UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-QSB

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

For the quarterly period ended September 30, 2007

o
For the transition period from __________ to __________

Commission file number: 0-22773
 
NETSOL TECHNOLOGIES, INC.
(Exact name of small business issuer as specified in its charter)

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


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

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

Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days.

Yes x
No o

The issuer had 24,877,766 shares of its $.001 par value Common Stock and 2,170 shares of Series A 7% Cumulative Convertible Preferred Stock issued and outstanding as of November 5, 2007.

Transitional Small Business Disclosure Format (check one)

Yes o
 No x
 
Page 1
 
NETSOL TECHNOLOGIES, INC.

INDEX

PART I.
FINANCIAL INFORMATION
Page No.
     
Item 1.
Financial Statements
  
     
Consolidated Unaudited Balance Sheet as of September 30, 2007
3
     
Comparative Unaudited Consolidated Statements of Operations
 
for the Three Months Ended September 30, 2007 and 2006
4
     
Comparative Unaudited Consolidated Statements of Cash Flow
 
for the Three Months Ended September 30, 2007 and 2006
5
     
Notes to the Unaudited Consolidated Financial Statements
7
     
Item 2.
Management's Discussion and Analysis or Plan of Operation
22
     
Item 3.
Controls and Procedures
32
     
PART II.
OTHER INFORMATION
  
     
Item 1.
Legal Proceedings
32
     
Item 2.
Changes in Securities
32
     
Item 3.
Defaults Upon Senior Securities
32
     
Item 4.
Submission of Matters to a Vote of Security Holders
32
   
 
Item 5.
Other Information
32
     
Item 6.
Exhibits and Reports on Form 8-K
32

(a) Exhibits
(b) Reports on Form 8-K
 
Page 2
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET — SEPTEMBER 30, 2007
(UNAUDITED)
 
 ASSETS
 
Current assets:
          
Cash and cash equivalents
  
$
4,837,241
        
Accounts receivable, net of allowance for doubtful accounts of $170,087
    
9,302,976
       
Revenues in excess of billings
    
9,597,690
       
Other current assets
    
2,322,668
       
 Total current assets
        
26,060,575
 
Property and equipment, net of accumulated depreciation
          
7,932,816
 
Other assets, long-term
          
504,514
 
Intangibles:
              
Product licenses, renewals, enhancements, copyrights,
              
 trademarks, and tradenames, net
    
8,446,650
       
Customer lists, net
    
2,253,744
       
Goodwill
    
7,708,501
       
 Total intangibles
          
18,408,895
 
 Total assets
        
$
52,906,800
  
               
LIABILITIES AND STOCKHOLDERS' EQUITY
  
Current liabilities:
              
Accounts payable and accrued expenses
  
$
3,181,625
        
Current portion of loans and obligations under capitalized leases
    
3,145,437
       
Other payables - acquisitions
    
83,399
       
Unearned revenues
    
2,494,833
       
Due to officers
    
184,328
       
Dividend to preferred stockholders payable
    
71,157
       
Subsidiary dividend payable
    
816,098
       
Loans payable, bank
    
1,979,218
       
 Total current liabilities
        
11,956,095
 
Obligations under capitalized leases, less current maturities
          
282,156
 
Long term loans; less current maturities
          
680,398
 
 Total liabilities
          
12,918,649
 
Minority interest
          
3,827,554
 
Commitments and contingencies
              
               
Stockholders' equity:
              
Preferred stock, 5,000,000 shares authorized;
             
 3,800 issued and outstanding
    
3,800,000
       
Common stock, $.001 par value; 45,000,000 shares authorized;
              
 22,033,851 issued and outstanding
    
22,034
       
Additional paid-in-capital
    
69,562,129
       
Treasury stock
    
(10,194
)
      
Accumulated deficit
   
(36,228,549
)
      
Stock subscription receivable
    
(751,407
)
      
Common stock to be issued
    
79,612
       
Other comprehensive loss
    
(313,028
)
      
 Total stockholders' equity
        
36,160,597
 
 Total liabilities and stockholders' equity
        
$
52,906,800
  
 
See accompanying notes to these unaudited consolidated financial statements.
Page 3

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES 
CONSOLIDATED STATEMENTS OF OPERATIONS 
(UNAUDITED)
 
   
For the Three Months
 
   
Ended September 30,
 
   
2007
 
2006
 
Net Revenues:
          
Licence fees
  
$
1,903,552
  
$
1,578,412
  
Maintenance fees
    
1,583,420
   
1,294,964
 
Services
    
5,166,265
   
2,989,184
 
 Total revenues
    
8,653,237
   
5,862,560
 
Cost of revenues:
              
Salaries and consultants
   
2,321,030
   
1,932,073
 
Travel and entertainment
   
266,828
   
315,683
 
Communication
   
32,795
   
42,065
 
Depreciation and amortization
   
258,907
   
193,097
 
Other
   
507,895
   
426,620
 
 Total cost of revenues
    
3,387,455
   
2,909,538
 
Gross profit
    
5,265,782
   
2,953,022
 
Operating expenses:
              
Selling and marketing
    
832,493
   
518,044
 
Depreciation and amortization
    
464,647
   
449,374
 
Bad debt expense
    
2,439
   
65,808
 
Salaries and wages
    
907,879
   
998,391
 
Professional services, including non-cash compensation
   
160,050
   
260,870
 
General and adminstrative
    
678,573
   
820,086
 
 Total operating expenses
    
3,046,081
   
3,112,573
 
Income (loss) from operations
    
2,219,701
   
(159,551
)
Other income and (expenses)
              
Loss on sale of assets
    
(32,223
)
  
(12,280
)
Amortization of debt discount and capitalized cost of debt
    
-
   
(734,659
)
Interest expense
    
(233,804
)
  
(247,908
)
Interest income
    
33,863
   
90,746
 
Other income
   
111,947
   
67,785
 
 Total other expenses
    
(120,217
)
  
(836,316
)
Net income (loss) before minority interest in subsidiary
    
2,099,484
   
(995,867
)
Minority interest in subsidiary
    
(274,919
)
  
(247,273
)
Income taxes
    
(32,441
)
  
(52,824
)
Net income (loss)
   
1,792,124
   
(1,295,964
)
Dividend required for preferred stockholders
    
(71,157
)
  
-
 
Subsidiary dividend (minority holders portion)
    
(817,173
)
  
-
 
Net income (loss) applicable to common shareholders
    
903,794
   
(1,295,964
)
Other comprehensive income (loss):
              
Translation adjustment
    
162,403
   
(73,490
)
Comprehensive income (loss)
  
$
1,066,197
  
$
(1,369,454
)
               
Net income (loss) per share:
              
Basic
  
$
0.08
  
$
(0.08
)
Diluted
  
$
0.08
  
$
(0.08
)
Weighted average number of shares outstanding
              
Basic
    
21,425,235
   
17,046,715
 
Diluted
    
22,844,361
   
17,046,715
 
 
See accompanying notes to these unaudited consolidated financial statements.
 
Page 4
 
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES 
CONSOLIDATED STATEMENTS OF CASH FLOWS 
(UNAUDITED)
 
   
For the Three Months
 
   
Ended Sept 30,
 
   
2007
 
2006
 
Cash flows from operating activities:
         
Net income (loss) from continuing operations
 
$
903,794
  
$
(1,295,964
)
Adjustments to reconcile net income (loss) to net cash
             
used in operating activities:
             
Depreciation and amortization
   
723,554
   
651,161
 
Provision for uncollectible accounts
   
-
   
65,808
 
Loss on sale of assets
   
32,223
   
12,280
 
Minority interest in subsidiary
   
274,919
   
247,273
 
Stock issued for services
   
-
   
30,600
 
Stock issued for dividends payable to preferred stockholders
   
77,640
   
-
 
Fair market value of warrants and stock options granted
   
24,320
   
-
 
Amortization of capitalized cost of debt
   
-
   
734,659
 
Changes in operating assets and liabilities:
             
Increase in accounts receivable
   
(353,500
)
  
(250,489
)
Increase in other current assets
   
(1,080,375
)
  
(354,871
)
Decrease in accounts payable and accrued expenses
   
(1,129,263
)
  
(520,473
)
Net cash used in operating activities
   
(526,688
)
  
(680,016
)
Cash flows from investing activities:
             
Purchases of property and equipment
   
(745,901
)
  
(238,323
)
Sales of property and equipment
   
85,076
   
24,553
 
Proceeds from sale of certificates of deposit
   
-
   
1,739,851
 
Payments of acquisition payable
   
(879,007
)
  
(4,025,567
)
Increase in intangible assets
   
(841,312
)
  
(585,631
)
Net cash used in investing activities
   
(2,381,144
)
  
(3,085,117
)
Cash flows from financing activities:
             
Proceeds from sale of common stock
   
250,000
   
-
 
Proceeds from the exercise of stock options and warrants
   
903,499
   
-
 
Dividend payable to preferred shareholders
   
(6,482
)
  
-
 
Dividend payable by subsidary (minority interest portion)
   
816,098
   
-
 
Reduction of restricted cash
   
-
   
4,533,555
 
Proceeds from convertible notes payable
   
-
   
167,489
 
Proceeds from loans from officers
   
-
   
165,000
 
Proceeds from bank loans
   
2,444,291
   
-
 
Payments on bank loans
   
(25,110
)
  
-
 
Payments on capital lease obligations & loans - net
   
(692,353
)
  
237,702
 
Net cash provided by financing activities
   
3,689,943
   
5,103,746
 
Effect of exchange rate changes in cash
   
44,966
   
(9,961
)
Net increase in cash and cash equivalents
   
827,077
   
1,328,652
 
Cash and cash equivalents, beginning of year
   
4,010,164
   
2,493,768
 
Cash and cash equivalents, end of year
 
$
4,837,241
  
$
3,822,420
  
 
See accompanying notes to the unaudited consolidated financial statements.
 
Page 5

 
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES 
 
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED) 
 
   
For the Three Months
 
   
Ended September 30,
 
   
2007
  
2006
  
SUPPLEMENTAL DISCLOSURES:
         
Cash paid during the period for:
         
Interest
 
$
48,326
  
$
70,013
  
Taxes
 
$
76,762
  
$
-
  
               
NON-CASH INVESTING AND FINANCING ACTIVITIES:
              
Stock issued for accrued expenses and payables
  
$
-
  
$
15,000
  
Stock issued for intangible assets
  
$
-
  
$
137,360
  
Stock issued for the conversion of Preferred Stock
  
$
330,000
  
$
-
  
Common stock issued for acquisition of subsidiary
  
$
-
  
$
1,582,328
  
 
See accompanying notes to the unaudited consolidated financial statements.
 
Page 6
 
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES 
 
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 

NOTE 1 - BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION 
 
The Company designs, develops, markets, and exports proprietary software products to customers in the automobile finance and leasing, banking and financial services industries worldwide. The Company also provides system integration, consulting, IT products and services in exchange for fees from customers.
 
The consolidated condensed interim financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading.
 
These statements reflect all adjustments, consisting of normal recurring adjustments, which, in the opinion of management, are necessary for fair presentation of the information contained therein. It is suggested that these consolidated condensed financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s annual report on Form 10-KSB for the year ended June 30, 2007. 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 McCue, Inc. (“McCue”), NetSol Technologies Limited (“UK”), NetSol-Abraxas Australia Pty Ltd. (“Abraxas”), NetSol-CQ Limited (“CQ”), and its majority-owned subsidiaries, NetSol Technologies (Pvt), Ltd.(“PK Tech”), NetSol Connect (Pvt), Ltd. (now, NetSol Akhter Pvt. Ltd.) (“Connect”), TIG-NetSol (Pvt) Limited (“TIG”), and NetSol Omni (Private) Limited (“Omni”). All material inter-company accounts have been eliminated in consolidation.
 
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 September 2006, FASB issued SFAS 157 ‘Fair Value Measurements’. This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (“GAAP”), and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the Board having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. However, for some entities, the application of this Statement will change current practice. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The management is currently evaluating the effect of this pronouncement on the consolidated financial statements.
 
In September 2006, FASB issued SFAS 158 ‘Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R)’ This Statement improves financial reporting by requiring an employer to recognize the over funded or under funded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income of a business entity or changes in unrestricted net assets of a not-for-profit organization. This Statement also improves financial reporting by requiring an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions. An employer with publicly traded equity securities is required to initially recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after December 15, 2006. An employer without publicly traded equity securities is required to recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after June 15, 2007. However, an employer without publicly traded equity securities is required to disclose the following information in the notes to financial statements for a fiscal year ending after December 15, 2006, but before June 16, 2007, unless it has applied the recognition provisions of this Statement in preparing those financial statements:
 
Page 7
 
1. A brief description of the provisions of this Statement
2. The date that adoption is required
3. The date the employer plans to adopt the recognition provisions of this Statement, if earlier.

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

In February of 2007 the FASB issued SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities—including an amendment of FASB Statement No. 115.” The statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. Management is currently evaluating the effect of this pronouncement on the consolidated financial statements.
 
NOTE 4 - EARNINGS/(LOSS) PER SHARE:
 
“Earnings per share” is calculated in accordance with the Statement of financial accounting standards No. 128 (SFAS No. 128), “Earnings per share”. Basic net income per share is based upon the weighted average number of common shares outstanding. Diluted net income per share is based on the assumption that all dilutive convertible shares and stock options were converted or exercised. Dilution is computed by applying the treasury stock method. Under this method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period.
 
The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations:
 
Page 8
 
         
For the three months ended September 30, 2007
 
Net Income
 
Shares
 
Per Share
 
Basic earnings per share:
 
$
1,720,967
    
21,425,235
 
$
0.08
  
Dividend to preferred shareholders
   
71,157
             
Net income available to common shareholders
                   
Effect of dilutive securities
                   
Stock options
         
657,399
       
Warrants
         
387,279
       
Convertible Preferred Shares
           
374,448
         
Diluted earnings per share
 
$
1,792,124
    
22,844,361
 
$
0.08
  
                     
         
For the three months ended September 30, 2006
   
Net Income
   
Shares
   
Per Share
 
Basic earnings per share:
 
$
(1,295,964
)
  
17,046,715
 
$
(0.08
)
Net income available to common shareholders
                   
Effect of dilutive securities *
                   
Stock options
                   
Warrants
                         
Diluted earnings per share
 
$
(1,295,964
)
  
17,046,715
 
$
(0.08
)
 
* As there is a loss, these securities are anti-dilutive. The basic and diluted earnings per share is the same for the three months ended September 30, 2006

NOTE 5 - FOREIGN CURRENCY:  
 
The accounts of NetSol Technologies UK, Ltd., and NetSol-CQ Ltd. use the British Pound; NetSol Technologies, (PVT), Ltd, NetSol Connect PVT, Ltd., NetSol Omni, and NetSol-TiG use Pakistan Rupees; and NetSol Abraxas Australia Pty, Ltd. uses the Australian dollar as the functional currencies. NetSol Technologies, Inc., and subsidiary NetSol McCue, Inc., use the U.S. dollar as the functional currency. Assets and liabilities are translated at the exchange rate on the balance sheet date, and operating results are translated at the average exchange rate throughout the period. Accumulated translation losses of $313,028 at September 30, 2007 are classified as an item of accumulated other comprehensive loss in the stockholders’ equity section of the consolidated balance sheet. During the three months ended September 30, 2007 and 2006, comprehensive gain (loss) in the consolidated statements of operations included translation gain of $162,403 and loss of $73,490, respectively.
 
NOTE 6 - OTHER CURRENT ASSETS
 
Other current assets consist of the following at September 30, 2007:
 
Prepaid Expenses
 
$
807,524
  
Advance Income Tax
   
307,103
 
Employee Advances
   
137,423
 
Security Deposits
   
236,489
 
Other Receivables
   
815,504
 
Other Assets
   
18,625
 
           
Total
 
$
2,322,668
  
 
Page 9

NOTE 7 - PROPERTY AND EQUIPMENT

Property and equipment, net, consist of the following at September 30, 2007:
 
Office furniture and equipment
  
$
1,194,077
  
Computer equipment
    
7,408,681
 
Assets under capital leases
    
1,274,765
 
Building
    
3,264,491
 
Construction in process
    
283,623
 
Land
    
603,650
 
Autos
    
274,100
 
Improvements
    
467,557
 
Subtotal
    
14,770,944
 
Accumulated depreciation
    
(6,838,128
)
   
$
7,932,816
  

For the three months ended September 30, 2007 and 2006, fixed asset depreciation expense totaled $318,077 and $240,823, respectively. Of these amounts, $202,955 and $141,064, respectively, are reflected as part of cost of goods sold.

NOTE 8 - INTANGIBLE ASSETS:
 
Intangible assets consist of product licenses, renewals, enhancements, copyrights, trademarks, trade names, customer lists and goodwill. The Company evaluates intangible assets, goodwill and other long-lived assets for impairment, at least on an annual basis and whenever events or changes in circumstances indicate that the carrying value may not be recoverable from its estimated future cash flows. Recoverability of intangible assets, other long-lived assets and, goodwill is measured by comparing their net book value to the related projected undiscounted cash flows from these assets, considering a number of factors including past operating results, budgets, economic projections, market trends and product development cycles. If the net book value of the asset exceeds the related undiscounted cash flows, the asset is considered impaired, and a second test is performed to measure the amount of impairment loss. Potential impairment of goodwill has been evaluated in accordance with SFAS No. 142.
 
As part of intangible assets, the Company capitalizes certain computer software development costs in accordance with SFAS No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed.” Costs incurred internally to create a computer software product or to develop an enhancement to an existing product are charged to expense when incurred as research and development expense until technological feasibility for the respective product is established. Thereafter, all software development costs are capitalized and reported at the lower of unamortized cost or net realizable value. Capitalization ceases when the product or enhancement is available for general release to customers.
 
The Company makes on-going evaluations of the recoverability of its capitalized software projects by comparing the amount capitalized for each product to the estimated net realizable value of the product. If such evaluations indicate that the unamortized software development costs exceed the net realizable value, the Company writes off the amount by which the unamortized software development costs exceed net realizable value. Capitalized and purchased computer software development costs are being amortized ratably based on the projected revenue associated with the related software or on a straight-line basis over three years, whichever method results in a higher level of amortization.
 
Page 10

Product licenses and customer lists were comprised of the following as of September 30, 2007:
 
   
Product Licenses
 
Customer
Lists
 
Total
 
Intangible asset - June 30, 2007
 
$
14,511,208
  
$
5,451,094
  
$
19,962,302
  
Additions
   
839,459
   
-
   
839,459
 
Effect of translation adjustment
   
69,070
   
-
   
69,070
 
Accumulated amortization
   
(6,973,087
)
  
(3,197,350
)
  
(10,170,437
)
Net balance - September 30, 2007
 
$
8,446,650
  
$
2,253,744
  
$
10,700,394
  
                     
Amortization expense:
                   
Quarter ended September 30, 2007
 
$
231,816
  
$
173,661
  
$
405,477
  
Quarter ended September 30, 2006
 
$
236,678
  
$
173,661
  
$
410,339
  
 
The above amortization expense includes amounts in “Cost of Goods Sold” for capitalized software development costs of $55,952 and $60,814 for the quarters ended September 30, 2007 and 2006, respectively.

At September 30, 2007 and 2006, product licenses, renewals, enhancements, copyrights, trademarks, and tradenames, included unamortized software development and enhancement costs of $6,615,515and $3,097,446, respectively, as the development and enhancement is yet to be completed. Software development amortization expense was $55,952 and $60,814 for the quarters ended September 30, 2007 and 2006, respectively.
 
Amortization expense of intangible assets over the next five years is as follows:
 
           
 
  
FISCAL YEAR ENDING
 
 
  
Asset
 
9/30/08
  
9/30/09
  
9/30/10
  
9/30/11
  
9/30/12
  
TOTAL
 
Product Licences
 
$
927,263
  
$
798,366
  
$
412,480
  
$
144,159
  
$
60,473
  
$
2,342,741
  
Customer Lists
   
694,644
   
694,644
   
541,008
   
323,449
   
-
   
2,253,745
 
                                       
   
$
1,621,907
  
$
1,493,010
  
$
953,488
  
$
467,608
  
$
60,473
  
$
4,596,486
  
 
There were no impairments of the goodwill asset during the periods ended September 30, 2007 and 2006.
 
NOTE 9 - OTHER ASSETS - LONG TERM

PK Tech has outgrown its current facility and has looked to other sources to house its growing numbers of employees. During the year ended June 30, 2007, the owner of the adjacent land agreed to build an office to the Company’s specifications and the Company agreed to help pay for the development of the land in exchange for discounted rent for the next three years. As of September 30, 2007, the Company has paid a total of $498,544 in connection with this agreement. Of this amount, $231,024 has been classified as current, representing one-year of rental payments, with the balance of $267,520 shown as long-term assets.

In addition, PK Tech has begun work on building a new building behind the current one. The balance for advance for Capital-Work-In-Progress was $236,994.

Page 11

NOTE 10 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consist of the following at September 30, 2007:
 
Accounts Payable
 
$
864,217
  
Accrued Liabilities
   
1,948,579
 
Accrued Payroll
   
11,775
 
Accrued Payroll Taxes
   
71,668
 
Interest Payable
   
129,743
 
Deferred Revenues
   
45,020
 
Taxes Payable
   
110,623
 
           
Total
 
$
3,181,625
  
 
NOTE 11 - DEBTS
 
A) LOANS AND LEASES PAYABLE
 
Notes payable as of September 30, 2007 consist of the following:
 
          
 
  
Balance at
 
Current
 
Long-Term
 
Name
  
9/30/07
  
Maturities
  
Maturities
  
D&O Insurance
  
$
16,691
  
$
16,691
  
$
-
  
HSBC Loan
   
998,410
   
318,012
   
680,398
 
AMZ Loan
   
2,568,714
   
2,568,714
   
-
 
Subsidiary Capital Leases
   
524,176
   
242,020
   
282,156
 
                           
   
$
4,107,991
  
$
3,145,437
  
$
962,554
  
 
In January 2007, the Company renewed its directors’ and officers’ liability insurance for which the annual premium is $163,620. In January 2007, the Company arranged financing with AFCO Credit Corporation with a down payment of $16,784 with the balance to be paid in nine monthly installments of $16,784 each. The balance owing as of September 30, 2007 was $16,691.

In February 2005, the Company received a loan from Noon Group in the amount of $500,000. The note carries an interest rate of 9.75% per annum and is due in one year. The maturity date of the loan may be extended at the option of the holder for an additional year. In March, 2006, the note was extended for another year. During the fiscal year ended June 30, 2007, $48,750 of accrued interest was recorded for this loan. In April 2006, $51,250 of accrued interest was paid. Total unpaid accrued interest at June 30, 2006 was $65,044. In July 2007, the full principle and interest were paid.
 
On July 4, 2007, the Company entered into a debt agreement with AMZ, a brokerage firm, in Lahore, Pakistan for a total of $2,457,642. AMZ brokered the loan with 2 banks in Pakistan, Bank Islami Pakistan Ltd, and Security Leasing Corporation Ltd. The loan calls for 30% of the value of the loan to be collateralized by shares the Company owns in its Pakistan subsidiary, PK Tech, plus an additional 10% of the total share pledged to cover any extra margin due to the change in value of the pledged shares. A total of approximately 1,007,080 shares have been pledged as collateral. Finance costs associated with this debt totaled $39,445 and the Company received a net balance of $2,418,197. The loan has a maturity of three months and an interest rate 18.35%, consisting of the Karachi Interbank Offer Rate (“KIBOR”) of 9.09%, a base rate of 4.26%, and a mark-up rate of 5%. As of September 30, 2007, the accrued interest payable was $111,072 and was added to the principle of the note for a total owing of $2,568,714. Upon maturity on October 4, 2007, the note and accrued interest was rolled over for an additional three months.
 
In August 2007, the Company’s subsidiary, NetSol UK, entered into an agreement with HSBC Bank whereby the line of credit outstanding of £500,000 or approximately $1,023,850 was converted into a loan payable with a maturity of three years. The interest rate is 7.5% with monthly payments of £15,558 or approximately $31,858. The Parent has guaranteed payment on the loan should the subsidiary default on it.
 
CAPITAL LEASE OBLIGATIONS

The Company leases various fixed assets under capital lease arrangements expiring in various years through 2012. The assets and liabilities under capital leases are recorded at the lower of the present value of the minimum lease payments or the fair value of the asset. The assets are depreciated over the lesser of their related lease terms or their estimated useful lives and are secured by the assets themselves. Depreciation of assets under capital leases is included in depreciation expense for the three months ended September 30, 2007 and 2006.
 
Page 12

Following is the aggregate minimum future lease payments under capital leases as of September 30, 2007:
 
Minimum Lease Payments
      
Due FYE 9/30/08
  
$
293,050
  
Due FYE 9/30/09
    
250,516
 
Due FYE 9/30/10
    
66,810
 
Due FYE 9/30/11
    
347
 
Due FYE 9/30/12
    
-
 
 Total Minimum Lease Payments
    
610,723
 
Interest Expense relating to future periods
    
(86,547
)
Present Value of minimum lease payments
    
524,176
 
Less: Current portion
    
(242,020
)
Non-Current portion
  
$
282,156
  

Following is a summary of fixed assets held under capital leases as of September 30, 2007:
 
Computer Equipment and Software
  
$
671,551
  
Furniture and Fixtures
    
51,100
 
Vehicles
    
445,763
 
Building Equipment
    
106,351
 
            
Total
    
1,274,765
 
Less: Accumulated Depreciation
    
(568,749
)
Net
  
$
706,016
  

B) BANK LOAN
 
The Company’s Pakistan subsidiary, NetSol Technologies (Private) Ltd., has one loan with a bank, secured by the Company’s assets. The note consists of the following as of September 30, 2007:
 
TYPE OF
  
MATURITY
  
INTEREST
  
BALANCE
 
LOAN
  
DATE
  
RATE
  
USD
 
               
Export Refinance
    
Every 6 months
    
8%
$
1,979,218
  
                       
Total
              
$
1,979,218
  
 
C) OTHER PAYABLE - ACQUISITION

McCue Systems

As of September 30, 2007, Other Payable - Acquisition consists of total payments of $83,399 due to the shareholders of McCue Systems.

On June 30, 2006, the acquisition with McCue Systems, Inc. (“McCue”) closed (see Note 17). As a result, the first installment consisting of $2,117,864 cash and 958,213 shares of the Company’s restricted common stock was recorded. The cash portion was shown as “Other Payable - Acquisition” and the stock was shown as “Shares to Be Issued” as of June 30, 2006. During the fiscal year ended June 30, 2007, $2,059,413 of the cash portion of was paid to the McCue shareholders and in July 2006 the stock was issued. In June 2007, the second installment on the acquisition consisting of $903,955 in cash and 408,988 shares of the Company’s restricted common stock became due and was recorded. The cash portion was shown as “Other Payable - Acquisition” and the stock portion was issued on June 27, 2007. The balance at June 30, 2007 was $962,406. During the three months ended September 30, 2007, $879,007 of the cash was paid, leaving a balance of $83,399 to be paid which represents the few remaining McCue shareholders that have not been located as of this date.
 
Page 13

DUE TO OFFICERS

The officers of the Company from time to time loan funds to the Company.

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

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

In addition, the officers of the Company have advanced $34,328 as working capital. The balance due to officers as of September 30, 2007 was $184,328.

NOTE 12 - DIVIDEND PAYABLE
 
PREFERRED SHAREHOLDERS
 
The Company has issued Series A 7% Cumulative Convertible Preferred Stock under which dividends are payable (see Note 13). The dividend is to be paid quarterly, either in cash or stock at the Company’s election. The dividend for the three months ended September 30, 2007 totaled $71,157. This amount is payable and is reflected in these consolidated financial statements. This amount was paid with the issuance of 25,168 shares of the Company’s common stock on October 5, 2007.

SUBSIDIARY DIVIDEND

On September 26, 2007, the Company’s joint-venture subsidiary NetSol-TiG declared a cash dividend of 100,000,000 Pakistan Rupees (“pkr”) or approximately $1,651,522. Of this amount, the Company is due 50,520,000 pkr or approximately $834,349. The amount attributable to the minority holders is approximately $817,173 and is reflected on these unaudited consolidated financial statements. As of September 30, 2007, $744,380 of the dividend had been paid to the Company and the balance payable to the minority holders was $816,098.

NOTE 13 - STOCKHOLDERS’ EQUITY:
 
EQUITY TRANSACTIONS
 
PREFERRED STOCK
 
On October 30, 2006, the convertible notes payable (see note 12) were converted into 5,500 shares of Series A 7% Cumulative Convertible Preferred Stock. The preferred shares are valued at $1,000 per share or $5,500,000. The preferred shares are convertible into common stock at a rate of $1.65 per common share. The total shares of common stock that can be issued under these Series A Preferred Stock is 3,333,333. On January 19, 2007, the Form S-3 statement to register the underlying common stock and related dividends became effective. As of June 30, 2007, the balance of the preferred shares was 4,130 shares. During the three months ended September 30, 2007, 330 shares of preferred stock were converted into 200,000 shares of common stock valued at $330,000.

During the three months ended September 30, 2007, the Company issued 48,965 shares of the Company’s common stock valued at $77,640 as payment of the dividends due for the quarter ended June 30, 2007.

The Series A Convertible Preferred Stock carries certain liquidation and preferential rights. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, before any distribution of assets of the Corporation can be made to or set apart for the holders of Common Stock, the holders of Convertible Preferred Stock shall be entitled to receive payment out of such assets of the Corporation in an amount equal to $1,000 per share of Convertible Preferred Stock then outstanding, plus any accumulated and unpaid dividends thereon (whether or not earned or declared) on the Convertible Preferred Stock. In addition, the Convertible Preferred Stock ranks senior to all classes and series of Common Stock and existing preferred stock and to each other class or series of preferred stock established hereafter by the Board of Directors of the Corporation, with respect to dividend rights, redemption rights, rights on liquidation, winding-up and dissolution and all other rights in any manner, whether voluntary or involuntary.
 
Page 14

Business Combinations
 
McCue Systems, Inc.

In June 2006, the Company completed the acquisition of McCue Systems, Inc. A total of 37,731 shares valued at $64,612 are shown in “Shares to Be Issued” in these consolidated financial statements representing McCue Systems shareholders that have not been located as of this date.
 
Private Placements
 
In June 2007, the Company sold 757,576 shares of the Company’s common stock to two institutional investors for $1,250,000. The Company received $1,000,000 of this by June 30, 2007 and the remaining $250,000 cash due was received on July 2, 2007. The shares were issued in July 2007.

Options and Warrants Exercised

During the quarter ended September 30, 2007, the Company issued 20,757 shares of its common stock for the exercise of options valued at $34,999.

During the quarter ended September 30, 2007, the Company issued 450,000 shares of its common stock for the exercise of warrants valued at $868,500.

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, 2007, $250,000 was collected and no new receivables were issued. The balance at September 30, 2007 was $751,407.

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 September 30, 2007:
 
           
Aggregated
  
       
Exercise
  
Intrinsic
  
   
# shares
 
Price
  
Value
  
Options:
              
Outstanding and exercisable, June 30, 2007
    
7,102,363
 
 
$0.75 to $5.00
  
$
129,521
  
Granted
    
20,000
 
 
$1.60
        
Exercised
    
(20,757
)
 
$1.65 - $1.70
        
Expired
    
(10,000
)
 
$0.75
          
Outstanding and exercisable, September 30, 2007
    
7,091,606
 
 
$0.75 to $5.00
  
$
3,873,575
  
                     
Warrants:
                    
Outstanding and exercisable, June 30, 2007
    
3,002,725
 
 
$1.75 to $5.00
  
$
58,091
  
Granted
    
-
             
Exercised
    
(450,000
)
 
$1.93
        
Expired
    
-
               
Outstanding and exercisable, September 30, 2007
    
2,552,725
 
 
$1.65 to $5.00
  
$
2,232,026
  
 
Page 15
 
Following is a summary of the status of options and warrants outstanding at September 30, 2007:
 
     
Exercise Price
  
Number Outstanding
and Exercisable
 
Weighted Average
Remaining Contractual Life
 
Weighted Average 
Exercise Price 
OPTIONS:
            
$0.01 - $0.99
    
29,000
   
4.32
 
0.75
$1.00 - $1.99
    
2,942,606
   
7.75
 
1.83
$2.00 - $2.99
    
3,270,000
   
7.51
 
2.66
$3.00 - $5.00
    
830,000
   
6.52
 
4.27
                   
    
Totals
    
7,071,606
   
7.48
 
2.50
               
 
WARRANTS:
              
 
$1.00 - $1.99
    
1,874,622
   
3.87
 
1.83
$2.00 - $2.99
    
120,000
   
1.10
 
2.30
$3.00 - $5.00
    
558,103
   
1.62
 
3.46
                   
    
Totals
    
2,552,725
   
3.25
 
2.21
 
Options:
 
There were no options granted or vested during the quarter ended September 30, 2006.
 
During the quarter ended September 30, 2007, 20,000 options were granted to two officers with an exercise price of $1.60 per share and an expiration date of ten years, vesting immediately. Using the Black-Scholes method to value the options, the Company recorded $24,320 in compensation expense for these options in the accompanying consolidated financial statements.

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

Risk-free interest rate
    
4.5
%
Expected life
    
10 years
  
Expected volatility
    
65
%
 
Warrants:

There were no warrants issued or granted during the quarter ended September 30, 2007 and 2006.

 NOTE 14 - SEGMENT INFORMATION

The Company has identified three global regions or segments for its products and services; North America, Europe, and Asia-Pacific. Our reportable segments are business units located in different global regions. Each business unit provides similar products and services; license fees for leasing and asset-based software, related maintenance fees, and implementation and IT consulting services. Separate management of each segment is required because each business unit is subject to different operational issues and strategies due to their particular regional location. We account for intercompany sales and expenses as if the sales or expenses were to third parties and eliminate them in the consolidation. The following table presents a summary of operating information and certain balance sheet information for the three months ended September 30:
 
Page 16
 
   
2007
  
2006
  
Revenues from unaffiliated customers:
         
North America
 
$
1,073,611
  
$
1,303,026
  
Europe
   
1,664,916
   
1,488,335
 
Asia - Pacific
   
5,914,710
   
3,071,199
 
 Consolidated
 
$
8,653,237
  
$
5,862,560
  
               
Operating income (loss):
             
Corporate headquarters
 
$
(840,877
)
$
(816,986
)
North America
   
59,923
   
80,477
 
Europe
   
251,996
   
(136,113
)
Asia - Pacific
   
2,748,659
   
713,415
 
 Consolidated
 
$
2,219,701
  
$
(159,207
)
               
Net income (loss):
             
Corporate headquarters
 
$
(990,184
)
$
(1,736,489
)
North America
   
60,635
   
84,325
 
Europe
   
265,388
   
(199,947
)
Asia - Pacific
   
2,456,285
   
556,147
 
 Consolidated
 
$
1,792,124
  
$
(1,295,964
)
               
Identifiable assets:
             
Corporate headquarters
 
$
14,090,706
  
$
12,269,645
  
North America
   
1,791,231
   
2,093,910
 
Europe
   
5,010,230
   
5,026,237
 
Asia - Pacific
   
32,014,633
   
19,626,210
 
 Consolidated
 
$
52,906,800
  
$
39,016,002
  
               
Depreciation and amortization:
             
Corporate headquarters
 
$
350,347
  
$
352,891
  
North America
   
36,386
   
32,074
 
Europe
   
64,357
   
57,691
 
Asia - Pacific
   
272,464
   
199,815
  
 Consolidated
 
$
723,554
  
$
642,471
  
               
Capital expenditures:
             
Corporate headquarters
 
$
4,189
  
$
-
  
North America
   
50,033
   
6,795
 
Europe
   
19,079
   
31,840
 
Asia - Pacific
   
672,600
   
199,688
 
 Consolidated
 
$
745,901
  
$
238,323
  
 
Net revenues by our various products and services provided are as follows:
   
For the Three Months  
  
   
Ended September 30,
  
 
 
2007
  
2006
  
               
Licensing Fees
  
$
 1,903,552  
$
 1,578,412  
Maintenance Fees
     1,583,420     1,294,964  
Services
     5,166,265     2,989,184  
Total
  
$
 8,653,237     5,862,560  
 
Page 17
 
NOTE 15 - MINORITY INTEREST IN SUBSIDIARY
 
The Company had minority interests in several of its subsidiaries. The balance of the minority interest as of September 30, 2007 was as follows:
 
            
SUBSIDIARY
  
MIN INT %
  
MIN INT BALANCE AT 9/30/07
 
           
PK Tech
    
37.21
%
$
2,660,282
  
NetSol-TiG
    
49.90
%
  
903,862
 
Connect
    
49.90
%
  
263,410
 
Omni
    
49.90
%
  
-
 
                  
Total
        
$
3,827,554
  

NetSol Technologies, Limited (“PK Tech”)

In August 2005, the Company’s wholly-owned subsidiary, NetSol Technologies (Pvt), Ltd. (“PK Tech”) became listed on the Karachi Stock Exchange in Pakistan. The Initial Public Offering (“IPO”) sold 9,982,000 shares of the subsidiary to the public thus reducing the Company’s ownership by 28.13%. During the three months ended September 30, 2007, the Company was notified by an affiliate party that they had sold their shares; therefore, the adjusted minority ownership was increased to 37.21%. Net proceeds of the IPO were $4,890,224. As a result of the IPO, the Company is required to show the minority interest of the subsidiary on the accompanying consolidated financial statements.

For the three months ended September 30, 2007 and 2006, the subsidiary had net income of $2,009,037 and $670,781, of which $784,070 and $188,691, respectively, was recorded against the minority interest. The balance of the minority interest at September 30, 2007 was $2,660,282.

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

NetSol-TiG:

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

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

For the three months ended September 30, 2007 and 2006, the subsidiary had net income of $701,829 and $193,563, of which $(509,986), after considering cash dividends of $1,651,522, and $96,588 was recorded against the minority interest, respectively. The balance of the minority interest at September 30, 2007 was $903,862.

On September 26, 2007, the subsidiary’s board of directors authorized a cash dividend of 100,000,000 Pakistan Rupees (“pkr”) or approximately $1,651,522. Of this amount, the Company is due 50,520,000 pkr or approximately $834,349. The net value to the minority holders is approximately $817,173 and is reflected on these unaudited consolidated financial statements.

NetSol Connect:

In August 2003, the Company entered into an agreement with United Kingdom based Akhter Group PLC (“Akhter”). Under the terms of the agreement, Akhter Group acquired 49.9 percent of the Company’s subsidiary; Pakistan based NetSol Connect PVT Ltd. (“Connect”), an Internet service provider (“ISP”), in Pakistan through the issuance of additional Connect shares. As part of this Agreement, Connect changed its name to NetSol Akhter. The partnership with Akhter Computers is designed to rollout connectivity and wireless services to the Pakistani national market.
 
Page 18

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

For the three months ended September 30, 2007 and 2006, the subsidiary had net income of $1,674 and net loss of $68,563, respectively, of which $835 and ($34,213) respectively, was recorded against the minority interest. The balance of the minority interest at September 30, 2007 was $263,410.

NetSol Omni

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

For the three months ended September 30, 2007 and 2006, the subsidiary had a net loss of $10,175 and $7,600, of which $0 and ($3,792) was recorded against the minority interest. The balance of the minority interest at September 30, 2007 was $0.

NOTE 16 - CONVERTIBLE NOTE PAYABLE

On June 15, 2006, the Company entered into an agreement with 5 accredited investors whereby the Company issued 5 convertible notes payable for an aggregate principal value of $5,500,000. These notes bear interest at the rate of 12% per annum and are due in full one year from the issuance date or on June 15, 2007 (the “Financing”).  The Convertible Notes may immediately convert into shares of common stock of the Company at the conversion value (initially set at one share per $1.65 of principal dollar) to the extent that such conversion does not violate Nasdaq Market Place rules.  Due to the limitation rule, none of the note was convertible as of September 30, 2006. Upon the approval of the stockholders, to the extent not already converted into common shares, the Convertible Notes Payable would be immediately converted into shares of Preferred Stock. On October 18, 2006, the shareholders approved the shares and on October 30, 2006 the notes were converted into 5,500 shares of Preferred Stock. During the quarter ended September 30, 2006, $167,489 of interest was accrued. As of September 30, 2006, a total of $194,989 in accrued interest had been recorded on the notes and was added to the principle of the notes. During the fiscal year ended June 30, 2007, $251,167 of interest was accrued. On December 13, 2006, the note holders agreed to accept shares of the Company’s common stock in payment of the interest owed to them. In addition, the note holders required the Company to issue a total of 60,000 shares of the Company’s common stock valued at $88,201 as a premium to receive payment in shares rather than cash. This amount is included in “interest expense” in the accompanying consolidated financial statements.

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

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

As part of the agreement, the investors received warrants to purchase 1,666,668 shares of the Company’s common stock. The warrants have an exercise price of $2.00 and expire in five years. These warrants were valued using the Black-Scholes model at $2,108,335 and have been capitalized as a contra-account against the note balance in these consolidated financial statements. These costs are being amortized over the life of the loan or a pro-rata basis as the loan is converted into common or preferred stock. As the loans were converted on October 30, 2006, the balance of $2,022,363 was amortized and recorded as “amortization of debt discount” in the accompanying consolidated financial statements.
 
Page 19

The Black-Scholes pricing model used the following assumptions:

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

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

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

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

The Black-Scholes pricing model used the following assumptions:

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

NOTE 17 - ACQUISITION OF McCUE SYSTEMS

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

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

Page 20

NOTE 18 - SUBSEQUENT EVENTS

In October 2007, the preferred stockholders converted 1,630 preferred shares into 987,877 of the Company’s common stock valued at $1,629,999. In addition, $10,751 in accrued dividends on the preferred shares converted was paid with 6,516 shares of the Company’s common stock.

In October 2007, the Company issued 453,781 shares of the Company’s common stock valued at $781,020 for the exercise of options. In addition, 558,545 shares of the Company’s common stock valued at $1,050,144 for the exercise of warrants. Of this amount 99,453 shares valued at $164,097 were issued under cashless exercise options in the warrant agreement.

In October 2007, two investors exercised the green-shoe option in the private placement agreement signed in June 2007 whereby they could purchase the same number of shares at the same price until December 31, 2007. As a result, 757,576 shares of the Company’s common stock were sold for $1,250,000.
 
Page 21

Item 2. Management's Discussion and Analysis Or Plan Of Operation
 
The following discussion is intended to assist in an understanding of the Company's financial position and results of operations for the quarter ending September 30, 2007.

Forward-Looking Information.

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

INTRODUCTION

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

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

Information technology services are valuable only if they fulfill the business strategy and project objectives set forth by the customer. NetSol’s expert consultants have the technical knowledge and business experience to ensure the optimization of the development process in alignment with basic business principles. The Company offers a broad array of professional services to clients in the global commercial markets and specializes in the application of advanced and complex IT enterprise solutions to achieve its customers' strategic objectives. Its service offerings include IT Consulting & Services; NetSol Defense Division; Business Intelligence, Information Security, Outsourcing Services and Software Process Improvement Consulting; maintenance and support of existing systems; and, project management.
In addition to services, our offerings include our flagship product, LeaseSoft. LeaseSoft, a robust suite of four software applications, is an end-to-end solution for the lease and finance industry covering the complete leasing and finance cycle starting from quotation origination through end of contract. The four software applications under LeaseSoft have been designed and developed for a highly flexible setting and are capable of dealing with multinational, multi-company, multi-asset, multi-lingual, multi-distributor and multi-manufacturer environments. Each application is a complete system in itself and can be used independently to address specific sub-domains of the leasing/financing cycle. NetSol recently added LeaseSoft Fleet Management System (FMS). The Company has already signed an agreement for FMS with a major automotive company in the Asia Pacific region.
 
Page 22
 
LeaseSoft is a result of more than eight years of effort resulting in over 60 modules grouped in four comprehensive applications. These four applications are complete systems in themselves and can be used independently to exhaustively address specific sub-domains of the leasing/financing cycle. When used together, they fully automate the entire leasing / financing cycle.
 
Beyond LeaseSoft, our product offerings include LeasePak. LeasePak provides the leasing technology industry with the development of Web-enabled and Web-based tools to deliver superior customer service, reduce operating costs, streamline the lease management lifecycle, and support collaboration with origination channel and asset partners. LeasePak can be configured to run on HP-UX, SUN/Solaris or Linux, as well as for Oracle and Sybase users. And for scalability, NetSol McCue offers the LeasePak Bronze, Silver and Gold Editions for systems and portfolios of virtually all sizes and complexities. These solutions provide the equipment and vehicle leasing infrastructure at leading Fortune 500 banks and manufacturers, as well as for some of the industry’s leading independent lessors.

New product offerings and services include: inBanking, which provides full process automation and decision support in the front, middle and back offices of treasury and capital markets operations; LeaseSoft Portals and Modules through our European operations; LeasePak 6.0a of our LeasePak product suite; and, NetSol Technology Institute, our specialized career and technology program in Pakistan.

The Company is undertaking a consolidation of its operating units, placing all service and product operations under the direct control of its center of excellence, in Lahore, Pakistan. This consolidation enables the Company to coordinate and streamline product, service and marketing while taking further advantage of the cost arbitrage offered by our highly trained, highly productive, Pakistani resources. This consolidation follows the successful integration of the operations acquired in the United Kingdom and Burlingame, California and should facilitate the use of these regional offices as platforms for launching an expanding services offering, relying on the experience and resources in Pakistan and our product offerings in North America and Europe.
 
While the company will no longer be divided into groups and regions, the Company will continue to maintain regional offices in Burlingame and Calabasas, California for North America; in Horsham, the United Kingdom, for Europe and; our flagship operations in Lahore, Pakistan for Asia Pacific. The Company will continue to maintain country and/or services or products specific offices in Beijing, China; Adelaide, Australia; Bangkok, Thailand; and, additional offices in Pakistan.

PLAN OF OPERATIONS

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

 
·
Fully integrate management, customers, and regional products of the regional offices.
 
·
Launch IT services model in the US by leveraging the offshore low-cost development capabilities.
 
·
Embark on management and products reorganization and restructuring in NetSol US and UK operations.
 
·
Introduce and market two LeaseSoft modules: WSF and CAPS in the US market.
 
·
Expand product portfolio by enhancing current products and new releases to cater to wider global markets.
 
·
Enhance software design, engineering and service delivery capabilities by increasing investment in training.
 
·
Continue to invest in research and development in an amount between 7-10% of yearly budgets in financial, banking and various other domains within NetSol’s core competencies.
 
·
Recruit new sales personnel in US to grow the penetration in North American markets.
 
·
Aggressively penetrate the booming Chinese market and continue to exploit NetSol’s presence in China.
 
·
Migrate up to 50% of development costs of US and UK operations to Lahore.
 
·
Increase Capex, to enhance communications and development infrastructure. Roll out a second phase of construction of a technology campus in Lahore to respond to a growth of new orders and customers.
 
·
Market aggressively on a regional basis the Company’s tri-product solutions by broader marketing efforts for LeaseSoft in APAC and untapped markets; aggressively grow LeasePak solutions in North America; and, further establish NetSol-CQ Enterprise solution in the European markets.
 
Page 23
 
Top Line Growth through Investment in organic marketing activities. NetSol marketing activities will continue to:

 
·
Expand the marketing and distributions of regional products solutions in four continents: North America, Europe, Asia Pacific and Africa.
 
·
Expand relationships with all 40 customers in the US, Europe and Asia Pacific by offering enhanced product offerings.
 
·
Product positioning through alliances and partnership.
 
·
Capitalize on NetSol, McCue and NetSol-CQ affiliations with ELA (Equipment Leasing Association of N.A.) and European leasing forums.
 
·
Become a leading IT company in APAC in asset-based applications and capitalize on the surge in demand of NetSol products.
 
·
Joint Ventures and new alliances.
 
·
Be a dominant IT solutions provider in Pakistan amidst of explosive growth in the economy and automation in private and public sectors.
 
·
Hold frequent users group meetings in North America and Asia Pacific and customer road shows to attract bigger value new contracts.

Funding and Investor Relations:
 
 
·
Retained a new IR and communications firm in New York to position NetSol as a strong IT company with unlimited growth and upside outlook.
 
·
The increased valuation of NetSol stock price in the US resulted in investors and employees exercising options and warrants.
 
·
Adequately capitalize NetSol to face challenges and opportunities presented through the most economical means and vehicles creating further stability and sustainability.
 
·
Focus each division level to achieve optimum profitability and efficiencies to reduce the need for new external capital other than to fund major new initiatives.
 
·
Aggressive marketing campaign on Wall Street to get the story of NetSol known to retail, institutions, micro cap funds and analysts. Increased activities to present NetSol in various investor forums aimed at analysts and micro cap funds.
 
·
Continuing to efficiently and prudently manage cash flow and budgets. Subsidiaries will contribute to support the headquarters and corporate overheads..
 
·
Make every effort to enhance NetSol’s market capitalization in the US. At least two research analysts upgraded the target price from $3 to $4.
 
·
Reorganize the divisions globally for seamless integration to achieve better productivity, efficiency and leverage offshore capabilities to enhance margins.
 
Improving the Bottom Line:

 
·
Grow top line; enhance gross profit margins to 65% by leveraging the low-cost development facility in Lahore.
 
·
Generate much higher revenues per developer and service group, enhance productivity and lower cost per employee overall.
 
·
Consolidate subsidiaries and integrate and combine entities to reduce overheads and employ economies of scale.
 
·
Continue to review costs at every level to consolidate and enhance operating efficiencies.
 
·
Grow process automation and leverage the best practices of CMMi level 5.
 
·
More local empowerment and profit and loss ownership in each country office. Institute performance based compensation structure through three areas that includes both top-line and bottom-line targets.
 
·
Cost efficient management of every operation and continue further consolidation to improve bottom line.
 
·
Initiated steps to consolidate some of the new lines of services businesses to improve bottom line.

Management continues to be focused on building its delivery capability and has achieved key milestones in that respect. Key projects are being delivered on time and on budget, quality initiatives are succeeding, especially in maturing internal processes. Management believes that further leverage was provided by the development ‘engine’ of NetSol, which became CMMi Level 2 in early 2002. In a quest to continuously improve its quality standards, NetSol reached CMMi Level 5 on August 11,2006. The Company is expecting a growing demand for its products and alliances from blue chip companies worldwide as a result. NetSol plans to further enhance its capabilities by creating similar development engines in other Southeast Asian countries with CMMi levels quality standards. This would make NetSol much more competitive in the industry and provide the capabilities for development in multiple locations. Increases in the number of development locations with these CMMi levels of quality standards will provide customers with options and flexibility based on costs and broader access to skills and technology. NetSol PK has already launched implementation of ISO 27001, a global standard and a set of best practices for Information Security Management.
 
Page 24

MATERIAL TRENDS AFFECTING NETSOL

NetSol has identified the following material trends affecting NetSol

Positive trends:

 
·
Outsourcing of services and software development is growing worldwide.
 
·
The leasing and finance industry in North America has increased $260 billion and about the same size for the rest of world.
 
·
Recent outpouring of very positive US press and research coverage by major banks on NetSol’s growing image and name.
 
·
The influx of US companies and investors in addition to investors from all other parts of world to Pakistan. The US ranked to be the largest investors in Pakistan economy in current fiscal year 2007.
 
·
The levy of Indian IT sector excise tax of 35% (NASSCOM) on software exports is very positive for NetSol. In Pakistan there is a 15 year tax holiday on IT exports of services. There are 10 more years remaining on this tax incentive.
 
·
Cost arbitrage, labor costs still very competitive and attractive when compared with India. Pakistan is significantly under priced for IT services and programmers as compared to India.
 
·
Pakistan is one of the fastest growing IT destinations from emerging and new markets.
 
·
Chinese market is burgeoning and wide open for NetSol’s ‘niche’ products and services. NetSol is gaining a strong foothold in this market.
 
·
Only a handful of IT solutions providers in the world with global distribution network, complete end-to-end solution, and presence in the world’s key and strategic markets.
 
·
One of the few global IT companies in the leasing and finance domain with gold standard CMMi level 5 accreditation.
 
·
NetSol and NetSol PK are both listed in one of the most visible stock indexes in their respective markets.
 
·
NetSol majority owned subsidiary NetSol PK listed on KSE (Karachi Stock Exchange) has traded at record price of Pkr. 160 in October 2007 with bonus shares of 37% combined in last two quarters. The IPO price was Pkr. 25 in August 2005.
 
·
Overall economic expansion worldwide and explosive growth in the emerging markets specifically.
 
·
Continuous improvement of US and Indian relationships with Pakistan.
 
·
Economic turnaround in Pakistan including: a steady increase in gross domestic product; much stronger dollar reserves, which is at an all time high of over $15 billion; stabilizing reforms of government and financial institutions; improved credit ratings in the western markets, and elimination of corruption at the highest level.
 
·
Robust growth in outsourcing globally and investment of major US and European corporations in the developing countries. As demonstrated by the ‘World is Flat’ by Tom Friedman, there is a need for western companies to expand their businesses in emerging markets. Both Pakistan and China are in the forefront.
 
·
The imposition of a state of emergency in Pakistan may be perceived as assuring order and restoring confidence and creating certainty.

Negative trends:
.
 
·
The recent imposition of emergency rule in Pakistan may affect or delay some of the major new initiatives and cause reduced travel of foreigners to Pakistan.
 
·
The disturbance in Middle East and rising terrorist activities post 9/11 worldwide have resulted in issuance of travel advisory in some of the most opportunistic markets. In addition, travel restrictions and new immigration laws provide delays and limitations on business travel.
 
·
Negative perception and image created by extremism and terrorism in the South Asian region.
 
·
Instability of oil prices and uncertainty about the geo-political landscape in the Middle East.
 
·
Continuous impact of Iraq war on US and global economy.
 
Page 25

CRITICAL ACCOUNTING POLICIES

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

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

INCOME TAXES

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

Page 26

CHANGES IN FINANCIAL CONDITION

Quarter Ended September 30, 2007 as compared to the Quarter Ended September 30, 2006:

Net revenues and income for the quarter ended September 30, 2007 and 2006 are broken out among the subsidiaries as follows:
 
   
2007
  
2006
  
   
Revenue
  
 %
  
Net Income
 
Revenue
  
% 
  
Net Income
  
Corporate headquarters
 
$
-
    
0.00
%
$
(990,184
)
$
-
    
0.00
%
$
(1,736,489
)
                                       
North America:
                                     
Netsol McCue
   
1,073,611
   
12.41
%
  
60,635
   
1,303,026
   
22.23
%
  
84,325
 
     
1,073,611
   
12.41
%
  
60,635
   
1,303,026
   
22.23
%
  
84,325
 
                                       
Europe:
                                     
Netsol UK
   
129,725
   
1.50
%
  
3,985
   
2,476
   
0.04
%
  
(288,890
)
Netsol-CQ
   
1,535,191
   
17.74
%
  
261,403
   
1,485,859
   
25.34
%
  
88,943
 
     
1,664,916
   
19.24
%
  
265,388
   
1,488,335
   
25.39
%
  
(199,947
)
                                       
Asia-Pacific:
                                     
Netsol Tech
   
4,516,008
   
52.19
%
  
1,224,967
   
2,256,819
   
38.50
%
  
482,091
 
Netsol Connect
   
206,863
   
2.39
%
  
839
   
206,753
   
3.53
%
  
(34,350
)
Netsol-TiG
   
1,052,471
   
12.16
%
  
1,211,815
   
505,334
   
8.62
%
  
96,975
 
Netsol-Omni
   
20,418
   
0.24
%
  
(10,175
)
  
18,145
   
0.31
%
  
(3,808
)
Netsol-Abraxas Australia
 
118,950
   
1.37
%
  
28,839
   
84,148
   
1.44
%
  
15,239
 
     
5,914,710
   
68.35
%
  
2,456,285
   
3,071,199
   
52.39
%
  
556,147
 
                                       
Total Net Revenues
 
$
8,653,237
    
100.00
%
$
1,792,124
  
$
5,862,560
    
100.00
%
$
(1,295,964
)
 
Page 27

The following table sets forth the items in our unaudited consolidated statement of operations for the three months ended September 30, 2007 and 2006 as a percentage of revenues.
 
   
For the Three Months
     
   
Ended September 30,
     
   
2007
     
2006
     
                   
Revenues:
    
% 
    
% 
  
Licence fees
  
$
1,903,552
    
22.00
%
$
1,578,412
    
26.92
%
Maintenance fees
    
1,583,420
   
18.30
%
  
1,294,964
   
22.09
%
Services
    
5,166,265
   
59.70
%
  
2,989,184
   
50.99
%
 Total revenues
    
8,653,237
   
100.00
%
  
5,862,560
   
100.00
%
Cost of revenues:
                          
Salaries and consultants
   
2,321,030
   
26.82
%
  
1,932,073
   
32.96
%
Travel and entertainment
   
266,828
   
3.08
%
  
315,683
   
5.38
%
Communication
   
32,795
   
0.38
%
  
42,065
   
0.72
%
Depreciation and amortization
   
258,907
   
2.99
%
  
193,097
   
3.29
%
Other
   
507,895
   
5.87
%
  
426,620
   
7.28
%
 Total cost of sales
    
3,387,455
   
39.15
%
  
2,909,538
   
49.63
%
Gross profit
    
5,265,782
   
60.85
%
  
2,953,022
   
50.37
%
Operating expenses:
                          
Selling and marketing
    
832,493
   
9.62
%
  
518,044
   
8.84
%
Depreciation and amortization
    
464,647
   
5.37
%
  
449,374
   
7.67
%
Bad debt expense
    
2,439
   
0.03
%
  
65,808
   
1.12
%
Salaries and wages
    
907,879
   
10.49
%
  
998,391
   
17.03
%
Professional services, including non-cash compensation
   
160,050
   
1.85
%
  
260,870
   
4.45
%
General and adminstrative
    
678,573
   
7.84
%
  
820,086
   
13.99
%
 Total operating expenses
    
3,046,081
   
35.20
%
  
3,112,573
   
53.09
%
Income (loss) from operations
    
2,219,701
   
25.65
%
  
(159,551
)
  
-2.72
%
Other income and (expenses)
                          
Loss on sale of assets
    
(32,223
)
  
-0.37
%
  
(12,280
)
  
-0.21
%
Amortization of debt discount and capitalized cost of debt
    
-
   
0.00
%
  
(734,659
)
  
-12.53
%
Interest expense
    
(233,804
)
  
-2.70
%
  
(247,908
)
  
-4.23
%
Interest income
    
33,863
   
0.39
%
  
90,746
   
1.55
%
Other income and (expenses)
    
111,947
   
1.29
%
  
67,785
   
1.16
%
 Total other expenses
    
(120,217
)
  
-1.39
%
  
(836,316
)
  
-14.27
%
Net income (loss) before minority interest in subsidiary
    
2,099,484
   
24.26
%
  
(995,867
)
  
-16.99
%
Minority interest in subsidiary
    
(274,919
)
  
-3.18
%
  
(247,273
)
  
-4.22
%
Income taxes
    
(32,441
)
  
-0.37
%
  
(52,824
)
  
-0.90
%
Net income (loss)
   
1,792,124
   
20.71
%
  
(1,295,964
)
  
-22.11
%
Dividend required for preferred stockholders
    
(71,157
)
  
-0.82
%
  
-
   
0.00
%
Subsidiary dividend (minority holders portion)
    
(817,173
)
  
-9.44
%
  
-
   
0.00
%
Net income (loss) applicable to common shareholders
    
903,794
   
10.44
%
  
(1,295,964
)
  
-22.11
%

Net revenues for the quarter ended September 30, 2007 were $8,653,237 as compared to $5,862,560 for the quarter ended September 30, 2006. This reflects an increase of $2,790,677 or 47.6% in the current quarter as compared to the quarter ended September 30, 2006. Revenue from services, which includes consulting and implementation, increased 73% from $2,989,184 to $5,166,265. License and maintenance revenues both grew a healthy 20% over the comparable quarter in fiscal 2007. The increase is attributable mostly to growth in services business, several new license sales of LeaseSoft in China, growing outsourcing business of NetSol-TIG (JV) and additional maintenance work. In addition, several new business divisions have been formed in Lahore and are now producing revenues. The Company has experienced solid and consistent demand for IT services in the domestic sectors of Pakistan. The Company had hoped to close at least two major service contracts in Pakistan (with an approximate value of $3 million). This is now expected to occur in within the next two quarters. NetSol in Pakistan has been pre-qualified to participate in several public sector projects. The most significant is the World Bank funded Land Record Management Information Systems or LRMIS. This project has a World Bank grant of $300 million in Pakistan and NetSol was given a pilot project in the province of Punjab early 2007 and we anticipate to win the key projects in this area in next few quarters.
 
Page 28

The activities for NetSol new license sales - LeaseSoft is increasingly on the rise. The current pipeline boasts over 20 plus captive auto manufacturers globally at an advance stage of closing or decision making.

NetSol made a significant move by acquiring 100% of a US based software company McCue Systems Inc., (now “NetSol McCue”) in June 2006. The acquisition of NetSol McCue has provided the Company with a very strong and seasoned management team with a mature, profitable, business which contributes strongly to our top and bottom lines. During the current quarter five of our existing customers signed contracts to additional user licenses and training. The integration of a dedicated offshore team into NetSol McCue Development Department is continuing, with ongoing projects and management processes in place. This effort has resulted in a balanced use of onshore and offshore resources, with the Development Team now staffed 45% onshore and 55% offshore. Offshore resources are now making significant contribution throughout the development lifecycle.

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

During the quarter ended September 30, 2007, NetSol PK was awarded the contract for the implementation of the Motor Vehicle Registration System (MVRS) for all the 34 districts of the province of Punjab, Pakistan. Within this quarter, implementation has been successfully completed in 16 districts of the Province. In addition, a major automotive captive in Australia signed a contract to license LeaseSoft’s Retail Finance Solution, which comprises of Credit Application Processing System (CAP) and Contract Management System (CMS), as well as its Wholesale solution, Wholesale Finance System (WFS). In addition to these modules, NetSol Technologies will provide software customization, system implementation, and ongoing maintenance and support services to this client.

Our joint-venture, NetSol-TiG continues to grow. During the current quarter ten new resources were added for a total of 120 dedicated to the joint-venture projects. In addition, two new projects in the United States of America were signed and Innovation Group’s release management of five different countries has recently been given to our Extended Innovation (“EI”) division which works with the joint-venture.

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

 
·
BI Consulting: a consulting division with the initial objective of targeting the banking industry. The implementation of the new International Basel II Accord by local banks has created a huge demand for solutions that allow banks to accurately quantify their risks of incurring losses. This is a predictive capability offered by business intelligence software; and, for that purpose we’ve aligned ourselves with the largest financial services software company, SunGard, which is also among the top ten software companies globally.
 
·
Information Security (INFOSEC): in recognition of the ever growing awareness of highly publicized IT Security problems, NetSol has established a new business unit. The unit will provide services to secure all corporate information and their supporting processes, systems and networks. INFOSEC is designed to ensure "The right information to the right people at the right time". NetSol is partnering with a recognized global leader in information security (ISS - Internet Security Systems) to execute this business plan.
 
·
Defense Division: in light of our coordination with the Pakistan Defense Sector, NetSol established its very own Defense Division to cater specifically to the growing demands in this domain, and to deliver services with the professionalism and reliability that epitomizes NetSol’s CMMi Level 5 standing.
 
·
Enterprise Business Solutions (EBS): due to the dynamic nature of the business environment and the increasing demand for operational efficiency in today’s world, NetSol has built its own Enterprise Business Solutions (EBS) division partnering with Oracle and DataStream. With EBS, NetSol gives companies the ability to manage, maintain and track assets, plus the ability to use this data to drive decision-making in areas such as Maintenance, Inventory, Warranty, Up-time Reliability & Risk Management.

The gross profit was $5,265,782 in the quarter ending September 30, 2007 as compared with $2,953,022 for the same quarter of the previous year for an increase of 78% or $2,312,760. The gross profit percentage for the quarter increased approximately 11% to 61% from 50% in the quarter ended September 30, 2006. The cost of sales was $3,387,455 in the current quarter compared to $2,909,538 in the comparable quarter of fiscal 2007. As a percentage of sales it decreased 11% from 49.63% for the quarter ended September 30, 2006 to 39.15% in the current quarter. Although salaries and consultant fees increased $388,957 from $1,932,073 in the prior comparable quarter to $2,321,030, as a percentage of sales, it decreased 6% from 33% in the prior comparable quarter to 27% in the current quarter. The Company has added several new business divisions in Pakistan hiring the best talent in these specialized areas. It takes between 18-24 months for these new business units to fully develop their offerings and begin generating revenues. A few of these units are now producing revenues, the rest of the divisions are anticipated to start generating revenues in the next two quarters. The gross profit margin is expected to continue to improve as the integration of both the operations in Horsham, UK and Burlingame, US are fully integrated and cost savings are achieved. The Company has invested heavily in its infrastructure, both in people and equipment during the current fiscal year as it situated itself for increased growth organically and from the acquisitions of NetSol-CQ in February 2005 and NetSol McCue in June 2006.
 
Page 29
 
Operating expenses were $3,046,081 for the quarter ending September 30, 2007 as compared to $3,112,573, for the corresponding period last year for a slight decrease of $66,492. As a percentage of sales it decreased 18% from 53% to 35%. Depreciation and amortization expense amounted to $464,647 and $449,374 for the quarter ended September 30, 2007 and 2006, respectively. Combined salaries and wage costs were $907,879 and $998,391 for the comparable periods, respectively, or a decrease of $90,512 from the corresponding period last year. As a percentage of sales, these costs decreased 6.5% from 17% to 10.5%. General and administrative expenses were $678,573 and $820,086 for the quarters ended September 30, 2007 and 2006, respectively, a decrease of $141,513 or 17%. As a percentage of sales, these expenses were 8% in the current quarter compared to 14% in the comparable quarter. This decrease is due to the continued integration of the Company as a whole.

Selling and marketing expenses were $832,493 and $518,044, in the quarter ended September 30, 2007 and 2006, respectively, reflecting the growing sales activity of the Company. Although this reflects a 61% increase or $314,449, as a percentage of sales the increase was only .78% to 9.62% from 8.84%. Professional services expense decreased 39% to $160,050 in the quarter ended September 30, 2007, from $260,870 in the corresponding period last year.

Income from operations was $2,219,701 compared to loss of $159,551 for the quarters ended September 30, 2007 and 2006, respectively. This represents an increase of $2,379,252 for the quarter compared with the comparable period in the prior year. As a percentage of sales, net income from operations was 26% in the current quarter compared to -3% in the prior period.

Net income was $1,792,124 compared to net loss of $1,295,964 for the quarters ended September 30, 2007 and 2006, respectively. This is an increase of 238% or $3,088,087 compared to the prior year. The current fiscal quarter amount includes a net reduction of $274,919 compared to $247,273 in the prior period for the 49.9% minority interest in NetSol Connect, NetSol-TiG, and NetSol-Omni owned by another party, and the 37.21% minority interest in NetSol PK. In the quarter ended September 30, 2007 and 2006, the Company recognized $0 and $734,659 of amortized costs of debt, respectively. Interest expense was $233,804 in the current quarter as compared to $247,908 in the comparable period. Net income per share, basic and diluted, was $0.08 as compared to net loss per share, basic and diluted of $0.08 for the quarters ended September 30, 2007 and 2006.

The net EBITDA income was $2,781,923 compared to loss of $352,761 after amortization and depreciation charges of $723,554 and $642,471, income taxes of $32,441 and $52,824, and interest expense of $233,804 and $247,908, respectively. With the addition of the non-cash charge for the amortized costs of debt of $734,658 the adjusted income would be $381,897 for the quarter ended September 30, 2006. The EBITDA earning per share, basic and diluted was $0.13 and $0.12 for the quarter ended September 30, 2007 and the adjusted pro forma EBITDA earnings per share, basic and diluted, was $0.02 for the quarter ended September 30, 2006. Although the net EBITDA income is a non-GAAP measure of performance, we are providing it because we believe it to be an important supplemental measure of our performance that is commonly used by securities analysts, investors, and other interested parties in the evaluation of companies in our industry. It should not be considered as an alternative to net income, operating income or any other financial measures calculated and presented, nor as an alternative to cash flow from operating activities as a measure of our liquidity. It may not be indicative of the Company’s historical operating results nor is it intended to be predictive of potential future results.

Page 30

LIQUIDITY AND CAPITAL RESOURCES

The Company's cash position was $4,837,241 at September 30, 2007 compared to $3,822,420 at September 30, 2006.
 
Net cash used for operating activities amounted to $526,688 for the quarter ended September 30, 2007, as compared to $680,016 for the comparable period last fiscal year. The major change was the increase in other current assets, which includes the “Revenues in excess of billings” due to several new large contracts signed and progress on the contracts is over the amount that can be billed per the contract terms and the increase in accounts payable which includes the Unearned Revenues representing the increase in maintenance contracts.
 
Net cash used by investing activities amounted to $2,381,144 for the quarter ended September 30, 2007, as compared to $3,085,117 for the comparable period last fiscal year. The Company had net purchases of property and equipment of $745,901 compared to $238,323 for the comparable period last fiscal year. In addition, payments on the acquisition payable have been made of $879,007 and $4,025,567 for the quarters ended September 30, 2007 and 2006, respectively. The increase in intangible assets which represents amounts capitalized for the development of new products was $841,312 and $585,631 for the comparable periods.
 
Net cash provided by financing activities amounted to $3,689,943 and $5,103,746 for the quarters ended September 30, 2007, and 2006, respectively. In the current quarter the Company sold $250,000 of common stock. The quarter ended September 30, 2007 included the cash inflow of $903,499 compared to $0 from the exercising of stock options and warrants. In the current fiscal period, the Company had net proceeds on bank loans, loans and capital leases of $1,726,827 as compared to net proceeds of $237,702 in the comparable period last year and received $165,000 in loans from officers during the prior fiscal quarter.
 
The Company plans on pursuing various and feasible means of raising new funding to expand its infrastructure, enhance product offerings and strengthen marketing and sales activities in strategic markets. The strong growth in earnings and the signing of larger contracts with Fortune 500 customers largely depends on the financial strength of NetSol. Generally, the bigger name clients and new prospects diligently analyze and take into consideration a stronger balance sheet before awarding big projects to vendors. Therefore, NetSol would continue its effort to further enhance its financial resources in order to continue to attract large name customers and big value contracts. The company attracted 5 new institutional investors in 2006 that invested $5.5 million, raising its institutional investor base to over 15%. There are over 7.1 million employees and officers options unexercised and over 3 million investor warrants remaining to be exercised.

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

 
·
The third payment of NetSol McCue would be due based on the earn-out formula. This could be in the range of $1.0 million to $2.0 million in cash and common stock. This is based on an earn out structure and the Company expects to fund it through internal cash flow;
 
·
Notes payable and related interest for approximately $887,000;
 
·
Liquidity damages owed to convertible note holders of approximately $12,223;
 
·
Working capital of $1.0 million for US and UK business expansion, new business development activities and infrastructure enhancements.

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

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

 
·
Stock volatility due to market conditions in general and NetSol stock performance in particular. This may cause a shift in our approach to raising new capital through other sources such as secured long term debt.
 
·
Analysis of the cost of raising capital in the U.S., Europe or emerging markets. By way of example only, if the cost of raising capital is high in one market and it may negatively affect the company’s stock performance, we may explore options available in other markets.
 
Page 31

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

Item 3. Controls and Procedures
 
Management, under the supervision and with the participation of the chief executive officer and chief financial officer, conducted an evaluation of the disclosure controls and procedures as defined in rule 13a-15(e) as of the end of the period covered by this interim report on Form 10-QSB. Based on their evaluation, the chief executive officer and chief financial officer have concluded that our disclosure controls and procedures are effective.
 
There has been no change in our internal control over financial reporting that occurred in the period covered by this report that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.

PART II  OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 2. Changes in Securities.

On June 29, 2007, the Company entered into an agreement to sell a total of 757,576 shares of common stock and 378,786 warrants to acquire shares of common stock to two non-U.S. resident accredited investors at the price of and exercise price of $1.65 per share. The warrants are exercisable for a period of 5 years from the earlier of June 29, 2008 and the registration of the common stock underlying the warrants.
 
During the quarter ended September 30, 2007, holders of our Series A 7% Cumulative Convertible Preferred Stock converted a total of 330 shares of preferred stock into 200,000 shares of common stock. These shares were issued in reliance on exemptions from registration available under Regulation D and Regulation S of the Securities Act of 1933, as amended.

During the quarter ended September 30, 2007, holders of our Series A 7% Cumulative Convertible Preferred Stock received 48,965 shares of common stock as payment of dividends due under the terms of the Certificate of Designation. These shares were issued in reliance on exemptions from registration available under Regulation S and D of the Securities Act of 1933, as amended.

During the quarter ended September 30, 2007, employees exercised 20,757 options in exchange for $34,999.

During the quarter ended September 30, 2007, warrant holders exercised 450,000 warrants in exchange for $868,500.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Submission Of Matters To A Vote Of Security Holders

None

Item 5. Other Information

None.

Item 6. Exhibits and Reports on Form 8-K

Exhibits:
 
31.1
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (CEO)
31.2
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (CFO)
32.1
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (CEO)
32.2
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (CFO)
 
(1) Filed herewith
 
Page 32

Reports on Form 8-K.

a) On July 10, 2006, NetSol Technologies, Inc. filed a current report on form 8-K reporting the sale of restricted shares of common stock and warrants to purchase common stock by two non-U.S. resident accredited investors.
 
b) On September 19, 2007, NetSol Technologies, Inc. filed a current report on form 8-K reporting that it had issued a press release announcing its results of operations for the period ending June 30, 2007.
.
SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

NETSOL TECHNOLOGIES, INC.
 
Date: November 9, 2007
/s/ Najeeb Ghauri
 
___________________________
 
NAJEEB GHAURI
 
Chief Executive Officer
   
   
Date: November 9, 2007
/s/Tina Gilger
 
___________________________
 
TINA GILGER
 
Chief Financial Officer
 
Page 33