Compensation Philosophy and Objectives

 

The Compensation Committee believes that the most effective executive compensation program is one that is designed to reward the achievement of specific annual, long-term and strategic goals by the Company, and which aligns executives’ interests with those of the stockholders by rewarding performance at or above established goals, with the ultimate objective of increasing stockholder value. The philosophy of the Compensation Committee is to evaluate both performance and compensation to ensure that we maintain our ability to attract and retain superior employees in key positions and that compensation provided to key employees remains competitive relative to the compensation paid to similarly situated executives of our peer companies. To that end, the Compensation Committee believes executive compensation packages should include both cash and equity-based compensation that reward performance as measured against established goals.

 

 

Management develops our compensation plans by utilizing publicly available compensation data in the media services and technology industries. We believe that the practices of these groups of companies provide us with appropriate compensation benchmarks, because these groups of companies are in similar businesses and tend to compete with us for executives and other employees. For benchmarking executive compensation, we typically review the compensation data we have collected from these groups of companies, as well as a subset of the data from those companies that have a similar number of employees as the Company. For purposes of determining executive compensation, we have not engaged consultants to help us analyze this data or to compare our compensation programs with the practices of the companies represented in the compensation data we review.

 

Based on management's analyses and recommendations, the Compensation Committee has approved a pay-for-performance compensation philosophy, which is intended to establish base salaries and total executive compensation (taking into consideration the executive's experience and abilities) that are competitive with those companies with a similar number of employees represented in the compensation data we review.

 

We work within the framework of this pay-for-performance compensation philosophy to determine each component of an executive's initial compensation package based on numerous factors, including:

 

• the individual's particular background, track record and circumstances, including training and prior relevant work experience;

• the individual's role with us and the compensation paid to similar persons in the companies represented in the compensation data that we review;

• the demand for individuals with the individual's specific expertise and experience;

• performance goals and other expectations for the position; and,

• uniqueness of industry skills.

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The terms of each executive officer's compensation are derived from employment agreements negotiated between the Company and the executive. Each executive's employment agreement is generally negotiated to cover a one to three-year period, and prescribes the base salary and other annual payments, if any, to the executive. Employment agreements for all executive officers are approved by the Board of Directors and the Compensation Committee. Employment agreements for other executives are approved by the Company's Chief Executive Officer.

 

2008 Executive Compensation Components

 

For the fiscal year ended June 30, 2008, the principal components of compensation that our named executive officers were eligible to receive were:

 

• Base salary;

• Long Term Equity Incentive Compensation;

• Performance-based incentive compensation (discretionary bonus); and,

• Perquisites and other personal benefits.

 

Base Salary

 

An executive's base salary is evaluated together with components of the executive's other compensation to ensure that the executive's total compensation is consistent with our overall compensation philosophy.

 

The base salaries were established in arms-length negotiations between the executive and the Company, taking into account their extensive experience, knowledge of the industry, track record, and achievements on behalf of the Company.

 

Base salaries are adjusted annually by the Compensation Committee.

 

Annual Bonus

 

 

Director Compensation Policy

 

Messrs. Ghauri are not paid any fees or other compensation for services as members of our Board of Directors.

 

The non-employee members of our Board of Directors received as compensation for services as directors as well as reimbursement for documented reasonable expenses incurred in connection with attendance at meetings of our Board of Directors and the committees thereof. The Company paid the following amounts to members of the Board of Directors for the activities shown during the fiscal year ended June 30, 2008.

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BOARD ACTIVITY		CASH PAYMENTS
Annual Cash Retainer		$	10,000
Committee Membership		$	2,000
Chairperson for Audit Committee		$	15,000
Chairperson for Compensation Committee		$	12,000
Chairperson for Nominating and Corporate Governance Committee		$	9,000

 

Members of our Board of Directors are also eligible to receive stock option or stock award grants both upon joining the Board of Directors and on an annual basis in line with recommendations by the Compensation Committee, which grants are non-qualified stock options under our Employee Stock Option Plans. Further, from time to time, the non-employee members of the Board of Directors are eligible to receive stock grants that may be granted if and only if approved by the shareholders of the Company.

 

Compensation Committee Interlocks and Insider Participation

 

The current members of the Compensation Committee are Messrs. Caton (Chairman), Mr. Beckert, Mr. Burki and Mr. Shakow. During the fiscal year ended June 30, 2007, the Chairman of the Compensation Committee was Mr. Beckert. There were no other members of the committee during the fiscal year ended June 30, 2007. All current members of the Compensation Committee are "independent directors" as defined under the Nasdaq Marketplace Rules. None of these individuals were at any time during the fiscal year ended June 30, 2008, or at any other time, an officer or employee of the Company.

 

No executive officer of the Company serves as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving as a member of the Company's Board of Directors or Compensation Committee.

Employee Stock Option Plans

The 2001 plan authorizes the issuance of up to 2,000,000 options to purchase common stock of which 2,000,000 have been granted. The grant prices range between $.75 and $2.50.

The 2002 plan authorizes the issuance of up to 2,000,000 options to purchase common stock of which 2,000,000 options have been granted. The grant prices range between $.75 and $5.00.

In March 2004, our shareholders approved the 2003 stock option plan. This plan authorizes up to 2,000,000 options to purchase common stock of which 1,159,606 have been granted. The grant prices range between $1.00 and $5.00.

In March 2005, our shareholders approved the 2004 stock option plan. This plan authorizes up to 5,000,000 options to purchase common stock of which 4,998,246 have been granted. The grant prices range between $1.50 and $3.00.

In April 2006, our shareholders approved the 2005 stock option plan. This plan authorizes up to 5,000,000 options to purchase common stock of which 1,780,000 have been granted. The grant prices range between $1.70 and $2.55.

In May 2008, our shareholders approved the 2008 Equity Incentive Plan. This plan authorizes grants of up to 1,000,000 options or stock awards of which none have been granted.

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ITEM 11- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information regarding the beneficial ownership of the Company's Common Stock, its only class of outstanding voting securities as of September 15, 2008, by (i) each person who is known to the Company to own beneficially more than 5% of the outstanding common Stock with the address of each such person, (ii) each of the Company's present directors and officers, and (iii) all officers and directors as a group:

Name and Address		Number of Shares(1)(2)			Percentage Beneficially owned(4)
Najeeb Ghauri (3)			2,577,650			9.75	%
Naeem Ghauri (3)			2,261,367			8.56	%
Salim Ghauri (3)			2,434,406			9.21	%
Eugen Beckert (3)			223,900			*
Shahid Javed Burki (3)			194,000			*
Mark Caton (3)			6,000			*
Alexander Shakow (3)			0			*
Patti McGlasson (3)			135,000			*
Tina Gilger (3)			81,731			*
The Tail Wind Fund Ltd.(5)(6)			2,748,818			9.90	%
All officers and directors
as a group (nine persons)			7,914,054			29.95	%

* Less than one percent

(1) Except as otherwise indicated, the Company believes that the beneficial owners of the common stock listed below, based on information furnished by such owners, have sole investment and voting power with respect to such shares, subject to community property laws where applicable. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities.

(2) Beneficial ownership is determined in accordance with the rules of the Commission and generally includes voting or investment power with respect to securities. Shares of common stock relating to options currently exercisable or exercisable within 60 days of September 19, 2007 are deemed outstanding for computing the percentage of the person holding such securities but are not deemed outstanding for computing the percentage of any other person. Except as indicated by footnote, and subject to community property laws where applicable, the persons named in the table above have sole voting and investment power with respect to all shares shown as beneficially owned by them. Includes shares issuable upon exercise of options exercisable within 60 days, as follows: Mr. Najeeb Ghauri, 1,774,227; Mr. Naeem Ghauri, 1,784,227; Mr. Salim Ghauri, 1,774,227; Mr. Eugen Beckert, 135,000; Mr. Shahid Burki, 150,000; Ms. Tina Gilger, 70,000; and Ms. Patti McGlasson, 110,000.

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

(4) Shares issued and outstanding as of September 13, 2007 were 21,374,922.

(5) Address: The Bank of Nova Scotia Trust Company (Bahamas) Ltd., Windermere House, 404 East Bay Street, P.O. Box SS-5539, Nassau, Bahamas. Tail Wind Advisory & Management Ltd., a UK corporation authorized and regulated by the Financial Services Authority of Great Britain (“TWAM”), is the investment manager for The Tail Wind Fund Ltd., and David Crook is the CEO and controlling shareholder of TWAM. Each of TWAM and David Crook expressly disclaims any equitable or beneficial ownership of the shares being referred to hereunder and held by The Tail Wind Fund Ltd.

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(6) Subject to the Ownership Limitation (defined below), The Tail Wind Fund Ltd. (“Tail Wind”) may be deemed to beneficially own a total of 4,352,073 shares of Common Stock, including: 1,268,740 shares of Common Stock held by Tail Wind,; 1,060,606 shares of Common Stock issuable upon conversion of $1,750,000 in liquidation preference of the Company’s Series A 7% Cumulative Convertible Preferred Stock (“the Preferred Stock”); 303,030 sshares of Common Stock issuable upon exercise of Warrants issued to Tail Wind on June 29, 2007; 303,030 shares of Common Stock issuable upon exercise of Warrants issued to Tail Wind on October 29, 2007 (together with the warrants issued on June 29, 2007, the “Warrants”); and, 1,416,667 shares of Common Stock issuable upon conversion of $4,250,000 in principal amount of the Company’s Convertible Notes due July 31, 2011 issued to Tail Wind on July 23, 2008 (the “Notes”). . In accordance with Rule 13d-4 under the Securities Exchange Act of 1934, as amended, because the number of shares of Common Stock into which the Reporting Person's Notes, Preferred Stock and Warrants are convertible and exercisable is limited, pursuant to the terms of such instruments, to that number of shares of Common Stock which would result in the Reporting Person having beneficial ownership of 9.9% of the total issued and outstanding shares of Common Stock (the "Ownership Limitation"), Tail Wind disclaims beneficial ownership of any and all shares of Common Stock that would cause Tail Wind's beneficial ownership to exceed the Ownership Limitation. In accordance with the Ownership Limitation, Tail Wind, based upon 26,285,761 shares of common stock outstanding (as of July 23, 2008), Tail Wind beneficially owns 2,748,818 shares of Common Stock and disclaims beneficial ownership of 1,603,255.

ITEM 12-CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

In July 2007, the board approved compensation for service on the Audit, Compensation and Nominating and Corporate Governance Committees. This compensation is discussed in the sections entitled “Compensation of Directors” beginning on page 53.

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PART IV

ITEM 13 - EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

3.1		Articles of Incorporation of Mirage Holdings, Inc., a Nevada corporation, dated March 18, 1997,
		incorporated by reference as Exhibit 3.1 to NetSol’s Registration Statement No. 333-28861 filed on
		Form SB-2 filed June 10, 1997.*
3.2		Amendment to Articles of Incorporation dated May 21, 1999, incorporated by reference as Exhibit 3.2 to NetSol’s Annual Report for the fiscal year ended June 30, 1999 on Form 10K-SB filed September 28, 1999.*
3.3		Amendment to the Articles of Incorporation of NetSol International, Inc. dated March 20, 2002 incorporated by reference as Exhibit 3.3 to NetSol’s Annual Report on Form 10-KSB/A filed on February 2, 2001.*
3.4		Amendment to the Articles of Incorporation of NetSol Technologies, Inc. dated August 20, 2003 filed as Exhibit A to NetSol’s Definitive Proxy Statement filed June 27, 2003.*
3.5		Amendment to the Articles of Incorporation of NetSol Technologies, Inc. dated March 14, 2005 filed as Exhibit 3.0 to NetSol’s quarterly report filed on Form 10-QSB for the period ended March 31, 2005.*
3.6		Amendment to the Articles of Incorporation dated October 18, 2006 filed as Exhibit 3.5 to NetSol’s Annual Report for the fiscal year ended June 30, 2007 on Form 10-KSB.*
3.7		Amendment to Articles of Incorporation dated May 12, 2008 (1)*
3.8		Bylaws of Mirage Holdings, Inc., as amended and restated as of November 28, 2000 incorporated by reference as Exhibit 3.3 to NetSol’s Annual Report for the fiscal year ending in June 30, 2000 on Form 10K-SB/A filed on February 2, 2001.*
3.9		Amendment to the Bylaws of NetSol Technologies, Inc. dated February 16, 2002 incorporated by reference as Exhibit 3.5 to NetSol’s Registration Statement filed on Form S-8 filed on March 27, 2002.*
4.1		Form of Common Stock Certificate*
4.2		Form of Warrant*.
4.3		Form of Series A 7% Cumulative Preferred Stock filed as Annex E to NetSol’s Definitive Proxy Statement filed September 18, 2006*.
10.1		Lease Agreement for Calabasas executive offices dated December 3, 2003 incorporated by reference as Exhibit 99.1 to NetSol’s Current Report filed on Form 8-K filed on December 24, 2003.*
10.2		Company Stock Option Plan dated May 18, 1999 incorporated by reference as Exhibit 10.2 to the Company’s Annual Report for the Fiscal Year Ended June 30, 1999 on Form 10K-SB filed September 28, 1999.*
10.3		Company Stock Option Plan dated April 1, 1997 incorporated by reference as Exhibit 10.5 to NetSol’s Registration Statement No. 333-28861 on Form SB-2 filed June 10, 1997*
10.4		Company 2003 Incentive and Nonstatutory incorporated by reference as Exhibit 99.1 to NetSol’s Definitive Proxy Statement filed February 6, 2004.*
10.5		Company 2001 Stock Options Plan dated March 27, 2002 incorporated by reference as Exhibit 5.1 to NetSol’s Registration Statement on Form S-8 filed on March 27, 2002.*
10.6		Company 2008 Equity Incentive Plan incorporated by reference as Annex A to NetSol’s Definitive Proxy Statement filed May 28, 2008.*
10.6		Frame Agreement by and between DaimlerChrysler Services AG and NetSol Technologies dated June 4, 2004 incorporated by reference as Exhibit 10.13 to NetSol’s Annual Report for the year ended June 30, 2005 on Form 10-KSB filed on September 15, 2005.*
10.7		Share Purchase Agreement dated as of January 19, 2005 by and between the Company and the shareholders of CQ Systems Ltd. incorporated by reference as Exhibit 2.1 to NetSol’s Current Report filed on form 8-K on January 25, 2005.*
10.8		Stock Purchase Agreement dated May 6, 2006 by and between the Company, McCue Systems, Inc. and the shareholders of McCue Systems, Inc. incorporated by reference as Exhibit 2.1 to NetSol’s Current Report filed on form 8-K on May 8, 2006.*
10.9		Employment Agreement by and between NetSol Technologies, Inc. and Patti L. W. McGlasson dated May 1, 2006 incorporated by reference as Exhibit 10.20 to NetSol’s Annual Report on form 10-KSB dated September 18, 2006.*
10.11.		Employment Agreement by and between the Company and Najeeb Ghauri dated January 1, 2007 filed as Exhibit 10.11 to the Company’s Annual Report filed on Form 10-KSB for the year ended June 30, 2007.*
10.12		Employment Agreement by and between the Company and Naeem Ghauri dated January 1, 2007 filed as Exhibit 10.11 to the Company’s Annual Report filed on Form 10-KSB for the year ended June 30, 2007.*
10.13		Employment Agreement by and between the Company and Salim Ghauri dated January 1, 2007 filed as Exhibit 10.11 to the Company’s Annual Report filed on Form 10-KSB for the year ended June 30, 2007.*
10.14		Employment Agreement by and between the Company and Tina Gilger dated August 1, 2007 filed as Exhibit 10.11 to the Company’s Annual Report filed on Form 10-KSB for the year ended June 30, 2007.*
10.15		Amendment to Employment Agreement by and between Company and Najeeb Ghauri dated effective January 1, 2007.*

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10.16		Amendment to Employment Agreement by and between Company and Naeem Ghauri dated effective January 1, 2007. *
10.17		Amendment to Employment Agreement by and between Company and Salim Ghauri dated effective January 1,*
10.18		Lease Agreement by and between McCue Systems, Inc. and Sea Breeze 1 Venture dated April 29, 2003*.
10.19		Amendment to Lease Agreement by and between McCue Systems, Inc. and Sea Breeze 1 Venture dated June 25, 2007 filed as Exhibit 10.19 to the Company’s Annual Report filed on Form 10-KSB for the year ended June 30, 2007. *
10.20		Lease Agreement by and between NetSol Pvt Limited and Civic Centres Company (PVT) Limited dated May 28, 2001 incorporated by this reference as Exhibit 10.23 to NetSol’s Annual Report on form 10-KSB dated September 18, 2006.*
10.21		Lease Agreement by and between NetSol Pvt Limited and Mrs. Rameeza Zobairi dated December 5, 2005 incorporated by this reference as Exhibit 10.24 to NetSol’s Annual Report on form 10-KSB dated September 18, 2006.*
10.22		Lease Agreement by and between NetSol Pvt Limited and Mr. Nisar Ahmed dated May 4, 2006 incorporated by this reference as Exhibit 10.25 to NetSol’s Annual Report on form 10-KSB dated September 18, 2006.*
10.23		Lease Agreement by and between NetSol Technologies, Ltd. and Argyll Business Centres Limited dated April 28, 2006 incorporated by this reference as Exhibit 10. 26 to NetSol’s Annual Report on form 10-KSB dated September 18, 2006.*
10.24		Tenancy Agreement by and between NetSol Technologies, Ltd. and Beijing Lucky Goldstar Building Development Co. Ltd. dated June 26, 2007 filed as Exhibit 10.21 to the Company’s Annual Report filed on Form 10-KSB for the year ended June 30, 2007.*
10.25		Company 2005 Stock Option Plan incorporated by reference as Exhibit 99.1 to NetSol’s Definitive Proxy Statement filed on March 3, 2006.*
10.26		Company 2004 Stock Option Plan incorporated by reference as Exhibit 99.1 to NetSol’s Definitive Proxy Statement filed on February 7, 2005.*
10.27		Working area sublease by and between NetSol Technologies, Ltd. and Toyota Leasing (Thailand) Co. Ltd., dated June 21, 2007 filed as Exhibit 10.24 to the Company’s Annual Report filed on Form 10-KSB for the year ended June 30, 2007.*
10.28		Lease Agreement by and between NetSol Technologies, Inc. and NetSol Technologies North America, Inc. and NOP Watergate LLC dated April 3, 2008.*
10.29		Lease Amendment Number Three by and between NetSol Technologies, Inc. and Century National Properties, Inc. dated December 12, 2007. *
10.30		Rent Agreement by and between Mr. Tahir Mehmood Khan and NetSol Technologies Ltd. Dated January 21, 2008. *

21.1 A list of all subsidiaries of the Company*

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

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

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

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

 

*Previously Filed

(1) Filed Herewith

(b) Reports on Form 8-K

1)

On May 1, 2008, the Company filed a current report including its press release dated April 30, 2008 which announced the results of operations and financial conditions for its Pakistani subsidiary, NetSol Technologies, Ltd. for the quarter ended March 31, 2008.

2)

On May 13, 2008, the Company filed a current report including its press release dated May 13, 2008 and Financial Results Presentation dated May 13, 2008 which announced the results of operations and financial conditions for the quarter ended March 31, 2008.

 

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Item 14 Principal Accountant Fees and Services

 

Audit Fees 

 

Kabani & Co. audited the Company’s financial statements for the fiscal years ended June 30, 2008 and June 30, 2007. The aggregate fees billed by Kabani & Co. for the annual audit and review of financial statements included in the Company’s Form 10-KSB or services that are normally provided by Kabani & Company that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for the year ended June 30, 2008 was $120,000, and for the year ended June 30, 2007 was $105,000.

 

Audit Related Fees 

 

 The aggregate fees billed by Kabani & Co. during fiscal 2008 including assurance and related audit services not covered in the preceding paragraph was $37,500. These “Audit Related Fees” were primarily for services in connection with the review of quarterly financial statements.. The aggregate fees billed by Kabani & Company during fiscal 2007 including assurance and related audit services not covered in the preceding paragraph was $52,500. These “Audit Related Fees” were primarily for services in connection with the review of quarterly financial statements and the Company’s filing of a Registration Statement and amendments thereto on Form S-3.

 

Tax Fees 

 

Tax fees for fiscal year 2008 were $4,500 and consisted of the preparation of the Company’s federal and state tax returns for the fiscal years 2007. Tax fees for fiscal year 2007 were $12,500 and consisted of the preparation of the Company’s federal and state tax returns for the fiscal year 2006.

 

All Other Fees 

 

There were no other fees billed by Kabani & Co. or services rendered to NetSol during the fiscal years ended June 30, 2008 and 2007, other than as described above.

 

Pre-Approval Procedures 

 

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

(i)

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

(ii)

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

(iii)

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

 

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

 

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

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SIGNATURES

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

		NetSol Technologies, Inc.
Date: November 10, 2008		BY:	/S/ NAJEEB GHAURI
			Najeeb Ghauri
			Chief Executive Officer
Date: November 10, 2008		BY:	/S/ Tina Gilger
			Tina Gilger
			Chief Financial Officer

 

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

Date: November 10, 2008		BY:	/S/ NAJEEB U. GHAURI
			Najeeb U. Ghauri
			Chief Executive Officer
			Director, Chairman
Date: November 10, 2008			/S/ SALIM GHAURI
			Salim Ghauri
			President, APAC
			Director
Date: November 10, 2008		BY:	/S/ NAEEM GHAURI
			Naeem Ghauri
			President, EMEA
			Director
Date: November 10, 2008		BY:	/S/ EUGEN BECKERT
			Eugen Beckert
			Director
Date: November 10, 2008		BY:	/S/ SHAHID JAVED BURKI
			Shahid Javed Burki
			Director
Date: November 10, 2008		BY:	/S/ MARK CATON
			Mark Caton
			Director
Date: November 10, 2008		BY:	/S/ ALEXANDER SHAKOW
			Alexander Shakow
			Director

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NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

Description		Page
Report of Independent Registered Public Accounting Firm		F-2
Consolidated Balance Sheets as of June 30, 2008, 2007, and 2006 (restated)		F-3
Consolidated Statements of Operations for the Years Ended June 30, 2008, 2007, and 2006 (restated)		F-4
Consolidated Statements of Stockholders’ Equity for the Years Ended
June 30, 2008, 2007, and 2006 (restated)		F-5
Consolidated Statements of Cash Flows for the Years Ended June 30, 2008, 2007, and 2006 (restated)		F-8
Notes to Consolidated Financial Statements		F-10

 

F - 1

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 

Board of Directors

NetSol Technologies, Inc. and subsidiaries

Calabasas, California

We have audited the accompanying consolidated balance sheets of NetSol Technologies, Inc. and subsidiaries as of June 30, 2008, 2007 and 2006, and the related consolidated statements of operations, stockholders’ equity and cash flows for the years ended June 30, 2008, 2007, and 2006. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of NetSol Technologies, Inc. and subsidiaries as of June 30, 2008, 2007 and 2006, and the results of its consolidated operations and its cash flows for the years ended June 30, 2008, 2007, and 2006 in conformity with accounting principles generally accepted in the United States of America.

As discussed in note 22, the Company restated its financial statements for the years ended June 30, 2008, 2007 and 2006.

/s/ Kabani & Company, Inc.

CERTIFIED PUBLIC ACCOUNTANTS

Los Angeles, California

September 12, 2008 except for note 2, 14, 18 and 22 which are as of November 6, 2008

F - 2

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NETSOL TECHNOLOGIES INC AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS - RESTATED

		As of 6/30/08			As of 6/30/07			As of 6/30/06
ASSETS
Current assets:
Cash and cash equivalents		$	6,275,238		$	4,010,164		$	2,493,768
Certificates of deposit			-			-			1,739,851
Restricted cash			-			-			4,533,555
Accounts receivable, net of allowance for doubtful accounts			10,988,888			7,937,686			6,171,331
Revenues in excess of billings			11,053,042			8,501,769			4,469,069
Other current assets			2,406,407			2,278,749			2,822,869
Total current assets			30,723,575			22,728,368			22,230,443
Property and equipment, net of accumulated depreciation			9,176,780			7,583,752			6,472,038
Other assets, long-term			1,866,437			1,308,267			-
Intangibles:
Product licenses, renewals, enhancements, copyrights,
trademarks, and tradenames, net			10,837,856			7,772,848			5,120,213
Customer lists, net			1,732,761			2,427,405			3,109,548
Goodwill			9,439,285			7,708,501			6,092,906
Total intangibles			22,009,902			17,908,754			14,322,667
Total assets		$	63,776,694		$	49,529,141		$	43,025,148
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses		$	4,116,659		$	3,590,651		$	3,276,159
Current portion of loans and obligations under capitalized leases			2,280,110			887,098			768,935
Other payables - acquisitions			846,215			962,406			4,086,204
Unearned revenues			3,293,728			2,815,660			2,669,995
Due to officers			184,173			356,422			90,767
Dividend to preferred stockholders payable			33,508			77,640			-
Loans payable, bank			2,932,551			3,097,928			662,800
Total current liabilities			13,686,944			11,787,805			11,554,860
Obligations under capitalized leases, less current maturities			332,307			339,759			183,168
Convertible notes payable - net			-			-			3,505,137
Long term loans; less current maturities			411,608			-			-
Total liabilities			14,430,859			12,127,564			15,243,165
Minority interest - restated			7,857,969			4,528,594			1,786,738
Commitments and contingencies			-			-			-
Stockholders' equity:
Preferred stock, 5,000,000 shares authorized;
1,920; 4,130 issued and outstanding			1,920,000			4,130,000			-
Common stock, $.001 par value; 95,000,000 shares authorized;
25,545,482; 20,556,553; 16,160,875 issued and outstanding			25,545			20,556			16,161
Additional paid-in-capital - restated			74,950,286			66,642,732			57,106,542
Treasury stock			(35,681	)		(10,194	)		(10,194	)
Accumulated deficit - restated			(33,071,702	)		(37,885,387	)		(31,873,104	)
Stock subscription receivable			(600,907	)		(1,001,407	)		(299,250	)
Common stock to be issued			1,048,249			1,329,612			1,749,979
Capitalized finance costs of debt			-			-			(326,599	)
Other comprehensive loss - restated			(2,747,924	)		(352,929	)		(368,290	)
Total stockholders' equity			41,487,866			32,872,983			25,995,245
Total liabilities and stockholders' equity		$	63,776,694		$	49,529,141		$	43,025,148

See accompanying notes to these consolidated financial statements.

F - 3

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NETSOL TECHNOLOGIES INC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS - RESTATED

 

		For the Years Ended June 30,
		2008			2007			2006
Net Revenues:
License fees		$	12,685,039		$	9,788,266		$	5,192,371
Maintenance fees			6,306,321			5,441,339			2,444,075
Services			17,650,815			14,052,481			11,053,966
Total revenues			36,642,175			29,282,086			18,690,412
Cost of revenues
Salaries and consultants			10,071,664			8,812,934			6,117,886
Travel			1,719,743			1,529,796			756,880
Repairs and maintenance			405,140			430,962			229,052
Insurance			239,043			211,897			8,519
Depreciation and amortization			1,398,454			794,482			733,370
Other			1,890,100			1,914,440			1,174,811
Total cost of sales			15,724,144			13,694,511			9,020,518
Gross profit			20,918,031			15,587,575			9,669,894
Operating expenses:
Selling and marketing			3,722,470			3,161,924			1,789,349
Depreciation and amortization			1,939,502			1,846,790			2,286,678
Bad debt expense			58,293			189,873			30,218
Salaries and wages			3,703,836			3,696,501			2,557,648
Professional services, including non-cash compensation			837,598			1,067,702			607,706
General and adminstrative			3,447,113			2,977,917			2,657,642
Total operating expenses			13,708,812			12,940,707			9,929,241
Income from operations			7,209,219			2,646,868			(259,347	)
Other income and (expenses):
Loss on sale of assets			(35,484	)		(2,977	)		(35,090	)
Beneficial conversion feature			-			(2,208,334	)		(14,389	)
Amortization of debt discount and capitalized cost of debt			-			(2,803,691	)		-
Liquidation damages			-			(180,890	)		-
Fair market value of warrants issued			-			(68,411	)		(21,505	)
Interest expense			(626,708	)		(617,818	)		(442,887	)
Interest income			195,103			201,015			280,276
Gain on sale of subsidiary shares			1,240,808			-			-
Gain on foreign currency exchange rates			2,020,839			178,522			191,736
Other income and (expenses)			148,544			74,050			8,294
Total other income (expenses)			2,943,102			(5,428,534	)		(33,565	)
Net income (loss) before minority interest in subsidiary			10,152,321			(2,781,666	)		(292,912	)
Minority interest in subsidiary - restated			(5,038,115	)		(2,832,985	)		(1,155,183	)
Income taxes			(121,982	)		(160,306	)		(106,021	)
Net income (loss) - restated			4,992,224			(5,774,957	)		(1,554,116	)
Dividend required for preferred stockholders			(178,541	)		(237,326	)		-
Net income (loss) applicable to common shareholders - restated			4,813,683			(6,012,283	)		(1,554,116	)
Other comprehensive loss:
Translation adjustment - restated			(2,394,994	)		15,361			152,401
Comprehensive income (loss) - restated		$	2,418,689		$	(5,996,922	)	$	(1,401,715	)
Net income (loss) per share:
Basic - restated		$	0.20		$	(0.33	)	$	(0.11	)
Diluted - restated		$	0.19		$	(0.33	)	$	(0.11	)
Weighted average number of shares outstanding
Basic			24,118,538			18,189,590			14,567,007
Diluted			25,997,049			18,189,590			14,567,007

See accompanying notes to these consolidated financial statements.

F - 4

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NETSOL TECHNOLOGIES INC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY – RESTATED

FOR THE YEARS ENDED JUNE 30, 2006, 2007 AND 2008

																							Other
														Stock						Capitalized			Compre-
								Additional						Sub-						Finance			hensive						Total
		Common Stock						Paid-in			Treasury			scriptions			Shares to			Costs			Income/			Accumulated			Stockholders'
		Shares			Amount			Capital			Shares			Receivable			be Issued			of Debt			(Loss)			Deficit			Equity
Balance at June 30, 2005			13,830,884		$	13,831		$	46,610,746		$	(27,197	)	$	(616,650	)	$	108,500		$	-		$	(520,691	)	$	(30,318,988	)	$	15,249,551
Issuance of common stock for cash			933,334			933			1,399,067																					1,400,000
Issuance of common stock for services			67,255			67			111,548									7,500												119,115
Excercise of common stock options			285,383			285			346,697						317,400			5,000												669,382
Issuance of common stock in
exchange for notes payable & interest			36,607			37			70,981																					71,018
Issuance of common stock for
conversion of convertible debentures			80,646			81			149,919																					150,000
Issuance of common stock in
exchange for purchase of CQ Systems			884,535			885			1,847,795																					1,848,680
Issuance of common stock in
exchange for purchase of McCue			-			-			-									1,628,979												1,628,979
Issuance of common stock in
exchange for accrued expenses			42,231			42			64,036																					64,078
Issuance of treasury shares for services												17,003																		17,003
Capital contribution from issuance of subsidiary stock on foreign exchange			-			-			4,031,002																					4,031,002
Fair market value of warrants
and options issued			-			-			2,474,751																					2,474,751
Capitalized finance costs of debt			-			-			-												(326,599	)								(326,599	)
Foreign currency translation
adjustments - restated			-			-			-															152,401						152,401
Net income for the year - restated			-			-			-																		(1,554,116	)		(1,554,116	)
Balance at June 30, 2006 - restated			16,160,875		$	16,161		$	57,106,542		$	(10,194	)	$	(299,250	)	$	1,749,979		$	(326,599	)	$	(368,290	)	$	(31,873,104	)	$	25,995,245

See accompanying notes to these consolidated financial statements.

F - 5

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NETSOL TECHNOLOGIES INC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY – RESTATED

FOR THE YEARS ENDED JUNE 30, 2006, 2007 AND 2008

																													Other
																				Stock						Capitalized			Compre-
														Additional						Sub-						Finance			hensive						Total
		Preferred Stock						Common Stock						Paid-in			Treasury			scriptions			Shares to			Costs			Income/			Accumulated			Stockholders'
		Shares			Amount			Shares			Amount			Capital			Shares			Receivable			be Issued			of Debt			(Loss)			Deficit			Equity
Balance at
June 30, 2006 - restated			-		$	-			16,160,875		$	16,161		$	57,106,542		$	(10,194	)	$	(299,250	)	$	1,749,979		$	(326,599	)	$	(368,290	)	$	(31,873,104	)	$	25,995,245
Preferred Stock issued
for conversion of
convertible note			5,500			5,500,000																														5,500,000
Excercise of common
stock options									1,525,030			1,525			2,548,198						(517,250	)		(5,000	)											2,027,473
Common stock issued for:
Cash									103,333			104			108,396						(219,907	)		1,141,500												1,030,093
Services									261,984			261			390,216						35,000			7,500												432,977
Conversion of
preferred stock			(1,370	)		(1,370,000	)		830,302			830			1,369,170																					-
Payment of dividend
on preferred stock									105,589			105			159,579																					159,684
Common stock issued
in exhange for:
Notes payable and
related interest									230,863			231			339,137																					339,368
Purchase of
McCue Systems									1,329,470			1,330			2,274,677									(1,564,367	)											711,640
Beneficial conversion
feature															2,208,334																					2,208,334
Repricing of warrants															11,667																					11,667
Adjustment to
stockholder list									9,107			9			(9	)																				-
Fair market value
of warrants and
options issued									-			-			136,571																					136,571
Finance costs
of capital raised									-			-			(9,746	)											326,599									316,853
Foreign currency
translation adjusts - restated									-			-			-															15,361						15,361
Net loss for the year -restated									-			-			-																		(6,012,283	)		(6,012,283	)
Balance at
June 30, 2007 restated			4,130		$	4,130,000			20,556,553		$	20,556		$	66,642,732		$	(10,194	)	$	(1,001,407	)	$	1,329,612		$	-		$	(352,929	)	$	(37,885,387	)	$	32,872,983

See accompanying notes to these consolidated financial statements.

F - 6

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NETSOL TECHNOLOGIES INC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY – RESTATED

FOR THE YEARS ENDED JUNE 30, 2006, 2007 AND 2008

																										Other
																				Stock						Compre-
														Additional						Sub-						hensive						Total
		Preferred Stock						Common Stock						Paid-in			Treasury			scriptions			Shares to			Income/			Accumulated			Stockholders'
		Shares			Amount			Shares			Amount			Capital			Shares			Receivable			be Issued			(Loss)			Deficit			Equity
Balance at
June 30, 2007 -restated			4,130		$	4,130,000			20,556,553		$	20,556		$	66,642,730		$	(10,194	)	$	(1,001,407	)	$	1,329,612		$	(352,929	)	$	(37,885,385	)	$	32,872,983
Excercise of common
stock options									849,938			850			1,477,079						80,500			36,600									1,595,029
Excercise of common
stock warrants									1,087,359			1,087			1,753,460																		1,754,547
Common stock issued for:
Cash									1,515,152			1,516			2,498,484						250,000			(1,250,000	)								1,500,000
Services									57,500			58			126,268									41,600									167,926
Conversion of
preferred stock			(2,210	)		(2,210,000	)		1,339,392			1,339			2,208,661																		-
Payment of dividend
on preferred stock									114,588			114			222,559																		222,673
Common stock issued
in exhange for:
Purchase of 100%
Omni									25,000			25			76,725																		76,750
Purchase of
McCue Systems																								890,437									890,437
Purchase of
Treasury Shares																		(25,487	)														(25,487	)
Fair market value
of options issued									-			-			24,320																		24,320
Finance costs
of capital raised									-			-			(10,000	)																	(10,000	)
Write-off of
subscription rec															(70,000	)					70,000												-
Foreign currency
translation adjusts - restated									-			-			-												(2,394,994	)					(2,394,994	)
Net income for the year -restated									-			-			-															4,813,683			4,813,683
Balance at
June 30, 2008 - restated			1,920		$	1,920,000			25,545,482		$	25,545		$	74,950,286		$	(35,681	)	$	(600,907	)	$	1,048,249		$	(2,747,924	)	$	(33,071,702	)	$	41,487,866

See accompanying notes to these consolidated financial statements.

F - 7

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NETSOL TECHNOLOGIES INC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS - RESTATED

		For the Years Ended June 30,
		2008			2007			2006
Cash flows from operating activities:
Net income (loss) - restated		$	4,992,224		$	(5,774,957	)	$	(1,554,116	)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
Depreciation and amortization			3,337,956			2,641,272			3,020,048
Bad debt expense			58,293			189,873			30,218
Gain on forgiveness of debt			-			-			(8,294	)
Loss on sale of assets			35,484			2,977			35,090
Gain on sale of subsidiary shares in Pakistan			(1,240,808	)		-			-
Minority interest in subsidiary - restated			5,038,115			2,832,985			1,155,183
Stock issued for services			167,926			88,099			200,194
Stock issued for convertible note payable interest			-			311,868			-
Fair market value of warrants and stock options granted			24,320			136,571			25,618
Beneficial conversion feature			-			2,208,334			14,389
Amortization of capitalized cost of debt			-			2,815,358			100,172
Changes in operating assets and liabilities:
Increase in accounts receivable			(4,123,995	)		(2,858,608	)		(1,351,660	)
Increase in other current assets			(4,980,504	)		(3,359,736	)		(3,809,179	)
Decrease in long-term assets			229,622			159,940			-
Increase in accounts payable and accrued expenses			233,408			560,136			450,419
Net cash provided by/(used in) operating activities			3,772,041			(45,888	)		(1,691,918	)
Cash flows from investing activities:
Purchases of property and equipment			(4,435,755	)		(2,420,470	)		(2,709,569	)
Sales of property and equipment			15,838			366,088			301,684
Net proceeds of certificates of deposit			-			1,737,481			(1,534,371	)
Payments of acquisition payable			(879,007	)		(4,027,753	)		4,086,204
Purchase of treasury stock			(25,486	)		-			-
Increase in intangible assets			(4,829,369	)		(3,295,262	)		(5,027,968	)
Cash brought in at acquisition			-			-			473,890
Net cash used in investing activities			(10,153,779	)		(7,639,916	)		(4,410,130	)
Cash flows from financing activities:
Proceeds from sale of common stock			1,500,000			1,030,093			1,400,000
Proceeds from the exercise of stock options and warrants			3,282,827			1,008,250			669,382
Proceeds from sale of subsidiary stock			1,765,615			-			4,031,001
Finance costs incurred for sale of common stock			(10,000	)		-			-
Reduction of restricted cash			-			4,533,555			(4,533,555	)
Proceeds from loans from officers			-			165,000			-
Bank overdraft			85,335			-			-
Proceeds from bank loans			5,441,870			-			-
Payments on bank loans			(99,936	)		-
Proceeds from convertible notes payable			-			-			5,500,000
Payments on capital lease obligations & loans - net			(3,409,496	)		2,359,017			82,650
Net cash provided by financing activities			8,556,215			9,095,915			7,149,478
Effect of exchange rate changes in cash			90,597			106,285			74,611
Net increase in cash and cash equivalents			2,265,074			1,516,396			1,122,041
Cash and cash equivalents, beginning of year			4,010,164			2,493,768			1,371,727
Cash and cash equivalents, end of year		$	6,275,238		$	4,010,164		$	2,493,768

   

See accompanying notes to these consolidated financial statements.

F - 8

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NETSOL TECHNOLOGIES INC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

		For the Years Ended June 30,
		2008			2007			2006
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Interest		$	559,156		$	232,783		$	244,390
Taxes		$	118,535		$	70,184		$	45,511
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Common stock issued for intangible assets		$	-		$	269,128		$	-
Common stock issued for acquisition of 100% of subsidiary		$	76,750		$	2,295,649		$	1,848,680
Common stock issued for payment of note payable and related interest		$	-		$	27,500		$	71,018
Common stock issued for dividend payable		$	222,673		$	-		$	-
Common stock issued for conversion of debentures		$	-		$	150,000		$	150,000
Bonus stock distribution issued by subsidiary to minority holders		$	1,160,994		$	345,415		$	345,415
Stock issued for the conversion of Preferred Stock		$	2,210,000		$	1,370,000		$	1,370,000
Warrants issued to convertible note holders		$	-		$	-		$	2,108,335
Warrants issued for cost of debt		$	-		$	-		$	340,799
Preferred stock issued for conversion of convertible note payable		$	-		$	5,500,000		$	5,500,000

 

See accompanying notes to these consolidated financial statements.

 

F - 9

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NETSOL TECHNOLOGIES INC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - BUSINESS AND CONTINUED OPERATIONS

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

 

In March 2000, the Company formed NetSol (Pvt), Limited as a wholly owned subsidiary. The subsidiary was merged into the Company’s subsidiary, NetSol Technologies Limited (“NetSol PK”) in April 2006.

Business Combinations Accounted for Under the Purchase Method:

NetSol Technologies Europe Limited (“NTE”) (formerly CQ Systems)

On January 19, 2005, the Company entered into an agreement to acquire 100% of the issued and outstanding shares of common stock of CQ Systems Ltd., a company organized under the laws of England and Wales. The acquisition closed on February 22, 2005. The initial purchase price was £3,576,335 or $6,730,382, of which one-half was due at closing payable in cash and stock and the other half was due when the audited March 31, 2006 financial statements were completed. On the closing date, $1.7 million was paid and 681,965 shares were issued to the shareholders of CQ, valued at $1,676,795 at an average share price of $2.46 was recorded. In addition, the agreement called for the accumulated retained earnings amounting to £423,711 or $801,915 of CQ Systems as of the closing date to be paid to the shareholders in cash and stock. In April 2005, the additional cash of £350,000 or $662,410 was paid and 77,503 shares of the Company’s common stock valued at $139,505 were issued. The total amount paid at closing was $4,178,710. In June 2006, the final installment for the purchase of CQ Systems was determined based on the audited revenues for the twelve month period ending March 31, 2006. Based on the earn-out formula in the purchase agreement, £2,087,071 or $3,785,210 was due in cash and stock. On June 12, 2006, 884,535 shares of the Company’s restricted common stock were issued to the shareholders of CQ Systems. In July 2006, the cash portion of $1,936,530 plus $31,810 of interest was paid to the shareholders.

During the year ended June 30, 2008, the name of the subsidiary was changed to NetSol Technologies Europe Limited.

NetSol Technologies North America (“NTNA”) (formerly McCue Systems)

 

On May 6, 2006, the Company entered into an agreement to acquire 100% of the issued and outstanding stock of 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 the revenue 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 were recorded. The cash was paid on July 5, 2006 and the shares were also issued in July 2006. The total amount paid at closing was $3,746,843. In June 2007, the second installment due 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, 2006 397,700 shares of the Company’s restricted common stock were issued to the shareholders of McCue Systems. In July and August 2006, $450,000 and $429,007, respectively, of the cash portion was paid to the shareholders. In June 2007, the second installment on the acquisition consisting of $903,955 in cash and 408,988 shares of the Company’s restricted common stock became due and was recorded. In July and August, 2007, $879,007 of the cash was paid. In June 2008, the third and final installment was determined based on the audited revenues for the twelve month period ending December 31, 2007. Based on the earn-out formula in the purchase agreement, $1,525,632 was due, consisting of $762,816 in cash and 345,131 shares of the Company’s restricted common stock. The cash portion is shown as “Other Payable - Acquisition” and the stock portion is shown in “Shares to be issued” on these consolidated financial statements. The balance at June 30, 2008 was $846,215. Of this amount, $104,452 represents the few remaining McCue shareholders that have not been located as of the date of this report. The shares were issued on July 3, 2008 and the cash due was paid in July and August 2008.

F - 10

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NETSOL TECHNOLOGIES INC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

During the year ended June 30, 2008 the name of the subsidiary was changed to NetSol Technologies North America, Inc.

 

Business Combinations Accounted for Under the Pooling of Interest Method:

Abraxas Australia Pty, Limited

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

Formation of Subsidiary:

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

NetSol-Innovation (formerly TiG-Netsol)

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

During the year ended June 30, 2008, the name of the joint venture was changed to NetSol-Innovation (Private) Limited.

NetSol Omni

In February 2006, the Company purchased 50.1% of the outstanding shares for $60,012 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. 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. During the quarter ended June 30, 2006, Talk Trainers changed its name to NetSol Omni (Private) Limited (“Omni”).

In December 2007, the Company entered into an agreement with the minority shareholders of Omni, whereby the Company purchased the remaining 49.9% of Omni for 25,000 shares of the Company’s common stock valued at $76,750. Also in December, the operations of the subsidiary were merged into the operations of NetSol PK and will be reported under that subsidiary in the future.

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NETSOL TECHNOLOGIES INC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Merger of Subsidiaries

On April 28, 2006, the Companies wholly-owned subsidiary NetSol (PVT), Limited (“PK Private”) merged into NetSol Technologies (PVT), Ltd, both located in Lahore, Pakistan. As the subsidiaries were under common control, the assets and liabilities of PK Private were recorded at historically values at the time of the merger. The consolidated financial statements reflect the income and expenses of PK Private for the fiscal year up to the date of the merger.

In December 2007, the Companies wholly-owned subsidiary Omni was merged into NetSol PK both located in Lahore, Pakistan. As the subsidiaries were under common control, the assets and liabilities of Omni were recorded at historically values at the time of the merger. The consolidated financial statements reflect the income and expenses of Omni for the fiscal year up to the date of the merger.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - RESTATED

Principles of Consolidation:

 

The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, NetSol Technologies North America, Inc. (“NTNA”), NetSol Technologies Limited (“NetSol UK”), NetSol-Abraxas Australia Pty Ltd. (“Abraxas”), NetSol Technologies Europe Limited (“NTE”), and its majority-owned subsidiaries, NetSol Technologies, Ltd.(“NetSol PK”), NetSol Connect (Pvt), Ltd. (“Connect”), TIG-NetSol (Pvt) Limited (“NetSol-TIG”), and NetSol Omni (Private) Limited (“Omni”). All material inter-company accounts have been eliminated in the consolidation.

 

Business Activity:

 

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

 

Use of Estimates:

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

Cash and Cash Equivalents:

Equivalents

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

Concentration

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

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NETSOL TECHNOLOGIES INC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Accounts Receivable:

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

Revenues in excess of billings:

“Revenues in excess of billings” represent the total of the project to be billed to the customer over the revenues recognized under the percentage of completion method. As the customer is billed under the terms of their contract, the corresponding amount is transferred from this account to “Accounts Receivable.”

Property and Equipment:

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

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

Intangible Assets:

Intangible assets consist of product licenses, renewals, enhancements, copyrights, trademarks, trade names, customer lists and goodwill. The Company evaluates intangible assets, goodwill and other long-lived assets for impairment, at least on an annual basis and whenever events or changes in circumstances indicate that the carrying value may not be recoverable from its estimated future cash flows.

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

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

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NETSOL TECHNOLOGIES INC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Statement of Cash Flows:

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

Revenue Recognition:

The Company recognizes its revenue in accordance with the Securities and Exchange Commissions (“SEC”) Staff Accounting Bulletin No. 104, “Revenue Recognition” (“SAB 104”) and The American Institute of Certified Public Accountants (“AICPA”) Statement of Position (“SOP”) 97-2, “Software Revenue Recognition,” as amended by SOP 98-4 and SOP 98-9, SOP 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts,” and Accounting Research Bulletin 45 (ARB 45) “Long-Term Construction Type Contracts.” The Company’s revenue recognition policy is as follows:

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

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

Unearned Revenue: Unearned Revenue is broken down into three main categories; a) annual maintenance contracts whereby the annual fee is collected at the beginning of the service period and recognized on a pro-rata basis over the life of the contract, b) service revenue connected to those contracts which the implementation and development segments are recognized on the percentage of completed method; and c) customized development projects for existing customers to modify their version of the product to better meet their individual needs which are recognized on the percentage of completion method. As of June 30, 2008, unearned revenues were $3,293,728.

Fair Value:

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

Advertising Costs:

The Company expenses the cost of advertising as incurred. Advertising costs for the years ended June 30, 2008, 2007, and 2006 were $781,709 and $643,081 and $593,811 respectively.

F - 14

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NETSOL TECHNOLOGIES INC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

EARNINGS/(LOSS) PER SHARE - RESTATED: 

 

“Earnings per share” is calculated in accordance with the Statement of financial accounting standards No. 128 (SFAS No. 128), “Earnings per share”. Basic net income per share is based upon the weighted average number of common shares outstanding. Diluted net income per share is based on the assumption that all dilutive convertible shares and stock options were converted or exercised. Dilution is computed by applying the treasury stock method. Under this method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period.

 

The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations:

For the year ended June 30, 2008		Net Income			Shares			Per Share
Basic earnings per share:		$	4,813,683			24,118,538		$	0.20
Dividend to preferred shareholders			178,541
Net income available to common shareholders
Effect of dilutive securities
Stock options						950,910
Warrants						559,160
Convertible Preferred Shares						368,441
Diluted earnings per share		$	4,992,224			25,997,049		$	0.19
For the year ended June 30, 2007			Net Loss			Shares			Per Share
Basic earnings per share:		$	(6,012,283	)		18,189,590		$	(0.33	)
Dividend to preferred shareholders			237,326
Effect of dilutive securities *
Stock options						-
Warrants						-
Diluted earnings per share		$	(5,774,957	)		18,189,590		$	(0.33	)
For the year ended June 30, 2006			Net Loss			Shares			Per Share
Basic earnings per share:		$	(1,554,116	)		14,567,007		$	(0.11	)
Dividend to preferred shareholders			-
Effect of dilutive securities *
Stock options						-
Warrants						-
Diluted earnings per share		$	(1,554,116	)		14,567,007		$	(0.11	)

 

* As there is a loss, these securities are anti-dilutive. The basic and diluted earnings per share is the same for the year ended June 30, 2007 and 2006

 

Other Comprehensive Income & Foreign Currency Translation - RESTATED:

SFAS 130 requires unrealized gains and losses on the Company’s available for sale securities, currency translation adjustments, and minimum pension liability, which prior to adoption were reported separately in stockholders’ equity, to be included in other comprehensive income. The accounts of NetSol UK and NTE use the British Pound; NetSol PK, Connect, Omni, and NetSol-TiG use Pakistan Rupees; and Abraxas uses the Australian dollar as the functional currencies. NetSol Technologies, Inc., and subsidiary, NTNA, use the U.S. dollar as the functional currency. Assets and liabilities are translated at the exchange rate on the balance sheet date, and operating results are translated at the average exchange rate throughout the period. During the years ended June 30, 2008, 2007, and 2006, comprehensive income included net translation loss of $2,394,994 and income $15,361 and $152,401, respectively. Other comprehensive loss, as presented on the accompanying consolidated balance sheet in the stockholders’ equity section amounted to $2,747,923, $352,929, and $368,290 as of June 30, 2008, 2007, and 2006, respectively.

F - 15

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NETSOL TECHNOLOGIES INC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Accounting for Stock-Based Compensation:

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

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

In December 2004, the FASB issued FASB Statement No. 123R, "Share-Based Payment, an Amendment of FASB Statement No. 123" ("FAS No. 123R"). FAS No. 123R requires companies to recognize in the statement of operations the grant- date fair value of stock options and other equity-based compensation issued to employees. FAS No. 123R is effective beginning in the Company's first quarter of fiscal year ended June 30, 2007.

INCOME TAXES - RESTATED