The following discussion is intended to assist in an understanding of NetSol's financial position and results of operations for the year ended June 30, 2008.

Forward Looking Information

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

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

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

· Grow NetSol in the newest region in the UAE and Gulf states. Initially, a small virtual office is being set up in Dubai area that could roll into a bigger and stand alone presence in the area.

· Globalization and diversification of development and programming capabilities, not limited to Southeast Asia but exploration of emerging economies in Central and South America to support the NTNA business.

· Most strategic goal in 2009 is to establish the NTNA business by expanding the existing operations. The move from a smaller office in Burlingame to a much larger office in Emeryville will be a major event in NetSol history. This strategy has strong potential of ramping up global business and valuation for Netsol consistent with our stated vision.

· Actively explore both opportunistic and synergistic alliances and partnerships in Americas and Europe.

· Improve the quality of hiring of senior management personnel in key locations. Further build a stronger middle management resource pool to deliver and execute the growth and earnings envisioned by the management.

· Introduce and market two LeaseSoft modules: WSF and CAPS in the US market.

· Grow into new business verticals including healthcare, insurance, and banking in the US and European markets. The launch of Global Business Services through these verticals is an important goal in 2009.

· Enhance software design, engineering and service delivery capabilities by increasing investment in training.

· Continue to invest in research and development in an amount between 7-10% of yearly budgets in both new developments and domains within NetSol's core competencies.

· NetSol technology campus to become much more cost efficient, enhanced productivity and services to global clients and partners.

· 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 Enterprise solution in the European markets.

· Broaden value added investor base in the UAE region and US institutions. Also attract technology focused analysts coverage to improve NetSol valuation and multiples.

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

· Prompt organic expansion in North America market by expanding the sales and marketing team.

· Diversify in new verticals of services in North America such as insurance, healthcare, public sectors.

· Continue sales momentum and pipeline of LeaseSoft in APAC, Europe and now in the Americas.

· Further extending services offerings to existing 30 plus US customers.

· Penetrate further into the Chinese market by adding new locations.

· Effectively enter the UAE and regional markets for LeaseSoft and services.

· Further penetrate in Australian market in captive and non-captive sectors.

· Fully leverage NetSol's reputable name in the UK and European markets within banking, leasing and insurance sectors.

· Encourage joint ventures and new alliances.

.
Funding and Investor Relations:

· Add breadth and depth to the investor base in the US and UK by aggressively presenting in various investors forums and analysts meetings.

· Grow further institutional ownership from 20% to 40% by continuously presenting the Company with a focus on the US /China / UAE business expansion.

· IR/PR to expand media reach in 2009. NetSol has been interviewed by Fox Business Network, Nasdaq site and many print publications in 2008.

· NetSol management was invited on June 24, 2008 to closing bell at NASDAQ Stock Exchange.

· Expand the investor ownership in the UAE market to generate increased trading volumes on the NASDAQ Capital Market and the DIFX exchanges.

· Continue to encourage stock options exercises by officers and employees. Improve internal cash flows through enhanced process of A/Rs collections and explore most strategic investors with value add perspectives.

· Make every effort to enhance NetSol's market capitalization in the US.

Improving the Bottom Line:

· Grow topline, enhance gross profit margins to 62-65% by leveraging the low-cost development facility in Lahore and Best Shoring model.

· Generate much higher revenues per developer and service group, enhance productivity and lower cost per employee overall.

· Consolidate subsidiaries and integrate and combine entities to reduce overheads and employ economies of scale.

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

· Grow process automation and leverage the best practices of CMMi level 5.

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

· Initiated steps to consolidate some of the new lines of services businesses to improve both operating and net margins.

Management continues to be focused on building its delivery capability and has achieved key milestones in that respect. Key projects are being delivered on time and on budget, quality initiatives are succeeding, especially in maturing internal processes.

In a quest to continuously improve its quality standards, NetSol is frequently assessed to maintain its CMMi Level 5 quality certification. We believe that the CMMi standards achievement is a key reason in NetSol's demand surge worldwide. We remain convinced that this trend will continue for all NetSol offerings promoting further beneficial alliances and increasing the number and quality of our global customers. The quest for quality standards is a key to NetSol overall sustainability and success. In 2008 NetSol PK became ISO 27001 certified, a global standard and a set of best practices for Information Security Management

MATERIAL TRENDS AFFECTING NETSOL

NetSol has identified the following material trends affecting NetSol

Positive trends:

· Robust worldwide shift towards cost redundancies, economies of scale and labor arbitrage.

· The global economic pressures has shifted IT processes and technology to utilize both offshore and onshore solutions providers, to control the costs and improve ROIs.

· New trends in the most emerging and newest markets. There has been a noticeable new demand of leasing and financing solutions as a result of new buying habits and patterns in the Middle East, Eastern Europe and Central America.

· The overall leasing and finance industry in North America has steadily grown to over $260 billion despite the subprime crises, partly due to the resulting lack of cash liquidity.

· The levy of Indian IT sector excise tax of 35% (NASSCOM) on software exports is very positive for NetSol. In Pakistan there is a 15 year tax holiday on IT exports of services. There are 10 more years remaining on this tax incentive.

· Cost arbitrage, labor costs still very competitive and attractive when compared with India. Pakistan is significantly under priced for IT services and programmers as compared to India.

· 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.

Negative trends:

· The disturbance in Middle East, Afghanistan and Pakistan borders. Due to 9/11 events and global war on terrorism, the travel advisory of Americans travel restrictions to Pakistan continue. In addition, travel restrictions to the US and more stringent immigration laws are causing delays in travel to the US.

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

· Overall slump in world markets, curtailing IT and spending budgets.

· Unstable economic and political environment in Pakistan and the current volatility of Pakistan's capital markets.

· Worry of an expanding and unending credit crunch in the world economies due to financial and banking sector failures.

· Overall decline of auto sales due to higher oil prices and inflationary pressure.

CRITICAL ACCOUNTING POLICIES

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

VALUATION OF LONG-LIVED AND INTANGIBLE ASSETS

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

INCOME TAXES

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

CASH RESOURCES
We were successful in improving our cash position by the end of our fiscal year, June 30, 2008 with $6.2 million in cash worldwide. In addition, $3.3 million was injected by the exercise of options and warrants in 2008 and $1.5 million was injected from a sale of restricted common stock in a private placement.

CHANGE IN MANAGEMENT AND BOARD OF DIRECTORS

Board of Directors

At the 2008 Annual Shareholders Meeting a seven member board was elected. The shareholders voted for the following slate of directors: Mr. Najeeb U. Ghauri, Mr. Salim Ghauri, Mr. Eugen Beckert, Mr. Naeem U. Ghauri, Mr. Shahid Burki, Mr. Mark Caton and Mr. Alexander Shakow.

Committees

The Audit committee is made up of Mr. Shahid Burki as Chairman, Mr. Caton, Mr. Beckert and Mr. Shakow as members. The Compensation committee consists of Mr. Caton as its Chairman and Mr. Beckert, Mr. Burki, and Mr. Shakow as its members. The Nominating and Corporate Governance Committee consists of Mr. Beckert as chairman and Mr. Burki, Mr. Caton and Mr. Shakow as members.

RESULTS OF OPERATIONS

THE YEAR ENDED JUNE 30, 2008 COMPARED TO THE YEAR ENDED JUNE 30, 2007

Net revenues for the year ended June 30, 2008 were $36,642,175 as compared to
$29,282,086 for the year ended June 30, 2007. Net revenues are broken out among
the subsidiaries as follows:

                               [[Image Removed]]

                                      2008                       2007
       North America:
       Netsol Tech NA (NTNA)      $  3,969,521      10.83 %  $  4,953,083      16.92 %
                                     3,969,521      10.83 %     4,953,083      16.92 %

       Europe:
       Netsol UK                     1,767,564       4.82 %       138,656       0.47 %
       Netsol Tech Europe (NTE)      5,908,661      16.13 %     5,344,316      18.25 %
                                     7,676,225      20.95 %     5,482,972      18.72 %

       Asia-Pacific:
       NetSol PK                    19,610,797      53.52 %    14,796,001      50.53 %
       Netsol-Innovation             4,199,520      11.46 %     2,622,318       8.96 %
       Netsol Connect                  811,232       2.21 %       972,095       3.32 %
       Netsol-Omni                      30,366       0.08 %        44,151       0.15 %
       Netsol-Abraxas Australia        344,514       0.94 %       411,466       1.41 %
                                    24,996,429      68.22 %    18,846,031      64.36 %

       Total Net Revenues         $ 36,642,175     100.00 %  $ 29,282,086     100.00 %

The following table sets forth the items in our consolidated statement of operations for the years ended June 30, 2008 and 2007 as a percentage of revenues.

                                                         For the Year
                                                        Ended June 30,
                                         2008                        2007
                                                        %                           %
Net Revenues:
License fees                         $ 12,685,039        34.62 % $  9,788,266        33.43 %
Maintenance fees                        6,306,321        17.21 %    5,441,339        18.58 %
Services                               17,650,815        48.17 %   14,052,481        47.99 %
Total revenues                         36,642,175       100.00 %   29,282,086       100.00 %
Cost of revenues
Salaries and consultants               10,071,664        27.49 %    8,812,934        30.10 %
Travel                                  1,719,743         4.69 %    1,529,796         5.22 %
Repairs and maintenance                   405,140         1.11 %      430,962         1.47 %
Insurance                                 239,043         0.65 %      211,897         0.72 %
Depreciation and amortization           1,398,454         3.82 %      794,482         2.71 %
Other                                   1,890,100         5.16 %    1,914,440         6.54 %
Total cost of sales                    15,724,144        42.91 %   13,694,511        46.77 %
Gross profit                           20,918,031        57.09 %   15,587,575        53.23 %
Operating expenses:
Selling and marketing                   3,722,470        10.16 %    3,161,924        10.80 %
Depreciation and amortization           1,939,502         5.29 %    1,846,790         6.31 %
Bad debt expense                           58,293         0.16 %      189,873         0.65 %
Salaries and wages                      3,703,836        10.11 %    3,696,501        12.62 %
Professional services, including
non-cash compensation                     837,598         2.29 %    1,067,702         3.65 %
General and adminstrative               3,447,113         9.41 %    2,977,917        10.17 %
Total operating expenses               13,708,812        37.41 %   12,940,707        44.19 %
Income from operations                  7,209,219        19.67 %    2,646,868         9.04 %
Other income and (expenses):
Gain (loss) on sale of assets             (35,484 )      -0.10 %       (2,977 )      -0.01 %
Beneficial conversion feature                   -         0.00 %   (2,208,334 )      -7.54 %
Amortization of debt discount and
capitalized cost of debt                        -         0.00 %   (2,803,691 )      -9.57 %
Liquidation damages                             -         0.00 %     (180,890 )      -0.62 %
Fair market value of warrants
issued                                          -         0.00 %      (68,411 )      -0.23 %
Interest expense                         (626,708 )      -1.71 %     (617,818 )      -2.11 %
Interest income                           195,103         0.53 %      339,164         1.16 %
Gain on sale of subsidiary shares       1,240,808         3.39 %            -         0.00 %
Other income and (expenses)             2,169,383         5.92 %      114,423         0.39 %
Total other income (expenses)           2,943,102         8.03 %   (5,428,534 )     -18.54 %
Net income (loss) before minority
interest in subsidiary                 10,152,321        27.71 %   (2,781,666 )      -9.50 %
Minority interest in subsidiary        (5,038,115 )     -13.75 %   (2,832,985 )      -9.67 %
Income taxes                             (121,982 )      -0.33 %     (160,306 )      -0.55 %
Net income (loss)                       4,992,224        13.62 %   (5,774,957 )     -19.72 %
Dividend required for preferred
stockholders                             (178,541 )      -0.49 %     (237,326 )      -0.81 %
Net income (loss) applicable to
common shareholders                     4,813,683        13.14 %   (6,012,283 )     -20.53 %

The total consolidated net revenue for fiscal year 2008 was $36,642,175 compared to $29,282,086 in fiscal year 2007. This is a nearly 25% increase in revenue. Maintenance fee revenue increased 16% from $5,441,339 to $6,306,321. Revenue from services, which includes consulting and implementation, increased 26% from $14,052,481 to $17,650,815. 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 verticals 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. 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 two pilot projects in the province of Punjab in 2007, and a recent one in Islamabad. NetSol anticipates winning key projects in this area in next few quarters.

The fiscal year ended June 30, 2008 was a very busy and exciting period for NetSol worldwide. The activity for NetSol's new license sales for LeaseSoft is increasingly on the rise. The current pipeline boasts over 30 plus captive auto manufacturers and non-captives globally at an advance stage of closing or decision making.

Several new major customers were added in 2008 in APAC and the European markets. The most significant license customers included Nissan in China, BMW in Hong Kong, a major Italian auto manufacture in China, and a major European bank. Several domestic projects and contracts were signed during the year.

Due to the revision in our pricing policy, LeaseSoft license value in APAC is in the range of $1.0 to $2.0 million, without factoring in services maintenance and implementation fees. Normally, NetSol negotiates 18-20% 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. 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 current year, our APAC division successfully implemented its LeaseSoft product suite for two major automotive captives in Hong Kong and China. NetSol has signed a contract with one of the largest leasing companies in Saudi Arabia for LeaseSoft and this contract marks NetSol's entry into the lucrative Middle East region. In addition, a contract with a leading automobile manufacturer in Australia was signed for the LeaseSoft product. NetSol won a contract with a leading bank in Pakistan for Basel II advisory services this opportunity for NetSol represents a new business sector vertical for the Company. A contract was signed with a major public sector hospital in Pakistan to design and implement an IT system. This represents a new vertical for NetSol in developing Hospital Management Systems. In addition, NetSol has launched a new information security management initiative in Pakistan, called "Secure Pakistan". The project aims to secure critical information, while in storage or transfer, from theft.

NetSol signed a new frame agreement with Mercedes Benz Financial Services AG Germany, to service their needs in the Middle East, Africa, and the Asia-Pacific regions. The frame agreement outlines the implementation of basic and general provisions, regulations, and processes of existing and all future individual agreements for the development and delivery of software or services to Mercedes Benz Financial Services.

During the current year, NetSol, lead by the North American division has launched Global Services to bring our competencies in delivering IT services to the global market and especially in North America. A new business model, "BestShoring" was developed to deliver the best solution to the market using both on-shore and off-shore resources.

The North American division has introduced "consulting selling" to it market whereby the clients requirements are being accessed, with requirements workshops, and providing the best solution to meet the client's needs with LeasePak and/or LeaseSoft. North America is introducing the LeaseSoft product suite to its market.

Our joint-venture, NetSol-Innovation continues to grow overall. The total programmer strength is over 130 people 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.

Our EMEA division ("NTE") had two customers "go-live" during the current fiscal year and had several contracts for data transfers as the market in Europe consolidated. There were three new customers contracts signed during the current fiscal year, using the full co-operation of the UK and Pakistan teams for the implementation, with the UK staff doing the customer facing activities while Lahore provided the technical and development input; a win for our "BestShoring" model.

The gross profit was $20,918,031 for year ended June 30, 2008 as compared with $15,587,575 for the same period of the previous year. This is a 34% increase. The gross profit percentage was 57% for the current fiscal year and 53% in the prior year. The cost of sales was $15,724,144 in the current year compared to $13,694, 511 in the prior year. Although salaries and consultant fees increased $1,258,730 from $8,812,934 in the prior year to $10,071,664, as a percentage of sales, it decreased 3% from 30% in the prior year to 27% in the current year. 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.

Operating expenses were $13,708,812 for the year ended June 30, 2008 as compared to $12,940,707 for the year ended June 30, 2007, an increase of only 6% from the prior year. The increase is mainly attributable to increased selling and marketing activities, additional employees and an increase in overall activities due to our increased marketing efforts. As a percentage of sales it decreased 7% from 44% to 37%. Depreciation and amortization expense amounted to $1,939,502 and $1,846,790 for the year ended June 30, 2008 and 2007, respectively. Combined salaries and wage costs were $3,703,836 and $3,696,501 for the comparable periods, respectively, or an increase of only $7,335 from the corresponding period last year. As a percentage of sales, these costs decreased slightly from . . .