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 September 30, 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 [  ]

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

        TITLE OF CLASS                          NUMBER OF SHARES OUTSTANDING ON
  Common Stock, $.0033 par value                        November 3, 2006

                                                           33,412,468
                                                           ----------

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

                        FORM 10-QSB - September 30, 2006



                                      INDEX

<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION


      <S>                                                                                                <C>
      ITEM 1 - FINANCIAL STATEMENTS

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

      CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS For the three months ended
           September 30, 2006 (unaudited)
             and September 30, 2005 (unaudited) .......................................................  3 - 4

      CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS For the three months ended
           September 30, 2006 (unaudited)
             and September 30, 2005 (unaudited) .........................................................5 - 6

      NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS .............................................7 - 20

      ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN
                 OF OPERATION ........................................................................ 20 - 25

      ITEM 3 - CONTROLS AND PROCEDURES ................................................................25 - 26


PART II - OTHER INFORMATION

      ITEM 1 - LEGAL PROCEEDINGS .........................................................................27

      ITEM 2 - CHANGES IN SECURITIES AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES ............28

      ITEM 3 - DEFAULTS UPON SENIOR SECURITIES ...........................................................28

      ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS .......................................28

      ITEM 5 - OTHER INFORMATION .........................................................................28

      ITEM 6 - EXHIBITS...................................................................................28

SIGNATURES................................................................................................29
</TABLE>

<PAGE>

                     NETWOLVES CORPORATION AND SUBSIDIARIES

                     CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
                                                                                             September 30,         June 30,
                                                                                                 2006                2006
                                                                                             -------------        ----------
                                                                                              (Unaudited)
<S>                                                                                          <C>                 <C>
ASSETS
Current assets
    Cash and cash equivalents                                                                $   957,093         $ 2,016,156
    Accounts receivable, net of allowance for doubtful accounts of
       $509,169 and $1,146,044 at September 30, 2006 and June 30, 2006, respectively           3,125,004           2,825,679
    Inventories                                                                                  309,171             302,562
    Prepaid expenses                                                                             294,967             367,808
                                                                                             -----------          ----------
       Total current assets                                                                    4,686,235           5,512,205

Property and equipment, net                                                                      128,870             148,620

Identifiable intangible assets, net                                                            1,003,671           1,192,043

Goodwill and other indefinite lived intangible assets                                          3,801,973           3,793,072

Other assets                                                                                      78,222              78,222
                                                                                             -----------          ----------
       Total assets                                                                          $ 9,698,971         $10,724,162
                                                                                             ===========         ===========

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

</TABLE>


                                       1
<PAGE>


                     NETWOLVES CORPORATION AND SUBSIDIARIES

                     CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>

                                                                                  September 30,            June 30,
                                                                                      2006                   2006
                                                                                  ---------------         -----------
                                                                                    (Unaudited)
<S>                                                                               <C>                    <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
    Accounts payable and accrued expenses                                         $   5,329,352          $  5,755,385
    Deferred revenue                                                                    601,043               538,267
    Current maturities of long term debt                                                 90,000               100,000
                                                                                  -------------          -------------
       Total current liabilities                                                      6,020,395             6,393,652
Long term debt, net of current maturities                                             1,068,750             1,118,750
                                                                                  -------------          -------------
       Total liabilities                                                              7,089,145             7,512,402
                                                                                  -------------          -------------
Shareholders' equity
    Series A convertible preferred stock, $.0033 par value; $6,157,506
      liquidation preference; 1,000,000 shares authorized; 199,903 and
      178,186 shares issued and outstanding on September 30, 2006 and June
      30, 2006, respectively                                                      $   2,418,644          $  2,092,885
    Series B convertible preferred stock, $.0033 par value; $6,661,158
      liquidation preference; 500,000 shares authorized; 192,893 and
      192,921 shares issued and outstanding on September 30, 2006 and June
      30, 2006                                                                        2,500,761             2,501,209
    Series C convertible preferred stock, $.0033 par value; $1,613,768
      liquidation preference; 100,000 shares authorized; 12,962 shares
      issued and outstanding on September 30, 2006 and June 30, 2006                    205,361               205,361
    Preferred stock, $.0033 par value; 400,000 shares authorized; no shares
      issued and outstanding on September 30, 2006 and June 30, 2006                       -                     -
    Common stock, $.0033 par value; 65,000,000 authorized; 33,134,713 and
      33,134,097 shares issued and outstanding on September 30, 2006 and
      June 30, 2006, respectively                                                       109,346               109,344
     Additional paid-in capital                                                      79,386,764            79,570,125
     Accumulated deficit                                                            (82,011,050)          (81,267,164)
                                                                                  -------------          -------------
       Total shareholders' equity                                                     2,609,826             3,211,760
                                                                                  -------------          -------------
                                                                                  $   9,698,971          $ 10,724,162
                                                                                  =============          =============
The  accompanying  notes are an integral  part of these  condensed  consolidated
financial statements.
</TABLE>
                                       2
<PAGE>
                     NETWOLVES CORPORATION AND SUBSIDIARIES

                 CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
                                   (Unaudited)


<TABLE>
<CAPTION>
                                                                                 For the three months ended
                                                                                       September 30,
                                                                             -------------------------------------

                                                                                  2006                   2005
                                                                             -------------          --------------
        <S>                                                                  <C>                    <C>
        Revenue
           Voice services                                                    $   2,593,379          $    3,829,418
           Managed service charges                                               2,056,766               2,205,656
           Equipment and consulting
                                                                                       512                   1,126
                                                                             -------------          --------------
                                                                                 4,650,657               6,036,200
                                                                             -------------          --------------
        Cost of revenue
           Voice services                                                        1,698,197               2,377,447
           Managed service charges                                               1,290,132               1,452,720
           Equipment and consulting
                                                                                         -                       -
                                                                             -------------          --------------
                                                                                 2,988,329               3,830,167
                                                                             -------------          --------------
        Gross profit
                                                                                 1,662,328               2,206,033
                                                                             -------------          --------------
       Operating expenses
           General and administrative                                            1,275,616               1,735,984
           Engineering and development                                              54,273                 209,951
                                                                                   970,051               1,292,073
                                                                             -------------          --------------
                                                                                 2,299,940               3,238,008
                                                                             -------------          --------------
        Loss before other (expense)                                               (637,612)             (1,031,975)
                                                                             -------------          --------------
        Other (expense) income
            Other income                                                                 -                 144,002
                                                                                   (40,234)                 16,951
                                                                             -------------          --------------
                                                                                   (40,234)                160,953
                                                                             -------------          --------------
       Loss before income taxes                                                   (677,846)               (871,022)
                                                                                    66,040                   5,314
                                                                             -------------          --------------
        Net loss                                                             $    (743,886)          $    (876,336)
                                                                             =============          ==============
The  accompanying  notes are an integral  part of these  condensed  consolidated
financial statements.
</TABLE>
                                       3
<PAGE>

                     NETWOLVES CORPORATION AND SUBSIDIARIES

                 CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                                For the three months ended
                                                                                      September 30,
                                                                                --------------------------

                                                                                 2006                    2005
                                                                             -------------          --------------


        <S>                                                                  <C>                    <C>
        Net loss                                                             $   (743,886)          $    (876,336)

            Dividends and beneficial conversion on convertible
               preferred stock                                                   (188,852)               (203,778)
                                                                             -------------          --------------
        Net loss attributable to common   shareholders                       $   (932,738)         $   (1,080,114)
                                                                             =============          ==============

        Basic and diluted net loss per share                                  $      (.03)            $      (.04)
                                                                             =============          ==============
         Weighted average common shares
            outstanding, basic and diluted                                     33,134,177              29,851,142
                                                                             =============          ==============
The  accompanying  notes are an integral  part of these  condensed  consolidated
financial statements.
</TABLE>
                                       4
<PAGE>
                     NETWOLVES CORPORATION AND SUBSIDIARIES

                 CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
                                  (Unaudited)

<TABLE>
<CAPTION>
                                                                                    For the three months ended
                                                                                           September 30,
                                                                                 ----------------------------------
                                                                                      2006                 2005
                                                                                 ------------          ------------
<S>                                                                              <C>                   <C>
Cash flows from operating activities
     Net loss                                                                    $   (743,886)         $   (876,336)
     Adjustments to reconcile net loss to net cash used in provided by
     operating activities
           Depreciation                                                                18,081                38,998
          Amortization                                                                188,372               188,373
         Inventory write off                                                                -                51,238
         Other income                                                                       -
                                                                                                           (144,002)
         Bad debt expense                                                             128,835                     -
           Non-cash charge to operations with respect to
                stock and warrants issued for services and amortization
           of previously issued warrants                                                5,000                24,000
           Loss on disposal of property and equipment                                   1,669                     -

     Changes in operating assets and liabilities
         Restricted cash                                                                    -                25,958
         Accounts receivable                                                         (428,160)              583,761
         Inventories                                                                   (6,609)                    -
         Prepaid expenses                                                              72,840               109,886
         Other assets                                                                       -               (17,517)
         Accounts payable and accrued expenses                                       (289,080)           (1,092,744)
         Deferred revenue
                                                                                       62,776              (172,341)
                                                                                 ------------          ------------
           Net cash used in operating activities
                                                                                     (990,162)           (1,280,726)
                                                                                 ------------          ------------
Cash flows from investing activities
       Patent costs paid                                                               (8,901)                    -
       Payment on existing customer list                                              (60,000)             (100,000)
       Purchases of property and equipment
                                                                                            -               (22,682)
                                                                                 ------------          ------------
           Net cash used in investing activities
                                                                                      (68,901)              (122,682)
                                                                                 ------------          ------------

The  accompanying  notes are an integral  part of these  condensed  consolidated
financial statements.
</TABLE>
                                       5
<PAGE>
                     NETWOLVES CORPORATION AND SUBSIDIARIES

                 CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                      For the three months ended
                                                            September 30,

                                                          2006            2005
                                                      ------------   ------------
<S>                                                   <C>            <C>
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               (1,059,063)   (1,193,408)


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

Cash and cash equivalents, end of period              $    957,093   $ 2,131,910
                                                      ============   ============
Cash paid for income taxes                            $     66,040   $     5,313
                                                      ============   ============

Cash paid for interest                                $     48,899   $       553
                                                      ============   ============


SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
 AND FINANCING ACTIVITIES

Dividends accrued on convertible preferred stock      $    188,852   $   203,778
                                                      ============   ============

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        $        493   $    78,030
                                                      ============   ============

The  accompanying  notes are an integral  part of these  condensed  consolidated
financial statements.
</TABLE>
                                       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 September 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  three  months  ended  September  30,  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 has been
     extended  to October 1,  2007.  Based on the  Company's  cash  position  of
     approximately $1.0 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,  together  with current  forecasts  and debt
     financing,  the Company  believes that it has  sufficient  cash to meet its
     funding needs through  September 30, 2007.  However,  the Company's current
     forecast  does  not  address   events  beyond  October  1,  2007  including
     developing  a plan  for the  Company  to have  the  ability  to  repay  its
     indebtedness due in October 2007 and November 2007 as referenced in Note 6.
     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  September 30, 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.

                                       7

<PAGE>
                     NETWOLVES CORPORATION AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)



4.   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  19.6  million  and  23.2  million  at
     September  30, 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
     $200,988 and $108,183, respectively, at September 30, 2006 and $203,100 and
     $99,462, respectively, at June 30, 2006.

     Stock-based compensation

     In December 2004, the Financial Accounting Standards Board ("FASB") revised
     SFAS No. 123 ("SFAS No. 123R"),  "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 have 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 the Company to avoid
     recognizing future compensation  expense associated with these options upon
     adoption of SFAS No. 123R,  "Share-Based  Payment." 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.

                                       8
<PAGE>
                     NETWOLVES CORPORATION AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)



     Stock-based compensation (continued)

     Effective  July 1, 2006,  the Company  adopted  the fair value  recognition
     provisions of SFAS No. 123 (Revised 2004), "Share-Based Payment," using the
     modified-prospective-transition method. As a result, the Company's net loss
     before taxes for the three months ended  September  30, 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.  There was no impact on
     the  condensed  consolidated  statement  of  operations  as a result of the
     adoption of SFAS No. 123 (Revised 2004).

     Prior to July 1, 2006,  the  Company's  stock-based  employee  compensation
     plans were accounted for under the recognition  and measurement  provisions
     of APB No. 25, and related Interpretations,  as permitted by FASB Statement
     No. 123,  "Accounting  for Stock-Based  Compensation."  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
                                                            --------------------------
                                                                September 30, 2005
                                                                ------------------
        <S>                                                       <C>
        Net loss attributable to common shareholders,
          as reported                                             $     (1,080,114)

        Deduct:  Total stock-based employee
          compensation expense determined under fair
          value based method for all awards, net of
          related tax effects                                              (95,194)
                                                                  -----------------

        Pro forma net loss attributable to common
        shareholders                                              $     (1,175,308)
                                                                  =================

        Basic and diluted net loss per share
                 As reported                                      $        (.04)
                 Pro forma                                        $        (.04)
</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>
                                                                             Weighted-
                                                                              Average        Aggregate Intrinsic
                                                          Stock Options    Exercise Price           Value
                                                       -----------------------------------------------------------
       <S>                                                <C>                 <C>               <C>
       Outstanding, June 30, 2006                         5,104,200            .75
       Granted
                                                             50,000            .17
       Exercised                                                  -              -
       Cancelled/forfeited                                  (10,500)          5.00
                                                       ---------------------------
       Outstanding, September 30, 2006                    5,143,700            .73               $   131,775
                                                       ===========================
       Exercisable, September 30, 2006                    5,143,700            .73               $   131,775
                                                       ===========================
</TABLE>
     The following table summarizes  information about stock options outstanding
     at September 30, 2006:
<TABLE>
<CAPTION>
                                                        Options                             Options
                                                     outstanding at                      exercisable at
                                                   September 30, 2006                  September 30, 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                2,660,500      4.81       $     0.15        2,660,500  $     0.15
       $      0.51-$  1.00                1,063,950      3.50       $     1.00        1,063,950  $     1.00
       $      1.01-$  1.50                1,308,250      1.50       $     1.19        1,308,250  $     1.19
       $      1.51-$  2.00                    6,500      2.06       $     1.88            6,500  $     1.88
       $      2.01-$12.00                  104,500       2.37       $     7.00          104,500  $     7.00
                                         ---------                                    ---------

                                         5,143,700                                    5,143,700
                                         =========                                    =========
</TABLE>
                                       10
<PAGE>
                     NETWOLVES CORPORATION AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

     Summary of Recently Issued Accounting Pronouncements

     In November 2004, 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 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 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  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 Company does not expect the adoption
     of SFAS No. 154 to 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

                                       11
<PAGE>
                     NETWOLVES CORPORATION AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)


     Summary of Recently Issued Accounting Pronouncements (continued)

     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  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 June 2005,  the FASB  ratified  the EITF  Issue  05-2,  "The  Meaning of
     Conventional  Convertible  Debt  Instrument in Issue No. 00-19".  EITF 05-2
     retained the definition of a conventional  convertible  debt  instrument as
     set  forth  in  EITF  00-19,  and  which  is used  in  determining  certain
     exemptions  to  the  accounting   treatments  prescribed  under  SFAS  133,
     "Accounting for Derivative  Instruments and Hedging Activities".  EITF 05-2
     also  clarified  that  certain  contingencies  related to the exercise of a
     conversion option would not be outside the definition of "conventional" and
     determined that  convertible  preferred  stock with a mandatory  redemption
     date  would  also   qualify  for  similar   exemptions   if  the   economic
     characteristics  of the preferred  stock are more akin to debt than equity.
     EITF 05-2 is effective  for new  instruments  entered into and  instruments
     modified in periods  beginning after June 29, 2005. The Company adopted the
     provisions  of EITF 05-2 on July 1,  2005,  which  did not have a  material
     effect 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" 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" - 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.

                                       12
<PAGE>
                     NETWOLVES CORPORATION AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)



     Summary of Recently Issued Accounting Pronouncements (continued)

     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  Statement  of  Financial  Accounting
     Standards  ("SFAS")  No.  157,  "Fair  Value  Measurements".  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 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.

     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.

5.   Accounts payable and accrued expenses

     Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
                                                                            September 30,           June 30,
                                                                                 2006                 2006
                                                                          -----------------      ---------------
              <S>                                                             <C>                  <C>
              Trade accounts payable and other accrued operating
                 expenses                                                     $  2,967,359         $   3,271,042
              Sales and excise tax payable                                          65,711               132,409
              Universal services charges payable                                 1,206,415             1,114,795
              Dividends payable                                                    353,867               490,819
              Compensated absences                                                 356,004               356,361
              Other liabilities                                                    369,532               372,826
              Bonuses and commissions payable                                       10,302                16,974
              Accrued taxes
                                                                                       162                   159
                                                                              ------------         -------------
                                                                              $  5,329,352         $   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 September 30, 2006 consists of the following:
<TABLE>
<CAPTION>
                                                                             September 30,         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 October 1, 2007. 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. Due November 2007.
           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                90,000             150,000
           revenues (See Note 7).                                            ------------        ------------

           Total Long-Term Debt                                                 1,158,750           1,218,750

           Less: Current Maturities                                              (90,000)           (100,000)
                                                                             ------------        ------------
           Long-Term Debt, Less Current Maturities                          $   1,068,750       $   1,118,750
                                                                            =============       =============
</TABLE>

     Maturities of long-term  debt at September 30, 2006 for the next five years
     and in the aggregate are as follows:
<TABLE>
<CAPTION>
                             For the period ending
                             ---------------------
                                 September 30,                         Amount
                                 -------------                         ------

                                      <S>                     <C>
                                      2007                    $           90,000
                                      2008                             1,068,750

                                   Thereafter                                  -
                                                              ------------------
                                                              $        1,158,750
                                                              ==================
</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.

     The Company was not in violation of any debt  covenants as of September 30,
     2006.

                                       14
<PAGE>
                     NETWOLVES CORPORATION AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)



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 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.

     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 three months ended
     September 30, 2006 the Company made a partial payment however,  the Company
     is not in default of this agreement as a result of this partial payment. As
     of September  30, 2006 the Company has made payments  totaling  $160,000 on
     this existing customer list.

8.   Related party transactions

     During the three months ended September 30, 2006 and 2005, the Company paid
     approximately $36,000 and $33,000,  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.

                                       15
<PAGE>
                     NETWOLVES CORPORATION AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)



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 three months ended September 30, 2006, investors converted 3 shares
     of Series A  Preferred  Stock and 28  shares  of Series B  Preferred  Stock
     resulting  in  issuances  of 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 three
     months ended  September  30, 2006 and 2005,  were  $188,852  and  $203,778,
     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.

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.

                                       16
<PAGE>
                     NETWOLVES CORPORATION AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)


<TABLE>
<CAPTION>
                                                      For the three months ended
                                                            September 30,

                                                       2006                 2005
                                                   ------------         ------------
<S>                                                <C>                  <C>
Revenue
     Voice Services                                $  2,593,379         $  3,829,418
     Managed Service Charges                          2,056,766            2,205,656
     Equipment and Consulting                               512                1,126
                                                   ------------         ------------
         Total                                        4,650,657            6,036,200
                                                   ============         ============

Cost of revenue
     Voice Services                                   1,698,197            2,377,447
     Managed Service Charges                          1,290,132            1,452,720
     Equipment and Consulting
                                                              -                    -
                                                   ------------         ------------
         Total                                        2,988,329            3,830,167
                                                   ============         ============

Operating loss
     Voice Services                                   (357,063)            (650,144)
     Managed Service Charges                          (280,549)            (381,831)
     Equipment and Consulting                                -                    -
                                                   ------------         ------------
         Total                                     $  (637,612)        $ (1,031,975)
                                                   ============         ============
</TABLE>
     Revenue and cost of revenue  are  allocated  to each  segment on a specific
     identification method,  operating expenses are allocated to each segment on
     a pro rata basis,  based upon revenue.  The Company is not disclosing total
     assets for each reportable segment because this information is not reviewed
     by the chief operating decision maker.

     All of the  Company's  sales  occur in the United  States  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 18% of
     consolidated  revenue for the three months ended  September  30, 2005.  The
     agreement with this customer terminated on June 30, 2005.

     For the three months ended  September 30, 2006 the Company did not have one
     major customer that accounted for more than 10% of consolidated revenue.

                                       17
<PAGE>
                     NETWOLVES CORPORATION AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)


     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  38%
     and 58% of the total cost of revenue for the three months  ended  September
     30, 2006 and 2005, respectively. The Company has a commitment to purchase a
     minimum of $650,000 of telecommunication services monthly from Sprint.

     In  addition,   the  Company  made  purchases  from  MCI  that   aggregated
     approximately 28% and 25% and Qwest that aggregated approximately 11.2% and
     5.7% of the total  cost of revenue  for the three  months  ended  September
     30,2006 and 2005, respectively.

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:

          --   The agreement with the Chief  Executive  Officer is 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  in Note 13b,  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.

          --   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

          --   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.

     As part of management's  plan to reduce certain expenses of the Company the
     above  parties  voluntarily  accepted  pay  reductions  of 60%, 50% and 50%
     respectively  of their  current pay.  This amount is net of an existing 15%
     deferment  and will begin  February 1, 2007.  This  reduction  will only be
     reinstated to its original  amount by the consent of the Company's Board of
     Directors.

                                       18
<PAGE>
                     NETWOLVES CORPORATION AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)


 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)   As further  discussed in note 13 below,  on December 6, 2006, the
               Company was served  with an action  against the Company by Walter
               M.  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  his  employment
               agreement.

          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.


13.  Subsequent event

     a)   Subsequent to September 30, 2006, investors converted 13,750 shares of
          Series B Preferred  Stock  resulting in issuances of 275,000 shares of
          common stock.

     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.

                                       19
<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.

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


                                       20
<PAGE>
                     NETWOLVES CORPORATION AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)


     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.)
     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.

                                       21
<PAGE>
                     NETWOLVES CORPORATION AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)


     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  balance  sheet.  We must then


                                       22
<PAGE>
                     NETWOLVES CORPORATION AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)


     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  September   30,  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

     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").

     Three months ended September 30, 2006 and 2005

     Revenue

     Revenue  decreased to $4.7 million for the three months ended September 30,
     2006,  compared to $6.0 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 MSC segment of approximately $1.2 million and $0.1
     million,  respectively.  The  decrease  in the Voice  Services  segment was
     attributable to attrition  within the customer base of  approximately  $1.3
     million of which Swift was  approximately  $1.1 million partially offset by
     growth from new customers and existing  customers.  The decrease in the MSC
     segment is primarily  attributable to attrition within the customer base of
     $0.2 million of which Swift was approximately $0.6 million partially offset
     by growth of $0.4 million.  As of September 30, 2006, Swift  Transportation
     accounted for 0% of overall  revenues as compared to 18% 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 $3.0  million  for the three  months  ended
     September  30,  2006  compared  to $3.8  million for the same period in the
     prior year. Cost of revenue within the Voice Services segment  decreased to
     $1.7  million or 35% profit  margin  compared to $2.4 million or 38% profit
     margin for the same period in the prior year. This decreased  profit margin
     is primarily attributable to customer attrition as well as rate concessions


                                       23
<PAGE>
                     NETWOLVES CORPORATION AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)


     in the current period.  Cost of revenue within the MSC segment decreased to
     $1.3 million or 37 % profit margin, compared to $1.5 million, or 34% profit
     margin for the same period in the prior year.  The increased  profit margin
     is primarily  the result of sales of our more  profitable  MSC services and
     vendor credits  received 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 36% for the three months ended September 30, 2006,
     compared to 37% for the same period in the prior year.

     General and administrative

     General and  administrative  expenses  consist  primarily  of salaries  and
     related expenses for executive,  finance and operations personnel,  as well
     as insurance,  rent, travel,  communication  expense and professional fees.
     General and administrative  expenses were $1.3 million and $1.7 million for
     the three  months  ended  September  30, 2006 and 2005,  respectively.  The
     decrease in general and administrative  expenses were due to the net effect
     of staff  reductions of  approximately  $0.3 million and cost reductions of
     approximately $0.1 million from the prior period.

     Engineering and development

     Engineering  and  development  expenses  decreased  to $.05 million for the
     three months ended  September  30, 2006,  compared to $0.21 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 and cost reductions of $0.05 million.

     Sales and marketing

     Sales and marketing expenses decreased to $1.0 million for the three months
     ended  September 30, 2006,  compared to $1.3 million for the same period in
     the prior year. The decrease in sales and marketing  expenses was primarily
     the result of a decrease in the number of sales and sales support personnel
     and associated  travel and  entertainment,  which resulted in a decrease of
     approximately  $0.4 million  partially offset by an increase of bad debt of
     $0.1 million.

     Other income (expenses)

     Other income (expenses)  decreased $0.20 million for the three months ended
     September 30, 2006. The decrease 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 in the prior period and an
     increase in interest expense of $0.1.

     Liquidity and Capital Resources

     Our operating activities used cash of approximately $1.0 million during the
     three months ended  September 30, 2006, as compared to using  approximately
     $1.3 million for the same period in the prior year. Cash used in operations
     for the three months ended September 30, 2006 was primarily attributable to
     a net loss of approximately $.7 million,  a decrease in accounts payable of
     approximately $0.3 million, a decrease in prepaid expenses of approximately
     $0.07 million  partially  offset by non-cash  charges for  depreciation and
     amortization  and bad debt expense of  approximately  $0.2 million and $0.1
     million,  respectively.  Additionally,  accounts receivable,  inventory and
     deferred  revenue  increased by $0.4  million,  $0.007  million,  and $0.06

                                       24
<PAGE>

     million,  respectively.  Cash used in operations for the three months ended
     September   30,  2005  was  primarily   attributable   to  a  net  loss  of
     approximately $0.9 million, a decrease in accounts payable of approximately
     $1.1 million,  a decrease 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
     inventory write off of approximately  $0.2 million,  $0.02 million and $0.1
     million,  respectively.   Additionally,  accounts  receivable  and  prepaid
     expenses decreased by $0.6 million and $0.1 million, respectively.

     Our investing  activities  used  approximately $ 0.07 million for the three
     months ended  September  30, 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 $0.06 million and patent cost paid $0.009 million.  Cash used
     in investing  activities for the three months ended  September 30, 2005 was
     primarily attributable to payments on customer lists previously acquired in
     the amount of $0.1 million and  purchases of property and  equipment in the
     amount of approximately $0.02 million.

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

     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 has been extended to October 1, 2007. Based on
     our cash position of approximately  $1.0 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,  together with current
     forecasts and debt  financing,  we believe that we have  sufficient cash to
     meet our funding needs through  September  30, 2007.  However,  our current
     forecast does not address events beyond October 1, 2007,  developing a plan
     for the  Company  to have the  ability  to repay  its  indebtedness  due in
     October 2007 and November  2007 as  referenced  in Note 6 of the  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 June 30, 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

     We maintain  controls and procedures  designed to ensure that it is able to
     collect the information  that is required to be disclosed in the reports it
     files with the SEC, and to process, summarize and disclose this information

                                       25
<PAGE>
                     NETWOLVES CORPORATION AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)


     within  the time  period  specified  in the  rules of the  SEC.  Our  Chief
     Executive and Chief Financial  Officers are  responsible for  establishing,
     maintaining and enhancing these procedures.  They are also responsible,  as
     required by the rules  established  by the SEC, for the  evaluation  of the
     effectiveness of these procedures.

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

     Management has  identified a significant  deficiency as 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.  A  significant  deficiency  is a  control  deficiency,  or
     combination  of  control  deficiencies  that  result in a more than  remote
     likelihood of an  inconsequential  misstatement of the Company's interim or
     annual financial statements.

     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.

     During the  quarter  ended  September  30,  2006  personnel  were added and
     received the necessary training. Additionally,  management has reviewed all
     systems and procedures relating to the financial close and have implemented
     additional controls and other process improvements.

     There were no other  change in our  Internal  Controls  during the  quarter
     ended  September 30, 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 significant  deficiency  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  significant
     deficiency  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.

                                       26
<PAGE>
                     NETWOLVES CORPORATION AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)


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.

     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.

                                       27
<PAGE>
                     NETWOLVES CORPORATION AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)





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.

                                       28


<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: Decmeber 13, 2006