752
Contingencies                                                                                           --

Stockholders' equity:
     Common stock, $.001 par value; 25,000,000 share authorized;
        12,254,076 issued and outstanding                                           12,254
     Additional paid-in-capital                                                 43,350,274
     Treasury stock                                                                (27,197)
     Accumulated deficit                                                       (31,296,539)
     Stock subscription receivable                                              (1,375,642)
     Common stock to be issued                                                     254,800
     Other comprehensive loss                                                     (323,619)
                                                                              ------------
        Total stockholders' equity                                                              10,594,331
                                                                                              ------------
        Total liabilities and stockholders' equity                                            $ 13,391,220
                                                                                              ============




          See accompanying notes to consolidated financial statements.







                   NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)




                                                                     For the Three Months            For the Six Months
                                                                      Ended December 31,              Ended December 31,
                                                                      2004          2003             2004           2003
                                                               ------------------------------------------------------------
Net revenues                                                   $  2,723,227    $  1,208,345    $  4,781,532    $  2,180,957
Cost of revenues                                                    828,973         490,336       1,580,620         950,713
                                                               ------------    ------------    ------------    ------------
Gross profit                                                      1,894,254         718,009       3,200,912       1,230,244

Operating expenses:
      Selling and marketing                                         135,352          27,465         254,700          46,687
      Depreciation and amortization                                 424,649         411,228         838,473         824,029
      Settlement costs                                               43,200         100,000          43,200         100,000
      Bad debt expense                                                   --          41,188              --          93,506
      Salaries and wages                                            447,984         278,909         795,221         594,449
      Professional services, including non-cash
          compensation                                              140,971          84,288         255,305         239,702
      General and adminstrative                                     292,751         361,446         570,266         748,484
                                                               ------------    ------------    ------------    ------------
          Total operating expenses                                1,484,907       1,304,524       2,757,165       2,646,857
                                                               ------------    ------------    ------------    ------------
Income (loss) from operations                                       409,347        (586,515)        443,747      (1,416,613)
Other income and (expenses)
      Gain (Loss) on sale of assets                                      --           3,069            (620)        (33,919)
      Beneficial conversion feature                                (194,416)        (96,027)       (231,916)        (96,027)
      Fair market value of warrants issued                         (221,614)             --        (249,638)             --
      Gain on settlement of debt                                    139,367         104,088         189,641         104,088
      Interest expense                                             (108,425)             --        (130,000)             --
      Other income and (expenses)                                    20,884         (48,819)         43,219         (85,392)
                                                               ------------    ------------    ------------    ------------
          Total other expenses                                     (364,204)        (37,689)       (379,314)       (111,250)
                                                               ------------    ------------    ------------    ------------
Net income (loss) before minority interest in sub subsidiary         45,143        (624,204)         64,433      (1,527,863)
Minority interest in subsidiary                                        (809)         58,029          14,259          93,338
                                                               ------------    ------------    ------------    ------------
Net income (loss)                                                    44,334        (566,175)         78,692      (1,434,525)
Other comprehensive (loss)/gain:
      Translation adjustment                                        (89,720)        (27,419)       (173,409)       (107,207)
                                                               ------------    ------------    ------------    ------------
Comprehensive loss                                             $    (45,386)   $   (593,594)   $    (94,717)   $ (1,541,732)
                                                               ============    ============    ============    ============

Net income (loss) per share:
      Basic                                                    $       0.00    $      (0.08)   $       0.01    $      (0.20)
                                                               ============    ============    ============    ============
      Diluted                                                  $       0.00    $      (0.08)   $       0.01    $      (0.20)
                                                               ============    ============    ============    ============

Weighted average number of shares outstanding
      Basic                                                      10,643,113       7,331,928      10,073,951       7,089,123
      Diluted                                                    13,455,875       7,331,928      12,760,805       7,089,123





          See accompanying notes to consolidated financial statements.




                   NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)







                                                                      For the Six Months
                                                                      Ended December 31,
                                                                     2004           2003
                                                             --------------------------------
 Cash flows from operating activities:
      Net income (loss) from continuing operations              $    78,692    $(1,434,525)
      Adjustments to reconcile net income (loss) to net cash
          Used in operating activities:
      Depreciation and amortization                                 978,020        824,029
      Gain on settlement of debt                                   (189,641)      (104,088)
      Loss on disposal of assets                                        620         33,919
      Minority interest in subsidiary                               (14,259)       (93,338)
      Stock issued for services                                      52,835             --
      Stock issued for settlement costs                                  --        100,000
      Fair market value of warrants and stock options granted       249,638             --
      Beneficial conversion feature                                 231,916         96,027
      Changes in operating assets and liabilities:
      Increase in assets:
          Accounts receivable                                      (727,132)       (14,785)
          Other current assets                                   (1,397,331)      (977,161)
      Decrease in liabilities:
          Accounts payable and accrued expenses                    (728,055)      (350,316)
                                                                -----------    -----------
      Net cash used in operating activities                      (1,464,697)    (1,920,238)
Cash flows from investing activities:
      Purchases of property and equipment                          (467,586)      (129,082)
      Disposal of property and equipment                             86,988        143,462
      Purchases of certificates of deposit                         (550,000)    (1,220,221)
      Proceeds from sale of certificates of deposit                 391,403      1,000,000
      Increase in intangible assets - development costs            (299,479)       (66,855)
      Capital investments in minority interest of subsidiary        287,797         10,000
      Proceeeds from sale of minority interest of subsidiary             --        200,000
                                                                -----------    -----------
      Net cash used in investing activities                        (550,877)       (62,696)
Cash flows from financing activities:
      Proceeds from sale of common stock                          1,512,000      1,102,049
      Proceeds from the exercise of stock options                   343,900        814,350
      Purchase of treasury shares                                   (51,704)            --
      Proceeds from loans                                             5,994        800,000
      Payments on capital lease obligations & loans                (236,597)      (376,489)
                                                                -----------    -----------
      Net cash provided by financing activities                   1,573,593      2,339,910
Effect of exchange rate changes in cash                              58,930        (14,260)
                                                                -----------    -----------
Net (decrease) increase in cash and cash equivalents               (383,051)       342,716
Cash and cash equivalents, beginning of period                      871,161        214,490
                                                                -----------    -----------
Cash and cash equivalents, end of period                        $   488,110    $   557,206
                                                                ===========    ===========





          See accompanying notes to consolidated financial statements.




                   NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
                                   (UNAUDITED)




                                                                      For the Six Months
                                                                      Ended December 31,
                                                                     2004           2003
                                                             --------------------------------
SUPPLEMENTAL DISCLOSURES:
       Cash paid during the period for:
          Interest                                              $   50,749     $   47,911
                                                                ===========    ===========
          Taxes                                                 $   14,083     $       --
                                                                ===========    ===========

NON-CASH INVESTING AND FINANCING ACTIVITIES:
      Common stock issued for accrued expenses and accounts
        payable                                                 $   42,808     $       --
                                                                ===========    ===========
      Common stock issued for conversion of convertible
        debenture                                               $1,050,000     $       --
                                                                ===========    ===========
      Common stock issued for settlement of debt                $   45,965     $       --
                                                                ===========    ===========
      Common stock issued for legal settlement                  $       --     $  100,000
                                                                ===========    ===========
      Common stock issued for conversion of note payable        $       --     $  500,000
                                                                ===========    ===========
      Common stock issued for acquisition of product license    $       --     $  166,860
                                                                ===========    ===========





          See accompanying notes to consolidated financial statements.




                   NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES


              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1 - BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION


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

The consolidated condensed interim financial statements included herein have
been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations, although the Company believes
that the disclosures are adequate to make the information presented not
misleading.

These statements reflect all adjustments, consisting of normal recurring
adjustments, which, in the opinion of management, are necessary for fair
presentation of the information contained therein. It is suggested that these
consolidated condensed financial statements be read in conjunction with the
financial statements and notes thereto included in the Company's annual report
on Form 10-KSB for the year ended June 30, 2004. The Company follows the same
accounting policies in preparation of interim reports. Results of operations for
the interim periods are not indicative of annual results.

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

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

NOTE 2 - USE OF ESTIMATES:

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

NOTE 3 - NEW ACCOUNTING PRONOUNCEMENTS:

In 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 will evaluate the impact of EITF 03-01 once final guidance is issued.




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 second quarter of fiscal 2006.
The Company believes that the adoption of this standard will have no material
impact on its financial statements.

In December 2004, the FASB issued SFAS Statement No. 153, "Exchanges of
Nonmonetary Assets." The Statement is an amendment of APB Opinion No. 29 to
eliminate the exception for nonmonetary exchanges of similar productive assets
and replaces it with a general exception for exchanges of nonmonetary 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.

NOTE 4 - 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 three months ended December 31, 2004       Net Income     Share      Per Share
----------------------------------------------------------------------------------------
 Basic earnings per share:                          $   44,334   10,643,113   $   0.00
       Net income available to common shareholders
 Effect of dilutive securities
       Stock options                                              1,995,981
       Warrants                                                     816,781
                                                    ----------   ----------   --------
 Diluted earnings per share                         $   44,334   13,455,875   $   0.00
                                                    ==========   ==========   ========


----------------------------------------------------------------------------------------
 For the three months ended December 31, 2004      Net Income     Shares      Per Share
----------------------------------------------------------------------------------------

Basic earnings per share:                          $   78,692   10,073,951   $   0.01
       Net income available to common shareholders
 Effect of dilutive securities
       Stock options                                             1,924,129
       Warrants                                                    762,725
                                                    ----------   ----------   --------
 Diluted earnings per share                         $   78,692   12,760,805   $   0.01
                                                    ==========   ==========   ========




Weighted average number of shares used to compute basic and diluted loss per
share is the same in the financial statements for the period ended December 31,
2003, since the effect of dilutive securities is anti-dilutive.

NOTE 5 - FOREIGN CURRENCY:

The accounts of NetSol Technologies UK, Ltd. use the British Pound; NetSol
Technologies, (PVT), Ltd, NetSol (Pvt), Limited and NetSol Connect PVT, Ltd. use
Pakistan Rupees; and NetSol Abraxas Australia Pty, Ltd. uses the Australian
dollar as the functional currencies. NetSol Technologies, Inc., and subsidiary
NetSol USA, Inc., use the 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. Accumulated translation losses of $323,619 at December 31, 2004 are
classified as an item of accumulated other comprehensive loss in the
stockholders' equity section of the consolidated balance sheet. During the six
months ended December 31, 2004 and 2003, comprehensive loss in the consolidated
statements of operation included translation loss of $173,409 and $107,207,
respectively.

NOTE 6 - OTHER CURRENT ASSETS

Other current assets consist of the following at December 31, 2004:


 Prepaid Expenses                      $ 298,472
 Advance Income Tax                       86,949
 Employee Advances                        36,315
 Security Deposits                        11,876
 Other Receivables                        78,882

                                       ---------
     Total                             $ 512,494
                                       =========


In August 2004, the Company entered into a two-year consulting agreement with a
non-related third party whereby the Company agreed to pay the consultant a total
of 100,000 shares of its common stock valued at $111,920. This has been recorded
as a prepaid expense and is being amortized over the life of the service
agreement. During the six months ended December 31, 2004, $20,985 was expensed.

NOTE 7 - DEBTS

NOTES PAYABLE


Notes payable as of December 31, 2004 consist of the following:


-----------------------------------------------------------------------------
                            Balance at       Current           Long-Term
      Name                   12/31/04        Maturities        Maturities
-----------------------------------------------------------------------------
H. Smith Settlement          $168,321         $168,321         $       --
A. Zaman Settlement            21,300           21,300                 --
First Funding                   3,217            3,217                 --
Subsidiary note                 5,229            5,229                 --
Subsidiary  capital leases     69,779           69,779                 --
                             --------         --------         ----------
                             $267,846         $267,846         $       --
                             ========         ========         ==========





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 has recorded as a note payable in the accompanying
consolidated financial statements. The agreement calls 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, which the
Company has recorded as a note payable in the accompanying consolidated
financial statements. 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, 2004 was $199,321. During the six months
ended December 31, 2004, the Company paid $31,000. The balance owing at December
31, 2004 was $168,321. The entire balance has been classified as current and is
included in "Current maturities of notes and obligations under capitalized
leases" in the accompanying consolidated financial statements.

In June 2002, the Company signed a settlement agreement with a former employee
for payment of past services rendered. The Company agreed to pay the employee 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 six
months ended December 31, 2004, the Company paid $5,000. The entire balance has
been classified as a current liability in the accompanying consolidated
financials statements.

In January 2004, the Company renewed its director's and officer liability
insurance for which the annual premium is $167,000. In April 2004, the Company
arranged financing with AFCO Credit Corporation with a down payment of $50,100
with the balance to be paid in monthly installments. The balance owing as of
December 31, 2004 was $0.

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 three months ended December 31, 2004, the Company paid
$2,727. The balance owing at December 31, 2004 was $3,217 and is classified as a
current liability in the accompanying consolidated financials statements.

In addition, the various subsidiaries had current note payable of $5,229 and
current maturities of capital leases of $69,779 as of December 31, 2004.

BANK NOTE

The Company's Pakistan subsidiary, NetSol Technologies (Private) Ltd., has three
loans with a bank, secured by the Company's assets. These notes consist of the
following as of December 31, 2004:



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

Export Refinance         Every 6 months          4%         $326,907
Term Loan                April 20, 2005         10%           15,507
Line of Credit           On Demand               8%           50,285

                                                            --------
Total                                                       $392,699
                                                            ========





NOTE 8 - STOCKHOLDERS' EQUITY:

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.

EQUITY TRANSACTIONS

Private Placements

In August 2004, the Company received $200,000 for the purchase of 190,476 shares
of the Company's common stock. In November 2004, the stock was issued to the
purchasing parties.

During the quarter ended December 31, 2004, the Company sold 1,217,143 shares of
its common stock for $1,268,000 in a private placement agreement.

In addition, the Company received $62,000 as payment on stock subscriptions
receivable during the six months ended December 31, 2004.

Services, Accrued Expenses and Payables

In August 2004, the Company entered into a two-year consulting agreement with a
non-related third party whereby the Company issued 50,000 shares of its common
stock valued at $55,960 for the first year of service and has agreed to issue an
additional 50,000 shares at the beginning of the second year. The value of these
shares of $55,960 is included in the "Stock to be Issued" on the accompanying
consolidated financial statements.

In October 2004, the Company issued 5,000 shares for services rendered valued at
$6,850. In addition, 1,339 shares were issued for accrued expenses valued at
$3,000.

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 beneficial conversion feature expense in the amount of $6,916.

Stock Options Exercised

During the quarter ended December 31, 2004, the Company issued 742,777 shares of
its common stock for the exercise of options. The Company received $343,900 in
cash from the exercise of these options and recorded "Stock Subscription
Receivable" in the amount of $795,083.

Issuance of shares for Conversion of Debt

During the quarter ended September 30, 2004, three of the convertible debenture
holders elected to convert their notes into common stock. The total of the notes
converted was $150,000 and the Company issued 80,646 shares of its common stock
to the note holders.

During the quarter ended December 31, 2004, sixteen of the convertible debenture
holders elected to convert their notes into common stock. The total of the notes
converted was $900,000 and the Company issued 483,873 shares of its common stock
to the note holders.

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.

During the quarter ended September 30, 2004, the Company received a payment of
$20,000 on the receivable. In addition, $18,750 of accrued salaries for one of
the officers was applied against the receivable. The balance at September 30,
2004 was $458,809.

During the quarter ended December 31, 2004, the Company recorded receivables
from options exercises of $905,083 and received payments of $110,000. The
Company also recorded receivables from purchase agreements $182,000 and received
payments of $24,000. In addition, $6,250 of accrued salaries for one of the
officers was applied against the receivable. Also during the quarter, a
purchaser 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 at December 31, 2004 was $1,375,642.

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 during the
six months ended December 31, 2004:




                                                                  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                                      498,500      $1.14 to $1.30       282,260           $3.30
     Exercised                                   (742,777)     $0.75 to $2.21            --            --
     Expired                                      (10,000)         $  1.00               --            --
                                                ---------                           -------
Outstanding and exercisable, Dec. 31, 2004      1,608,000                           975,442




There were no options granted or exercised during the quarter ended September
30, 2004.

During the quarter ended December 31, 2004, 498,500 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. No expense was recorded for the
granting of these options.

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 year ended December 31, 2004 as follows:


Net income - as reported                         $    78,692
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             (313,195)

                                                 -----------
Pro forma net loss                               $  (234,503)
                                                 ===========

Earnings per share:
     Basic, as reported                                0.01
     Diluted, as reported                              0.01

     Basic, pro forma                                 (0.02)
     Diluted, pro forma                               (0.02)


During the quarter ended September 30, 2004, three debenture holders converted
their notes into common stock. As part of the conversion, warrants to purchase a
total of 40,323 common shares were issued to the note holders. The warrants
expire in five years and have an exercise price of $3.30 per share. The warrants
were valued using the fair value method at $28,024 or $0.69 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 quarter ended December 31, 2004, sixteen debenture holders converted
their notes into common stock. As part of the conversion, warrants to purchase a
total of 241,937 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 $221,614 or $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%





NOTE 9 - 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 has been
evaluated in accordance with SFAS No. 142. The SFAS No. 142 is applicable to the
financial statements of the Company beginning July 1, 2002.

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

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

Intangible assets consisted of the following as of December 31, 2004:





                                 Product Licenses   Customer Lists       Goodwill            Total
                                 ----------------   --------------       --------            -----
Intangible asset - June 30, 2004   $ 5,450,357       $ 1,977,877       $ 2,153,311       $ 9,581,545
Additions                              260,553                --                --           260,553
Effect of translation adjustment        (3,670)           (3,670)
Accumulated amortization            (3,354,436)       (1,494,141)       (1,429,383)       (6,277,960)
                                   -----------       -----------       -----------       -----------
    Net balance - Dec. 31, 2004    $ 2,352,804       $   483,736       $   723,928       $ 3,560,468
                                   ===========       ===========       ===========       ===========

Amortization expense:
Six months ended Dec. 31, 2004     $   395,675       $   157,832       $   215,332       $   768,839
Six months ended Dec. 31, 2003     $   398,449       $   157,832       $   215,332       $   771,613




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




------------------------------------------------------------------------------------------------------
                                                     FISCAL YEAR ENDING
         Asset          6/30/05         6/30/06        6/30/07       6/30/08     6/30/09       TOTAL
------------------------------------------------------------------------------------------------------
 Product Licences       356,748         713,498         33,372      33,372        7,612     1,144,602
 Customer Lists         157,834         276,326         44,076       5,500            -       483,736
 Goodwill               215,332         430,664         40,664      37,269            -       723,929

                   -----------------------------------------------------------------------------------
                        729,914       1,420,488        118,112      76,141        7,612     2,352,267
                   ===================================================================================






NOTE 10 - LITIGATION:

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. As a result
of this settlement, the Company recorded an expense of $43,200 in the
accompanying consolidated financial statements.

NOTE 11 - SEGMENT INFORMATION

The following table presents a summary of operating information and certain
year-end balance sheet information for the six months ended December 31:


                                               2004             2003
Revenues from unaffiliated customers:
     North America                         $    274,119    $    207,500
     International                            4,507,413       1,973,457
                                           ------------    ------------
        Consolidated                       $  4,781,532    $  2,180,957
                                           ============    ============

Operating income (loss):
     North America                         $ (1,405,156)   $ (1,719,115)
     International                            1,848,903         302,502
                                           ------------    ------------
        Consolidated                       $    443,747    $ (1,416,613)
                                           ============    ============

Identifiable assets:
     North America                         $  3,206,834    $  4,446,114
     International                           10,184,386       5,175,774
                                           ------------    ------------
        Consolidated                       $ 13,391,220    $  9,621,888
                                           ============    ============

Depreciation and amortization:
     North America                         $    745,757    $    741,520
     International                               92,716          82,509
                                           ------------    ------------
        Consolidated                       $    838,473    $    824,029
                                           ============    ============

Capital expenditures:
     North America                         $         --    $     27,073
     International                              467,586         102,009
                                           ------------    ------------
        Consolidated                       $    467,586    $    129,082
                                           ============    ============



NOTE 12 - MINORITY INTEREST IN SUBSIDIARY

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 new 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
envisaged that Connect would require a maximum $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 December 31, 2004, a total of
$751,356 had been transferred to Connect.

For the six months ended December 31, 2004, the subsidiary had net losses of
$28,575, of which $14,259 was recorded against the minority interest. The
balance of the minority interest at December 31, 2004 was $99,752.

NOTE 13 - CONVERTIBLE DEBENTURE

On March 24, 2004, the Company entered into an agreement with several investors
to acquire Series A Convertible Debentures (the "Bridge Loan") whereby a total
of $1,200,000 in debentures were procured through Maxim Group, LLC. The Company
received a net of $1,049,946 after placement expenses. In addition, the
beneficial conversion feature of the debenture was valued at $300,000. 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 six months ended December 31, 2004, the Company amortized $225,000. The
unamortized balance at December 31, 2004 was $37,500

During the six months ended December 31, 2004, 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 December 31, 2004, is
$112,500.

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. The debentures are to
be converted at the rate of $1.86 and are automatically convertible as of August
6, 2004. The Company recorded interest expense on the debentures in the amount
of $79,252.

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 $107,190.




NOTE 15 - SUBSEQUENT EVENTS

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 is projected to
close during the first quarter of 2005. CQ Systems' business model complements
the Company's growth strategy. CQ Systems' product offering is synergistic to
that of the Company, as it has an established and balanced mix of recurring
revenue flow form the European marketplace, and a strong foothold with a
comparable target audience. The Company believes the acquisition will facilitate
considerable growth within the European marketplace as the Company blend and
expands the product offering by leveraging the Company's offshore technology
infrastructure to contain costs and improve margins.

According to the terms of the Share Purchase Agreement, the Company will acquire
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.



                               CQ SYSTEMS LIMITED

                             COMPANY NUMBER: 1998080
                             (REGISTERED IN ENGLAND)

                    REPORTS ON AUDITS OF FINANCIAL STATEMENTS

                           AND ADDITIONAL INFORMATION

                            YEAR ENDED 31 MARCH 2004



                               CQ SYSTEMS LIMITED

      COMPANY INFORMATION
      FOR THE YEAR ENDED 31 MARCH 2004


                    DIRECTORS:          P J Grace
                                        G E Tarrant

                                        I M Tarrant
                                        A Elliott
                                        J Halliday
                                        J Manktelow
                                        C S Taylor
                                
                    SECRETARY:          P M Tarrant

                    REGISTERED OFFICE:  Planet House

                                        North Heath Lane
                                        Horsham
                                        West Sussex
                                        United Kingdom
                                        RH12 5QE

                    REGISTERED NUMBER:  1998080 (England)

                    AUDITORS:           CMB Partnership
                                        
                                        Chartered Accountants and Registered
                                        Auditors
                                        Chapel House
                                        1 Chapel Street
                                        Guildford
                                        Surrey
                                        United Kingdom
                                        GU1 3UH



                               CQ SYSTEMS LIMITED

                                    CONTENTS

FINANCIAL STATEMENTS                                                    PAGE

         Important Note                                                  1

         Original Directors Report of United Kingdom GAAP statements     2 - 3

         Original Independent Auditors Report on United Kingdom GAAP     4
         Statements

         Independent Auditors Report on US GAAP statements               5

         Consolidated Balance Sheets                                     6

         Consolidated Statements of Income and Retained Earnings         7

         Consolidated Statements of Comprehensive Income                 7

         Consolidated Statements of Cash Flows                           8 - 9

         Notes to the Financial Statements                               10 - 11



      IMPORTANT NOTE

      The  consolidated US GAAP financial  information  contained in this report
      represents  historical  information,  which  previously  was  reported  in
      accordance  with United  Kingdom GAAP and has been  restated in accordance
      with US GAAP. The restatement to US GAAP has been performed at the request
      of the directors of the company.

      The  consolidated US GAAP financial  information  includes certain primary
      information  (consolidated  balance sheet,  consolidated income statement,
      changes in  shareholders  equity,  consolidated  cash flow  statement  and
      certain explanatory notes.)

      The  original  financial  statements  for the year  ended  31  March  2004
      prepared in  accordance  with  United  Kingdom  GAAP were  approved by the
      directors on 23 November 2004. The  Independent  Auditors  Report on those
      financial  statements  was also dated 23 November  2004 and is attached on
      page 4. As outlined  above,  the  directors of the company have  requested
      that the original  financial  statements be restated in accordance with US
      GAAP. The  Independent  Auditors have attached a report on those financial
      statements on page 5.


                                     Page 1


                               CQ SYSTEMS LIMITED

      REPORT OF THE DIRECTORS 
      FOR THE YEAR ENDED 31 MARCH 2004

      The directors  present  their report with the financial  statements of the
      group for the year ended 31 March 2004.

      PRINCIPAL ACTIVITY

      The  principal  activity of the group in the year under review was that of
      the provision of computer software and services.

      DIRECTORS

      The directors during the year under review were:

      P J Grace
      G E Tarrant
      I M Tarrant
      A Elliott
      J Halliday
      J Manktelow
      C S Taylor - appointed 5/2/04

      The beneficial  interests of the directors holding office on 31 March 2004
      in the issued share capital of the company were as follows:
      
                                                                     01.04.03
                                                                     or date of
                                                                     appointment
                                                    31.3.04           if later
      ORDINARY (POUND)0.20 SHARES

      P J Grace                                      75,000             75,000
      G E Tarrant                                   150,000            150,000
      I M Tarrant                                   150,000            150,000
      A Elliott                                      55,983             55,983
      J Halliday                                     38,034             38,034
      J Manktelow                                    30,983             30,983
      C S Taylor                                         --                 --

      The directors' interests above include shares held by connected persons.

      STATEMENT OF DIRECTORS' RESPONSIBILITIES

      Company law requires the  directors to prepare  financial  statements  for
      each  financial  year  which  give a true  and fair  view of the  state of
      affairs of the  company  and of the profit or loss of the company for that
      period.  In  preparing  those  financial  statements,  the  directors  are
      required to

      -     select   suitable   accounting   policies   and  then   apply   them
            consistently;
      -     make judgements and estimates that are reasonable and prudent;
      -     prepare the  financial  statements on the going concern basis unless
            it is  inappropriate  to presume that the company  will  continue in
            business.

      The directors are responsible for keeping proper accounting  records which
      disclose with  reasonable  accuracy at any time the financial  position of
      the company and to enable  them to ensure  that the  financial  statements
      comply  with  the  Companies  Act  1985.  They are  also  responsible  for
      safeguarding  the assets of the  company  and hence for taking  reasonable
      steps for the prevention and detection of fraud and other irregularities.

      AUDITORS

      The auditors,  CMB  Partnership,  will be proposed for  re-appointment  in
      accordance with Section 385 of the Companies Act 1985.


                                     Page 2


REPORT OF THE DIRECTORS - CONTINUED
FOR THE YEAR ENDED 31 MARCH 2004

This report has been prepared in accordance with the special  provisions of Part
VII of the Companies Act 1985 relating to small companies.

ON BEHALF OF THE BOARD:


P M Tarrant - Secretary

Date: 23 November 2004


                                       1


REPORT OF THE  INDEPENDENT  AUDITORS TO THE  SHAREHOLDERS  OF CQ SYSTEMS LIMITED
(EXEMPT FROM REQUIREMENT TO PREPARE GROUP ACCOUNTS)

"We have audited the  financial  statements  of CQ Systems  Limited for the year
ended 31 March 2004 on pages five to eleven.  These  financial  statements  have
been prepared in accordance  with the Financial  Reporting  Standard for Smaller
Entities  (effective  June 2002),  under the historical  cost convention and the
accounting policies set out therein.

This report is made solely to the  company's  members,  as a body, in accordance
with Section 235 of the Companies Act 1985.  Our audit work has been  undertaken
so that we might state to the company's members those matters we are required to
state to them in an auditors'  report and for no other  purpose.  To the fullest
extent  permitted  by law, we do not accept or assume  responsibility  to anyone
other than the company and the company's  members as a body, for our audit work,
for this report, or for the opinions we have formed.

RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS

As  described  on page  two the  company's  directors  are  responsible  for the
preparation of financial statements in accordance with applicable law and United
Kingdom Accounting Standards.

Our  responsibility  is to audit the financial  statements  in  accordance  with
relevant  legal  and  regulatory   requirements   and  United  Kingdom  Auditing
Standards.

We report to you our opinion as to whether the financial  statements give a true
and fair view and are properly  prepared in  accordance  with the  Companies Act
1985.  We also report to you if, in our opinion,  the Report of the Directors is
not consistent with the financial statements, if the company has not kept proper
accounting records, if we have not received all the information and explanations
we  require  for  our  audit,  or if  information  specified  by  law  regarding
directors' remuneration and transactions with the company is not disclosed.

We read the Report of the Directors and consider the implications for our report
if we become aware of any apparent misstatements within it.

BASIS OF AUDIT OPINION

We conducted  our audit in accordance  with United  Kingdom  Auditing  Standards
issued by the Auditing Practices Board. An audit includes examination, on a test
basis,  of evidence  relevant to the amounts and  disclosures  in the  financial
statements.  It also  includes an assessment  of the  significant  estimates and
judgements made by the directors in the preparation of the financial statements,
and of  whether  the  accounting  policies  are  appropriate  to  the  company's
circumstances, consistently applied and adequately disclosed.

We  planned  and  performed  our audit so as to obtain all the  information  and
explanations  which  we  considered  necessary  in  order  to  provide  us  with
sufficient evidence to give reasonable  assurance that the financial  statements
are  free  from  material  misstatement,   whether  caused  by  fraud  or  other
irregularity  or error.  In forming  our opinion we also  evaluated  the overall
adequacy of the presentation of information in the financial statements.

OPINION

In our opinion the financial  statements  give a true and fair view of the state
of the company's affairs as at 31 March 2004 and of its profit for the year then
ended and have been properly prepared in accordance with the Companies Act 1985.

CMB Partnership
Chartered Accountants and Registered Auditors
Chapel House, 1 Chapel Street
Guildford
Surrey GU1 3UH                                            Date: 23 November 2004


                                       2


BOARD OF DIRECTORS
CQ SYSTEMS LIMITED

INDEPENDENT AUDITORS' REPORT

We have audited the  accompanying  balance sheets of CQ Systems,  as of 31 March
2004 and 2003,  and the  related  statements  of income and  retained  earnings,
comprehensive  income,  and cash flows for the years then ended. 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  audits  in  accordance  with  generally   accepted  auditing
standards.  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.  We draw
attention to the note on page 1 in that the original  accounts  were prepared in
accordance with United Kingdom accounting and auditing  standards.  We have been
requested to report on the  financial  statements  prepared  under US GAAP.  The
scope  of our work  for the  purpose  in US GAAP  financial  statements  did not
include  examining  or dealing with events after the date of the Audit Report on
the United Kingdom GAAP accounts.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the financial  position of CQ Systems Limited,  as of 31
March 2004 and 2003 and the results of its operations and its cash flows for the
years then ended in conformity with accounting  principles generally accepted in
the United States of America.


                                       3


                               CQ SYSTEMS LIMITED
                           CONSOLIDATED BALANCE SHEET



                                     ASSETS
                                                                                       MARCH 31
                                                                                  2004             2003
                                                                    NOTE         (POUND)          (POUND)

CURRENT ASSETS
  Cash and cash equivalents                                                       809,488            448,136
  Accounts receivable                                                             400,280            435,806
  Prepaid expenses and other debtors                                               60,501             47,216
                                                                                ---------          ---------

TOTAL CURRENT ASSETS                                                            1,270,269            931,158
                                                                                ---------          ---------

EQUIPMENT                                                           2
  Automobiles                                                                      64,725             39,732
  Furniture and equipment                                                         172,841            155,093
  Computer equipment                                                              580,772            546,646
                                                                                ---------          ---------
                                                                                  818,338            741,471

Less accumulated depreciation                                                     676,768            616,420
                                                                                ---------          ---------

                                                                                  141,570            125,051
                                                                                ---------          ---------

                                                                                1,411,839          1,056,209
                                                                                =========          =========

                      LIABILITIES AND SHAREHOLDERS' EQUITY
                                                                                       MARCH 31
                                                                               2004                 2003
                                                                              (POUND)              (POUND)
CURRENT LIABILITIES
  Accounts payable                                                                 16,682             21,365
  Hire purchase liabilities                                                        23,428             32,153
  Payroll, Vat and corporation taxes payable                                      283,017            135,117
  Dividends payable                                                                53,062             30,000
  Accrued liabilities                                                              75,197             92,911
  Deferred income                                                     1.b         418,581            410,193 
                                                                                ---------          ---------

TOTAL CURRENT LIABILITIES                                                         869,967            721,739

LONG TERM LIABILITIES AND PROVISIONS
  Hire purchase liabilities                                                        38,270              5,275
  Deferred tax                                                                      2,916              1,198
                                                                                ---------          ---------
TOTAL LIABILITIES                                                                 911,153            728,212

SHAREHOLDERS' EQUITY
  Ordinary Shares
    1,000,000 shares authorised (pound)0.20 par value
    Issued 500,000 shares                                                         100,000            100,000
  Retained earnings                                                               400,686            227,997
                                                                                ---------          ---------

                                                                                1,411,839          1,056,209
                                                                                =========          =========


                       See notes to financial statements.


                                       4


                               CQ SYSTEMS LIMITED
             CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS



                                                                                YEAR ENDED       YEAR ENDED
                                                                              MARCH 31 2004      MARCH 31 2003
                                                                                 (POUND)            (POUND)
                                                                    NOTE

SALES                                                                           2,739,303          2,471,477
 1.b

COST OF SALES                                                                   1,082,577          1,069,974
                                                                                ---------          ---------

                                                                                1,656,726          1,401,503

OPERATING EXPENSES                                                  1.e         1,119,171          1,302,176 
                                                                                ---------          ---------

INCOME FROM OPERATIONS                                                            537,555             99,327

OTHER INCOME (EXPENSES)
  Interest income                                                                  19,483             10,257
  Interest payable                                                                 (5,238)            (3,530)
                                                                                ---------          ---------

INCOME BEFORE CORPORATION                                                         551,800            106,054
AND DEFERRED TAXES

UK CORPORATION AND DEFERRED TAXES                                     3          (141,049)           (29,076)
                                                                                ---------          ---------

NET INCOME                                                                        410,751             76,978

RETAINED EARNINGS
  Beginning of year                                                               227,997            181,019
  Less: Dividends                                                                (238,062)           (30,000)
                                                                                ---------          ---------

  End of year                                                                     400,686            227,997
                                                                                =========          =========

                 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

                                                                                  2004               2003
                                                                                 (POUND)            (POUND)

NET INCOME                                                                        410,751             76,978

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

COMPREHENSIVE INCOME                                                              410,751             76,978
                                                                                =========          =========


                       See notes to financial statements.


                                       5


                               CQ SYSTEMS LIMITED
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                     MARCH 31
                                                 2004         2003
                                                (POUND)       (POUND)

CASH FLOWS FROM OPERATING ACTIVITIES

  Cash received from customers                 2,761,544     2,343,179
  Cash paid to suppliers and employees        (2,074,453)   (2,235,165)
  Interest received                               19,483        10,257
  Interest paid                                   (5,238)       (3,530)
  Corporation tax paid                           (27,878)       (8,782)
                                              ----------    ----------

  Net cash provided by operating activities      673,458       105,959

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

CASH FLOWS FROM INVESTING ACTIVITIES

  Net sales (purchases) of equipment             (97,106)      (27,462)
                                              ----------    ----------

  Net cash used by investing activities          (97,106)      (27,462)
                                              ----------    ----------

CASH FLOWS FROM FINANCING ACTIVITIES

  Dividends paid                                (215,000)           --
                                              ----------    ----------

  Net cash used by financing activities         (215,000)           --
                                              ----------    ----------

NET INCREASE IN CASH AND CASH EQUIVALENTS        361,352        78,497

CASH AND CASH EQUIVALENTS

  Beginning of year                              448,136       369,639
                                              ----------    ----------

  End of year                                    809,488       448,136
                                              ==========    ==========

                       See notes to financial statements.


                                       6


                               CQ SYSTEMS LIMITED
                CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED



                                                                              MARCH 31
                                                                           2004       2003
                                                                          (POUND)    (POUND)
RECONCILIATION OF NET INCOME TO CASH
PROVIDED BY OPERATING ACTIVITIES

Net Income                                                               410,751     76,978

Adjustments to reconcile net income to net cash provided by operating
activities:

  Depreciation                                                            80,587    111,390
  Decrease/(increase) in accounts receivable and other debtors            22,241   (128,297)
  Increase in accounts payable and other creditors                        46,708     25,594
  Increase in corporation taxes payable                                  111,453     19,096
  Increase in deferred taxes                                               1,718      1,198
                                                                        --------   --------

                                                                         262,707     28,981
                                                                        --------   --------

                                                                         673,458    105,959
                                                                        ========   ========


                       See notes to financial statements.


                                       7


                               CQ SYSTEMS LIMITED
                          NOTES TO FINANCIAL STATEMENTS

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

            The accompanying  consolidated  financial statements are prepared in
            accordance  with  accounting  principles  generally  accepted in the
            United States of America (US GAAP) and are stated in United  Kingdom
            sterling.

            In preparing the consolidated  financial  statements,  management is
            required 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 consolidated balance sheet
            and the  reported  amounts  of  revenues  and  expenses  during  the
            reported period. Actual results could differ from those estimates.

a.    PRINCIPLES OF CONSOLIDATION

            The  consolidated   financial   statements   include  the  financial
            statements of the group and its subsidiary.  The group's  subsidiary
            is Custom Quest Limited, a dormant company that has not traded since
            31 May 2001 in which  the  group has a 100%  direct  holding  in the
            voting  rights.  The net  assets  of the  subsidiary  company  since
            cessation of trade is (pound)nil.

      b.    TURNOVER

            Licence revenue is recognised  where orders have been signed and the
            product is delivered.  In contracts with multiple  elements revenues
            are allocated to each element based on the fair value on completion,
            delivery and acceptance by the customer.  For other services related
            activity, revenue is recognised on a percentage of completion basis.

      c.    TANGIBLE FIXED ASSETS

            Depreciation  is provided at the  following  rates in order to write
            off each asset over its useful life;

            Computer software             50% straight line
            Office furniture and fittings 15% straight line
            Computer equipment            33.33% straight line
            Automobiles                   25% straight line

            The group evaluates  tangible fixed assets for impairment  losses at
            least  annually  and  whenever  events or changes  in  circumstances
            indicate  that the  carrying  amount  may not be  recoverable  or is
            greater than its fair value.

      d.    DEFERRED TAX

            Deferred tax is recognised in respect of all timing differences that
            have  originated  but not reversed at the balance sheet date.  These
            reflect  the   expected   future  tax   consequences   of  temporary
            differences  between the carrying  amounts of assets and liabilities
            at the balance sheet date and their respective tax bases.


                                       8


                               CQ SYSTEMS LIMITED
                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

      E.    RESEARCH AND DEVELOPMENT

            Expenditure  on research and  development is written off in the year
            in which it is incurred. Development costs on computer software that
            is to be sold  relates to bespoke  work  undertaken  for  particular
            customers as and when requested.  Under these  circumstances,  these
            costs are  written  off as  incurred  rather  than  capitalised  and
            amortised,  as  they  relate  solely  to  the  individual  customers
            specifications  rather than being  available for general  release to
            customers.

      f.    ADVERTISING

            The company expenses advertising costs as they are incurred.

      G.    HIRE PURCHASE AND LEASING COMMITMENTS

            Assets obtained under hire purchase contracts are capitalised in the
            balance sheet and are depreciated over their useful estimated lives.

            The  interest  element  of  these  obligations  are  charged  to the
            statement of income and retained  earnings over the lease term.  The
            capital element of the future payments is treated as liability.

            Rentals paid under operating  leases are charged to the statement of
            income and retained earnings on a straight line basis.

      H.    PENSIONS

            The  company  operates  a  defined   contribution   pension  scheme.
            Contributions  payable for the year are charged in the  statement of
            income and retained earnings.

      I.    CASH AND CASH EQUIVALENTS

            Cash and cash equivalents consist of cash at bank and in hand.

2.    SECURED CREDITORS

      The amounts owed under hire  purchase  contracts  totalling  (pound)61,698
      (2003 - (pound)37,428)  are secURed on the assets acquired.  The bank also
      holds securities over any bank borrowings ((pound)nil at the balance SHeet
      date.)

3.    CORPORATION AND DEFERRED TAXES

      Provision  is made for  United  Kingdom  corporation  tax  payable  on the
      group's  taxable  net  income.  This is  provided  for at the  rate of tax
      prevailing at that time. The current standard  corporation tax rate in the
      United Kingdom is 30%. Deferred tax is provided using the standard rate.

4.    COMMITMENTS

      The group is committed to making operating lease payments of (pound)82,500
      in the forthcoming year.

                                       9







                               CQ SYSTEMS LIMITED

                             COMPANY NUMBER: 1998080
                             (Registered in England)

                    REPORTS ON AUDITS OF FINANCIAL STATEMENTS

                           AND ADDITIONAL INFORMATION



                            YEAR ENDED 31 MARCH 2003








                               CQ SYSTEMS LIMITED


      COMPANY INFORMATION
      FOR THE YEAR ENDED 31 MARCH 2003


             DIRECTORS:                          P J Grace
                                                 G E Tarrant
                                                 I M Tarrant
                                                 A Elliott
                                                 J Halliday
                                                 J Manktelow

             SECRETARY:                          P M Tarrant


             REGISTERED OFFICE:                  Planet House
                                                 North Heath Lane
                                                 Horsham
                                                 West Sussex
                                                 United Kingdom
                                                 RH12 5QE


             REGISTERED NUMBER:                  1998080 (England)



             AUDITORS:                           CMB Partnership
                                                 Chartered Accountants and
                                                 Registered Auditors
                                                 Chapel House
                                                 1 Chapel Street
                                                 Guildford
                                                 Surrey
                                                 United Kingdom
                                                 GU1 3UH






                                    CONTENTS


FINANCIAL STATEMENTS                                                   PAGE



   Important Note                                                        1

   Original Directors Report of United Kingdom GAAP statements           2 - 3

   Original Independent Auditors Report on United Kingdom GAAP           4
   Statements

   Independent Auditors Report on US GAAP statements                     5

   Consolidated Balance Sheets                                           6

   Consolidated Statements of Income and Retained Earnings               7

   Consolidated Statements of Comprehensive Income                       7

   Consolidated Statements of Cash Flows                                 8 - 9

   Notes to the Financial Statements                                     10 - 11





     Important note

     The consolidated US GAAP financial information contained in this report
     represents historical information, which previously was reported in
     accordance with United Kingdom GAAP and has been restated in accordance
     with US GAAP. The restatement to US GAAP has been performed at the request
     of the directors of the company.

     The consolidated US GAAP financial information includes certain primary
     information (consolidated balance sheet, consolidated income statement,
     changes in shareholders equity, consolidated cash flow statement and
     certain explanatory notes.)

     The original financial statements for the year ended 31 March 2003 prepared
     in accordance with United Kingdom GAAP were approved by the directors on 29
     October 2003. The Independent Auditors Report on those financial statements
     was also dated 29 October 2003 and is attached on page 4. As outlined
     above, the directors of the company have requested that the original
     financial statements be restated in accordance with US GAAP. The
     Independent Auditors have attached a report on those financial statements
     on page 5.


                                     Page 2



      CQ SYSTEMS LIMITED

      REPORT OF THE DIRECTORS
      FOR THE YEAR ENDED 31 MARCH 2003

      The directors present their report with the financial statements of the
      group for the year ended 31 March 2003.

      PRINCIPAL ACTIVITY The principal activity of the group in the year under
      review was that of the provision of computer software and services.

      DIRECTORS
      The directors during the year under review were:

      P J Grace
      G E Tarrant
      I M Tarrant
      A Elliott
      J Halliday
      J Manktelow

      The beneficial interests of the directors holding office on 31 March 2003
      in the issued share capital of the company were as follows:

                                                                  01.04.02 or
                                                          date of appointment
      Ordinary (pound)0.20 shares       31.3.03                      if later

      P J Grace                          75,000                       75,000
      G E Tarrant                       150,000                      150,000
      I M Tarrant                       150,000                      150,000
      A Elliott                          55,983                       55,983
      J Halliday                         38,034                       38,034
      J Manktelow                        30,983                       30,983

      The directors' interests above include shares held by connected persons.

      STATEMENT OF DIRECTORS' RESPONSIBILITIES Company law requires the
      directors to prepare financial statements for each financial year which
      give a true and fair view of the state of affairs of the company and of
      the profit or loss of the company for that period. In preparing those
      financial statements, the directors are required to

      - select suitable accounting policies and then apply them consistently;
      - make judgements and estimates that are reasonable and prudent;
      - prepare the financial statements on the going concern basis unless it is
      inappropriate to presume that the company will continue in business.

      The directors are responsible for keeping proper accounting records which
      disclose with reasonable accuracy at any time the financial position of
      the company and to enable them to ensure that the financial statements
      comply with the Companies Act 1985. They are also responsible for
      safeguarding the assets of the company and hence for taking reasonable
      steps for the prevention and detection of fraud and other irregularities.

      AUDITORS
      CMB Partnership were appointed as auditors during the year and will be
      proposed for re-appointment in accordance with Section 385 of the
      Companies Act 1985.





                                     Page 2




CQ SYSTEMS LIMITED

REPORT OF THE DIRECTORS
FOR THE YEAR ENDED 31 MARCH 2003

This report has been prepared in accordance with the special provisions of Part
VII of the Companies Act 1985 relating to small companies.

ON BEHALF OF THE BOARD:





P M Tarrant - Secretary

Date: 29 October 2003




                                       1



REPORT OF THE INDEPENDENT AUDITORS TO THE SHAREHOLDERS OF CQ SYSTEMS LIMITED

"We have audited the financial statements of CQ Systems Limited for the year
ended 31 March 2003 on pages four to eleven. These financial statements have
been prepared in accordance with the Financial Reporting Standard for Smaller
Entities (effective June 2002), under the historical cost convention and the
accounting policies set out therein.

This report is made solely to the company's members, as a body, in accordance
with Section 235 of the Companies Act 1985. Our audit work has been undertaken
so that we might state to the company's members those matters we are required to
state to them in an auditors' report and for no other purpose. To the fullest
extent permitted by law, we do not accept or assume responsibility to anyone
other than the company and the company's members as a body, for our audit work,
for this report, or for the opinions we have formed.

Respective responsibilities of directors and auditors
As described on page two the company's directors are responsible for the
preparation of financial statements in accordance with applicable law and United
Kingdom Accounting Standards.

Our responsibility is to audit the financial statements in accordance with
relevant legal and regulatory requirements and United Kingdom Auditing
Standards.

We report to you our opinion as to whether the financial statements give a true
and fair view and are properly prepared in accordance with the Companies Act
1985. We also report to you if, in our opinion, the Report of the Directors is
not consistent with the financial statements, if the company has not kept proper
accounting records, if we have not received all the information and explanations
we require for our audit, or if information specified by law regarding
directors' remuneration and transactions with the company is not disclosed.

We read the Report of the Directors and consider the implications for our report
if we become aware of any apparent misstatements within it.

Basis of audit opinion
We conducted our audit in accordance with United Kingdom Auditing Standards
issued by the Auditing Practices Board. An audit includes examination, on a test
basis, of evidence relevant to the amounts and disclosures in the financial
statements. It also includes an assessment of the significant estimates and
judgements made by the directors in the preparation of the financial statements,
and of whether the accounting policies are appropriate to the company's
circumstances, consistently applied and adequately disclosed.

We planned and performed our audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the financial statements
are free from material misstatement, whether caused by fraud or other
irregularity or error. In forming our opinion we also evaluated the overall
adequacy of the presentation of information in the financial statements.

Opinion
In our opinion the financial statements give a true and fair view of the state
of the company's affairs as at 31 March 2003 and of its profit for the year then
ended and have been properly prepared in accordance with the Companies Act
1985".

CMB Partnership
Chartered Accountants and Registered Auditors
Chapel House, 1 Chapel Street
Guildford
Surrey GU1 3UH                                            Date: 29 October 2003


                                       2



BOARD OF DIRECTORS
CQ SYSTEMS LIMITED

Independent Auditors' Report

We have audited the accompanying balance sheets of CQ Systems Limited, as of 31
March 2003 and 2002, and the related statements of income and retained earnings,
comprehensive income, and cash flows for the years then ended. 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 audits in accordance generally accepted auditing standards.
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. We draw
attention to the note on page 1 in that the original accounts were prepared in
accordance with United Kingdom accounting and auditing standards. We have been
requested to report on the financial statements prepared under US GAAP. The
scope of our work for the purpose in US GAAP financial statements did not
include examining or dealing with events after the date of the Audit Report on
the United Kingdom GAAP accounts.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of CQ Systems Limited, as of 31
March 2003 and 2002 and the results of its operations and its cash flows for the
years then ended in conformity with accounting principles generally accepted in
the United States of America.


                                       3



                           CONSOLIDATED BALANCE SHEET

                                     ASSETS
                                                               March 31
                                                          2003            2002
                                          Note          (pound)         (pound)
CURRENT ASSETS
  Cash and cash equivalents                              448,136         369,639
  Accounts receivable                                    435,806         310,188
  Prepaid expenses and other debtors                      47,216          44,536
                                                       ---------       ---------

TOTAL CURRENT ASSETS                                     931,158         724,363
                                                       ---------       ---------

EQUIPMENT
                                           2
  Automobiles                                             39,732          49,402
  Furniture and equipment                                155,093         154,127
  Computer equipment                                     546,646         518,922
                                                       ---------       ---------
                                                         741,471         722,451

Less accumulated depreciation                            616,420         513,472
                                                       ---------       ---------

                                                         125,051         208,979
                                                       ---------       ---------

                                                       1,056,209         933,342
                                                       =========       =========

                      LIABILITIES AND SHAREHOLDERS' EQUITY
                                                               March 31
                                                               2003        2002
                                          Note               (pound)     (pound)
CURRENT LIABILITIES
  Accounts payable                                            21,365      20,600
  Hire purchase liabilities                                   32,153      41,231
  Payroll, Vat and corporation taxes
  payable                                                    135,117      87,935
  Dividends payable                                           30,000          --
  Accrued liabilities                                         92,911     114,289
  Deferred income                                            410,193     350,863
                                          1.b
                                                           ---------   ---------

TOTAL CURRENT LIABILITIES                                    721,739     614,918

LONG TERM LIABILITIES AND PROVISIONS
  Hire purchase liabilities                                    5,275      37,405
  Deferred tax                                                 1,198          --
                                                           ---------   ---------

TOTAL LIABILITIES                                            728,212     652,323

SHAREHOLDERS' EQUITY
  Ordinary Shares
    1,000,000 shares authorised
    (pound)0.20 par value
    Issued 500,000 shares                                    100,000     100,000
  Retained earnings                                          227,997     181,019
                                                           ---------   ---------

                                                           1,056,209     933,342

                                                           =========   =========

                        See notes to financial statements


                                       4



             CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS

                                                                      10 Month
                                                       Year ended   Period ended
                                                        March 31       March 31
                                          Note        2003 (pound)  2002 (pound)

SALES                                                   2,471,477     2,209,098
                                          1.b
COST OF SALES                                           1,069,974     1,042,194
                                                       ----------    ----------

                                                        1,401,503     1,166,904

OPERATING EXPENSES                                      1,302,176     1,130,355
                                          1.e          ----------    ----------

INCOME FROM OPERATIONS                                     99,327        36,549

OTHER INCOME (EXPENSES)
  Interest income                                          10,257         9,744
  Interest payable                                         (3,530)       (5,515)
                                                       ----------    ----------

INCOME BEFORE CORPORATION                                 106,054        40,778
AND DEFERRED TAXES

UK CORPORATION AND DEFERRED TAXES          3              (29,076)       (8,782)
                                                       ----------    ----------

NET INCOME                                                 76,978        31,996

RETAINED EARNINGS
  Beginning of year                                       181,019       356,023
  Less: Dividends                     )                   (30,000)     (207,000)
                                                       ----------    ----------

  End of year                                             227,997       181,019

                                                       ==========    ==========


                 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

                                                         2003             2002
                                                        (pound)          (pound)

NET INCOME                                              76,978            31,996

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

COMPREHENSIVE INCOME                                    76,978            31,996

                                                        ======            ======


                       See notes to financial statements.


                                       5


                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                               March 31
                                                           2003          2002
                                                         (pound)       (pound)

CASH FLOWS FROM OPERATING ACTIVITIES

  Cash received from customers                        2,343,179       2,260,695
  Cash paid to suppliers and employees               (2,235,165)     (2,222,307)
  Interest received                                      10,257           9,744
  Interest paid                                          (3,530)         (5,515)
  Corporation tax paid                                   (8,782)         (4,639)
                                                     ----------      ----------

  Net cash provided by operating activities             105,959          37,978

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

CASH FLOWS FROM INVESTING ACTIVITIES

  Net sales (purchases) of equipment                    (27,462)        (73,646)
                                                     ----------      ----------

  Net cash used by investing activities                 (27,462)        (73,646)
                                                     ----------      ----------

CASH FLOWS FROM FINANCING ACTIVITIES

  Dividends paid                                             --        (207,000)
                                                     ----------      ----------

  Net cash used by financing activities                      --        (207,000)
                                                     ----------      ----------

NET INCREASE IN CASH AND CASH EQUIVALENTS                78,497        (242,668)

CASH AND CASH EQUIVALENTS

  Beginning of year                                     369,639         612,307
                                                     ----------      ----------

  End of year                                           448,136         369,639

                                                     ==========      ==========


                       See notes to financial statements.



                                       6



                CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued

                                                                 March 31
                                                            2003          2002
                                                          (pound)        (pound)

RECONCILIATION OF NET INCOME TO CASH
PROVIDED BY OPERATING ACTIVITIES

Net Income                                                 76,978        31,996
Adjustments to reconcile net income to net cash
provided by operating activities:

  Depreciation                                            111,390       122,581
  Decrease/(increase) in accounts
  receivable and other debtors                           (128,297)       51,597
  Increase/(decrease) in accounts
  payable and other creditors                              25,594      (172,339)
  Increase in corporation taxes payable                    19,096         4,143
  Increase in deferred taxes                                1,198            --
                                                         --------      --------

                                                           28,981         5,982

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

                                                          105,959        37,978

                                                         ========      ========


                       See notes to financial statements.



                                       7



                          NOTES TO FINANCIAL STATEMENTS


1.    Summary of significant accounting policies

      The accompanying consolidated financial statements are prepared in
      accordance with accounting principles generally accepted in the United
      States of America (US GAAP) and are stated in United Kingdom sterling.

      In preparing the consolidated financial statements, management is required
      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 consolidated balance sheet and the reported amounts of
      revenues and expenses during the reported period. Actual results could
      differ from those estimates.

      a.    Principles of consolidation

            The consolidated financial statements include the financial
            statements of the group and its subsidiary. The group's subsidiary
            is Custom Quest Limited, a dormant company that has not traded since
            31 May 2001 in which the group has a 100% direct holding in the
            voting rights. The net assets of the subsidiary company since
            cessation of trade is (pound)nil.

      b.    Turnover

            Licence revenue is recognised where orders have been signed and the
            product is delivered. In contracts with multiple elements revenues
            are allocated to each element based on the fair value on completion,
            delivery and acceptance by the customer. For other services related
            activity, revenue is recognised on a percentage of completion basis.

      c.    Tangible Fixed Assets

            Depreciation is provided at the following rates in order to write
            off each asset over its useful life;

            Computer software             50% straight line
            Office furniture and fittings 15% straight line
            Computer equipment            33.33% straight line
            Automobiles                   25% straight line

            The group evaluates tangible fixed assets for impairment losses at
            least annually and whenever events or changes in circumstances
            indicate that the carrying amount may not be recoverable or is
            greater than its fair value.

      d.    Deferred Tax

            Deferred tax is recognised in respect of all timing differences that
            have originated but not reversed at the balance sheet date. These
            reflect the expected future tax consequences of temporary
            differences between the carrying amounts of assets and liabilities
            at the balance sheet date and their respective tax bases.



                                       8



                    NOTES TO FINANCIAL STATEMENTS - Continued


      e.    Research and Development

            Expenditure on research and development is written off in the year
            in which it is incurred. Development costs on computer software that
            is to be sold relates to bespoke work undertaken for particular
            customers as and when requested. Under these circumstances, these
            costs are written off as incurred rather than capitalised and
            amortised, as they relate solely to the individual customers
            specifications rather than being available for general release to
            customers.

      f.    Advertising

            The company expenses advertising costs as they are incurred.

      g.    Hire Purchase and Leasing Commitments

            Assets obtained under hire purchase contracts are capitalised in the
            balance sheet and are depreciated over their useful estimated lives.

            The interest element of these obligations are charged to the
            statement of income and retained earnings over the lease term. The
            capital element of the future payments is treated as liability.

            Rentals paid under operating leases are charged to the statement of
            income and retained earnings on a straight line basis.

      h.    Pensions

            The company operates a defined contribution pension scheme.
            Contributions payable for the year are charged in the statement of
            income and retained earnings.

      i.    Cash and cash equivalents

            Cash and cash equivalents consist of cash at bank and in hand.

2.    SECURED CREDITORS

      The amounts owed under hire purchase contracts totalling (pound)37,428
      (2002 - (pound)78,636) are secured on the assets acquired. The bank also
      holds securities over any bank borrowings ((pound)nil at the balance sheet
      date.)

3.    CORPORATION AND DEFERRED TAXES

      Provision is made for United Kingdom corporation tax payable on the
      group's taxable net income. This is provided for at the rate of tax
      prevailing at that time. The current standard corporation tax rate in the
      United Kingdom is 30%. Deferred tax is provided using the standard rate.

4.    COMMITMENTS

      The group is committed to making operating lease payments of (pound)82,500
      in the forthcoming year.






                                     PART II

                     INFORMATION NOT REQUIRED IN PROSPECTUS

Indemnification of Directors and Officers

      We are required by our Bylaws and Certificate of Incorporation to
indemnify, to the fullest extent permitted by law, each person that we are
permitted to indemnify. Our Bylaws it to indemnify such parties to the fullest
extent permitted by Nevada law.

      Nevada corporation law permits us to indemnify our directors, officers,
employees, or agents against expenses, including attorneys fees, judgments,
fines and amounts paid in settlements actually and reasonably incurred in
relation to any action, suit, or proceeding brought by third parties because
they are or were directors, officers, employees, or agents of the corporation.
In order to be eligible for such indemnification, however, our directors,
officers, employees, or agents must have acted in good faith and in a manner
they reasonably believed to be in, or not opposed to, our best interests. In
addition, with respect to any criminal action or proceeding, the officer,
director, employee, or agent must have had no reason to believe that the conduct
in question was unlawful.

      In derivative actions, we may only indemnify our officers, directors,
employees, and agents against expenses actually and reasonably incurred in
connection with the defense or settlement of a suit, and only if they acted in
good faith and in a manner they reasonably believed to be in, or not opposed to,
our best interests. Indemnification is not permitted in the event that the
director, officer, employee, or agent is actually adjudged liable to the
corporation unless, and only to the extent that, the court in which the action
was brought so determines.

      Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to our controlling directors, officers,
or persons pursuant to the foregoing provisions, we have been informed that in
the opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Act and is therefore unenforceable.

Expenses of Issuance and Distribution

The following is an estimate of the expenses that we expect to incur in
connection with this registration. We will pay all of these expenses, and the
selling stockholders will not pay any of them.

         SEC Registration fee                   $       444.60
         Printing and engraving expenses        $       300.00*
         Legal fees and expenses                $     1,500.00*
         Accounting fees and expenses           $         0.00*
         Miscellaneous                          $         0.00*
                                                --------------
                  Total                         $     2,244.60*
                                                ==============

      * Estimate, and subject to future contingencies.

Recent Sale of Unregistered Securities

In May 2003, Peter J. Jegou was granted warrants to acquire 20,000 shares of
common stock of NetSol Technologies at the price of $1.75 per share until May
31, 2004 and warrants to acquire 20,000 shares of common stock at the exercise
price of $3.75 per share until May 31, 2004. These warrants were granted to Mr.
Jegou as compensation as compensation under the terms of a consulting agreement
with NetSol. Mr. Jegou also holds 19,485 shares of common stock, which he
acquired, in the July private placement of NetSol stock. NetSol relied on an
exemption available under Regulation D of the Securities Act in providing him
with these shares and warrants.

                                       55


In August 2003 Mr. Hugh Duddy was issued options to acquire 160,000 shares of
NetSol Technologies, Inc. stock through as compensation for consulting services
provided by Mr. Duddy. Mr. Duddy's options entitle him to acquire up to 40,000
shares of common stock at the exercise price of $1.00 per share; 40,000 shares
of common stock at the exercise price of $2.50 per share; 40,000 shares at the
exercise price of $3.75 per share; and 40,000 shares at the exercise price of
$5.00 per share. Each option may be exercised from the date of grant until
November 14, 2007 or as otherwise limited by NetSol's nonstatutory stock option
plan.

In February 2003, DCD Holdings Ltd., a UK investment company, signed an
agreement to acquire 1,350,000 Rule 144 restricted shares of NetSol
Technologies, Inc., in a private placement. The agreement also includes warrants
for underlying shares of restricted Rule 144 stock totaling 2,750,000 with an
average price of $0.625. NetSol immediately received approximately $260,000. The
shares were issued in reliance on an exemption from registration available under
Regulation S of the Securities Act of 1933.

In an offering closing prior to the reverse stock split in August 2003, we sold
809,999, post-reverse split, shares of restricted common stock to 12 accredited
investors for total consideration of $1,215,000 in reliance on an exemption from
registration available under Rule 506 of Regulation D of the Securities Act of
1933, as amended. This offering originally provided units consisting of shares
of common stock and warrants to acquire common stock but was amended to adjust
the number of shares consistent with NASDAQ compliance requirements. As part of
the placement agent agreement with Maxim Group LLC, we issued warrants to
purchase 81,000 shares of common stock to Maxim Partners, nominee of Maxim Group
LLC.

                                       56


On August 20, 2003, we entered into a loan agreement with an accredited non-U.S.
investor. Under the terms of the loan, we borrowed $500,000 from the investor.
The note has an interest rate of 8% per annum. The note is due on a date that is
one hundred (120) days from the issuance date. In the event of default by us
only, the note is convertible into shares of common stock at $1.75 per share,
and 100,000 warrants at the exercise price of $3.25 which expire one year from
the conversion date, and 100,000 warrants at an exercise price of $5.00 per
share which expire two years from the conversion date. The note was issued in
reliance on an exemption available from registration under Regulation S of the
Securities Act of 1933, as amended.

On October 14, 2003, we announced the execution of an agreement to acquire Pearl
Treasury System Ltd, a United Kingdom company. This acquisition requires us to
issue up to 60,000 shares of common stock to the shareholders of Pearl Treasury
System, Ltd. 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.

On December 16, 2003, we issued 34,843 shares, valued at $100,000, to ACB, Ltd.,
formerly Arab Commerce Bank, as part of a settlement of an action instituted by
ACB Ltd. against NetSol. The shares were issued in reliance on an exemption
available from registration under Regulation S of the Securities Act of 1933, as
amended.

On December 17, 2003, NetSol entered into a loan agreement with an accredited
non-U.S. investor, Noon Group. Under the terms of the loan, NetSol borrowed
$100,000 from the investor. The note has an interest rate of 6% per annum. The
note is due on a date that is six months from the issuance date. In the event of
default by NetSol only, the note is convertible into shares of common stock at
$1.95 per share, and 51,282 warrants at the exercise price of $3.25 per share
which expire one year from the conversion date. The note was issued in reliance
on an exemption available from registration under Regulation S of the Securities
Act of 1933, as amended. On March 24, 2004, the loan was converted into 51,282
shares of NetSol's common stock.

On December 24, 2003, NetSol entered into a loan agreement with an accredited
non-U.S. investor, Akhtar Group. Under the terms of the loan, NetSol borrowed
$250,000 from the investor. The note has an interest rate of 6% per annum. The
note is due on a date that is one hundred and twenty (120) days from the
issuance date. In the event of default by NetSol only, the note is convertible
into shares of common stock at $1.85 per share, and 135,135 warrants at the
exercise price of $3.00 per share which expire six months from the conversion
date. The note was issued in reliance on an exemption available from
registration under Regulation S of the Securities Act of 1933, as amended.
Effective March 8, 2004, the loan was converted into 135,135 shares of NetSol's
common stock.

On February 6, 2004, NetSol issued an additional 10,352 shares valued at $35,135
for interest to ACB (formerly Arab Commerce Bank) pursuant to the terms of the
legal settlement dated November 3, 2003. These shares were issued as part of the
settlement agreement with Arab Commerce Bank and NetSol and were issued in
reliance on an exemption available from registration under Regulation S of the
Securities Act of 1933, as amended.

                                       57


On March 26, 2004, NetSol issued debentures to 23 accredited investors in a
principal amount of one million two hundred thousand dollars ($1,200,000). The
debentures mature two years from the date of the debenture, or March 26, 2006
and bear interest at the rate of 10% per annum payable in common stock or cash
at NetSol's option, on a quarterly basis. Pursuant to the terms of a supplement
between NetSol and the debenture holders, the conversion rate was set at one
share for each $1.86 of principal. As part of that amendment, each debenture
holder is entitled to receive, at conversion, warrants to purchase up to 50% of
the shares issuable to the debenture holders at conversion at the exercise price
of $3.30 per share. These warrants expire in June 2009. These debentures and
warrants were issued in reliance on an exemption from registration available
under Regulation D of the Securities Act of 1933, as amended.

On May 20, 2004, NetSol issued 386,362 shares of common stock and warrants to
acquire up to 193,182 shares of common stock at the exercise price of $3.30 per
share to 9 accredited investors. These shares and warrants were issued in
reliance on an exemption from registration available under Regulation D of the
Securities Act of 1933, as amended.

In June 2004, NetSol issued a total of 45,000 shares of common stock, valued at
$39,240, to its directors as compensation for board service completed in January
2004. These shares were issued in reliance on an exemption from registration
available under Regulation D and S of the Securities Act of 1933, as amended.

During the fiscal year ended June 30, 2004 and 2003, employees exercised options
to acquire 1,067,309 and 954,983 shares of common stock in exchange for a total
exercise price of $1,370,551 and $850,816, respectively.

Certain sales milestones were achieved for the NetSol Altvia subsidiary during
the current year. NetSol issued 100,000 shares to Altvia as agreed in the
acquisition agreement. These shares were issued in reliance on an exemption
available under Regulation D of the Securities Act of 1933, as amended.

During the year, a total of 123,350 shares of NetSol's common stock, valued at
$209,200, were issued to three investors as reimbursement for debts of NetSol
paid by the investors. These shares were issued in reliance on an exemption
available under Regulation S of the Securities Act of 1933, as amended.

In August 2004, the Company issued 50,000 shares valued at $55,960 to Westrock
Advisors for consulting services. These shares were issued in reliance on an
exemption from registration available under Regulation D of the Securities Act
of 1933, as amended.

In August and September 2004, three holders of $150,000 in convertible
debentures converted their notes into 80,645 shares of the Company's common
stock.

In December 2004, 16 holders of $900,000 in convertible debentures converted
their notes into 483,873 shares of the Company's common stock.

In the quarter ended December 31, 2004, the Company sold 1,250,000 shares of
common stock to 4 accredited non-U.S. investors. These shares were issued in
reliance on an exemption from registration available under Regulation S of the
Securities Act of 1933, as amended.

                                       58


Exhibits and Financial Statement Schedules

 (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   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.

3.6   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.(*)

5.1   Opinion of Malea Farsai, counsel to NetSol, as to the legality of the
      securities being registered.(1)

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.

                                       59


10.8  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.

10.9  Consulting Contract, dated September 1, 1999 by and between Irfan Mustafa
      and NetSol International, Inc. incorporated by reference as Exhibit 10.10
      to NetSol's Annual Report for the Fiscal Year Ended June 30, 2000 on Form
      10K-SB filed on October 15, 2000.

10.10 Sublease Agreement between RPMC, Inc. and NetSol Technologies, Inc. dated
      September 20, 2002 incorporated by reference as Exhibit 10.11 to NetSol's
      Annual Report for the Fiscal Year Ended June 30, 2002 on Form 10K-SB filed
      on October 15, 2002.

10.11 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.

10.12 Lease Agreement between Butera properties V, LLC and NetSol USA, Inc.
      dated June 2004 incorporated by reference as Exhibit 10.12 to Form SB-2/A
      filed on July 21, 2004.

10.13 Frame Agreement by and between DaimlerChrysler Services AG and NetSol
      Technologies dated June 4, 2004 incorporated by reference as Exhibit 10.13
      to Form SB-2/A filed on July 21, 2004.

10.14 Share Acquisition Agreement by and between CQ Systems Ltd. and NetSol
      Technologies, Inc. dated January 19, 2005 incorporated by reference as
      Exhibit 2.1 to Form 8-K on January 25, 2005.

21.1  A list of all subsidiaries of NetSol (*)

23.1  Consent of Kabani & Company (*)

23.2  Consent of Malea Farsai, Esq.(*)

      * Filed herewith

                                       60


Undertakings

Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.

The undersigned registrant hereby undertakes:

(1) To file, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:

            (i) To include any prospectus required by section 10(a)(3) of the
      Securities Act of 1933.

            (ii) To reflect in the prospectus any facts or events which,
      individually or together, represent a fundamental change in the
      information in the registration statement; and notwithstanding the
      forgoing, any increase or decrease in volume of securities offered (if the
      total dollar value of securities offered would not exceed that which was
      registered) and any deviation from the low or high end of the estimated
      maximum offering range may be reflected in the form of prospectus filed
      with the Commission pursuant to Rule 424(b) if, in the aggregate, the
      changes in the volume and price represent no more than a 20% change in the
      maximum aggregate offering price set forth in the "Calculation of
      Registration Fee" table in the effective registration statement.

            (iii) To include any additional or changed material information on
      the plan of distribution.

(2) For purposes of determining liability under the Securities Act, to treat
each post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.

(3) To file a post-effective amendment to remove from registration any of the
securities that remains unsold at the end of the offering.

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                                   SIGNATURES

      Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form SB-2 and has duly caused this amendment to be
signed on its behalf by the undersigned, thereunto duly authorized, in the city
of Calabasas, State of California on February 15, 2005.

                                  NETSOL TECHNOLOGIES, INC.

                                  By: /s/ Naeem Ghauri
                                      -------------------------------------
                                      Naeem Ghauri, Chief Executive Officer

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each of the undersigned hereby
constitutes and appoints Naeem Ghauri, as his true and lawful attorney-in-fact
and agent, with full power of substitution and resubstitution, for him and on
his behalf to sign, execute and file this registration statement and any or all
amendments (including, without limitation, post-effective amendments) to this
registration statement, and to file the same, with all exhibits thereto and any
and all documents required to be filed with respect therewith, with the
Securities and Exchange Commission or any regulatory authority, granting unto
such attorney-in-fact and agent full power and authority to do and perform each
and every act and thing requisite and necessary to be done in connection
therewith and about the premises in order to effectuate the same as fully to all
intents and purposes as he might or could do if personally present, hereby
ratifying and confirming all that such attorney-in-fact and agent, or his
substitute or substitutes, may lawfully do or cause to be done.

Pursuant to the requirements of the Securities Act of 1933, as amended, this
registration statement has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated:

Name and Signature                Title                              Date
------------------                -----                              ----

/s/ Naeem Ghauri        Director and Chief Executive Officer   February 17, 2004
----------------------

/s/ Najeeb U. Ghauri    Director, Chairman, and Chief          February 17, 2004
----------------------  Financial Officer

/s/ Irfan Mustafa       Director                               February 17, 2004
----------------------

/s/ Salim Ghauri        Director and President                 February 17, 2004
----------------------

/s/ James Moody         Director                               February 17, 2004
----------------------

/s/ Eugen Beckert       Director                               February 17, 2004
----------------------

/s/ Shahid Javed Burki  Director                               February 17, 2004
----------------------

/s/ Shabir Randeree     Director                               February 17, 2004
----------------------

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