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, 2006
                                               -----------------

                        Commission file number 000-25831

                              NetWolves Corporation
             (Exact name of registrant as specified in its charter)

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


                  4805 Independence Pkwy, Tampa, Florida 33634
                    (Address of principal executive offices)

                                 (813) 286-8644
              (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:
<TABLE>
<CAPTION>
     TITLE OF CLASS                            NUMBER OF SHARES OUTSTANDING ON
---------------------------                              March 7, 2007
<S>                                                        <C>
Common Stock, $.0033 par value                      ----------------------
                                                           34,109,713
                                                           ----------
</TABLE>
Transitional Small Business Disclosure Format (check one):   Yes [  ]   No [X]
<PAGE>
                     NETWOLVES CORPORATION AND SUBSIDIARIES

                         FORM 10-QSB - DECEMBER 31, 2006






                                      INDEX

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

      CONDENSED CONSOLIDATED BALANCE SHEETS
           December 31, 2006 (unaudited) and June 30, 2006 .............................................. 1 - 2

      CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
           For the three and six months ended December 31, 2006 (unaudited)
             and December 31, 2005 (unaudited)............................................................3 - 4

      CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS For the six months ended
           December 31, 2006 (unaudited)
             and December 31, 2005 (unaudited) ...........................................................5 - 6

      NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS .............................................. 7 - 21

      ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN
                 OF OPERATION ...........................................................................22 - 27

      ITEM 3 - CONTROLS AND PROCEDURES ...................................................................   28


PART II - OTHER INFORMATION

      ITEM 1 - LEGAL PROCEEDINGS .........................................................................   29

      ITEM 2 - CHANGES IN SECURITIES AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES ............   30

      ITEM 3 - DEFAULTS UPON SENIOR SECURITIES ...........................................................   30

      ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS .......................................   30

      ITEM 5 - OTHER INFORMATION .........................................................................   30

      ITEM 6 - EXHIBITS...................................................................................   30

SIGNATURES................................................................................................   31
</TABLE>
<PAGE>
                     NETWOLVES CORPORATION AND SUBSIDIARIES

                      CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
                                                                                      December 31,            June 30,
                                                                                          2006                  2006
                                                                                    -----------------       ------------
                                                                                       (Unaudited)
ASSETS

<S>                                                                                      <C>                <C>
Current assets
     Cash and cash equivalents                                                         $    565,717        $   2,016,156
 Accounts receivable, net of allowance of $657,434 and $1,146,044 at
 December 31, 2006 and June 30, 2006, respectively                                        2,991,395            2,825,679
     Inventories                                                                            265,853              302,562
     Prepaid expenses                                                                       540,988              367,808
                                                                                       ------------        -------------
               Total current assets                                                       4,363,953            5,512,205

Property and equipment, net                                                                 110,600              148,620

Identifiable intangible assets, net                                                         815,297            1,192,043

Goodwill and other indefinite lived intangible assets                                     3,801,972            3,793,072

Other assets
                                                                                             78,222               78,222
                                                                                       ------------        -------------

               Total assets                                                            $  9,170,044        $  10,724,162
                                                                                       ============        =============

            See notes to condensed consolidated financial statements

                                       1
<PAGE>
                     NETWOLVES CORPORATION AND SUBSIDIARIES

                      CONDENSED CONSOLIDATED BALANCE SHEETS
(Continued)                                                                            December 31,           June 30,
                                                                                          2006                  2006
                                                                                      ------------         -------------
                                                                                       (Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
    Accounts payable and accrued expenses                                             $  5,452,315         $   5,755,385
    Deferred revenue                                                                       909,271               538,267
    Current maturities of long term debt                                                    60,000               100,000
                                                                                      ------------         -------------
       Total current liabilities                                                         6,421,586             6,393,652
Long term debt, net of current maturities                                                1,068,750             1,118,750
                                                                                      ------------         -------------
         Total liabilities                                                               7,490,336             7,512,402
                                                                                      ------------         -------------

Shareholders' equity
    Series A convertible preferred stock, $.0033 par value; $6,357,014
      liquidation preference; 1,000,000 shares authorized; 199,903 and 178,186
      shares issued and outstanding on December 30, 2006 and June
      30, 2006, respectively                                                          $  2,418,644         $   2,092,885
    Series B convertible preferred stock, $.0033 par value; $6,383,621
      liquidation preference; 500,000 shares authorized; 179,143 and 192,921
      shares issued and outstanding on December 31, 2006 and June
      30, 2006                                                                           2,155,753             2,501,209
     Series C convertible preferred stock, $.0033 par value;
      $1,648,766 liquidation preference; 100,000 shares authorized; 12,962
      shares issued and outstanding on December 31, 2006 and June 30, 2006                 205,361               205,361
    Preferred stock, $.0033 par value; 400,000 shares authorized; no shares
      issued and outstanding on December 31, 2006 and June 30, 2006                              -                     -
    Common stock, $.0033 par value; 65,000,000 authorized; 34,109,713 and
      33,134,097 shares issued and outstanding on December 31, 2006 and
      June 30, 2006, respectively                                                          112,563               109,344
     Additional paid-in capital                                                         79,872,413            79,570,125
     Accumulated deficit                                                             (83,085, 026)          (81,267,164)
                                                                                      ------------         -------------
            Total shareholders' equity                                                   1,679,708             3,211,760
                                                                                      ------------         -------------
                                                                                     $   9,170,044         $  10,724,162
                                                                                     =============         =============

</TABLE>
            See notes to condensed consolidated financial statements

                                       2
<PAGE>
                     NETWOLVES CORPORATION AND SUBSIDIARIES

                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                          For the three months ended                  For the six months ended
                                                                  December 31,                               December 31,
                                                                  ------------                               ------------
                                                             2006               2005                   2006                 2005
                                                     -------------------   -----------------    -------------------    -------------
<S>                                                     <C>                  <C>                   <C>                  <C>
Revenue
    Voice services                                      $   2,183,082        $  3,540,664          $   4,776,461      $   7,370,082
    Managed service charges                                 2,157,891           1,999,351              4,214,657          4,205,007
    Equipment and consulting                                      640              19,918                  1,152             21,044
                                                     -------------------   -----------------    -------------------    -------------
                                                            4,341,613           5,559,933              8,992,270         11,596,133
                                                     -------------------   -----------------    -------------------    -------------
Cost of revenue (excluding depreciation
         and amortization shown separately below)
    Voice services                                          1,455,075           2,427,009              3,153,272          4,804,456
    Managed service charges                                 1,373,157           1,233,440              2,663,289          2,686,160
    Equipment and consulting                                        -                 175                      -                175
                                                     -------------------   -----------------    -------------------    -------------
                                                            2,828,232           3,660,624              5,816,561          7,490,791
                                                     -------------------   -----------------    -------------------    -------------
Operating expenses
    General and administrative                              1,358,297           1,491,913              2,617,089          3,039,962
    Engineering and development                                38,765             122,848                 93,038            332,799
    Sales and marketing                                       940,244           1,337,846              1,720,667          2,590,483
    Depreciation and amortization                             205,643             223,226                412,096            450,597
                                                     -------------------   -----------------    -------------------    -------------
                                                            2,542,949           3,175,833              4,842,890          6,413,841
                                                     -------------------   -----------------    -------------------    -------------
 Loss before other income (expense)                        (1,029,568)         (1,276,524)            (1,667,181)        (2,308,499)

 Other income (expense)
    Other income                                                    -             275,198                      -            419,200
    Interest income (expense)                                 (43,083)              3,403                (83,317)            20,354
                                                     -------------------   -----------------    -------------------    -------------
                                                              (43,083)            278,601                (83,317)           439,554
                                                     -------------------   -----------------    -------------------    -------------
Loss before income taxes                                   (1,072,651)           (997,923)            (1,750,498)        (1,868,945)
     Provision for income taxes                                (1,324)               (116)               (67,364)            (5,430)
                                                     -------------------   -----------------    -------------------    -------------
 Net loss                                              $  ( 1,073,975)       $   (998,039)         $  (1,817,862)      $ (1,874,375)
                                                     ===================   =================    ===================    =============

            See notes to condensed consolidated financial statements

                                       3
<PAGE>
                     NETWOLVES CORPORATION AND SUBSIDIARIES

                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (Unaudited)


(Continued)                                              For the three months ended                  For the six months ended
                                                                 December 31,                                December 31,
                                                                 ------------                                ------------
                                                             2006                2005                  2006                 2005
                                                     -------------------   -----------------    -------------------    -------------
 Basic and diluted net loss per share
 Net loss                                               $ ( 1,073,975)       $    (998,039)     $   (1,817,862)      $   (1,874,375)

    Dividends on convertible preferred stock                 (198,284)            (160,009)          ( 387,136)            (363,787)
                                                     -------------------   -----------------    -------------------    -------------

Net loss attributable to common shareholders            $ ( 1,272,259)       $   1,158,048)     $   (2,204,998)      $   (2,238,162)
                                                     ===================   =================    ===================    =============

Basic and diluted net loss per share                    $        (.04)       $        (.04)     $         (.07)      $         (.07)
                                                     ===================   =================    ===================    =============
 Weighted average common shares                            33,521,399           30,163,805          33,327,788           30,007,474
     outstanding, basic and diluted                  ===================   =================    ===================    =============
</TABLE>
            See notes to condensed consolidated financial statements

                                       4
<PAGE>
                     NETWOLVES CORPORATION AND SUBSIDIARIES

                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                                      For the six months ended
                                                                                            December 31,
                                                                                            ------------
                                                                                      2006                 2005
                                                                               -------------------   ------------------
<S>                                                                             <C>                   <C>
Cash flows from operating activities
     Net loss                                                                   $  (1,817,862)        $  (1,874,375)
     Adjustments to reconcile net loss to net cash used in operating
     activities
           Depreciation                                                                35,350                73,850
           Amortization                                                               376,746               376,747
           Bad debt expense                                                           302,896               264,872
           Non-cash charge to operations with respect to
            stock, options and warrants issued for services and amortization
            of previously issued warrants                                             347,142                67,400
           Other income                                                                     -              (424,166)
           Loss on disposal of property and equipment                                   2,671                     -

     Changes in operating assets and liabilities
       Restricted cash                                                                      -                25,958
       Accounts receivable                                                           (468,612)                5,552
       Inventories                                                                     36,709                40,711
       Prepaid expenses                                                              (173,180)               36,231
       Other assets                                                                         -               (12,517)
       Accounts payable and accrued expenses                                         (364,402)             (202,511)
                                                                                      371,004              (180,996)
                                                                               -------------------   ------------------
         Net cash used in operating activities                                     (1,351,538)           (1,803,244)
                                                                               -------------------   ------------------

Cash flows from investing activities
     Payment on existing customer list                                                (90,000)             (100,000)
     Patent costs paid                                                                 (8,901)               (7,385)
     Purchases of property and equipment
                                                                                            -               (31,492)
                                                                               -------------------   ------------------

       Net cash used in investing activities                                    $     (98,901)        $    (138,877)
                                                                               -------------------   ------------------

            See notes to condensed consolidated financial statements

                                        5
<PAGE>
                     NETWOLVES CORPORATION AND SUBSIDIARIES

                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Unaudited)

(Continued)                                                                           For the six months ended
                                                                                            December 31,
                                                                                            ------------
                                                                                      2006                 2005
                                                                               -------------------   ------------------
Cash flows from financing activities
     Advance from shareholder
                                                                                              -               210,000
                                                                               -------------------   ------------------

                Net cash provided by financing activities
                                                                                              -               210,000
                                                                               -------------------   ------------------

Net decrease in cash and cash equivalents
                                                                                     (1,450,439)           (1,732,121)

Cash and cash equivalents, beginning of period                                        2,016,156             3,325,318
                                                                               -------------------   ------------------

Cash and cash equivalents, end of period                                           $    565,717         $   1,593,197
                                                                               ===================   ==================

Cash paid for income taxes                                                         $     67,364         $       4,627
                                                                               ===================   ==================

Cash paid for interest                                                             $     96,978         $       5,430
                                                                               ===================   ==================

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES

Dividends accrued on convertible preferred stock                                   $    387,133         $     363,787
                                                                               ===================   ==================

Dividends paid-in-kind on convertible preferred stock                              $    325,804         $     332,441
                                                                               ===================   ==================

Purchase price adjustment-reduction of long term debt and customer list            $          -         $     800,000
                                                                               ===================   ==================

Conversions of preferred stock to common stock                                     $    345,501         $      81,728
                                                                               ===================   ==================

Conversion of debt to common stock                                                 $          -         $     210,000
                                                                               ===================   ==================
</TABLE>
            See notes to condensed consolidated financial statements

                                        6
<PAGE>
                     NETWOLVES CORPORATION AND SUBSIDIARIES

              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, 2006, 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,  2006.  The
results  of  operations  for the six  months  ended  December  31,  2006 are not
necessarily indicative of the results to be expected for the full year.

2.   Management's Plan

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
historical  losses from  operating  activities.  The maturity  date of our notes
previously due in March 2007 and November  2007,  with the exception of $95,000,
have been extended to January 1, 2008.  Based on the Company's  cash position of
approximately $.5 million, vendor negotiations,  additional staff reductions, as
well as the extension of the maturity date of notes previously due in March 2007
and  November  2007,  with the  exception  of  $95,000,  together  with  current
forecasts and debt financing,  the Company believes that we have sufficient cash
to meet its funding  needs  through  December 31, 2007.  However,  the Company's
current  forecast  does not address  events  beyond  January 1, 2008,  including
developing a plan for the Company to have the ability to repay its  indebtedness
due in January  2008 as  referenced  in Note 6 of these  condensed  consolidated
financial statements.  In addition,  certain executive officers and shareholders
have guaranteed additional cash flow to the Company in the amount of $200,000 in
the event such cash is needed through December 31, 2007.  However,  there can be
no assurances  that the Company will be successful in these  initiatives or that
these initiatives will result in improved financial performance.

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  provides network security  solutions coupled with network  management
and  communication  services.  NetWolves'  products offer  applications  such as
firewalls,  virtual  private  networks,  intrusion  detection  systems,  content
filtering,  virus detection,  congestion  management,  and intelligent failover.
Additionally,  NetWolves provides network design, provisioning,  monitoring, and
management services.

4.   Significant accounting policies

Principles of consolidation

The  condensed   consolidated  financial  statements  include  the  accounts  of
NetWolves  Corporation  and  its  subsidiaries.   All  significant  intercompany
transactions and balances have been eliminated in consolidation.

                                       7
<PAGE>
                     NETWOLVES CORPORATION AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)


Use of Estimates

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

Basic and diluted net loss per share

The diluted loss per share does not include the impact of potential shares to be
issued upon  exercise  of  convertible  preferred  stock,  options and  warrants
aggregating approximately 16.3 million and 22.7 million at December 31, 2006 and
2005,  respectively,  because the Company had a net loss  attributable to common
shareholders and, therefore, the effect would be antidilutive.

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 $185,000 and
$80,853,   respectively,   at  December   31,  2006  and  $203,100  and  $99,462
respectively, at June 30, 2006.

Reclassifications

Certain reclassifications have been made to the condensed consolidated financial
statements  shown for the prior  period  in order to have  them  conform  to the
current period's classifications.

Stock-based compensation

In December  2004, the Financial  Accounting  Standards  Board  ("FASB")  issued
Statement of Financial  Accounting  Standard No. 123 (revised 2004), Share Based
Compensation ("SFAS No. 123(R)).  This Statement revised SFAS No. 123 ("SFAS No.
123"),  "Accounting  for Stock Based  Compensation."  The  revision  establishes
standards for the accounting of  transactions  in which an entity  exchanges its
equity instruments for goods or services,  particularly transactions in which an
entity  obtains  employee  services in  share-based  payment  transactions.  The
revised  statement  requires  a public  entity to measure  the cost of  employee
services  received in exchange for an award of equity  instruments  based on the
grant-date  fair  value of the  award.  That cost is to be  recognized  over the
period during which the employee is required to provide  service in exchange for
the award.  Changes in fair value during the requisite  service period are to be
recognized  as  compensation  cost over that period.  In  addition,  the revised
statement amends SFAS No. 95,  "Statement of Cash Flows," to require that excess
tax benefits be reported as a financing  cash flow rather than as a reduction of
taxes paid.  The  provisions  of the revised  statement  are  effective  for the
Company commencing July 1, 2006.

After evaluation, on June 29, 2006, the Board of Directors approved accelerating
the vesting of  approximately  263,104 stock  options under the Company's  stock
plans and granted  815,500 options to employees and 600,000 options to the Board
of Directors of the Company,  which vested immediately.  The options had a range
of exercise prices of $.15 to $12.00.  The closing price of the Company's common
stock on June 28, 2006,  the last trading day before  approval of  acceleration,
was $0.11.  Since all of the accelerated  options were  out-of-the-money  at the
time of the  acceleration no charge to operations was recorded.  Generally,  all
options issued to employees are issued at the money and accordingly no charge to
operations was recorded.  The purpose of the  accelerated  vesting was to enable

                                       8
<PAGE>
                     NETWOLVES CORPORATION AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

Stock-based compensation (continued)

the Company to avoid recognizing  future  compensation  expense  associated with
these options upon  adoption of SFAS No. 123R.  The  aggregate  pre-tax  expense
that, absent the acceleration and immediate  vesting,  would have been reflected
in the Company's  consolidated  financial statements beginning in fiscal 2007 is
estimated to be approximately $ 140,000.

Effective  July  1,  2006,  the  Company  adopted  the  fair  value  recognition
provisions of SFAS No. 123R using the modified-prospective-transition method. As
a result, the Company's net loss before taxes for the three and six months ended
December  31, 2006 is the same if it had  continued  to account for  share-based
compensation   under  APB  Opinion  No.  25  "Accounting  for  Stock  Issued  to
Employees."  The stock  based  compensation  expense is  included in general and
administrative expense in the condensed consolidated statement of operations.

Prior to July 1, 2006, the Company's  stock-based  employee  compensation  plans
were  accounted  for  under  the  recognition  and  measurement   provisions  of
Accounting  Principle Board Opinion ("APB") No. 25, "Accounting for Stock Issued
to Employees" ("APB No. 25") and related  Interpretations,  as permitted by FASB
Statement No. 123. The Company did not recognize  stock-based  compensation cost
in its statement of operations  for periods prior to July 1, 2006 as all options
granted had an exercise  price equal to or greater  than the market value of the
underlying common stock on the date of grant. However,  compensation expense was
recognized  for certain  options  granted to non  employees of the Company based
upon fair value.

As was permitted under SFAS No. 148, "Accounting for Stock-Based  Compensation -
Transition and  Disclosure,"  which amended SFAS No. 123, the Company elected to
continue to follow the intrinsic  value method in accounting for its stock-based
employee  compensation  arrangements  as  defined  by APB No.  25,  and  related
interpretations  including FASB  Interpretation  No. 44, "Accounting for Certain
Transactions  Involving Stock Compensation," an interpretation of APB No. 25. No
stock-based  employee  compensation  cost is  reflected  in  operations,  as all
options granted under those plans had an exercise price equal to or greater than
the  market  value of the  underlying  common  stock on the date of  grant.  The
following table  illustrates the effect on net loss and net loss per share as if
the Company had applied the fair value recognition provisions of SFAS No. 123 to
stock-based employee compensation:
<TABLE>
<CAPTION>
                                                               For the three months ended        For the six months ended
                                                               --------------------------        ------------------------
                                                                    December 31, 2005                December 31, 2005
                                                                     -----------------                -----------------
        <S>                                                         <C>                              <C>
        Net loss attributable to common shareholders,
          as reported                                               $        (1,158,048)             $       (2,238,162)
        Deduct:  Total stock-based employee
          compensation expense determined under fair
          value based method for all awards, net of
          related tax effects                                                   (94,082)                       (188,164)
                                                                     -----------------                -----------------

        Pro forma net loss attributable to common
        shareholders                                                $        (1,252,130)             $       (2,426,326)
                                                                    ====================             ===================

        Basic and diluted net loss per share
                 As reported                                           $           (.04)               $           (.08)
                 Pro forma                                             $           (.04)               $           (.08)
</TABLE>

                                       9
<PAGE>
                     NETWOLVES CORPORATION AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)


Stock-based compensation (continued)

A summary of the Company's stock plan is presented below:
<TABLE>
<CAPTION>
                                                          Stock Options    Weighted-Average   Aggregate Intrinsic
                                                                            Exercise Price           Value
                                                       ----------------------------------------------------------
       <S>                                                        <C>            <C>             <C>
       Outstanding, June 30, 2006                                 5,104,200      $    0.75
       Granted                                                    2,607,500      $    0.16
       Exercised                                                          -      $      -
       Cancelled/forfeited                                          (23,750)     $    2.77
                                                        ----------------------------------
       Outstanding, December 31, 2006                             7,687,950      $    0.54       $         -
                                                        ==================================       ================
       Exercisable, December 31, 2006                             6,993,864      $    0.58       $         -
                                                        ==================================       ================
</TABLE>
The following table summarizes  information  about stock options  outstanding at
December 31, 2006:
<TABLE>
<CAPTION>
                                                         Options                                  Options
                                                      outstanding at                           exercisable at
                                                    December 31, 2006                        December 31, 2006
                                                    -----------------                        -----------------
                                                           Weighted
                                                            average       Weighted                        Weighted
                                                           remaining      average                          average
               Range of                   Number of       contractual     exercise       Number of        exercise
            exercise prices                shares            life          price          Shares            price
            ---------------                ------            ----          -----          ------            -----
       <S>                                <C>                 <C>        <C>            <C>               <C>
       $      0.00-$  0.50                5,218,000           4.65       $  0.15        4,529,914         $   0.21

       $      0.51-$  1.00                1,053,700           3.25       $  1.00        1,053,700         $   1.00

       $      1.01-$  1.50                1,305,250           1.25       $  1.19        1,305,250         $   1.19

       $      1.51-$  2.00                    6,500           1.81       $  1.88            6,500         $   1.88

       $      2.01-$ 12.00                  104,500           2.11       $  7.00          104,500         $   7.00
                                          ---------                                     ---------
                                          7,687,950                                     6,993,864
                                          =========                                     =========
</TABLE>
During the six months ended  December 31, 2006,  the Company  granted  2,607,500
options  with a  weighted  average  exercise  price of $0.16 and a fair value of
$315,325.  During the six month ended December 31, 2006 1,918,414 options with a
weighted  average  exercise price of $0.16 vested.  At December 31, 2006,  there
were 689,086 non-vested options outstanding with an exercise price of $0.16. The
remaining   compensation   expense  related  to  these  non-vested   options  is
approximately  $76,000 and will be expensed  over a weighted  average  period of
1.97 years.

The weighted  average fair value of options  granted during the six months ended
December 31, 2006 is $0.11.

Summary of Recently Issued Accounting Pronouncements

In March 2005,  the FASB issued final  guidance  that  clarifies  how  companies
should   account  for   "conditional"   asset   retirement   obligations.   FASB
Interpretation No. 47, "Accounting for Conditional Asset Retirement Obligations"
("FIN 47"),  deals with  obligations to perform asset  retirement  activities in
which the timing and/or method of settlement are  conditional on a future event.
In  implementing  the new guidance,  which was adopted by the Company as of June
30, 2006,  the Company will need to identify its  conditional  asset  retirement

                                       10
<PAGE>
                     NETWOLVES CORPORATION AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

Summary of Recently Issued Accounting Pronouncements (continued)

obligations and determine  whether it can reasonably  estimate the fair value of
each  obligation.  If the Company can  reasonably  estimate the fair value of an
obligation it needs to recognize a liability for that  obligation.  The adoption
of FIN 47 did not have a material impact on the Company's consolidated financial
statements.

In May  2005,  the FASB  issued  SFAS No.  154,  "Accounting  Changes  and Error
Corrections"  ("SFAS No.  154")  established  new  standards on  accounting  for
changes in accounting  principles.  Pursuant to the new rules,  all such changes
must be accounted for by retrospective  application to the financial  statements
of prior periods  unless it is  impracticable  to do so. SFAS No. 154 supercedes
Accounting  Principles Bulletin ("APB") Opinion No. 20, "Accounting Changes" and
SFAS No. 3,  "Reporting  Accounting  Changes in interim  Financial  Statements",
though it carries forward the guidance of those  pronouncements  with respect to
accounting for changes in estimates,  changes in the reporting  entity and error
corrections.  This  statement  is  effective  for  accounting  changes and error
corrections  made in years  beginning  after  December 15, 2005. The adoption of
SFAS No.  154 did not  have a  material  impact  on its  consolidated  financial
statements.

In September 2005, the FASB ratified the EITF's Issue No. 05-7,  "Accounting for
Modifications  to Conversion  Options  Embedded in Debt  Instruments and Related
Issues" ("EITF 05-7"),  which  addresses  whether a modification to a conversion
option that changes its fair value effects the  recognition of interest  expense
for associated debt instrument  after the  modification,  and whether a borrower
should recognize a beneficial conversion feature, not a debt extinguishment,  if
a debt  modification  increases the intrinsic  value of the debt.  The statement
will be effective for accounting  modifications of debt instrument  beginning in
the first interim or annual  reporting period beginning after December 15, 2005.
The  adoption  of EITF  05-7 did not have a  material  impact  on the  Company's
consolidated financial position or results of operations.

In September  2005,  the FASB  ratified  the EITF's Issue No. 05-8,  "Income Tax
Consequences of Issuing  Convertible Debt with a Beneficial  Conversion Feature"
("EITF 05-8"),  which discusses  whether the issuance of convertible debt with a
beneficial  conversion  feature results in a basis  difference  arising from the
intrinsic  value of the beneficial  conversion  feature on the  commitment  date
(which is  recorded  in the  shareholders'  equity for book  purposes,  but as a
liability for income tax purposes) and, if so, whether that basis  difference is
a temporary  difference  under FASB  Statement No. 109,  "Accounting  for Income
Taxes." The statement  will be effective for  accounting  modifications  of debt
instrument  beginning in the first interim or annual  reporting period beginning
after  December  15,  2005.  The  adoption  of EITF 05-8 did not have a material
impact  on  the  Company's   consolidated   financial  position  or  results  of
operations.

In October 2005, the FASB issued FSP FAS 123(R)-2,  "Practical  Accommodation to
the  Application of Grant Date as Defined in FASB Statement No.  123(R)",  which
provides  clarification of the concept of mutual understanding  between employer
and employee with respect to the grant date of a share-based payment award. This
FSP provides that a mutual  understanding  of the key terms and conditions of an
award shall be presumed to exist on the date the award is approved by management
if the  recipient  does not have the  ability  to  negotiate  the key  terms and
conditions of the award and those key terms and conditions  will be communicated
to the individual recipient within a relatively short time period after the date

                                       11
<PAGE>
                     NETWOLVES CORPORATION AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

Summary of Recently Issued Accounting Pronouncements (continued)

of approval.  This  guidance was  applicable  upon the initial  adoption of SFAS
123(R).  The  adoption  of this  pronouncement  did not  have an  impact  on the
Company's consolidated financial position, results of operations, or cash flows.

In November 2005, the FASB issued Staff Position No. FAS 123 (R)-3,  "Transition
Election  Related  to  Accounting  for the Tax  Effects of  Share-Based  Payment
Awards,"  FAS  123(R)  provides  that  companies  may  elect to use a  specified
alternative  method to  calculate  the  historical  pool of excess tax  benefits
available to absorb tax  deficiencies  recognized  upon adoption of SFAS No. 123
(R). The option to use the alternative method is available regardless of whether
SFAS  No.  123 (R) was  adopted  using  the  modified  prospective  or  modified
retrospective  application  transition method, and whether it has the ability to
calculate  its pool of excess tax  benefits in  accordance  with the guidance in
paragraph  81 of SFAS No. 123 (R).  This method only  applies to awards that are
fully vested and  outstanding  upon adoption of SFAS No. 123 (R). FAS 123 (R)- 3
became effective after November 10, 2005. The adoption of SFAS No. 123 (R)-3 did
not have a material impact on the Company's  consolidated  financial position or
results of operations.

In February 2006, the FASB issued SFAS No. 155,  "Accounting  for Certain Hybrid
Financial Instruments" ("SFAS No. 155") an amendment to SFAS No. 133 "Accounting
for Derivative Instruments and Hedging Activities" and SFAS No. 140, "Accounting
for  Transfers  and  Servicing  of  Financial  Assets  and   Extinguishments  of
Liabilities".   This  statement  resolves  issues  addressed  in  Statement  133
Implementation  Issue  No.  D1,  "Application  of  Statement  133 to  Beneficial
Interests in Securitized  Financial Assets." This statement is effective for all
financial  instruments  acquired or issued after the  beginning of the Company's
first  fiscal  year that begins  after  September  15, 2006 with early  adoption
permitted.  The Company  does not expect the  adoption of SFAS No. 155 to have a
material impact on its consolidated financial statements.

In March  2006,  the FASB  issued SFAS No. 156,  "Accounting  for  Servicing  of
Financial  Assets"  - ("SFAS  No.  156") an  amendment  of SFAS  No.  140.  This
Statement requires that all separately recognized servicing assets and servicing
liabilities be initially measured at fair value, if practicable.  This statement
should be adopted as of the beginning of its first fiscal year that begins after
September 15, 2006 with early  adoption  permitted.  The Company does not expect
the  adoption  of SFAS No.  156 to have a  material  impact on its  consolidated
financial statements.

In June 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty
in Income Taxes- an interpretation of FASB Statement No. 109" ("FIN 48"). FIN 48
clarifies  the  accounting  for  uncertainty  in income taxes  recognized  in an
enterprise's  financial  statements  in  accordance  with  SFAS  No.  109.  This
Interpretation  prescribes a recognition threshold and measurement attribute for
the financial  statement  recognition and measurement of a tax position taken or
expected to be taken in a tax return. This Interpretation also provides guidance
on derecognition,  classification, interest and penalties, accounting in interim
periods,  disclosure,  and  transition.  FIN 48 is  effective  for fiscal  years
beginning  after December 15,  2006.The  Company does not expect the adoption of
FIN 48 to have a material impact on its consolidated financial statements.

In  September  2006,  the FASB issued SFAS No.  157,  "Fair Value  Measurements"
("SFAS No. 157"). SFAS No. 157 clarifies the principle that fair value should be
based on the assumptions market  participants would use when pricing an asset or
liability  and  establishes  a  fair  value   hierarchy  that   prioritizes  the


                                       12
<PAGE>
                     NETWOLVES CORPORATION AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

Summary of Recently Issued Accounting Pronouncements (continued)

information used to develop those assumptions.  SFAS No. 157 requires fair value
measurements  to  be  separately  disclosed  by  level  within  the  fair  value
hierarchy.  SFAS No. 157 is effective for financial statements issued for fiscal
years beginning after November 15, 2007, and interim periods within those fiscal
years.  The Company is currently  evaluating the impact of adopting SFAS No. 157
on its future results of operations and financial condition.

In September  2006,  the FASB issued SFAS No. 158,  "Employers'  Accounting  for
Defined Benefit  Pension and Other  Postretirement  Plans--an  amendment of FASB
Statements No. 87, 88, 106, and 132(R). This Statement amends Statement 87, FASB
Statement No. 88,  Employers'  Accounting for  Settlements  and  Curtailments of
Defined Benefit Pension Plans and for Termination  Benefits,  Statement 106, and
FASB Statement No. 132 (revised 2003), Employers' Disclosures about Pensions and
Other Postretirement  Benefits,  and other related accounting  literature.  This
Statement improves financial reporting by requiring an employer to recognize the
overfunded or underfunded status of a defined benefit postretirement plan (other
than a  multiemployer  plan)  as an  asset  or  liability  in its  statement  of
financial position and to recognize changes in that funded status in the year in
which the changes occur  through  comprehensive  income of a business  entity or
changes  in  unrestricted  net  assets of a  not-for-profit  organization.  This
Statement also improves financial  reporting by requiring an employer to measure
the  funded  status  of a plan  as of the  date  of its  year-end  statement  of
financial position, with limited exceptions.  The Board issued this Statement to
address  concerns  that prior  standards on  employers'  accounting  for defined
benefit  postretirement  plans failed to communicate  the funded status of those
plans in a complete and  understandable  way. Prior standards did not require an
employer to report in its  statement of financial  position  the  overfunded  or
underfunded status of a defined benefit postretirement plan. Those standards did
not  require  an  employer  to  recognize   completely   in  earnings  or  other
comprehensive  income the  financial  effects of certain  events  affecting  the
plan's funded status when those events occurred. The Company does not expect the
adoption  of FIN 48 to have a  material  impact  on its  consolidated  financial
statements.

In  September  2006,  the  Securities  and  Exchange   Commission  issued  Staff
Accounting  Bulletin  ("SAB")  No. 108,  "Considering  the Effects of Prior Year
Misstatements   When   Quantifying   Misstatements  in  Current  Year  Financial
Statements".  SAB No. 108 provides interpretive guidance on the consideration of
the  effects  of  prior  year   misstatements   in   quantifying   current  year
misstatements for the purpose of assessing materiality. SAB No. 108 is effective
for fiscal  years  ending  after  November  15,  2006.  The Company is currently
evaluating  the  impact  of  adopting  SAB  No.  108 on its  future  results  of
operations and financial condition.

In  February  2007,  the FASB issued  SFAS No.  159,  The Fair Value  Option for
Financial  Assets and  Financial  Liabilities--Including  an  amendment  of FASB
Statement No. 115.  This  Statement  permits  entities to choose to measure many
financial instruments and certain other items at fair value. The objective is to
improve  financial  reporting  by providing  entities  with the  opportunity  to
mitigate  volatility in reported earnings caused by measuring related assets and
liabilities  differently  without  having  to  apply  complex  hedge  accounting
provisions.  The fair value option  established  by this  Statement  permits all
entities to choose to measure eligible items at fair value at specified election
dates. A business entity shall report  unrealized  gains and losses on items for
which the fair value option has been elected in earnings (or another performance
indicator if the business  entity does not report  earnings) at each  subsequent
reporting date. A not-for-profit  organization shall report unrealized gains and
losses in its  statement of  activities  or similar  statement.  This  Statement
applies to all entities,  including  not-for-profit  organizations.  Most of the
provisions  of this  Statement  apply only to entities that elect the fair value
option. However, the amendment to FASB Statement No. 115, Accounting for Certain
Investments  in  Debt  and  Equity  Securities,  applies  to all  entities  with
available-for-sale  and trading securities.  Some requirements apply differently
to entities that do not report net income. This Statement is effective as of the
beginning of an entity's  first fiscal year that begins after November 15, 2007.
The  Company  does not  expect the  adoption  of SFAS No. 159 to have a material
impact on its consolidated financial statements.

5.   Accounts payable and accrued expenses

Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
                                                                                December 31,          June 30,
                                                                                   2006                2006
                                                                             -----------------    ---------------
              <S>                                                              <C>                 <C>
              Trade accounts payable and other accrued operating
                 expenses                                                      $  2,730,238        $   3,271,042
              Sales and excise taxes payable                                         46,904              132,409
              Universal services charges payable                                  1,279,507            1,114,795
              Dividends payable                                                     552,148              490,819
              Compensated absences                                                  227,802              356,361
              Other current liabilities                                             599,351              372,826
              Bonuses and commissions payable                                        15,553               16,974
              Accrued taxes                                                             812                  159
                                                                             -----------------    ---------------
                                                                               $  5,452,315        $   5,755,385
                                                                             =================    ===============
</TABLE>

                                       13
<PAGE>
                     NETWOLVES CORPORATION AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

6.       Long Term Debt

         Long term debt at December 31, 2006 consists of the following:
<TABLE>
<CAPTION>
                                                                            December 31,           June 30,
                                                                                2006                 2006
                                                                        -----------------    -----------------
           <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 - 2 remaining contingent payments in the
           amount of $100,000 was due July 31, 2006 and $50,000 due
           July 31, 2007. Payments contingent on achieving targeted
           revenues (See Note 7).                                                  60,000             150,000
                                                                        -----------------    -----------------

           Total Long-Term Debt                                                 1,128,750           1,218,750

           Less: Current Maturities                                             (155,000)           (100,000)
                                                                        -----------------    -----------------
           Long-Term Debt, Less Current Maturities                          $     973,750       $   1,118,750
                                                                        =================    =================
</TABLE>
Maturities of long-term debt at December 31, 2006 for the next five years and in
the aggregate are as follows:
<TABLE>
<CAPTION>
                             For the period ending
                             ---------------------
                                  December 31,                            Amount
                                  ------------                            ------

                                      <S>                             <C>
                                      2007                            $          155,000
                                      2008                                       973,750

                                   Thereafter                                          -
                                                        ---------------------------------
                                                                      $        1,128,750
                                                        =================================
</TABLE>
At all times the Company must maintain  current  accounts  receivable of no less
than $1,500,000.Current accounts receivable is defined as amounts which are less
than sixty days past due.


7.   Acquisition of customer list

On  October 1,  2004,  the  Company  acquired  a  customer  list from  Education
Communications   Consortia,   Inc.  ("ECCI")  for  a  total  purchase  price  of
$1,444,277,  including $144,277 in acquisition costs, of which $500,000 was paid
in cash on the date of closing.  The remaining $800,000 was originally  recorded
as a note  payable  due in  four  annual  installments  of  $200,000  commencing
November 30, 2005,  bearing interest of 4% per annum. The payment of each of the
four annual  installments  is contingent  upon  achieving  annual  revenue of $2
million for each twelve  month period  ending  September  30, 2005 to 2008.  The
purchase  price,  including  the entire  contingent  liability,  was  originally
recorded as an intangible  asset, as it was initially  believed that payment was
assured beyond a reasonable  doubt,  and was amortized over its expected  useful
life of 5 years.

In September 2005, the Company  determined that gross revenues  derived from the
ECCI customer list did not reach the annual revenue of $2 million as required by
the  purchase  agreement  and also no longer  believes  that the  balance of the

                                       14
<PAGE>
                     NETWOLVES CORPORATION AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

payments are assured  beyond a reasonable  doubt.  Accordingly,  the Company has
recorded  a  decrease  in the  customer  list in the  amount of  $800,000  and a
corresponding  decrease in notes payable.  As a result, the Company has reversed
previously recorded amortization expense and accrued interest totaling $144,002,
which is reflected as other income in the  accompanying  condensed  consolidated
statements of operations.  The adjustment  will also have the effect of reducing
future amortization expense by $160,000 per annum.

In September 2006, the Company  determined that gross revenues  derived from the
ECCI customer list did not reach the annual revenue of $2 million as required by
the purchase agreement and no longer believes that the remaining $400,000 of the
performance payment is assured beyond a reasonable doubt.

In  April  2005,  the  Company  acquired  a  customer  list and  entered  into a
non-compete agreement for $200,000 and $200,000 respectively.  The customer list
has an estimated useful of 5 years and the non-compete will be amortized over 27
months.  The Company made cash payment of $150,000 with three additional  annual
payments  commencing  July 31, 2005 in the  amounts of  $100,000,  $100,000  and
$50,000 (see Note 6). During the six months ended  December 31, 2006 the Company
made partial payments totaling $90,000 and the Company is not in default of this
agreement  as a result of this  partial  payment.  As of  December  31, 2006 the
Company has made  payments  totaling  $190,000 on this existing  customer  list.
Subsequent to December 31, 2006, the Company made another partial payment in the
amount of $10,000.

8. Related party transactions

During the three  months  ended  December  31, 2006 and 2005,  the Company  paid
approximately $52,000 and $30,000, respectively, for legal services to law firms
in which an employee/stockholder is affiliated.

During the six  months  ended  December  31,  2006 and 2005,  the  Company  paid
approximately $88,000 and $64,000, respectively, for legal services to law firms
in which an employee/stockholder is affiliated.

The Company  received a non-interest  bearing  advance from a shareholder in the
amount of  $210,000  during  the  quarter  ended  September  30,  2005,  with no
scheduled  repayment  terms.  During  December 31, 2005 this short term debt was
repaid with the issuances of 840,000 shares of restricted  common stock, with no
registration rights

9. Shareholders' equity

Preferred stock
---------------

On July 1, 2006 stock  dividends  totaling  21,720  shares were paid in Series A
Preferred  Stock to Series A  Preferred  Stock  investors  representing  accrued
dividends through June 30, 2006

For the six months  ended  December 31,  2006,  investors  converted 3 shares of
Series A Preferred Stock and 13,778 shares of Series B Preferred Stock resulting
in issuances of 275,616  shares of common stock.  There were no  conversions  of
Series C 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, 2006 were $188,507 and $377,359, respectively.

Options
-------

During  September 2006, the Company entered into an agreement with a consultant.
In return for services,  the Company  granted  options to purchase 50,000 shares
with a value of $5,000.

                                       15
<PAGE>
                     NETWOLVES CORPORATION AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

During  December 2006, the Company  entered into an agreement with a consultant.
In return for services,  the Company granted options to purchase  250,000 shares
with a value of $20,000.

During December 2006, at a meeting of the  compensation  committee,  the Company
authorized  the issuance of 2,307,500  options with a fair value of $290,325 and
700,000  shares of common stock under its existing stock  option/stock  issuance
plans.  This  represents an aggregate of 1,825,000  options with a fair value of
$237,250  issued to its executives and directors and 482,500 options with a fair
value of $53,075  issued to its employees and  consultants.  The options have an
exercise  price of $.16 and a vesting  period that ranges  from  immediately  to
twenty four months.  The closing price of the Company's common stock on December
12, the last trading day before authorization of the issuance was $0.16.

For the six months  ended  December 31,  2006,  the fair value of the  Company's
stock  options  was  estimated  on  the  following  assumptions:   (1)  expected
volatility of 109% to 113%,  (2) risk-free  interest rates of 4.54% to 4.82% and
expected lives of 2 to 5 years.

10.  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 three reportable business segments: Voice
Services,  Managed  Service  Charges and Equipment and  Consulting.  These three
segments reflect management's approach to operating and directing the businesses
and aligns 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, which operates worldwide, provides network and security
technology and a variety of recurring  managed data services.  The Equipment and
Consulting  segment,  which  operates  worldwide,  is  primarily  engaged in the
design,  development,  marketing and support of  information  delivery  hardware
products and software as well as providing  consulting  services on an as needed
basis for certain existing or potential customers.
<TABLE>
<CAPTION>
                                                 For the three months ended             For the six months ended
                                                        December 31,                          December 31,
                                                        ------------                          ------------
                                                    2006             2005                 2006             2005
                                            -----------------  -----------------  -----------------  ----------------
                  <S>                           <C>                <C>                <C>                <C>
                                  Revenue
                           Voice Services        $  2,183,082       $  3,540,664       $  4,776,461       $  7,370,082
                  Managed Service Charges           2,157,891          1,999,351          4,214,657          4,205,007
                  Equipment and Consulting                640             19,918              1,152             21,044
                                                 ------------       ------------      -------------      -------------
                                     Total       $  4,341,613       $  5,559,933       $  8,992,270       $ 11,596,133
                                                 ============       ============       ============       ============
                           Cost of revenue
                            Voice Services       $  1,455,075       $  2,427,009       $  3,153,272       $  4,804,456
                   Managed Service Charges          1,373,157          1,233,440          2,663,289          2,686,160
                  Equipment and Consulting                  -                175                  -                175
                                                 ------------       ------------      -------------      -------------
                                     Total       $  2,828,232       $  3,660,624       $  5,816,561       $  7,490,791
                                                 ============       ============       ============       ============
                            Operating loss
                            Voice Services       $   (517,145)       $  (816,975)      $   (885,563)      $ (1,454,354)
                   Managed Service Charges           (511,271)          (459,549)          (781,404)          (854,145)
                  Equipment and Consulting               (152)                  -              (214)                 -
                                                 ------------       ------------      -------------      -------------
                                     Total       $ (1,029,568)      $ (1,276,524)      $ (1,667,181)      $ (2,308,499)
                                                =============      =============       ============      =============
</TABLE>
                                       16
<PAGE>
                     NETWOLVES CORPORATION AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

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 and are shipped  primarily
from the Company's facilities in the United States.

11. Major Customer/Significant Agreements

The Company had one major customer which accounted for  approximately 6% and 12%
of  consolidated  revenue for the three and six months ended  December 31, 2005,
respectively. The agreement with this customer terminated on June 30, 2005.

For the three and six months  ended  December  31, 2006 the Company did not have
any major customer that accounted for more than 10% of consolidated revenue.

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, which expires November 2008. The remaining minimum
monthly commitment is as follows:
<TABLE>
<CAPTION>
                                                 Monthly
         Months                                Commitment
         ---------                             ----------
         <S>                                   <C>
         41 - 52 (November 2006)               $  550,000
         53 - 64 (November 2007)                  650,000
         65 - 76 (November 2008)                  750,000
</TABLE>
The Company made purchases from Sprint that aggregated approximately 34% and 48%
of the total cost of revenue  for the six months  ended  December  31,  2006 and
2005,  respectively.  For the three months ended  December 31, 2006 and 2005 the
Company made purchases from Sprint that aggregated  approximately 31% and 38% of
the total cost of revenue, respectively.

In addition,  the Company made purchases from MCI that aggregated  approximately
25% and 25% and Qwest that aggregated approximately 12% and 7% of the total cost
of revenue for the six months ended  December  31, 2006 and 2005,  respectively.
For the three  months  ended  December  31,  2006 and  2005,  the  Company  made
purchases  from MCI that  aggregated  approximately  22% and 25% and Qwest  that
aggregated approximately 13% and 7% of the total cost of revenue.

12. Commitments and contingencies

Employment agreements

The Company has  employment  agreements  with certain  members of its  executive
management team. All of the employment  agreements  provide 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:

o    As discussed below, the agreement with the Chief Executive  Officer was for
     a term of five  years at an annual  salary of  $275,000  subject to cost of
     living increments.  On July 1, 2004, a new agreement was entered into for a
     term of six  years,  terminating  on July 1, 2010,  at an annual  salary of
     $275,000 subject to cost of living increments.  As further discussed below,
     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


                                       17
<PAGE>
                     NETWOLVES CORPORATION AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

Executive  Officer  and a director of the  Company,  effective  immediately.  As
previously reported, a committee has been appointed to search for candidates for
the  position  of Chief  Executive  Officer.  Until then  Michael R.  Rocque,  a
director of the Company, was appointed as its Acting Chief Executive Officer.

o    The agreement  with the Senior Vice President is for a term of three years,
     subject  to two  additional  one-year  extensions,  at an annual  salary of
     $175,000.  On July 1, 2004, a new  agreement was entered into 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.

o    The  agreement  with the  Chief  Financial  Officer  is for a term of three
     years, subject to two additional one-year  extensions,  at an annual salary
     of $150,000.  On July 1, 2004, a new  agreement was entered into 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.

o    As part of the plan to reduce  certain  expenses  of the Company the Senior
     Vice  President  and  Chief  Financial  Officer  voluntarily  accepted  pay
     reductions  of 50% of their  current pay. This amount is net of an existing
     15% deferment and commenced  February 1, 2007.  This reduction will only be
     reinstated to its original  amount by the consent of the Company's Board of
     Directors.

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
          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,  Michael R. Rocque,  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 E. Foote,  formerly Vice  President,  was appointed as
          the   Company's   Acting   President  to  be  involved  in  day-to-day
          operations.

                                       18
<PAGE>
                     NETWOLVES CORPORATION AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

          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, 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.

          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.



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.

         Overview

          NetWolves  Corporation  ("NetWolves"  or the  "Company")  is a network
          continuity and security provider that offers high-performance  network
          security   solutions  coupled  with  robust  network   management  and
          communication services. The Company designs,  develops,  assembles and
          sells Internet infrastructure security platforms, coupled with network
          based  management  services,  designed  to  significantly  reduce  the
          up-front and ongoing costs  associated  with small,  medium and remote
          offices'  global  Internet  access.  NetWolves'  patent pending system
          technology  enables  organizations  to obtain their short,  middle and

                                       19
<PAGE>

          long term IT and e-business  initiatives through the deployment of our
          plug `n' play perimeter  office  security  platform,  coupled with our
          secure  remote   monitoring   and   management   ("SRM2  TM")  system.
          Additionally,   NetWolves'  advanced,  centralized,  reporting  module
          offers the ability for corporate executives to view, via the Internet,
          both  statistical  and  performance  based  metrics  for their  global
          network.

          We  operate  in three  segments.  The Voice  Services  segment,  which
          operates  worldwide,  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  Services  Charges  ("MSC" or Managed  Services)
          segment  provides  network and  security  technology  and a variety of
          recurring managed data services.  The Equipment and Consulting segment
          delivers  networking  and security  equipment  and software as well as
          provides consulting services on an as needs basis for certain existing
          or potential customers.

          We have created 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 sell 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 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 secure remote  monitoring  and management
          ("SRM2  TM")   system.   SRM2  TM  provides   centralized   management
          capabilities  for hundreds or thousands  of remote  locations  without
          risking   networking   integrity   because  it  does  not  require  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.


         Critical accounting policies

          The Company's  discussion and analysis of its 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,  stock
          based  compensation and goodwill and other intangible  assets. 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.

                                       20
<PAGE>
         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 condensed 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.  Maintenance  or monitoring  revenue that is bundled with an
          initial  licenses fee is deferred and  recognized  ratably  within the
          period in the accompanying consolidated statement of operations.

          Revenue  from  the  sale  of  hardware,  where  our  software  is  not
          essential,  is recognized  within Equipment and Consulting  revenue at
          the time of delivery of hardware  products to the  customer,  when the
          fee is  fixed  and  determinable,  collectibility  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   condensed
          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 our software  arrangements,  which consists of
          maintenance, monitoring and, at times, training and consulting. We use
          the residual method for delivered  elements.  Our consulting  projects
          are  short-term in nature and are recorded as revenue in Equipment and
          Consulting  revenues  in  the  accompanying   condensed   consolidated
          statements of operations when services are provided.

          Revenue for shipping and handling are included  within  Equipment  and
          Consulting  revenue  and the  related  costs are  included  in cost of
          revenue  in the  accompanying  condensed  consolidated  statements  of
          operations.

          Allowance for doubtful accounts

          The Company  provides  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 the Company's  customer
          base. If the financial  condition of the Company's  customers  were to
          deteriorate,  resulting  in an  impairment  of their  ability  to make
          payments, additional allowances may be required.

          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 condensed consolidated

                                       21
<PAGE>

          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  31,2006  and June  30,  2006.  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.

          Stock-based compensation

          We apply SFAS 123(R) to account for stock-based employee  compensation
          plans. Under this method compensation cost is recognized for awards of
          shares of common  stock or stock  options to  directors,  officers and
          employees of the Company only if the quoted  market price of the stock
          at the grant  date (or other  measurement  date,  if later) is greater
          than the  amount the  grantee  must pay to  acquire  the  stock.  This
          statement  requires  that we  measure  the cost of  employee  services
          received in exchange for an award of equity  instruments  based on the
          grant-date fair value of the award. That cost is to be recognized over
          the period during which the employee is required to provide service in
          exchange  for the award.  Changes in fair value  during the  requisite
          service  period are to be  recognized as  compensation  cost over that
          period.

          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.

          Six months ended December 31, 2006 and 2005

          Revenue

          Revenue  decreased to $9.0  million for the six months ended  December
          31, 2006,  compared to $11.6  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 $2.6 million.  The decrease
          in the Voice Services segment was  attributable to customer  attrition
          of approximately $2.6 million.  Swift accounted for approximately $1.7
          million of the Voice Services attrition in the current period.  During
          the  six  months  ended  December  31,  2006,   Swift   Transportation
          contributed  none of the  Company's  overall  revenues  in the current
          period as compared  to 12% in the same  period in the prior year.  The
          contract with Swift terminated effective June 30, 2005.

          Cost of revenue (excluding depreciation and amortization)

          Cost of revenue  decreased  to $5.8  million for the six months  ended
          December 31, 2006  compared to $7.5 million for the same period in the
          prior  year.  Cost  of  revenue  within  the  Voice  Services  segment
          decreased  to $ 3.2  million  compared  to $4.8  million  for the same
          period in the prior year.  This decrease is primarily  attributable to
          customer  attrition in the current period.  Cost of revenue within the
          MSC segment  remained at $2.7 million compared to $2.7 million for the
          same period in the prior year.  The decrease in cost of revenue within
          the Equipment and Consulting segment was nominal.

          General and administrative

          General and administrative expenses were $2.6 million and $3.0 million
          for the six months ended December 31, 2006 and 2005 respectively.  The
          decrease in general and administrative expenses were due to a decrease
          in payroll of $0.4  million,  a decrease  in  accounting  fees of $0.1
          million and a decrease or related  cost  reductions  of  approximately
          $0.2 million offset by an increase in non cash equity  compensation of
          $0.1 million and non cash equity  consulting  of $0.2 million from the
          prior period.

                                       22
<PAGE>
          Engineering and development

          Engineering and development expenses decreased to $0.1 million for the
          six months ended  December 31, 2006,  compared to $0.3 million for the
          same  period  in the prior  year.  The  decrease  in  engineering  and
          development  expenses were primarily  attributable to staff reductions
          and associated  engineering and development  expenses of approximately
          $0.2 million.

          Sales and marketing

          Sales and  marketing  expenses  decreased  to $1.5 million for the six
          months ended December 31, 2006,  compared to $2.6 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 $0.6
          million,  a decrease in associated sales and marketing expenses in the
          amount of $0.2 million, a decrease in consulting and professional fess
          in the  amount of $0.1  million  and a  decrease  in  related  support
          personnel  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 $0.0 million for the six months
          ended December 31, 2006 compared to $.4 million for the same period in
          the prior  year.  Other  income for the same  period in the prior year
          consisted of $0.1 million  related to the  reduction in short and long
          term  notes  payable  associated  with  the  acquisition  of the  ECCI
          customer list (see Note 4 to the  consolidated  financial  statements)
          and reduction in accrued expenses in the amount of $0.3 million.


          Three months ended December 31, 2006 and 2005

          Revenue

          Revenue  decreased to $4.3 million for the three months ended December
          31,  2006,  compared to $5.6  million for the same period in the prior
          year.  The decrease in revenue is  attributable  to our Voice Services
          segment where  revenue  decreased  $1.4  million.  The decrease in the
          Voice  Services  segment was  attributable  to customer  attrition  of
          which,  Swift accounted for approximately  $0.6 million in the current
          period. As of December 31, 2006, Swift Transportation contributed none
          of the Company's overall revenues in the current period as compared to
          8% in the same  period in  the prior  year.  The  contract  with Swift
          terminated effective June 30, 2005.

          The decrease in Equipment and Consulting was nominal.

          Cost of revenue (excluding depreciation and amortization)

          Cost of revenue  decreased  to $2.8 million for the three months ended
          December 31, 2006, compared to $3.7 million for the same period in the
          prior year. The decrease is  attributable to reduced cost in the Voice
          Services segment of approximately $.9 million due to lost customers.

          Cost of  revenue  within the MSC  segment  increased  to $1.4  million
          compared to $1.2  million  for the same period in the prior year.  The
          increase is primarily attributable to the addition of new customers.

          General and administrative

          General and administrative  expenses decreased to $1.4 million for the
          three months ended December 31, 2006, compared to $1.5 million for the
          same period in the prior  year.  The  decrease  was the result of cost
          cutting  initiatives  of  payroll  and  payroll  related  expenses  of
          approximately  $0.3  million  and a decrease  in various  general  and

                                       23
<PAGE>
          administrative  expenses of  approximately  $0.1 million  offset by an
          increase in non cash equity compensation of approximately $0.1 million
          and an increase in non cash equity  consulting of  approximately  $0.2
          million from the prior period.

          Engineering and development

          Engineering  and development  expenses  decreased to $0.04 million for
          the three months ended December 31, 2006, compared to $0.1 million for
          the same period in the prior year.  The  decrease in  engineering  and
          development  expenses were primarily  attributable to staff reductions
          and related cost of approximately $0.06 million.

          Sales and marketing

          Sales and marketing  expenses  decreased to $0.9 million for the three
          months ended December 31, 2006,  compared to $1.3 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 $0.3
          million,  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 $0.0 million for the three months
          ended  December 31, 2006  compared to $0.3 million for the same period
          in the prior year.  Other income for the same period in the prior year
          consisted of a $0.3 million reduction in accrued expenses.

          Liquidity and Capital Resources

          Our  operating  activities  used cash of  approximately  $1.4  million
          during the six months ended  December  31,  2006,  as compared to cash
          used of  approximately  $1.8  million for the same period in the prior
          year.  Cash used in operations  for the six months ended  December 31,
          2006 was primarily  attributable to a net loss of  approximately  $1.8
          million,  an increase in accounts  receivable  of  approximately  $0.5
          million,  prepaid  expenses  of  approximately  $0.2  million  and  an
          increase in deferred revenue of approximately $0.4 million,  partially
          offset by non-cash charges for depreciation and  amortization,  equity
          compensation and bad debt expense of approximately $0.4 million,  $0.3
          million and $0.3 million,  respectively.  Additionally,  inventory and
          accounts  payable  decreased by $0.04 and $0.3 million,  respectively.
          Cash used in operations for the six months ended December 31, 2005 was
          primarily attributable to a net loss of approximately $1.9 million, an
          increase in accounts payable of  approximately  $0.2 million and other
          income of  approximately  $0.4 million,  partially  offset by non-cash
          charges for depreciation and amortization, equity compensation and bad
          debt  expense of  approximately  $0.5  million,  $0.1 million and $0.3
          million,  respectively.  Additionally,  accounts  receivable,  prepaid
          expenses  and  inventory   decreased  by  $0.1  and  deferred  revenue
          decreased $0.2 million.

          Our investing  activities used approximately $ 0.1 million for the six
          months  ended  December 31, 2006 as compared to using $0.1 million for
          the same period in the prior year.  Cash used in investing  activities
          was primarily  attributable  to payments on customer lists  previously
          acquired  in the  amount  of $0.09  million.  Cash  used by  investing
          activities  for the six months ended  December 31, 2005, was primarily
          attributable to payments on customer lists previously  acquired in the
          amount of $100,000  and  purchases  of property  and  equipment in the
          amount of approximately $0.03 million.

          There were no financing  activities  for the six months ended December
          31, 2006. Our financing activities provided approximately $0.2 million
          for the six months ended December 30, 2005. Cash provided by financing
          activities   was   primarily   attributable   to  an  advance  from  a
          shareholder.

                                       24
<PAGE>
          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 historical losses from operating activities. The maturity date
          of our notes  previously due in March 2007 and November 2007, with the
          exception of $95,000,  have been extended to January 1, 2008. Based on
          our cash  position of  approximately  $.5  million,  significant  cost
          cutting initiatives, vendor negotiations, additional staff reductions,
          further significant  executive pay reductions as well as the extension
          of the  maturity  date of  notes  previously  due in  March  2007  and
          November  2007,  with the  exception of $95,000  together with current
          forecasts and debt financing,  we believe that we have sufficient cash
          to meet our funding  needs  through  December 31, 2007.  However,  our
          current  forecast  does not  address  events  beyond  January 1, 2008,
          including  developing  a plan for the  Company to have the  ability to
          repay its  indebtedness due in January 2008 as referenced in Note 6 of
          these  condensed  consolidated  financial  statements.   In  addition,
          certain executive officers and shareholders have guaranteed additional
          cash flow to the  Company in the amount of  $200,000 in the event such
          cash is needed  through  December 31, 2007.  However,  there can be no
          assurances that the Company will be successful in these initiatives or
          that these initiatives will result in improved financial performance.

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.

          Evaluation of Disclosure Controls

          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  a
          deficiency  was  identified in its internal  controls  over  financial
          reporting  which  constitutes  a  "material  weakness."   Accordingly,
          management  has  concluded  that a deficiency  was  identified  in its
          internal  controls  over  financial   reporting  which  constitutes  a
          "material  weakness."  Accordingly,  management has concluded that its
          disclosure controls and procedures are not effective.

          The  material  weakness  is a result of  certain  required  analytical
          schedules and memorandums  not being reviewed in a timely manner.  In,
          addition,  the  review  process  is not  being  performed  in a timely
          manner.

          Changes in Internal Controls

          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.

                                       25
<PAGE>
          There were no change in our Internal Controls during the quarter ended
          December  31,  2006 that has  materially  affected,  or is  reasonably
          likely to materially affect, our Internal Controls.

          Changes in Internal Controls Over Financial Reporting

          It is our  responsibility  to establish and maintain adequate internal
          control over financial  reporting.  The material weakness  identified,
          relates to the timeliness of the review process of our financial close
          and reporting process. These control deficiencies in the aggregate did
          not result in any misstatements in the annual or interim  consolidated
          financial  statements.  Management  is in the process of remedying the
          material  weakness  described above.  Management will be reviewing all
          systems and  procedures  relating  to the  financial  close,  with the
          objective  of  implementing  additional  controls  and  other  process
          improvements in the near future

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.

          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.

                                       26
<PAGE>
          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.


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

          None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

          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.


                                       27
<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/ Michael R. Rocque
                                ------------------------
                                Michael R. Rocque
                                Chief Executive Officer and Director




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










Date: March 9, 2007