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

FORM 10-QSB

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

For the quarterly period ended December 31, 2007 OR

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

For the transition period from ______ to ______

Commission file number 000-25831

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

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

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

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

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

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

Yes X No

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

Yes No X

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

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

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

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


NETWOLVES CORPORATION AND SUBSIDIARIES

(DEBTOR-IN-POSSESSION)

FORM 10-QSB - December 31, 2007

INDEX

PART I - FINANCIAL INFORMATION
 ITEM 1 - FINANCIAL STATEMENTS

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

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

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

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

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

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


PART II - OTHER INFORMATION

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

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

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

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

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

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

 SIGNATURES.......................................................................................... 25-28


NETWOLVES CORPORATION AND SUBSIDIARIES

(DEBTOR-IN-POSSESSION)

CONDENSED CONSOLIDATED BALANCE SHEETS

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

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

Property and equipment, net 112,689 79,557

Identifiable intangible assets, net 343,937 438,550

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

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

 Total Assets $ 7,158,345 $ 7,811,984
 ===================== ======================

1

See notes to condensed consolidated
financial statements.


NETWOLVES CORPORATION AND SUBSIDIARIES

(DEBTOR-IN-POSSESSION)

CONDENSED CONSOLIDATED BALANCE SHEETS

 December 31, June 30,
 --------------------- ----------------------
 2007 2007
 --------------------- ----------------------
 (Unaudited)
LIABILITIES AND SHAREHOLDERS' DEFICIT

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

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

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

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

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

Shareholders' Deficit

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

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

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

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

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

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

 Total Liabilities and Shareholders' Deficit $ 7,158,345 $ 7,811,984
 ===================== ======================

2

See notes to condensed consolidated
financial statements.


NETWOLVES CORPORATION AND SUBSIDIARIES

(DEBTOR-IN-POSSESSION)

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

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

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

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

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

 Basic and Diluted Net Loss Per Share $ (0.02) $ (0.04) $ (0.04) $ (0.07)
 ================ ================= ================ ================
 Weighted Average Common Shares
 Outstanding, basic
 and diluted 34,309,713 33,521,399 34,309,713 33,327,788
 ================ ================= ================ ================

3

See notes to condensed consolidated
financial statements.


NETWOLVES CORPORATION AND SUBSIDIARIES

(DEBTOR-IN-POSSESSION)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

 For the Six Months Ended December 31,
 --------------------------------------------
 2007 2006
 --------------------- ----------------------
Cash flows from operating activities
 Net loss $ (725,297) $ (1,817,862)
 --------------------- ----------------------

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

 Loss on Disposal of Property and Equipment 276 2,671

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

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

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

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

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

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

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

 Cash paid for interest $ -- $ 96,978

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

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

 Conversions of preferred stock to common stock -- 345,501
 ===================== ======================

4

See notes to condensed consolidated
financial statements.


NETWOLVES CORPORATION AND SUBSIDIARIES

(DEBTOR-IN-POSSESSION)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Interim financial information

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

2. Bankruptcy, Management's Plan and Going Concern

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

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

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

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

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

5

NETWOLVES CORPORATION AND SUBSIDIARIES

(DEBTOR-IN-POSSESSION)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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

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

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

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

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

6

NETWOLVES CORPORATION AND SUBSIDIARIES

(DEBTOR-IN-POSSESSION)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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

3. The Company

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

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

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

4. Reclassifications

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

5. Income Taxes

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

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

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

7

NETWOLVES CORPORATION AND SUBSIDIARIES

(DEBTOR-IN-POSSESSION)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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

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

6. Summary of Recent Accounting Pronouncements

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

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

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

8

NETWOLVES CORPORATION AND SUBSIDIARIES

(DEBTOR-IN-POSSESSION)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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

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

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

7. Inventories

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

8. Accounts payable and accrued expenses

Accounts payable and accrued expenses consist of the following:

 Pre-Petition
 -----------------------------------------
 December 31, June 30,
 2007 2007
 --------------------- -------------------
Pre-petition trade accounts payable and other accrued $4,275,784 $4,027,516
 operating expenses subject to compromise
Sales and excise tax payable 54,754 54,754
Dividends payable 615,688 563,874
Compensated absences 65,856 65,856
Other liabilities 194,309 194,309
 --------------------- -------------------

 $5,206,391 $4,906,309
 ===================== ===================

9

NETWOLVES CORPORATION AND SUBSIDIARIES

(DEBTOR-IN-POSSESSION)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 Post-Petition
 --------------------------------------------
 December 31, June 30,
 2007 2007
 --------------------- ----------------------
Post-petition trade accounts payable and other accrued operating $862,891 $ 756,977
expenses not subject to compromise
Sales and excise tax payable 78,492 13,226
Compensated absences 43,568 33,059
Other liabilities 168,094 270,474
Bonuses and commissions payable 48,074 48,074
Accrued taxes -- 161
 --------------------- ----------------------


 $ 1,201,119 $1,121,971
 ==================== ======================

9. Long Term Debt

Long Term debt consists of the following:

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

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

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

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

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

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

 Long-Term Debt, Less Current Maturities $ -- $ --
 ====================== ======================

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

10

NETWOLVES CORPORATION AND SUBSIDIARIES

(DEBTOR-IN-POSSESSION)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

10. Related party transactions

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

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

11. Shareholders' equity

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

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

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

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

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

Options

Stock option plans
The Company's Stock Option Plans (the "Plans"), authorize the Board of Directors to grant nonstatutory stock options to employees and directors to purchase up to a total of 9,932,500 shares of the Company's common stock. Generally, options granted under the Plans vest ratably over three years. If any award under the Plans terminates, expires unexercised, or is canceled, the shares of common stock that would otherwise have been issuable pursuant thereto will be available for issuance pursuant to the grant of new awards.

 Approximate
 Maximum net cumulative
 allowable issuances Maximum
 Plans Date adopted issuances December 31, 2007 term in years
--------------------- ----------------------- ------------------- -------------------------- -----------------------
 1998 Plan June 1998 282,500 72,500 10
 2000 Plan July 2000 1,500,000 750,000 10
 2001 Plan February 2001 1,750,000 1,675,000 10
 2002 Plan June 2002 3,000,000 1,394,650 10
 2003 Plan June 2003 2,400,000 2,153,450 10
 2006 Plan April 2006 1,000,000 315,500 10
 --------- ---------
 9,932,500 6,361,100
 ========= =========

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NETWOLVES CORPORATION AND SUBSIDIARIES

(DEBTOR-IN-POSSESSION)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

A summary of the Company's stock options is presented below:

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

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

Exercisable, December 31, 2007 6,025,764 $ 0.38 $ --
 ========= ======== ========

The following table summarizes information about stock options outstanding at December 31, 2007:

 Options outstanding at Options exercisable at
 December 31, 2007 December 31, 2007
 ---------------------------------------------------- ---------------------------------------
 Weighted
 average Weighted Weighted
 remaining average average
 Range of Number of contractual exercise Number of exercise
 exercise prices shares life price Shares price
------------------------- ------------------- ---------------- --------------- ----------------- ---------------------
$ 0.00-$ 0.50 5,213,000 3.65 0.16 4,877,664 0.17
$ 0.51-$ 1.00 517,100 4.63 0.99 517,100 1.00
$ 1.01-$ 1.50 552,000 0.27 1.19 552,000 1.19
$ 1.51-$ 2.00 6,500 0.81 1.88 6,500 1.88
$ 2.01-$ 12.00 72,500 1.01 5.00 72,500 5.00
 --------- ---------
 6,361,100 6,025,764
 ========= =========

12. Securities purchase agreement

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

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

12

NETWOLVES CORPORATION AND SUBSIDIARIES

(DEBTOR-IN-POSSESSION)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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

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

13. Segment Information

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

The Voice Services segment provides voice services including switched and dedicated outbound, switched and dedicated toll-free inbound, dedicated T1 access loops, calling and debit cards, and conference calling. The Managed Service Charges segment provides network and security technology and a variety of recurring managed data services.

 For the Three Months Ended For the Six Months Ended
 December 31, December 31,
 --------------------------------- ---------------------------------
 2007 2006 2007 2006
 ---------------- ---------------- ---------------- ----------------
Revenue
 Voice services $2,017,532 2,183,082 $4,104,566 $4,776,461
 Managed service charges 2,145,054 2,158,531 4,217,800 4,215,809
 ------------ ------------ ----------- ------------

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

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

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

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

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

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

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

13

NETWOLVES CORPORATION AND SUBSIDIARIES

(DEBTOR-IN-POSSESSION)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

14. Significant agreements

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

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

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

15. Commitments and contingencies

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

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

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

Litigation

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

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

14

NETWOLVES CORPORATION AND SUBSIDIARIES

(DEBTOR-IN-POSSESSION)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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

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

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

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

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

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

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

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

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

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

15

NETWOLVES CORPORATION AND SUBSIDIARIES

(DEBTOR-IN-POSSESSION)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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

Leases

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

The approximate future minimum annual lease payments, for the new office space is summarized as follows:

 Fiscal Year
 Ending June 30, Amount
----------------------------------- ------------------
 2008 $ 43,557
 2009 58,076
 ---------

 Total $101,633
 =========

16. Subsequent Event

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

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

Forward-Looking Statements

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

16

NETWOLVES CORPORATION AND SUBSIDIARIES

(DEBTOR-IN-POSSESSION)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Overview

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

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

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

Chapter 11 Reorganization

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

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

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

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

17

NETWOLVES CORPORATION AND SUBSIDIARIES

(DEBTOR-IN-POSSESSION)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations is based upon the consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenue and expenses during the periods. Estimates have been made by management in several areas, including, but not limited to, revenue recognition, allowance for doubtful accounts, the realizability of deferred tax assets, goodwill and other intangible assets and stock based compensation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions.

We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

Revenue recognition

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

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

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

Allowance for doubtful accounts

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

18

NETWOLVES CORPORATION AND SUBSIDIARIES

(DEBTOR-IN-POSSESSION)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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

Income taxes

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

Goodwill and other intangible assets

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

Results of Operations

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

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

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

Revenue

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

Cost of revenue (excluding depreciation amortization)

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

19

NETWOLVES CORPORATION AND SUBSIDIARIES

(DEBTOR-IN-POSSESSION)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

General and administrative

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

Sales and marketing

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

Other income (expenses)

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

Reorganization Cost

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

Three months ended December 31, 2007 and 2006

Revenue

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

Cost of revenue (excluding depreciation and amortization)

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

20

General and administrative

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

Sales and marketing

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

Other income (expenses)

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

Reorganization Cost

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

Liquidity and Capital Resources

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

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

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NETWOLVES CORPORATION AND SUBSIDIARIES

(DEBTOR-IN-POSSESSION)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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

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

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

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

Summary

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

ITEM 3 - CONTROLS AND PROCEDURES

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

22

NETWOLVES CORPORATION AND SUBSIDIARIES

(DEBTOR-IN-POSSESSION)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Evaluation of Disclosure Controls

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

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

Changes in Internal Controls Over Financial Reporting

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

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

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

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

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

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

23

NETWOLVES CORPORATION AND SUBSIDIARIES

(DEBTOR-IN-POSSESSION)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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

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

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

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

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

None

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

Not applicable.

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

Not applicable

ITEM 5. OTHER INFORMATION

Not applicable.

ITEM 6. EXHIBITS

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

24

SIGNATURES

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

BY: NETWOLVES CORPORATION

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




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



Date: February 13, 2008

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