NETWOLVES CORP - 10-K Annual Report

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

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 2001
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period _______________ to _______________

Commission File No. 0-25831

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

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

One Corporate Drive, Bohemia, New York 11716
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(Address of Principal Executive Offices) (Zip Code)

Registrant's telephone number, including area code: (631) 589-8275
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Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $.0033 par value
------------------------------
(Title of Class)

Indicate by check mark 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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X].

The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing sale price of the Common Stock on September
6, 2001 as reported on the NASDAQ, was approximately $24,115,000. Shares of
Common Stock held by each executive officer and director and by each person who
owns 5% or more of the outstanding Common Stock have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliates status
is not necessarily a conclusive determination for other purposes.

As of September 6, 2001, the Registrant had outstanding 10,658,065 shares of
Common Stock.

Documents incorporated by reference: None

NETWOLVES CORPORATION AND SUBSIDIARIES

FORM 10-K

AS OF JUNE 30, 2001, 2000 AND 1999

TABLE OF CONTENTS

PART I
ITEM 1 Business 1
ITEM 2 Properties 11
ITEM 3 Legal Proceedings 11
ITEM 4 Submission of Matters to a Vote of Security Holders 12

PART II
ITEM 5 Market for Registrant's Common Equity and Related Stockholder
Matters 13
ITEM 6 Selected Financial Data 13
ITEM 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations 15
ITEM 7a Quantitative and Qualitative Disclosure About Market Risk 22
ITEM 8 Financial Statements and Supplementary Data 22
ITEM 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 23

PART III
ITEM 10 Directors and Executive Officers of the Registrant 24
ITEM 11 Executive Compensation 25
ITEM 12 Security Ownership of Certain Beneficial Owners and Management 27
ITEM 13 Certain Relationships and Related Transactions 27

PART IV
ITEM 14 Exhibits, Financial Statements Schedules, and Reports on Form 8-K 28

SIGNATURES 29

PART I

ITEM 1. BUSINESS

This Annual Report on Form 10-K, the exhibits hereto and the information
incorporated by reference herein contain "forward looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act") and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and such forward looking statements involve risks
and uncertainties. When used in this report, the words "expects", "anticipates"
and "estimates" and similar expressions are intended to identify forward looking
statements. Such statements are subject to risks and uncertainties that could
cause actual results to differ materially from those projected. These risks and
uncertainties include those discussed below and those discussed in "Management's
Discussion and Analysis of Financial Condition and Results of Operations" or
incorporated by reference herein. NetWolves Corporation undertakes no obligation
to publicly release any revisions to these forward looking statements to reflect
events or circumstances after the date this Report is filed with the Securities
and Exchange Commission or to reflect the occurrence of unanticipated events.

Overview

NetWolves Corporation ("NetWolves" or the "Company") designs, develops,
manufactures and sells Internet infrastructure security platforms, coupled with
network based management services, designed to significantly reduce the upfront
and ongoing costs associated with small, medium and remote offices' global
internet access. The Company was founded in order to leverage the rapid
progression of technology, removing barriers of entry for organizations desiring
to attain the benefits and flexibility a public network enterprise offers.
NetWolves patent pending system technology enables organizations to obtain their
short, middle and long term IT and e-business initiatives through the deployment
of our plug 'n' play perimeter office security platform, coupled with our secure
remote monitoring and management ("SRM2 TM") system. Additionally, NetWolves
advanced, centralized, reporting module offers for the first time the ability
for corporate executives to view, via the Internet, statistical and performance
metrics in real time.

Netwolves products and services offer complete system solutions to
organizations needing cost effective network security (firewall, routing,
intrusion detection, content filtering, email, intranet, FTP, etc.) complete
with advanced integrated hardware, a user-friendly interface, and internet-based
expansion capabilities. As companies combine data and communications to reduce
costs, NetWolves' provides cost-effective, value-added expansion technologies
such as virtual private networking ("VPN"), a process used to allow secure data
transmissions on a local area network, a wide area network, or to secure
wireless network connections. This feature affords the user virtually all the
benefits of lease-line service without the attendant recurring costs.

NetWolves differentiates itself from its competitors primarily through its
proprietary patent pending technology, which provides centralized remote
monitoring and management facilities (SRM2 TM). While other, more
labor-intensive management systems currently exist, such systems require an
inbound administrative port to provide remote monitoring and management. Most
Fortune 1000 companies are unwilling to take the risk of opening up an inbound
administrative port while having their entire enterprise on a public broadband
format. "Hackers", using simple port scanning tools, can easily locate these
administrative inbound ports. SRM2 TM has the ability to monitor thousands of
locations concurrently without opening an administrative inbound port and allows
the secure, remote management and monitoring of multiple all-in-one gateway
servers located worldwide. This monitoring can be performed in real-time, and
from one or numerous central sites. This technology also allows a network
administrator to create a configuration template with all the configuration
information and changes required for all-in-one units. This template can be
applied to each unit, all via a secure configuration mechanism from the central
monitoring location, without compromising network security. It is this SRM2 TM
system that forms the basis of the Company's agreement with the General Electric
Company.

NetWolves "edge of the network" security platforms and centralized
management and monitoring systems are designed for our customers' present and
future needs. The Company's initial target markets are the end users in small
and mid-size businesses and large organizations with satellite offices. Larger
end users, to whom the product is marketed, are companies with multi-state
locations, government agencies and educational markets. NetWolves products are
designed to service numerous markets, including financial, medical, legal,

1

travel, entertainment, hotel, education, government, auto and petroleum
industries. The Company's strategy is to establish their SRM2 TM technology as
the standard for enterprise-wide secure network connectivity worldwide. To
achieve its objectives, NetWolves seeks to form relationships with leading
companies in their respective areas to deliver application-specific Internet
solutions.

Agreement with General Electric

On June 29, 2000, NetWolves and General Electric Company ("GE") entered
into a six year agreement for the master purchase, license and support services
of NetWolves' security, remote monitoring and configuration management system.
GE, after extensive due diligence in looking for the all- in-one small office
solution for network management, interconnectivity and security management,
chose the Company's products for deployment throughout their enterprise.

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.

GE has commenced the process of using the Company's products for
interconnectivity of its worldwide offices. The Company's products enable GE's
offices to interact with each other, utilizing NetWolves advanced firewall
security. NetWolves believes that this agreement further validates the Company's
technology and innovations within the firewall and network security markets.
Network security is one of the most formidable challenges facing Fortune 1000
companies, and with its new SRM2 TM system, NetWolves can offer the appropriate
solutions.

Industry Background

International Data Corporation (IDC), a market research organization,
expects worldwide Internet infrastructure spending to increase from about $124
billion in 1999 to $370 billion in 2003, with a Compounded Annual Growth Rate of
32%. In order for the Internet to achieve its potential, the market or corporate
users require that a comprehensive security infrastructure must exist in order
to establish the requisite level of trust and confidence for conducting
medium-to-large scale business transactions on-line. The realization that the
Internet remains unsecured is not unknown to the investment community. Based on
information gathered from various industry sources, the Internet security
appliance market will reach as much as $13.3 billion by 2004. Infonetics
Research, Inc. sees the VPN products segment within the Internet security
marketplace growing to $32 billion by 2003. NetWolves is poised to leverage this
emerging and growing market.

While security awareness is pervasive in the Fortune 100, the market is
exploding in the Fortune 1000. NetWolves products and services allow companies
from the Fortune 1000 to the medium and small office markets to take full
advantage of the emerging global Internet-based economy. The medium and small
office markets include business enterprises, remote and branch offices of large
corporations, government offices, telecommuter home offices, and education
markets for businesses and consumers.

NetWolves' products can be deployed pre-configuration, which minimizes the
purchase, installation and maintenance costs typical of traditional Internet
security and access solutions. With retail prices ranging from $1,000 to $5,000,
compared to competitive products that range in price from approximately $5,000
to in excess of $20,000, the Company's products are designed to enable customers
to reduce purchase, service and personnel hiring costs. A recently released
survey conducted by Information Security reveals that the percentage of
companies spending more than $1 million for security has risen from 12% in 1999
to 25% today. NetWolves' products are designed to maximize reliability and
uptime, and can be used in networks ranging in size from one to thousands of
users in multiple locations. In effect, NetWolves is fast becoming a beneficiary
of growing awareness among corporations looking to acquire security.

2

Historically, to create an Internet presence, an organization needed access
to complex network technologies and one or more costly general-purpose servers,
which often require technically skilled staff to maintain. The expense and
technical complexity of these network technologies and general purpose servers
often discourage their adoption by small-to-medium-size organizations, due to
their limited budgets and technology skills. The reliability of these complex
networks was often called to question, due, if for no other reason, for their
complexity alone. NetWolves SRM2 TM system represents an innovative approach to
cost effective network managed security, working with other network devices, to
provide services to perimeter network users. Today, building upon NetWolves
core-technology foundation, server appliances have evolved to become centrally
managed security services (see MSS), designed to facilitate authorized users
within the network while, at the same time providing an aggressive rejection of
"hackers" who have the capabilities to gain unauthorized access into networks.

The security of the perimeter or remote office is a critical component for
virtually every local area network (LAN) and wide area network (WAN) connected
to the Internet. Applications such as Firewall, VPN, Web Server and Web Access
Control have become absolute necessities for virtually every business, whether a
single-location retailer or a Fortune 1000 global enterprise. Recent news of
security breaches is driving Corporate America to focus its priorities on
identifying and correcting network vulnerabilities. The NetWolves
security-hardened software platform, integral to our SRM2 TM system
configurations, is an important step forward toward meeting the challenge of
today's increasingly sophisticated network assaults.

Products and Services

The NetWolves Security Suite ("NSS") and gateway platforms offer
sophisticated, yet easy-to-use devices for securely connecting people and
networks to the Internet by combining a wide range of functionality and
communications choices. These functionalities include Internet access, firewall
security, web access control, e-mail, IP routing, web server, web caching
server, DNS caching server, DHCP server, and file sharing in an
easy-to-configure integrated software and hardware gateway solution. NetWolves'
platforms work with a variety of access methods including North American T1/56K,
European E1 standards, local dial up or ISDN lines, DSL, or cable modems.

When NetWolves' gateway platform is connected to a company's internal
computer network and an Internet service, it provides shared Internet access for
a few or up to hundreds of users behind the appliance. The Internet provides one
of today's most cost-effective means of communication, and through use of the
NSS, an organization with many locations can create online communities
leveraging the power of the Internet.

NSSs are advanced firewall security systems that enable business to
implement company-wide network security policies. NSSs protect a company's
valuable data assets from hackers. NSSs cost substantially less than the
purchase of its functionality in separate products. Further, its "all-in-one"
solution significantly reduces costly network administration overhead, since
there are less divergent components to administer within the NSS. Each feature
within the suite is designed to work together using integrated hardware and
software with a common interface. This facilitates expansion and support of the
converging voice and data industries.

NetWolves' platforms are configured using a web-based graphical user
interface (GUI) and are designed for basic network connectivity, although they
can be customized to handle large-scale applications for vertical market
solutions. NetWolves develops custom software applications that are fully
integrated with commodity off-the-shelf hardware components. NetWolves maximizes
its focus in core technology research and development, and out-sources the
physical manufacturing functions required to meet production requirements.

Keeping data secure is one of the main functions of NSS. Companies
significantly reduce leased line/private communication costs by installing the
VPN feature and utilizing the Internet to maintain data privacy, which is
maintained through the use of a tunneling protocol and security procedures,
sending encrypted (scrambled) data over the Internet. The primary benefit of the
VPN is providing the client communication services at significantly reduced
costs by utilizing the shared public infrastructure rather than private
services. Businesses are implementing a similar process called Client or Remote
VPN, allowing employees to communicate with their company's network at any time
from outside the workplace, using a laptop or desktop computer and Client VPN
software. This cost-effective solution makes businesses more productive by
giving remote users secure access to vital data resources.

3

The World Wide Web is a broad universe of network-accessible information.
To enable employers to keep employees focused on business issues, most NSS
packages include Web Access Control as a standard or optional feature. Using Web
Access Control, a Client's System Administrator can block or permit access to
the Internet and specific web sites. If a business owner or teacher needs to
enforce or implement an acceptable usage policy to keep employees productive or
students from inappropriate sites, this is accommodated through Web Access
Control.

E-mail allows electronic messages to be delivered over the Internet to
specific individuals and groups. It is one of the fastest, most cost-effective
ways to deliver messages, documents, web pages, and secured information. Many
NSS packages include as a standard or an optional feature an integrated E-mail
server that supports a virtually unlimited number of accounts.

NSS incorporates an Internet Protocol (IP) router. The Internet Protocol is
the language the Internet "speaks" in order to communicate. A router is a
device, or in some cases, software that determines the next network point to
which a packet of data should be forwarded toward its destination. The router is
connected to at least two networks and decides which way to send each
information packet based on its current understanding of the state of the
networks to which it is connected.

The NSS Web server is a program that, using the client/server model and the
World Wide Web's Hypertext Transfer Protocol (HTTP), serves the files that form
web pages to Web users (whose computers contain web browsers such as Netscape
that forward their requests). Every computer on the Internet that contains a web
site must have a Web Server program. The most widely used Web servers are
Apache, which is the server used by NetWolves to host an Internet web site or an
intranet. An intranet is similar to an Internet site except that it is
accessible by internal users and not by the general public. If you need to make
an area of the Intranet available to a business partner or supplier it is done
through authentication (usually a username and password) - this is referred to
as an Extranet.

Clients using a NetWolves Web Server can quickly bring new products to
market, use it as a portal for customer service and build web sites to sell
products and services online. Utilized with the Web Server, additional programs
can be used with the Web Server to collect valuable customer data, such as
personal preferences, product interest, and time spent browsing specific web
pages.

Top-of-the-line NSS packages incorporate a Web Caching server, which stores
web pages visited by users. Caching web pages speeds up browsing and optimizes
Internet services. Pages stored remain available locally for subsequent
requests. This feature enhances the efficiency of the NSS as an Internet access
solution.

Typically, using a web browser, a user attempting to access information on
the Internet performs a Domain Name System (DNS) lookup. DNS is the Internet
service that converts understandable web site names (for example
www.netwolves.com) into computer readable web site numbers or IP addresses (IP
numbers are meaningful only to those who need to know them and not to the
average web user). By integrating a DNS Caching server directly into the NSS,
Internet traffic is reduced and web site address look-up time is faster,
therefore increasing the overall performance of the system.

A Dynamic Host Configuration Protocol (DHCP) server integrated into the NSS
allows for easy management when adding computers to the company network. It
saves time and allows network administrators to work more efficiently,
eliminating the need for a person to travel to a remote location to configure a
computer with an IP address.

File Sharing allows employees or departments to use the NSS to share data
files with co-workers, specifying varying levels of access privileges.
Individuals and groups can be organized in any way a company chooses. Access is
restricted to those connected to the company network and permitted to have
access. Benefits include centrally located files, backup of local computer
files, password protection, and the ability to preset privileges for files so
only certain users can open, read and modify them.

Web Based Administrative Interface (AI) allows the network administrator to
configure the various subsystems of the NSS. The NSS becomes completely
transparent to the Internet user. Likewise, because the NSS is easy to set-up,
it will feel transparent to the administrator. This is especially true should
changes be required following initial installation. Since all administration of
the NSS is performed through a web browser, the administrator can work from any
workstation on the LAN.

4

NSS Features

The NSS offers the following features:

o They can securely connect any number of users in a small geographic
area (LAN) simultaneous to the Internet through a dedicated
connection.

o Hierarchical caching, which are rules that tell a computer to look for
the data stored locally before accessing the internet for data, gives
the NSS more efficient web viewing and greater ability to transfer
data from one file to another.

o Any number of users can send and receive e-mail individually, while
sharing one Internet service provider account.

o A firewall protects the LAN from Internet-borne attacks.

o An advanced network address translation module allows the creation of
powerful address translation rules for greater firewall flexibility.

o Files that store events for review at a later date ensure appropriate
use of Internet resources.

o Scalability allows Internet usage to grow as a company expands.

o A network file server centrally stores programs and data for
accessibility to multiple users simultaneously and shares data and
programs from a central location.

o They can be used as a stand-alone firewall to protect the resources of
a private network from users outside on a public network.

o They allow a company to publish and host a web site.

Optional NSS Features

The NSS also offers the following optional features:

o Extra 10.2 GB EIDE hard drive provides extra storage for shared files
and Web data.

o E-Mail Archive module allows all inbound and outbound e-mail to be
saved for archival/compliance purposes.

o Advanced access control module allows control over who can access the
web and the sites to which they have access.

o Virtual Private Networking (VPN) module provides a process for
encrypting data for secure transmission over public networks and
supports Internet Key Exchange (IKE) and IPsec (a security protocol).

o Intrusion Detection System (IDS) is a real time, network-based system
designed to detect, report, and terminate unauthorized activity
throughout the network.

o Utilizing SmartFilter technology, the network administrator can
effectively block or deny access to the Internet and specific web
sites.

5

Firewall and Security Functions

NetWolves believes that security is an essential element of any Internet
connectivity solution. For this reason, the NSS includes high-end firewall
security protection, without requiring the purchase of additional components.

NSSs are designed to protect a company's private data and systems from
outside intruders with its firewall security system, incorporating three
separate firewall technologies:

o Stateful packet filters verify that all incoming data packets coming
from the Internet have been requested by an authorized user on the
LAN.

o Proxy applications prevent unauthorized Internet applications from
accessing the LAN.

o Network Address Translation ("NAT"), which are conversions of public
addresses to and from private addresses, makes the network invisible
to outside Internet users by hiding the internal network's addresses
of each sender or receiver of information.

All packets of data entering the NSS from the Internet are first checked
for validity against a series of stateful packet filters. Data is then forwarded
to proxy applications that further inspect the contents of the packets for
potential security violations. If the data is determined to be valid by both the
stateful packet filters and proxy applications, it is allowed to enter the
secure LAN.

NSS is designed with fully configurable firewalls and network address
translation rules that give the network administrator greater flexibility in
allowing or denying incoming and outgoing data.

E-Mail Services

A key feature of NSS is the advanced and powerful management of electronic
mail. With only one Internet account, an unlimited number of users can send and
receive e-mail. In addition, NSS supports Internet e-mail standards. For e-mail
between the NSS and the Internet, NetWolves uses the standard simple mail
transfer protocol (SMTP) protocol, which is the standard for e-mail transmission
on the Internet. For LAN users, the NSS supports a number of different
protocols. If the NSS is used as the LAN's e-mail server, two common
client-server e-mail protocol standards are supported:

o POP-3 - a process for retrieving e-mail from its stored location to
the viewer.

o IMAP - a method of viewing electronic mail at its stored location.

The NSS supports several e-mail clients, including:

o Microsoft Exchange TM

o Microsoft Internet Mail TM

o Netscape Navigator Mail TM

o Eudora TM

o Pegasus TM

The NSS supports several e-mail gateways, including:

o Microsoft Exchange Server TM

o Lotus cc:Mail TM

o GroupWise Mail TM

o Others with SMTP gateways

6

Secure Remote Management and Monitoring Services ("SRM2 TM")

Under the SRM2 TM umbrella, product architecture planners believe that
Managed Security Services (MSS) will play an even more important role in future
security plans. Since a customer base already exists within NSSs, the
security-monitoring infrastructure will significantly reduce costs and provide
effective and economical network managed security services to NetWolves clients.

SRM2 TM is comprised of the following product subsystems:

o SRM2 TM provides monitoring, notification, paging and alarming
capabilities of remote appliances. The firewall status, VPN tunnel
status and AI configuration status of all remote appliances are
monitored and logged.

o SRM2 TM Management and Configuration allows remote appliances to be
managed and configured individually or by groups. This can include
complete operating system upgrades. Additionally, the remote
appliances are capable of fail over to an alternate SRM2 TM server in
the event that the primary server is inaccessible.

o SRM2 TM Extranet allows an authorized user to access specific
information about remote appliances (individually or by groups) via an
extranet site. Specific information includes firewall status, the
number of active VPN connections, traffic statistics, intrusion
detection data, activity logs, and AI configuration data.

o SRM2 TM NetMetrics allows for page retrieval time and e-mail cycle
time calculations to be performed. Page retrieval time is calculated
by determining the time it takes to completely load specified web
page(s) directly from the Internet, while e-mail cycle time is
calculated by determining the amount of time it takes to send and then
receive a reply e-mail from a specified mail account. The metrics
information is then transferred from each individual appliance to a
database, where it can be accessed by the SRM2 TM system via the
extranet site.

o SRM2 TM SmartFilter specifies which users on a protected LAN can
access the Web, as well as which sites containing material considered
inappropriate for viewing within a business or educational environment
should be blocked. A categorized database of URLs provides control
over which sites can be visited or should be blocked. Web site access
is controlled by user, group or category.

o SRM2 TM Intrusion Detection provides host and network based intrusion
detection capabilities for remote appliances. Host file system level
IDS is provided by Samhain, while network level IDS is provided by
Snort. Web-based reporting of the IDS information is provided by ACID
(Analysis Console for Intrusion Detection). The IDS information is
then transferred from each individual appliance to a database, where
it can be accessed by the SRM2 TM system via the extranet site.

o SRM2 TM Virus Detection will stipulate both protection (security) of
remote appliances from hardware glitches, software bugs and any
attempts to sabotage client data, and damage control through immediate
detection. Activity logs are transferred from each individual
appliance to a database, where they can be accessed by the SRM2 TM
system via the extranet site.

SRM2 TM technology, combined with the Company's core suite of secure
internet appliances and a centralized monitoring office, makes available to
network administrators and organizations what the Company believes to be the
complete solution to managing, monitoring and securing their networks.

Engineering and Development

The Internet and the computer hardware and software industry are
characterized by rapid technological change, which requires ongoing development
and maintenance of products. It is customary for modifications to be made to
products as experience with their use grows or changes in manufacturer's
hardware and software are required.

7

NetWolves' engineering and development group is comprised of a core team of
engineers who specialize in different areas of security and product development.
NetWolves engineering team has experience in a variety of industries, including
information security, designing networking protocols, building interfaces,
designing databases, and computer telephony. Their expertise is used in the
design of our core products and seeking enhanced functionality to meet future
customer needs. As of August 20, 2001, the Company's engineering and development
group consists of 31 employees. The Company seeks to recruit highly qualified
employees and its ability to attract and retain such employees will be a
principal factor in its success in achieving and maintaining a leading
technological position.

Engineering and development expenses were approximately $1,893,000,
$1,329,000 and $418,000, exclusive of capitalized software development costs of
approximately $116,000, $170,000 and none for the years ended June 30, 2001,
2000 and 1999, respectively. The Company intends to increase its investment in
product development and believes that its future product offerings will depend,
in part, on its ability to develop, manufacture and market new products and
enhancements to existing products on a cost-effective and timely basis.

Manufacturing

The Company currently uses a hybrid manufacturing and assembly model to
produce its products. The enclosures for the Company's FoxBox products are
manufactured by Florida Metal Stamping, Inc. ("FMS") of Largo, Florida. FMS is
an ISO 9002 certified manufacturer, fabricator and assembler of enclosures for
major electronic systems manufacturers. ChipTech Corp. of Pembroke Park, Florida
supplies the enclosures and motherboards for the Company's WolfPac products.
Electronic components and custom enclosure components for significant future
builds will be outsourced to one or numerous manufacturers.

While the Company has no long-term agreement with FMS or ChipTech, it
believes that alternative manufacturers are available in the event the Company
seeks to change or expand upon manufacturers of its products.

Production Process

The process used to produce NetWolves products begins with hardware
configuration, installing the appropriate version of the Company's software,
configuring client-specific software components, followed by a unit testing
process. Raw/prefabricated materials, components, and subassemblies required for
production include motherboards, CPU's, cases, Ethernet cards, network
communication cards, hard drives, memory, CPU fans and power supplies. The
Company believes that these materials are available from several companies and
that alternative sources of supply are currently available.

Testing

A majority of testing is performed as part of the manufacturing process. In
addition, NetWolves performs quality testing via the Internet on a periodic
basis to verify that the assembled products meet all production quality
criteria. Also, randomly chosen units are shipped from the production assembly
facility back to NetWolves for additional testing.

In addition to testing the product on a regular basis, NetWolves researches
the status of existing components used in its products to determine if they are
being phased out or prices have changed. If it concludes that a certain
component must be substituted, trial testing is performed on a new component to
determine if it meets product component criteria. If it meets this criterion,
which includes cost effectiveness, longer life expectancy and product
efficiency, a plan to develop and use the component is implemented.

8

Customer Service and Technical Support

The Company maintains an experienced staff of customer service personnel to
provide technical support to its customers. Each member of the customer service
staff is certified through an ongoing in- house training and testing program to
provide support for each individual product. The Company's customer service
staff provides product support via telephone and e-mail 24 hours per day, seven
days per week. The Company generally provides software and documentation
updates, including maintenance releases, operating system upgrades and major
functional upgrades, as part of its customer support services.

Sales and Marketing

The Company's marketing and sales strategy is to enter into multi-national
reseller agreements with one or more primary distributors and value added
resellers (Internet Service Providers (ISP's), Competitive Local Exchange
Carriers (CLEC's), Incumbent Local Exchange Carriers (ILEC's), systems
integrators, interconnects) of Internet access security devices. In addition,
NetWolves' direct sales force is focused on opening large scale opportunities
for firewalls, caching servers, hosting servers, email servers, web access
filtering systems, and file servers with multi-national Fortune 1000
enterprises. The channel and direct sales approach allows NetWolves to take
advantage of the personal business contacts of its senior stockholders while
building channel sales potential in the low end of the market. The Company is
also entering into agreements and partnerships with providers of services,
software and hardware products that enhance the functionality of its product
lines . This functionality is geared to enhance our entry to markets that
include education, finance, medical, legal, petroleum, government, travel,
hotel, entertainment and auto industries. NetWolves intends to recruit sales
representatives and sales engineering consultants in two North American regional
areas; Eastern and Western United States, managed by our Director of Sales and
Marketing currently and Regional Managers in the future. Field Sales
Representatives are currently in place in London, New York, Tampa, Dallas and
Chicago. They are supported by an in-house telemarketing organization based in
Tampa, Florida. Our sales engineers perform important pre and post-sales
functions, including systems analysis, product demonstrations, and customizing
solutions for various end user and value added reseller prospects.

The Company has implemented marketing initiatives to support sales and
distribution of its products and services and to communicate and promote
corporate initiatives and direction. The Company's sales and marketing
management employees are responsible for collateral development, lead
generation, customer and technical support, systems analysis, and market
awareness of the Company and its products. Marketing programs include public
relations, product seminars, industry conferences and trade shows, coop
advertising, telemarketing and direct mail. The Company's marketing employees
also contribute to both the product development direction and strategic planning
processes by providing product/market research and conducting focused product
surveys.

Licensing and Intellectual Property

The Company considers certain features of its products, including its
methodology and technology, to be proprietary. The Company relies on a
combination of trade secret, copyright and trademark laws, contractual
provisions and certain technology and security measures to protect its
proprietary intellectual property. We generally enter into confidentiality
agreements with our employees, consultants, business partners and major
customers. NetWolves owns numerous copyrighted works of authorship in computer
programs, including, but not limited, to portions of the FoxOS (operating
system), ESCN (distance learning), products related to FoxOS and ESCN, and
various proprietary enhancements to publicly available open source system
software; as well as traditional media, including, but not limited to, marketing
materials, documentation and white papers. Applications for registration of
those copyrights have been filed with respect to some of these works, and
further applications are expected to be filed in the near future.

On June 21, 2000, the Company filed a patent application with the U.S.
Patent and Trademark Office for technology that provides secure, centralized
remote management and monitoring of networks using the Internet. This "SRM2 TM "
system has enabled the Company to expand the use of its technology to Fortune
1000 organizations with multiple worldwide locations such as General Electric.

9

Notwithstanding the efforts the Company takes to protect its proprietary
rights, existing trade secret, copyright, and trademark laws afford only limited
protection. Despite our efforts to protect our proprietary rights and other
intellectual property, unauthorized parties may attempt to copy aspects of our
products, obtain and use information that we regard as proprietary or
misappropriate our copyrights, trademarks, trade dress and similar proprietary
rights. In addition, the laws of some foreign countries do not protect
proprietary rights to as great an extent as do the laws of the United States.
Our means of protecting our proprietary rights may not be adequate. In addition,
our competitors might independently develop similar technology or duplicate our
products or circumvent any patents or our other intellectual property rights.

The Company does not intend to sell or transfer title of its products to
its clients, though this structure may change as the Company expands its
operations. The Company intends to license products pursuant to licensing and
maintenance agreements for which extended payment terms may be offered. In the
case of extended payment term agreements, the customer is contractually bound to
equal monthly fixed payments. In the case of extended payment term agreements,
maintenance may be bundled for the length of the payment term. Thereafter, in
both instances, the customer may purchase maintenance annually.

Competition

Current and potential competitors in our markets include, but are not
limited to, the following, all of whom sell world-wide or have a presence in
most of the major markets for such products: security appliance suppliers such
as Cobalt Networks, Inc. (acquired by Sun Microsystems, Inc.), Watchguard
Technologies, Inc., SonicWALL, Inc., enterprise firewall software vendors such
as Check Point Software and Axent Technologies; network equipment manufacturers
such as Cisco Systems, Lucent Technologies, Nortel Networks, 3COM and Nokia;
computer or network component manufacturers such as Intel Corporation; and
operating system software vendors such as Microsoft Corporation, Novell, Inc.
and Sun Microsystems, Inc. The Company expects competition to intensify as more
companies enter the market and compete for market share. In addition, companies
currently in the server market may continue to change product offerings in order
to capture further market share. Many of these companies have substantially
greater financial and marketing resources, research and development staffs,
manufacturing and distribution facilities. There can be no assurance that the
Company's current and potential competitors will not develop products that may
or may not be perceived to be more effective or responsive to technological
change than that of the Company, or that current or future products will not be
rendered obsolete by such developments. Furthermore, increased competition could
result in price reductions, reduced margins or loss of market share, any of
which could have a material adverse effect on the Company's business operating
results and financial condition.

The Company believes that an important competitive factor in its market is
the cost effective integration of many services in a single unit. In this
regard, the Company believes that it compares favorably to its competitors in
the markets it serves in price and overall cost of ownership, including
administrative and maintenance costs. However, equally important are other
factors, including but not limited to, product quality and scope of performance,
product reliability, availability, upgradability, and technical service and
support. The Company's ability to compete will depend upon, among other factors,
its ability to anticipate industry trends, invest in product research and
development, and effectively manage the introduction of new or upgraded products
into targeted markets.

Employees

As of August 20, 2001, the Company employed approximately 75 full-time
employees (9 of which are covered by employment agreements). Approximately 31 of
these employees are involved in research and development, 21 in sales and
marketing, and 23 in finance and general administration. In addition, the
Company has retained independent contractors on a consulting basis who support
engineering and marketing functions. To date, the Company believes it has been
successful in attracting and retaining skilled and motivated individuals. The
Company's success will depend in large part upon its continued ability to
attract and retain qualified employees. The Company has never experienced a work
stoppage and its employees are not covered by a collective bargaining agreement.
The Company believes that it has good relations with its employees.

10

ITEM 2. PROPERTIES

The Company currently maintains leased facilities in the locations listed
below.

CURRENT
ANNUAL
SQUARE TERM OF LEASE
FUNCTION LOCATION FEET LEASE COSTS
---------------------- --------------------- ------- -------- ----------

NetWolves Technologies 4002 Eisenhower Blvd. 20,520 12/20/05 $ 441,000
Corporation - Corporate Tampa, FL 33634
Headquarters

NetWolves Corporation One Corporate Drive 4,318 06/30/05 $ 100,000
/ComputerCOP Corp. - Bohemia, NY 11716
Corporate Headquarters

TSG Global Education Web, 320 Soundview Road 1,800 12/31/04 $ 79,000
Inc. - Corporate Guilford, CT 06437
Headquarters

On February 27, 2001, the Company entered into an agreement with GATX
Capital Corporation ("GATX"), whereby the Company assigned one of its leases to
GATX through the term of the lease. In accordance with the terms of the
agreement, the Company is required to make monthly payments approximating $2,500
through June 2002.

The Company believes that its present facilities are adequate to meet its
current business requirements and that suitable facilities for expansion will be
available, if necessary, to accommodate further physical expansion of corporate
operations and for additional sales and support offices.

ITEM 3. LEGAL PROCEEDINGS

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 claims 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 are 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 and the continuing disputes
between the parties.

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.

11

Subsequently, the Sullivan Group (as the Plaintiffs in Action 2) sought an
Order compelling the Company to issue an opinion that 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
have now reasserted as counterclaims in their answer in Action No. 2, all of the
claims which they 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 are 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 their complaint, the Sullivan
Group are 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 are 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 are compelled to deposit all of the
proceeds of such sales into an escrow to be held as security for any and all
costs and damages that the Company may suffer or incur if it is determined
ultimately that such relief was wrongfully granted.

The Company believes that its claims against the Sullivan Group are meritorious
based on the facts and circumstances. Further, the Company believes that the
claims by the Sullivan Group lack merit and it intends to engage in a vigorous
defense.

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

No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year.

12

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

(a) On April 20, 2000, NetWolves' common stock commenced trading on the
NASDAQ SmallCap market under the trading symbol "WOLV". From December 1998 to
April 20, 2000, NetWolves' common stock was traded on the OTC Bulletin Board
under the same symbol. Prior to the December 1998 name and symbol change, the
Company's stock traded under the symbol "WDGT", Watchdog Patrols, Inc. The
following table sets forth the high and low closing prices for the common stock
for the fiscal quarters indicated:

Fiscal 2001 Fiscal 2000
----------- -----------
Quarter High Low High Low
------- ----------- ---------- ---------- ---------

First $ 11.000 $ 4.625 $ 31.500 $ 16.500
Second 7.500 2.625 25.250 18.500
Third 6.000 2.969 23.125 17.000
Fourth 5.420 2.594 16.750 7.500

As of September 6, 2001, there were approximately 175 holders of record of
the common stock. On August 21, 2001, the closing sales price of NetWolves
common stock was $3.25 per share.

NetWolves has not paid any cash dividends on its Common Stock and does not
presently intend to do so. Future dividend policy will be determined by its
Board of Directors on the basis of NetWolves' earnings, capital requirements,
financial condition and other factors deemed relevant.

The transfer agent and registrar of NetWolves' Common Stock is American
Stock Transfer and Trust Co., 40 Wall Street, New York, New York 10005.

ITEM 6. SELECTED FINANCIAL DATA

The following consolidated financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our consolidated financial statements and notes
thereto. The selected consolidated statement of operations data for the years
ended June 30, 2001, 2000 and 1999 and the selected consolidated balance sheet
data as of June 30, 2001 and 2000 are derived from, and are qualified by
reference to, the audited consolidated financial statements included elsewhere
in this annual report on Form 10-K. The selected consolidated statement of
operations data for the period from February 13, 1998 (inception) to June 30,
1998 and the selected consolidated balance sheet data as of June 30, 1998 are
derived from our audited consolidated financial statements that are not included
in this annual report on Form 10-K. The historical results presented below are
not necessarily indicative of future results.

13

Period from
Year ended June 30, February 13, 1998
----------------------------------------------------- (inception) to
2001 2000 1999 June 30, 1998
---------------- ---------------- ---------------- -----------------

Consolidated Statements of
Operations Data:
Revenue $ 1,425,138 $ 1,423,690 $ 1,789,144 $ 29,621
Cost of revenue 1,345,120 959,039 582,724 5,681
-------------- -------------- ------------- --------------
Gross profit 80,018 464,651 1,206,420 23,940

Operating expenses 15,982,067 24,281,166 8,666,381 149,510
-------------- -------------- ------------- --------------
Loss before other income (expense)
and income taxes (15,902,049) (23,816,515) (7,459,961) (125,570)

Investment income (expense), net 650,003 611,746 58,884 6,501
Other (expense) income (3,545) 68,012 478,063 (345)
-------------- -------------- ------------- --------------
Loss before income taxes (15,255,591) (23,136,757) (6,923,014) (119,414)
(Provision for) benefit from income
taxes - (25,000) - 20,000
-------------- -------------- ------------- --------------
Net loss from continuing operations (15,255,591) (23,161,757) (6,923,014) (99,414)

Discontinued business
Loss from discontinued operations (4,725,901) (1,165,191) - -
Loss on disposal of discontinued
operations (650,000) - - -
-------------- -------------- ------------- --------------
Net loss $ (20,631,492) $ (24,326,948) $ (6,923,014) $ (99,414)
=============== ============= ============= ==============
Basic and diluted net loss per share
Loss from continuing operations $ (1.74) $ (3.29) $ (1.48) $ (0.04)
Loss from discontinued operations (.61) (.17) - -
-------------- -------------- ------------- --------------
$ (2.35) $ (3.46) $ (1.48) $ (0.04)
============== ============= ============= ==============
Weighted average common shares
Outstanding, basic and diluted 8,776,928 7,034,994 4,691,651 2,810,102
============== ============= ============= ==============

June 30,
---------------------------------------------------------------------
2001 2000 1999 1998
-------------- -------------- ------------- --------------
Consolidated Balance Sheet Data:
Cash and cash equivalents $ 4,411,657 $ 20,204,309 $ 5,585,981 $ 1,118,416
Marketable securities, available for
sale 71,000 99,500 606,000 1,063,828
Working capital 3,794,438 19,459,099 5,799,246 2,918,327
Total assets 6,860,444 25,543,130 12,811,934 2,959,451
Long-term debt, net of current
maturities 80,000 418,102 266,537 -
Minority interest 281,693 305,761 704,500 -
Total shareholders' equity 4,662,230 22,807,629 11,099,802 2,928,003

14

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

Forward-looking Statements

Certain statements in this "Management's Discussion and Analysis of
Financial Condition and Results of Operations" are forward looking statements.
These statements relate to future events or our future financial performance and
involve known and unknown risks, uncertainties and other factors that may cause
our or our industry's actual results, levels of activity, performance or
achievements to be materially different from any future results, levels of
activity, performance or achievements expressed or implied by the
forward-looking statements. In some cases, you can identify forward-looking
statements by terminology such as "may", "will", "should", "expects", "plans",
"anticipates", "believes", "estimates", "predicts", "potential", "continue" or
the negative of these terms or other comparable terminology. These statements
are only predictions. Actual events or results may differ materially. In
evaluating these statements, you should specifically consider various factors,
including the risks included in this annual report on Form 10-K. These factors
may cause our actual results to differ materially from any forward- looking
statement.

Overview

The Company is a corporation with a limited operating history, formed in
February 1998, when it commenced field trial and limited sales of its original
product, the "FoxBox". Additionally, efforts were made to obtain operating
capital and convert the Company to a public entity. This was successfully
accomplished through a reverse merger with Watchdog Patrols, Inc., a publicly
traded (OTCBB), non- reporting corporation. Operating expenses have increased
significantly since the Company's inception. This reflects the cost associated
with the formation of the Company as well as increased efforts to promote market
awareness for the Company's security products and services, solicit new
customers, recruit personnel, build operating infrastructure and continued
product development.

Netwolves products and services offer complete system solutions to
organizations needing cost effective network security (firewall, routing,
intrusion detection, content filtering, email, intranet, FTP, etc.) complete
with advanced integrated hardware, a user-friendly interface, and net-based
expansion capabilities. As companies combine data and communications to reduce
costs, NetWolves' provides cost-effective, value-added expansion technologies
such as VPN, a process used to allow secure data transmissions on a local area
network, a wide area network, or to secure wireless network connections. This
feature affords the user virtually all the benefits of lease-line service
without the attendant recurring costs.

NetWolves differentiates itself from its competitors primarily through its
proprietary patent pending technology, which provides centralized remote
monitoring and management ("SRM2 TM"). While other, more labor intensive
management systems currently exist, such systems require an inbound
administrative port to provide remote monitoring and management. Most Fortune
1000 companies are unwilling to take the risk of opening up an administrative
inbound port while having their entire enterprise on a public broadband format.
"Hackers", using simple port scanning tools, can easily locate these
administrative inbound ports. SRM2 TM has the ability to monitor thousands of
locations concurrently without opening an administrative inbound port and allows
the secure, remote management and monitoring of multiple all-in-one gateway
servers located worldwide. This monitoring can be performed in real-time, and
from one or numerous central sites. This technology also allows a network
administrator to create a configuration template with all the configuration
information and changes required for all-in-one units. This template can be
applied to each unit, all via a secure configuration mechanism from the central
monitoring location, without compromising network security. It is this SRM2 TM
system that forms the basis of the Company's agreement with the General Electric
Company.

The Company's initial target markets are perimeter offices of Fortune 1000
companies and small to medium size business requiring secure managed Internet
access.

15

In January 1999, the Company entered into an agreement with Sales &
Management Consulting, Inc. (d/b/a The Sullivan Group), a consulting
organization serving the needs of the automobile aftermarket, convenience stores
and oil industry. In July 1999, the Company acquired The Sullivan Group and the
five principal officers and employees of The Sullivan Group were retained under
long-term employment contracts. On or about November 22, 2000 the Company
commenced a lawsuit in the United States District Court for the Southern
District of New York against certain defendants who were officers and/or
directors of TSG (see Item 3 - Legal Proceedings).

In February 2000, NetWolves acquired ComputerCOP Corporation, whose assets
included ComputerCOP technology, inventory and $20.5 million in cash intended to
fund future growth. The shares issued by the Company in connection with the
acquisition are subject to a Voting Trust Agreement, wherein the Company's chief
executive officer has been granted the right to vote all Trust Shares for two
years, subject to earlier termination on the sale of the shares based on certain
parameters. During June 2001, the Company formally adopted a plan to discontinue
its ComputerCOP software operations. At that time, this consisted primarily of
ComputerCOP software technology, inventory and property and equipment. The
Company has accrued a provision for estimated losses during the phase out period
operations of approximately $497,000 at June 30, 2001 and has restated the
consolidated financial statements for the years prior to fiscal 2001 to
separately report results of discontinued operations from the results of
continuing operations.

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 in the
process of 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.

In connection with the Company entering into the agreement, the Company
issued GE a warrant to purchase 500,000 shares of common stock that may be
exercised ratably at a price equivalent to the market price at the time of
vesting and which vest 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 Company issued 200,000 shares of common stock to GE in June 2000.

Results of Operations

The Company had operated in three business segments, the technology
segment, the training and consulting segment and the computer software segment.
During June 2001, the Company formally adopted a plan to discontinue its
ComputerCOP software operations, eliminating the computer software segment, and
has restated the consolidated financial statements for the years prior to fiscal
2001 to separately report results of discontinued operations from the results of
continuing operations.

The year ended June 30, 2001 ("Fiscal 2001") compared to the year ended June 30,
2000 ("Fiscal 2000") is as follows:

Revenue

Revenue from continuing operations increased to $1,425,138 in Fiscal 2001
from $1,423,690 in Fiscal 2000. The increase in revenue was primarily the result
of an increase in sales of the Company's Internet products and services
(technology segment), partially offset by an decrease in management and
consulting service revenue as a result of the continuing disputes between TSG
and certain former employees (See "Item 3 Legal Proceedings"). The increase in
revenue in the technology segment is from shipments to its major customer within
that segment. Additional sales to this major customer were delayed largely as a

16

result of requests by this customer to add additional features in the products
prior to delivery, including the embedding of third party software applications.
The Company believes that the delay in delivery caused by adding these
additional features will result in substantial additional benefits, since the
features added to its core products should assist the Company in facilitating
sales to other Fortune 1000 companies. The Company intends to generate
continuing revenue from the sale of its Internet products and services in the
coming year, including continuing revenue from this customer, as the requested
additional features, including new third party software applications, have now
been added to its products so that the focus will be on the production and sale
of its core technology. The decrease in consulting revenue is primarily
attributable to the termination of a contract with BP Amoco in December 2000.
Service revenue from the TSG subsidiary will be substantially reduced as a
result of the reduction in its operations and the continuing disputes between
the parties.

Revenue from discontinued operations increased to $102,525 compared to none
in the prior year. The increase was due to the commencement of sales of the
ComputerCOP software during the year ended June 30, 2001.

Cost of revenue and gross profit

Cost of revenue for sale of the Company's Internet products and services
include manufacturing costs, which to date have been outsourced, packaging and
shipping costs and warranty expenses. Cost of revenue in connection with
management and consulting services include direct expenses of employees and
consultants utilized in the generation of management and consulting revenue.
Cost of revenue from continuing operations increased to $1,345,120 for fiscal
2001 as compared to $959,039 for Fiscal 2000.

Overall gross profit from continuing operations was at 6% for Fiscal 2001
as compared to 33% for Fiscal 2000. Negative gross profit in the technology
segment resulted from a writedown of inventory approximating $243,000, of which,
approximately $97,000 occurred during the quarter ended June 30, 2001, caused by
the substantial upgrades and improvements made by the Company to its core
products. A decrease in gross profit in the training and consulting segment is
primarily due to the use of higher cost vendors due to limited availability of
comparable alternatives, coupled with a reduced pricing model for the equivalent
levels of service.

Cost of revenue from discontinued operations increased to $8,356 compared
to none in Fiscal 2000. The increase was due to the commencement of sales of the
ComputerCOP software during the year end June 30, 2001.

Engineering and development

Engineering and development expenses, which are expensed as incurred,
consist primarily of salaries and related expenses for personnel utilized in
designing, maintaining and enhancing our products as well as material costs for
test units and prototypes. Costs associated with the development of software
products are generally capitalized once technological feasibility is reached.
Engineering and development expenses from continuing operations increased to
$1,893,372 in Fiscal 2001 from $1,329,341 in Fiscal 2000. The increase in
engineering and development costs was primarily the result of the employment of
additional engineering and development personnel. This was partially offset by
the Company capitalizing approximately $116,000 in software development costs
during Fiscal 2001 as compared to approximately $170,000 in Fiscal 2000. We
expect to incur significant engineering and development costs in the future to
assist in additional development of our core products being sold to our major
customer. We expect to incur engineering and development costs in the future as
we continue to maintain our existing product line as well as develop new
products and features, as evidenced by the development of our "SRM2 TM"
technology.

Engineering and development expenses from discontinued operations increased
to $478,068 in Fiscal 2001 compared to $5,000 in Fiscal 2000. The increase was
primarily due to the hiring of engineering personnel and a full year of
operations at ComputerCOP Corporation.

Sales and marketing

Sales and marketing expenses consist primarily of salaries, commissions and
related expenses for personnel engaged in marketing, sales and customer support
functions, as well as costs associated with trade shows, promotional activities,
advertising and public relations. Sales and marketing expenses from continuing

17

operations increased to $4,958,719 in Fiscal 2001 from $4,868,686 in Fiscal
2000. The increase in sales and marketing expenses was primarily the result of
the employment of additional sales personnel and an increase in marketing
efforts to effectuate brand awareness designed for future growth. The Company
intends to continue to aggressively promote its current and future products and,
therefore, expects sales and marketing costs to increase in absolute dollars in
the future.

Sales and marketing expenses from discontinued operations increased to
$681,636 in Fiscal 2001 compared to $48,032 in Fiscal 2000. The increase was
primarily due to a full year of operations at ComputerCOP Corporation.

General and administrative

General and administrative expenses consist primarily of salaries and
related expenses for executive, finance, facilities and human resources
personnel, recruiting expenses and professional fees. General and administrative
expenses from continuing operations decreased to $7,714,047 in Fiscal 2001
compared to $14,067,059 in Fiscal 2000. The decrease was primarily due to a
reduction in equity compensation given to various financial consultants, and
staff reductions and reduced operations of the Company's training and consulting
segment. We expect general and administrative costs to increase in absolute
dollars in the future.

General and administrative expenses from discontinued operations increased
to $1,551,384 in Fiscal 2001 compared to $1,112,159 in Fiscal 2000. The increase
was primarily due to a full year of amortization expense on the acquired
ComputerCOP software technology and a full year of operations at ComputerCOP
Corporation.

Impairment charges

Impairment charges from continuing operations decreased to $1,415,929 in
Fiscal 2001 compared to $4,016,080 in Fiscal 2000. In June 2001, the Company
determined that the remaining unamortized value of a warrant previously issued
to Comdisco, Inc., was impaired and, accordingly, recorded a charge to
operations of approximately $1,245,000 during fiscal 2001. On June 30, 2000, the
Company recorded a writedown of its training content and goodwill (training and
consulting segment) relating to the acquisition of Sales and Management
Consulting, Inc. ("SMCI") in the amount of $4,016,080. This writedown eliminated
all remaining intangible assets relating to the SMCI 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 are uncertain. Moreover, anticipated
future cash flows of TSG indicate that the recoverability of the asset is not
reasonably assured.

Impairment charges from discontinued operations increased to $2,108,982 in
Fiscal 2001 compared to none in Fiscal 2000. On December 31, 2000, the Company
recorded a writedown of its ComputerCOP technology 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. 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.

Other income (expenses)

Other income (expenses) from continuing operations consists primarily of
investment portfolio income and decreased to $646,458 in Fiscal 2001 from
$679,758 in Fiscal 2000. The decrease was primarily due to a decrease in gains
from the minority interest in TSG due to a reduced loss from the subsidiary in
Fiscal 2001, partially offset by an increase in interest income due to the
increased average cash balance from the ComputerCOP Corporation acquisition.

The year ended June 30, 2000 ("Fiscal 2000") compared to the year ended June 30,
1999 ("Fiscal 1999") is as follows:

18

Revenue

Revenue from continuing operations decreased to $1,423,690 in Fiscal 2000
from $1,789,144 in Fiscal 1999. The 20% decrease in revenue was primarily the
result of a decrease in sales of the Company's Internet products and services
partially offset by an increase in management and consulting revenue. The
decrease in sales of the Company's Internet products and services is primarily
the result of a one-time stocking order for 500 units sold to Anicom, Inc. in
March/April 1999. While the Company did sell units to various customers during
Fiscal 2000, the levels of such sales were significantly below the 500 units
sold to Anicom, Inc. in the previous period. The Company's selling efforts
during the period were primarily designed to enhance future growth. The increase
in consulting revenue is primarily attributable to the Company entering into an
agreement to provide management and consulting services to certain franchisees
of BP Amoco commencing in December 1999.

Through June 30, 2000 the Company had not generated any revenue from its
ComputerCOP technology.

Cost of revenue and gross profit

Cost of revenue from continuing operations increased to $959,039 in Fiscal
2000 from $582,724 in Fiscal 1999. Overall gross profit decreased to 33% in
Fiscal 2000 from 67% in Fiscal 1999. This was primarily attributable to revenue
from management and consulting services, which have significantly reduced
margins. The gross profit on the sale of the Company's Internet products and
services decreased to 57% in Fiscal 2000 from 67% in Fiscal 1999. This is
primarily the result of competitive pricing pressure on the Company's core
product line.

Engineering and development

Engineering and development expenses from continuing operations increased
to $1,329,341 in Fiscal 2000 from $418,109 in Fiscal 1999. In addition, the
Company capitalized approximately $170,000 in software development costs during
Fiscal 2000. The increase in engineering and development costs was primarily the
result of the employment of additional engineering and development personnel. We
expect to incur significant engineering and development costs in the future as
we continue to maintain our existing product line as well as develop new
products and features, as evidenced by the development of SRM2 TM.

Engineering and development expenses from discontinued operations increased
to $5,000 compared to none in Fiscal 1999. The increase was due to the fact that
ComputerCOP Corporation was not acquired until February 10, 2000.

Sales and marketing

Sales and marketing expenses from continuing operations increased to
$4,868,686 in Fiscal 2000 from $2,194,518 in Fiscal 1999. The increase in sales
and marketing expenses was primarily the result of the employment of additional
sales personnel and an increase in marketing efforts to effectuate brand
awareness designed for future growth. Included in sales and marketing expenses
for Fiscal 2000 and Fiscal 1999 are $2,539,362 and $1,467,750, respectively, of
non-cash compensation for services in the form of the Company's common stock,
options and warrants.

Sales and marketing expenses from discontinued operations increased to
$48,032 compared to none in Fiscal 1999. The increase was due to the fact that
ComputerCOP Corporation was not acquired until February 10, 2000.

General and administrative

General and administrative expenses from continuing operations increased to
$14,067,059 in Fiscal 2000 from $6,053,754 in Fiscal 1999. The increase was
primarily due to a full year of operations of the Company's training and
consulting segment as well as the employment of additional administrative
personnel, payment of professional fees for services rendered and equity
compensation given to various financial consultants. Included in general and
administrative expenses for Fiscal 2000 and Fiscal 1999 are $6,152,718 and
$3,695,000, respectively, of non-cash compensation for services in the form of
the Company's common stock, options and warrants.

19

General and administrative expenses from discontinued operations increased
to $1,112,159 compared to none in Fiscal 1999. The increase was due to the fact
that ComputerCOP Corporation was not acquired until February 10, 2000.

Impairment charges

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 are uncertain. Moreover, anticipated future cash flows
of TSG indicate that the recoverability of the asset is not reasonably assured.

Other income (expenses)

Other income (expenses) from continuing operations consists primarily of
portfolio income and increased to $679,758 in Fiscal 2000 from $536,947 in
Fiscal 1999. The increase was primarily due to an increase in interest income in
Fiscal 2000 due to the increased average cash balance from the ComputerCOP
Corporation acquisition compared with a realized gain on the sale of marketable
securities in Fiscal 1999.

Quarterly Results

The following table presents certain unaudited quarterly results for the
last eight quarters:

Three months ended
------------------------------------------------------------------------------------------------------------
Sep 30, Dec 31, Mar 31, Jun 30, Sep 30, Dec 31, Mar 31, Jun 30,
1999 1999 2000(4) 2000 2000 2000 2001 2001
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------

Revenue $ 137,951 $ 334,198 $ 463,405 $ 488,136 $ 453,531 $ 534,911 $ 233,949 $ 202,747
Cost of revenue 96,169 112,695 361,441 388,734 312,693 330,779 396,667 304,981
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross profit (1) 41,782 221,503 101,964 99,402 140,838 204,132 (162,718) (102,234)
Operating expenses(2) 3,659,533 5,806,301 3,607,643 11,207,689 4,511,822 3,780,837 3,064,945 4,624,463
Other income, net 42,667 63,493 208,384 340,214 272,720 200,344 106,995 66,399
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Loss from continuing
operations (3,575,084) (5,521,305) (3,297,295) (10,768,073) (4,098,264) (3,376,361) (3,120,668) (4,660,298)
Loss from
discontinued
operations (3) - - (353,483) (811,708) (853,898) (2,970,854) (452,281) (448,868)
Loss on disposal of
discontinued
operations - - - - - - - (650,000)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net loss $(3,575,084) $(5,521,305) $(3,650,778)$(11,579,781) $(4,952,162) $(6,347,215) $(3,572,949) $(5,759,166)
========== ========== ========== ========== ========== ========== ========== ==========
Basic and diluted
loss per share:
Loss from continuing
operations $ (.59) $ (.88) $ (.44) $ (1.29) $ (.47) $ (.39) $ (.36) $ (.53)
========== ========== ========== ========== ========== ========== ========== ==========
Loss from
discontinued
operations $ - $ - $ (.05) $ (.10) $ (.10) $ (.34) $ (.05) $ (.13)
========== ========== ========== ========== ========== ========== ========== ==========
Weighted average
common shares
outstanding, basic
and diluted 6,068,218 6,303,801 7,460,777 8,330,240 8,667,613 8,742,613 8,742,613 8,742,613

(1) Negative gross profit for the quarters ended March 31, 2001 and June 30,
2001 is primarily due to writedowns of inventory due to obsolescence in such
quarters.

(2) The increase in operating expenses during the quarter ended June 30, 2000 is
primarily due to an impairment recorded on the training and consulting segment.

(3) The increase in loss from discontinued operations during the quarter ended
December 31, 2000 is primarily due to an impairment recorded on the ComputerCOP
software technology.

20

(4) The Company had estimated without independent appraisal a total purchase
price excluding cash payments of approximately $32,690,000 on the acquisition of
ComputerCOP Corporation in its filing of Form 10-Q for the period ended March
31, 2000. Based on an appraisal obtained during the quarter ended June 30, 2000,
the total consideration paid for such acquisition has been determined to be
$26,776,460. The effects of this change include a reduction in stockholders
equity of approximately $5,910,000, and a corresponding reduction in the value
of the software and inventory acquired in the same amount. Further, the
amortization of the software acquired for the year ended June 30, 2000, reflects
the basis using the appraised value and resulted in a reduction of amortization
expense of $268,910 for the period.

Liquidity and Capital Resources

The year ended June 30, 2001 ("Fiscal 2001") compared to the year ended June 30,
2000 ("Fiscal 2000") is as follows:

Our operating activities used cash of $13.7 million during the year ended
June 30, 2001, as compared to $8.4 million during the prior year. Cash used for
the year ended June 30, 2001 was primarily attributable to a net loss of $20.6
million and a decrease in accounts payable and accrued expenses of $.9 million,
partially offset by non-cash expenses including amortization, equity
compensation and an impairment provision totaling $1.2 million, $2.0 million and
$3.5 million, respectively. Cash used in operating activities for the year ended
June 30, 2000 was primarily attributable to a net loss of $24.3 million,
partially offset by non-cash expenses including amortization, equity
compensation and an impairment provision totaling $3.0 million, $8.7 million and
$4.0 million, respectively and an increase in accounts payable and accrued
expenses of $1.0 million. Cash used in operating activities included above
relating to discontinued operations totaled $1.5 million for the year ended June
30, 2001.

Our investing activities used cash of $1.1 million during the year ended
June 30, 2001, as compared to providing cash of $19.2 million during the prior
year. Cash used in investing activities for the year ended June 30, 2001 was
primarily attributable to the Company's purchases of property and equipment
totaling $.7 million. Cash provided by investing activities for the year ended
June 30, 2000 was primarily attributable to $20.5 million of cash acquired in
the ComputerCOP Corporation acquisition, partially offset by finders fees paid
related to the transaction of $.6 million. Cash used in investing activities
included above relating to discontinued operations totaled $.1 million for the
year ended June 30, 2001.

Our financing activities used cash of $1.0 million during the year ended
June 30, 2001, as compared to providing cash of $3.8 million during the prior
year. Cash used for the year ended June 30, 2001 was primarily attributable to
the Company's repurchases of warrants relating to the Anicom settlement totaling
$.7 million. Cash provided by financing activities for the year ended June 30,
2000 was primarily attributable to cash proceeds from the issuance of common
stock totaling $4.3 million, partially offset by financing costs paid. There
were no cash flows from financing activities related to discontinued operations
for the year ended June 30, 2001.

The year ended June 30, 2000 ("Fiscal 2000") compared to the year ended June 30,
1999 ("Fiscal 1999") is as follows:

Our operating activities used cash of $8.4 million during the year ended
June 30, 2000, as compared to $2.3 million during the prior year. Cash used in
operating activities for the year ended June 30, 2000 was primarily attributable
to a net loss of $24.3 million, partially offset by non-cash expenses including
amortization, equity compensation and an impairment provision totaling $3.0
million, $8.7 million and $4.0 million, respectively. Cash used in operating
activities for the year ended June 30, 1999 was primarily attributable to a net
loss of $6.9 million, partially offset by equity compensation totaling $5.2
million. Cash used in operating activities included above relating to
discontinued operations totaled $.5 million for the year ended June 30, 2000.

Our investing activities provided cash of $19.2 million during the year
ended June 30, 2000, as compared to $1.1 million during the prior year. Cash
provided by investing activities for the year ended June 30, 2000 was primarily
attributable to $20.5 million of cash acquired in the ComputerCOP Corporation
acquisition, partially offset by finders fees paid related to the transaction of
$.6 million. Cash provided by investing activities for the year ended June 30,
1999 was primarily attributable to proceeds from the sale of marketable
securities totaling $1.3 million, partially offset by $.6 million of advances to
a subsidiary. Cash provided by investing activities included above relating to
discontinued operations totaled $19.9 million for the year ended June 30, 2000.

21

Our financing activities provided cash of $3.8 million during the year
ended June 30, 2000, as compared to $5.7 million during the prior year. Cash
provided by financing activities for the year ended June 30, 2000 was primarily
attributable to cash proceeds from the issuance of common stock totaling $4.3
million, partially offset by financing costs paid. Cash provided by financing
activities for the year ended June 30, 1999 was primarily attributable to cash
proceeds from the issuance of common stock totaling $6.0 million, partially
offset by financing costs paid. There were no cash flows from financing
activities related to discontinued operations for the year ended June 30, 2000.

Post June 30, 2001 transactions

On July 10, 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). Also in
July 2001, the Company completed another private placement to accredited
investors for $325,000 through the sale of 130,000 shares of unregistered common
stock at $2.50 per share. Additionally, on October 11, 2001, the Company
received $500,000 in the form of a non-negotiable promissory note that bears
interest at the rate of 10% per annum. Such principal and interest is due and
payable in full on April 1, 2003.

Summary

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 $4.4 million at June 30, 2001 and an additional $3.8 million
was received in July and October 2001 (as noted above). Management believes that
the Company has adequate capital resources to meet its working capital needs for
at least the next twelve months based upon its current and planned operating
level and estimated revenue. In order for the Company to execute its business
plan, significant cash outflows were necessary for, among other things,
developing infrastructure and the utilizaton of consultants. Such spending
levels have recently been reduced in accordance with the Company's updated
business plan. To the extent necessary, the Company intends to 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, management will
institute cost saving measures that will significantly reduce the Company's
overhead expenses.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Management does not believe that there is any material market risk exposure
with respect to derivative or other financial instruments that would require
disclosure under this item.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements of the Company and its subsidiaries are included
herein:

o Reports of Independent Certified Public Accountants

o Consolidated Balance Sheets at June 30, 2001 and 2000

o Consolidated Statements of Operations, Cash Flows and Shareholders'
Equity for the years ended June 30, 2001, 2000 and 1999

o Notes to Consolidated Financial Statements

22

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE

On June 26, 2001 the Board of Directors determined to replace Richard A.
Eisner & Company, LLP, the Company's independent public accountants for the
fiscal year ending June 30, 2001, with Arthur Andersen LLP, which will be the
Company's independent certified public accountants for its fiscal year ending
June 30, 2001.

In connection with the audit for the Company's fiscal year ended June 30,
2000 and through June 26, 2001, there were no disagreements or reportable events
with Richard A. Eisner & Company, LLP on any matters of accounting principles or
practices, financial statement disclosure or auditing scope or procedure, which
agreements, if not resolved to their satisfaction, would have caused it to make
a reference to the subject matter of the disagreement in connection with their
report.

The report of Richard A. Eisner & Company, LLP for the year ended June 30,
2000 does not contain an adverse opinion or a disclaimer of opinion, or a
qualification or modification as to uncertainty, audit scope or accounting
principles.

The Company has not had any discussions nor received any written opinion or
oral advice from Arthur Andersen LLP during the two most recent fiscal years and
any subsequent interim period preceding the dismissal of Richard A. Eisner &
Company, LLP with respect to either the application of accounting principles to
a specified transaction, either completed or proposed, or as to the type of
audit opinion that might be rendered on the registrant's financial statements.

23

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The directors and executive officers of the Company and their ages are as
follows:

Name Age Position
----------------- --- ------------------------------------

Walter M. Groteke 31 Chairman of the Board, President and
Chief Executive Officer
Walter R. Groteke 54 Vice President - Sales and Marketing
and Director
Peter C. Castle 33 Treasurer, Secretary, Vice President -
Finance
Ed Lavin 57 Director
James A. Cannavino 56 Director
Myron Levy 60 Director

Principal Occupations of Officers and Directors

Walter M. Groteke, a co-founder of the Company, has been Chairman of the
Board, Chief Executive Officer and a director of the Company since June 1998.
Mr. Groteke is responsible for planning, developing and establishing policies
and business objectives for the Company. From June 1995 until 1997, Mr. Groteke
was regional business development manager for Techmatics, Inc., an information
systems Department of Defense contractor. From May 1993 to June 1995, Mr.
Groteke was senior account manager for NYNEX's strategic account management
program.

Walter R. Groteke has been a director of the Company since February 1999
and Vice President - Sales and Marketing since August 1998. From 1995 through
July 1998, Mr. Groteke was a regional and district sales manager for GTE Florida
and GTE Communications Corporation. Mr. Groteke founded Hawk Telecom in 1975 and
was President until its sale in 1994. Mr. Groteke is the father of Walter M.
Groteke.

Peter C. Castle has been Vice President - Finance since January 2000,
Controller from August 1998 until December 1999 and Treasurer and Secretary
since August 1999. From 1996 through July 1998 Mr. Castle was the Southeast
Regional Finance Manager for Magellan Health Service, Inc. a $1.6 billion
managed behavioral care company based in Georgia. Prior to that Mr. Castle was
the Controller for Physician's Care Network of NY, Inc.

James A. Cannavino has been a director of the Company since April, 2000.
Mr. Cannavino is President and Chief Executive Officer of CyberSafe, Inc., a
corporation specializing in network security. Additionally, he is Chairman of
Direct Insite Corp. (f/k/a Computer Concepts Corp.) He was the President and
Chief Executive Officer of Perot Systems Corporation through July 1997, and
prior to that was a Senior Vice President at IBM, responsible for strategy and
development. He also served on the IBM Corporate Executive Committee and
Worldwide Management Council, and on the board of IBM's integrated services and
solutions company. Mr. Cannavino currently serves on the boards of National
Center for Missing and Exploited Children, 7th Level, Inc. and Marist College.

Ed Lavin has been a director of the Company since February 1999. Since May
2000, Mr. Lavin has been President and Chief Executive Officer of Hawkeye Group,
a telecommunications company. From March 1999 until May 2000, he was Chairman
and Chief Executive Officer of Staples Communications, a subsidiary of Staples
Corporation since March, 1999. Mr. Lavin began his career at ADT from 1967 to
1972. In 1970 he was promoted into ADT's National Accounts Division. Mr. Lavin
then joined the L. M. Ericcson Company of Sweden from 1973 to 1979 where he
served as Vice President of Sales in the United States. Mr. Lavin immigrated to
Canada in 1980 to form Canadian Telecommunications Group and was Chairman and
CEO of Canadian Telecommunications Group (CTG) from 1980 to 1986. Mr. Lavin
moved to TIE Communications where he served as president from 1987 to 1990. TIE
Communications acquired Centel Communications, which was later merged with
WilTel Communications where he served as CEO from 1990 to 1993. In November
1993, Mr. Lavin founded Quest America, a telecommunications consulting company
based in Boston, Massachusetts. On April 10, 1996, Mr. Lavin led a group that
acquired Executone Information Systems' Network Division. The purchaser was a
group financed by Bain Capital, Inc. of Boston, Massachusetts. The company name

24

was later changed to Claricom, Inc. In March 1999, Claricom successfully merged
its business with Staples Corporation.

Mr. Levy is a certified public accountant and has been President of Herley
Industries, Inc., a NASDAQ National Market Company, since June 1993 and Chief
Executive Officer since July 2001. He has been employed by Herley since October
1988 having held various executive positions. For the ten years prior to joining
Herley, Mr. Levy was employed in various executive capacities, including Vice
President, of Griffon Corporation, a New York Stock Exchange company. For
approximately ten years prior thereto, Mr. Levy was an accountant with Arthur
Andersen LLP.

ITEM 11. EXECUTIVE COMPENSATION

The following table sets forth the annual and long-term compensation with regard
to the Chairman/Chief Executive Officer and each of the other executive officers
of the Company who received more than $100,000 for services rendered during
fiscal 2001.

Summary Compensation Table

Annual Compensation Long Term Compensation
------------------------------------------ ----------------------
Securities
Other Restricted underlying
Fiscal annual stock options/
Name and principal position year Salary Bonus Compensation(1) awards warrants
--------------------------------- ------ ------------ ----------- -------------- ----------- ----------

Walter M. Groteke 2001 $ 238,750 $ - $ - $ - 850,000
Chairman and Chief Executive 2000 130,000 - - - -
Officer 1999 101,250 - - - -

Walter R. Groteke 2001 $ 161,250 $ - $ - $ - 300,000
Senior Vice President 2000 154,740 - - - -
1999 - - - 768,750 200,000

Peter C. Castle 2001 $ 138,750 $ - $ - $ - 275,000
Treasurer, Secretary and 2000 97,620 - - - 65,000
Vice President Finance 1999 82,828 - - - 40,000

(1) Other annual compensation excludes certain perquisites and other
non-cash benefits provided by the Company since such amounts do not
exceed the lesser of $50,000 or 10% of the total annual base salary
disclosed in the table for the respective officer.

Option Grants in Last Fiscal Year

The following table provides information regarding stock options we granted
in fiscal 2001 to named executive officers whose compensation exceeded $100,000
in fiscal 2001. The table includes the potential realizable value over the
five-year term of the options, based on assumed rates of stock appreciation of
5% and 10%, compounded annually. The assumed rates of appreciation are
prescribed by the Securities and Exchange Commission for illustrative purposes
only and are not intended to forecast or predict future stock prices. Any actual
gains on option exercises will depend on the future performance of our stock.

Potential realizable value
at assumed annual rates
of stock price
Annual compensation appreciation for option term (3)
----------------------------------------------------------- -------------------------------

Number of Percent of
securities total options
underlying granted to
options employees in Exercise Expiration
Name granted (#)(1) fiscal year (2) price ($/Sh) date 5% ($) 10% ($)
---- ---------- -------------- ----------- ----------- ----- ------

Walter M. Groteke 450,000 10.4% $ 5.00 8/15/05 $ 486,000 $ 1,048,500
Walter M. Groteke 400,000 9.2% 4.00 5/21/06 344,000 740,000
Walter R. Groteke 100,000 2.3% 5.00 8/15/05 108,000 233,000
Walter R. Groteke 200,000 4.6% 4.00 5/21/06 172,000 370,000
Peter C. Castle 75,000 1.7% 5.00 8/15/05 81,000 174,750
Peter C. Castle 200,000 4.6% 4.00 5/21/06 172,000 370,000

25

(1) 50% of the option shares vest immediately and the remaining 50% vest
after one year of service for the August 15, 2000 issuance. 100% of
the option shares vest immediately for the May 21, 2001 issuance. We
granted all options under our stock option plans at exercise prices at
the fair market value of our common stock on the date of grant.

(2) In fiscal 2001, we granted options/warrants to purchase up to an
aggregate of 4,330,250 shares to employees, directors and consultants.

(3) The 5% and 10% assumed annual rates of compounded stock price
appreciation are mandated by rules of the Securities and Exchange
Commission. There can be no assurance provided to any executive
officer or any other holder of the Company's securities that the
actual stock price appreciation over the five-year option term will be
at the assumed 5% and 10% levels or at any other defined level. Unless
the market price of the Common Stock appreciates over the option term,
no value will be realized from the option grants made to the executive
officers.

Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values

The following table provides information regarding value realized from
options exercised during fiscal 2001 and unexercised options held as of June 30,
2001 by our Chief Executive Officer and the other executive officers whose
compensation exceeded $100,000 in fiscal 2001. The value of unexercised
in-the-money options is calculated at June 30, 2001.

Number of securities Value of unexercised
underlying unexercised in-the-money
Shares options at fiscal options at fiscal
acquired on Value year end (#) year end ($) (1)
Name exercise (#) realized ($) Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ----------- ----------- ------------- ----------- -------------

Walter M. Groteke - - 825,000 225,000 $ 330,000 $ -
Walter R. Groteke - - 450,000 50,000 330,000 -
Peter C. Castle - - 329,167 50,833 - -

(1) Based upon the closing price of common stock of $3.28 on June 30,
2001.

Employment Agreements

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:

o The agreement with the Walter M. Groteke, Chairman and Chief Executive
Officer, is for a term of five years at an annual salary of $275,000
subject to cost of living increments.

o The agreement with the Walter R. Groteke, Senior Vice President, is
for a term of three years, subject to two additional one-year
extensions, at an annual salary of $175,000.

o The agreement with the Peter C. Castle, Treasurer, Secretary and 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.

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.

26

Approximate net
Maximum cumulative
Date allowable issuances Maximum
Plan name plan adopted issuances June 30, 2001 term in years
----------- -------------- --------- ---------------- -------------

1998 Plan June 1998 282,500 141,000 10
2000 Plan July 2000 1,500,000 1,374,000 10
2001 Plan February 2001 1,750,000 500,000 10
--------- ---------
3,532,500 2,015,000
========= =========

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth the beneficial ownership of shares of voting
stock of the Company, as of August 27, 2001, of (i) each person known by the
Company to beneficially own 5% or more of the shares of outstanding common
stock, based solely on filings with the Securities and Exchange Commission, (ii)
each of the Company's executive officers and directors and (iii) all of the
Company's executive officers and directors as a group. Except as otherwise
indicated, all shares are beneficially owned, and investment and voting power is
held by the persons named as owners.

Name and Address Amount and Nature
Of Beneficial Owner of Shares Ownership Percentage
------------------- ------------------- ----------

Direct Insite Corp. 1,425,000 (1) 13.4 %
Pequot Capital Management, Inc. 1,200,000 11.3 %
Walter M. Groteke 2,903,064 (2) 27.2 %
Walter R. Groteke 625,000 (3) 5.9 %
Peter C. Castle 371,667 (4) 3.5 %
James A. Cannavino 215,000 (5) 2.0 %
Ed Lavin 65,000 (6) * %
Myron Levy 70,000 (7) * %
Executive officers and
directors as a group (6 persons) 4,249,731 39.9 %

* less than one percent (1%) unless otherwise indicated.

(1) The voting rights to these shares are held by Mr. Walter M. Groteke
pursuant to the terms of a voting agreement.

(2) Includes 1,425,000 shares owned by Direct Insite Corp. covered by a
voting agreement and an option to purchase 450,000 shares of common
stock at $5.00 per share, options to purchase 400,000 shares of common
stock at $4.00 per share and a warrant to purchase 200,000 shares of
common stock at $1.63 per share.

(3) Includes an option to purchase 100,000 shares at $5.00 per share, an
option to purchase 200,000 shares of common stock at $4.00 per share
and a warrant to purchase 200,000 shares at $1.63 per share.

(4) Includes an option to purchase 26,667 shares of common stock at $5.00
per share, a warrant to purchase 65,000 shares of common stock at
$12.00 per share, an option to purchase 75,000 shares of common stock
at $5.00 per share and an option to purchase 200,000 shares at $4.00
per share. Does not include an option to purchase 13,333 shares of
common stock at $5.00 per share.

(5) Represents a warrant issued to Mr. Cannavino to purchase 200,000
shares of common stock at $10.00 per share and an option issued to
purchase 15,000 shares of common stock at $4.82 per share.

(6) Includes an option issued to Mr. Lavin to purchase 15,000 shares of
common stock at $4.82 per share.

(7) Includes a warrant issued to Mr. Levy to purchase 50,000 shares of
common stock at $5.00 per share and an option issued to purchase
15,000 shares of common stock at $4.82 per share.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None

27

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) See Index to Financial Statements at beginning of attached financial
statements.

(b) Reports on Form 8-K
-------------------

Current Report on Form 8-K dated June 26, 2001.

(c) Exhibits
--------

3.1 Certificate of Incorporation, as amended.*
3.2 By-Laws. *
4.1 Specimen common stock certificate.*
4.2 Form of warrant to investment banking firm. *
4.3 Form of warrant to employees.*
10.1 Agreement between The Sullivan Group and NetWolves Corporation dated
January 5, 1999.*
10.2 Warrant Agreement between NetWolves Corporation and Walter M. Groteke dated
June 17, 1998.*
10.3 1998 Stock Option Plan*
10.4 2000 Stock Option Plan *****
10.5 2001 Stock Option Plan
10.6 Form of Indemnification Agreement*
10.7 Agreement and Plan of Merger dated as of July 7, 1999 among NetWolves
Corporation, TSG Global Education Web, Inc. and Sales and Management
Consulting, Inc., d/b/a The Sullivan group and Duffy-Vinet Institute. **
10.8 Exchange Agreement dated as of February 10, 2000 by and among NetWolves
Corporation, Computer Concepts Corp. and ComputerCOP Corporation with
Exhibits.****
10.9 Employment Agreement between NetWolves Corporation and Walter M. Groteke
dated October 1, 2000.
10.10Employment Agreement between NetWolves Corporation and Walter R. Groteke
dated October 1, 2000. ******
10.11Employment Agreement between NetWolves Corporation and Peter C. Castle
dated October 1, 2000. ******

---------

* Previously filed as exhibits to Report on Form 10, as amended.

** Previously filed as an exhibit to Report on Form 8-K dated July 7, 1999,
as amended.

*** Previously filed as an exhibit to Report on Form 10/A, Amendment No. 1.

**** Previously filed as an exhibit to Report on Form 8-K dated February 10,
2000.

***** Previously filed as an exhibit to Report on Form 10-K for the fiscal year
ended June 30, 2000.

****** Previously filed as an exhibit to Report on Form 10-Q for the quarter
ended March 31, 2001.

28

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized on the 11th day of October 2001.

NetWolves Corporation

By: /s/ Walter M. Groteke
Walter M. Groteke
Chairman of the Board, President
and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below on October 11, 2001 by the following persons in the
capacities indicated:

/s/ Walter M. Groteke Chairman of the Board and President
Walter M. Groteke Chief Executive Officer

/s/ Walter R. Groteke Vice President - Sales and Marketing
Walter R. Groteke and Director

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

/s/ James A. Cannavino Director
James A. Cannavino

/s/ Ed Lavin Director
Ed Lavin

/s/ Myron Levy Director
Myron Levy

29

NETWOLVES CORPORATION AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

AS OF JUNE 30, 2001, 2000 AND 1999

CONTENTS

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-1

INDEPENDENT AUDITORS' REPORT F-2

INDEPENDENT AUDITORS' REPORT F-3

CONSOLIDATED BALANCE SHEETS
June 30, 2001 and 2000 F-4

CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended June 30, 2001, 2000 and 1999 F-5

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the years ended June 30, 1999, 2000 and 2001 F-6 - F-7

CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended June 30, 2001, 2000 and 1999 F-8 - F-9

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-10 - F-37

INDEPENDENT AUDITORS' REPORT ON SCHEDULE II F-38

INDEPENDENT AUDITORS' REPORT ON SCHEDULE II F-39

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES F-40

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Board of Directors and Shareholders of
NetWolves Corporation:

We have audited the accompanying consolidated balance sheet of NetWolves
Corporation (a New York corporation) and subsidiaries as of June 30, 2001, and
the related consolidated statements of operations, shareholders' equity and cash
flows for the year then ended. 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. 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 financial position of NetWolves Corporation and
subsidiaries as of June 30, 2001, and the results of their operations and their
cash flows for the year then ended in conformity with accounting principles
generally accepted in the United States.

Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. Schedule II listed in the index of financial
statements is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
Schedule II has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.

/s/ Arthur Andersen LLP

Tampa, Florida,
August 17, 2001 (except with respect to
the matters discussed in Note 17, as to
which the date is October 11, 2001)

F-1

Board of Directors and Shareholders
NetWolves Corporation
Bohemia, New York

INDEPENDENT AUDITORS' REPORT

We have audited the accompanying consolidated balance sheet of NetWolves
Corporation and subsidiaries (the "Company") as of June 30, 2000, and the
related consolidated statements of operations, shareholders' equity and cash
flows 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 financial position of NetWolves
Corporation and subsidiaries as of June 30, 2000, and the consolidated results
of their operations and their consolidated cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States of
America.

/s/ Richard A. Eisner & Company, LLP

New York, New York
August 24, 2000

F-2

Board of Directors and Shareholders
NetWolves Corporation
Bohemia, New York

INDEPENDENT AUDITOR'S 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, 1999. 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. 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 cash flows of
NetWolves Corporation and subsidiaries for the year ended June 30, 1999 in
conformity with accounting principles generally accepted in the United States.

/s/ Hays & Company

August 12, 1999
New York, New York

F-3

NETWOLVES CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

June 30,
--------------------------------------

2001 2000
------------------ ------------------

ASSETS

Current assets
Cash and cash equivalents $ 4,411,657 $ 20,204,309
Marketable securities, available for sale 71,000 99,500
Accounts receivable, net of allowance for doubtful accounts of
$152,259 and $44,747 at June 30, 2001 and 2000, respectively 366,868 248,861
Inventories 361,656 633,453
Prepaid expenses 234,648 151,344
Other current assets 185,130 133,270
------------------ ------------------
Total current assets 5,630,959 21,470,737

Property and equipment, net 982,748 590,906
Software 73,414 3,427,688
Intangible assets - -
Other assets 173,323 53,799
------------------ ------------------
$ 6,860,444 $ 25,543,130
================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities
Accounts payable and accrued expenses $ 926,634 $ 1,792,030
Accrued losses of discontinued operations 496,927 -
Deferred revenue 129,978 11,173
Current maturities of long-term debt 282,982 208,435
------------------ ------------------
Total current liabilities 1,836,521 2,011,638

Long-term debt, net of current maturities 80,000 418,102
------------------ ------------------
Total liabilities 1,916,521 2,429,740
------------------ ------------------
Minority interest 281,693 305,761
------------------ ------------------
Commitments and contingencies

Shareholders' equity
Preferred stock, $.0033 par value; 2,000,000 and no shares authorized
on June 30, 2001 and 2000, respectively; no shares issued and
outstanding on June 30, 2001 and 2000 - -
Common stock, $.0033 par value; 50,000,000 and 10,000,000 shares
authorized on June 30, 2001 and 2000, respectively; 9,167,613 and
8,592,613 shares issued and outstanding on June 30, 2001 and 2000,
respectively 30,254 28,356
Additional paid-in capital 57,748,499 56,076,197
Unamortized value of equity compensation (1,011,500) (1,851,893)
Accumulated deficit (51,980,868) (31,349,376)
Accumulated other comprehensive loss (124,155) (95,655)
------------------ ------------------
Total shareholders' equity 4,662,230 22,807,629
------------------ ------------------
$ 6,860,444 $ 25,543,130
================== ==================

The accompanying notes to the financial statements
are an integral part of these consolidated
balance sheets.

F-4

NETWOLVES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

For the year ended June 30,
-----------------------------------------------------------

2001 2000 1999
----------------- ----------------- -----------------

Revenue
Products $ 341,203 $ 132,825 $ 1,789,144
Services 1,083,935 1,290,865 -
----------------- ----------------- -----------------
1,425,138 1,423,690 1,789,144
----------------- ----------------- -----------------
Cost of revenue
Products 439,799 56,739 582,724
Services 905,321 902,300 -
----------------- ----------------- -----------------
1,345,120 959,039 582,724
----------------- ----------------- -----------------
Gross profit 80,018 464,651 1,206,420
----------------- ----------------- -----------------
Operating expenses

General and administrative 7,714,047 14,067,059 6,053,754
Engineering and development 1,893,372 1,329,341 418,109
Sales and marketing 4,958,719 4,868,686 2,194,518
Impairment charges 1,415,929 4,016,080 -
----------------- ----------------- -----------------
15,982,067 24,281,166 8,666,381
----------------- ----------------- -----------------
Loss before other income (expense)
and income taxes (15,902,049) (23,816,515) (7,459,961)

Other income (expense)
Investment income 650,003 611,746 58,884
(Loss) gain on sale of marketable securities - (35,000) 478,518
Minority interest 24,068 148,739 -
Interest expense (27,613) (45,727) (455)
----------------- ----------------- -----------------
Loss before income taxes (15,255,591) (23,136,757) (6,923,014)

Provision for income taxes - (25,000) -
----------------- ----------------- -----------------
Net loss from continuing operations (15,255,591) (23,161,757) (6,923,014)

Discontinued business
Loss from discontinued operations (4,725,901) (1,165,191) -
Loss on disposal of discontinued operations (650,000) - -
----------------- ----------------- -----------------
Net loss $ (20,631,492) $ (24,326,948) $ (6,923,014)
================= ================= =================
Basic and diluted net loss per share
Loss from continuing operations $ (1.74) $ (3.29) $ (1.48)
Loss from discontinued operations (.61) (.17) -
----------------- ----------------- -----------------
$ (2.35) $ (3.46) $ (1.48)
================= ================= =================
Weighted average common shares
outstanding, basic and diluted 8,776,928 7,034,994 4,691,651
================= ================= =================

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

F-5

NETWOLVES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

FOR THE YEARS ENDED JUNE 30, 1999, 2000 AND 2001

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)
------ ------ ---------- ----------- ------------- --------------- ------------- -------------

Balance, June 30, 1998 4,313,870 $ 14,236 $ 3,012,159 $ (99,414) $ 1,022 $ - $ 2,928,003

Common stock and warrants issued
for services 770,000 2,541 5,160,209 - - - 5,162,750

Proceeds from sale of warrants - - 300,000 - - - 300,000

Common stock issued in private
placement, net of expenses 800,000 2,640 5,350,085 - - - 5,352,725

Adjustment to fair value of
Reverse Acquisition - - (190,485) - - - (190,485)

Common stock issued in purchase
business combination (Note 4) 180,000 594 4,094,406 - - - 4,095,000

Marketable securities valuation
adjustment - - - - 374,823 - 374,823 374,823

Net loss, year ended June 30, 1999 - - - (6,923,014) - - (6,923,014) (6,923,014)
--------- ------ ---------- ----------- ----------- --------------- ------------ -----------
Total comprehensive loss $(6,548,191)
===========
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) 8,692,080

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 4) 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

F-6

NETWOLVES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

FOR THE YEARS ENDED JUNE 30, 1999, 2000 AND 2001

(continued)

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)
------ ------ ---------- ----------- ------------- --------------- ------------- -------------
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
========= ======= =========== ============ =========== =============== ============

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

F-7

NETWOLVES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the year ended June 30,
-----------------------------------------------------------
2001 2000 1999
----------------- ----------------- ----------------

Cash flows from operating activities
Net loss $ (20,631,492) $ (24,326,948) $ (6,923,014)
Adjustments to reconcile net loss to net cash used
in operating activities
Depreciation 231,029 93,763 15,896
Amortization 1,190,223 2,968,786 -
Realized loss (gain) on sale of marketable
securities - 35,000 (478,518)
Provision for impairment 3,524,911 4,016,080 -
Provision for inventory obsolescence 243,222 - -
Loss on disposal of property and equipment 64,435 - -
Accrued loss on disposal of discontinued
operations 496,927 - -
Provision for doubtful accounts 141,101 4,747 35,000
Non-cash charge to operations with respect to
common stock, options and warrants issued for
services 1,974,799 8,692,080 5,162,750
Minority interest (24,068) (148,739) -

Changes in operating assets and liabilities
Accounts receivable (225,519) (176,701) (34,883)
Inventories 86,484 (340,099) (95,944)
Prepaid expenses (83,304) (83,443) (49,584)
Other current assets 14,551 7,928 (85,197)
Accounts payable and accrued expenses (865,396) 978,694 187,863
Deferred compensation - (100,000) -
Deferred revenue 118,805 11,173 -
----------- ---------- ----------
Net cash used in operating activities (13,743,292) (8,367,679) (2,265,631)
----------- ---------- ----------
Cash flows from investing activities
Proceeds from the sale of marketable securities - - 1,311,169
Issuance of notes receivable - (56,000) -
License fees paid (150,000) - -
Patent costs paid (32,101) - -
Proceeds from assets held for sale, net - - 549,515
Finders fees paid in connection with acquisition of
ComputerCOP Corp. - (550,000) -
Appraisal fee paid in connection with acquisition - (40,000) -
of ComputerCOP Corp.
Cash acquired - ComputerCOP Corp. - 20,500,000 -
Purchases of property and equipment (745,215) (459,978) (200,383)
Advances to subsidiary, net of cash acquired of
$412,224, plus acquisition costs paid - - (561,776)
Capitalized software costs (116,066) (170,913) -
Payments of security deposits (37,423) (31,018) (18,054)
----------- ---------- ----------
Net cash (used in) provided by investing
activities (1,080,805) 19,192,091 1,080,471
----------- ---------- ----------

F-8

NETWOLVES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the year ended June 30,
----------------------------------------------------------

2001 2000 1999
----------------- ----------------- ----------------

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 - 4,312,500 6,000,000
Financing costs paid in connection with sale of
common stock - (330,825) (647,275)
Cash proceeds from sale of warrants - - 300,000
---------------- ---------------- --------------
Net cash (used in) provided by financing
activities (968,555) 3,793,916 5,652,725
---------------- ---------------- --------------
Net (decrease) increase in cash and cash equivalents (15,792,652) 14,618,328 4,467,565

Cash and cash equivalents, beginning of year 20,204,309 5,585,981 1,118,416
---------------- ---------------- --------------
Cash and cash equivalents, end of year $ 4,411,657 $ 20,204,309 $ 5,585,981
================ ================ ==============

Cash paid for interest $ 27,613 $ 45,727 $ 455
================ ================ ==============
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES

Reverse acquisition (Note 3)
Net assets held for sale
$ - $ - $ (190,485)
---------------- ---------------- --------------
Outstanding common stock of Watchdog Patrols, Inc. $ - $ - $ (190,485)
================ ================ ==============
Purchase acquisition (Note 4)
Accounts receivable $ - $ - $ 70,221
Property and equipment - - 35,255
Intangible assets - - 6,024,121
Accrued expenses and other liabilities - - (400,498)
Long-term debt - - (309,948)
Acquisition costs - - (82,875)
Advances to subsidiary, net of cash acquired
of $412,224 - - (536,776)
Minority interest - - (704,500)
---------------- ---------------- --------------
Common stock issued in purchase acquisition $ - $ - $ 4,095,000
================ ================ ==============
Noncash conversion of preferred stock to common stock
(Note 4) $ - $ 250,000 $ -
================ ================ ==============
Software ($2,907,520) and inventory ($175,000) $ - $ 3,082,520 $ -
acquired through issuance of equity instruments ================ ================ ==============

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

F-9

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.

Additionally, in conjunction with TSG's acquisition of Sales and Management
Consulting, Inc. (d/b/a The Sullivan Group, see Note 4), 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, 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 4). ComputerCOP Corp.'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 (Note 5).

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 4). 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 4).

Prepaid expenses

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

F-10

NETWOLVES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2 Significant accounting policies (continued)

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 the 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 $154,331 and $207,325, respectively, at June
30, 2001 and $80,931 and $552,522, respectively, at June 30, 2000. Included
in inventory at June 30, 2001 and June 30, 2000 is $25,000 and $201,493,
respectively, of finished goods and raw materials inventory relating to
discontinued operations (Note 5).

Property and equipment

Property and equipment are stated at cost. Costs assigned to property and
equipment of the acquired businesses (Note 4) 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

F-11

NETWOLVES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2 Significant accounting policies (continued)

Property and equipment (continued)

useful lives of the related assets. Depreciation and amortization is
included in general and administrative expenses in the accompanying
consolidated statements of operations.

Intangible assets

Intangible assets at June 30, 1999 consisted of intangible assets acquired
in connection with the Company's purchase business combination effective
June 30, 1999 (Note 4). These assets consisted of training content
(including a training library, industry benchmarking data and the Profit
Coach profitability analysis module), which had a fair value of $1,000,000.
The remaining portion of the intangible asset (approximating $5,024,000)
was allocated to goodwill. The training content and the goodwill were being
amortized over their estimated useful lives of 3 years. On June 30, 2000,
the Company recorded a loss on impairment of the carrying value of the
intangible assets at that date (Note 4).

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 $1,190,000 and $960,000 in
amortization expense for the years ended June 30, 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 $116,000, $170,000 and none and incurred
approximately $1,893,000, $802,000 and $418,000 in research and development
costs for the years ended June 30, 2001, 2000 and 1999, respectively.

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

F-12

NETWOLVES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2 Significant accounting policies (continued)

Income taxes (continued)

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.

Stock options

SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123")
establishes a fair value-based method of accounting for stock 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
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 for the years ended June 30,
2001, 2000 and 1999 does not include the impact of potential shares to be
issued upon exercise of options and warrants aggregating approximately
7,135,000, 3,057,000 and 2,116,000, 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, 2001, approximately $325,000 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, 2001, 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 stockholders' equity and
comprehensive income (loss).

F-13

NETWOLVES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2 Significant accounting policies (continued)

Summary of recent accounting pronouncements

In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS 133). SFAS 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as Derivatives) and for hedging activities. It
requires that entities recognize Derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. In June 1999, the FASB issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of FASB Statement No. 133," which delayed the date for
implementation to all fiscal quarters of all fiscal years beginning after
June 15, 2000. In June 2000, the FASB issued SFAS No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities - an
amendment of SFAS No. 133," which amends the accounting and reporting
standards of SFAS 133 for Derivatives and certain hedging activities. The
adoption of SFAS 133, on July 1, 2000, did not have a material effect on
the Company's results of operations.

On July 20, 2001, the Financial Accounting Standards Board issued
Statements of SFAS No. 141 ("SFAS No. 141"), "Business Combinations", and
SFAS No. 142 ("SFAS No. 142"), "Goodwill and Other Intangible Assets." SFAS
No. 141 addresses financial accounting and reporting for goodwill and other
intangible assets acquired in a business combination at acquisition. SFAS
No. 141 requires the purchase method of accounting to be used for all
business combinations initiated after June 30, 2001; establishes specific
criteria for the recognition of intangible assets separately from goodwill;
and requires unallocated negative goodwill to be written off immediately as
an extraordinary gain (instead of being deferred and amortized). SFAS
No.142 addresses financial accounting and reporting for intangible assets
acquired individually or with a group of other assets at acquisition. SFAS
No. 142 also addresses financial accounting and reporting for goodwill and
other intangible assets subsequent to their acquisition. SFAS No. 142
provides that goodwill and intangible assets which have indefinite useful
lives will not be amortized but rather will be tested at least annually for
impairment. It also provides that intangible assets that have finite useful
lives will continue to be amortized over their useful lives, but those
lives will no longer be limited to forty years. SFAS No. 141 is effective
for all business combinations initiated after June 30, 2001 and for all
business combinations accounted for by the purchase method for which the
date of acquisition is after June 30, 2001. The provisions of SFAS No. 142
are effective for fiscal years beginning after December 15, 2001. The
Company plans to adopt SFAS No. 142 effective July 1, 2002. The Company is
considering the provisions of SFAS No. 141 and No. 142 and at present has
not determined the impact of adopting SFAS No. 141 and SFAS No. 142.

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.

F-14

NETWOLVES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3 Reverse acquisition

On June 17, 1998, Watchdog acquired all of the outstanding common stock of
NetWolves, LLC (the "Reverse Acquisition"). For accounting purposes, the
acquisition has been treated as an acquisition of Watchdog by NetWolves,
LLC and as a recapitalization of NetWolves, LLC. The historical financial
statements prior to June 17, 1998 are those of NetWolves, LLC. The
acquisition of Watchdog has been recorded based on the fair value of
Watchdog's net tangible assets, which consist primarily of cash, marketable
securities and certain assets held for sale, with an aggregate value of
$2,962,150 (net of transaction costs of $261,022). Since this transaction
is in substance, a recapitalization of NetWolves, LLC and not a business
combination, pro forma information is not presented.

As part of the Reverse Acquisition, the NetWolves, LLC membership interests
were converted into 2,640,322 shares of Watchdog common stock and warrants
to purchase an aggregate of 620,000 shares of Watchdog common stock at an
exercise price of $1.63 per share. Immediately prior to the Reverse
Acquisition, there were 1,673,548 shares of Watchdog common stock issued
and outstanding. In addition, certain pre-Reverse Acquisition shareholders
of Watchdog received warrants to purchase 500,000 shares of Watchdog common
stock at an exercise price of $1.63 per share. Additionally, two
individuals, who provided consulting services with respect to the Reverse
Acquisition, received warrants to purchase an aggregate of 87,500 shares of
Watchdog common stock at an exercise price of $2.00 per share. These
warrants are described further in Note 10.

In connection with the Reverse Acquisition, in the fourth quarter of fiscal
1999, the Company reduced the fair value of Watchdog's net tangible assets
(the assets held for sale) and, accordingly, recorded an adjustment to
additional paid-in capital of $190,485.

4 Purchase acquisitions

ComputerCOP Corporation

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 valued at
$23,962,500. ComputerCOP Corporation'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 10). 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-15

NETWOLVES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4 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
Corporation acquisition as well as all the shares sold by the three
officers (the "Trust Shares") are subject to a Voting Trust Agreement,
wherein the Company's chief executive officer has 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 5). 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 (Note 5).

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 are
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-16

NETWOLVES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4 Purchase acquisitions (continued)

The purchase price approximated $4,095,000 (exclusive of acquisition costs
of $82,875), which consisted of 180,000 shares of NetWolves restricted
common stock valued at $22.75 per share (fair value of the common stock was
based on its quoted market price on the effective date of the acquisition).
Additionally, certain officers of TSG had options to acquire up to 175,000
(4%) additional shares of TSG's common stock based upon meeting certain
performance levels. The acquisition has been accounted for with an
effective date of June 30, 1999 using the purchase method of accounting.
Accordingly, assets and liabilities were recorded at their fair values as
of June 30, 1999.

An allocation of the fair value of the assets acquired and liabilities
assumed is as follows:

Purchase price
NetWolves common stock issued $ 4,095,000
Acquisition costs 82,875
---------------
$ 4,177,875
===============
Allocation of purchase price
Fair value of tangible assets and liabilities
Current assets $ 70,221
Non-current assets 35,255
Current liabilities (443,909)
Non-current liabilities (266,537)
Advances to TSG, net of cash acquired of $412,224 (536,776)
---------------
(1,141,746)
---------------
Minority interest
Common stock and additional paid-in capital (454,500)
Preferred stock (250,000)
---------------
(704,500)
---------------
Intangible assets acquired 6,024,121
---------------
$ 4,177,875
===============

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 are uncertain. Moreover,
anticipated future cash flows of TSG indicated that the recoverability of
the asset was not reasonably assured.

F-17

NETWOLVES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4 Purchase acquisitions (continued)

At the time of the Merger and in accordance with TSG's newly formed stock
option plan, the SMCI shareholders (who are all employees of TSG) received
605,000 five-year options to purchase TSG common stock at an exercise price
of $.35 per share. The options were issued in proportion to the SMCI
shareholders' ownership interest. The intrinsic value of these options
(plus the 70,000 shares of TSG common stock) totaled $430,000, which has
been reflected in the allocation of the purchase price. Additionally, the
SMCI shareholders are entitled to an additional 175,000 options to purchase
TSG common stock (with an exercise price at fair value at the time of
grant), subject to TSG meeting specific earnings targets over the three
years ending June 30, 2000, 2001 and 2002. These options will be accounted
for as compensation expense in accordance with APB 25 in such future
periods. To date, these earnings targets have not been met. All of the
shareholders of SMCI entered into 3-year employment agreements with TSG
(Note 15).

In accordance with the Merger, NetWolves made $4,750,000 of non-interest
bearing open account working capital advances to TSG.

Also, in accordance with the Merger, the Board of Directors of TSG consists
of three members designated by NetWolves and two members designated by the
SMCI shareholders. A four-fifths majority of the TSG Board is required for
specified significant actions including: sale or merger of the business,
changes to the TSG capital structure, declaration of dividends and
repayment of the working capital advances made by NetWolves. A simple
majority of the TSG Board is required for all general operating matters.

The following unaudited pro forma financial information has been prepared
assuming that the acquisition of SMCI had taken place at the beginning of
the period presented. The pro forma information is not necessarily
indicative of the combined results that would have occurred had the
acquisition taken place at the beginning of the period, nor is it
necessarily indicative of the results that may occur in the future. The
results of operations for the years ended June 30, 2001 and 2000 are
included in the Statements of Operations in the accompanying consolidated
financial statements.

Year ended
June 30, 1999
-------------
(Unaudited)

Revenue $ 2,904,000
Net loss $ (7,907,000)
Basic and diluted net loss per share $ (1.62)

On or about November 22, 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") (Note
16).

5 Disposal of business segment

During June 2001, the Company formally adopted a plan to discontinue its
ComputerCOP software operations. At that time, this consisted primarily of
ComputerCOP software technology, inventory and property and equipment. The
Company has accrued a provision for estimated losses during the phase out
period of approximately $497,000 at June 30, 2001 and has restated the
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:

F-18

NETWOLVES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5 Disposal of business segment (continued)

For the year ended June 30,
----------------------------------

2001 2000
------------------ ---------------

Revenue $ 102,525 $ -
Cost of revenue 8,356 -
Selling, general and administrative 1,563,295 204,446
Amortization 1,147,793 960,745
Impairment 2,108,982 -
----------------- --------------
Loss from discontinued operations $ (4,725,901) $ (1,165,191)
================= ==============

Proceeds to the Company from disposal of its ComputerCOP software
operations discussed above are expected to approximate $400,000, including
the sale of the ComputerCOP technology and the liquidation of certain
inventories, accounts receivable and property and equipment retained by the
Company. Such assets had a carrying value of approximately $205,000 at June
30, 2001, after deducting an allowance for the estimated loss on disposal
on certain inventories. Included in the consolidated balance sheets at June
30, 2000 is cash, inventory, software, other current assets, property and
equipment and other assets approximating $84,000, $201,000, $3,257,000,
$27,000, $8,000 and $26,000, respectively, relating to discontinued
operations. The Company expects to complete the disposal of its ComputerCOP
operations through the sale of its remaining assets during the year ended
June 30, 2002.

6 Marketable securities, available for sale

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

Gross
Amortized unrealized Fair
cost loss value
--------------- --------------- ---------------

June 30, 2001
Bonds $ 195,155 $ (124,155) $ 71,000
=============== =============== ===============
June 30, 2000
Bonds $ 195,155 $ (95,655) $ 99,500
=============== =============== ===============

Proceeds from sales of marketable securities and realized gains on such
sales aggregated $1,311,169, and $478,518, respectively, for the year ended
June 30, 1999. There were no sales of marketable securities during the
years ended June 30, 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,
2001 are as follows:

Amortized Fair
cost value
--------------- ---------------

Due in one year or less $ - $ -
Due after one year through five years 195,155 71,000
--------------- ---------------
$ 195,155 $ 71,000
=============== ===============

F-19

NETWOLVES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7 Property and equipment, net

Property and equipment consist of the following:

June 30,
--------------------------------------
2001 2000
----------------- -----------------

Machinery and equipment $ 867,832 $ 510,849
Furniture and fixtures 281,484 145,839
Leasehold improvements 152,150 44,278
----------------- -----------------
1,301,466 700,966
Less: accumulated depreciation and amortization (318,718) (110,060)
----------------- -----------------
Property and equipment, net $ 982,748 $ 590,906
================= =================

8 Accounts payable and accrued expenses

Accounts payable and accrued expenses consist of the following:

June 30,
--------------------------------------
2001 2000
----------------- -----------------

Trade accounts payable and other accrued operating
expenses $ 777,226 $ 1,283,568
Compensated absences 143,206 95,793
Commissions payable 2,000 32,410
Payroll/sales taxes payable 4,202 20,335
Finders fee payable - 300,000
Accrued advertising - 59,924
----------------- -----------------
$ 926,634 $ 1,792,030
================= =================

9 Long-term debt

Long-term debt consists of the following:

June 30,
--------------------------------------
2001 2000
----------------- -----------------

Notes payable to DVI $ 242,982 $ 266,537
Finders fee payable 120,000 360,000
----------------- -----------------
362,982 626,537
Less current maturities of long-term debt (282,982) (208,435)
----------------- -----------------
Long-term debt, net of current maturities $ 80,000 $ 418,102
================= =================

F-20

NETWOLVES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

9 Long-term debt (continued)

The notes payable (the "DVI Notes") to the Duffy-Vinet Institute, Inc.
("DVI") were assumed by the Company in connection with the Merger (Note 4).
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.

Aggregate maturities of long-term debt are as follows:

Year ending June 30,

2002 $ 282,982
2003 80,000
---------------
$ 362,982
===============

10 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, 1999, the Company issued 1,750,000 shares of
its common stock as follows:

o 150,000 unregistered shares were issued to the Company's Vice
President of Sales and Marketing (who is also a Director of the
Company) for services rendered during the six months ended
December 31, 1998, which resulted in a charge to operations of
approximately $769,000.

o 260,000 unregistered shares were issued to Internet Technologies,
Inc., a consultant to the Company ("Internet Technologies"), for
services rendered during the nine months ended March 31, 1999,
which resulted in a charge to operations of approximately
$1,333,000.

o 100,000 unregistered shares were issued to a financial consultant
and 100,000 unregistered shares were issued to the Company's
legal counsel for services rendered during the three months
ending March 31, 1999, which resulted in an aggregate charge to
operations of $1,025,000.

F-21

NETWOLVES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10 Shareholders' equity (continued)

Common stock issuances (continued)

o 100,000 unregistered shares were issued in conjunction with the
appointment of two new Directors of the Company effective
February 1, 1999 (50,000 shares each), which resulted in an
aggregate charge to operations of approximately $513,000.

o On June 29, 1999, the Company completed a private placement. The
Company sold 800,000 shares of unregistered common stock at $7.50
per share (a total of $6,000,000) exclusive of commission and
other fees totaling $647,275. The placement agent received 80,000
warrants, exercisable at $9.375 each; the warrants vest one year
after the closing of the private placement and expire four years
after vesting. Additionally, 60,000 shares were issued to
Internet Technologies for services rendered in connection with
the private placement.

o 180,000 unregistered shares were issued in connection with the
Merger (Note 4) on June 30, 1999 valued at $22.75 per share,
totaling $4,095,000.

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

o 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%.

o 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.

o 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).

o 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.

o 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 14).

o 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-22

NETWOLVES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10 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:

o 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.

o On May 14, 2000 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, is being 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.

o 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.

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.

Maximum
allowable Maximum
Plans Date adopted issuances term in years
------------------- ------------------- ------------------- -------------

1998 Plan June 1998 282,500 10
2000 Plan July 2000 1,500,000 10
2001 Plan February 2001 1,750,000 10
---------
3,532,500
=========

Warrants

For the year ended June 30, 1999, the Company granted warrants to purchase
its common stock as follows:

o 200,000 ten-year warrants issued to the Company's Vice-President
of Sales and Marketing (who is also a Director of the Company) at
an exercise price of $1.63 per share. These warrants were issued
for services rendered during the six months ended December 31,
1998 and resulted in a charge to operations of approximately
$699,000, based upon the intrinsic value of the warrants on the
date of grant.

F-23

NETWOLVES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10 Shareholders' equity (continued)

Warrants (continued)

o 100,000 two-year performance based warrants were issued to two
terminated employees (50,000 warrants each) at an exercise price
of $5.00 per share. The warrants have since been canceled.

o 25,000 five year warrants were granted to a consultant in March
1999 for services rendered, which resulted in a charge to
operations of $189,000, based on the fair value of the warrant at
the time of grant.

o 300,000 warrants were issued to Anicom, Inc. for cash
consideration of $300,000 (see Note 14).

o 80,000 warrants were issued to the placement agent in connection
with a private placement of common stock (see "Common Stock
Issuances" above).

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

o 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.

o On July 31, 1999, a financial consultant of 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.

o 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.

o 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.

o 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.

F-24

NETWOLVES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10 Shareholders' equity (continued)

Warrants (continued)

o 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.

o 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.

o 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.

o 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.

o 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.

F-25

NETWOLVES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10 Shareholders' equity (continued)

Warrants (continued)

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

o 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.

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%, 65% and 65% for fiscal 2001, 2000 and 1999,
respectively, risk-free interest rates ranging from 4.26% to 6.68%, and
expected life equaling the term of each respective warrant.

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:

For the year ended June 30,
------------------------------------------------------------

2001 2000 1999
----------------- ----------------- -----------------

Net loss
As reported $ (20,631,492) $ (24,326,948) $ (6,923,014)
Pro forma $ (32,903,464) $ (24,950,773) $ (6,829,767)

Basic and diluted net loss per share
As reported $ (2.35) $ (3.46) $ (1.48)
Pro forma $ (3.74) $ (3.55) $ (1.46)

The weighted average fair value per share of common stock, options and
warrants granted to employees during the years ended June 30, 2001, 2000
and 1999, approximated $2.73, $10.97 and $5.02, 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 4.76 to 6.69%, and
expected lives ranging from 5 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):

F-26

NETWOLVES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10 Shareholders' equity (continued)

Summary of options and warrants (continued)

Weighted
average
Number exercise
options and price per
warrants share
---------- ----------------

Outstanding at June 30, 1998 1,587,500 $ 1.65
Granted 924,000 $ 5.08
Exercised - $ -
Forfeited (396,000) $ 1.77
---------
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 $ 8.41
Granted 4,830,250 $ 4.79
Exercised - $ -
Forfeited (752,583) $ 8.23
---------
Outstanding at June 30, 2001 7,134,500 $ 5.07
=========

The following table summarizes information about all of the Company's
options and warrants outstanding at June 30, 2001:

Options and warrants Options and warrants
outstanding at exercisable at
June 30, 2001 June 30, 2001
-------------------------------------- ------------------------
Weighted
average Weighted Weighted
remaining average average
Range of Number of contractual exercise Number of exercise
exercise prices shares life price Shares price
--------------- --------- ----------- ------- --------- --------

$ 1.63 1,217,000 5.13 $ 1.63 1,217,000 $ 1.63
$ 3.00-$3.08 15,000 4.87 $ 3.02 - $ -
$ 4.00-$4.82 2,370,000 4.27 $ 4.06 1,853,333 $ 4.07
$ 5.00-$5.25 2,372,750 4.13 $ 5.10 2,372,750 $ 5.10
$ 6.00-$9.50 295,000 3.67 $ 7.09 81,500 $ 9.38
$ 10.00-$13.00 629,250 5.09 $ 10.94 606,250 $ 10.92
$ 15.00-$18.00 235,500 3.15 $ 16.46 214,999 $ 16.41
--------- ---------
7,134,500 6,345,832
========= =========

All employee based stock compensation awards issued for the year ended June
30, 2001 had no intrinsic value and, accordingly, resulted in no charge to
operations in such period.

F-27

NETWOLVES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

11 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". 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.

For the year ended June 30,
------------------------------------------------------
2001 2000 1999
---------------- ---------------- ----------------

Revenue
Technology $ 487,588 $ 132,825 $ 1,789,144
Training and consulting 937,550 1,290,865 -
---------------- ---------------- ----------------
Total $ 1,425,138 $ 1,423,690 $ 1,789,144
================ ================ ================
Operating loss
Technology $ (14,460,314) $ (14,786,837) $ (7,459,961)
Training and consulting (1,441,735) (9,029,678) -
---------------- ---------------- ----------------
Total $ (15,902,049) $ (23,816,515) $ (7,459,961)
================ ================ ================
June 30,
----------------------------------
2001 2000
Identifiable assets ----------------- ----------------
Technology $ 6,413,782 $ 21,231,907
Training and consulting 241,369 708,678
----------------- ----------------
6,655,151 21,940,585
Net assets of discontinued operations 205,293 3,602,545
----------------- ----------------
Total $ 6,860,444 $ 25,543,130
================= ================
Net revenue by geographic area follows:
For the year ended June 30,
------------------------------------------------------
2001 2000 1999
---------------- ---------------- ----------------
Revenue
United States $ 1,115,838 $ 1,423,690 $ 1,789,144
Foreign 309,300 - -
---------------- ---------------- ----------------
Total $ 1,425,138 $ 1,423,690 $ 1,789,144
================ ================ ================

F-28

NETWOLVES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

11 Segment information (continued)

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 and three
customers that accounted for 34%, 15% and 10% of consolidated accounts
receivable at June 30, 2000. The Company had one major customer in the
Technology segment, which accounted for 95% of consolidated revenue for the
year ended June 30, 1999.

12 Income taxes

The provision for income taxes consists of the following:

For the year ended June 30,
----------------------------------------------
2001 2000 1999
--------------- --------------- -----------

Current - Federal and States $ - $ (25,000) $ -
Deferred - Federal - - -
Deferred - States - - -
--------------- --------------- -----------
Provision for income taxes $ - $ (25,000) $ -
=============== =============== ===========

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

For the year ended June 30,
----------------------------------------------
2001 2000 1999
--------------- --------------- -----------

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 .8 9.2 17.8
Other items (.1) - .2
Loss on disposal 1.1 - -
Depreciation & amortization .5 - -
Effect of graduated tax rates - - -
Impairment 5.8 5.7 -
Permanent differences .2 .1 .3
Valuation allowance on deferred tax
asset 31.7 25.1 21.7
------ ------ ------
Effective tax rate 0.0% 0.1% 0.0%
====== ====== ======

F-29

NETWOLVES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

12 Income taxes (continued)

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

June 30,
--------------------------------------

2001 2000
----------------- -----------------

Non deductible reserves and other $ 266,000 $ 17,000
Options and warrants - 3,721,000
Loss on disposal of discontinued operations 260,000 -
Net operating loss carryforward 11,465,000 6,548,000
Intangible assets 2,758,000 1,606,000
Valuation allowance on net deferred tax asset (14,749,000) (11,892,000)
----------------- -----------------
Deferred tax asset, net $ - $ -
================= =================

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 recognized.

At June 30, 2001, the Company has net tax operating loss carryforwards of
approximately $29 million available to offset future income tax
liabilities, if any, that may be subject to Section 382 of the Internal
Revenue Code. The carryforward losses expire in the years 2012 through 2021
and have not been recognized in the accompanying consolidated financial
statements as a result of a valuation of the total potential tax asset.
Approximately $700,000 of these carryforwards were generated by SMCI prior
to the Merger which are subject to the separate return limitation year
(SRLY) rules and are subject to the restriction pursuant to Section 382 of
the Internal Revenue Code.

13 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 is
also a director and treasurer of TSG, as follows:

o 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.

o TSG leases 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.

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

F-30

NETWOLVES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

13 Related party transactions (continued)

In addition, in July 1999, another shareholder, who was the President and
Chief Executive Officer of TSG, borrowed $50,000 at an interest rate of 6%
per annum. Interest on the loan is payable quarterly and the entire
principal balance is payable upon the third anniversary date of issuance.
The ex-President and Chief Executive Officer is currently in default of the
terms of this loan and the Company is attempting to obtain all amounts
currently due (Note 16).

In August 2000, 150,000 unregistered shares were issued to a consulting
firm for services rendered (Note 10). 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.

14 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 10).

In June 2000, the Company issued 200,000 shares of common stock to GE (Note
10).

F-31

NETWOLVES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

14 Major customers/significant agreements (continued)

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, and had included a liability to Amoco
of $57,000 in accounts payable and accrued expenses at June 30, 2000 in the
accompanying consolidated balance sheets. Such liability was subsequently
paid in August 2000.

The agreement also called for the maintenance of a separate advertising
fund to be used to fund marketing and advertising costs for the
franchisees. At June 30, 2000, this fund was approximately $108,000 and was
included in cash and cash equivalents in the accompanying consolidated
balance sheets.

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 (see
Note 16).

15 Commitments and contingencies

Leases

The Company has entered into several leases for office space, office
equipment and vehicles. Additionally, as a result of the Merger, TSG
assumed several leases, which are included below. At June 30, 2001, the
approximate future minimum annual lease payments (including the lease for
office space with the TSG officer, (Note 13), are summarized as follows:

F-32

NETWOLVES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

15 Commitments and contingencies (continued)

Leases (continued)

Fiscal year ending June 30,

2002 $ 766,000
2003 704,000
2004 653,000
2005 620,000
2006 254,000
------------------
$ 2,997,000
==================

The above future minimum annual lease payments include approximately
$430,000 in payments for discontinued operations.

Total rent expense for the years ended June 30, 2001, 2000 and 1999 was
$576,914, $394,184, and $139,417, respectively.

Employment agreements

In connection with the Merger (Note 4), TSG entered into employment
agreements with 5 executives who were the principals of SMCI. Each of the
agreements are substantially identical and provide for the following
significant terms:

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

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

o two of the executives shall each 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 shall each receive 1.67% of pre-tax
profits of TSG (up to a maximum of 50% of each employee's base
salary),

o An aggregate of 605,000 incentive TSG stock options issued to the
employees (Note 4),

o An aggregate of 175,000 contingently issuable incentive TSG stock
options to the employees (Note 4),

o If within eighteen months of the Merger, TSG has not initiated an
initial public offering or acquired a publicly held shell, two
executives shall 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.

The Company has ceased payments under the TSG employment agreements in
connection with litigation with The Sullivan Group (Note 16).

F-33

NETWOLVES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

15 Commitments and contingencies (continued)

Employment agreements (continued)

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

o One of the agreements is for a period of three years and grants
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.

o 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.

o 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;

o The last agreement is for a period of three years and provides
for monthly compensation of $20,000, and the agreement also
grants 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.

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:

o 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.

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

o 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.

Pension plan

As of a result of the Merger, TSG has assumed the obligations of a 401(k)
defined contribution plan that provides retirement benefits to qualified
TSG employees. Company contributions to the plan are discretionary. In
addition, employees have 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.

F-34

NETWOLVES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

16 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 claims 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 is 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 and the continuing disputes
between the parties.

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 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.

Subsequently, the Sullivan Group (as the Plaintiffs in Action 2) sought an
Order compelling the Company to issue an opinion that 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.

F-35

NETWOLVES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

16 Legal matters (continued)

The Sullivan Group (continued)

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 have now reasserted as counterclaims in
their answer in Action No. 2, all of the claims which they 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 are 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 their complaint,
the Sullivan Group are 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 are 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 are compelled to deposit all of the proceeds of such sales into an
escrow to be held as security for any and all costs and damages that the
Company may suffer or incur if it is determined ultimately that such relief
was wrongfully granted.

The Company believes that its claims against the Sullivan Group will be
meritorious based on the facts and circumstances. Further, the Company
believes that the claims by the Sullivan Group lack merit and it intends to
engage in a vigorous defense.

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 all covered by a 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.

17 Subsequent events

Private placements/loans

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). Also
in July 2001, the Company completed another private placement to accredited
investors for $325,000 through the sale of 130,000 shares of unregistered
common stock at $2.50 per share. Additionally, on October 11, 2001, the
Company received $500,000 in the form of a non-negotiable promissory note
that bears interest at the rate of 10% per annum. Such principal and
interest is due and payable in full on April 1, 2003.

F-36

Settlement agreement

In July 2001, and in consideration for the termination of an employee of
the Company's employment agreement, the Company issued 150,000 shares to
such employee, which resulted in a charge to fiscal 2002 operations of
$487,500.

Liquidity

NetWolves had cash and cash equivalents of $4.4 million at June 30, 2001
and an additional $3.8 million was received in July and October 2001 (as
discussed above). Management believes that the Company has adequate capital
resources to meet its working capital needs for at least the next twelve
months based upon its current and planned operating level and estimated
revenue. In order for the Company to execute its business plan, significant
cash outflows were necessary for, among other things, developing
infrastructure and the utlilization of consultants. Such spending levels
have recently been reduced in accordance with the Company's updated
business plan. To the extent necessary, the Company intends to 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, management will institute cost saving measures that will
significantly reduce the Company's overhead expenses.

F-37

Board of Directors and Shareholders
NetWolves Corporation
Bohemia, New York

INDEPENDENT AUDITORS' REPORT

The audit referred to in our report dated August 24, 2000 on the consolidated
financial statements of NetWolves Corporation and subsidiaries, which appear in
Part II, also include 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/ Richard A. Eisner & Company, LLP

New York, New York
August 24, 2000

F-38

Board of Directors and Shareholders
NetWolves Corporation
Bohemia, New York

INDEPENDENT AUDITOR'S REPORT

We have audited the consolidated statements of operations, shareholders' equity
and cash flows of NetWolves Corporation and subsidiaries (the "Company") for the
year ended June 30, 1999, and have issued our report thereon dated August 12,
1999; such consolidated financial statements and report are included elsewhere
in this Form 10-K. Our audit also included Schedule II for the year ended June
30, 1999. The financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audit. In our opinion, such financial statement schedule, when considered in
relation to the basic consolidated 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/ Hays & Company

August 12, 1999
New York, New York

F-39

SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

Additions Balance
Balance at charged to costs Deductions from at
beginning and allowances end
of period expenses of period
--------------- --------------- --------------- ---------------

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
Provision for impairment of intangible assets $ 4,016,080 $ 1,415,929 $ - $ 5,432,009

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

Year ended June 30, 1999:
Allowance for doubtful accounts receivable $ - $ 40,000 $ - $ 40,000
Provision for impairment of intangible assets $ - $ - $ - $ -

F-40