Document:

Exhibit 10.4
                             SUBSCRIPTION AGREEMENT

     Subscription  Agreement (this "Agreement"),  dated as of November 6, 2001,
between NetWolves Corporation, a New York corporation (the "Company") and Credit
Suisse Warburg Pincus Emerging Growth Fund, Inc. (the "Purchaser").

     WHEREAS,  the Purchaser desire to subscribe for, and the Company desires to
issue to the Purchaser  1,000,000  shares (the "Shares") of the Company's common
stock, $0.0033 par value, (the "Common Stock") all upon the terms and conditions
set forth in this Agreement.

     NOW,  THEREFORE,  in  consideration  of the  foregoing  and  of the  mutual
premises,  covenants,  representations  and warranties herein  contained,  it is
hereby agreed as follows:

     1. Subscription Price; Issuance.

     In reliance on the  representations  and  warranties  contained  herein and
subject to the terms and conditions  hereof, the Purchaser hereby subscribes for
the Shares. Upon the execution of this Agreement,  the Company shall deposit one
or more certificates, in the names and denominations specified by the Purchaser,
representing  the Shares with Stroock & Stroock & Lavan,  LLP,  which shall hold
the certificates in escrow pending delivery of such  certificates to a custodian
to  be  designated  by  the  Purchaser.   Immediately   upon  delivery  of  such
certificates to such custodian, the Purchaser shall remit payment for the Shares
to the Company in an amount equal to $2,000,000 (the "Purchase Price") (or $2.00
per Share), by wire in immediately  available funds to a bank account previously
designated by the Company.

     2. Representations and Warranties of the Company.

     The Company represents and warrants to the Purchaser as follows:

     2.1 Corporate  Status.  Each of the Company and its  subsidiaries  has been
duly  organized and is validly  existing as a corporation in good standing under
the laws of the jurisdiction of its incorporation,  has full corporate power and
authority  to own or lease its  properties  and conduct its  business as its has
been conducted,  is being conducted or is proposed to be conducted,  and is duly
qualified as a foreign  corporation and in good standing in all jurisdictions in
which  the  character  of the  property  owned or  leased  or the  nature of the
business  transacted  by it makes  qualification  necessary,  except  where  the
failure  to be so  qualified  would not have a  material  adverse  effect on the
business,  properties,  financial  condition  or  results of  operations  of the
Company and its subsidiaries, taken as a whole (a "Material Adverse Effect").

     2.2  Authority  of  Agreement.  The Company has the power and  authority to
execute and deliver this Agreement and to carry out its  obligations  hereunder.
The execution, delivery and performance by the Company of this Agreement and the
consummation of the transactions  contemplated  hereby have been duly authorized
by all necessary corporate action on the part of the Company, and this Agreement
constitutes the valid and legally binding obligation of the Company  enforceable

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against  the  Company in  accordance  with its terms,  except as the same may be
limited by bankruptcy,  insolvency,  reorganization  or other laws affecting the
enforcement  of  creditors'  rights  generally  now or  hereafter  in effect and
subject to the  application  of equitable  principles  and the  availability  of
equitable remedies.  The issuance of the Shares is not, and will not be, subject
to any  preemptive  rights or right of first refusal that have not been properly
waived or complied with.

     2.3 No Conflicts. The execution, delivery and performance of this Agreement
by the  Company  and  the  other  instruments  and  agreements  to be  executed,
delivered and performed by the Company  pursuant hereto and the  consummation of
the transactions  contemplated hereby and thereby by the Company do not and will
not,  with or  without  the  giving of notice  or the  passage  of time or both,
violate or conflict with or result in a breach or  termination  of any provision
of, or constitute a default  under,  the  Certificate  of  Incorporation  or the
By-Laws of the  Company or any order,  judgment,  decree,  statute,  regulation,
contract, agreement or any other restriction of any kind or description to which
the Company,  or any of its subsidiaries,  or its, or their, assets may be bound
or subject.  None of the Company or any of its  subsidiaries is in violation of,
or (with or  without  notice  or lapse of time or both) in  default  under,  any
material term or provision of its Certificate of Incorporation or By-Laws.

     2.4 Fully Paid and Non-Assessable. The Shares are duly authorized and, when
issued  and paid for in  accordance  with the terms of this  Agreement,  will be
validly issued and outstanding,  fully paid and nonassessable and free and clear
of all liens and restrictions,  other than liens that might have been created or
suffered by the Purchaser with respect to the Shares and restrictions imposed by
the Securities Act of 1933, as amended (the "Securities Act").

     2.5 Certificate and Bylaws.  The copies of the Certificate of Incorporation
and By-Laws of the Company which have been  delivered to (or made  available for
inspection  by) the Purchaser  prior to the execution of this Agreement are true
and  complete  and have not been  amended  or  repealed  since  the date of such
delivery or inspection.

     2.6 Capital Stock. As of the date hereof,  the authorized  capital stock of
the Company  consists of (i)  2,000,000  shares of  preferred  stock,  par value
$.0033 per share, none of which are issued and outstanding; and, (ii) 50,000,000
shares of common stock of which  10,668,065 are issued and outstanding  prior to
giving  effect  to the  issuance  of the  Shares or any  shares of Common  Stock
pursuant to the exercise of  outstanding  options and  warrants.  As of the date
hereof, the Company has reserved a total of 6,918,000 shares of Common Stock for
issuance upon the exercise of stock options or purchase rights granted under its
stock plans or under other stock  option  agreements  or  warrants.  Except with
respect  to such  reserved  shares of Common  Stock and the  Shares to be issued
hereunder, the Company has no outstanding  subscription,  option, warrant, right
of  first  refusal,   preemptive  right,  call,  contract,  demand,  commitment,
convertible  security  or other  instrument,  agreement  or  arrangement  of any
character or nature  whatever  under which the Company is or may be obligated to
issue common stock,  preferred stock or other equity security of any kind. As of
the date  hereof,  all  outstanding  shares  of  Common  Stock  have  been  duly
authorized, validly issued, fully paid and are nonassessable.

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     2.7 Securities  Laws.  Subject to the accuracy of the  representations  and
warranties  contained in Section 3, the offer,  issue and sale of the Shares are
and will be exempt from registration and prospectus delivery requirements of the
Securities Act are and will be issued in compliance with all applicable  federal
and state securities laws.

     2.8 Financial  Statements.  Included in the Company's Annual Report on Form
10-K  (the  "Form  10-K")  for the  year  ended  June 30,  2001 are the  audited
consolidated  balance sheets of the Company and its  subsidiaries as of June 30,
2001 (the "Balance Sheet Date"), June 30, 2000 and June 30, 1999 and the audited
consolidated  statements of  operations,  cash flow and changes of  stockholders
equity for the periods then ended,  together with the related  reports of Arthur
Andersen LLP, Richard A. Eisner & Company, and Hays & Company,  each independent
certified public accountants.  The foregoing financial  statements (i) are true,
complete and correct in all material  respects  and are in  accordance  with the
books and records of the Company and its  subsidiaries,  (ii) present fairly the
financial  condition of the Company and its  subsidiaries  at the Balance  Sheet
Date  and  other  dates  therein  specified  and  the  consolidated  results  of
operations and changes in financial position of the Company and its subsidiaries
for the periods  therein  specified,  and (iii) have been prepared in accordance
with generally accepted accounting principles applied on a basis consistent with
prior accounting periods. None of the Company or any of its subsidiaries has any
liabilities  or  obligations,   either  acquired  or  absolute,   contingent  or
otherwise,  which are not reflected or provided for in the financial  statements
except  liabilities not in excess of $100,000 in the aggregate arising after the
Balance Sheet Date which were incurred in the ordinary course of business.

     2.9 Changes.  Since the Balance Sheet Date, except as disclosed in the Form
10-K, there has been no event which would have a Material Adverse Effect.  Since
the  Balance  Sheet  Date,  except as  disclosed  in the Form 10-K,  none of the
Company or any of its  subsidiaries  has (a) mortgaged,  pledged or subjected to
lien any of its material assets,  tangible or intangible,  (b) sold, transferred
or leased a material  portion of its assets,  (c) cancelled or  compromised  any
material debt or claim, or waived or released any right, of material value,  (d)
suffered any physical  damage,  destruction  or loss  (whether or not covered by
insurance)  having a material  effect,  (e) declared or paid any dividends on or
made any other  distributions with respect to, or purchased or redeemed,  any of
its outstanding equity  securities,  or (f) suffered or experienced any material
adverse  change or loss in its business  other than its  continuing  losses from
operations.

     2.10 Material  Agreements of the Company and its Subsidiaries.  None of the
Company  or any of its  subsidiaries  is a party  to or  otherwise  bound by any
written or oral  agreement,  instrument or  arrangement  that is material to it,
except for those  agreements  included as  exhibits to the Form 10-K  ("Material
Contracts").  The Company has furnished or made  available to the Purchaser true
and complete  copies of all such Material  Contracts  and all other  agreements,
instruments  and other  documents  requested by the Purchaser or its  authorized
representative.  No default exists, and no event has occurred which, with notice
or lapse of time or both,  would constitute a default in the due performance and

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observance of any term, covenant or condition of any indenture,  mortgage,  deed
of trust,  lease or other agreement or instrument to which the Company or any of
its  subsidiaries is a party or by which the Company or any of its  subsidiaries
or any of  their  respective  properties  is  bound  or may be  affected  in any
material adverse respect with regard to property,  business or operations of the
Company and its subsidiaries.

     2.11  Litigation.  Except as disclosed in the Form 10-K, there is no action
pending and, to the best knowledge of the Company,  there is no material  action
threatened  against the Company,  any of its subsidiaries or any of its or their
properties  or  assets.  None of the  Company or any of its  subsidiaries  is in
default  with  respect  to  any  order,  writ,  judgment,   injunction,  decree,
determination or award of any court or of any governmental entity.

     2.12 Disclosure.  No  representation or warranty or other statement made by
the Company herein,  or in any document or certificates  delivered the Purchaser
pursuant hereto, contains any untrue statement or omits to state a material fact
necessary  to make any of them,  in light of the  circumstances  in which it was
made, not misleading.

     2.13 Intellectual Property.

     (a) Each of the Company and its  subsidiaries  has sufficient  title to and
ownership  of or rights to all  patents,  patent  rights,  patent  applications,
inventions,  trademarks, service marks, trade names, copyrights and information,
proprietary rights and processes necessary for the conduct of its business,  and
the use by the Company or such  subsidiary  of the  foregoing  does not conflict
with or constitute an infringement of the rights of others.  Each of the Company
and its subsidiaries  has sufficient  licenses,  permits and other  governmental
authorizations  required for the conduct of its business as currently  conducted
and is not in default  with respect  thereto,  except as the failure to have any
such license,  permit or authorization or any default with respect thereto would
not have a Material Adverse Effect.

     (b)  None  of the  Company  or any of its  subsidiaries  has  received  any
communications  alleging  that it has  violated,  has no  knowledge  that it has
violated,  or by conducting its business,  it will violate,  any of the patents,
patent  applications,   inventions,  trademarks,  service  marks,  trade  names,
copyrights or trade secrets,  confidential  information,  proprietary  rights or
processes of any other person or entity.

     2.14 Retirement Obligations. Except for a non-contributory 401(k) plan, the
Company  does not have any  Employee  Benefit  Plan as defined  in the  Employee
Retirement Income Security Act of 1974, as amended.

     2.15 No  Governmental  Consent or Approval  Required.  Based in part on the
representations  made  by the  Purchaser  in  Section  3 of this  Agreement,  no
authorization,   consent,  approval  or  other  order  of,  declaration  to,  or
registration,  qualification,  designation or filing with, any federal, state or
local  governmental  agency or body is  required  by or from the Company for the

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valid and lawful  authorization,  execution  and delivery by the Company of this
Agreement or any other agreement  entered into by the Company in connection with
this Agreement,  and  consummation of the  transactions  contemplated  hereby or
thereby, or for the valid and lawful authorization,  issuance, sale and delivery
of the Shares.

     2.16 Nasdaq Listing Compliance.  The Common Stock is registered pursuant to
Section 12(g) of the Exchange Act of 1934, as amended (the  "Exchange  Act") and
is approved for quotation on the Nasdaq Small Cap Market.  The Company has taken
no action  designed to (or likely to have the effect of) result in a termination
the  registration  of the Common Stock under the Exchange Act or a de-listing of
the Common Stock from the Nasdaq Small Cap Market, nor has the Company received,
nor has it any reason to  believe it will  receive,  any  notification  that the
Securities  and  Exchange  Commission  (the  "Commission")  or Nasdaq,  Inc.  is
contemplating terminating such registration or listing.

     2.17  Reporting  Status.  The  Company  has  filed in a timely  manner  all
documents  that the Company was  required to file under the  Exchange Act during
the 12 months  preceding the date of this Agreement and such documents  complied
as to form in all material  respects with the  Commission s  requirements  as of
their respective  filing dates, and the information  contained therein as of the
date thereof did not contain any untrue  statement of a material fact or omit to
state a material  fact  required to be stated  therein or  necessary to make the
statements  therein,  in light of the circumstances  under which they were made,
not misleading.

     2.18  Compliance  with  Nasdaq  Requirements.  The  Shares  have  been duly
included  for  trading on the Nasdaq  Small Cap Market,  and the  Company  shall
comply with all requirements of Nasdaq, Inc. with respect to the issuance of the
Shares.

     2.19  Eligibility  to File Form S-3. The Company is  currently  eligible to
register  the  resale  of  Shares  in a  secondary  offering  on a  registration
statement on Form S-3 under the Securities Act.

     3.   Representations  and  Warranties  of  the  Purchaser.   The  Purchaser
represents and warrants to the Company as follows:

     3.1 Authority for Agreements.  The Purchaser has the power and authority to
execute and deliver this Agreement and to carry out its  obligations  hereunder.
The execution,  delivery and  performance by the Purchaser of this Agreement and
the  consummation  of  the  transactions  contemplated  hereby  have  been  duly
authorized  by all  necessary  action  on the  part of the  Purchaser  and  this
Agreement constitutes the valid and legally binding obligation of the Purchaser,
enforceable  against the Purchaser in accordance  with its terms,  except as the
same may be  limited by  bankruptcy,  insolvency,  reorganization  or other laws
affecting the  enforcement  of creditors'  rights  generally now or hereafter in
effect  and  subject  to  the  application  of  equitable   principles  and  the
availability of equitable remedies.

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     3.2 Investor Representations and Acknowledgments.

     (a) The Purchaser is acquiring the Shares for the Purchaser's own accounts,
for investment only, and not with a view to, or for resale in connection with, a
distribution   of  the  Shares  and  with  no  present   intention  of  selling,
transferring,  granting a participation in or otherwise distributing the Shares,
all within the  meaning of the  Securities  Act,  and the rules and  regulations
thereunder and any applicable state, securities or blue sky laws.

     (b) The  Purchaser  is not a party or subject to or bound by any  contract,
undertaking,  agreement  or  arrangement  with any person to sell,  transfer  or
pledge  the  Shares  or any  part  thereof  to any  person,  and has no  present
intention to enter into such a contract, undertaking, agreement or arrangement.

     (c) The Purchaser acknowledges to the Company that:

          (i) The Company has  advised  the  Purchaser  that the Shares have not
     been registered  under the Securities Act or under the laws of any state on
     the basis that the  issuance  thereof  contemplated  by this  Agreement  is
     exempt from such registration;

          (ii) The Company's  reliance on the availability of such exemption is,
     in part,  based  upon the  accuracy  and  truthfulness  of the  Purchaser's
     representations contained herein;

          (iii) The Shares cannot be resold without registration or an exemption
     under  the  Securities  Act  and  such  state  securities  laws,  and  that
     certificates representing the Shares will bear a restrictive legend to such
     effect;

          (iv) The  Purchaser  has  evaluated the merits and risks of purchasing
     the Shares, and has such knowledge and experience in financial and business
     matters that the Purchaser is capable of evaluating the merits and risks of
     such  purchase,  is aware of and has  considered  the  financial  risks and
     financial  hazards  of  purchasing  the  Shares,  and is able  to bear  the
     economic risk of purchasing  the Shares,  including  the  possibility  of a
     complete loss with respect thereto;

          (v) The  Purchaser  has had access to such  information  regarding the
     business and finances of the Company, including the Form 10-K, and has been
     provided the  opportunity  to discuss  with the  Company's  management  the
     business,  affairs and  financial  condition  of the Company and such other
     matters  with respect to the Company as would  concern a reasonable  person
     considering  the   transactions   contemplated  by  this  Agreement  and/or
     concerned with the operation of the Company.

     (d) Additional  Representations and Warranties of Accredited Investors. The
Purchaser represents and warrants that the Purchaser is an "accredited investor"
within  the  meaning  of Rule  501(d)  of  Regulation  D  promulgated  under the
Securities Act, because the Purchaser comes within one or more of the enumerated
categories therein.

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     4. Registration of Restricted Stock.

     4.1 Required Registration.

     (a) At any  time  after  the  30th day  following  date of the  Purchaser's
acquisition of the Shares hereby, the Purchaser can demand that the Company file
a registration statement covering the Shares. Within 14 business days after such
demand, the Company shall prepare and file a registration  statement on Form S-3
under the Securities Act or other  appropriate form in the event Form S-3 is not
available,  covering the Shares and shall use commercially reasonable efforts to
cause such  registration  statement  to become  effective  as  expeditiously  as
possible and to remain effective until the earliest to occur of (i) the date all
the Shares  covered  thereby  have been sold,  (ii) the date by which all Shares
covered thereby may be sold under Rule 144(k)  promulgated  under  theSecurities
Act, or (iii) the date which is the 36-month  anniversary of the date upon which
the Purchaser acquired the Shares hereunder.

     (b) Following the effectiveness of a registration  statement filed pursuant
to this section, the Company may, at any time, suspend the effectiveness of such
registration for up to thirty (30) days, as appropriate (a "Suspension Period"),
by giving  notice to the  Purchaser,  if the Board of  Directors  of the Company
shall have  reasonably  determined in good faith that the Company is required to
disclose any material corporate development which disclosure may have a Material
Adverse Effect on the Company.  Notwithstanding the foregoing,  no more than one
Suspension Period may occur during any twelve-month  period,  unless approved by
Purchaser.  The Company  shall use its best  efforts to limit the  duration  and
number of any  Suspension  Periods.  The Purchaser of Shares  agrees that,  upon
receipt of any notice from the Company of a  Suspension  Period,  the  Purchaser
shall forthwith  discontinue  disposition of Shares covered by such registration
statement or  prospectus  until the  Purchaser  (i) is advised in writing by the
Company  that the use of the  applicable  prospectus  may be  resumed,  (ii) has
received  copies of a supplemental  or amended  prospectus,  if applicable,  and
(iii) has received  copies of any additional or  supplemental  filings which are
incorporated or deemed to be incorporated by reference into such prospectus.

     (c) If the registration  statement required to be filed pursuant to Section
4.1(a)  has not  been  filed by the  Company  with  the  Commission  by the 14th
business day following the demand date or has not been declared effective by the
Commission  within 50  calendar  days after the filing  date  (either  event,  a
"Registration Default"), then following such Registration Default and until such
Registration Default is cured by the Company filing such registration  statement
with the Commission and such registration  statement being declared effective by
the Commission (a "Registration  Cure"),  the Company shall pay to the Purchaser
an amount (the "Default  Payment")  equal to the product of (x) one thirtieth of
one percent of the Purchase Price of the Shares and (y) the number of days which
elapse  between  the  date  of the  Registration  Default  and  the  date of the
Registration Cure (the "Registration  Default Period").  The Default Payment may
be paid in  either  cash or  additional  shares of  Common  Stock,  such form of
payment to be  determined at the election of the Company each 30 days during the

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Registration  Default Period up to the 90th day following the date of the demand
and  thereafter to be  determined at the election of the Purchaser  each 30 days
during the Registration  Default Period, with the number of additional shares of
Common Stock  calculated  based upon the closing price of the  Company's  Common
Stock on the Nasdaq Small Cap Market on the trading day immediately prior to the
end of the period with respect to which such Default Payment  relates.  Any such
shares of Common Stock paid to the Purchaser which  constitutes all or part of a
Default  Payment shall  immediately  become  subject to the demand  registration
rights  granted  to the  Purchaser  under  this  Section.  The  Company  and the
Purchaser agree that the damages resulting from a Registration  Default would be
difficult or impossible to determine and that the Default  Payment  represents a
reasonable approximation of the anticipated damages.  Accordingly, the Purchaser
agrees that the receipt of the Default  Payment  shall be  Purchaser's  sole and
exclusive  remedy under this Agreement or otherwise for a Registration  Default,
and in no event shall the Company be liable for any lost profits, consequential,
special, punitive or similar damages, no matter how identified, resulting from a
Registration Default. Notwithstanding the foregoing, Purchaser shall be entitled
to exercise the right to seek specific  performance and other equitable remedies
with respect to the Company's obligations under the Agreement.

     4.2 Registration  Procedures.  When the Company effects the registration of
the Shares under the  Securities  Act  pursuant to Section  4.1(a)  hereof,  the
Company will, at its expense, as expeditiously as possible:

     (a) In accordance  with the Securities Act and the rules and regulations of
the Commission,  prepare and file in accordance  with Section  4.1(a),  with the
Commission  a  registration  statement  with  respect  to the Shares and use its
commercially  reasonable efforts to cause such registration  statement to become
and remain effective for the period described herein,  and prepare and file with
the Commission such amendments to such registration statement and supplements to
the prospectus  contained  therein as may be necessary to keep such registration
statement  effective  for  such  period  and  such  registration  statement  and
prospectus accurate and complete for such period;

     (b)  Furnish  to the  Purchaser  such  reasonable  number  of copies of the
registration statement,  preliminary prospectus, final prospectus and such other
documents as such  Purchaser may  reasonably  request in order to facilitate the
sale or public offering of the Shares;

     (c) Use its best efforts to register or qualify the Shares  covered by such
registration  statement  under  such state  securities  or blue sky laws of such
jurisdictions  as the Purchaser may  reasonably  request within twenty (20) days
following the original filing of such  registration  statement,  except that the
Company  shall not for any purpose be  required to execute a general  consent to
service of process or to qualify to do business as a foreign  corporation in any
jurisdiction where it is not so qualified;

     (d) Notify the Purchaser,  promptly after it shall receive notice  thereof,
of the date and time when such  registration  statement and each  post-effective
amendment thereto has become effective or a supplement to any prospectus forming
a part of such registration statement has been filed;

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     (e) Notify such Purchaser promptly of any request by the Commission for the
amending or  supplementing of such  registration  statement or prospectus or for
additional information;

     (f) Prepare and file with the Commission,  promptly upon the request of the
Purchaser,  any  amendments or  supplements  to such  registration  statement or
prospectus which, in the opinion of counsel for the Purchaser, is required under
the Securities Act or the rules and  regulations  thereunder in connection  with
the distribution of the Shares by the Purchaser;

     (g) Cause to have  prepared and filed with the  Commission  such reports or
opinions  as  may  reasonably  be  requested  by  any   underwriter,   including
appropriate legal opinions and comfort letters, if applicable;

     (h) Prepare and promptly file with the Commission,  and promptly notify the
Purchaser of the filing of, such amendments or supplements to such  registration
statement  or  prospectus  as may be  necessary  to correct  any  statements  or
omissions  if, at the time when a  prospectus  relating  to such  securities  is
required to be delivered under the Securities Act, any event has occurred as the
result of which any such  prospectus  or any other  prospectus as then in effect
would  include  an  untrue  statement  of a  material  fact or omit to state any
material fact required to be stated  therein or necessary to make the statements
therein not misleading; and

     (i) Advise the Purchaser,  promptly after it shall receive notice or obtain
knowledge  thereof,  of  the  issuance  of any  stop  order  by  the  Commission
suspending the effectiveness of such registration statement or the initiation or
threatening of any proceeding for that purpose and promptly use its best efforts
to prevent the  issuance of any stop order or to obtain its  withdrawal  if such
stop order should be issued.

     4.3 Expenses.  With respect to any registration  effected  pursuant to this
Section 4, all fees,  costs and expenses of and incidental to such  registration
and the public  offering in connection  therewith shall be borne by the Company,
provided,  however, that the Purchaser shall bear its own legal fees and its pro
rata share of any underwriting discounts or commissions, if any.

     4.4 Indemnification.

     (a) The Company will  indemnify  and hold  harmless the  Purchaser  and any
underwriter (as defined in the Securities Act) for the Purchaser's  Shares,  and
any person who controls the Purchaser or such underwriter  within the meaning of
the Securities Act, and any officer, director,  employee, agent, partner, member
or  affiliate  of the  Purchaser  (for  purposes  of this  Section  4.4(a),  the
"Indemnified  Parties"),  from and against, and will reimburse the Purchaser and
each such  Indemnified  Party  with  respect  to, any and all  claims,  actions,
demands, losses, damages, liabilities, costs and expenses to which the Purchaser
or any such  Indemnified  Party may become  subject under the  Securities Act or
otherwise,   insofar  as  such  claims,  actions,   demands,   losses,  damages,
liabilities,  costs or expenses  arise out of or are based upon (i) violation of

                                       9
<PAGE>

any securities  laws; (ii) any untrue  statement or alleged untrue  statement of
any material  fact  contained in such  registration  statement,  any  prospectus
contained therein or any amendment or supplement thereto, or arise out of or are
based upon the  omission or alleged  omission to state  therein a material  fact
required to be stated  therein or necessary to make the  statements  therein not
misleading,  or (iii) any breach of any representation,  warranty,  agreement or
covenant of the Company contained herein;  provided,  however,  that the Company
will not be liable in any such case to the extent that any such  claim,  action,
demand,  loss,  damage,  liability,  cost or  expense  is  caused  by an  untrue
statement or alleged untrue statement or omission or alleged omission so made in
strict   conformity  with  information   furnished  by  the  Purchaser  or  such
Indemnified  Party in writing  specifically  for use in the  preparation of such
registration  statement,  any prospectus  contained  therein or any amendment or
supplement thereto.

     (b) If the Shares are included in a registration pursuant to the provisions
of Section 4 hereof, the Purchaser will indemnify and hold harmless the Company,
and any person who  controls  the Company  within the meaning of the  Securities
Act,  from and  against,  and will  reimburse  the Company and such  controlling
persons  with  respect to, any and all losses,  damages,  liabilities,  costs or
expenses  to which the  Company or such  controlling  person may become  subject
under  the  Securities  Act or  otherwise,  insofar  as  such  losses,  damages,
liabilities,  costs or  expenses  are  caused by any  untrue or  alleged  untrue
statement of any material fact  contained in such  registration  statement,  any
prospectus  contained  therein or any  amendment or supplement  thereto,  or are
caused by the omission or the alleged  omission to state therein a material fact
required to be stated  therein or necessary to make the statements  therein,  in
light of the circumstances in which they were made, not misleading, in each case
to the extent,  but only to the extent,  that such untrue  statement  or alleged
untrue  statement or omission or alleged omission was so made solely in reliance
upon  and  in  strict  conformity  with  written  information  furnished  by the
Purchaser  specifically  for  use  in  the  preparation  any  such  registration
statement,  any  prospectus  contained  therein or any  amendment or  supplement
thereto; provided, however, that the liability of the Purchaser pursuant to this
subsection  (b) shall be limited  to an amount  not to exceed  the net  proceeds
received  by the  Purchaser  from  the sale of  Shares  under  the  registration
statement which gives rise to such obligation to indemnify.

     (c)  Promptly  after  receipt  by  a  party  indemnified  pursuant  to  the
provisions  of  paragraph  (a) or (b)  of  this  Section  4.4 of  notice  of the
commencement  of any  action  involving  the  subject  matter  of the  foregoing
indemnity  provisions,  such indemnified party will, if a claim thereof is to be
made against the indemnifying  party pursuant to the provisions of paragraph (a)
or (b),  notify the  indemnifying  party of the  commencement  thereof;  but the
omission  so to notify  the  indemnifying  party  will not  relieve  it from any
liability  which it may have to an indemnified  party  otherwise than under this
Section 4.4 and shall not relieve the  indemnifying  party from liability  under
this Section 4.4 unless such indemnifying party is materially prejudiced by such
omission.  In case such action is brought against any  indemnified  party and it
notifies the indemnifying  party of the commencement  thereof,  the indemnifying
party  shall have the right to  participate  in,  and, to the extent that it may
wish, jointly with any other indemnifying  party similarly  notified,  to assume
the defense thereof,  with counsel  reasonably  satisfactory to such indemnified

                                       10
<PAGE>

party, and after notice from the indemnifying party to such indemnified party of
its election so to assume the defense thereof,  the indemnifying  party will not
be liable to such indemnified party pursuant to the provisions of such paragraph
(a) or (b)  for  any  legal  or  other  expense  subsequently  incurred  by such
indemnified  party in connection  with the defense thereof other than reasonable
costs of investigation.  No indemnifying party shall be liable to an indemnified
party for any  settlement  of any  action or claim  without  the  consent of the
indemnifying  party. No indemnifying party will consent to entry of any judgment
or enter into any  settlement  which does not include as an  unconditional  term
thereof the giving by the claimant or plaintiff to such  indemnified  party of a
release  from all  liability  in  respect  to such  claim or  litigation  and no
settlement can have non-monetary remedies.

     (d) If the  indemnification  provided for in subsection  (a) or (b) of this
Section 4.4 is held by a court of competent  jurisdiction to be unavailable to a
party to be indemnified with respect to any claims,  actions,  demands,  losses,
damages,  liabilities,   costs  or  expenses  referred  to  therein,  then  each
indemnifying  party  under any such  subsection,  in lieu of  indemnifying  such
indemnified party thereunder,  hereby agrees to contribute to the amount paid or
payable by such indemnified party as a result of such claims, actions,  demands,
losses,  damages,  liabilities,  costs  or  expenses  in such  proportion  as is
appropriate to reflect the relative fault of the  indemnifying  party on the one
hand and of the indemnified party on the other in connection with the statements
or omissions which resulted in such claims, actions,  demands,  losses, damages,
liabilities,  costs  or  expenses,  as  well  as any  other  relevant  equitable
considerations.  The  relative  fault  of  the  indemnifying  party  and  of the
indemnified  party shall be  determined  by reference  to,  among other  things,
whether  the  untrue or  alleged  untrue  statement  of a  material  fact or the
omission or alleged  omission to state a material  fact  relates to  information
supplied by the indemnifying  party or by the indemnified  party and the parties
relative intent, knowledge,  access to information and opportunity to correct or
prevent such statement or omission.  Notwithstanding  the foregoing,  the amount
the Purchaser  shall be obligated to contribute  pursuant to this subsection (d)
shall be limited to an amount not to exceed  the net  proceeds  received  by the
Purchaser from the sale of Shares under the  registration  statement which gives
rise  to  such  obligation  to  contribute.   No  person  guilty  of  fraudulent
misrepresentation  (within the meaning of Section 11(f) of the  Securities  Act)
shall be entitled to  contribution  hereunder from any person who was not guilty
of such fraudulent misrepresentation.

     4.5 Reporting Requirements Under the Exchange Act. The Company shall timely
file such  information,  documents and reports as the  Commission may require or
prescribe  under  Section 13 of the Exchange Act. The Company  acknowledges  and
agrees that the purposes of the  requirements  contained in this Section 4.5 are
to enable,  among other reasons, the Purchaser to comply with the current public
information  requirement  contained in paragraph (c) of Rule 144 should any such
Purchaser ever wish to dispose of any of the Shares without  registration  under
the  Securities  Act in reliance upon Rule 144 (or any other  similar  exemptive
provision).

                                       11
<PAGE>

     4.6  Stockholder  Information.  The Company may  require the  Purchaser  to
furnish the Company  such  information  with  respect to the  Purchaser  and the
distribution  of its  Shares as the  Company  may from  time to time  reasonably
request  in  writing  as  shall  be  required  by law or by  the  Commission  in
connection therewith.

     4.7  Transfer of  Registration  Rights.  The parties  hereto agree that the
demand  registration  rights  granted  hereunder  are  transferable  and  may be
exercised by any subsequent  holder of the Shares,  subject to each of the terms
and conditions contained herein.

     5.  Further  Assurances.  At any time and from time to time  after the date
hereof, each party shall, without further consideration,  execute and deliver to
the other such other  instruments or documents and shall take such other actions
as the other may reasonably  request to carry out the transactions  contemplated
by this Agreement.

     6.  Miscellaneous.  Any party may waive compliance by the other with any of
the provisions of this Agreement.  No waiver of any provision shall be construed
as a waiver of any other provision.  Any waiver must be in writing. The headings
contained in this Agreement are for reference purposes only and shall not affect
in any way the meaning or interpretation  of this Agreement.  This Agreement may
not be modified or amended except in writing signed by both parties hereto. This
Agreement may be executed in several counterparts, each of which shall be deemed
an original, and all of which shall constitute one and the same instrument. This
Agreement shall be governed in all respects, including validity,  interpretation
and effect,  by the laws of the State of New York,  applicable to contracts made
and to be performed in New York.  This Agreement shall be binding upon and inure
to the  benefit  of and be  enforceable  by the  successors  and  assigns of the
parties hereto.  Except with respect to the demand registration provided herein,
this Agreement shall not be assignable by either party without the prior written
consent of the other, such consent not to be unreasonably  withheld.  The rights
and  obligations  contained in this  Agreement are solely for the benefit of the
parties  hereto and are not intended to benefit or be  enforceable  by any other
party, under the third party beneficiary doctrine or otherwise.

                                       12
<PAGE>

     IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the
date first above written.

                                        NETWOLVES CORPORATION

                                        By:/s/ Walter R. Groteke
                                           --------------------------------
                                        Name:  Walter R. Groteke
                                        Title: Executive Vice President

                                        CREDIT SUISSE WARBURG PINCUS
                                         EMERGING GROWTH FUND, INC.

                                        By:/s/ Mike A. Pignataro
                                           --------------------------------
                                        Name:  Mike A. Pignataro
                                        Title:    Chief Financial Officer

                                       13Exhibit 10.5

CONTENTS

INDEPENDENT AUDITORS' REPORT                                        F-1

CONSOLIDATED BALANCE SHEETS
        June 30, 2002 and 2001                                      F-2

CONSOLIDATED STATEMENTS OF OPERATIONS
        For the years ended June 30, 2002, 2001 and 2000            F-3

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
        For the years ended June 30, 2000, 2001 and 2002            F-4 - F-5

CONSOLIDATED STATEMENTS OF CASH FLOWS
        For the years ended June 30, 2002, 2001 and 2000            F-6 - F-7

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                          F-8 - F-35

INDEPENDENT AUDITORS' REPORT ON SCHEDULE II                         F-36

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES        F-37

<PAGE>

Board of Directors and Shareholders
NetWolves Corporation
Bohemia, New York

                          INDEPENDENT AUDITORS' REPORT

We  have  audited  the  accompanying   consolidated  statements  of  operations,
shareholders'  equity and cash flows of NetWolves  Corporation and  subsidiaries
(the "Company") for the year ended June 30, 2000. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.

We conducted our audit in accordance with auditing standards  generally accepted
in the  United  States of  America.  Those  standards  require  that we plan and
perform the audit to obtain  reasonable  assurance  about  whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audit  provides  a
reasonable basis for our opinion.

     In our opinion,  the financial statements referred to above present fairly,
in  all  material   respects,   the  consolidated   results  of  operations  and
consolidated  cash flows of NetWolves  Corporation and subsidiaries for the year
ended June 30, 2000, in conformity with accounting principles generally accepted
in the United States of America.

/s/ Eisner LLP
Eisner LLP

New York, New York
August 24, 2000

Except for the reclassification of the discontinued operations
as to which the date is June 30, 2001

                                      F-1
<PAGE>

                     NETWOLVES CORPORATION AND SUBSIDARIES

                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                  June 30,
                                                                      -------------------------------
                                                                           2002             2001
                                                                           ----             ----
<S>                                                                   <C>              <C>
ASSETS
Current assets
    Cash and cash equivalents                                         $     656,880    $   4,087,767
    Restricted cash                                                         366,276          323,890
    Marketable securities, available for sale                                82,250           71,000
    Accounts receivable, net of allowance for doubtful accounts of
       $191,164 and $152,259 at June 30, 2002 and 2001, respectively        107,178          366,868
    Inventories                                                             136,930          361,656
    Prepaid expenses                                                        129,293          234,648
    Purchase deposits                                                       841,000             -
    Other current assets                                                     13,491          185,130
                                                                      -------------    -------------
       Total current assets                                               2,333,298        5,630,959

Property and equipment, net                                                 682,395          982,748
Software, net                                                               104,874           73,414
Other assets                                                                103,887          173,323
                                                                      -------------    -------------
                                                                      $   3,224,454    $   6,860,444
                                                                      =============    =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
    Accounts payable and accrued expenses                             $     675,321    $     926,634
    Accrued losses of discontinued operations                               137,958          496,927
    Deferred revenue                                                         46,780          129,978
    Current maturities of long-term debt                                    362,982          282,982
                                                                      -------------    -------------
       Total current liabilities                                          1,223,041        1,836,521

Accrued losses of discontinued operations                                   235,012             -
Long-term debt, net of current maturities                                      -              80,000
                                                                      -------------    -------------
       Total liabilities                                                  1,458,053        1,916,521
                                                                      -------------    -------------
Minority interest                                                           272,533          281,693
                                                                      -------------    -------------
Commitments and contingencies

Shareholders' equity
    Preferred stock, $.0033 par value; 2,000,000 and no shares
       authorized on June 30, 2002 and 2001, respectively; no
       shares issued and outstanding on June 30, 2002 and 2001                                   -                -
    Common stock, $.0033 par value; 50,000,000 shares authorized
       on June 30, 2002 and 2001; 12,607,119 and 9,167,613 shares
       issued and outstanding on June 30, 2002 and 2001, respectively        41,604           30,254
    Additional paid-in capital                                           65,176,647       57,748,499
    Unamortized value of equity compensation                                   -          (1,011,500)
    Accumulated deficit                                                 (63,611,478)     (51,980,868)
    Accumulated other comprehensive loss                                   (112,905)        (124,155)
                                                                      -------------    -------------
       Total shareholders' equity                                         1,493,868        4,662,230
                                                                      -------------    -------------
                                                                      $   3,224,454    $   6,860,444
                                                                      =============    =============
The accompanying notes to the financial statements
  are an integral part of these consolidated
  balance sheets.

</TABLE>

                                      F-2

<PAGE>

                             NETWOLVES CORPORATION

                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                               For the year ended June 30,
                                                               ---------------------------
                                                      2002                2001                2000
                                                      ----                ----                ----
<S>                                             <C>                  <C>                  <C>
Revenue
    Products                                    $    246,016         $    341,203         $    132,825
    Services                                         492,732            1,083,935            1,290,865
                                                ------------         ------------         ------------
                                                     738,748            1,425,138            1,423,690
                                                ------------         ------------         ------------

Cost of revenue
    Products                                         304,809              439,799               56,739
    Services                                         395,589              905,321              902,300
                                                ------------         ------------         ------------
                                                     700,398            1,345,120              959,039
                                                ------------         ------------         ------------
Gross profit                                          38,350               80,018              464,651
                                                ------------         ------------         ------------
Operating expenses
    General and administrative                     6,347,406            7,714,047           14,067,059
    Engineering and development                    1,856,223            1,893,372            1,329,341
    Sales and marketing                            2,500,793            4,958,719            4,868,686
    Impairment charges                                  -               1,415,929            4,016,080
                                                ------------         ------------         ------------
                                                  10,704,422           15,982,067           24,281,166
                                                ------------         ------------         ------------
Loss before other income (expense)
    and income taxes                             (10,666,072)         (15,902,049)         (23,816,515)

Other income (expense)
    Investment income                                117,147              650,003              611,746
    (Loss) gain on sale of marketable securities      -                    -                   (35,000)
    Minority interest                                  9,160               24,068              148,739
    Interest expense                                 (37,571)             (27,613)             (45,727)
                                                ------------         ------------         ------------
Loss before income taxes                         (10,577,336)         (15,255,591)         (23,136,757)

    Provision for income taxes                          -                    -                 (25,000)
                                                ------------         ------------         ------------
Net loss from continuing operations              (10,577,336)         (15,255,591)         (23,161,757)

Discontinued business
    Loss from discontinued operations                   -              (4,725,901)          (1,165,191)
    Loss on disposal of discontinued operations,
       including $525,204 and none for
       operating losses at June 30, 2002 and
       2001, respectively.                        (1,053,274)            (650,000)               -
                                                ------------         ------------         ------------
Net loss                                        $(11,630,610)        $(20,631,492)        $(24,326,948)
                                                ============         ============         ============
Basic and diluted net loss per share
    Loss from continuing operations             $      (0.90)        $      (1.74)        $      (3.29)
    Loss from discontinued operations                  (0.09)                (.61)                (.17)
                                                ------------         ------------         ------------
                                                $      (0.99)        $      (2.35)        $      (3.46)
                                                ============         ============         ============
Weighted average common shares
  outstanding, basic and diluted                  11,756,220            8,776,928            7,034,994
                                                ============         ============         ============

The accompanying notes to the financial statements
  are an integral part of these consolidated
  statements.
</TABLE>
                                       F-3
<PAGE>

                     NETWOLVES CORPORATION AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

                FOR THE YEARS ENDED JUNE 30, 2000, 2001 AND 2002
<TABLE>
<CAPTION>
                                                                        Accumulated
                                               Additional                  other        Unamortized        Total
                               Common stock     paid-in    Accumulated  comprehensive  value of equity  shareholders' Comprehensive
                            Shares    Amount    Capital      deficit    income(loss)   compensation        equity     income (loss)
                            ------    ------   ----------  -----------  -------------- ---------------- ------------ --------------
<S>                       <C>        <C>       <C>          <C>          <C>             <C>            <C>
Balance, June 30, 1999    6,063,870  $ 20,011  $17,726,374  $(7,022,428) $   375,845     $      -       $ 11,099,802
  Common stock, options
  and warrants issued
  for services              212,500       701   10,543,272         -            -          (1,851,893)      8,692,08

Common stock issued
  in private placement,
  net of expenses           287,500       949    3,980,726         -            -                -         3,981,675

Common stock issued upon
  exercise of warrants
  (cashless)                114,855       379         (379)        -            -                -              -

Common stock and warrants
  issued in purchase
  business combination
  (Note 3)                1,900,000     6,270   23,576,250         -            -                -        23,582,520

Common stock issued in
  conversion of TSG
  preferred stock            13,888        46      249,954         -            -                -           250,000

Marketable securities
  valuation adjustment         -         -            -            -        (471,500)            -          (471,500)  $   (471,500)

Net loss, year ended
  June 30, 2000                -         -            -     (24,326,948)        -                -       (24,326,948)   (24,326,948)
                         ----------  --------   ----------  -----------   -----------    -----------    ------------   ------------
  Total comprehensive
    loss                                                                                                               $(24,798,448)
                                                                                                                       ============

Balance, June 30, 2000    8,592,613    28,356   56,076,197  (31,349,376)     (95,655)      (1,851,893)    22,807,629
Common stock, options
  and warrants issued
  for services              575,000     1,898    2,377,302         -            -             840,393      3,219,593

Marketable securities
  valuation adjustment         -         -            -            -         (28,500)            -           (28,500)   $   (28,500)

Repurchase of warrant          -         -        (705,000)        -            -                -          (705,000)

Net loss, year ended
  June 30, 2001                -         -            -     (20,631,492)        -                -       (20,631,492)   (20,631,492)
                         ----------  --------   ----------  -----------   -----------    -----------    ------------   ------------

  Total comprehensive
    loss                                                                                                               $(20,659,992)
                                                                                                                       ============

Balance, June 30, 2001    9,167,613  $  30,254 $57,748,499 $(51,980,868)  $ (124,155)     $(1,011,500)  $  4,662,230
</TABLE>

                                      F-4
<PAGE>

                     NETWOLVES CORPORATION AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

                FOR THE YEARS ENDED JUNE 30, 2000, 2001 AND 2002

(continued)
<TABLE>
<CAPTION>
                                                                        Accumulated
                                               Additional                  other        Unamortized        Total
                               Common stock     paid-in    Accumulated  comprehensive  value of equity  shareholders' Comprehensive
                            Shares    Amount    Capital      deficit    income(loss)   compensation        equity     income (loss)
                            ------    ------   ----------  -----------  -------------- ---------------- ------------ --------------

<S>                       <C>       <C>        <C>         <C>           <C>            <C>             <C>
Balance, June 30, 2001    9,167,613 $  30,254  $57,748,499 $(51,980,868) $ (124,155)    $(1,011,500)    $  4,662,230

Common stock, options
  and warrants issued
  for services              130,000       429      466,569         -           -               -             466,998

Amortization of warrants       -         -           -             -           -          1,011,500        1,011,500

Common stock issued in
  settlement of
  employment agreements     350,000     1,155      956,345         -           -               -             957,500

Common stock issued in
  private placement,
  net of expenses of
  $310,000                2,830,000     9,339    6,005,661         -           -                -          6,015,000

Common stock issued
  upon exercise of
  warrants                  129,506       427         (427)        -           -                -               -

Marketable securities
  valuation adjustment        -          -          -              -         11,250             -             11,250    $   11,250

Net loss, year ended
  June 30, 2002               -          -          -       (11,630,610)       -                -        (11,630,610)  (11,630,610)
                         ----------  --------   ----------  -----------   -----------    -----------    ------------   ------------

  Total comprehensive
    loss                                                                                                              $(11,619,360)
                                                                                                                      =============

Balance, June 30, 2002  12,607,119  $  41,604  $65,176,647 $(63,611,478)  $(112,905)    $       -        $ 1,493,868
                        ==========  =========  =========== ============  ===========    ===========     ============

The accompanying notes to the financial statements
are an integral part of these consolidated statements.
</TABLE>

                                      F-5
<PAGE>

                     NETWOLVES CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                                                                     For the year ended June 30,
                                                                    -------------------------------------------------------
                                                                           2002               2001               2000
                                                                           ----               ----               ----
<S>                                                                <C>                  <C>                 <C>
Cash flows from operating activities
  Net loss                                                         $  (11,630,610)      $ (20,631,492)      $  (24,326,948)
   Adjustments to reconcile net loss to net cash used
      in operating activities
         Depreciation                                                     243,715             231,029               93,763
         Amortization                                                      42,390           1,190,223            2,968,786
         Realized loss on sale of marketable securities                      -                   -                  35,000
         Provision for impairment                                         100,000           3,524,911            4,016,080
         Provision for inventory obsolescence                             193,086             243,222                 -
         Loss on disposal of property and equipment                        91,723              64,435                 -
         Provision for doubtful accounts                                   38,905             141,101                4,747
         Provision for other assets                                        56,000                -                    -
         Non-cash charge to operations with respect to
             common stock, options and warrants issued for
             services                                                   2,344,998           1,974,799            8,692,080
         Minority interest                                                 (9,160)            (24,068)            (148,739)

   Changes in operating assets and liabilities
       Restricted cash                                                    (42,386)           (323,890)                -
       Accounts receivable                                                220,785            (225,519)            (176,701)
       Inventories                                                         15,021              86,484             (340,099)
           Prepaid expenses
                                                                          105,355             (83,304)             (83,443)
       Other current assets                                               165,639              14,551                7,928
       Accounts payable and accrued expenses                             (251,313)           (865,396)             978,694
       Accrued loss on disposal of discontinued operations               (123,957)             496,927                  -
       Deferred compensation                                                 -                   -                (100,000)
       Deferred revenue                                                   (83,198)            118,805               11,173
                                                                     ------------        ------------         ------------

          Net cash used in operating activities                        (8,523,007)        (14,067,182)          (8,367,679)
                                                                     ------------        ------------         ------------
   Cash flows from investing activities
       Finders fee paid in connection with acquisition of
          Norstan Network Services, Inc.                                 (350,000)              -                    -
       Deposit paid to Norstan, Inc. in connection with
          acquisition of Norstan Network Services, Inc.                  (400,000)              -                    -
       Issuance of notes receivable                                         -                   -                  (56,000)
       License fees paid                                                    -                (150,000)               -
       Patent costs paid                                                  (13,293)            (32,101)               -
       Finders fees paid in connection with acquisition of
          ComputerCOP Corp.                                                 -                   -                 (550,000)
       Appraisal fee paid in connection with acquisition of                 -                   -
          ComputerCOP Corp.                                                                                        (40,000)
       Cash acquired - ComputerCOP Corp.                                    -                   -               20,500,000
       Purchases of property and equipment                               (104,456)           (745,215)            (459,978)
       Capitalized software costs, net of funding                         (72,852)           (116,066)            (170,913)
       Return of (payments for) security deposits                          17,721             (37,423)             (31,018)
                                                                     ------------        ------------         ------------
          Net cash (used in) provided by investing
            activities                                                   (922,880)         (1,080,805)          19,192,091
                                                                     ------------        ------------         ------------
</TABLE>

                                      F-6
<PAGE>

                     NETWOLVES CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                     For the year ended June 30,
                                                                    -------------------------------------------------------
                                                                           2002               2001               2000
                                                                           ----               ----               ----
<S>                                                                <C>                  <C>                 <C>
Cash flows from financing activities
    Repayment of long-term debt                                           -                (263,555)              (43,411)
    Repayment of advances from TSG officer                                -                   -                  (144,348)
    Repurchase of warrant                                                 -                (705,000)                -
    Cash proceeds from issuance of common stock                       6,325,000               -                 4,312,500
    Financing costs paid in connection with sale of
      common stock                                                     (310,000)             -                  (330,825)
                                                                   ------------        ------------         -------------

          Net cash provided by (used in) financing
             activities                                               6,015,000            (968,555)            3,793,916
                                                                   ------------        ------------         -------------
Net (decrease) increase in cash and cash equivalents                 (3,430,887)        (16,116,542)           14,618,328

Cash and cash equivalents, beginning of year                          4,087,767          20,204,309             5,585,981
                                                                   ------------        ------------         -------------
Cash and cash equivalents, end of year                             $    658,880        $  4,087,767         $  20,204,309
                                                                   ============        ============         =============

Cash paid for interest                                             $     16,250        $     27,613         $      45,727
                                                                   ============        ============         =============
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
    FINANCING ACTIVITIES

    Noncash conversion of preferred stock to common stock
      (Note 3)                                                     $      -            $       -            $      250,000
                                                                   ============        ============         =============

    Common stock issued for services related to purchase
      of Norstan Network Services, Inc. (Note 17)                  $     91,000        $       -            $        -
                                                                   ============        ============         =============
    Software ($2,907,520) and inventory ($175,000)
       acquired through issuance of equity instruments             $      -            $       -            $    3,082,520
                                                                   ============        ============         =============

</TABLE>

The accompanying notes to the financial statements
  are an integral part of these consolidated
  statements.                                         F-7

<PAGE>

                     NETWOLVES CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1    The Company

     The  consolidated  financial  statements  include the accounts of NetWolves
     Corporation and its three subsidiaries, NetWolves Technologies Corporation,
     ComputerCOP  Corporation  and its majority owned TSG Global  Education Web,
     Inc. ("TSG") (collectively "NetWolves" or the Company").

     NetWolves, LLC was an Ohio limited liability company formed on February 13,
     1998, which was merged into Watchdog Patrols, Inc. ("Watchdog") on June 17,
     1998.  Watchdog,  the legal surviving entity of the merger was incorporated
     under the laws of the State of New York on January 5, 1970.  As a result of
     the merger and subsequent sale of Watchdog's business, Watchdog changed its
     name to NetWolves.

     NetWolves is an Internet systems  developer that has designed and developed
     multi-functional  products that are secure,  integrated,  modular  Internet
     gateways.  Its products  support secure access to the Internet for multiple
     users  through  a single  connection  and,  among  other  things,  provides
     electronic mail, firewall security and web site hosting and also contains a
     network file server.  Since inception,  the Company has been developing its
     business  plan and  building  its  infrastructure  in order to  effectively
     market its products.

     In conjunction with TSG's  acquisition of Sales and Management  Consulting,
     Inc.  (d/b/a  The  Sullivan  Group,  see  Note  3),  the  Company  provided
     consulting,  educational and training services primarily to the oil and gas
     and automotive industries throughout the United States.

     Pursuant to an agreement dated February 10, 2000, the Company  acquired all
     of   the   outstanding    capital   stock   of   ComputerCOP    Corporation
     ("ComputerCOP"),  a New  York  corporation  and a  subsidiary  of  Computer
     Concepts Corp. ("Computer Concepts"),  in exchange for 1,775,000 restricted
     shares  of the  Company's  common  stock  valued at  $23,962,500  (Note 3).
     ComputerCOP's assets included ComputerCOP  technology,  inventory and $20.5
     million  in cash.  In June  2001,  management  approved  a  formal  plan of
     disposal of its  computer  software  business  segment and such segment was
     disposed of in August 2002 (Note 4).

     On July 9, 2002, the Company  acquired all of the outstanding  common stock
     of Norstan  Network  Services,  Inc.,  a provider of  multiple  source long
     distance services to customers  located  throughout the United States (Note
     17).

2    Significant accounting policies

     Use of estimates

     In  preparing   consolidated   financial   statements  in  conformity  with
     accounting  principles generally accepted in the United States,  management
     makes estimates and assumptions  that affect the reported amounts of assets
     and liabilities and disclosures of contingent assets and liabilities at the
     date of the  consolidated  financial  statements,  as well as the  reported
     amounts of revenue and expenses during the reporting period. Actual results
     could differ from those estimates.

     Principles of consolidation

     The consolidated  financial  statements include the accounts of the Company
     and  its  subsidiaries.   All  significant  intercompany  transactions  and
     balances have been eliminated in consolidation.  The separate  ownership of
     one  of  the   Company's   subsidiaries   is  reflected  in  the  Company's
     consolidated  financial  statements  as  minority  interest  (Note 3).  The
     minority   interest   includes  common  stock   representing  1.7%  of  the
     outstanding shares of the subsidiary and preferred stock, until January 24,
     2000,  at which time the  preferred  stockholder  elected  to  convert  the
     preferred stock into shares of NetWolves common stock (Note 3).

                                     F-8
<PAGE>

                     NETWOLVES CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2    Significant accounting policies (continued)

     Prepaid expenses  Prepaid  expenses  consist  primarily of prepaid rent and
     insurance and are being  amortized  over their  respective  lives using the
     straight-line method.

     Discontinued operations

     The  consolidated  financial  statements for the years prior to fiscal 2001
     have been restated to separately report results of discontinued  operations
     from the results of  continuing  operations.  Disclosures  included  herein
     pertain to the Company's continuing operations unless otherwise noted.

     Revenue recognition

     The Company  records  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  No.  101 ("SAB  101")
     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.  Accordingly,
     revenue from the sale of hardware and perpetual and term software  licenses
     are recognized,  net of provisions for returns, at the time of delivery and
     acceptance of hardware and software products by the customer,  when the fee
     is fixed and determinable and  collectibility  is probable.  Maintenance or
     monitoring  revenue that is bundled with an initial license fee is deferred
     and recognized ratably over the maintenance or monitoring  period.  Amounts
     deferred  for  maintenance  or  monitoring  are based on the fair  value of
     equivalent maintenance or monitoring services sold separately.  The Company
     recognizes  revenue from consulting and training fees when the services are
     provided.  Shipping and  handling  costs are included in cost of revenue in
     the accompanying consolidated statements of operations.

     Marketable securities

     Marketable  securities,  which are all  classified as "available for sale",
     are valued at fair value.  Unrealized  gains or losses are  recorded net of
     income taxes as "accumulated other  comprehensive  income" in shareholders'
     equity,  whereas  realized gains and losses are recognized in the Company's
     consolidated statements of operations using the first-in, first-out method.

     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. During the year ended June 30, 2001, the Company recorded
     a writedown of inventory approximating $243,000. Additionally, raw material
     and finished goods amounted to $108,079 and $28,851,  respectively, at June
     30,  2002 and  $154,331  and  $207,325,  respectively,  at June  30,  2001.
     Included in  inventory at June 30, 2001 is $25,000,  of finished  goods and
     raw materials inventory relating to discontinued operations (Note 4).

                                      F-9
<PAGE>

                     NETWOLVES CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2    Significant accounting policies (continued)

     Property and equipment

     Property and equipment are stated at cost.  Costs  assigned to property and
     equipment of the acquired  businesses (Note 3) were based on estimated fair
     value at  acquisition.  Depreciation  is provided on furniture and fixtures
     and machinery and equipment over their estimated lives, ranging from 5 to 7
     years, using the straight-line method. Leasehold improvements are amortized
     over the lesser of the term of the respective  lease or the useful lives of
     the related  assets.  Expenditures  for maintenance and repairs are charged
     directly to the appropriate  operating  accounts at the time the expense is
     incurred.  Expenditures  determined to represent  additions and betterments
     are  capitalized and amortized over the lesser of their useful lives or the
     useful  lives of the  related  assets.  Depreciation  and  amortization  is
     included  in  general  and  administrative  expenses  in  the  accompanying
     consolidated statements of operations.

     Software costs

     Costs  associated with the  development of software  products are generally
     capitalized  once  technological  feasibility  is established in accordance
     with  Statement  of  Financial   Accounting   Standards  ("SFAS")  No.  86,
     "Accounting  for the  Costs of  Computer  Software  to be Sold,  Leased  or
     Otherwise Marketed".  Purchased software technologies are recorded at cost.
     Software  costs  associated  with  technology   development  and  purchased
     software  technologies  are  amortized  using the  greater  of the ratio of
     current  revenue  to  total   projected   revenue  for  a  product  or  the
     straight-line  method  over its  estimated  useful  life.  Amortization  of
     software costs begins when products become  available for general  customer
     release.  The  Company  recorded  approximately  $41,000,   $1,190,000  and
     $960,000 in  amortization  expense for the years ended June 30, 2002,  2001
     and 2000, respectively, relating to software costs. Costs incurred prior to
     establishment  of  technological  feasibility  are expensed as incurred and
     reflected  as  engineering  and  development   costs  in  the  accompanying
     consolidated  statements of operations.  The Company  capitalized  software
     development  costs of  approximately  $73,000,  $116,000  and  $170,000 and
     incurred approximately $1,856,000,  $1,893,000 and $802,000 in research and
     development  costs  for the  years  ended  June 30,  2002,  2001 and  2000,
     respectively.  Accumulated  amortization at June 30, 2002 was approximately
     $2,192,000.

     Impairment of long-lived assets

     In  accordance  with  Statement of Financial  Accounting  Standard No. 121,
     "Accounting for the Impairment of Long-Lived  Assets and Long-Lived  Assets
     to Be Disposed Of", the Company  reviews its long-lived  assets,  including
     software  development costs,  intangible assets and property and equipment,
     for impairment  whenever events or changes in  circumstances  indicate that
     the  carrying  amount  of the  assets  may  not be  fully  recoverable.  To
     determine  recoverability of its long-lived  assets,  the Company evaluates
     the probability that future  undiscounted net cash flows,  without interest
     charges, will be less than the carrying amount of the assets.

     Income taxes

     In  accordance  with  Statement  of Financial  Accounting  Standard No. 109
     "Accounting for Income Taxes",  the Company accounts for income taxes using
     the  liability  method  which  requires the  determination  of deferred tax
     assets and liabilities  based on the differences  between the financial and
     tax bases of assets and  liabilities  using enacted tax rates in effect for
     the year in which differences are expected to reverse. The net deferred tax
     asset is  adjusted  by a valuation  allowance,  if,  based on the weight of
     available evidence,  it is more likely than not that some portion or all of
     the net  deferred  tax asset  will not be  realized.  The  Company  and its
     subsidiaries file a consolidated Federal income tax return.

                                      F-10

<PAGE>

                     NETWOLVES CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2    Significant accounting policies (continued)

     Stock options

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

     Basic and diluted net loss per share

     The  Company  displays  loss per  share in  accordance  with  SFAS  No.128,
     "Earnings Per Share" ("SFAS 128").  SFAS 128 requires dual  presentation of
     basic and diluted earnings per share.  Basic earnings per share includes no
     dilution and is computed by dividing net income (loss)  available to common
     shareholders  by the weighted  average number of common shares  outstanding
     for the period.  The diluted  loss per share does not include the impact of
     potential  shares  to be issued  upon  exercise  of  options  and  warrants
     aggregating approximately 7,474,200, 7,135,000 and 3,057,000, for the years
     ended  June  30,  2002,  2001  and  2000,  respectively,   which  would  be
     antidilutive.

     Cash and cash equivalents

     Generally,   the  Company  considers  highly  liquid  investments  in  debt
     securities  with  original  maturities  of three  months or less to be cash
     equivalents. At June 30, 2002, approximately $366,000 of the Company's cash
     is being utilized to secure various letters of credit.

     Concentrations and fair value of financial instruments

     Financial   instruments   that   potentially   subject   the   Company   to
     concentrations  of credit risk consist  principally of cash investments and
     marketable securities. At June 30, 2002, the Company's cash investments are
     held at primarily  one financial  institution.  The fair value of financial
     instruments approximates their recorded values.

     Comprehensive income (loss)

     The  Company  presents  comprehensive  income  (loss)  in  accordance  with
     Statement   of  Financial   Accounting   Standards   No.  130,   "Reporting
     Comprehensive  Income"  ("SFAS 130").  SFAS 130  establishes  standards for
     reporting and display of comprehensive income (loss) and its components. As
     this statement pertains to disclosure information  requirements,  it has no
     impact on the  Company's  operating  results  or  financial  position.  The
     Company's  adjustment to arrive at comprehensive  income (loss) consists of
     the  marketable  securities  valuation  adjustment  and is presented in the
     accompanying   consolidated   statements   of   shareholders'   equity  and
     comprehensive income (loss).

                                      F-11
<PAGE>

                     NETWOLVES CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2    Significant accounting policies (continued)

     Summary of recent accounting pronouncements

     In June 2001, the FASB issued SFAS No. 141,  Business  Combinations  ("SFAS
     No. 141") and SFAS No. 142, Goodwill and Other Intangible Assets ("SFAS No.
     142").  SFAS No. 141  addresses  financial  accounting  and  reporting  for
     business combinations while SFAS No. 142 addresses financial accounting and
     reporting for acquired goodwill and other intangible  assets.  SFAS No. 141
     applies to all business  combinations  initiated after June 30, 2001, while
     SFAS No. 142 is  required  to be applied in fiscal  years  beginning  after
     December  15, 2001.  The adoption of SFAS No. 141 had a material  impact on
     our financial statements due to the segregation of identifiable intangibles
     separate  from  goodwill.  Identifiable  intangible  assets with other than
     indefinite lives will continue to be amortized in the financial statements,
     however,  goodwill and identifiable intangible assets with indefinite lives
     will no longer be amortized.  In connection with the acquisition  discussed
     in Note 17 to the financial  statements,  the adoption of SFAS No. 141 will
     have a material impact on our financial  statements.  Other than the impact
     on  amortization,  the  adoption  of SFAS No.  142 is not  expect to have a
     material impact on our financial statements although we will be required to
     review our intangibles  and goodwill  annually for indicators of impairment
     and this review could result in recognition of impairment losses.

     During  August  2001,  the FASB issued SFAS No.  144,  "Accounting  for the
     Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"). SFAS No. 144
     addresses financial accounting and reporting for the impairment or disposal
     of long-lived assets. SFAS No. 144 supersedes SFAS No. 121, "Accounting for
     the  Impairment  of  Long-Lived  Assets  and for  Long-Lived  Assets  to Be
     Disposed Of" ("SFAS No. 121"), and the accounting and reporting  provisions
     of Accounting  Principles  Board Opinion No. 30,  "Reporting the Results of
     Operations - Reporting  the Effects of Disposal of a Segment of a Business,
     and   Extraordinary,   Unusual  and   Infrequently   Occurring  Events  and
     Transactions"  ("APB No. 30"). SFAS No. 144 was issued because SFAS No. 121
     did not address the accounting for a segment of a business accounted for as
     a  discontinued  operation  under APB No.  30,  and two  accounting  models
     existed for long-lived assets to be disposed of. SFAS No. 144 establishes a
     single  accounting  model for long-lived  assets to be disposed of by sale.
     SFAS No. 144 retains the  requirements  of SFAS No. 121 to (a) recognize an
     impairment  loss only if the carrying  amount of a long-lived  asset is not
     recoverable from its undiscounted  cash flows and (b) measure an impairment
     loss as the  difference  between the carrying  amount and fair value of the
     asset.  SFAS No. 144 also requires that a long-lived asset to be abandoned,
     exchanged for a similar  productive  asset,  or  distributed to owners in a
     spinoff be considered  held and used until it is disposed of. Lastly,  SFAS
     No. 144 retains  the  requirement  of SFAS No. 121 to measure a  long-lived
     asset  classified  as held for sale at the lower of its carrying  amount or
     fair  value  less  cost to sell and to cease  depreciation  (amortization).
     Therefore,  discontinued  operations  are  no  longer  measured  on  a  net
     realizable   value  basis,  and  future  operating  losses  are  no  longer
     recognized  before they occur. SFAS No. 144 retains the basic provisions of
     APB No. 30 for the  presentation of  discontinued  operations in the income
     statement  but  broadens  that  presentation  to include a component  of an
     entity.  The  provisions  of SFAS  No.  144  are  effective  for  financial
     statements  issued for fiscal years  beginning after December 15, 2001, and
     interim  periods  within  those  fiscal  years,   with  early   application
     encouraged.  The  provisions  of SFAS No. 144  generally  are to be applied
     prospectively.  The Company plans to adopt SFAS No. 144  effective  July 1,
     2002, and has not yet determined the impact of adoption.

                                      F-12
<PAGE>

                     NETWOLVES CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2    Significant accounting policies (continued)

     Summary of recent accounting pronouncements (continued)

     In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
     No. 4, 44, and 64,  Amendment  of FASB  Statement  No.  13,  and  Technical
     Corrections"   ("SFAS  No.  145").   This  standard   concludes  that  debt
     extinguishments used as part of a company's risk management strategy should
     not be  classified  as an  extraordinary  item.  SFAS No. 145 also requires
     sale-  leaseback  accounting  for  certain  lease  modifications  that have
     economic effects that are similar to sale-leaseback transactions.  SFAS No.
     145 is effective for fiscal years beginning after May 15, 2002.

     In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
     With Exit or Disposal  Activities  ("SFAS No. 146").  SFAS No. 146 requires
     that a liability for a cost associated with an exit or disposal activity is
     recognized  at fair value when the  liability  is incurred and is effective
     for exit or disposal activities that are initiated after December 31, 2002.
     The Company does not expect its adoption of this standard in fiscal 2003 to
     have a significant impact on its financial statements.

     Shipping and handling costs

     Shipping and  handling  costs are included in cost of revenue - products in
     the consolidated statements of operations.

     Product warranties

     The Company  offers  warranties on the sales of certain of its products and
     records an accrual for  estimated  future  claims.  Such accruals are based
     upon historical experience and management's estimate of the level of future
     claims.

     Reclassifications

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

3    Purchase acquisitions

     ComputerCOP Corporation

     Pursuant to an agreement dated February 10, 2000, the Company  acquired all
     of the outstanding capital stock of ComputerCOP, a New York corporation and
     a subsidiary of Computer  Concepts,  in exchange for  1,775,000  restricted
     shares of the Company's  common stock valued at $23,962,500.  ComputerCOP's
     assets  included  ComputerCOP  technology,  inventory  and $20.5 million in
     cash. In connection with the transaction, the Company incurred finders fees
     of  approximately of $960,000 and issued 125,000  restricted  shares of the
     Company's  common  stock  valued at  $2,405,000  and a five year warrant to
     purchase 300,000 shares of the Company's common stock valued at $2,928,000.
     In addition,  a warrant to purchase  600,000 shares of the Company's common
     stock did not vest in  accordance  with its term and were canceled on March
     31, 2000 (Note 9). In  addition,  the Company  incurred  professional  fees
     relating to the  acquisition  aggregating  $350,000.  The fair value of the
     shares  issued  (approximately  $24.0  million)  and finders fees and other
     acquisition  costs  (approximately  $6.6  million)  have been  allocated as
     follows: cash of $20,500,000, ComputerCOP software technology of $4,217,520
     and  inventory  of  $175,000,  with a portion of the finders fees and other
     acquisition costs charged as a cost of raising capital.

                                      F-13
<PAGE>
                     NETWOLVES CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3    Purchase acquisitions (continued)

     ComputerCOP Corporation (continued)

     Additionally,  Computer Concepts  purchased 225,000 shares of the Company's
     common stock from three other officers of the Company for $4.5 million.

     All of the shares issued by the Company in connection  with the ComputerCOP
     acquisition  as well as all the  shares  sold by the  three  officers  (the
     "Trust  Shares")  were  subject to a Voting  Trust  Agreement,  wherein the
     Company's  chief  executive  officer had been granted the right to vote all
     Trust Shares for two years,  subject to earlier  termination on the sale of
     those shares based on certain parameters.

     On December 31, 2000, the Company  recorded a writedown of its  ComputerCOP
     technology  (computer  software  segment)  in  the  amount  of  $2,000,000,
     reducing the carrying  value of the asset to $202,395 at December 31, 2000.
     Additionally,  in June  2001 the  Company  recorded  an  impairment  of the
     remaining carrying value of the ComputerCOP  technology  totaling $108,982.
     These impairments are included in loss from discontinued  operations in the
     consolidated statements of operations (Note 4). The asset was determined to
     be impaired because of the inability of the software technology to generate
     future operating income without  substantial sales volume increases,  which
     are  uncertain.  Fair  value was based on  discounted  future  cash  flows.
     Accordingly, actual results could vary significantly from such estimates.

     In June 2001, management approved a formal plan of disposal of its computer
     software  business  segment  and on  August  31,  2002  the  operations  of
     ComputerCOP ceased (Note 4).

     Sales and Management Consulting, Inc.

     On July 7,  1999  (effective  June  30,  1999),  NetWolves  and  Sales  and
     Management Consulting,  Inc. (d/b/a The Sullivan Group) ("SMCI") executed a
     merger  agreement (the "Merger")  pursuant to which NetWolves  acquired the
     outstanding  capital  stock of SMCI.  Under  the terms of the  Merger,  TSG
     Global  Education  Web,  Inc.  ("TSG") (a subsidiary  of  NetWolves),  with
     4,150,000 shares of common stock outstanding prior to the Merger, purchased
     all of the  outstanding  shares  of SMCI's  common  stock in  exchange  for
     180,000 shares of NetWolves' restricted common stock. The shareholders were
     restricted  from  selling,  transferring  or  pledging  such  shares for an
     eighteen-  month period.  Upon  consummation of the Merger SMCI merged into
     TSG and TSG was the surviving entity.

     Concurrent  with the Merger,  the  shareholders  of SMCI  purchased  70,000
     shares of TSG common stock at $.35 per share for aggregate cash proceeds of
     $24,500.  This  represents  1.7% of the  outstanding  common  stock of TSG.
     Additionally,  TSG  issued  250,000  shares  of  TSG  Series  A  Non-Voting
     Cumulative   (8%)   Convertible   Preferred   Stock  to  one  of  the  SMCI
     shareholders,  which  was  issued  in  partial  settlement  of  outstanding
     liabilities owed to the former shareholder.  The preferred  stockholder was
     entitled  to  preferential  liquidation  rights  and was also  entitled  to
     cumulative  dividends  to be  included in minority  interest  expense  that
     accrued at the rate of 8% per annum commencing on June 30, 1999. On January
     24, 2000, the preferred  stockholder elected to convert the preferred stock
     into 13,888 shares of NetWolves  common stock (the fair market value at the
     time of conversion).  The TSG common and preferred stock (until  conversion
     on January  24,  2000) have been  reflected  as  minority  interest  in the
     accompanying consolidated financial statements.

                                      F-14
<PAGE>

                     NETWOLVES CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3    Purchase acquisitions (continued)

     Sales and Management Consulting, Inc. (continued)

     On June 30, 2000, the Company  recorded a writedown of its training content
     and goodwill (training and consulting  segment) relating to the acquisition
     of  SMCI  in the  amount  of  $4,016,080.  This  writedown  eliminates  all
     remaining  intangible  assets relating to the  acquisition.  The intangible
     assets  were  determined  to be impaired  because of the current  financial
     condition of TSG and TSG's  inability to generate future  operating  income
     without substantial sales volume increases which were uncertain.  Moreover,
     anticipated  future cash flows of TSG indicated that the  recoverability of
     the asset  was not  reasonably  assured.  In  November  2000,  the  Company
     commenced a lawsuit  against  certain  defendants who were officers  and/or
     directors of TSG (the  "Sullivan  Group") and against an Ohio  Corporation,
     ProCare, Inc. ("ProCare"). This lawsuit was settled in July 2002 (Note 15).

4    Disposal of business segment

     During June 2001, the Company  formally  adopted a plan to discontinue  its
     ComputerCOP  software  operations.  At that time, this operation  consisted
     primarily of ComputerCOP  software  technology,  inventory and property and
     equipment.  At June 30, 2001, the Company accrued a provision for estimated
     losses during the phase out period of  approximately  $497,000.  During the
     year  ended  June  30,  2002,  the  Company  recorded   additional  charges
     aggregating  $1,053,275,  which primarily  represented the cost of salaries
     through an  extended  disposal  date of August 31,  2002,  coupled  with an
     equity  settlement  of an  employment  contract  (Note  14)  and a  revised
     estimate of the total leased facility costs, net of a sublease. At the time
     of the decision to discontinue  this  operation,  the Company  restated its
     consolidated  financial  statements  for the years  prior to fiscal 2001 to
     separately  report results of  discontinued  operations from the results of
     continuing   operations.   A  summary  of  the  operating  results  of  the
     discontinued operations follows:

<TABLE>
<CAPTION>
                                                      For the year ended June 30,
                                              -------------------------------------------
                                              2002                2001               2000
                                              ----                ----               ----

<S>                                        <C>                 <C>              <C>
Revenue                                    $   220,267         $   102,525      $       -
Cost of revenue                                 37,970               8,356              -
Selling, general and administrative          1,135,571           2,213,295          204,446
Amortization                                      -              1,147,793          960,745
Impairment                                     100,000           2,108,982              -
                                           -----------         -----------      -----------
                                             1,053,274           5,375,901        1,165,191

Loss on disposal of discontinued
  operations                                (1,053,274)           (650,000)            -
                                           -----------         -----------      -----------

Loss from discontinued operations          $      -            $(4,725,901)     $(1,165,191)
                                           ===========         ===========      ===========
</TABLE>

     Effective   August  31,  2002,   the  Company   ceased  all  operations  of
     ComputerCOP,   terminated  all  remaining   employees  of  ComputerCOP  and
     subleased a majority of the space  previously  occupied by ComputerCOP  for
     $5,000 per month for a period of six months. The sublease also provides the
     lessee  use of certain  furniture  and  equipment  during the period of the
     lease.

                                      F-15
<PAGE>

                     NETWOLVES CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5       Marketable securities, available for sale
        The following is a summary of marketable securities, available for sale:

<TABLE>
<CAPTION>
                                                     Gross
                                  Amortized        unrealized
                                    cost              loss         Fair value
                                  ----------      -----------      -----------
        <S>                      <C>              <C>              <C>
        June 30, 2002
        Bonds                    $  195,155       $(112,905)       $  82,250
                                 ==========       =========        =========

        June 30, 2001
        Bonds                    $  195,155       $(124,155)       $  71,000
                                 ==========       =========        =========
</TABLE>

     There were no sales of  marketable  securities  during the years ended June
     30,  2002,  2001 and 2000 and the  Company  recognized  a realized  loss of
     $35,000 on the expiration of a warrant to purchase  restricted common stock
     of an  unrelated  publicly  traded  company  during the year ended June 30,
     2000.

     The maturities of the Company's  investments in debt securities at June 30,
     2002 are as follows:

<TABLE>
<CAPTION>
                                                Amortized         Fair
                                                  cost            value
                                                ---------      ----------
     <S>                                        <C>            <C>
     Due in one year or less                    $  -           $    -
     Due after one year through five years        195,155         82,250
                                                ---------      ---------
                                                $ 195,155      $  82,250
                                                =========      =========
</TABLE>

6    Property and equipment, net

     Property and equipment consist of the following:

<TABLE>
<CAPTION>
                                                                June 30,
                                                      --------------------------
                                                           2002           2001
                                                           ----           ----
<S>                                                   <C>            <C>
     Machinery and equipment                          $   755,045    $   867,832
     Furniture and fixtures                               218,497        281,484
     Leasehold improvements                               140,875        152,150
                                                        1,114,417      1,301,466
     Less: accumulated depreciation and amortization     (432,022)      (318,718)
                                                      -----------    -----------
     Property and equipment, net                      $   682,395    $   982,748
                                                      ===========    ===========
</TABLE>

                                      F-16
<PAGE>

                     NETWOLVES CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7    Accounts payable and accrued expenses

     Accounts payable and accrued expenses consist of the following:

<TABLE>
<CAPTION>
                                                                     June 30,
                                                            -------------------------
                                                                2002          2001
                                                                ----          ----
<S>                                                         <C>           <C>
     Trade accounts payable and other accrued operating
       expenses                                             $   490,311   $   777,226
     Compensated absences                                       182,671       143,206
     Commissions payable                                          1,300         2,000
     Payroll/sales taxes payable                                  1,039         4,202
                                                            -----------   -----------
                                                            $   675,321   $   926,634
                                                            ===========   ===========
</TABLE>

8    Long-term debt

     Long-term debt consists of the following:

<TABLE>
<CAPTION>
                                                                     June 30,
                                                            -------------------------
                                                                2002          2001
                                                                ----          ----
<S>                                                         <C>           <C>
     Notes payable to DVI                                   $   242,982   $   242,982
     Finders fee payable                                        120,000       120,000
                                                            -----------   -----------
                                                                362,982       362,982
     Less current maturities of long-term debt                 (362,982)     (282,982)
                                                            -----------   -----------
     Long-term debt, net of current maturities              $      -      $    80,000
                                                            ===========   ===========
</TABLE>

     The notes  payable (the "DVI  Notes") to the  Duffy-Vinet  Institute,  Inc.
     ("DVI") were assumed by the Company in connection with the Merger (Note 3).
     The DVI Notes are secured by all of the assets SMCI had  acquired  from DVI
     in 1992. These assets consisted of furniture,  fixtures and equipment (with
     a net  book  value of  $12,000)  and a  portion  of the  intangible  assets
     acquired  from SMCI  including  a library  of  master  tapes and  completed
     training  programs.  At the  time of the  Merger,  the  fair  value  of the
     liability  (totaling  $309,948) was determined by  calculating  the present
     value of the future  payments to be made using an implied  interest rate of
     11%.  At June 30,  1999,  the DVI Notes  required  66 monthly  payments  of
     $6,280, including interest.

     During  fiscal  2001,  TSG ceased  making  payments on the DVI Notes and is
     attempting  to negotiate a  restructuring  of such debt.  Accordingly,  all
     amounts due have been included in current liabilities.

     In connection with the Company's purchase of ComputerCOP  Corporation,  the
     Company incurred finder fees of $960,000,  $360,000 of which are payable at
     $10,000 per month over 36 months  commencing on March 1, 2000.  The Company
     has ceased making  payments on the debt in the current  fiscal year and has
     classified all amounts due as current liabilities.

                                      F-17
<PAGE>

                     NETWOLVES CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

9    Shareholders' equity

     Common stock issuances

     In July 2000, the Certificate of  Incorporation  of the Company was amended
     to  increase  the  authorized  shares of common  stock from  10,000,000  to
     50,000,000  shares  and  to  authorize  issuance  of  2,000,000  shares  of
     preferred stock.

     Management determined the fair value of all common stock issuances based on
     each respective issuance's quoted market price at the time of issuance.

     For the year ended June 30, 2000,  the Company issued  2,528,743  shares of
     its common stock as follows:

     --   The Company sold 287,500  shares of  unregistered  common stock during
          the  year  to  accredited   investors  at  $15  per  share   (totaling
          $4,312,500) exclusive of commissions and fees of approximately 7%.

     --   On  November  20,  1999,  12,500  shares  were  issued to a  financial
          consultant  for  services  rendered  during  the three  months  ending
          December  31,  1999,  which  resulted  in a charge  to  operations  of
          $275,000.

     --   During January 2000, its preferred  stockholder elected to convert the
          preferred stock into 13,888 shares of NetWolves  common stock (at fair
          market value at the time of conversion).

     --   Pursuant to an agreement dated February 10, 2000, the Company acquired
          all of the outstanding capital stock of ComputerCOP Corporation, a New
          York  corporation and a subsidiary of Computer  Concepts,  in exchange
          for  1,775,000  restricted  shares of the Company's  common stock.  In
          addition,   the  Company  issued  125,000  restricted  shares  of  the
          Company's  common stock as finders' fees. The fair value of the common
          stock issued to Computer  Concepts and common stock issued as finders'
          fees  is  included  in the  value  of  the  ComputerCOP  software  and
          inventory, less the cash acquired of 20.5 million.

     --   In June 2000,  the Company  issued General  Electric  Company  ("GE"),
          200,000 shares of common stock valued at $1,926,000, which is included
          in Sales and  Marketing  expenses in the  Consolidated  Statements  of
          Operations (Note 13).

     --   A total of 114,855 shares of the Company's  common stock was issued to
          outside   consultants   upon  the  exercise  of  warrants   (cashless)
          previously issued to these individuals.

                                      F-18
<PAGE>

                     NETWOLVES CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

9    Shareholders' equity (continued)

     Common stock issuances (continued)

     For the year ended June 30, 2001,  the Company issued 575,000 shares of its
     common stock as follows:

     --   In  August  2000,  150,000   unregistered  shares  were  issued  to  a
          consulting firm for services  rendered,  which resulted in a charge to
          operations  of $807,000 and is included in sales and  marketing in the
          consolidated statements of operations. One of the Company's employees,
          who  is  also  a  shareholder,  has  an  ownership  interest  in  this
          consulting firm.

     --   On May 14, 2001 and in connection with the Company entering into a one
          year agreement with its investment bankers, the Company issued 400,000
          unregistered  shares.  The fair value of the shares,  $1,156,000,  was
          amortized  over the life of the  agreement  and is included in general
          and administrative in the consolidated  statements of operations.  The
          investment  bankers  have  demand  registration  rights on the  shares
          issued 90 days after the commencement of the agreement.

     --   In June 2001, 25,000  unregistered  shares were issued to a consulting
          firm for services  rendered,  which resulted in a charge to operations
          of $89,250  and is  included  in  general  and  administrative  in the
          consolidated statements of operations.

     For the year ended June 30, 2002,  the Company issued  3,439,506  shares of
     its common stock as follows:

     --   On July 9, 2001, the Company completed a private placement with Pequot
          Partners Fund,  L.P. and Pequot  International  Fund,  Inc., two funds
          managed by Pequot Capital Management,  Inc. The Company sold 1,200,000
          shares  of  unregistered  common  stock at $2.50 per share (a total of
          $3,000,000).

     --   In July 2001, the Company  completed a private placement to accredited
          investors  for  $325,000   through  the  sale  of  130,000  shares  of
          unregistered common stock at $2.50 per share.

     --   In July 2001, and in consideration for the termination of a three year
          employment   agreement,   the  Company   issued   150,000   shares  of
          unregistered common stock to such employee, which resulted in a charge
          to fiscal 2002 operations of $487,500.

     --   In November 2001, the Company completed private placements with Credit
          Suisse Asset Management,  LLC, and Whiffletree Partners,  LP, which is
          managed by Palisade Capital Management,  LLC, whereby the Company sold
          an aggregate of 1,500,000 shares of unregistered common stock at $2.00
          per  share  (a total  of  $3,000,000)  exclusive  of  commissions  and
          professional services aggregating $310,000, $300,000 of which was paid
          to a  company  in which an  employee  of  NetWolves  has an  ownership
          interest.

     --   In November 2001, and in consideration  for the termination of a three
          year  employment  agreement,  the  Company  issued  200,000  shares of
          unregistered  common stock and a warrant to purchase 100,000 shares of
          unregistered common stock to such employee, which resulted in a charge
          to  loss  from  discontinued  operations  of  $320,000  (exclusive  of
          $150,000 which had been previously accrued).

                                      F-19
<PAGE>

                     NETWOLVES CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

9    Shareholders' equity (continued)

     Common stock issuances (continued)

     --   In January 2002, the Company  issued  100,000  shares of  unregistered
          common stock for  professional  and  consulting  services  relating to
          potential  business  acquisitions to a company in which an employee of
          NetWolves  has an  ownership  interest.  A portion of the cost of such
          issuance has been  included in other  current  assets in the condensed
          consolidated balance sheets at June 30, 2002.

     --   During  the  year the  Company  issued a total  of  30,000  shares  of
          unregistered common stock to two consultants for professional services
          which resulted in a charge to fiscal 2002 operations of $68,300.

     --   A total of 129,506 shares of the Company's common stock were issued to
          individuals upon the cashless  exercise of warrants  previously issued
          to these individuals.

     Stock option plans

     The  Company's  Stock Option Plans (the  "Plans"),  authorize  the Board of
     Directors to grant nonstatutory  stock options to employees,  directors and
     consultants to purchase up to a total of 3,532,500  shares of the Company's
     common stock. Generally,  options granted under the Plans vest ratably over
     three years. If any award under the Plans terminates,  expires unexercised,
     or is canceled,  the shares of common stock that would  otherwise have been
     issuable  pursuant  thereto will be available for issuance  pursuant to the
     grant of new awards.

<TABLE>
<CAPTION>
                                                           Approximate
                                          Maximum         net cumulative
                                         allowable          issuances         Maximum
       Plans          Date adopted       issuances        June 30, 2002    term in years
       -----          ------------       ---------       ----------------  -------------

     <S>               <C>                <C>                <C>                 <C>
     1998 Plan         June 1998          282,500            121,000             10
     2000 Plan         July 2000        1,500,000          1,394,000             10
     2001 Plan       February 2001      1,750,000            850,000             10
                                        ---------          ---------
                                        3,532,500          2,365,000
                                        =========          =========
</TABLE>

     Warrants

     For the year ended June 30, 2000, the Company granted  warrants to purchase
     its common stock as follows:

     --   On July 26, 1999 and in connection  with the Company  entering into an
          agreement with  Comdisco,  Inc.  ("Comdisco"),  Comdisco was granted a
          five-year   warrant  to  purchase  125,000  shares  of  the  Company's
          unregistered  common stock, at an exercise price of $10 per share. The
          warrant  is  immediately  exercisable.  The  value of the  warrant  of
          $2,390,000 was being  amortized over the initial term of the agreement
          (four years). In June 2001, the Company  determined that the remaining
          unamortized  value  of the  warrant  was  impaired  and,  accordingly,
          recorded a charge to operations  of  approximately  $1,245,000  during
          fiscal 2001, which is included in impairment  expense in the Company's
          consolidated statement of operations.

                                      F-20
<PAGE>

                     NETWOLVES CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

9    Shareholders' equity (continued)

     Warrants (continued)

     --   On July 31, 1999, a financial  consultant to the Company was granted a
          five-year  warrant to purchase  100,000 shares of common stock,  at an
          exercise  price  of  $12  per  share.  The  warrants  are  immediately
          exercisable  and the shares  issuable  pursuant to the  warrants  have
          piggyback registration rights. The value of the warrants of $1,704,000
          was being amortized over a period of three months.

     --   On  November  1, 1999,  the  Company  granted a  five-year  warrant to
          purchase  24,000 shares of common stock,  at an exercise  price of $18
          per share to a public  relations  firm. The warrants vest ratably over
          twelve months and resulted in a charge to operations of  approximately
          $205,000  through May 31, 2000, at which time the  remaining  unvested
          warrants  were  canceled due to  termination  of the public  relations
          firm's services.

     --   In November  1999,  a  consultant  was granted a five-year  warrant to
          purchase  60,000 shares of common stock,  at an exercise  price of $18
          per share for services provided in connection with a private placement
          of the Company's common stock.

     --   During December 1999, the Company granted 65,000 ten-year  warrants to
          the Company's  Vice  President of Finance at an exercise  price of $12
          per share. The warrants vest immediately and accordingly resulted in a
          charge to  operations of $422,500,  based upon the intrinsic  value of
          the warrants on the date of grant.

     --   In December  1999,  a  consultant  was  granted a ten-year  warrant to
          purchase  100,000 shares of common stock,  at an exercise price of $12
          per share. The warrants are immediately exercisable.  The value of the
          warrants   resulted  in  a  charge  to  operations  of   approximately
          $1,536,000 during the three months ended December 31, 1999.

     --   In connection  with the February 10, 2000  acquisition  of ComputerCOP
          Corporation,  the Company issued a warrant to purchase an aggregate of
          300,000 shares of the Company's  stock that are initially  exercisable
          at $25 per share if exercised on or before  September 30, 2002 and $30
          thereafter  until they expire on February 10, 2005.  The fair value of
          this warrant of $2,928,000 has been allocated between the value of the
          software and the cost of capital  obtained.  In addition,  the Company
          issued  another  warrant to purchase an aggregate of 600,000 shares of
          the Company's  common  stock.  This warrant did not vest in accordance
          with its terms and was canceled on March 31, 2000.

     --   On May 12, 2000, and in full settlement  with a previously  terminated
          employee,  the Company  granted a one-year  warrant to purchase 10,000
          shares of common  stock,  at an exercise  price of $15 per share.  The
          warrant is immediately exercisable.  The value of the warrant resulted
          in a charge to operations of  approximately  $14,000  during the three
          months ended June 30, 2000.

     --   In June 2000, three  consultants were granted  three-year  warrants to
          purchase  100,000,  50,000 and 7,500,  respectively,  shares of common
          stock,  at exercise  prices ranging from $15 to $17 per share.  Two of
          the warrants are immediately exercisable and one vests ratably over 18
          months.  The value of the warrants  resulted in a charge to operations
          of approximately $395,000 for the three months ended June 30, 2000.

                                      F-21
<PAGE>

                     NETWOLVES CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

9    Shareholders' equity (continued)

     Warrants (continued)

     --   On June 22, 2000 and in connection  with the Company  entering into an
          agreement  with GE, the Company  issued a warrant to purchase  500,000
          shares of common stock.  The warrant may be exercised  with respect to
          any given  shares in whole or, from time to time in part,  on or prior
          to the two-year anniversary of the date of vesting of such shares. The
          warrant  vests as follows:  GE may  exercise  the warrant to purchase,
          cumulatively,   up  to  100,000,   200,000,   350,000   and   500,000,
          respectively,  shares of the  Company's  common stock upon the Company
          receiving  orders (as defined in the  agreement) of an amount equal to
          or in excess  of, in the  aggregate,  $2, $3, $4 and $5  million.  The
          exercise price of the warrant shall be the average  (weighted by daily
          trading volume) of the reported  closing price of the Company's common
          stock over the 20  consecutive  trading day period  ending two trading
          days  prior to the date GE gives  notice to  exercise  its  conversion
          right.  GE  has  demand   registration   rights  (subject  to  certain
          limitations as defined in the agreement)  covering at least 20% of the
          shares of common stock issuable upon exercise of these warrant.

     For the year ended June 30, 2001, the Company granted  warrants to purchase
     its common stock as follows:

     --   In May 2001,  seven  consultants  were granted  warrants to purchase a
          total of 105,000  shares of common stock,  at exercise  prices ranging
          from  $4  to $5  per  share.  All  of  the  warrants  are  immediately
          exercisable and have terms ranging from 2 to 5 years. The value of the
          warrants resulted in a charge to operations of approximately  $197,000
          for the three months ended June 30, 2001,  portions of which have been
          included in general and  administrative and sales and marketing in the
          consolidated statements of operations.

     For the year ended June 30, 2002, the Company granted  warrants to purchase
     its common stock as follows:

     --   In February  2002,  a  consultant  was granted a warrant to purchase a
          total of 100,000 shares of common stock, at an exercise price of $2.94
          per share. The warrant is immediately  exercisable and has a term of 3
          years.  The value of the warrant resulted in a charge to operations of
          approximately  $128,000 during the year ended June 30, 2002, which has
          been  included  in  general  and  administrative  in the  consolidated
          statements of operations.

     The value of the  warrants  had been  calculated  using  the  Black-Scholes
     option-pricing  model with the following  assumptions:  no dividend  yield,
     expected  volatility  of 75%, 75% and 65% for fiscal  2002,  2001 and 2000,
     respectively,  risk-free  interest  rates ranging from 3.55% to 6.69%,  and
     expected life equaling the term of each respective warrant.

                                      F-22
<PAGE>

                     NETWOLVES CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

9    Shareholders' equity (continued)

     Summary of options and warrants

     The Company has adopted the  disclosure  provisions of SFAS 123 and applies
     APB  25  in  accounting  for  stock  options   granted  to  employees  and,
     accordingly,  recognizes  non-cash  compensation  charges  related  to  the
     intrinsic  value of employee stock  options.  If the Company had elected to
     recognize  compensation  expense  based  upon the fair value at the date of
     grant consistent with the methodology prescribed by SFAS 123, the effect on
     the Company's net loss and net loss per share would be as follows:

<TABLE>
<CAPTION>
                                                  For the year ended June 30,
                                        ------------------------------------------------
                                            2002             2001             2000
                                            ----             ----             ----
<S>                                     <C>              <C>              <C>
Net loss
  As reported                           $(11,630,610)    $(20,631,492)    $(24,326,948)
  Pro forma                             $(12,295,088)    $(32,903,464)    $(24,950,773)

Basic and diluted net loss per share
  As reported                           $      (0.99)    $      (2.35)    $      (3.46)
  Pro forma                             $      (1.05)    $      (3.74)    $      (3.55)
</TABLE>

     The  weighted  average  fair value per share of common  stock,  options and
     warrants  granted to employees  during the years ended June 30, 2002,  2001
     and 2000, approximated $1.38, $2.73 and $10.97, respectively, are estimated
     on the date of grant using the Black-Scholes  option-pricing model with the
     following assumptions:  no dividend yield, expected volatility ranging from
     65% to 75%,  risk-free  interest  rates  ranging  from 4.57% to 6.69%,  and
     expected lives ranging from 2 to 10 years.

     The  following  is a summary  of all of the  Company's  stock  options  and
     warrants  that were  described  in detail  above  (excluding  the TSG stock
     options):

<TABLE>
<CAPTION>
                                                                        Weighted
                                                                        average
                                               Number options and       exercise
                                                    warrants           price per
                                                                         share
                                               -------------------     ----------
<S>                                                 <C>                <C>
Outstanding at June 30, 1999                        2,115,500          $   3.13
   Granted                                          1,901,500          $  18.86
   Exercised                                         (120,500)         $   1.90
   Forfeited                                         (839,667)         $  19.68

Outstanding at June 30, 2000                        3,056,833          $   6.29
   Granted                                          4,830,250          $   4.63
   Exercised                                                -          $      -
   Forfeited                                         (752,583)         $   8.23

Outstanding at June 30, 2001                        7,134,500          $   4.96
   Granted                                            719,700          $   3.43
   Exercised                                         (129,506)         $   1.63
   Forfeited                                         (250,494)         $   5.29
                                                    ---------
Outstanding at June 30, 2002                        7,474,200          $   4.86
                                                    =========
</TABLE>

At June 30, 2002, there were approximately 1,167,500 options available for
future issuance.

                                      F-23
<PAGE>

                     NETWOLVES CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

9    Shareholders' equity (continued)

     Summary of options and warrants (continued)

     The  following  table  summarizes  information  about all of the  Company's
     options and warrants outstanding at June 30, 2002:

<TABLE>
<CAPTION>
                                        Options and warrants                Options and warrants
                                           outstanding at                      exercisable at
                                           June 30, 2002                       June 30, 2002
                                        --------------------                ---------------------
                                             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>
     $  1.63-$1.75            1,507,000         3.54        $  1.67      1,007,000        $  1.63
     $  2.94-$3.30              557,500         4.30        $  3.18        102,500        $  2.94
     $  4.00-$4.82            1,997,000         3.76        $  4.03      1,961,667        $  4.03
     $  5.00-$5.25            2,327,200         3.13        $  5.10      2,277,333        $  5.10
     $  6.00-$9.50              244,500         2.58        $  7.14        134,833        $  8.03
     $10.00-$13.00              623,500         4.07        $ 10.94        611,167        $ 10.92
     $15.00-$18.00              217,500         1.86        $ 16.42        217,500        $ 16.42
                              ---------                                  ---------
                              7,474,200                                  6,312,000
                              =========                                  =========
</TABLE>

     Options exercisable as of June 30, 2001 and June 30, 2000 was 6,345,832 and
     2,297,000, respectively.

     All employee based stock compensation awards issued for the year ended June
     30, 2002 had no intrinsic value and, accordingly,  resulted in no charge to
     operations in such period.

10   Segment information

     The  Company  reports  segments in  accordance  with  Financial  Accounting
     Standards  Board  Statement  No.  131  "Disclosures  about  Segments  of an
     Enterprise and Related  Information".  As of June 30, 2002, the Company and
     its subsidiaries operate in two separate business segments,  the Technology
     segment and the Training and Consulting  segment.  These operating segments
     are representative of the Company's  management  approach to its evaluation
     of its  operations.  The accounting  policies of the  reportable  operating
     segments  are the same as those  described  in the  summary of  significant
     accounting policies. The Technology segment,  which operates worldwide,  is
     primarily  engaged in the  design,  development,  marketing  and support of
     information  delivery  hardware  products  and  software.  The Training and
     Consulting  segment,  which  operates  domestically,  provides  management,
     consulting,  educational and training services primarily to the oil and gas
     and automotive industries throughout the United States.

                                      F-24
<PAGE>

                     NETWOLVES CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10   Segment Information (contined)

<TABLE>
<CAPTION>
                                                For the year ended June 30,
                                       -------------------------------------------
                                            2002            2001           2000
                                            ----            ----           ----
     <S>                               <C>              <C>             <C>
     Revenue
       Technology                      $    404,498     $    487,588    $    132,825
       Training and consulting              334,250          937,550       1,290,865
                                       ------------     ------------    ------------
         Total                         $    738,748     $  1,425,138    $  1,423,690
                                       ============     ============    ============
     Operating loss
       Technology                      $(10,127,644)    $(14,460,314)   $(14,786,837)

     Training and consulting               (538,428)      (1,441,735)     (9,029,678)
                                       ------------     ------------    ------------
       Total                           $(10,666,072)    $(15,902,049)   $(23,816,515)
                                       ============     ============    ============
</TABLE>

<TABLE>
<CAPTION>
                                                                       June 30,
                                                                -----------------------
                                                                2002               2001
                                                                ----               ----
     <S>                                                    <C>                <C>
     Identifiable assets
       Technology                                           $ 3,114,692        $ 6,413,782
       Training and consulting                                   45,143            241,369
                                                            -----------        -----------
                                                              3,159,835          6,655,151
       Net assets of discontinued operations                     64,619            205,293
                                                           ------------        -----------
       Total                                               $  3,224,454        $ 6,860,444
                                                           ============        ===========

       Net revenue by geographic area follows:

</TABLE>

<TABLE>
<CAPTION>
                                                For the year ended June 30,
                                       -------------------------------------------
                                            2002            2001           2000
                                            ----            ----           ----
     <S>                               <C>              <C>              <C>
     Revenue
       United States                   $    686,882     $  1,115,838     $  1,423,690
       Foreign                               51,866          309,300             -
                                       ------------     ------------     ------------
         Total                         $    738,748     $  1,425,138     $  1,423,690
                                       ============     ============     ============
</TABLE>

     The  Company  incurred  interest  expense  of  $16,250  and  $21,321 in the
     Technology and the Training and Consulting  segments,  respectively for the
     year ended June 30, 2002.  Additionally,  the Company incurred depreciation
     expense of  $198,971  and $7,319 in the  Technology  and the  Training  and
     Consulting segments, respectively, for the year ended June 30, 2002.

     The  Company  had one  major  customer  in the  Technology  segment,  which
     accounted for 34% of consolidated  revenue for the year ended June 30, 2002
     and four customers, one in the Technology segment and three in the Training
     and  Consulting  segment  that  accounted  for  29%,  10%,  13%  and 21% of
     consolidated  accounts  receivable  at June 30,  2002.  The Company had two
     major customers,  one in the Technology segment and one in the Training and
     Consulting  segment,  which  accounted  for 21% and 35%,  respectively,  of
     consolidated  revenue  for the year ended June 30,  2001 and two  customers
     that accounted for 56% and 12% of consolidated  accounts receivable at June
     30,  2001.  The  Company  had two major  customers,  both  included  in the
     Training  and  Consulting  segment,  which  accounted  for  46%  and 24% of
     consolidated  revenue for the year ended June 30, 2000.

                                      F-25
<PAGE>

                     NETWOLVES CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

11   Income taxes

     The  provision for income taxes consists of the following:

<TABLE>
<CAPTION>

                                           For the year ended June 30,
                                           2002        2001        2000
                                           ----        ----        ----

<S>                                     <C>         <C>         <C>
     Current - Federal and States       $    -      $    -      $ (25,000)
     Deferred - Federal                      -           -           -
     Deferred - States                       -           -           -
                                        ----------  ----------  ----------
     Provision for income taxes         $    -      $    -      $ (25,000)
                                        ==========  ==========  ==========
</TABLE>

     The following  table  summarizes the  significant  differences  between the
     Federal  statutory  tax  rate  and the  Company's  effective  tax  rate for
     financial reporting purposes:

<TABLE>
<CAPTION>
                                              For the year ended June 30,
                                              2002        2001        2000
                                              ----        ----        ----
<S>                                        <C>         <C>         <C>
     Federal statutory tax rate            (34.0)%     (34.0)%     (34.0)%
     State and local taxes net of Federal
     Tax effect                             (6.0)       (6.0)       (6.0)
     Stock and option compensation            .4          .8         9.2
     Other items                               -         (.1)          -
     Loss on disposal                          -         1.1           -
     Depreciation & amortization               -          .5           -
     Effect of graduated tax rates             -           -           -
     Impairment                                -         5.8         5.7
     Permanent differences                    .2          .2          .1
     Valuation allowance on deferred tax
     Asset                                  39.4        31.7        25.1
                                           ------      ------      ------
     Effective tax rate                      0.0%        0.0%        0.1%
                                           ======      ======      ======
</TABLE>

     The tax effects of temporary  differences and carryforwards  that give rise
     to deferred tax assets or liabilities are summarized as follows:

<TABLE>
<CAPTION>
                                                                 June 30,
                                                    ---------------------------------
                                                        2002                 2001
                                                        ----                 ----
    <S>                                              <C>               <C>
     Non deductible reserves and other               $    216,000      $     266,000
     Loss on disposal of discontinued operations          148,000            260,000
     Net operating loss carryforward                   16,246,000         11,465,000
     Intangible assets                                  2,407,000          2,758,000
     Valuation allowance on net deferred tax asset    (19,017,000)       (14,749,000)
                                                     ------------      -------------
        Deferred tax asset, net                      $          -      $           -
                                                     ============      =============
</TABLE>

                                      F-26
<PAGE>

                     NETWOLVES CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

11   Income taxes (continued)

     Due to the history of net  operating  losses for income tax  purposes,  the
     Company has provided for full valuation  allowances on the net deferred tax
     asset due to it being more likely than not that the deferred tax asset will
     not be utilized.

     At June 30, 2002, the Company has net tax operating loss  carryforwards  of
     approximately  $40.6  million.  A  portion  or all of these  losses  may be
     subject to Section  382 of the  Internal  Revenue  Code and  therefore  not
     available to offset future income tax liabilities.  The carryforward losses
     expire in the years 2012 through 2022 and have not been  recognized  in the
     accompanying  consolidated  financial statements as a result of a valuation
     allowance against the deferred tax asset.

12   Related party transactions

     In  connection  with the Merger,  the Company had assumed  obligations  and
     entered into  commitments with one of the Company's  shareholders,  who was
     also a director and treasurer of TSG, as follows:

     --   Deferred  compensation  payable aggregating $100,000 at June 30, 1999,
          represented  unpaid  salary to the TSG officer for  services  rendered
          prior to the  Merger.  The  deferred  compensation  was payable in six
          monthly installments of $16,667 commencing in October 31, 1999.

     --   TSG leased its office facilities from the TSG officer for annual lease
          payments of  approximately  $75,000  (exclusive  of sales tax) through
          December 2004, which  approximates fair market value. The Company paid
          approximately  $53,000 and $79,000 in  connection  with this lease for
          the years ended June 30, 2001 and 2000, respectively.

     --   The loans and advances  from the TSG officer of $144,348  were payable
          in four equal monthly  installments of $37,203 (including  interest at
          8%) commencing on July 1, 1999.

     In addition,  in July 1999, another shareholder,  who was the President and
     Chief  Executive  Officer of TSG,  borrowed  $50,000 from the Company at an
     interest rate of 6% per annum.  Interest on the loan was payable  quarterly
     and the entire  principal  balance was payable  upon the third  anniversary
     date of issuance. In connection with the settlement of the TSG lawsuit, the
     note was forgiven (Note 15).

     In August  2000,  150,000  unregistered  shares were issued to a consulting
     firm for services rendered (Note 9). One of the Company's employees, who is
     also a shareholder,  has an ownership  interest in this consulting firm. In
     December 2000, the Company  reduced the exercise price of 300,000  warrants
     previously issued to this consulting firm to $5 per share and shortened the
     remaining term of the warrant to three years, which resulted in a charge to
     operations  of $468,000  that is  included  in general  and  administrative
     expenses.  The market  price of the  Company's  common stock at the time of
     this reduction was $4.188 per share.

     In July 2001,  the  Company  paid  $300,000  for  marketing  services  to a
     consulting  firm in which one of the  Company's  employees has an ownership
     interest.   This  amount  is  included  in  sales  and   marketing  in  the
     consolidated statements of operations for the year ended June 30, 2001.

                                      F-27
<PAGE>

                     NETWOLVES CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

13   Major customers/significant agreements

     General Electric Company

     On June 29, 2000,  NetWolves and General  Electric  Company ("GE") signed a
     contract  for  the  master  purchase,   license  and  support  services  of
     NetWolves' security, remote monitoring and configuration management system.
     GE is using the Company's products for  interconnectivity  of its worldwide
     offices.

     The  contract  is for a term of six  years  and can be  extended  for  four
     additional  one-year periods unless prior notice of non-renewal is given by
     either party as defined in the  agreement.  The  contract  provides for the
     Company to receive a fee upon  shipment  of each  unit,  and an  additional
     one-time configuration and installation fee. Additionally, upon shipment of
     each unit,  GE has the right to purchase from the Company  support  service
     and annual  monitoring and  management  service on an annual basis ("Annual
     Services").  The Annual Services shall continue at the same rate per annum,
     at GE's  discretion,  provided  that GE requests  such services at any time
     during a subsequent year. GE is required to pay fees for Annual Services in
     full  from  the  expiration  date of the  prior  year  period  and  revenue
     generated from the Annual Services is recognized over the service period.

     On June 22,  2000 and in  connection  with the  Company  entering  into the
     agreement with GE, the Company issued a warrant to purchase  500,000 shares
     of common stock (Note 9).

     In June 2000, the Company issued 200,000 shares of common stock to GE (Note
     9).

     Amoco Oil Company

     On December 1, 1999, the Company  entered into a three-year  agreement (the
     "Management  Agreement")  with Amoco Oil  Company  ("Amoco"),  whereby  the
     Company  was  granted the  exclusive  right to service and support  certain
     franchised  automotive  maintenance  and repair  businesses  located within
     Minnesota. For the years ended June 30, 2001 and 2000, the Company recorded
     management  fee revenue  from the  Management  Agreement  of  approximately
     $500,000 and $650,000, respectively.

     Effective  December  31,  2000,  Amoco  terminated  the  contract  with the
     Company.

     Anicom, Inc.

     In January  1999,  the Company  entered into a five-year  exclusive  master
     distribution  agreement  with Anicom,  Inc.  ("Anicom") to  distribute  its
     internet  connectivity  devices  throughout  North  America.  Additionally,
     Anicom was entitled to receive a  commission  on any sales or leases of the
     units made  directly by the Company that Anicom was not involved with and a
     commission on certain technical  support revenue earned by the Company.  In
     accordance   with  the  terms  of  the  agreement,   the  Company   shipped
     approximately   $1,700,000  of  product  to  Anicom,  which  accounted  for
     approximately  95% of the  Company's  revenue  for the year  ended June 30,
     1999.

     For cash consideration paid to the Company of $300,000,  the Company issued
     Anicom  300,000  warrants  to  purchase  common  stock of the Company at an
     exercise  price of $5 per share.  The warrants  issued to Anicom would have
     vested in equal  installments  over three  years,  commencing  on the first
     anniversary of the agreement and would have expired in January 2004. Anicom
     also obtained  piggyback  registration  rights with respect to the issuable
     shares of common stock.

     On April  10,  2000,  the  Company  exercised  its right to  terminate  its
     exclusive distributorship agreement with Anicom pursuant to its terms.

                                      F-28
<PAGE>

14   Commitments and contingencies

     Leases

     The  Company has  entered  into  several  leases for office  space,  office
     equipment and vehicles.  At June 30, 2002, the  approximate  future minimum
     annual lease payments, are summarized as follows:

<TABLE>
<CAPTION>

     Fiscal year ending June 30,

        <S>                              <C>
        2003                             $  607,000
        2004                                604,000
        2005                                608,000
        2006                                270,000
                                         ----------
                                         $2,089,000
                                         ==========
</TABLE>

     The above  future  minimum  annual  lease  payments  include  approximately
     $307,000 in payments for discontinued operations.

     Total rent expense (excluding discontinued  operations) for the years ended
     June  30,  2002,  2001  and  2000 was  $590,508,  $576,914,  and  $394,184,
     respectively.

     Employment agreements

     In  connection  with the  Merger  (Note 3),  TSG  entered  into  employment
     agreements  with 5 executives who were the principals of SMCI.  Each of the
     agreements  were  substantially  identical  and provided for the  following
     significant terms:

     --   employment terms of three years with automatic renewals for additional
          one-year  terms  unless  terminated  by either party  through  written
          notice,

     --   annual salaries of $150,000 for two individuals and $100,000 for three
          individuals adjusted annually for cost of living increases,

     --   two of the executives were to receive 5% of pre-tax profits of TSG (up
          to a maximum of 100% of each  employee's base salary) and three of the
          executives  were to receive  1.67% of pre-tax  profits of TSG (up to a
          maximum of 50% of each employee's base salary),

     --   an  aggregate of 605,000  incentive  TSG stock  options  issued to the
          employees (Note 3),

     --   an  aggregate of 175,000  contingently  issuable  incentive  TSG stock
          options to the employees (Note 3),

     --   if within  eighteen  months of the Merger,  TSG had not  initiated  an
          initial  public  offering  or  acquired a  publicly  held  shell,  two
          executives  were to receive  10% of pre- tax  profits of TSG up to $10
          million  and 5% of pre-tax  profits in excess of $10  million,  not to
          exceed, in the aggregate, $1.5 million in compensation in any year.

     In November  2000,  the Company  ceased  payments  under the TSG employment
     agreements in connection  with  litigation  with The Sullivan Group and all
     agreements  were  cancelled as part of the  settlement  of such  litigation
     (Note 15).

                                      F-29
<PAGE>

                     NETWOLVES CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

14   Commitments and contingencies (continued)

     Employment agreements (continued)

     In August 2000 the Company  entered into  employment  agreements  with four
     employees with the following terms:

     --   One of the  agreements was for a period of three years and granted the
          employee  warrants to purchase  250,000  shares of common stock of the
          Company at a purchase  price of $5.25 per share,  subject to a vesting
          schedule as specified in such agreement. This agreement was terminated
          in July 2001 (Note 9).

     --   Another  agreement  is for a  thirty-month  period and  provides for a
          monthly salary of $12,000,  plus  reimbursement of certain expenses of
          $3,000 per month. In addition,  the agreement also grants the employee
          warrants to purchase  350,000 shares of common stock of the Company at
          a purchase price of $5.25 per share,  subject to a vesting schedule as
          specified in such agreement.  In July 2000 and before  commencement of
          employment,  this  individual  received  $250,000 in  consulting  fees
          relating to the Company's agreement with General Electric Company.

     --   Another  agreement  is for a period  of three  years  and  grants  the
          employee/stockholder,  who is affiliated  with a law firm who provided
          legal services to the Company,  warrants to purchase 275,000 shares of
          common  stock of the Company at a purchase  price of $5.125 per share,
          subject to a vesting schedule as specified in such agreement;

     --   The last  agreement  was for a period of three years and  provided for
          monthly  compensation  of $20,000,  and the agreement also granted the
          employee  warrants to purchase  200,000  shares of common stock of the
          Company at a purchase  price of $5.25 per share,  subject to a vesting
          schedule as specified in such agreement. This agreement was terminated
          in November 2001 (Note 4).

     Effective October 2000, the Company has entered into 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.

     --   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.

     --   The  agreement  with the Vice  President  of  Finance is for a term of
          three years,  subject to two  additional  one-year  extensions,  at an
          annual salary of $150,000.

     Benefit plans

     The Company has established a 401(k) defined  contribution plan.  Employees
     21 years or older  with at least six  months of  service  are  eligible  to
     participate  in the  plan.  Participants  may  elect  to  contribute,  on a
     tax-deferred basis, up to 15% of their compensation, not to exceed $11,000,
     in 2002.  The Company did not make any  contributions  to the plan in 2002,
     2001 and 2000.

                                      F-30
<PAGE>

                     NETWOLVES CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

14   Commitments and contingencies (continued)

     Benefit plans (continued)

     As of a result of the Merger,  TSG had assumed the  obligations of a 401(k)
     defined  contribution plan that provided  retirement  benefits to qualified
     TSG employees.  Company  contributions to the plan were  discretionary.  In
     addition,  employees had the option of deferring and contributing a portion
     of their annual  compensation to the plan in accordance with the provisions
     of the plan.  Pension expense was  approximately  $7,000 and $2,000 for the
     years  ended  June 30,  2001 and 2000,  respectively.  There was no pension
     expense for the year ended June 30, 2002.

15   Legal matters

     Anicom Inc.

     On April 19, 2000, Anicom,  Inc. commenced an action against the Company in
     the U.S. District Court for the Northern  District of Illinois.  The action
     was based upon NetWolves' alleged failure to deliver  approximately  74,842
     shares  of its  common  stock to  Anicom,  upon  exercise  by Anicom of the
     Company's warrants.  The action sought specific  performance as well as any
     damages  that may have  resulted  from a  diminution  in value of NetWolves
     common stock.

     On November 16, 2000, and in connection  with the  litigation,  the Company
     and Anicom reached a settlement  (the  "Settlement  Agreement").  Under the
     Settlement  Agreement  the  allegations  for  the  breach  of  the  warrant
     agreement  by the  Company  and  unasserted  claims  for the  breach of the
     distribution  agreement by Anicom and the Company were settled. The Company
     paid  $1,150,000  to Anicom  pursuant to the  Settlement  Agreement,  which
     included the repurchase of all unvested warrants. As of September 30, 2000,
     the Company reduced  additional  paid-in capital in the amount of $705,000,
     representing  the fair value of the warrants,  calculated  using the Black-
     Scholes option pricing model with the following assumptions: dividend yield
     of none,  expected  volatility of 65%, risk free interest rate of 5.85% and
     an expected term of 3.17 years - the remaining  life to the maturity  date.
     The remaining  portion of the  settlement,  in the amount of $445,000,  has
     been  charged to  operations  and  included in general  and  administrative
     expenses for the year ended June 30, 2001.

     The Sullivan Group

     On or about November 22, 2000 the Company  commenced a lawsuit ("Action 1")
     in the United States  District Court for the Southern  District of New York
     against certain  defendants who were officers and/or  directors of TSG (the
     "Sullivan   Group")  and  against  an  Ohio  Corporation,   ProCare,   Inc.
     ("ProCare").  In response to Action 1, on or about  December 19, 2000,  the
     Sullivan  Group  commenced  a lawsuit  ("Action  2") in the  United  States
     District  Court for the  Southern  District of New York against the Company
     and other defendants. The Company claimed that it was induced to enter into
     the merger  agreement  and  consummate  the merger  transaction  based upon
     fraudulent  misrepresentations  and the purposeful  concealment of material
     information  by the  Sullivan  Group.  The Sullivan  Group was  contending,
     correspondingly,  that it was the  Company  and  certain of the current and
     former  officers and directors who induced the Sullivan Group to enter into
     the  merger  agreement  by  making  false or  negligent  misrepresentations
     regarding the Company's  principal  product.  Service  revenue from the TSG
     subsidiary  has been,  and will continue to be  substantially  reduced as a
     result of the reduction in its operations.

     The Sullivan  Group and ProCare moved to dismiss  Action 1 based upon their
     contention that the Court lacked subject matter  jurisdiction to adjudicate
     the  controversy.  Correspondingly,  NetWolves and TSG moved in Action 2 to
     dismiss the claims of the Sullivan Group against them therein on the ground
     that the Federal  Rules of Civil  Procedure  compel the  Sullivan  Group to
     interpose such claims,  if at all, as  counterclaims  in Action 1.

                                      F-31
<PAGE>

                     NETWOLVES CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

15   Legal matters (continued)

     The  Sullivan  Group  (continued)

     Subsequently,  the Sullivan Group (as the Plaintiffs in Action 2) sought an
     Order  compelling  the Company to issue an opinion  that shares  previously
     issued to the Sullivan Group (the "Shares") are freely saleable without any
     restrictions  or  limitations  under Rule 144.  The  Company  opposed  this
     application on the ground that independent of the aggregation or "acting in
     concert"   limitation  under  Rule  144  which  the  Company  contends  was
     applicable, the return of the Shares was an element of the relief sought by
     the Company in Action 1.

     In a decision dated May 8, 2001,  which  addressed all three  motions,  the
     Court granted the Sullivan  Group's  motion to dismiss  Action No. 1 on the
     ground that full  diversity of  citizenship  between the plaintiffs and the
     defendants did not exist, and, therefore, as a procedural matter, the Court
     lacked  subject  matter  jurisdiction.  As a  consequence,  in  addition to
     denying the material  allegations  of the Sullivan  Group's  complaint  and
     setting  forth  several  affirmative  defenses  to the 10b-5  claim and the
     claims for fraud, negligent  misrepresentation and breach of the Employment
     Agreements,  the Company and TSG had then  reasserted as  counterclaims  in
     their  answer in Action  No. 2, all of the claims  which they had  asserted
     against the Sullivan  Group and ProCare (as an additional  defendant on the
     counterclaims)  in their complaint in Action No. 1 plus an additional claim
     against  the   Sullivan   Group  for  breach  of  certain  of  the  express
     representations  and  warranties  in the  Merger  Agreement.  Based  on the
     foregoing,  the Company and TSG were seeking compensatory damages in excess
     of $5 million,  punitive damages in the amount of $5 million and injunctive
     and other  ancillary  relief.  Based upon the allegations in its complaint,
     the Sullivan  Group was seeking $8 million in  compensatory  damages and $8
     million in punitive  damages.  Although the Court did enjoin the Company to
     have its counsel issue an opinion letter under Rule 144, the Sullivan Group
     nevertheless  were  restricted to selling as a group during the  prescribed
     temporal  periods only that limited  number of shares  permitted  under the
     aggregation  proscriptions of Rule 144(e).  The Court further mandated that
     as a condition of granting such preliminary injunctive relief, the Sullivan
     Group was  compelled  to deposit all of the  proceeds of such sales into an
     escrow.

     In July 2002, this action including all of the counterclaims was settled in
     all respects pursuant to a settlement  agreement which provided essentially
     for the  exchange of releases  among the parties and the  reimbursement  to
     David Sullivan of $50,000 in respect of prior unpaid  expenses  incurred by
     him on behalf of the Sullivan Group.

     Security guard business

     Certain  claims,  suits and  complaints  arising in the normal  course with
     respect  to  the  Company's  former   uniformed   security  guard  services
     operations have been filed or are pending  against the Company.  Generally,
     these  matters are covered by the  Company's  general  liability  insurance
     policy. In the opinion of management, all such matters are without merit or
     are of such kind, or involve such matters,  as would not have a significant
     effect on the  financial  position or results of operations of the Company,
     if disposed of unfavorably.

                                      F-32
<PAGE>

                     NETWOLVES CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

16   Management's plan

     Historically,  the Company's  source of liquidity has been equity financing
     which is used to fund losses from operating activities.  NetWolves had cash
     and cash  equivalents  of  approximately  $657,000  at June 30, 2002 and an
     additional  $4 million was received  subsequent to June 30, 2002 (Note 17).
     In order for the  Company to execute its  business  plan,  additional  cash
     outflows are necessary  for, among other things,  continued  development of
     technology, conducting customer pilot programs and increased sales efforts.
     To the extent  necessary,  the  Company  intends to  utilize  the  expected
     operating profits of the recently  acquired Norstan Network Services,  Inc.
     and raise additional  monies from the sale of its capital stock to meet its
     funding  needs  over the next 12 to 24  months,  however,  there  can be no
     assurance  that the  Company  will have  sufficient  capital to finance its
     operations.  If the Company is unable to raise  additional  monies from the
     sale  of its  capital  stock,  or  there  is a  reduction  in the  expected
     operating  profits of  Norstan  Network  Services,  Inc.,  management  will
     institute  cost  saving  measures  intended  to  significantly  reduce  its
     overhead expenses and curtail the operations of certain business  segments.
     However,  even if the Company does raise sufficient  operating  capital and
     Norstan Network Services,  Inc.  continues to generate  operating  profits,
     there can be no  assurances  that the net proceeds  will be  sufficient  to
     enable it to develop its business to a level where it will generate profits
     and cash flows from operations. These matters raise substantial doubt about
     the  Company's  ability  to  continue  as a  going  concern.  However,  the
     accompanying  consolidated  financial  statements  have been  prepared on a
     going concern  basis,  which  contemplates  the  realization  of assets and
     satisfaction of liabilities in the normal course of business. The financial
     statements do not include any adjustments relating to the recoverability of
     the recorded assets or the  classification of the liabilities that might be
     necessary should the Company be unable to continue as a going concern.

17   Subsequent events

     Acquisition of Norstan Network Services, Inc.

     On  July 9,  2002,  the  Company,  through  its  wholly  owned  subsidiary,
     NetWolves Acquisitions, Inc., acquired all of the outstanding capital stock
     of Norstan Network  Services,  Inc.  ("NNSI")  pursuant to a Stock Purchase
     Agreement  dated as of January 30, 2002, as amended,  among  Norstan,  Inc.
     ("Seller") and NNSI, both Minnesota corporations, the Company and NetWolves
     Acquisitions,  Inc., a Delaware corporation. The Company paid to the Seller
     $7,500,000, $3,750,000 of which was paid in cash on or prior to closing and
     $3,750,000 is payable under the term of a non-interest  bearing  promissory
     note due July 9, 2003.  The purchase  price was  determined  through  arms'
     length  negotiations.  The  $3,750,000  in cash paid by the  Company to the
     Seller was primarily obtained through equity and debt financing (see below)
     and to a lesser  extent from working  capital.  The total  purchase  price,
     including acquisition costs, is summarized as follows:

<TABLE>

<S>                                                           <C>
     Cash paid to Norstan, Inc., on or prior to closing       $  3,750,000
     Promissory note payable*                                    3,479,850
     Finders fee                                                   350,000
     Professional fees                                             218,500
                                                              ------------
                                                              $  7,798,350
                                                              ============

*The non-interest bearing promissory note payable with a face value of
$3,750,000 was discounted using a rate of 7.5% and is due on July 9, 2003.
</TABLE>

                                      F-33
<PAGE>

                     NETWOLVES CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

17   Subsequent events (continued)

     Acquisition of Norstan Network Services, Inc. (continued)

     NNSI provides multiple source long distance services and related consulting
     and professional  services throughout the United States. As a result of the
     acquisition, the Company expects to increase its security solution revenues
     by leveraging  NNSI's  existing  customer  base.  In addition,  the Company
     expects the  acquisition  will enable it to expand the range of services it
     can offer its major  customer as well as future  customers.  The results of
     NNSI's operations will be included in our consolidated financial statements
     commencing July 9, 2002.

     The following table summarizes the preliminary estimated fair values of the
     assets  acquired and  liabilities  assumed at the July 9, 2002  acquisition
     date.  The fair  value  of  intangibles  was  obtained  from a third  party
     appraisal,  the  cost of which  is  included  in the  purchase  price.  The
     determination   of  the  fair  value  of  assets  and  liabilities  at  the
     acquisition date as well as the  identification  of other intangible assets
     is continuing and may be subject to change.

<TABLE>
<CAPTION>

<S>                                                       <C>
Current assets                                            $  2,860,923
Equipment                                                       56,300
Intangible assets not subject to amortization - licenses       203,000
Intangible assets subject to amortization
   (estimated 5 year useful life)                            3,376,000
Goodwill                                                     3,574,219
                                                          ------------
Total assets acquired                                       10,070,442
                                                          ------------
Current liabilities                                         (2,272,092)
                                                          ------------
Total liabilities assumed                                   (2,272,092)
                                                          ------------
Net assets acquired                                       $  7,798,350
                                                          ============

</TABLE>

     As summary  of the fair  value of  acquired  intangible  assets  subject to
     amortization,  as determined by a third party  appraisal,  as well as their
     respective estimated useful lives, is as follows:

<TABLE>
<CAPTION>
                                         Estimated
                                         Useful Life        Fair Value
                                         -----------        ----------
<S>                                        <C>             <C>
Customer base                              5 Years         $ 2,436,000
Computer billing software                  5 Years             940,000
                                                           -----------
Total intangible assets                                    $ 3,376,000
                                                           ===========
</TABLE>

     All of the  goodwill  arising  from  this  acquisition  is  expected  to be
     deductible for income tax purposes over a period of 15 years.

                                      F-34
<PAGE>

                     NETWOLVES CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

17   Subsequent events (continued)

     Post year end financing

     On July 16, 2002 the Company amended its Certificate of  Incorporation,  as
     authorized by its Board of Directors,  by designating  1,000,000  shares of
     its 2,000,000  shares of preferred stock as Series A Convertible  Preferred
     Stock, par value $.0033 per share ("Series A Preferred Stock").

     Cumulative  dividends on the Series A Preferred Stock will accrue at a rate
     of 8% per annum from the date of issuance  and will be payable  annually in
     additional shares of the Series A Preferred Stock. Each share of the Series
     A Preferred  Stock will be convertible  at the time of the holders'  option
     into 10 shares of the common stock (an exercise  price of $1.50 per share).
     Holders of Series A  Preferred  Stock will have  voting  rights on an as if
     converted  basis  and  will  vote as a single  class  with  holders  of the
     Company's common stock.

     Through  August 15,  2002,  the  Company has issued  219,833  shares of its
     Series A Preferred Stock for a total cash consideration of $3,297,500.  The
     shares were issued in connection  with a private  offering of the Company's
     securities  pursuant  to  which  shareholders  also  received  warrants  to
     purchase shares of the Company's  common stock at an initial exercise price
     equal to $1.65 per  share.  Five  warrants  were  issued  for each share of
     Series A Preferred Stock  (one-half  warrant for each share of common stock
     issuable upon conversion of the Series A Preferred Stock). The warrants are
     exercisable  for five years from the issuance  date and are callable by the
     Company if the closing price of the  Company's  common stock is at or above
     three times the exercise price for 30 consecutive trading days.

     Approximately  $3,000,000  of the  proceeds  from the sale of the  Series A
     Preferred Stock was utilized to purchase the  outstanding  capital stock of
     Norstan Network Services, Inc. in July 2002. The Company is seeking to sell
     additional  shares of its Series A Preferred  Stock,  the proceeds of which
     are intended to be used for working capital.

     On July 10, 2002, the Company received  advances from certain  individuals,
     some of  whom  are  officers  and  directors  of the  Company,  aggregating
     $600,000,  of which,  $100,000 was  subsequently  repaid.  The advances are
     non-interest bearing, due on demand and have no scheduled repayment terms.

     Stock option plan

     In June 2002, the Company's  Board of Directors  authorized the creation of
     the 2002 stock option plan (the "2002 Plan") to grant  non-qualified  stock
     options to employees,  directors and  consultants to purchase up to a total
     of 3,000,000  shares of the Company's  common stock. If any award under the
     Plans terminates, expires unexercised, or is canceled, the shares of common
     stock that would  otherwise  have been  issuable  pursuant  thereto will be
     available for issuance pursuant to the grant of new awards. As of September
     30, 2002, no options had been issued under this plan.

                                      F-35
<PAGE>

To the Board of Directors and
   Shareholders of
NetWolves Corporation

                          INDEPENDENT AUDITORS' REPORT

     The audit  referred to in our report dated August 24, 2000,  except for the
reclassification of the discontinued operations as to which the date is June 30,
2001, on the consolidated statements of operations, shareholders equity and cash
flows of NetWolves Corporation and subsidiaries (the "Company"), which appear in
Part II,  also  includes  Schedule  II for the year  ended June 30,  2000.  This
schedule is the responsibility of the Company's  management.  Our responsibility
is to express  an opinion  based on our audit.  In our  opinion,  the  financial
statement  schedule  referred to above, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects,
the information set forth therein, in compliance with the applicable  accounting
regulations of the Securities and Exchange Commission.

/s/ Eisner LLP
Eisner LLP

New York, New York
August 24, 2000

                                      F-36
<PAGE>

                                  SCHEDULE II

                 VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

<TABLE>
<CAPTION>
                                                                     Additions
                                                    Balance at       charged to     Deductions      Balance
                                                    beginning        costs and         from         at end
                                                    of period        expenses       allowances      of period
                                                    ---------        ----------     ----------      ----------
<S>                                                 <C>              <C>            <C>            <C>
Year ended June 30, 2002:
  Allowance for doubtful notes and accounts
     receivable                                     $  152,259       $   38,905     $     -        $  191,164
  Allowance for other assets                        $   33,589       $   56,000     $     -        $   89,589
  Accrued losses of discontinued operations         $  496,927       $        -     $  123,957     $  372,970

Year ended June 30, 2001:
  Allowance for doubtful accounts receivable        $   44,747       $  107,512     $     -        $  152,259
  Allowance for other assets                        $        -       $   33,589     $     -        $   33,589
  Accrued losses of discontinued operations         $        -       $  496,927     $     -        $  496,927

Year ended June 30, 2000:
  Allowance for doubtful accounts receivable        $   40,000       $   30,000     $   25,253     $   44,747
  Provision for impairment of intangible assets     $        -       $4,016,080     $     -        $4,016,080

</TABLE>

                                      F-37

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