UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-QSB

             [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

                For the quarterly period ended December 31, 2007
                                               -----------------
                                       OR

             [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                 For the transition period from ______ to ______


                        Commission file number 000-25831

                              NetWolves Corporation
                              ---------------------
        (Exact name of small business issuer as specified in its charter)

            New York                                        11-2208052
            --------                                        ----------
(State or other jurisdiction of                          (I.R.S. Employer
Incorporation or organization)                           Identification No.)


              4710 Eisenhower Blvd. Suite F-2, Tampa, Florida 33634
              -----------------------------------------------------
                    (Address of principal executive offices)

                                 (813) 579-3200
                                 --------------
              (Registrant's telephone number, including area code)

                                      None
                                      ----
   (Former name, former address and former fiscal year, if changed since last
                                    report)

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

Yes  X    No
    ---      ---

Indicate by check mark whether the  registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act)

Yes    No  X
   ---    ---

Indicate the number of shares  outstanding of each of issuer's classes of common
stock as of the latest practicable date:

      TITLE OF CLASS                          NUMBER OF SHARES OUTSTANDING ON
------------------------------
Common Stock, $.0033 par value                         February 5, 2008
                                                       -----------------

                                                          34,309,713
                                                          ----------

Transitional Small Business Disclosure Format (check one):   Yes [  ]   No [X]
<PAGE>





                     NETWOLVES CORPORATION AND SUBSIDIARIES

                             (DEBTOR-IN-POSSESSION)

                         FORM 10-QSB - December 31, 2007






                                      INDEX
<TABLE>
PART I - FINANCIAL INFORMATION
<S>                                                                                                         <C>
      ITEM 1 - FINANCIAL STATEMENTS

        CONDENSED CONSOLIDATED BALANCE SHEETS
           December 31, 2007 (unaudited) and June 30, 2007 ...............................................   1 - 2

        CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
           For the three and six months ended December 31, 2007 (unaudited) and 2006 (unaudited)..........     3

        CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
           For the six months ended December 31, 2007 (unaudited) and 2006 (unaudited)   .................     4

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ...........................................     5 - 16

      ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN
               OF OPERATION .............................................................................   16 - 22

      ITEM 3 - CONTROLS AND PROCEDURES ...................................................................    22


PART II - OTHER INFORMATION

      ITEM 1 - LEGAL PROCEEDINGS .........................................................................    23

      ITEM 2 - CHANGES IN SECURITIES AND SMALL BUSINESS ISSUER PURCHASES
                 OF EQUITY SECURITIES ....................................................................    23

      ITEM 3 - DEFAULTS UPON SENIOR SECURITIES ...........................................................    23

      ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS .......................................    23

      ITEM 5 - OTHER INFORMATION .........................................................................    23

      ITEM 6 - EXHIBITS...................................................................................    23

      SIGNATURES..........................................................................................   25-28
</TABLE>
<PAGE>
                     NETWOLVES CORPORATION AND SUBSIDIARIES

                             (DEBTOR-IN-POSSESSION)

                      CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
                                                                                 December 31,            June 30,
                                                                           --------------------- ----------------------
                                                                                    2007                  2007
                                                                           --------------------- ----------------------
ASSETS                                                                           (Unaudited)
<S>                                                                                <C>                   <C>
Current assets
  Cash and cash equivalents                                                        $   499,984           $  1,027,465
  Accounts receivable, net of allowance for doubtful accounts
   of $120,000 and $0, respectively                                                  1,708,930              1,745,159
  Inventories, net                                                                      53,001                 74,279
  Prepaid expenses                                                                     371,152                494,149
                                                                           --------------------- ----------------------

       Total Current Assets                                                          2,633,067              3,341,052

Property and equipment, net                                                            112,689                 79,557

Identifiable intangible assets, net                                                    343,937                438,550

Goodwill and other indefinite lived intangible assets                                3,801,973              3,801,973

Other assets                                                                           266,679                150,852
                                                                           --------------------- ----------------------

       Total Assets                                                               $  7,158,345           $  7,811,984
                                                                           ===================== ======================
</TABLE>
                                        1
See notes to condensed consolidated
  financial statements.
<PAGE>
                     NETWOLVES CORPORATION AND SUBSIDIARIES

                             (DEBTOR-IN-POSSESSION)

                      CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
                                                                                 December 31,            June 30,
                                                                             --------------------- ----------------------
                                                                                     2007                  2007
                                                                             --------------------- ----------------------
                                                                                 (Unaudited)
LIABILITIES AND SHAREHOLDERS' DEFICIT

<S>                                                                                <C>                    <C>
Current Liabilities
  Liabilities subject to compromise-pre-petition
    Current portion of long-term debt                                              $ 1,207,987            $ 1,207,987
    Account payable and accrued expenses                                             5,206,391              4,906,309
                                                                             --------------------- ----------------------

       Total Current Liabilities Subject to Compromise-Pre-
        Petition                                                                     6,414,378              6,114,296
                                                                             --------------------- ----------------------

  Liabilities not subject to compromise-post petition
    Account payable and accrued expenses                                             1,201,119              1,121,971
    Deferred revenue                                                                   815,838              1,092,580
                                                                             --------------------- ----------------------

       Total Current Liabilities Not Subject to Compromise-Post-
       Petition                                                                      2,016,957             2,214,551
                                                                             --------------------- ----------------------

       Total Liabilities                                                             8,431,335              8,328,847
                                                                             --------------------- ----------------------

Shareholders' Deficit

Series A convertible preferred stock, $.0033 par value; $7,123,016 and
$6,718,296 liquidation preference on December 31, 2007 and June 30, 2007,
respectively; 1,000,000 authorized; 223,887 and 199,903 shares issued and
outstanding on December 31, 2007 and June 30, 2007,
respectively.                                                                        2,778,404              2,418,644

Series B convertible preferred stock, $.0033 par value; $7,159,708 and
$6,778,360 liquidation preference on December 31, 2007 and June 30,
2007, respectively; 500,000 shares authorized; 201,886 shares issued
and outstanding on December 31, 2007 and June 30, 2007.                              2,519,689              2,519,689

Series C convertible preferred stock, $.0033 par value; $1,821,334 and
$1,721,735 liquidation preference on December 31, 2007 and June 30,
2007, respectively; 100,000 shares authorized; 14,131 and 12,962 shares
issued and outstanding December 31, 2007 and June 30, 2007,
respectively.                                                                          275,501                205,361

Preferred stock, $.0033 par value; 400,000 shares authorized; no shares
issued and outstanding                                                                      --                     --

Common stock, $.0033 par value; 65,000,000 shares authorized;
34,309,713 shares issued and outstanding on December 31, 2007 and June
30, 2007.                                                                              113,223                113,223
Additional paid-in capital                                                          79,067,750             79,528,489
Accumulated deficit                                                                (86,027,557)           (85,302,269)
                                                                             --------------------- ----------------------

         Total Shareholders' Deficit                                                (1,272,990)              (516,863)
                                                                             --------------------- ----------------------

         Total Liabilities and Shareholders' Deficit                               $ 7,158,345            $ 7,811,984
                                                                             ===================== ======================
</TABLE>
                                        2
See notes to condensed consolidated
  financial statements.

<PAGE>
                     NETWOLVES CORPORATION AND SUBSIDIARIES

                             (DEBTOR-IN-POSSESSION)

                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                        For the Three Months Ended          For the Six Months Ended
                                                               December 31,                       December 31,
                                                     ---------------------------------- ---------------------------------
                                                          2007              2006             2007             2006
                                                     ---------------- ----------------- ---------------- ----------------
<S>                                                     <C>               <C>              <C>              <C>
Revenue
  Voice services                                        $2,017,532        2,183,082        $4,104,566       $4,776,461
  Managed service charges                                2,145,054        2,158,531         4,217,800        4,215,809
                                                     ---------------- ----------------- ---------------- ----------------
                                                         4,162,586        4,341,613         8,322,366        8,992,270
                                                     ---------------- ----------------- ---------------- ----------------
Cost of Revenue (excluding depreciation and
amortization shown separately below)
  Voice services                                         1,334,897        1,455,075         2,685,918        3,153,272
  Managed service charges                                1,421,511        1,373,157         2,716,006        2,663,289
                                                     ---------------- ----------------- ---------------- ----------------
                                                         2,756,408        2,828,232         5,401,924        5,816,561
                                                     ---------------- ----------------- ---------------- ----------------
Operating Expenses
  General and administrative                               792,677        1,397,062         1,893,645        2,710,127
  Sales and marketing                                      603,292          940,244         1,222,484        1,720,667
  Depreciation and amortization                             61,797          205,643           123,907          412,096
                                                     ---------------- ----------------- ---------------- ----------------
                                                         1,457,766        2,542,949         3,240,036        4,842,890
                                                     ---------------- ----------------- ---------------- ----------------
Loss Before Other (Expense) Income                         (51,588)      (1,029,568)         (319,594)      (1,667,181)

 Other (Expense) Income
   Interest (expense) income                                (3,407)         (43,083)            9,761          (83,317)
   Reorganization cost                                    (298,102)              --          (404,061)              --
                                                     ---------------- ----------------- ---------------- ----------------
                                                          (301,509)         (43,083)         (394,300)         (83,317)
                                                     ---------------- ----------------- ---------------- ----------------
         Loss Before Income Taxes                         (353,097)      (1,072,651)         (713,894)      (1.750,498)
                                                     ---------------- ----------------- ---------------- ----------------
  Provision for income taxes                                     -           (1,324)          (11,403)         (67,364)
                                                     ---------------- ----------------- ---------------- ----------------
         Net Loss                                    $    (353,097)     $(1,073,975)     $   (725,297)    $ (1,817,862)
                                                     ================ ================= ================ ================

         Dividends on Convertible Preferred
         Stock                                            (217,115)        (198,284)     $   (481,713)    $   (387,136)
                                                     ================ ================= ================ ================

         Net Loss Attributable to Common
         Shareholders                                     (570,212)      (1,272,259)       (1,207,008)      (2,204,998)
                                                     ================ ================= ================ ================

         Basic and Diluted Net Loss Per Share         $      (0.02)      $    (0.04)      $     (0.04)    $      (0.07)
                                                     ================ ================= ================ ================
         Weighted Average Common Shares
         Outstanding, basic
            and diluted                                 34,309,713       33,521,399        34,309,713       33,327,788
                                                     ================ ================= ================ ================
</TABLE>
                                       3
See notes to condensed consolidated
  financial statements.
<PAGE>
                     NETWOLVES CORPORATION AND SUBSIDIARIES

                             (DEBTOR-IN-POSSESSION)

                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                                                For the Six Months Ended December 31,
                                                                            --------------------------------------------
                                                                                     2007                  2006
                                                                            --------------------- ----------------------
<S>                                                                                <C>                  <C>
Cash flows from operating activities
 Net loss                                                                          $  (725,297)         $  (1,817,862)
                                                                            --------------------- ----------------------

Adjustments to reconcile net loss to net cash used in operating
 Activities
    Depreciation                                                                        29,294                 35,350
    Amortization                                                                        94,613                376,746
    Bad debt expense                                                                   120,000                302,896
    Non-cash charge to operations with respect to stock, options
      and warrants issued for services and amortization of
      previously issued warrants                                                        20,975                347,142

       Loss on Disposal of Property and Equipment                                          276                  2,671

Changes in operating assets and liabilities
    Accounts receivable                                                                (83,771)              (468,612)
    Inventories                                                                         21,278                 36,709
    Prepaid expenses and other current assets                                          122,997               (173,180)
    Other Assets                                                                      (115,827)                    --
    Pre-petition accounts payable and accrued expenses                                 248,276               (364,402)
    Post-petition accounts payable and accrued expenses                                 79,149                     --
    Deferred revenue                                                                  (276,742)               371,004
                                                                            --------------------- ----------------------

         Net Cash Used In Operating Activities                                        (464,779)            (1,351,538)
                                                                            --------------------- ----------------------

Cash flows from investing activities
    Payment on existing customer list                                                       --                (90,000)
    Patent costs paid                                                                       --                 (8,901)
    Purchase of property and equipment                                                 (62,702)                    --
                                                                            --------------------- ----------------------

         Net Cash Used In Investing Activities                                         (62,702)               (98,901)
                                                                            --------------------- ----------------------
         Net Decrease in Cash and Cash Equivalents                                    (527,481)            (1,450,439)

Cash and Cash Equivalents - Beginning                                                1,027,465              2,016,156
-------------------------                                                   --------------------- ----------------------

Cash and Cash Equivalents - Ending                                                  $  499,984              $ 565,717
-------------------------                                                   ===================== ======================

Supplement Cash Flow Information
--------------------------------
  Cash paid for income taxes                                                         $  11,403              $  67,364

  Cash paid for interest                                                             $      --              $  96,978

Supplemental Disclosure of Non-Cash Investing and Financing Activities
----------------------------------------------------------------------
  Dividends accrued on convertible preferred stock                                     481,713                387,136
                                                                            ===================== ======================

  Dividends paid-in-kind on convertible preferred stock                                429,900                325,804
                                                                            ===================== ======================

  Conversions of preferred stock to common stock                                            --                345,501
                                                                            ===================== ======================
</TABLE>
                                       4

See notes to condensed consolidated
  financial statements.
<PAGE>
                     NETWOLVES CORPORATION AND SUBSIDIARIES

                             (DEBTOR-IN-POSSESSION)

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

1.   Interim financial information

     The summary financial information  contained herein is unaudited;  however,
     in the opinion of management,  all adjustments  (consisting  only of normal
     recurring  accruals)  necessary for a fair  presentation  of such financial
     information have been included.  These financial statements,  including the
     condensed  consolidated  balance sheet as of June 30, 2007,  which has been
     derived from audited financial statements, are presented in accordance with
     the  requirements  of Form  10-QSB and  consequently  may not  include  all
     disclosures  normally required by generally accepted accounting  principles
     or those normally made in the Company's  Annual Report on Form 10-KSB.  The
     accompanying  condensed consolidated financial statements and related notes
     should be read in  conjunction  with the  Company's  Annual  Report on Form
     10-KSB for the fiscal year ended June 30, 2007.  The results of  operations
     for the three and six months ended  December  31, 2007 are not  necessarily
     indicative of the results to be expected for the full year.

2.   Bankruptcy, Management's Plan and Going Concern

     On May 21, 2007 NetWolves  Corporation ("the Company") (also referred to as
     the "Debtor") filed voluntary  petitions for relief under Chapter 11 of the
     United States  Bankruptcy Code in the United States  Bankruptcy  Court (the
     "Bankruptcy  Court")  in  order  to  facilitate  the  restructuring  of the
     Debtor's debt,  trade  liabilities  and other  obligations.  Throughout the
     Bankruptcy proceedings, the Debtors will continue to operate their business
     and manage  their  properties  as  "debtors-in-possession"  pursuant to the
     Bankruptcy  Code.  In  general,  as  debtors-in-possession,  the  Debtor is
     authorized under Chapter 11 to continue to operate as an ongoing  business,
     but may not engage in transactions  outside the ordinary course of business
     without the prior approval of the Bankruptcy Court.

     Under  the   Bankruptcy   Code,   the  filing  of  a  bankruptcy   petition
     automatically stays most actions against the Debtors,  including actions to
     collect pre-petition indebtedness or to exercise control of the property of
     the Debtors' estate. Absent an order of the Bankruptcy Court, substantially
     all   pre-petition   liabilities   will  be  addressed   under  a  plan  of
     reorganization.  The Bankruptcy Court established  October 1, 2007 for both
     non-governmental  agencies  and  governmental  agencies as the bar date for
     filing proofs of claims.

     Under the  Bankruptcy  Code,  the  Debtors  may  assume  or reject  certain
     pre-petition executory contracts and unexpired leases,  including leases of
     real property,  subject to the approval of the Bankruptcy Court and certain
     other conditions.  Rejection of an unexpired lease or executory contract is
     treated  as a  pre-petition  breach  of the  lease or  contract,  generally
     resulting  in damages  being  treated  as  pre-petition  unsecured  claims.
     Counterparties  to these  rejected  contracts or unexpired  leases may file
     proofs of claim against the Debtors' estate for damages,  if any,  relating
     to such rejections.

     The  United  States  Trustee  for the Middle  District  of  Florida,  Tampa
     Division  (the  "Trustee")  appointed  an official  committee  of unsecured
     creditors (the "Creditors'  Committee").  The Creditors'  Committee and its
     legal  representatives  have a right to be heard on all  matters  that come
     before the Bankruptcy Court.

     The Debtors are in the process of  reconciling  creditors'  proofs of claim
     filed with the  Bankruptcy  Court that differ in amount  from the  Debtors'
     records.  Certain  creditors have filed claims  substantially  in excess of
     amounts  reflected in the Debtors'  records.  Based on ongoing  analyses of
     claims filed,  the nature of such  differences has been identified as being
     attributable  to  duplicate  claims  for the  same  obligation  filed  with
     several,  and in certain  cases all the  Debtors;  damages  sought in legal
     suits;  certain  contingent  liabilities  arising from  contracts and other
     claims filed against the Debtors;  creditors claiming  compensation  and/or
     damages for  completed  and  partially  completed  contracts  and  purchase
     orders; and other disputed items. In addition, claims have been filed which
     do not state a specific claim amount or as to which a specific claim amount
     is not readily determinable.

                                       5
<PAGE>
                     NETWOLVES CORPORATION AND SUBSIDIARIES

                             (DEBTOR-IN-POSSESSION)

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

     The Financial  Statements  have also been  prepared in accordance  with the
     American Institute of Certified Public Accountants  ("AICPA")  Statement of
     Position 90-7, "Financial Reporting by Entities in Reorganization under the
     Bankruptcy Code" ("SOP 90-7").  Accordingly,  all  pre-bankruptcy  petition
     ("pre-petition") liabilities believed to be subject to compromise have been
     segregated  in the  Condensed  Consolidated  Balance  Sheets (the  "Balance
     Sheets") and  classified  as  "liabilities  subject to  compromise"  at the
     estimated   amount  of  allowable   claims  under  the  Chapter  11  Cases.
     Liabilities  not  believed to be subject to  compromise  in the  bankruptcy
     proceedings are separately  classified as "current" and  "non-current,"  as
     appropriate.  Expenses (including  professional  fees),  realized gains and
     losses,  and provisions for losses  resulting from the  reorganization  are
     reported  separately as "Reorganization  Costs." Also,  interest expense is
     reported  only to the extent  that it is to be paid  during the  Chapter 11
     Cases.  Contractual  interest in total debt is as disclosed in Note 9. Cash
     used for reorganization  items was approximately  $298,000 and $404,000 for
     the three and six months ended December 31, 2007.

     Upon  confirmation  of all amounts owed, any remaining  differences  may be
     resolved by negotiated agreement between the Debtors and the claimant or by
     the  Bankruptcy  Court as part of the  Chapter 11 Case.  Consequently,  the
     amounts included in the condensed  consolidated  balance sheets at December
     31, 2007 and June 30, 2007 as  liabilities  that are subject to  compromise
     under reorganization  proceedings may be subject to adjustment. The Debtors
     have made appropriate provision for all claims of creditors it believes are
     valid;  however,  at this time,  the Debtors cannot make a prediction as to
     the aggregate  amount of claims  allowed or the ultimate  treatment of such
     allowed claims under the Plan.

     On October 29, 2007,  the Company filed a Joint Plan of  Reorganization  of
     Debtors and related Disclosure Statement with the Bankruptcy Court.

     On January  17,  2008,  the  Company  filed a First  Amended  Joint Plan of
     Reorganization  of  Debtors  and  related  Disclosure  Statement  with  the
     Bankruptcy Court.

     The  accompanying  condensed  consolidated  financial  statements have been
     prepared  on a  going  concern  basis,  which  contemplates  continuity  of
     operations,  realization of assets,  and  liquidation of liabilities in the
     ordinary  course of  business,  and do not reflect  adjustments  that might
     result if the  Company  were unable to  continue  as a going  concern.  The
     Company  has  incurred  net losses  for each of the last two  years.  As of
     December  31,  2007,  the  Company  had a  working  capital  deficiency  of
     $5,798,268 and shareholders'  deficiency of $1,272,990.  Realization of the
     Company's assets,  however, is dependent on the continued operations of the
     Company  and  the  future  success  of  such  operations.  There  can be no
     assurances  that the  Company  will  emerge  from  Chapter  11  bankruptcy.
     Historically,   the  Company  has  experienced  significant  recurring  net
     operating  losses as well as  negative  cash  flows  from  operations.  The
     Company's  main source of  liquidity  has been  equity and debt  financing,
     which has been used to fund  continuing  losses from operating  activities.
     Based on the Company's cash position of approximately $500,000, and further
     taking into  account  ongoing  costs  related to the Chapter 11  bankruptcy
     proceedings,  as well as the ultimate disposition of pre-petition claims of
     creditors  pursuant  to an  approved  plan of  reorganization,  the Company
     believes that it may not have sufficient cash to meet the Company's funding
     requirements through December 31, 2008, without raising additional capital.
     The Company's  ability to raise additional  capital to fund operations also
     may have been  impaired by the Chapter 11  reorganization  proceeding.  The
     Company  plans to  continue  its  cost  reduction  efforts  as well as seek
     additional  financing to satisfy a plan of  reorganization by the Company's
     creditors. However, based upon the issues discussed herein, there can be no
     assurances  that the Company  will be able to raise  additional  capital on
     desirable  terms or at all,  in order to satisfy  its  future  obligations.
     These  factors  raise  substantial  doubt  about the  Company's  ability to
     continue as a going concern, which may require further restructuring,  or a

                                       6
<PAGE>
                     NETWOLVES CORPORATION AND SUBSIDIARIES

                             (DEBTOR-IN-POSSESSION)

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)


     sale or liquidation of the Company and could cause significant  dilution or
     a total loss to its shareholders.  The financial  statements do not include
     any adjustment relating to the recoverability of the recorded assets or the
     classification  of liabilities  that may be necessary should the Company be
     unable to continue as a going concern.

3.   The Company

     The  consolidated  financial  statements  include the accounts of NetWolves
     Corporation  and  its  subsidiaries,   NetWolves  Technologies  Corporation
     ("NWT"),  Norstan Network Services,  Inc., d/b/a NetWolves Network Services
     ("NNS")  and  TSG  Global   Education  Web,  Inc.   ("TSG")   (collectively
     "NetWolves" or the "Company").

     NetWolves Corporation is a global  telecommunications  and Internet managed
     services providers offering  single-source  network solutions that provides
     multi-carrier and multi-vendor  implementation to over 1,000 customers. The
     Company's principal activity is to design,  manage and deliver products and
     services   allowing   people  and  networks  to  access  the  Internet  and
     telecommunications networks,  efficiently and cost effectively. In addition
     to the prevailing networking equipment,  NetWolves also offers our patented
     system technology to organizations with complex requirements, that our plug
     `n' play perimeter office security  platforms and secure remote  monitoring
     and management ("SRM2 TM") system ideally solve.

     The Company operates primarily in two distinct segments. The Voice Services
     segment provides voice services including switched and dedicated  outbound,
     switched and  dedicated  toll-free  inbound,  calling and debit cards,  and
     conference  calling.  The Managed Services Charges segment provides network
     and security  technology  and a variety of recurring  managed data services
     giving its customers a single source solution.

4.   Reclassifications

     Certain reclassifications have been made to the December 31, 2006 condensed
     consolidated  statement of operations  and cash flows in order to have them
     conform to the current period's  classifications.  These  reclassifications
     have no effect on previously reported net loss.

5.   Income Taxes

     The Company has adopted the  provisions of Financial  Accounting  Standards
     Board ("FASB") Interpretation No. 48, "Accounting for Uncertainty in Income
     Taxes - an  interpretation of FASB Statement No. 109 ("FIN 48"), on July 1,
     2007.  FIN 48 clarifies  the  accounting  for  uncertainty  in income taxes
     recognized in an enterprise's  financial statements in accordance with SFAS
     No. 109,  "Accounting  for Income  Taxes,"  and  prescribes  a  recognition
     threshold and measurement process for financial  statement  recognition and
     measurement of a tax classification,  interest and penalties, accounting in
     interim period, disclosure and transition.

     The Company has  identified its Federal tax return and its state tax return
     in New  York  as  "major"  tax  jurisdictions,  as  defined.  Based  on the
     Company's  evaluation,  it has been concluded that there are no significant
     uncertain tax positions  requiring  recognition in the Company's  financial
     statements. The Company's evaluation was performed for tax years ended June
     30, 2004 through June 30, 2007,  the only periods  subject to  examination.
     The Company  believes that its income tax positions and deductions would be
     sustained  on audit and does not  anticipate  any  adjustments  that  would
     result in a material  change to its financial  position.  In addition,  the
     Company  did not  record a  cumulative  effect  adjustment  related  to the
     adoption of FIN 48.

     The Company's policy for recording  interest and penalties  associated with
     audits is to record  such  items as a  component  of income  before  income
     taxes.  Penalties  are  recorded  in other  expense  and  interest  paid or

                                       7
<PAGE>
                     NETWOLVES CORPORATION AND SUBSIDIARIES

                             (DEBTOR-IN-POSSESSION)

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

     received is recorded in interest expense or interest income,  respectively,
     in the statement of operations. There were no amounts accrued for penalties
     or interest  as of or during the three and six months  ended  December  31,
     2007. The Company does not expect its  unrecognized tax benefit position to
     change during the next twelve  months.  Management is currently  unaware of
     any issues under review that could result in significant payments, accruals
     or material deviations from its position.

     The Company is no longer subject to U.S. Federal income tax examinations by
     the  Internal  Revenue  Service  and most state and local  authorities  for
     fiscal tax years ending prior to June 30, 2004 (certain  state  authorities
     may  subject the Company to  examination  up to the period  ending June 30,
     2003). The Company does, however, have prior year net operating loss, which
     will remain open for examination.

6.   Summary of Recent Accounting Pronouncements

     In September 2006, the FASB issued SFAS No. 157, "Fair Value  Measurements"
     ("SFAS  157").  SFAS 157 defines fair value,  establishes  a framework  for
     measuring  fair value in  generally  accepted  accounting  principles,  and
     expands  disclosures  about  fair  value  measurements.   It  codifies  the
     definitions  of fair  value  included  in other  authoritative  literature;
     clarifies and, in some cases, expands on the guidance for implementing fair
     value measurements; and increases the level of disclosure required for fair
     value  measurements.   Although  SFAS  157  applies  to  (and  amends)  the
     provisions of existing  authoritative  literature,  it does not, of itself,
     require any new fair value  measurements,  nor does it establish  valuation
     standards. SFAS 157 is effective for financial statements issued for fiscal
     years  beginning  after November 15, 2007, and interim periods within those
     fiscal years. The Company will evaluate the impact of adopting SFAS 157 but
     does not  expect  that it will  have a  material  impact  on the  Company's
     consolidated financial position, results of operations or cash flows.

     In  December  2006,  the FASB  issued  "FASB Staff  Position  ("FSP")  EITF
     00-19-2,  "Accounting  for  Registration  Payment  Arrangements".  This FSP
     specifies  that  the  contingent  obligation  to make  future  payments  or
     otherwise transfer  consideration under a registration payment arrangement,
     whether  issued as a separate  agreement  or included  as a provision  of a
     financial  instrument or other agreement,  should be separately  recognized
     and measured in  accordance  with FASB  Statement  No. 5,  "Accounting  for
     Contingencies".  This FSP further  clarifies  that a  financial  instrument
     subject to a registration  payment  arrangement  should be accounted for in
     accordance  with other  applicable  GAAP without  regard to the  contingent
     obligation to transfer  consideration  pursuant to the registration payment
     arrangement.  This FSP amends various authoritative literature notably FASB
     Statement  No. 133,  "Accounting  for  Derivative  Instruments  and Hedging
     Activities",  FASB  Statement No. 150,  "Accounting  for Certain  Financial
     Instruments with  Characteristics of both Liabilities and Equity", and FASB
     Interpretation No. 45, "Guarantor's  Accounting and Disclosure Requirements
     for Guarantees,  Including Indirect  Guarantees of Indebtedness of Others".
     This FSP is effective immediately for registration payment arrangements and
     the financial  instruments  subject to those  arrangements that are entered
     into or modified subsequent to December 21, 2006. For registration  payment
     arrangements and financial  instruments  subject to those arrangements that
     were entered  into prior to December  21, 2006,  the guidance in the FSP is
     effective for financial  statements issued for fiscal years beginning after
     December 15, 2006,  and interim  periods  within  those fiscal  years.  The
     adoption  of this  pronouncement  did not  have a  material  impact  on the
     Company's financial position, results of operations, or cash flows.

     In February  2007, the FASB issued SFAS No. 159, "The Fair Value Option for
     Financial  Assets  and  Financial  Liabilities"  ("SFAS  159").  Under  the
     provisions  of SFAS 159,  companies  may  choose to  account  for  eligible
     financial instruments,  warranties and insurance contracts at fair value on
     a  contract-by-contract  basis. Changes in fair value will be recognized in
     earnings  each  reporting  period.  SFAS  159 is  effective  for  financial

                                       8
<PAGE>
                     NETWOLVES CORPORATION AND SUBSIDIARIES

                             (DEBTOR-IN-POSSESSION)

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

     statements  issued for fiscal years  beginning after November 15, 2007, and
     interim  periods within those fiscal years.  The Company is required to and
     plans to adopt the provisions of SFAS 159 beginning in the first quarter of
     fiscal 2008. The Company is currently  assessing the impact of the adoption
     of SFAS 159.

     In December 2007, the Financial  Accounting Standards Board ("FASB") issued
     Statement of Financial  Accounting  Standards ("SFAS") No. 141R,  "Business
     Combinations"  ("SFAS  141R"),  which  replaces  SFAS  No.  141,  "Business
     Combinations."  SFAS  141R  establishes  principles  and  requirements  for
     determining  how an  enterprise  recognizes  and measures the fair value of
     certain  assets  and  liabilities  acquired  in  a  business   combination,
     including noncontrolling interests,  contingent consideration,  and certain
     acquired  contingencies.   SFAS  141R  also  requires   acquisition-related
     transaction expenses and restructuring costs be expensed as incurred rather
     than capitalized as a component of the business combination. SFAS 141R will
     be  applicable   prospectively  to  business  combinations  for  which  the
     acquisition date is on or after the beginning of the first annual reporting
     period  beginning on or after  December  15, 2008.  SFAS 141R would have an
     impact on accounting for any  businesses  acquired after the effective date
     of this pronouncement.

     In December 2007, the FASB issued SFAS No. 160,  "Noncontrolling  Interests
     in Consolidated  Financial  Statements - An Amendment of ARB No. 51" ("SFAS
     160").  SFAS 160  establishes  accounting  and reporting  standards for the
     noncontrolling interest in a subsidiary (previously referred to as minority
     interests).  SFAS 160 also requires that a retained noncontrolling interest
     upon the  deconsolidation of a subsidiary be initially measured at its fair
     value.  Upon  adoption of SFAS 160, the Company would be required to report
     any  noncontrolling  interests  as a separate  component  of  stockholders'
     deficit.  The  Company  would also be  required  to present  any net income
     allocable to  noncontrolling  interests and net income  attributable to the
     stockholders  of  the  Company  separately  in its  condensed  consolidated
     statement  of  operations.  SFAS 160 is  effective  for fiscal  years,  and
     interim  periods within those fiscal years,  beginning on or after December
     15, 2008. SFAS 160 requires  retroactive  adoption of the  presentation and
     disclosure   requirements  for  existing  minority  interests.   All  other
     requirements  of SFAS 160 shall be  applied  prospectively.  SFAS 160 would
     have an impact on the  presentation  and  disclosure of the  noncontrolling
     interests of any non wholly owned businesses acquired in the future.

7.   Inventories

     Inventories  consist of raw materials and finished  goods.  Inventories are
     valued at the lower of cost or net  realizable  value  using the  first-in,
     first-out method. Additionally, raw material and finished goods amounted to
     $144,303 and $82,012,  respectively,  at December 31, 2007 and $160,476 and
     $87,116,  respectively, at June 30, 2007. At December 31, 3007 and June 30,
     2007 the Company had a reserve for slow-moving inventories of $173,313.

8.   Accounts payable and accrued expenses

     Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
                                                                                         Pre-Petition
                                                                          -----------------------------------------
                                                                              December 31,            June 30,
                                                                                  2007                  2007
                                                                          --------------------- -------------------
<S>                                                                           <C>                    <C>
Pre-petition trade accounts payable and other accrued                         $4,275,784             $4,027,516
 operating expenses subject to compromise
Sales and excise tax payable                                                      54,754                 54,754
Dividends payable                                                                615,688                563,874
Compensated absences                                                              65,856                 65,856
Other liabilities                                                                194,309                194,309
                                                                          --------------------- -------------------

                                                                              $5,206,391             $4,906,309
                                                                          ===================== ===================
</TABLE>
                                       9
<PAGE>
                     NETWOLVES CORPORATION AND SUBSIDIARIES

                             (DEBTOR-IN-POSSESSION)

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                                                         Post-Petition
                                                                          --------------------------------------------
                                                                              December 31,            June 30,
                                                                                  2007                  2007
                                                                          --------------------- ----------------------
<S>                                                                               <C>                   <C>
Post-petition trade accounts payable and other accrued operating                  $862,891              $ 756,977
expenses not subject to compromise
Sales and excise tax payable                                                        78,492                 13,226
Compensated absences                                                                43,568                 33,059
Other liabilities                                                                  168,094                270,474
Bonuses and commissions payable                                                     48,074                 48,074
Accrued taxes                                                                           --                    161
                                                                          --------------------- ----------------------


                                                                               $ 1,201,119             $1,121,971
                                                                          ==================== ======================
</TABLE>
9.       Long Term Debt

       Long Term debt consists of the following:
<TABLE>
<CAPTION>
                                                                                   December 31,             June 30
                                                                                       2007                   2007
                                                                                ----------------------------------------------
   <S>                                                                            <C>                   <C>
   Note  payable - 13 month  note,  18%  annual  interest  rate,  paid
   monthly. In addition, the Company is required to maintain certain covenants.
   This note was due March 2007 but has been extended to January 1, 2008.
   Collateralized by substantially all assets of the Company.                        $ 403,750             $  403,750

   Note payable - 18 month note, 18% annual interest rate paid monthly. In
   addition, the Company is required to maintain certain covenants. This note
   was due November 2007, with the exception of $95,000, has been extended to
   January 1, 2008. Collateralized by
   substantially all assets of the Company.                                            665,000                665,000

   Note  payable - 1  remaining  contingent  payment  in the amount of
   $50,000  due  July  31,  2007.  Payments  contingent  on  achieving
   targeted revenues.                                                                   50,000                 50,000
                                                                                ---------------------- ----------------------

   Note Payable - 18-month  note net of debt  discount of $5,763,  10%
   annual  interest  rate paid  monthly.  In addition,  the Company is
   required  to  maintain   certain   covenants.   Collateralized   by
   substantially all assets of the Company.                                             89,237                 89,237
                                                                                ---------------------- ----------------------

         Total long-term Debt                                                        1,207,987              1,207,987

         Less: Current Maturities                                                  (1,207,987)            (1,207,987)
                                                                                ---------------------- ----------------------

         Long-Term Debt, Less Current Maturities                                   $      --              $       --
                                                                                ====================== ======================
</TABLE>
          The Company's voluntary petition to reorganize under Chapter 11 of the
          Bankruptcy  Code has  resulted in default  under the  covenants of the
          above-discussed notes. As a result, the full-face amount of the notes,
          plus accrued interest, in the amount of $1,243,918 was due at June 30,
          2007. Notwithstanding the aforementioned,  the default has been stayed
          by the Chapter 11 bankruptcy proceeding pending the approval of a plan
          of reorganization

                                       10
<PAGE>
                     NETWOLVES CORPORATION AND SUBSIDIARIES

                             (DEBTOR-IN-POSSESSION)

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

10.  Related party transactions

     During the three months ended  December 31, 2007 and 2006, the Company paid
     approximately $45,000 and $52,000,  respectively, for legal services to law
     firms in which an employee/stockholder is affiliated.

     During the six months ended  December  31, 2007 and 2006,  the Company paid
     approximately $90,000 and $88,000,  respectively, for legal services to law
     firms in which an employee/stockholder is affiliated.

11.  Shareholders' equity

     Preferred stock
     ---------------
     On February 1, 2007 stock dividends  totaling 22,746 shares with a value of
     $363,936  were  paid in  Series B  Preferred  Stock to  Series B  investors
     representing accrued dividends through January 31, 2007.

     On May 1,  2007  stock  dividends  totaling  1,169  shares  with a value of
     $70,140 were paid in Series C Preferred  Stock to Series C Preferred  Stock
     investors representing accrued dividends through April 30, 2007.

     On July 1, 2007 stock  dividends  totaling  23,984 shares with a value of $
     359,760 were paid in Series A Preferred  Stock to Series A Preferred  Stock
     investors representing accrued dividends through June 30, 2007.

     For the six months ended  December 31, 2007,  there were no  conversions of
     Preferred Stock.

     Dividends on the Series A, B and C Preferred Stock accrue at a rate of 12%,
     12% and 9% per annum,  respectively.  Aggregate  dividends  accrued for the
     three and six months ended  December 31, 2007 were  $217,115 and  $481,713,
     respectively.  Aggregate  dividends  accrued  for the three and six  months
     ended December 31, 2006 were $198,284 and $387,136.

     Options
     -------

     Stock option plans
     The  Company's  Stock Option Plans (the  "Plans"),  authorize  the Board of
     Directors to grant nonstatutory stock options to employees and directors to
     purchase up to a total of 9,932,500  shares of the Company's  common stock.
     Generally,  options  granted under the Plans vest ratably over three years.
     If any  award  under  the  Plans  terminates,  expires  unexercised,  or is
     canceled,  the  shares of  common  stock  that  would  otherwise  have been
     issuable  pursuant  thereto will be available for issuance  pursuant to the
     grant of new awards.
<TABLE>
<CAPTION>
                                                                         Approximate
                                                  Maximum              net cumulative
                                                  allowable               issuances                  Maximum
       Plans               Date adopted           issuances           December 31, 2007           term in years
--------------------- ----------------------- ------------------- -------------------------- -----------------------
     <S>                  <C>                     <C>                    <C>                           <C>
     1998 Plan              June 1998                282,500                72,500                        10
     2000 Plan              July 2000              1,500,000               750,000                        10
     2001 Plan            February 2001            1,750,000             1,675,000                        10
     2002 Plan              June 2002              3,000,000             1,394,650                        10
     2003 Plan              June 2003              2,400,000             2,153,450                        10
     2006 Plan              April 2006             1,000,000               315,500                        10
                                                   ---------             ---------
                                                   9,932,500             6,361,100
                                                   =========             =========
</TABLE>
                                       11
<PAGE>
                     NETWOLVES CORPORATION AND SUBSIDIARIES

                             (DEBTOR-IN-POSSESSION)

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

     A summary of the Company's stock options is presented below:
<TABLE>
<CAPTION>

                                                                              Weighted-Average       Aggregate Intrinsic
                                                  Stock Options                Exercise Price               Value
                                              --------------------------------------------------------------------------
 <S>                                                       <C>                       <C>                     <C>
 Outstanding, July 1, 2007                                 6,884,700                 $   0.46                $     --
 Granted                                                          --                       --                      --
 Exercised                                                        --                       --                      --
 Cancelled/forfeited                                       (523,600)                 $   1.60                      --
                                                           ---------                 ---------               --------

 Outstanding, December 31, 2007                            6,361,100                 $   0.37                $     --
                                                           =========                 ========                ========

 Exercisable, December 31, 2007                            6,025,764                 $   0.38                $     --
                                                           =========                 ========                ========
</TABLE>
     The following table summarizes  information about stock options outstanding
at December 31, 2007:
<TABLE>
<CAPTION>
                                        Options outstanding at                         Options exercisable at
                                           December 31, 2007                             December 31, 2007
                          ---------------------------------------------------- ---------------------------------------
                                                 Weighted
                                                  average         Weighted                             Weighted
                                                 remaining        average                              average
        Range of              Number of         contractual       exercise        Number of            exercise
    exercise prices             shares             life            price            Shares              price
------------------------- ------------------- ---------------- --------------- ----------------- ---------------------
<C>                                <C>                   <C>             <C>          <C>                        <C>
$      0.00-$  0.50                5,213,000             3.65            0.16         4,877,664                  0.17
$      0.51-$  1.00                  517,100             4.63            0.99           517,100                  1.00
$      1.01-$  1.50                  552,000             0.27            1.19           552,000                  1.19
$      1.51-$  2.00                    6,500             0.81            1.88             6,500                  1.88
$      2.01-$ 12.00                   72,500             1.01            5.00            72,500                  5.00
                                   ---------                                          ---------
                                   6,361,100                                          6,025,764
                                   =========                                          =========
</TABLE>
12.  Securities purchase agreement

     During March 2006, the Company entered into a securities purchase agreement
     whereas  the  Company  sold  18%  senior  secured  promissory  notes in the
     principal  amount  of up to  $950,000  and up to  1,000,000  shares  of the
     Company's  common  stock,  $ 0.0033 par value per share at a price of $0.05
     per share or 100 shares for each $95.00 of principal  amount of notes sold.
     On March 21, 2006 the Company issued  $403,750  principal  amount of senior
     secured notes. The notes bear interest at the rate of 18% and provide for a
     maturity  date  thirteen  months from the closing date. As a result of this
     debt financing agreement the Company issued 425,000 shares of the Company's
     common stock for $21,250 with registration  rights during the quarter ended
     September 30, 2006.

     In May 2006,  the Company  entered into an additional  securities  purchase
     agreement  wherein the Company sold 18% senior secured  promissory notes in
     the principal amount of $665,000 and 700,000 shares of the Company's common
     stock at a price of  $0.05  per  share or 100  shares  for each  $95.00  of
     principal  amount of notes sold. The notes bear interest at the rate of 18%
     and provide for a maturity date eighteen months from the closing date. As a
     result of this debt  financing  agreement the Company issued 700,000 shares
     of the Company's common stock for $35,000 with registration rights.

                                       12
<PAGE>
                     NETWOLVES CORPORATION AND SUBSIDIARIES

                             (DEBTOR-IN-POSSESSION)

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

     During the quarter  ended  March 31, 2007 the Company  sold one 10% secured
     subordinated  promissory  note in the amount of  $100,000  with an 18 month
     maturity  date.  As a result,  the  Company  issued  200,000  shares of the
     Company's common stock for $5,000.

     NetWolves'  voluntary  petition  to  reorganize  under  Chapter  11 of  the
     Bankruptcy  Code has  resulted  in a  default  under the  covenants  of the
     above-discussed notes. As a result, the full-face amount of the notes, plus
     accrued  interest,  in the amount of  $1,243,918  was due at May 21,  2007.
     Notwithstanding  the  aforementioned,  the  default  has been stayed by the
     Chapter  11  bankruptcy  proceeding  pending  the  approval  of a  plan  of
     reorganization.

13.  Segment Information

     The Company reports  segments in accordance with SFAS No. 131  "Disclosures
     about Segments of an Enterprise and Related  Information" ("SFAS 131"). The
     Company's  management  evaluates its operations in two reportable  business
     segments:  Voice Services and Managed Service  Charges.  These two segments
     reflect management's approach to operating and directing the businesses and
     align financial and managerial reporting.

     The Voice Services segment provides voice services  including  switched and
     dedicated outbound,  switched and dedicated toll-free inbound, dedicated T1
     access loops,  calling and debit cards, and conference calling. The Managed
     Service  Charges  segment  provides  network and security  technology and a
     variety of recurring managed data services.
<TABLE>
<CAPTION>
                                                        For the Three Months Ended         For the Six Months Ended
                                                               December 31,                      December 31,
                                                     --------------------------------- ---------------------------------
                                                          2007             2006             2007             2006
                                                     ---------------- ---------------- ---------------- ----------------
<S>                                                      <C>               <C>             <C>              <C>
Revenue
  Voice services                                         $2,017,532        2,183,082      $4,104,566      $4,776,461
  Managed service charges                                 2,145,054        2,158,531       4,217,800       4,215,809
                                                        ------------     ------------    -----------     ------------

                                                          4,162,586        4,341,613       8,322,366       8,992,270
                                                        ------------     ------------    -----------     ------------

Cost of Revenue
  Voice services                                          1,334,897        1,455,075       2,685,918       3,153,272
  Managed service charges                                 1,421,511        1,373,157       2,716,006       2,663,289
                                                        ------------     ------------    -----------     ------------

                                                          2,756,408        2,828,232       5,401,924       5,816,561
                                                        ------------     ------------    -----------     ------------

Operating loss
Voice Services                                              (25,004)        (517,695)    $ (157,622)       $(885,563)
Managed Service Charges                                     (26,584)        (511,873)      (161,970)        (781,618)
                                                        ------------     ------------    -----------     ------------

         Total                                           $  (51,588)     $(1,029,568)    $ (319,592)     $(1,667,181)
                                                        ============     ===========     ===========     ============

</TABLE>
     Revenue and cost of revenue  are  allocated  to each  segment on a specific
     identification method;  operating expenses are allocated to each segment on
     a pro rata basis,  based upon revenue.  The Company is not disclosing total
     assets for each reportable segment because this information is not reviewed
     by the chief operating decision-maker.

     All of the Company's sales occur in the United States.

                                       13
<PAGE>
                     NETWOLVES CORPORATION AND SUBSIDIARIES

                             (DEBTOR-IN-POSSESSION)

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

14.  Significant agreements

     Sprint Communications Company L.P.
     The Company has two  agreements  with Sprint  Communications  Company  L.P.
     ("Sprint")  to  supply  telecommunication  services  to  the  Company.  The
     agreement  for switched  services has a term of 28 months and the agreement
     for the data and private line services has a term of 24 months. The Company
     currently  has a  commitment  to  purchase a minimum  of  telecommunication
     services  monthly from Sprint.  The minimum monthly  commitment is $750,000
     and expires in November 2008.

     The Company made purchases from Sprint that  aggregated  approximately  29%
     and 34% of the total cost of revenue for the six months ended  December 31,
     2007 and 2006,  respectively.  For the three months ended December 31, 2007
     and  2006,  the  Company  made   purchases  from  Sprint  that   aggregated
     approximately 28% and 31% of the total cost of revenue,  respectively.  The
     Company  currently  has a  commitment  to purchase a minimum of $750,000 of
     telecommunication services monthly from Sprint.

     In addition,  the Company  made  purchases  from  Verizon  that  aggregated
     approximately  23% and 26% and Qwest that aggregated  approximately 13% and
     11% of the total cost of revenue for the six months ended December 31, 2007
     and 2006,  respectively.  For the three months ended  December 31, 2007 and
     2006,  the Company made purchases from Verizon of 22% and 22% and Qwest 14%
     and 11%, respectively.

15.  Commitments and contingencies

     Employment agreements
     The Company has an  employment  agreement  with one member of its executive
     management  team. The employment  agreement  provides for certain  payments
     following  death  or  disability,  for  certain  fringe  benefits  such  as
     reimbursement  for reasonable  expenses and participation in medical plans,
     and for  accelerated  payments  in the event of change  of  control  of the
     Company. The specific terms are as follows:

     On July 1, 2004,  an agreement  was entered  into with the Chief  Financial
     Officer for a term of five years,  terminating  on July 1, 2009 and subject
     to additional one-year extensions, at an annual salary of $175,000.

     As part of the plan to reduce  certain  expenses  of the  Company the Chief
     Financial  Officer  voluntarily  accepted  a pay  reduction  of  50% of his
     current pay.  This amount is net of an existing 15% deferment and commenced
     February 1, 2007.  This reduction was reinstated to its original  amount by
     the consent of the Company's Board of Directors as of June 30, 2007.

     Litigation

     a.   On April 24, 2006, the Company's  subsidiary  NetWolves ECCI Corp (the
          "Subsidiary")   filed  an  action  in  the  Florida   Circuit   Court,
          Hillsborough  County against Education  Communications  Consortia Inc.
          ("ECCI").  The action arises from ECCI's breach of the October 1, 2004
          Asset  Purchase  Agreement  between the parties (the  "Agreement")  by
          failing to pay  $70,273  pursuant  to a  reconciliation  of  billings,
          receivable and costs in accordance with the terms of the Agreement.

          On April 27,  2006,  ECCI served the Company  and  Subsidiary  with an
          action  in  the  Circuit  Court  of  Kanawha  County,  West  Virginia,
          alleging,  inter  alia  that  the  Subsidiary  had  failed  to pay the
          $200,000 first  installment of a promissory  note ("the Note") and has

                                       14
<PAGE>
                     NETWOLVES CORPORATION AND SUBSIDIARIES

                             (DEBTOR-IN-POSSESSION)

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

          anticipatorily  breached  payment  of  the  remaining  balance.  As  a
          consequence, ECCI alleges that the entire $800,000 note, together with
          interest  and costs,  is joint and  severally  due and  payable by the
          Subsidiary and by the Company,  as guarantor.  ECCI asserts additional
          claims  against  the  Company in the  aggregate  sum of  approximately
          $121,000 based on alleged reimbursable costs incurred by ECCI.

          The Company and Subsidiary believe that ECCI's action is without merit
          and therefore no accrual has been made. Among other things,  it is the
          Company's   position  that  the  Agreement  provided  as  a  condition
          precedent to any  installment  payment that ECCI achieve  annual gross
          revenue of at least  $2,000,000;  and that ECCI failed to achieve this
          amount.  However,  there can be no assurances that the Company will be
          successful.

     b.   At a meeting of the Board of Directors  held on December 4, 2006,  the
          Company  accepted  the  resignation  of Walter M. Groteke as Chairman,
          Chief  Executive  Officer  and a director  of the  Company,  effective
          immediately. At the same time, Scott Foote, a director of the Company,
          was appointed as its Acting Chief Executive Officer.

          The  action  was the  result of a series of events  commencing  with a
          resolution  approved by the Board of  Directors on October 27, 2006 to
          separate the positions of Chairman and Chief Executive  Officer,  both
          positions  being  held by  Walter M.  Groteke,  subject  to  finding a
          suitable  candidate,  if any,  for the  position  of  Chief  Executive
          Officer. As previously  reported,  a committee was appointed to search
          for candidates  for the position of Chief  Executive  Officer.  At the
          same time Scott Foote,  formerly  Vice  President was appointed as the
          Company's Acting President to be involved in day-to-day operations.

          In response to these  resolutions,  Mr.  Groteke  through his counsel,
          informed  the  Company on  November  16,  2006,  by written  notice as
          required by his employment  agreement,  that Mr. Groteke was resigning
          from the  Company  for "good  reason,"  as defined  in the  employment
          agreement;  that the  letter  constituted  his 15-day  formal  notice,
          making  his  resignation  effective  December  1,  2006;  and that Mr.
          Groteke was demanding all  compensation  and benefits set forth in the
          agreement through June 30, 2010, the remainder of its term.

          On November 21, 2006, the Company through its counsel responded to the
          November 16th letter by denying that Mr. Groteke had any basis for his
          claims, stating among other things, that Mr. Groteke remained Chairman
          and CEO with all of his responsibilities  inherent in these positions.
          By letter dated November 28, 2006, Mr. Groteke's  counsel affirmed his
          prior position.

          At the  December  4, 2006  Board of  Directors  meeting,  the Board of
          Directors formally accepted his resignation.  The acceptance was based
          on his voluntary  resignation and not for the reasons set forth by his
          counsel.

          On December 6, 2006, in the  Hillsborough  County Circuit Court of the
          State of  Florida,  Mr.  Groteke  served  the  Company  with an action
          seeking  declaratory  relief and a judgment for his full  compensation
          and benefits under the employment agreement, on the grounds previously
          set forth.

          It is the Company's position that Mr. Groteke voluntarily resigned and
          is no  longer  entitled  to  the  compensation  set  forth  under  his
          employment agreement.

     c.   On May 21, 2007,  NetWolves filed for protection under Title 11 of the
          Bankruptcy Code in the United States  Bankruptcy  Court for the Middle
          District of Florida, Tampa Division.

                                       15
<PAGE>
                     NETWOLVES CORPORATION AND SUBSIDIARIES

                             (DEBTOR-IN-POSSESSION)

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

          The actions referenced above against NetWolves were stayed pursuant to
          the Bankruptcy  Code's  automatic stay provisions on May 21, 2007 when
          NetWolves filed for reorganization  under Chapter 11 of the Bankruptcy
          Code.  The Company  believes it has strong  defenses to these lawsuits
          and  intends  to  contest  them  vigorously.  However,  because  these
          lawsuits are in the discovery  phase, the Company is unable to provide
          an evaluation of the final  outcome of the  litigation.  On August 17,
          2007 the above  referenced  actions were removed to the federal  court
          advisory proceedings subject to the bankruptcy codes.

     Leases

          The Company entered into a lease surrender  agreement at the same time
          entering into a lease assignment agreement, which commenced on October
          1, 2007 and  expiring on May 31, 2009.  Monthly rent is  approximately
          $5,000 per  month.  On October  12,  2007,  the  Company  vacated  the
          premises and successfully relocated their Tampa office.

          The  approximate  future  minimum annual lease  payments,  for the new
          office space is summarized as follows:
<TABLE>
<CAPTION>
                                  Fiscal Year
                                Ending June 30,                 Amount
                      ----------------------------------- ------------------
                                    <S>                         <C>
                                    2008                        $  43,557
                                    2009                           58,076
                                                                ---------

                                    Total                        $101,633
                                                                =========
</TABLE>
     16.  Subsequent Event

          On January 17, 2008,  the Company  filed a First Amended Joint Plan of
          Reorganization  of Debtors and related  Disclosure  Statement with the
          Bankruptcy Court.

     ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

     Forward-Looking Statements

     This  Form  10-QSB  includes,   without   limitation,   certain  statements
     containing the words "believes." "anticipates", "estimates", "expects", and
     words of a similar nature, constitute  "forward-looking  statements" within
     the meaning of the Private  Securities  Litigation Reform Act of 1995. This
     Act provides a "safe  harbor" for  forward-looking  statements to encourage
     companies to provide  prospective  information  about themselves so long as
     they identify these  statements as forward looking and provide  meaningful,
     cautionary statements identifying important factors that could cause actual
     results to differ from the projected  results.  All  statements  other than
     statements of historical fact made in this Form 10-QSB are forward-looking.
     In  particular,  the statements  herein  regarding  industry  prospects and
     future  results of  operations  or financial  position are  forward-looking
     statements.   Forward-looking   statements  reflect   management's  current
     expectations and are inherently uncertain. The Company's actual results may
     differ significantly from management's  expectations based on certain risks
     and  uncertainties,  including the risk factors referenced in the Company's
     filings with the Securities and Exchange Commission.  Readers are cautioned
     not to place  undue  reliance  on  these  forward-looking  statements.  The
     Company does not undertake any obligation to release publicly any revisions
     to  these   forward-looking   statements   to  reflect   future  events  or
     circumstances or to reflect the occurrence of unanticipated events.

                                       16
<PAGE>
                     NETWOLVES CORPORATION AND SUBSIDIARIES

                             (DEBTOR-IN-POSSESSION)

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)


Overview

NetWolves  Corporation  is a  global  telecommunications  and  Internet  managed
services  providers  offering  single-source  network  solutions  that  provides
multi-carrier and multi-vendor implementation to over 1,000 customers worldwide.
Our principal  activity is to design,  manage and deliver  products and services
allowing  people and  networks  to access the  Internet  and  telecommunications
networks,  efficiently  and cost  effectively.  In  addition  to the  prevailing
networking  equipment,  NetWolves also offers our patented system  technology to
organizations with complex requirements, that our plug `n' play perimeter office
security  platforms  and secure remote  monitoring  and  management  ("SRM2 TM")
system ideally solve. Additionally,  NetWolves' advanced, centralized, reporting
offers the ability for  corporate  executives to view,  via the  Internet,  both
statistical and performance based metrics for their global network.

We operate  primarily  in two  distinct  segments.  The Voice  Services  segment
provides voice services including switched and dedicated outbound,  switched and
dedicated  toll-free inbound,  calling and debit cards, and conference  calling.
The Managed Services  Charges segment  provides network and security  technology
and a variety of recurring managed data services.

We have  achieved an offering of managed  products  and  services  that meet the
necessary  requirements  for  organizations  to move off expensive  private data
networks  while  attaining the benefits and  flexibility of public data network.
Additionally,  our  proprietary  technology  provides a high  level of  security
through its integrated approach to management,  monitoring and  interoperability
for small and medium remote enterprise  locations  (locations with less than 500
network  users).  We offer a  Managed  Services  Offering  (MSO)  that  provides
complete  system  solutions  to  organizations  needing  cost-effective  network
security features  (firewall,  virtual private  networking,  routing,  intrusion
detection,  content  filtering,  email,  etc.)  delivered on low-cost  commodity
hardware  with  Internet-based  expansion  capabilities.   Our  patented  system
technology  enables  organizations to achieve corporate  Information  technology
(IT) and e-business  initiatives  through the  deployment of easily  installable
perimeter office security  platforms,  coupled with our SRM2 TM system.  SRM2 TM
provides centralized management capabilities for hundreds or thousands of remote
locations  without  risking  networking  integrity  because  it  never  opens an
administrative port on the remote device, which is common network vulnerability.
We also  provide  cost-effective,  value-added  expansion  technologies  such as
Intelligent  Failover,  which means that if one  circuit  for gaining  access to
information  fails,  the system  would  automatically  switch to an  alternative
circuit based upon customer defined parameters.

Chapter 11 Reorganization

On May 21, 2007, NetWolves filed for protection under Title 11 of the Bankruptcy
Code in the United States  Bankruptcy  Court for the Middle District of Florida,
Tampa Division.

Numerous creditors and purported  creditors have filed proofs of claims with the
Bankruptcy Court in the Company's  Chapter 11 proceeding.  The Company is in the
process of  reviewing  these  claims  and it expects to object to a  significant
number of claims.  Claims  believed to be  legitimate  have been recorded by the
Company at their historical amounts in the condensed  consolidated balance sheet
as December  31,  2007.  If the  Bankruptcy  Court allows the claims the Company
believes are baseless,  the Company believes these creditors will participate in
the Plan as general unsecured creditors.  The ultimate impact of these claims on
the Company's  consolidated  financial position and results of operations cannot
presently be determined.

On October 29, 2007, the Company filed a Joint Plan of Reorganization of Debtors
and related Disclosure Statement with the Bankruptcy Court.

On  January  17,  2008,  the  Company  filed  a  First  Amended  Joint  Plan  of
Reorganization of Debtors and related  Disclosure  Statement with the Bankruptcy
Court.

                                       17
<PAGE>
                     NETWOLVES CORPORATION AND SUBSIDIARIES

                             (DEBTOR-IN-POSSESSION)

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations
is based upon the consolidated financial statements, which have been prepared in
accordance with U.S. generally accepted accounting  principles.  The preparation
of financial  statements in conformity with U.S. generally  accepted  accounting
principles requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities,  the disclosure of contingent assets
and  liabilities  as of the date of the financial  statements,  and the reported
amounts of revenue and expenses during the periods.  Estimates have been made by
management in several areas, including, but not limited to, revenue recognition,
allowance  for  doubtful  accounts,  the  realizability  of deferred tax assets,
goodwill and other intangible assets and stock based  compensation.  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  believe  the  following  critical   accounting   policies  affect  our  more
significant  judgments and estimates used in the preparation of our consolidated
financial statements.

Revenue recognition

We record  revenue in  accordance  with  Statement  of Position  97-2  "Software
Revenue Recognition" ("SOP 97-2"), issued by the American Institute of Certified
Public  Accountants  (as modified by  Statement of Position  98-9) and SEC Staff
Accounting  Bulletin 104 "Revenue  Recognition"  ("SAB 104")  regarding  revenue
recognition in financial statements.  SOP 97-2 provides additional guidance with
respect to multiple  element  arrangements;  returns,  exchanges,  and  platform
transfer rights;  resellers;  services; funded software development arrangements
and contract accounting.

Revenues  generated from the resale of voice services are recognized as services
are provided and are included within Voice Services  revenue in the accompanying
consolidated  statements  of  operations.  Revenues  generated  from the sale of
recurring  services  within the  Managed  Service  Charges  ("MSC")  segment are
recognized as services are provided.

Revenue  from the sale of  hardware,  where our  software is not  essential,  is
recognized  within  Equipment  &  Consulting  revenue at the time of delivery of
hardware  products  by the  customer,  when the fee is fixed  and  determinable,
collectability  is  probable  and a  contract  signed by both  parties  has been
obtained.  Maintenance  or  monitoring  revenue  that is bundled with an initial
license fee is  deferred  and  recognized  ratably  within MSC revenue  over the
maintenance or monitoring period in the accompanying  consolidated statements of
operations. Amounts deferred for maintenance or monitoring are based on the fair
value of equivalent maintenance or monitoring services sold separately.  We have
established  vendor  specific  objective  evidence  ("VSOE") on all  undelivered
elements of its software arrangements, which consists of maintenance, monitoring
and, at times, training and consulting. We use the residual method for delivered
elements.

Allowance for doubtful accounts

We provide  allowances  for  doubtful  accounts  for  estimated  losses from the
inability of customers to satisfy their accounts as originally  contemplated  at
the time of sale and charges actual losses to the allowance  when incurred.  The
calculation  for these  allowances  is based on the  detailed  review of certain
individual  customer accounts,  historical  satisfaction rates and the Company's
estimation of the overall  economic  conditions  affecting our customer base. If
the  financial  condition  of  our  Company's  customers  were  to  deteriorate,
resulting  in an  impairment  of  their  ability  to make  payments,  additional
allowances  may be  required  in  conjunction  with the  Company's  May 21, 2007
Chapter 11 bankruptcy filing. All questionable  accounts  previously sent out to

                                       18
<PAGE>
                     NETWOLVES CORPORATION AND SUBSIDIARIES

                             (DEBTOR-IN-POSSESSION)

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

agency were deemed  uncollectible  and written down at June 30, 2007. We have an
allowance  in the amount of  $120,000  reserved  for  uncollectible  accounts at
December 31, 2007.

Income taxes

As part of the process of preparing our consolidated financial statements we are
required to prepare our income  taxes in each of the  jurisdictions  in which we
operate.  This  process  involves  estimating  our actual  current tax  exposure
together with assessing temporary differences resulting from differing treatment
of items for tax and accounting  purposes.  These differences result in deferred
tax assets and liabilities,  which are included within our consolidated  balance
sheet.  We must then assess the likelihood  that our deferred tax assets will be
recovered  from future taxable income and to the extent we believe that recovery
is not likely, we must establish a valuation  allowance.  We have fully reserved
our deferred tax assets at December 31, 2007 and June 30, 2007. If  expectations
for future performance, the timing of deductibility of expenses, or tax statutes
change in the future, we could decide to adjust the valuation  allowance,  which
may increase or decrease income tax expense.

Goodwill and other intangible assets

We evaluate the  recoverability of goodwill and other intangibles of each of our
reporting  units as required  under SFAS 142 by comparing the fair value of each
reporting unit with its carrying  value.  The fair values of our reporting units
are determined using a combination of a discounted cash flow analysis and market
multiples based upon historical and projected  financial  information.  We apply
our best judgment when assessing the reasonableness of the financial projections
used to determine the fair value of each reporting unit.

Results of Operations
---------------------

The following  discussion  and analysis sets forth the major factors that affect
the Company's  results of operations  and financial  condition  reflected in the
unaudited  financial  statements for the three and six months ended December 31,
2007.  This  discussion  and  analysis  should be read in  conjunction  with the
information  contained  in our Annual  Report on Form 10-KSB for the fiscal year
ended June 30, 2007,  including the audited  financial  statements and footnotes
included therein.

We  currently  operate in two  business  segments,  the Voice  Services  segment
("Voice Services"), and the Managed Service Charges ("MSC") segment.

The six months ended December 31, 2007 compared to the six months ended December
31, 2006 is as follows:

Revenue

Revenue  decreased to $8.3  million for the six months ended  December 31, 2007,
compared to $9.0 million for the same period in the prior year.  The decrease in
revenue is primarily  attributable  to a decrease in Voice  Services  segment of
approximately  $0.7  million.  The  decrease in the Voice  Services  segment was
attributable to attrition within the customer base, which predominantly occurred
prior to our May 21, 2007 filing for protection under Title 11 of the Bankruptcy
Code in the United States  Bankruptcy  Court for the Middle District of Florida,
Tampa.

Cost of revenue (excluding depreciation amortization)

Cost of revenue  decreased to $5.4 million for the six months ended December 31,
2007  compared to $5.8  million  for the same period in the prior year.  Cost of
revenue within the Voice Services segment  decreased to $2.7 million compared to
$3.2  million.  This  decreased  cost of revenue is  primarily  attributable  to
customer attrition as previously described. The increased cost of revenue within
the MSC segment was nominal.

                                       19
<PAGE>
                     NETWOLVES CORPORATION AND SUBSIDIARIES

                             (DEBTOR-IN-POSSESSION)

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

General and administrative

General and  administrative  expenses were $1.9 million and $2.7 million for the
six months  ended  December  31,  2007 and 2006  respectively.  The  decrease in
general  and  administrative  expenses  were due to a decrease  in  payroll  and
payroll  related  expenses of $0.2 million,  a decrease in lease expense of $0.1
million,  a  decrease  in  professional  fees of $0.1  million,  a  decrease  in
consulting  expenses  of  approximately  $0.3  million  and a decrease  in other
expenses of $0.2 million.

Sales and marketing

Sales and marketing  expenses decreased to $1.2 million for the six months ended
December  31,  2007,  compared to $1.7  million for the same period in the prior
year. The decrease in sales and marketing expenses was primarily attributable to
staff  reductions  which  resulted in a decrease in payroll and payroll  related
expenses  in the amount of $0.2  million,  a decrease  in  associated  sales and
marketing  expenses  in the amount of $0.1  million  and a decrease  in bad debt
expense in the amount of $0.2 million.

Other income (expenses)

The decrease in interest expense was due to the non payment of interest payments
to the noteholders as a result of the  reorganization.  During a reorganization,
interest  expense  is only  recorded  to the  extent it will be paid  during the
proceeding  or if it is  probable  it will be an  allowed  priority,  secured or
unsecured  claim.  Other  expenses  for the six months  ended  December 31, 2006
consisted  of  interest  expense  to the  noteholders  in the  amount  of $(0.1)
million.  There were no interest  payments made to the  noteholders  for the six
months ended December 31, 2007.

Reorganization Cost

We incurred  reorganization  costs of  approximately to $0.4 million for the six
months  ended  December  31,  2007 as a result of our May 21,  2007  filing  for
protection under Title 11 of the Bankruptcy Code in the United States Bankruptcy
Court for the Middle  District of Florida,  Tampa.  These charges  relate to the
ongoing  Chapter 11  reorganization  activities,  necessary  for the  Company to
reorganize and work out its plan to emerge from bankruptcy.

Three months ended December 31, 2007 and 2006

Revenue

Revenue  decreased to $4.2 million for the three months ended December 31, 2007,
compared to $4.3 million for the same period in the prior year.  The decrease in
revenue is  attributable to our Voice Services  segment where revenue  decreased
$2.0 million.  The decrease in the Voice Services  segment was  attributable  to
customer attrition.

Cost of revenue (excluding depreciation and amortization)

Cost of revenue  decreased to $2.8  million for the three months ended  December
31, 2007,  compared to $2.8  million for the same period in the prior year.  The
decrease  is  attributable  to  reduced  cost in the Voice  Services  segment of
approximately  $0.1  million  due to lost  customers.  The  increase  in cost of
revenue within the MSC segment was nominal.

                                       20
<PAGE>

General and administrative

General and  administrative  expenses  decreased  to $0.8  million for the three
months ended December 31, 2007,  compared to $1.4 million for the same period in
the prior year.  The  decrease  was the result of cost  cutting  initiatives  in
addition to the relocation of our Tampa facility which  decreased  lease expense
of  approximately  $0.1  million,  a decrease  in payroll  and  payroll  related
expenses of  approximately  $0.02  million,  a decrease  in various  general and
administrative  expenses of approximately  $0.1 million,  a decrease in non cash
equity  compensation  of  approximately  $0.08  million,  a decrease in non cash
equity  consulting  of  approximately  $0.2  million and a decrease in legal and
accounting of approximately $0.1 million from the prior period.

Sales and marketing

Sales and  marketing  expenses  decreased  to $0.6  million for the three months
ended  December  31,  2007,  compared to $0.9 million for the same period in the
prior  year.  The  decrease  in  sales  and  marketing  expenses  was  primarily
attributable  to staff  reductions  which  resulted in a decrease in payroll and
payroll related  expenses in the amount of $0.1 million,  a decrease in bad debt
in the amount of $0.1 million and a decrease in  associated  sales and marketing
expenses in the amount of $0.1 million  compared to the same period in the prior
year. .


Other income (expenses)

Other income  (expenses)  decreased to $0.003 million for the three months ended
December  31, 2007  compared  to $0.04  million for the same period in the prior
year.  Other expense for the same period in the prior year  consisted of a $0.05
million of interest payments to note holders.

Reorganization Cost

We incurred  reorganization costs of approximately to $0.3 million for the three
months  ended  December  31,  2007 as a result of our May 21,  2007  filing  for
protection under Title 11 of the Bankruptcy Code in the United States Bankruptcy
Court for the Middle  District of Florida,  Tampa.  These charges  relate to the
ongoing  Chapter 11  reorganization  activities,  necessary  for the  Company to
reorganize and work out its plan to emerge from bankruptcy.



Liquidity and Capital Resources

Our operating  activities used cash of approximately $0.5 million during the six
months ended December 31, 2007, as compared to cash used of  approximately  $1.4
million for the same period in the prior year.  Cash used in operations  for the
six months ended December 31, 2007 was primarily  attributable  to a net loss of
approximately $0.7 million,  which included  reorganization costs, a decrease in
inventory of approximately $0.02 million, a decrease in prepaid expenses of $0.1
million and a decrease in deferred revenue in the amount of  approximately  $0.3
million. In addition, non-cash charges for depreciation and amortization, equity
compensation and bad debt expense was approximately $0.1 million,  $0.02 million
and $0.1 million, respectively.

Our investing  activities  used  approximately $ 0.06 million for the six months
ended December 31, 2007 as compared to using $0.1 million for the same period in
the prior year. Cash used in investing activities was primarily  attributable to
purchases of property and equipment during the relocation in the amount of $0.06
million. Cash used by investing activities for the six months ended December 31,
2006,  was  primarily  attributable  to payments on  customer  lists  previously
acquired  in the amount of $0.1 and patent  cost in the amount of  approximately
$0.009 million.

                                       21
<PAGE>
                     NETWOLVES CORPORATION AND SUBSIDIARIES

                             (DEBTOR-IN-POSSESSION)

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

There were no financing  activities  for the six months ended  December 31, 2007
and 2006.

On October 29,  2007,  our Joint Plan of  Reorganization  of Debtors and related
Disclosure Statement was filed with the Bankruptcy Court.

On January 17, 2008, we filed a First Amended  Joint Plan of  Reorganization  of
Debtors and related Disclosure Statement with the Bankruptcy Court. We intend to
borrow up to $600,000  (the "DIP Loan")  secured by senior  liens in the Company
and certain of its subsidiaries  assets. The DIP loan shall be used primarily to
provide  operating  capital  primarily to supplement its fluctuating  cash flows
through and up to confirmation.

The  Company  believes  that  the  DIP  loan  is  needed  to  assure  cash  flow
requirements so that we have sufficient  capital to meet the requirements of the
business,  make all deposits or advance  payments and all other payments ordered
by the Court  through the date of  confirmation.  With the  availability  of the
requested  DIP Loan,  we will be able to continue  operations,  move  forward to
obtain  confirmation,  exit financing and emerge from Chapter 11, although there
can be no assurances that we will emerge from Chapter 11.




Summary

Historically,  we have experienced significant recurring net operating losses as
well as negative  cash flows from  operations.  Our main source of liquidity has
been equity and debt financing,  which has been used to fund  continuing  losses
from operating activities.  Based on the our cash position of approximately $0.5
million at December 31, 2007,  and further  taking into  account  ongoing  costs
related  to the  Chapter  11  bankruptcy  proceedings,  as well as the  ultimate
disposition of pre-petition  claims of creditors pursuant to an approved plan of
reorganization,  we  believe  that we may not have  sufficient  cash to meet our
funding  requirements  through  December 31, 2008,  without  raising  additional
capital.  Our ability to raise  additional  capital to fund  operations also may
have been  impaired  by the  Chapter 11  reorganization  proceeding.  We plan to
continue cost reduction efforts, as exemplified by our recent,  substantial rent
reduction,  as well as seek financing to satisfy a plan of reorganization by our
creditors.  However,  based upon the issues  discussed  herein,  there can be no
assurances that we will be able to raise  additional  capital on desirable terms
or at all. These factors raise  substantial  doubt about our ability to continue
as a going  concern,  which  may  require  further  restructuring,  or a sale or
liquidation  and  could  cause  significant  dilution  or a  total  loss  to our
shareholders. The financial statements do not include any adjustment relating to
the  recoverability of the recorded assets or the  classification of liabilities
that may be necessary should we be unable to continue as a going concern.


ITEM 3 - CONTROLS AND PROCEDURES

CEO and CFO Certifications
--------------------------
The certifications of the CEO and the CFO required by Rules 13a-14 and 15d-14 of
the Securities Exchange Act of 1934, as amended (the "Certifications") are filed
as exhibits to this report.  This section of the report contains the information
concerning the evaluation of our disclosure  controls and procedures (as defined
in Exchange Act Rules  13a-15(e)  and  15d-15(e))  ("Disclosure  Controls")  and
changes to internal control over financial reporting (as defined in Exchange Act
Rules  13a-15(f)  and  15d-15(f))  ("Internal  Controls")  referred  to  in  the
Certifications  and this  information  should  be read in  conjunction  with the
Certifications for a more complete understanding of the topics presented.

                                       22
<PAGE>
                     NETWOLVES CORPORATION AND SUBSIDIARIES

                             (DEBTOR-IN-POSSESSION)

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

Evaluation of Disclosure Controls

We  maintain  controls  and  procedures  designed  to ensure  that it is able to
collect the information that is required to be disclosed in the reports it files
with the SEC, and to process, summarize and disclose this information within the
time period  specified  in the rules of the SEC. Our Chief  Executive  and Chief
Financial  Officers are responsible for establishing,  maintaining and enhancing
these  procedures.   They  are  also  responsible,  as  required  by  the  rules
established  by the  SEC,  for the  evaluation  of the  effectiveness  of  these
procedures.

Based  on our  management's  evaluation  (with  participation  of our  principal
executive officer and principal financial officer),  as of the end of the period
covered by this report, our principal  executive officer and principal financial
officer  have  concluded  that  its  disclosure   controls  and  procedures  are
effective.

Changes in Internal Controls Over Financial Reporting

We  maintain  a system of  internal  controls  designed  to  provide  reasonable
assurance that transactions are executed in accordance with management's general
or specific  authorization;  transactions  are  recorded as  necessary to permit
preparation  of financial  statements  in  conformity  with  Generally  Accepted
Accounting  Principles (GAAP) and maintain  accountability for assets. Access to
assets is permitted  only in accordance  with  management's  general or specific
authorization.

It is our  responsibility  to establish and maintain  adequate  internal control
over  financial  reporting.   Management  will  be  reviewing  all  systems  and
procedures  relating to the financial close. There was no change in our Internal
Controls during Second Quarter Fiscal 2008 that has materially  affected,  or is
reasonably likely to materially affect, our Internal Controls.


PART II - OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

On  April  24,  2006,  the  Company's   subsidiary   NetWolves  ECCI  Corp  (the
"Subsidiary") filed an action in the Florida Circuit Court,  Hillsborough County
against Education Communications Consortia Inc. ("ECCI"). The action arises from
ECCI's  breach of the  October  1, 2004 Asset  Purchase  Agreement  between  the
parties (the "Agreement") by failing to pay $70,273 pursuant to a reconciliation
of billings, receivable and costs in accordance with the terms of the Agreement.

On April 27, 2006,  ECCI served the Company and Subsidiary with an action in the
Circuit Court of Kanawha County, West Virginia,  alleging,  inter alia, that the
Subsidiary had failed to pay the $200,000 first installment of a promissory note
("the Note") and has  anticipatorily  breached payment of the remaining balance.
As a  consequence,  ECCI alleges that the entire  $800,000  note,  together with
interest and costs, is joint and severally due and payable by the Subsidiary and
by the Company, as guarantor. ECCI asserts additional claims against the Company
in the aggregate sum of  approximately  $121,000  based on alleged  reimbursable
costs incurred by ECCI.

The Company and  Subsidiary  believe  that  ECCI's  action is without  merit and
therefore  no accrual has been made.  Among other  things,  it is the  Company's
position that the Agreement provided as a condition precedent to any installment
payment that ECCI achieve annual gross revenue of at least $2,000,000;  and that
ECCI failed to achieve this amount. However, there can be no assurances that the
Company will be successful.

On November 16, 2006, Mr. Groteke through his counsel,  informed the Company, by
written  notice as required by his  employment  agreement,  that Mr. Groteke was
resigning  from the  Company  for "good  reason,"  as defined in the  employment
agreement;  that the letter  constituted  his 15-day formal  notice,  making his
resignation  effective  December 1, 2006; and that Mr. Groteke was demanding all
compensation and benefits set forth in the agreement  through June 30, 2010, the
remainder of its term.

                                       23
<PAGE>
                     NETWOLVES CORPORATION AND SUBSIDIARIES

                             (DEBTOR-IN-POSSESSION)

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

On November 21, 2006, the Company through its counsel  responded to the November
16th letter by denying  that Mr.  Groteke had any basis for his claims,  stating
among other things,  that Mr. Groteke remained  Chairman and CEO with all of his
responsibilities inherent in these positions. By letter dated November 28, 2006,
Mr. Groteke's counsel affirmed his prior position.

On December 6, 2006,  the Company was served with an action  against the Company
by Mr. Groteke in the Circuit Court of the State of Florida, Hillsborough County
seeking declaratory relief and a judgment for his full compensation and benefits
under the employment agreement, on the grounds previously set forth.

The Company believes that Mr. Groteke's action is without merit and therefore no
accrual has been made. Among other things it is the Company's  position that Mr.
Groteke voluntarily resigned and is no longer entitled to compensation set forth
in his employment agreement.

On May 21, 2007,  NetWolves and some of its  subsidiaries  filed for  protection
under Title 11 of the Bankruptcy Code in the United States  Bankruptcy Court for
the Middle District of Florida,  Tampa  Division.  These actions against us were
stayed pursuant to the Bankruptcy  Code's automatic stay provisions.  We believe
we have strong defenses to these lawsuits and intend to contest them vigorously.
On August 17,  2007 the above  referenced  actions  were  removed to the federal
court advisory proceedings subject to the bankruptcy codes.

ITEM 2. CHANGES IN  SECURITIES  AND SMALL  BUSINESS  ISSUER  PURCHASES OF EQUITY
     SECURITIES

        None

ITEM 3. DEFAULTS UPON SENIOR  SECURITIES  The  Company's  voluntary  petition to
     reorganize  under Chapter 11 of the Bankruptcy Code has resulted in default
     under  the  covenants  of  the  above-discussed  notes.  As a  result,  the
     full-face  amount of the notes,  plus  accrued  interest,  in the amount of
     $1,243,918 was due at May 21, 2007. Notwithstanding the aforementioned, the
     default has been stayed by the Chapter 11 bankruptcy proceeding pending the
     approval of a plan of reorganization


     Not applicable.

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

     Not applicable

ITEM 5. OTHER INFORMATION

     Not applicable.

ITEM 6. EXHIBITS

     31   CEO  and  CFO   certifications   pursuant   to  Section   302  of  the
          Sarbanes-Oxley Act of 2002.
     32   CEO  and  CFO   certifications   pursuant   to  Section   906  of  the
          Sarbanes-Oxley Act of 2002.

                                       24
<PAGE>


SIGNATURES

Pursuant to the requirements of the Exchange Act, the Registrant has duly caused
this  report to be  signed on its  behalf  by the  undersigned,  thereunto  duly
authorized.




                           BY:   NETWOLVES CORPORATION



                                 /s/ Scott Foote
                                 -------------------------------------
                                 Scott Foote
                                 Chief Executive Officer, President and Director




                                /s/ Peter C. Castle
                                --------------------------------------
                                Peter C. Castle
                                Chief Financial Officer, Vice President-Finance,
                                Director, Treasurer and Secretary



Date: February 13, 2008