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, 2005
                                               -----------------

                        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 JANUARY 31, 2006
     --------------             ------------------------------------------------
<S>                                                <C>
Common Stock, $.0033 par value                     31,622,375
</TABLE>

<PAGE>
                     NETWOLVES CORPORATION AND SUBSIDIARIES

                         FORM 10-QSB - DECEMBER 31, 2005

                                      INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
<S>   <C>                                                                                                  <C>

      ITEM 1 - FINANCIAL STATEMENTS

      CONDENSED CONSOLIDATED BALANCE SHEETS
           December 31, 2005 (unaudited) and June 30, 2005 ............................................... 1 - 2

      CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
           For the three and six months ended December 31, 2005 (unaudited)
             and December 31, 2004 (unaudited and as restated) ............................................3 - 4

      CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS For the six months ended
           December 31, 2005 (unaudited)
             and December 31, 2004 (unaudited) ............................................................5 - 6

      NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ...............................................7 - 13

      ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN
                 OF OPERATION ...........................................................................14 - 19

      ITEM 3 - CONTROLS AND PROCEDURES ...................................................................    20


PART II - OTHER INFORMATION

      ITEM 1 - LEGAL PROCEEDINGS .........................................................................    21

      ITEM 2 - CHANGES IN SECURITIES AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES ............    21

      ITEM 3 - DEFAULTS UPON SENIOR SECURITIES ...........................................................    21

      ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS .......................................    21

      ITEM 5 - OTHER INFORMATION .........................................................................    21

      ITEM 6 - EXHIBITS...................................................................................    21

SIGNATURES       .........................................................................................    22
</TABLE>

<PAGE>


                     NETWOLVES CORPORATION AND SUBSIDIARIES

                      CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
                                                                                    December 31,          June 30,
                                                                                        2005                2005
                                                                                 ------------------   -----------------
                                                                                    (Unaudited)
ASSETS
<S>                                                                             <C>                  <C>
Current assets
     Cash and cash equivalents                                                  $        1,593,197   $      3,325,318
     Restricted cash                                                                             -             25,958
     Accounts receivable, net of allowance of $515,317  at
        December 31, 2005 and June 30, 2005                                              3,936,234          4,206,658
     Inventories                                                                           427,994            468,705
     Prepaid expenses                                                                      318,406            354,637
                                                                                ------------------   -----------------
               Total current assets                                                      6,275,831          8,381,276

Property and equipment, net                                                                203,116            245,474

Identifiable intangible assets, net                                                      1,568,790          2,625,537

Goodwill and other indefinite lived intangible assets                                    3,791,072          3,783,687

Other assets                                                                                84,813             72,296
                                                                                ------------------   -----------------


               Total assets                                                     $      11,923,622    $     15,108,270
                                                                                ==================   ================

The  accompanying  notes are an integral  part of these  condensed  consolidated
financial statements.

                                        1

<PAGE>

                     NETWOLVES CORPORATION AND SUBSIDIARIES

                      CONDENSED CONSOLIDATED BALANCE SHEETS


(Continued)                                                                         December 31,          June 30,
                                                                                       2005                 2005
                                                                                ------------------   -----------------
                                                                                    (Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
    Accounts payable and accrued expenses                                       $       6,333,324  $        6,808,695
    Deferred revenue                                                                      511,934             692,930
    Current maturities of long term debt                                                  100,000             300,000
                                                                                ------------------   -----------------
       Total current liabilities                                                        6,945,258           7,801,625

Long term debt, net of current maturities                                                  50,000             750,000
                                                                                ------------------   -----------------
         Total liabilities                                                              6,995,258           8,551,625
                                                                                ------------------   -----------------

Shareholders' equity
    Series A convertible preferred stock, $.0033 par value; $5,845,014
      liquidation preference; 1,000,000 shares authorized; 182,873 and
      160,719 shares issued and outstanding on December 31, 2005 and June
      30, 2005, respectively                                                            2,163,300           1,830,979

    Series B convertible preferred stock, $.0033 par value; $7,277,948
      liquidation preference; 500,000 shares authorized; 207,219 shares
      issued and outstanding on December 31, 2005 and June 30, 2005                     2,729,977           2,729,977

    Series C convertible preferred stock, $.0033 par value; $2,048,096
      liquidation preference; 100,000 shares authorized; 14,267 and 16,028
      shares issued and outstanding on December 31, 2005 and June 30, 2005,
      respectively                                                                        283,661             365,269

    Preferred stock, $.0033 par value; 400,000 shares authorized; no shares
      issued and outstanding on December 31, 2005 and June 30, 2005                        -                     -

    Common stock, $.0033 par value; 65,000,000 authorized; 30,845,015 and
      29,824,205 shares issued and outstanding on December 31, 2005 and
      June 30, 2005, respectively                                                          101,788              98,420
     Additional paid-in capital                                                         79,029,436          79,080,423
     Unamortized value of equity compensation                                                    0             (43,000)
     Accumulated deficit                                                              (79,379,798)         (77,505,423)
                                                                                ------------------   -----------------

       Total shareholders' equity                                                        4,928,364           6,556,645
                                                                                ------------------   -----------------
                                                                                      $ 11,923,622  $       15,108,270
                                                                                ==================  ==================
</TABLE>
The  accompanying  notes are an integral  part of these  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,
                                      ---------------------------------------  ----------------------------------------

                                             2005                 2004                 2005                  2004
                                      ------------------  ------------------   ------------------    ------------------
<S>                                      <C>                  <C>                <C>                    <C>
 Revenue
    Voice services                       $  3,540,664         $  4,569,467       $  7,370,082           $  9,586,848
    Managed service charges                 1,999,351            1,753,427          4,205,007              3,624,860
    Equipment and consulting                   19,918              131,134             21,044                318,089
                                         ------------         ------------       ------------           ------------
                                            5,559,933            6,454,028         11,596,133             13,529,797
                                         ------------         ------------       ------------           ------------

 Cost of revenue
    Voice services                          2,427,009            2,833,281          4,804,456              5,970,378
    Managed service charges                 1,233,440            1,189,793          2,686,160              2,264,049
    Equipment and consulting                      175               16,487                175                147,595
                                         ------------         ------------       ------------           ------------
                                            3,660,624            4,039,561          7,490,791              8,382,022
                                         ------------         ------------       ------------           ------------

 Gross profit                               1,899,309            2,414,467          4,105,342              5,147,775
                                         ------------         ------------       ------------           ------------

Operating expenses
    General and administrative              1,370,083            1,877,721          3,106,067              3,456,810
    Engineering and development               122,848              239,637            332,799                474,402
    Sales and marketing                     1,682,902            1,246,768          2,974,975              2,157,861
                                         ------------         ------------       ------------           ------------
                                            3,175,833            3,364,126          6,413,841              6,089,073
                                         ------------         ------------       ------------           ------------

 Loss before other income (expense)        (1,276,524)            (949,659)        (2,308,499)              (941,298)

 Other income (expense)

    Other income                              275,198                8,291            419,200                 14,295
    Minority interest
    Interest expense                           3,403               (8,000)            20,354                  (8,000)
                                         ------------         ------------       ------------           ------------
                                              278,601                 291            439,554                   6,295
                                         ------------         ------------       ------------           ------------


Loss before income taxes                     (997,923)            (949,368)        (1,868,945)              (935,003)

Provision for income taxes                       (116)                   -             (5,430)                     -
                                         ------------         ------------       ------------           ------------

 Net loss                                $   (998,039)        $   (949,368)      $ (1,874,375)          $   (935,003)
                                         ============         ============       ============           ============

                                       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,
                                        ---------------------------------------  ----------------------------------------

                                               2005                 2004                 2005                  2004
                                        ------------------  ------------------   ------------------    ------------------

 Basic and diluted net loss per share

 Net loss                                 $  (998,039)         $   (949,368)       $ (1,874,375)         $   (935,003)
                                          ============         ============        ============          ============

    Dividends and beneficial conversion
       on convertible preferred stock        (160,009)             (284,180)           (363,787)             (690,825)
                                          ------------         ------------        ------------          ------------

Net loss attributable to common
  shareholders                            $(1,158,048)         $ (1,233,548)       $ (2,238,162)         $ (1,625,828)
                                          ============         ============        ============          ============


Basic and diluted net loss per share      $      (.04)         $       (.05)       $       (.07)         $       (.07)
                                          ============         ============        ============          ============

 Weighted average common shares
    outstanding, basic and diluted         30,163,805            23,465,049          30,007,474            22,501,609
                                          ============         ============        ============          ============
</TABLE>

The  accompanying  notes are an integral  part of these  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,
                                                                              ----------------------------------------

                                                                                      2005                  2004
                                                                              -------------------   ------------------
<S>                                                                              <C>                  <C>
Cash flows from operating activities
     Net loss                                                                     $ (1,874,375)        $     (935,003)
     Adjustments to reconcile net loss to net cash (used in) provided
     by operating activities
           Depreciation                                                                 73,850                104,457
           Amortization                                                                376,747                437,830
           Bad debt expense
                                                                                       264,872                132,764
           Non-cash charge to operations with respect to
             stock and warrants issued for services and amortization
             of previously issued warrants                                              67,400                201,825
           Other income                                                               (424,166)                     -
           Loss on disposal of property and equipment                                        -                  4,132

     Changes in operating assets and liabilities
       Restricted cash                                                                  25,958                   (156)
       Accounts receivable                                                               5,552               (120,990)
       Inventories                                                                      40,711               (371,292)
       Prepaid expenses                                                                 36,231               (275,332)
       Other current assets                                                            (12,517)                26,989
         Accounts payable and accrued expenses                                        (202,511)             1,468,147
       Accrued losses of discontinued operations                                                              (57,867)
       Deferred revenue                                                               (180,996)                29,763
                                                                                   -----------            -------------

         Net cash (used in) provided by operating activities                        (1,803,244)               645,267
                                                                                   -----------            -------------

Cash flows from investing activities
     Payment on existing customer list                                                (100,000)                    -
     Patent costs paid                                                                  (7,385)               (6,883)
     Payment to purchase customer contracts                                                  -              (500,000)
     Payments for security deposits                                                          -                (9,860)
     Purchases of property and equipment                                              (31,492)               (24,633)
                                                                                   -----------            -------------
         Net cash used in investing activities                                       (138,877)            $ (541,376)
                                                                                   -----------            -------------



The accompanying notes are an integral part of these 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,
                                                                               ----------------------------------------

                                                                                       2005                  2004
                                                                               -------------------   ------------------

Cash flows from financing activities
     NASDAQ listing fee                                                                      -                  (16,581)
     Advance from shareholder                                                          210,000                        -
                                                                                   -----------            -------------


       Net cash provided by (used in) in financing activities                         210,000                   (16,581)
                                                                                   -----------            -------------


Net (decrease) increase in cash and cash equivalents                                (1,732,121)                  87,310

Cash and cash equivalents, beginning of period                                       3,325,318                5,439,345
                                                                                   -----------            -------------


Cash and cash equivalents, end of period                                           $ 1,593,197            $   5,526,655
                                                                                  ============            =============



SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES


Note payable                                                                                 -            $     800,000
                                                                                  ============            =============

Warrant issued related to acquisition of customer list                                       -            $     175,000
                                                                                  ============            =============

Dividends accrued on convertible preferred stock                                  $    363,787            $     513,936
                                                                                  ============            =============

Dividends paid-in-kind on convertible preferred stock                             $    332,441            $   1,653,676
                                                                                  ============            =============

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

Conversions of preferred stock to common stock                                    $     81,728                        -
                                                                                  ============            =============

Issuance of common stock for consulting services                                  $     30,000                        -
                                                                                  ============            =============

Conversion of debt to common stock                                                $    210,000                        -
                                                                                  ============            =============

</TABLE>

The accompanying notes are an integral part of these condensed consolidated
  financial statements.
                                        6

<PAGE>


                     NETWOLVES CORPORATION AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

                   SIX MONTHS ENDED DECEMBER 31, 2005 AND 2004



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, 2005,  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, 2005.  The results of  operations
     for the six months ended December 31, 2005 are not  necessarily  indicative
     of the results to be expected for the full year.

2    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.

3    Significant accounting policies

     Principles of consolidation

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

     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  22.7  million  and  23.5  million  at
     December  31,  2005 and 2004,  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
     $257,733 and $ 170,261, respectively, at December 31, 2005 and $274,775 and
     $193,930, respectively, at June 30, 2005.

                                       7
<PAGE>


                     NETWOLVES CORPORATION AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

                   SIX MONTHS ENDED DECEMBER 31, 2005 AND 2004


     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

     Statement of Financial  Accounting  Standards ("SFAS") No. 123, "Accounting
     for Stock-Based  Compensation"  ("SFAS 123") establishes a fair value-based
     method of accounting for stock based  compensation  plans.  The Company has
     chosen  to adopt  the  disclosure  requirements  of SFAS 123 and SFAS  148,
     "Accounting  for  Stock-Based  Compensation  - Transition  and  Disclosure"
     ("SFAS 148") and continue to record stock  compensation  for its  employees
     and outside  directors  using the  intrinsic  value  method  prescribed  in
     Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
     Employees"  ("APB 25").  Under APB 25,  charges are made to  operations  in
     accounting  for stock options  granted to employees  and outside  directors
     when the  option  exercise  prices are below the fair  market  value of the
     common stock at the measurement date.

     If the Company had elected to recognize compensation expense based upon the
     fair value at the date of grant consistent with the methodology  prescribed
     by SFAS 123 and SFAS 148, the effect on the Company's net loss and net loss
     per share  would be as  follows:  For the three  months  For the six months
     ended December ended December 31, 31, . (As restated) (As restated)
<TABLE>
<CAPTION>
                                                   2005                2004                 2005                2004
                                           ------------------  -------------------  -------------------  ------------------
   <S>                                      <C>                <C>                   <C>                 <C>
   Net loss attributable to common
     shareholders, as reported              $     (1,158,048)  $      (1,233,548)    $      (2,238,162)  $      (1,625,828)

   Add:  Total stock-based employee
     compensation expense included in
     reported net income (loss), net of
     related tax effects                                                       -                                         -

   Deduct:  Total stock-based employee

     compensation expense determined
     under fair value based method for
     all awards, net of related tax
     effects                                         (94,082)           (126,751)             (188,164)           (247,358)
                                           ------------------  -------------------  -------------------  ------------------

   Pro forma net loss attributable to
   common shareholders
                                           $      (1,252,130)   $     (1,360,299)    $      (2,426,326)   $     (1,873,186)
                                           ==================  ===================  ===================  ==================

   Basic and diluted net loss per share
            As reported                    $            (.04)   $           (.05)    $            (.08)   $           (.07)
            Pro forma                      $            (.04)   $           (.06)    $            (.08)   $           (.08)
                                           ==================  ===================  ===================  ==================
</TABLE>

                                       8
<PAGE>


                     NETWOLVES CORPORATION AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

                   SIX MONTHS ENDED DECEMBER 31, 2005 AND 2004



     Stock-based compensation - Continued

     Equity  issuances to  non-employees in exchange for services are charged to
     operations  over the period the services are provided  using the fair value
     method on the measurement date.

     Summary of recent accounting pronouncements

     In November 2004, the Financial  Accounting Standards Board ("FASB") issued
     SFAS No. 151,  "Inventory  Costs,  an amendment  of ARB No. 43,  Chapter 4"
     ("SFAS 151").  SFAS 151 clarifies  that  abnormal  inventory  costs such as
     costs of idle  facilities,  excess freight and handling  costs,  and wasted
     materials (spoilage) are required to be recognized as current period costs.
     The Company  adopted SFAS 151 effective  July 1, 2005 and it did not have a
     material impact on the Company's financial position, results of operations,
     or cash flows.

     In December 2004, the FASB  finalized SFAS No. 123R  "Share-Based  Payment"
     ("SFAS 123R"), amending SFAS No. 123. SFAS 123R will require the Company to
     expense stock options based on grant date fair value. Further, the adoption
     of SFAS 123R will require  additional  accounting related to the income tax
     effects and additional disclosure regarding the cash flow effects resulting
     from  share-based  payment  arrangements.  The  effect of  expensing  stock
     options on the results of operations  using a Black-Scholes  option-pricing
     model is presented in Note 2. The adoption of SFAS 123R will have no effect
     on the Company's cash flows or financial position, but will have an adverse
     impact on the Company's  financial position and results of operations.  The
     provisions of SFAS 123R are effective  for the Company  commencing  July 1,
     2006.

     In December 2004,  the FASB issued SFAS No. 153,  "Exchanges of Nonmonetary
     Assets - an amendment of APB Opinion No. 29" ("SFAS 153").  This  statement
     amends APB  Opinion  No. 29 to  eliminate  the  exception  for  nonmonetary
     exchanges  of  similar  productive  assets and  replaces  it with a general
     exception for exchanges of nonmonetary  assets that do not have  commercial
     substance.  A nonmonetary  exchange has commercial  substance if the future
     cash flows of the entity are expected to change  significantly  as a result
     of the exchange. The Company adopted SFAS 153 effective July 1, 2005 and it
     did not have a  material  impact on the  Company's  consolidated  financial
     position, results of operations or cash flows.

     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 154
     supercedes  Accounting  Principles Bulletin (APB) Opinion 2, Accounting for
     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,   with  early  adoption   permitted  for  changes  and
     corrections  made in years  beginning  after May 2005. The Company does not
     expect  the  adoption  of SFAS No.  154 to have a  material  impact  on its
     condensed consolidated financial statements.

     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 must be adopted
     by calendar year  enterprises  by December 31, 2005, a Company will need to
     identify its conditional asset retirement obligations and determine whether

                                       9
<PAGE>


                     NETWOLVES CORPORATION AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

                   SIX MONTHS ENDED DECEMBER 31, 2005 AND 2004



     Summary of recent accounting pronouncements - Continued

     it can  reasonable  estimate  the  fair  value of each  obligation.  If the
     Company can reasonably  estimate the fair value of an  obligation;  it will
     need to  recognize a liability  for that  obligation.  The Company does not
     expect the  adoption of FIN 47 to have a material  impact on its  condensed
     consolidated financial statements.

     Accounts payable and accrued expenses

     Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
                                                                           December 31,          June 30,
                                                                               2005                2005
                                                                        -----------------   ------------------
              <S>                                                          <C>              <C>
              Trade accounts payable and other accrued operating
                 expenses                                                $       4,250,800  $      4,463,057
              Sales, excise and universal services charges payable                 724,121         1,190,545
              Dividends and registration penalties payable                         553,160            520,068
              Compensated absences                                                 329,688            361,506
              Other current liabilities                                            373,068            143,907
              Bonuses and commissions payable                                       78,460            112,556
              Accrued taxes                                                         24,027              8,379
              Accrued losses of discontinued operations                                  -              8,677
                                                                        ------------------  -----------------

                                                                        $        6,333,324  $       6,808,695
                                                                        ==================  =================
</TABLE>
4    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.

     The  Company  has  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
     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.  The Company will record the remaining  $600,000 of the  performance
     payment when it becomes probable that the payments will become due.

                                       10
<PAGE>


                     NETWOLVES CORPORATION AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

                   SIX MONTHS ENDED DECEMBER 31, 2005 AND 2004


     In April 2005,  the  Company  acquired a customer  list and entered  into a
     non-compete 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.  As of December 31, 2005,  the Company made the first
     annual payment in the amount of $100,000.


5    Related party transactions

     During  the  six  months  ended   December  31,  2005,   the  Company  paid
     approximately  $  64,000  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 the quarter ended December 31, 2005 this
     short  term  debt was  repaid  with the  issuances  of  840,000  shares  of
     restricted common stock, with no registration rights.


6    Shareholders' equity

     Preferred stock

     On July 1, 2005 stock dividends  totaling 22,162 shares were paid in Series
     A  Preferred  Stock to  Series A  Preferred  Stock  investors  representing
     accrued dividends through June 30, 2005

     For the six months ended December 31, 2005, investors converted 8 shares of
     Series A  Preferred  Stock and 1,761  shares  of Series C  Preferred  Stock
     resulting in issuances of 105,810 shares of common stock.

     During  December  2005,  the  Company  entered  into  an  agreement  with a
     consultant. In return for services, the Company issued 75,000 shares with a
     value of $30,000 of the Company's common 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 three
     and   six   months   ended    December   31,   2005   were   $160,009   and
     $363,787,respectively.

     Subsequent to December 31, 2005 investors converted 36,465 shares of Series
     B Preferred  Stock and 801 shares of Series C Preferred  Stock resulting in
     issuances of 777,360 shares of common stock.

7    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 and its subsidiaries  operate in three separate business  segments:
     Voice Services, Managed Service Charges and Equipment and Consulting.

                                       11
<PAGE>


                     NETWOLVES CORPORATION AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

                   SIX MONTHS ENDED DECEMBER 31, 2005 AND 2004


     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 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,  delivers  networking and security equipment and
     software as well as provides  consulting services on an as needed basis for
     certain existing and/or future customers.
<TABLE>
<CAPTION>
                                                   For the three months ended          For the six months ended
                                                          December  31,                      December 31,
                                                 --------------------------------   -------------------------------

                                                       2005              2004              2005             2004
                                                 ---------------  ---------------   ---------------  --------------
         <S>                                      <C>                <C>              <C>           <C>
         Revenue
              Voice Services                      $    3,540,664     $ 4,569,467      $ 7,370,082    $   9,586,848
              Managed Service Charges                  1,999,351       1,753,427        4,205,007        3,624,860
              Equipment and Consulting                    19,918         131,134           21,044          318,089
                                                 ---------------  ---------------   ---------------  --------------

                  Total                           $   5,559,933      $$6,454,028      $11,596,133    $  13,529,797
                                                 ===============  ===============   ===============  ==============

              Cost of revenue
              Voice Services                      $   2,427,009      $ 2,833,281      $ 4,804,456    $   5,970,378
              Managed Service Charges                 1,233,440        1,189,793        2,686,160        2,264,049
              Equipment and Consulting                      175           16,487              175          147,595
                                                 ---------------  ---------------   ---------------  --------------

                  Total                           $   3,660,624      $ 4,039,561      $ 7,490,791    $  8,382,022
                                                 ===============  ===============   ===============  ==============

         Operating income (loss)
              Voice Services                      $    (816,975)     $   (475,960)    $ (1,454,354)  $    (361,356)
              Managed Service Charges                  (459,549)         (405,044)        (854,145)       (381,186)
              Equipment and Consulting                        -           (68,655)               -        (198,756)
                                                 ---------------  ---------------   ---------------  --------------

                  Total                           $  (1,276,524)     $   (949,659)    $ (2,308,499)  $    (941,298)
                                                 ===============  ===============   ===============  ==============
</TABLE>

     Revenue and cost of revenue  are  allocated  to each  segment on a specific
     identification method,  operating expenses are allocated to each segment on
     a pro rata basis based upon revenue.

     The Company is not  disclosing  total  assets for each  reportable  segment
     because  the chief  operating  decision  maker  reviews  total  assets on a
     consolidated basis.

8.   Major Customer/Significant Agreements


     The Company had one major customer which  accounted for  approximately  12%
     and 27% of consolidated  revenue for the six months ended December 31, 2005
     and December 31,  2004,  respectively.  The  agreement  with this  customer
     terminated on June 30, 2005.


     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

                                       12
<PAGE>

                     NETWOLVES CORPORATION AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

                   SIX MONTHS ENDED DECEMBER 31, 2005 AND 2004


     made purchases from Sprint that aggregated approximately 48% and 66% of the
     total cost of revenue for the quarters ended December 31, 2005 and December
     31, 2004, respectively.  The Company currently has a commitment to purchase
     a minimum of $650,000 of  telecommunication  services  monthly from Sprint,
     which expires October 2008.

9.   Nasdaq

     On March 31, 2005,  Nasdaq informed the Company that its common stock would
     be  de-listed  if it  did  not  comply  with  Nasdaq's  minimum  bid  price
     requirement  by  September  27, 2005.  In order to comply,  the closing bid
     price of its  common  stock had to equal or  exceed  $1.00 per share for at
     least ten  consecutive  trading days prior to that date.  While the Company
     did not comply with this requirement by that date, the Company continued to
     meet the other continued  listing  criteria for the Nasdaq Small Cap Market
     and have been granted by Nasdaq an additional six-month period, until March
     27, 2006, to achieve the minimum bid price requirement.

10.  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  financing,  which was
     used to fund  historical  losses from  operating  activities.  Based on the
     Company's current cash position of approximately $1.6 million,  significant
     cost  cutting  initiatives,  including  vendor  negotiations  with  Sprint,
     BellSouth,  Vartec (carriers),  DA Colonial (lessor-Tampa facility),  staff
     reductions  and  indefinite  executive  pay  deferrals,  along with current
     forecasts  based on sales growth,  the Company  believes it has  sufficient
     cash to meet its  funding  needs for at least the next 12 months.  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.

                                       13
<PAGE>

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 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,  which  operates
     worldwide,  provides  network  and  security  technology  and a variety  of
     recurring  managed data  services.  The Equipment and  Consulting  segment,
     which operates  worldwide,  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.)

                                       14

<PAGE>

     delivered on low-cost  commodity  hardware  with  Internet-based  expansion
     capabilities. Our patent-pending 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.

     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.

                                       15
<PAGE>
     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  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, 2005 and June 30, 2005. 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

     The  Company  applies  the  intrinsic   value-based  method  of  accounting
     prescribed  by  Accounting   Principles   Board  ("APB")  Opinion  No.  25,
     "Accounting for Stock Issued to Employees", and related interpretations, to
     account for stock-based  employee  compensation plans and reports pro forma
     disclosures  by estimating the fair value of options issued and the related
     expense in accordance with SFAS 123. 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.

     Goodwill and other intangible assets

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

     Results of Operations

     We currently operate in three business segments, the Voice Services segment
     ("Voice  Services"),  the MSC  segment  and the  Equipment  and  Consulting
     segment ("Equipment and Consulting").

                                       16
<PAGE>
     Six months ended December 31, 2005 and 2004

     Revenue

     Revenue  decreased to $11.6  million for the six months ended  December 31,
     2005, compared to $ 13.5 million for the same period in the prior year. The
     decrease  in  revenue is  primarily  attributable  to a  decrease  in Voice
     Services segment and the Equipment and Consulting  segment of approximately
     $2.2 million and $0.3 million respectively. This was partially offset by an
     increase in revenue in the MSC segment of approximately  $0.6 million.  The
     decrease in the Voice Services  segment was attributable to the loss of two
     customers  resulting in attrition of approximately  $1.4 million  partially
     offset by growth from new customers and purchased  customer  lists totaling
     approximately  $0.2 million.  The decrease in the Equipment and  Consulting
     segment of approximately $0.2 is the result of limited product sales as the
     Company has elected to focus  primarily on MSC growth.  The increase in the
     MSC  segment  is  primarily  attributable  to new  customer  growth of $0.5
     million and purchased  customer lists of $0.1 million,  partially offset by
     customer  attrition  of  $0.2  million.  As of  December  31,  2005,  Swift
     Transportation  accounted for 12% of overall revenues as compared to 27% in
     the same  period in the prior  year.  The  contract  with Swift  terminated
     effective June 30, 2005.

     Cost of revenue and gross profit

     Cost of revenue decreased to $7.5 million for the six months ended December
     31, 2005  compared  to $8.4  million for the same period in the prior year.
     Cost of revenue  within the MSC segment  increased  to $2.7  million or 36%
     profit margin,  compared to $2.3 million, or 38% profit margin for the same
     period  in the  prior  year.  The  decreased  profit  margin  is  primarily
     attributable  to  non-recurring  charges in the  current  period as well as
     credits  received from vendors in the prior period.  Cost of revenue within
     the Voice Services segment  decreased to $ 4.8 million or 35% profit margin
     compared  to $6.0  million or 38% profit  margin for the same period in the
     prior year.  This  decreased  profit  margin is primarily  attributable  to
     customer  attrition  in the  current  period.  Cost of  revenue  within the
     Equipment and Consulting segment had a non-material impact on gross profit.

     Overall gross profit was 35.4% for the six months ended  December 31, 2005,
     compared  to 38% for the same  period in the prior  year.  The  decrease in
     profit  margin of our services and  products are  attributable  to one time
     charges and the cost associated with the loss of Swift Transportation.

     General and administrative

     General and administrative  expenses were $3.1 million and $3.5 million for
     the six months ended December 31, 2005 and 2004 respectively.  The decrease
     in general and  administrative  expenses were due to an increase in payroll
     of $0.1 million,  a decrease in  consulting  expense of $0.5 million and an
     increase in professional  fees of $0.2 million,  an increase of bad debt of
     $0.1 million,  a decrease in depreciation  and amortization of $0.1 million
     and the net effect of cost  reductions of  approximately  $0.2 million from
     the prior period.

     Engineering and development

     Engineering and development  expenses decreased to $0.3 million for the six
     months  ended  December  31,  2005,  compared to $0.5  million for the same
     period in the prior year.  The  decrease  in  engineering  and  development
     expenses were primarily  attributable to staff  reductions of approximately
     $0.2 million.

     Sales and marketing

     Sales and marketing  expenses increased to $ 3.0 million for the six months
     ended  December 31,  2005,  compared to $2.2 million for the same period in
     the prior year. The increase in sales and marketing  expenses was primarily
     the  result  of an  increase  in the  number  of sales  and  sales  support
     personnel  and  associated  travel and  entertainment,  which  resulted  in

                                       17
<PAGE>

     increased  salary of $0.3 million as well as  compensation  for consultants
     which increased $0.04 million compared to the same period in the prior year
     and an increase in non cash expenses. We have made a significant investment
     in the sales force,  which we  anticipate  will  continue to have  positive
     impact in future periods.

     Other income (expenses)

     Other income (expenses)  increased to $0.4 million for the six months ended
     December  31,  2005  compared  to $.006  million for the same period in the
     prior year. The increase was primarily attributable to $0.1 million of gain
     on 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, 2005 and 2004

          Revenue

     Revenue  decreased to $5.6 million for the three months ended  December 31,
     2005,  compared to $6.5 million for the same period in the prior year.  The
     decrease in revenue is  attributable  to our Voice  Services  segment where
     revenue decreased $1.1 million, offset by an increase of approximately $0.3
     million in our Managed Services segment and a decrease of approximately $.1
     million in our Equipment and  Consulting  segment.  The increase in Managed
     Services is attributable to new customer growth totaling approximately $0.2
     million  and  new  sales  within  our  existing   customer   base  totaling
     approximately $0.1 million.

          Cost of revenue and gross profit margin

     Cost of  revenue  decreased  to $3.6  million  for the three  months  ended
     December 31, 2005,  compared to $4 million for the same period in the prior
     year.  Cost of revenue within the MSC segment  increased to $1.2 million or
     38% profit margin, compared to 32% profit margin for the same period in the
     prior year.  The improved  profit margin is primarily  attributable  to our
     sale of more  profitable  MSC  services.  Cost of revenue  within the Voice
     Services segment decreased to $2.4 million or 31% profit margin compared to
     $2.8  million or 38% profit  margin for the same  period in the prior year.
     Cost  of  revenue  within  the  Equipment  and  Consulting  segment  had  a
     non-material impact on gross profit.

     Overall gross profit margin was 34% for the three months ended December 31,
     2005, compared to 37% for the same period in the prior year.

          General and administrative

     General and administrative expenses decreased to $1.3 million for the three
     months  ended  December  31,  2005,  compared to $1.9  million for the same
     period in the prior year. The decrease was the result of  significant  cost
     cutting initiatives.

          Engineering and development

     Engineering  and  development  expenses  decreased  to $0.1 million for the
     three months ended December 31, 2005, compared to $0.2 million for the same
     period in the prior year.  The  decrease  in  engineering  and  development
     expenses were primarily  attributable to staff  reductions of approximately
     $0.1 million.


                                       18
<PAGE>
          Sales and marketing

     Sales and marketing expenses increased to $1.7 million for the three months
     ended  December 31,  2005,  compared to $1.2 million for the same period in
     the prior year. The increase was primarily the result of an increase in the
     number of sales personnel, which resulted in increased salary, exclusive of
     benefits and indirect cost.

     Liquidity and Capital Resources

     Our operating activities used cash of approximately $1.8 million during the
     six months ended December 31, 2005, as compared to providing  approximately
     $0.6 million for the same period in the prior year. 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   $0.5   million,   an  increase   in  deferred   revenue  of
     approximately  $0.2 million and other income of approximately $0.1 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, respectively.
     Cash used in  operations  for the six months  ended  December  31, 2004 was
     primarily attributable to an increase in other income of approximately $0.4
     million,  $0.1  million  and  $0.3  million,  respectively.   Additionally,
     accounts  receivable,  prepaid  expenses and  inventory  decreased by $0.1,
     respectively. Cash used in operations for the six months ended December 31,
     2004  was  primarily  attributable  to  an  increase  in  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, $0.7 million and $0.3 million, respectively.

     Our  investing  activities  used  approximately  $ 0.1  million for the six
     months  ended  December  31, 2005 as compared to using $0.5 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 $100,000  and  purchases  of property  and  equipment  in the
     amount of approximately  $0.03 million.  Cash used by investing  activities
     for the six months ended December 30, 2004, was primarily  attributable  to
     the purchases of customer contracts.

     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.  Cash used by
     financing  activities  for  the  6  months  ended  December  31,  2004  was
     attributable to NASDAQ listing fees.

     Summary

     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  financing,  which was
     used to fund  historical  losses from  operating  activities.  Based on the
     Company's current cash position of approximately $1.6 million,  significant
     cost  cutting  initiatives,  including  vendor  negotiations  with  Sprint,
     BellSouth,  Vartec (carriers),  DA Colonial (lessor-Tampa facility),  staff
     reductions  and  indefinite  executive  pay  deferrals,  along with current
     forecasts  based on sales growth,  the Company  believes it has  sufficient
     cash to meet its  funding  needs for at least the next 12 months.  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.

                                       19
<PAGE>
ITEM 3 - CONTROLS AND PROCEDURES

     CEO and CFO Certifications
     --------------------------

     As of the end of the period covered by this quarterly  report,  the Company
     carried  out,  under  the  supervision  and with the  participation  of the
     Company's  management,  including the Company's Chief Executive Officer and
     Chief Financial Officer ("the Certifying  Officers"),  an evaluation of the
     effectiveness   of  its   "disclosure   Controls   and   procedures".   The
     certifications  of the CEO and the CFO  required  by  Rules  13a-14(a)  and
     15d-14(c)  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 the Company's
     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
     ---------------------------------

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

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


     Changes in Internal Controls

     The Company  maintains 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.

     During the prior reporting period ending June 30, 2005 management concluded
     that a deficiency was identified which  constituted a "material  weakness".
     Accordingly,  management  implemented  changes to remedy the  circumstances
     which created the deficiency and has concluded that the condition no longer
     exists. The additional staff has been added and trained.

                                       20
<PAGE>
PART II - OTHER INFORMATION


ITEM 1. LEGAL PROCEEDINGS

          None


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.

                                       21
<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/ Walter M. Groteke
                                  ------------------------
                                  Walter M. Groteke
                                  Chairman of the Board and President




                                  /s/ Peter C. Castle
                                  ------------------------
                                  Peter C. Castle
                                  Secretary and Treasurer
                                  Principal Financial Officer and
                                  Principal Accounting Officer








Date: February 21, 2006