UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549









FORM 10-K








ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE


SECURITIES
EXCHANGE ACT OF 1934





For the
fiscal year ended December 31, 2009.





TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE


SECURITIES
EXCHANGE ACT OF 1934





For the
transition period from ____________ to ___________.





Commission
File Number:   1-14896










NETWORK-1
SECURITY SOLUTIONS, INC.


(Exact
Name of Registrant as Specified in Its Charter)




Delaware
              11-3027591(State or Other
      Jurisdiction of Incorporation)
              (IRS Employer
      Identification Number)


445
Park Avenue, Suite 1018


New
York, New York 10022


(Address
of Principal Executive Offices)





Registrant's
telephone number, including area code:  (212) 829-5770





Securities
registered under Section 12(b) of the Act:






Title of Each
      Class
            Name of Each Exchange
      on Which RegisteredNone
            None




Securities
registered under Section 12(g) of the Act:





Common Stock, $.01 par
value


(Title of
Class)








Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.  Yes [ 
 ]   No [X]




Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Securities Exchange Act of
1934.  Yes [   ]   No [X]




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 whether this registrant has submitted electronically and posted on
its Corporate Website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).   Yes
[   ]   No [   ]




Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (Section 229.405 of this chapter) 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]\




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company.  See the definitions of "large accelerated filer,"
“accelerated filer” and "smaller reporting company" in Rule 12b-2 of the
Exchange Act.




Large
accelerated filer [  
]                                                                                                Accelerated
filer[   ]




Non-accelerated
filer   [  
]                                                                                                Smaller
Reporting Company  [X]




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).  Yes [   ]   No
[X]




The
aggregate market value of the voting and non-voting common stock of the
registrant held by non-affiliates computed by reference to the price at which
the stock was last sold as of June 30, 2009 was approximately
$16,238,700.




The
number of shares outstanding of Registrant's common stock as of March 31, 2010
was 24,135,557.





NETWORK-1
SECURITY SOLUTIONS, INC.




2009
FORM 10-K




TABLE
OF CONTENTS






Page
      No.PART
      IItem
      1.
              Business
              2Item
      1A.
              Risk
      Factors
              9Item
      1B.
              Unresolved
      Staff Comments
              14Item
      2.
              Properties
              14Item
      3.
              Legal
      Proceedings
              15PART
      IIItem
      4
              Market
      for Registrant's Common Equity, Related Stockholder Matters
      and Issuer Purchases of Equity Securities
              17Item
      5.
              Selected
      Financial Data
              18Item
      6.
              Management's
      Discussion and Analysis of Financial Condition and
      Results of Operations
              19Item
      7.
              Financial
      Statements and Supplementary Data
              23Item
      8.
              Changes
      in and Disagreements with Accountants on Accounting and
      Financial Disclosure
              23Item
      8A.
              Controls
      and Procedures
              24Item
      8B.
              Other
      Information
              25PART
      IIIItem
      9.
              Directors,
      Executive Officers and Corporate Governance
              26Item
      10.
              Executive
      Compensation
              30Item
      11.
              Security
      Ownership of Certain Beneficial Owners and Management and
      Related Stockholder Matters
              35Item
      12.
              Certain
      Relationships and Related Transactions and Director
      Independence
              38Item
      13.
              Principal
      Accountant Fees and Services
              41PART
      IVItem
      14.
              Exhibits
      and Financial Statement Schedules
              42SIGNATURES
              
              45











PART
I




Forward-looking
statements:





THIS
ANNUAL REPORT ON FORM 10-K CONTAINS STATEMENTS ABOUT FUTURE EVENTS AND
EXPECTATIONS WHICH ARE "FORWARD-LOOKING STATEMENTS." ANY STATEMENT IN THIS 10-K
THAT IS NOT A STATEMENT OF HISTORICAL FACT MAY BE DEEMED TO BE A FORWARD-LOOKING
STATEMENT. FORWARD-LOOKING STATEMENTS REPRESENT OUR JUDGMENT ABOUT THE FUTURE
AND ARE NOT BASED ON HISTORICAL FACTS. STATEMENTS CONTAINING SUCH WORDS AS
"MAY," "WILL," "EXPECT," "BELIEVE," "ANTICIPATE," "INTEND," "COULD," "ESTIMATE,"
"CONTINUE" OR "PLAN" AND SIMILAR EXPRESSIONS OR VARIATIONS ARE INTENDED TO
IDENTIFY FORWARD-LOOKING STATEMENTS. THESE STATEMENTS REFLECT THE CURRENT RISKS,
UNCERTAINTIES AND ASSUMPTIONS RELATED TO VARIOUS FACTORS IN THIS REPORT AND IN
OTHER FILINGS MADE BY US WITH THE SEC. BASED UPON CHANGING CONDITIONS, SHOULD
ANY ONE OR MORE OF THESE RISKS OR UNCERTAINTIES MATERIALIZE, INCLUDING THOSE
DISCUSSED AS “RISK FACTORS” IN ITEM 1A AND ELSEWHERE IN THIS REPORT, OR SHOULD
ANY UNDERLYING ASSUMPTIONS PROVE INCORRECT, ACTUAL RESULTS MAY VARY MATERIALLY
FROM THOSE DESCRIBED IN THIS REPORT AS ANTICIPATED, BELIEVED, ESTIMATED OR
INTENDED. WE UNDERTAKE NO OBLIGATION TO UPDATE, AND WE DO NOT HAVE A POLICY OF
UPDATING OR REVISING, THESE FORWARD-LOOKING STATEMENTS.





ITEM
1. BUSINESS.





Overview




Our
principal business is the acquisition, development, licensing and protection of
our intellectual property.  We presently own six patents issued by the
U.S. Patent Office that relate to various telecommunications and data networking
technologies and include, among other things, patents covering the control of
power delivery over local area networks (“LANs”) for the purpose of remotely
powering network devices over Ethernet (“PoE”) networks and systems and methods
for the transmission of audio, video and data over LANS in order to achieve
higher quality of service (“QoS”).  Our strategy is to pursue
licensing and strategic business alliances with companies in industries that
manufacture and sell products that make use of the technologies underlying our
intellectual property as well as with other users of the technologies who
benefit directly from the technologies including corporate, educational and
governmental entities.




To date,
our efforts with respect to our intellectual property have focused on licensing
our patent (U.S. Patent No. 6,218,930) covering the control of power delivery
over Ethernet cables (the “Remote Power Patent”).  As of
March 31, 2010, we had entered six license agreements with respect to our
Remote Power Patent which, among others, include license agreements with
Microsemi Corporation, Netgear, Inc. and D-Link.  At least for the
next twelve months, we do not presently anticipate licensing efforts for our
other currently owned patents besides our Remote Power Patent.  We may
seek to acquire additional patents in the future.  We continually
review opportunities to acquire or license additional intellectual property for
the purpose of pursuing licensing opportunities.


2


The
Patents




Our
intellectual property currently consists of the following patents:




U.S. Patent No.
6,218,930:  Apparatus and method for remotely powering access
equipment over a 10/100 switched Ethernet network;




U.S. Patent No.
6,577,631:  Communication switching module for the transmission
and control of audio, video, and computer data over a single network
fabric;




U.S. Patent No.
6,574,242:  Method for the transmission and control of audio,
video, and computer data over a single network fabric;




U.S. Patent No.
6,570,890:  Method for the transmission and control of audio,
video, and computer data over a single network fabric using Ethernet
packets;




U.S. Patent No.
6,539,011:  Method for initializing and allocating bandwidth in
a permanent virtual connection for the transmission and control of audio, video,
and computer data over a single network fabric; and




U.S. Patent No.
6,215,789:  Local area network for the transmission and control
of audio, video, and computer data.




In August
2008, we were issued European Patent No. 1086556 titled “Integrated Voice and
Data Communications over a Local Area Network” which covers the same technology
as covered by our U.S. QoS family of patents.  The Patent has issued
in France, Germany, Spain, United Kingdom, Ireland and Canada.




Our
future success is largely dependent upon our proprietary technologies, our
ability to protect our intellectual property rights and consummate license
agreements with respect to our intellectual property.  The complexity
of patent and common law, combined with our limited resources, create risk that
our efforts to protect our patents may not be successful.  We cannot
be assured that our patents will be upheld, or that third parties will not
invalidate our patents.  We face uncertainty as to the outcome of our
litigation commenced in February 2008 against several major data networking
equipment manufacturers pertaining to our Remote Power Patent.  (See
Risk Factors “We face uncertainty as to the outcome of our litigation with major
data networking equipment manufacturers”).




The
provisional patent application for our Remote Power Patent was filed on March
11, 1999 and the patent was granted by the U.S. Office of Patent and Trademark
on April 21, 2001.  The patent expires on March 11, 2020.




We were
incorporated under the laws of the State of Delaware in July
1990.  Our offices are located at 445 Park Avenue, Suite 1018, New
York, New York 10022 and our telephone number is (212) 829-5770.


3


Market
Overview – Remote Power Patent




Our
licensing efforts are currently focused on our Remote Power
Patent.  Our Remote Power Patent (U.S. Patent No. 6,218,930) relates
to several technologies which describe a methodology for controlling the
delivery of power to certain devices over an Ethernet network.




The
Institute of Electrical and Electronic Engineers (IEEE) is a non-profit,
technical professional association of more than 370,000 individual members in
approximately 160 countries. The Standards Association of the IEEE is
responsible for the creation of global industry standards for a broad range of
technology industries.  In 2000, at the urging of several industry
vendors, the IEEE formed a task force to facilitate the adoption of a
standardized methodology for the delivery of remote power over Ethernet networks
which would insure interoperability among vendors of switches and terminal
devices.  On June 13, 2003 the IEEE Standards Association approved the
802.3af Power over Ethernet standard (the “Standard”), which covers technologies
deployed in delivering power over Ethernet networks.  The Standard
provides for the Power Sourcing Equipment (PSE) to be deployed in switches or as
standalone midspan hubs to provide power to remote devices such as wireless
access points, IP phones and network-based cameras. The technology is commonly
referred to as Power over Ethernet (“PoE”).  We believe that our
Remote Power Patent covers several of the key technologies covered by the
Standard.




Ethernet
is the leading local area networking technology in use today.  PoE
technology allows for the delivery of power over Ethernet cables rather than by
separate power cords.  As a result, a variety of network devices,
including IP telephones, wireless LAN Access Points, web-based network security
cameras, data collection terminals and other network devices, are able to
receive power over existing data cables without the need to modify the existing
infrastructure to facilitate the provision of power for such devices through
traditional AC outlets.  Advantages such as lower installation costs,
remote management capabilities, lower maintenance costs, centralized power
backup, and flexibility of device location as well as the advent of worldwide
power compatibility, create the possibility of PoE becoming widely adopted in
networks throughout the world.




PoE
provides numerous benefits including quantifiable returns on
investment.  The cost of hiring electricians to pull power cables to
remote locations used for access points or security cameras can rival or exceed
the cost of the devices.  Another key benefit is the need for Voice
over IP power reliability in the face of power failures.  Using PoE
enables data center power supply systems to ensure ongoing power – a function
that would be difficult and expensive to implement if each phone required AC
outlets.




These and
other advantages such as remote management capabilities, lower maintenance
costs, and flexibility of device location have led to forecasts that PoE will be
widely adopted in networks throughout the world.  The benefits of PoE
are compelling as evidenced by the introduction of products by such leading
vendors such as Cisco Systems, Foundry Networks, Extreme Networks, 3Com,
Siemens, Nortel Networks and Avaya, as well as many others.




The
ability to supply power to end-devices over Ethernet networks can be applied to
other end-devices, such as advanced security cameras, RFID card readers, laptop
computers, personal digital assistants and portable digital music
players.  As the desire to connect more end-devices to the Ethernet
network grows, we believe that PoE technology will become more widely used as a
method to power these end-devices.


4


Additional
Patents




We also
own five (5) additional patents, besides our Remote Power Patent, covering
various methodologies that provide for allocating bandwidth and establishing QoS
for delay sensitive data, such as voice, on packet data networks.  QoS
issues become important when data networks carry packets that contain audio and
video which may require priority over data packets traveling over the same
network.  Covered within these patents are also technologies that
establish bi-directional communications control channels between
network-connected devices in order to support advanced applications on
traditional data networks.  We believe that potential licensees of the
technologies contained in these patents would be vendors deploying applications
that require the low latency transport of delay sensitive data such as video
over data networks.




Network-1
Strategy




Our
strategy is to capitalize on our intellectual property by entering into
licensing arrangements with third parties including manufacturers and users that
utilize our intellectual property’s proprietary technologies as well as any
additional proprietary technologies covered by patents which may be acquired by
us in the future.  We will also seek to enter into licensing
arrangements with users of the proprietary technologies, including corporate,
educational and governmental entities in those cases where the patent rights
extend to the users of the technologies contained in manufactured
products.




We do not
anticipate manufacturing products utilizing our intellectual property or any of
the proprietary technologies contained in our intellectual property.
Accordingly, we do not anticipate establishing a manufacturing, sales or
marketing infrastructure.  Consequently, we believe that our capital
requirements will be less than the capital requirements for companies with such
infrastructure requirements.




In
connection with our activities relating to the protection of our intellectual
property, it may be necessary to assert patent infringement claims against third
parties that we believe are infringing our patents, as is the case with our
litigation against eight major data networking equipment manufacturers (“Legal
Proceedings – Pending Litigation Against Major Data Networking Equipment
Manufacturers”) and as we previously asserted against D-Link (See “Legal
Proceedings - D-Link Settlement”).




Licensing




To date
we have entered into six license agreements with respect to our Remote Power
Patent.  We believe that potential licensees include, among others,
Wireless Local Area Networking (WLAN) equipment manufacturers, Local Area
Networking (LAN) equipment manufacturers, Voice Over IP Telephony (VOIP)
equipment manufacturers, and network camera manufacturers.  In
addition, we believe that additional potential licensees include users of the
equipment embodying the PoE technology covered by our Remote Power Patent,
including corporate, educational and federal, state and local government users,
as we believe that they are significant beneficiaries of the technologies
covered by our Remote Power Patent.


5


ThinkFire
Agreement




On
November 30, 2004, we entered into a Master Services Agreement (the “Agreement”)
with ThinkFire Services USA, Ltd. (“ThinkFire”) pursuant to which ThinkFire has
been granted the exclusive (except for direct efforts by us and related
companies) worldwide rights to negotiate license agreements for our Remote Power
Patent with respect to certain potential licensees agreed to between the
parties.  Either we or ThinkFire may terminate the Agreement upon 60
days’ notice for any reason or upon 30 days’ notice in the event of a material
breach.  We have agreed to pay ThinkFire a fee not to exceed 20% of
the royalty payments received from license agreements consummated by ThinkFire
on our behalf after we recover our expenses.




Licensing
Program




As of
March 31, 2010, we had transmitted letters to approximately
250  companies offering licenses to our Remote Power
Patent.  In addition, in September 2005 we initiated an industry-wide
Power Up Licensing program that offered licenses for our Remote Power Patent to
“early adopters” that included royalty rates and related fees at a discount from
our standard royalty rates and fees for a limited time period.  The
Power Up licensing program continued until May 2007.  No licenses were
granted under the Power Up licensing program.




On June
25, 2008, we announced the introduction of a Special Licensing Program for our
Remote Power Patent.  We entered into 3 license agreements as part of
our Special Licensing Program.  Our Special Licensing Program was of
limited duration (through December 31, 2008) and was implemented on an
industry-wide basis to offer discounted running royalty rates and exceptions to
our standard licensing terms and conditions for our Remote Power Patent to
vendors of finished products that comply with the PoE Standard, including
equipment defined in the PoE Standard as Power Sourcing Equipment (PSE) and
Powered Devices (PD).  The Special Licensing Program was available to
all vendors of PoE equipment including those companies that are defendants in
our pending patent litigation against eight major data networking equipment
manufacturers.  Our agreement with Microsemi Corp. - Analog Mixed
Signal Group Ltd. (“Microsemi”), dated June 17, 2008, among other things,
enabled Microsemi to assist its customers’ evaluation of our Remote Power Patent
and the terms being made available to vendors of PoE equipment pursuant to our
Special Licensing Program.




Microsemi
License




In August
2008, as part of our Special Licensing Program and our agreement with Microsemi
Corp-Analog Mixed Signal Group Ltd. (“Microsemi-Analog”), previously PowerDsine
Ltd, entered into in June 2008, Microsemi Corporation (“Microsemi”), the parent
company of Microsemi-Analog, entered into a license agreement with us with
respect to our Remote Power Patent.  The license agreement provides
that Microsemi is obligated to pay us quarterly royalty payments of 2% of the
sales price for certain of its Midspan PoE products for the full term of our
Remote Power Patent (March 2020).


6


Netgear
License




In May
2009 as part of the settlement and under our Special Licensing Program, Netgear
entered into a license agreement with us for the Remote Power Patent, effective
April 1, 2009. Under the terms of the license, Netgear licenses our Remote Power
Patent for its full term which expires in March 2020, and pays quarterly
royalties (which began as of April 1, 2009) based on its sales of Power over
Ethernet products, including those PoE products which comply with the Institute
of Electrical and Electronic Engineers 802.3af and 802.3at
Standards.  Licensed products include Netgear’s Power over Ethernet
enabled switches and wireless access points.  The royalty rates
included in the Netgear license are 1.7% of the sales price of Power Sourcing
Equipment, which includes Ethernet switches, and 2% of the sales price of
Powered Devices, which includes wireless access points.   The
royalty rates are subject to adjustment, under certain circumstances, if we
grant a license to other licensees with lower royalty rates and Netgear is able
to and agrees to assume all material terms and conditions of such other license.
In addition, Netgear paid us $350,000 upon the signing of the license
agreement.




D-Link
License




In August
2007, we agreed to licensing terms with D-Link Corporation and D-Link Systems
(collectively, “D-Link”) as part of a settlement agreement of our patent
infringement litigation against D-Link in the United States District Court for
the Eastern District of Texas, Tyler Division for infringement of our Remote
Power Patent (See “Legal Proceedings - D-Link Settlement”).




The
license terms include the agreement by D-Link to license our Remote Power Patent
for its full term which expires in March 2020, and the payment of monthly
royalty payments (which began in May, 2007) based upon a running royalty rate of
3.25% of the net sales of D-Link branded Power over Ethernet products, including
those products which comply with the IEEE 802.3af and 802.3at
Standards.  The royalty rate is subject to adjustment to a rate
consistent with other similarly situated licensees of our Remote Power Patent
based on units of shipments of licensed products.  In June 2009, based
upon several licenses issued to third parties under our Special Licensing
Program, we agreed with D-Link to adjust the royalty rate to 1.7% of the sales
price for Power Servicing Equipment (which includes Ethernet switches) and 2.0%
of the sales price for Powered Devices (which includes wireless access
points).  In addition, D-Link paid us an upfront payment of $100,000
upon signing of the license agreement.  The products covered by the
license include D-Link Power over Ethernet enabled switches, wireless access
points, and network security cameras, among others.




Legal
Representation




In
February 2008, we entered into an agreement with Dovel & Luner, LLP pursuant
to which such firm provides legal services to us with respect to our litigation
commenced in February 2008 against eight major data networking equipment
manufacturers, pending in the United States District Court for the Eastern
District of Texas, Tyler Division, for infringement of our Remote Power Patent
(See “Legal Proceedings”).  The terms of our agreement with Dovel
& Luner, LLP provide for fees of a maximum aggregate cash payment of $1.5
million plus a contingency fee of up to 24% depending upon when an outcome is
achieved.


7


With
respect to our litigation against D-Link, which was settled in May 2007, we
utilized the services of Blank Rome LLP, on a full contingency basis and also
the services of Potter Mitton, P.C. (Tyler, Texas) on an hourly basis to serve
as local counsel.  In accordance with our contingency fee agreement
with Blank Rome LLP, we will pay legal fees to Blank Rome LLP equal to 25% of
the royalty revenue received by us from our license agreement with D-Link after
we recover our expenses related to the litigation.




Competition




The
telecommunications and data networking licensing market is characterized by
intense competition and rapidly changing business conditions, customer
requirements and technologies.  Although we believe that we have
enforceable patents relating to telecommunications and data networking, there
can be no assurance that our intellectual property will be upheld or that third
parties will not invalidate any or all of the patents in our intellectual
property.  In addition, our current and potential competitors may
develop technologies that may be more effective than our proprietary
technologies or that would render our technologies less marketable or
obsolete.  Therefore, we may not be able to compete
successfully.




In
addition, other companies may develop competing technologies that offer better
or less expensive alternatives to PoE and the other technologies covered by our
intellectual property.  Several companies have notified the IEEE that
they may have patents and proprietary technologies that are covered by the
Standard.   In the event any of those companies asserts claims
relating to our patents, the licensing royalties available to us may be
limited.  Moreover, technological advances or entirely different
approaches developed by one or more of our competitors or adopted by various
standards groups could render our Remote Power Patent obsolete, less marketable
or unenforceable.




Description
of Property




We
currently lease office space in New York City at a cost of $3,400 per month
under a lease which expires in June 2010.




Employees
and Consultants




As of the
date of this prospectus, we had one full-time employee, no part-time employees
and three consultants.


8


ITEM
1A.   RISK FACTORS




We
operate in a highly competitive environment that involves a number of risks,
some of which are beyond our control.  The following discussion
highlights the most material of the risks.




We
have a history of losses and modest revenue from current
operations.




We have
incurred substantial operating losses since our inception, which have resulted
in an accumulated deficit of $(53,473,000) as of December 31,
2009.  For the years ended December 31, 2009 and December 31, 2008, we
incurred net losses of $(2,578,000) and $(1,618,000),
respectively.  We have financed our operations primarily by sales of
our equity securities and royalty revenue from licensing our Remote Power
Patent.  We had revenue of $811,000 and $349,000 from operations for
the years ended December 31, 2009 and December 31, 2008,
respectively.  Our ability to achieve revenue and generate positive
cash flow from operations is dependent upon consummating licensing agreements
with respect to our patented technologies.  As of March 31, 2010,
we had entered into six license agreements with respect to our Remote Power
Patent, which among others, included license agreements with Netgear, Inc.,
Microsemi Corporation and D-Link.  We may not be successful in
achieving additional material licensing agreements with third parties and our
failure to do so would have a material adverse effect on our business, financial
condition and results of operations.  We may not be able to achieve
material revenue or generate positive cash flow from operations from our
licensing business.




We
could be required to stop operations if we are unable to develop our technology
licensing business or raise capital when needed.




We
anticipate, based on our currently proposed plans and assumptions relating to
our operations (including the timetable of costs and expenses associated with
our continued operations), that our cash position of $2,264,000 at
March 16, 2010 will more likely than not be sufficient to satisfy our
operations and capital requirements until at least June 30,
2011.  However, we may expend our funds prior thereto.  In
the event our plans change, or our assumptions change or prove to be inaccurate
(due to unanticipated expenses, difficulties, delays or otherwise), we could
have insufficient funds to support our operations prior to June 30,
2011.  Our inability to obtain additional financing when needed,
absent generating sufficient cash from licensing arrangements, would have a
material adverse effect on us, requiring us to curtail or possibly cease our
operations.  In addition, any additional equity financing may involve
substantial dilution to the interests of our then existing
stockholders.




Our
licensing business may not be successful.




In
November 2003, we entered the technology licensing business following our
acquisition of six patents relating to various telecommunications and data
networking technologies including, among others, patents covering the delivery
of remote power over Ethernet and the transmission of audio, video and data over
computer and telephony networks.  As of March 31, 2010, we have
only entered into six license agreements with third parties with respect to our
patented technology.  Accordingly, we have a limited history in the
technology licensing business upon which an evaluation of our prospects and
future performance can be made.  Our prospects must be
considered


9


in light
of the risks, expenses and difficulties frequently encountered in the
development, operation and expansion of a new business based on patented
technologies including the risks and uncertainty of litigation.  We
may not be able to achieve sufficient revenue or profitable operations from our
licensing business.




Our
future source of licensing revenue is uncertain.




To date,
we have entered into six license agreements with respect to our Remote Power
Patent.  Our inability to consummate additional licensing agreements
and achieve material revenue from our patented technologies would have a
material adverse effect on our operations and possibly our ability to continue
our business.  In addition, our existing license agreements, as well
as additional license agreements which may be entered into in the future, may
not produce a stable or predictable stream of revenue in the foreseeable
future.  Furthermore, the success of our licensing efforts depends
upon the strength of our intellectual property rights.




Our
success is dependent upon our ability to protect our proprietary
technologies.




Our
success is substantially dependent upon our proprietary technologies and our
ability to protect our intellectual property rights.  We currently
hold six patents issued by the U.S. Patent Office that relate to various
telecommunications and data networking technologies and include among other
things, patents covering the delivery of power to certain devices over PoE
networks and the transmission of audio, voice and data over computer and
telephony networks.  We rely upon our patents and trade secret laws,
non-disclosure agreements with our employees, consultants and third parties to
protect our intellectual property rights.  The complexity of patent
and common law, our limited resources, and the uncertainty of the outcome of
litigation create risk that our efforts to protect our proprietary technologies
may not be successful.  We cannot assure you that our patents will be
upheld or that third parties will not invalidate our patent
rights.  If our intellectual property rights are not upheld, such an
event would have a material adverse effect on us.




Any
litigation to protect our intellectual property or any third party claims to
invalidate our patents could have a material adverse effect on our
business.




Our
success depends on our ability to protect our intellectual property
rights.  In August 2005, we commenced patent litigation against D-Link
Corporation and D-Link Systems, Incorporated for infringement of our Remote
Power Patent and in April 2007 we entered into a settlement agreement with the
D-Link parties.  In addition, in February 2008 we commenced patent
litigation against Cisco Systems, Inc. and seven other major data networking
equipment manufacturers which is currently pending in the United States District
Court for the Eastern District of Texas, Tyler Division. Although on May 29,
2009 we announced that we had agreed to settle this litigation with respect to
defendant Netgear, Inc., the litigation is still pending with respect to the
other defendants.  In the future, it may be necessary for us to
commence patent litigation against additional third parties whom we believe
require a license to our patents.  In addition, we may be subject to
claims seeking to invalidate our patents, as asserted by the defendants in the
aforementioned pending litigation in Texas with us.  These types of
claims, with or without merit, may subject us to costly litigation and diversion
of


10


management’s
focus.  If we are unsuccessful in enforcing and validating our patents
and/or if third parties making claims against us seeking to invalidate our
patents are successful, they may be able to obtain injunctive or other equitable
relief, which effectively could block our ability to license or otherwise
capitalize on our proprietary technologies.  Successful litigation
against us resulting in a determination that our patents are not valid or
enforceable, and/or that third parties do not infringe, would have a material
adverse effect on us.




Our
license agreements with Netgear, Inc., D-Link and Microsemi may not result in
significant royalties and do not necessarily mean we will achieve additional
license agreements.




For the
years ended December 31, 2009 and December 31, 2008, we received
aggregate royalty payments of $811,000 and $349,000, respectively, with respect
to our license agreements.  Our royalty revenue may not be stable or
predictable for the foreseeable future.  Notwithstanding our license
agreements with the D-Link, Microsemi and Netgear, Inc., there is no assurance
that we will achieve significant royalty revenue from such license agreements,
that we will be able to achieve additional material license agreements with
third parties relating to our Remote Power Patent or any of our other
patents.  Our failure to achieve significant royalty revenue from our
existing license agreements, or if we are unable to enter into additional
license agreements resulting in material royalty revenue, would have a material
adverse effect on our business, financial condition and results of
operations.




We
face uncertainty as to the outcome of our litigation against major data
networking equipment manufacturers.




In
February 2008, we commenced litigation against eight major data networking
equipment manufacturers in the United States District Court for the Eastern
District of Texas, Tyler Division, for infringement of our Remote Power
Patent.  The complaint named as defendants Cisco Systems, Inc., Cisco
Linksys, LLC, Enterasys Networks, Inc., 3COM Corporation, Inc., Extreme
Networks, Inc., Foundry Networks, Inc., Netgear, Inc. and Adtran,
Inc.  We seek injunctive relief and monetary damages for infringement
based upon reasonable royalties as well as treble damages for the defendant’s
continued willful infringement of our Remote Power Patent.  The
defendants in their answer asserted that they do not infringe any valid claim of
our Remote Power Patent, and further asserted that, based on several different
theories, the patent claims are invalid or unenforceable.  In addition
to these defenses, the defendants also asserted counterclaims for, among other
things, non-infringement, invalidity, and unenforceability of our Remote Power
Patent.  A Markman hearing, a hearing on claim construction of our
Remote Power Patent, was held in December 2009 and a trial date has been set for
July 2010.  On February 16, 2010, the United States District
Court for the Eastern District of Texas, Tyler Division, issued its Markman
Order in which the Court adopted a number of constructions proposed by us, while
also adopting constructions proposed by defendants as well as effectively
invalidating two of our claims at issue.  A Markman Order that does
not entirely adopt either the plaintiff’s or defendants’ position is common in
patent litigation.  In the event that the Court determines that our
Remote Power Patent is not valid or enforceable, and/or that the defendants do
not infringe, any such determination would have a material adverse effect on
us.


11


Material
licensing revenues from our Remote Power Patent may be dependent upon the
applicability of the IEEE Standard.




The
Institute of Electrical and Electronic Engineers (IEEE) is a non-profit,
technical professional association of more than 370,000 individual members in
approximately 160 countries.  The Standards Association of the IEEE is
responsible for the creation of global industry standards for a broad range of
technology industries.  In 2000, the IEEE formed a task force to
facilitate the adoption of a standardized methodology for the delivery of remote
power over Ethernet networks which would insure interoperability among vendors
of switches and terminal devices.  In June 2003, the IEEE Standards
Association approved the 802.3af Power Over Ethernet standard (the “Standard”),
which covers technologies deployed in delivering power over Ethernet cables
including whether deployed in switches or as standalone midspan hubs both of
which provide power to remote devices including, among others, wireless access
points, IP phones and network based cameras.  The technology is
commonly referred to as PoE.  We believe our Remote Power Patent
covers several of the key technologies covered by the
Standard.  However, there is a risk that as a result of litigation a
court may determine otherwise and such a determination may have a material
adverse effect on our ability to enter into license agreements and achieve
material revenue and profits from our Remote Power Patent.




Our
markets are subject to rapid technological change and our technologies face
potential technology obsolescence.




The
telecommunications and data networking technology market, including transmission
of audio, video and data over computer and telephony networks and the delivery
of remote PoE markets, are characterized by rapid technological changes,
changing customer requirements, frequent new product introductions and
enhancements, and evolving industry standards.  The introduction of
products embodying new technologies and the emergence of new industry standards
may render our technologies obsolete or less marketable.






In
addition, other companies may develop competing technologies that offer better
or less expensive alternatives to PoE and the other technologies covered by our
intellectual property.  Several companies have notified the IEEE that
they may have patents and proprietary technologies that are covered by the
Standard.   In the event any of those companies asserts claims
relating to our patents, the licensing royalties available to us may be
limited.  Moreover, technological advances or entirely different
approaches developed by one or more of our competitors or adopted by various
standards groups could render our Remote Power Patent obsolete, less marketable
or unenforceable.




Dependence
upon CEO and Chairman.




Our
success is largely dependent upon the personal efforts of Corey M. Horowitz, our
Chairman and Chief Executive Officer and Chairman of our Board of
Directors.  On June 8, 2009, we entered into a new employment
agreement with Mr. Horowitz pursuant to which he continues to serve as our
Chairman and Chief Executive Officer for a three year term.  However,
any loss of the services of Mr. Horowitz would have a material adverse effect on
our business and prospects.  We do not maintain key-man life insurance
on the life of Mr. Horowitz.


12


Risks related to low priced stocks.




Our
common stock currently trades on the OTC Bulletin Board under the symbol
NSSI.  Since the trading price of our common stock is below $5.00 per
share, our common stock is considered a penny stock.  SEC regulations
generally define a penny stock to be an equity security that is not listed on a
national securities exchange or an automated quotation system sponsored by a
registered national securities association, that has a market value of less than
$5.00 per share, subject to certain exceptions.  SEC regulations
require broker-dealers to deliver to a purchaser of our common stock a
disclosure schedule explaining the penny stock market and the risks associated
with it. Various sales practice requirements are also imposed on broker-dealers
who sell penny stocks to persons other than established customers and accredited
investors (generally institutions).  Broker-dealers must also provide
the customer with current bid and offer quotations for the penny stock, the
compensation of the broker-dealer and monthly account statements disclosing
recent price information for the penny stock held in the customer’s
account.




The
significant number of options and warrants outstanding may adversely affect the
market price for our common stock.




As of
March 31, 2010, there are outstanding options and warrants to purchase an
aggregate of 12,579,312shares of our common
stock at exercise prices ranging from $0.12 to $10.00.  To the extent
that outstanding options and warrants are exercised, existing stockholder
percentage ownership will be diluted and any sales in the public market of the
common stock underlying such options may adversely affect prevailing market
prices for our common stock.




We
have a significant amount of authorized but unissued preferred stock, which may
affect the likelihood of a change of control in our company.




Our Board
of Directors has the authority, without further action by our stockholders, to
issue 10,000,000 shares of preferred stock on such terms and with such rights,
preferences and designations as our Board of Directors may
determine.  Such terms may include restricting dividends on our common
stock, dilution of the voting power of our common stock or impairing the
liquidation rights of the holders of our common stock.  Issuance of
such preferred stock, depending on the rights, preferences and designations
thereof, may have the effect of delaying, deterring or preventing a change in
control.  In addition, certain “anti-takeover” provisions in Delaware
law may restrict the ability of our stockholders to authorize a merger, business
combination or change of control.


13


Our
stock price may be volatile.




The
market price of our common stock is likely to be highly volatile and could
fluctuate widely in price in response to various factors, many of which are
beyond our control, including the following:




● our
ability to successfully enforce and/or defend our Remote Power
Patent;




●           our
ability to enter into favorable license agreements with third parties with
respect to our Remote Power Patent;




●           our
ability to achieve material revenue and profits;




●           our
ability to raise capital when needed;




●           sales
of our common stock;




●           our
ability to execute our business plan;




●           technology
changes;




●           legislative,
regulatory and competitive developments; and




●           economic
and other external factors.






In
addition, the securities markets have from time to time experienced significant
price and volume fluctuations that are unrelated to the operating performance of
particular companies.  These market fluctuations may also materially
and adversely affect the market price of our common stock.




Additional
stock offerings may dilute current stockholders.





We may
need to issue additional shares of our capital stock or securities convertible
or exercisable for shares of our capital stock, including preferred stock,
options or warrants.  The issuance of additional capital stock may
dilute the ownership of our current stockholders.





ITEM
1B.  UNRESOLVED STAFF COMMENTS




None





ITEM
2.   PROPERTIES




We
currently lease office space in New York City at a cost of $3,400 per month
under a lease which expires in June 2010.


14


ITEM
3.   LEGAL PROCEEDINGS




Pending
Litigation Against Major Data Networking Equipment Manufacturers





In
February 2008, we commenced litigation against eight major data networking
equipment manufacturers in the United States District Court for the Eastern
District of Texas, Tyler Division, for infringement of our Remote Power
Patent.  The complaint named as defendants Cisco Systems, Inc., Cisco
Linksys, LLC, Enterasys Networks, Inc., 3COM Corporation, Inc., Extreme
Networks, Inc., Foundry Networks, Inc., Netgear, Inc. and Adtran,
Inc.  We seek injunctive relief and monetary damages for infringement
based upon reasonable royalties as well as treble damages for the defendants’
continued willful infringement of our Remote Power Patent.  The
defendants, in their answers to our complaint, asserted that they do not
infringe any valid claim of our Remote Power Patent, and further asserted that,
based on several different theories, the patent claims are invalid or
unenforceable.  In addition to these defenses, the defendants also
asserted counterclaims for, among other things, non-infringement, invalidity,
and unenforceability of our Remote Power Patent.  A Markman hearing, a
hearing on claim construction of our Remote Power Patent, was held in December
2009 and a trial date has been set for July, 2010.  On
February 16, 2010, the United States District Court for the Eastern
District of Texas, Tyler Division, issued its Markman Order in which the Court
adopted a number of constructions proposed by us, while also adopting
constructions proposed by defendants as well as effectively invalidating two of
our claims at issue.  A Markman Order that does not entirely adopt
either the plaintiff’s or defendants’ position is common in patent
litigation.  In the event that the Court determines that our Remote
Power Patent is not valid or enforceable, and/or that the defendants do not
infringe, any such determination would have a material adverse effect on our
company.





On May
29, 2009 we announced that we had agreed to settle the above referenced
litigation with respect to Netgear, Inc. (“Netgear”).  As part of the
settlement and under our Special Licensing Program, Netgear entered into a
license agreement with us for our Remote Power Patent and we agreed that all
claims and counterclaims involving Netgear in the litigation would be dismissed
with prejudice.  Under the terms of the license, Netgear licenses the
Remote Power Patent from us for its full term (which expires in March 2020), and
pays quarterly royalties (which began as of April 1, 2009) based on its sales of
Power over Ethernet products, including those Power over Ethernet products which
comply with the Institute of Electrical and Electronic Engineers 802.3af and
802.3at Standards.  Licensed products include Netgear’s Power over
Ethernet enabled switches and wireless access points.  The royalty
rates included in the license are 1.7% of the sales price of Power Sourcing
Equipment, which includes Ethernet switches, and 2% of the sales price of
Powered Devices, which includes wireless access points.   The
royalty rates are subject to adjustment, under certain circumstances, if we
grant a license to other licensees with lower royalty rates and Netgear is able
to and agrees to assume all material terms and conditions of such other license.
In addition, Netgear made a payment of $350,000 to us with respect to the
settlement.


15


D-Link
Settlement





In August
2005, we commenced patent litigation against D-Link Corporation and D-Link
Systems, Incorporated (collectively “D-Link”) in the United States District
Court for the Eastern District of Texas, Tyler division, for infringement of our
Remote Power Patent.  Our complaint sought, among other things, a
judgment that our Remote Power Patent is enforceable and has been infringed by
the defendants.  We also sought a permanent injunction restraining the
defendants from continued infringement, or active inducement of infringement by
others, of our Remote Power Patent.





In August
2007, we finalized the settlement of our patent infringement litigation against
D-Link.  Under the terms of the settlement, D-Link entered into a
license agreement for our Remote Power Patent the terms of which include monthly
royalty payments of 3.25% (subject to adjustment as noted below) of the net
sales of D-Link Power over Ethernet products, including those products which
comply with the IEEE 802.3af and 802.3at Standards, for the full term of our
Remote Power Patent, which expires in March 2020.  In addition, D-Link
paid us $100,000 upon signing of the Settlement Agreement.  The
royalty rate is subject to adjustment to a rate consistent with other similarly
situated licensees of our Remote Power Patent based on units of shipments of
licensed products.  In June 2009, based upon several licenses issued
to third parties under our Special Licensing Program, we agreed with D-Link to
adjust the royalty rate to 1.7% of the sales price for Power Servicing Equipment
(which includes Ethernet switches) and 2.0% of the sales price for Powered
Devices (which includes wireless access points).





Microsemi
- PowerDsine Settlement





On
November 16, 2005, we entered into a Settlement Agreement with PowerDsine, Inc.
and PowerDsine Ltd. (collectively, “PowerDsine”) which dismissed, with
prejudice, patent litigation brought by PowerDsine against us in March 2004 in
the United States District Court for the Southern District of New York that
sought a declaratory judgment that our Remote Power Patent was invalid and not
infringed by PowerDsine and/or its customers.  Under the terms of the
Settlement Agreement, we agreed that, under certain circumstances, we will not
initiate litigation against PowerDsine for its sale of Power over Ethernet (PoE)
integrated circuits.  In addition, we agreed that we will not seek
damages for infringement from customers that incorporate PowerDsine integrated
circuit products in PoE capable Ethernet switches manufactured on or
before  April 30, 2006. PowerDsine has agreed that it will not
initiate, assist or cooperate in any legal action relating to the Remote Power
Patent.  In June 2008 we entered into a new agreement with Microsemi
Corp-Analog Mixed Signal Group Ltd (“Microsemi Analog”), previously PowerDsine
Ltd, a subsidiary of Microsemi Corporation (“Microsemi”), a leading manufacturer
of high performance analog mixed-signal integrated circuits and high reliability
semiconductors, which, among other things, amended the prior Settlement
Agreement entered into between the parties in November 2005.  As part
of our Special Licensing Program and our agreement with Microsemi Analog entered
into in June 2008, Microsemi entered into a license agreement, dated
August 13, 2008, with us with respect to our Remote Power
Patent.  The license agreement provides that Microsemi is obligated to
pay us quarterly royalty payments of 2% of the sales price for certain of
Microsemi’s Midspan PoE products for the full term of our Remote Power Patent
(March 2020).


16


PART
II




ITEM
4.   MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES




Market Information. Our
Common Stock currently trades on the OTC Bulletin Board under the symbol
NSSI.  The following table sets forth, for the periods indicated, the
range of the high and low bid prices for our Common Stock as reported by
OTCBB.com and The Nasdaq Stock Market, Inc.  Such prices reflect
inter-dealer quotations, without retail mark-up, mark-down or commission and may
not necessarily represent actual transactions.






YEAR
      ENDED DECEMBER 31, 2009
            HIGH
            LOWFourth
      Quarter
            $1.23
            $0.90Third
      Quarter
            $1.18
            $0.66Second
      Quarter
            $0.98
            $0.36First
      Quarter
            $0.62
            $0.35YEAR
      ENDED DECEMBER 31, 2008
            HIGH
            LOWFourth
      Quarter
            $0.70
            $0.38Third
      Quarter
            $1.05
            $0.70Second
      Quarter
            $1.29
            $0.85First
      Quarter
            $1.50
            $1.14




On
March 31, 2010, the closing price for the Common Stock as reported on the
OTC Bulletin Board was $0.93 per share. The number of record holders of our
Common Stock was 77 as of March 31, 2010.




Dividend Policy. We have
never declared or paid any cash dividends on our Common Stock and do not intend
to declare or pay cash or other dividends in the foreseeable future. The Board
of Directors currently expects to retain any future earnings, if any, for use in
the operation and expansion of its business. The declaration and payment of any
future dividends will be at the discretion of the Board of Directors and will
depend upon a variety of factors, including future earnings, if any, operations,
capital requirements, our general financial condition, the preferences of any
series of preferred stock, our general business conditions and future
contractual restrictions on payment of dividends, if any.




Recent Issuances of Unregistered
Securities.  None.




Issuer Purchases of Equity
Securities.None.


17




Equity
Compensation Plan Information




The
following table summarizes share and exercise price information about our equity
compensation plans as of December 31, 2009.




(a)
              Number
      of securities to be issued upon exercise of outstanding options, warrants
      and rights
            Weighted-average
      exercise price of outstanding options, warrants and rights
            Number
      of securities remaining available for future issuance under equity
      compensation plans (excluding securities reflected in column)
      (a)Equity
      compensation plans approved by security holders(1)
            3,720,825
            $0.61
            0(1)Equity
      compensation plans not approved by security holders(2)
            0
            0
            0Aggregate
      individual option grants outside of Stock Option Plan
            8,858,487
            $0.98Total
            12,579,312
            $0.87
            0(1)__________
              (1)  Our
      1996 Amended and Restated Stock Option Plan provided for the issuance of
      options to purchase up to 4,000,000 shares of our common
      stock.  As of March 2006, no additional options could be issued
      under the plan in accordance with its terms.
              
              (2)  The
      aggregate individual option grants outside the Stock Option Plan referred
      to in the above table include options issued to our officers, directors,
      employees and consultants in consideration for certain services rendered
      to us.







ITEM
5.   SELECTED FINANCIAL DATA




We are a
"smaller reporting company" as defined in Rule 12b-2 promulgated under the
Securities Exchange Act of 1934, as amended and as such, are not providing the
information contained in this item pursuant to Item 301 of Regulation
S-K.


18


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




You
should read the following discussion of our results of operations and financial
condition in conjunction with the information contained in our Financial
Statements and related Notes.




Overview




Our
principal business is the acquisition, development, licensing and protection of
our intellectual property. We presently own six patents covering various
telecommunications and data networking technologies including, among others,
patents covering the delivery of power over Ethernet for the purpose of remotely
powering network devices, and the transmission of audio, video and data over
computer and telephony networks. Our strategy is to pursue licensing and
strategic business alliances with companies in the industries that manufacture
and sell products that make use of the technologies underlying our patents as
well as with other users of the technology who benefit directly from the
technology including corporate, educational and governmental
entities.




To date,
our efforts with respect to our intellectual property have focused on licensing
our patent (U.S. Patent No. 6,218,930) covering the control of power delivery
over Ethernet cables (the “Remote Power Patent”).  As of
March 31, 2010, we had entered into six license agreements with respect to
our Remote Power Patent which, among others, included license agreements with
D-Link, Microsemi Corporation and Netgear, Inc. (See Note [D] to our financial
statements included as part of this Annual Report).  We may seek to
acquire additional patents in the future.




To date
we have incurred significant losses and at December 31, 2009 had an
accumulated deficit of $(53,473,000).  For the year ended December 31,
2009 and the year ended December 31, 2008, we incurred net losses of
$(2,578,000) and $(1,618,000), respectively.  We anticipate that we
will continue to incur losses until we enter into additional license agreements
with respect to our patented technologies or achieve material additional revenue
from our existing license agreements.  We achieved revenue of $811,000
for the year ended December 31, 2009 and $349,000 for the year ended
December 31, 2008 with respect to royalties pertaining to our Remote Power
Patent.  Our inability to consummate additional material license
agreements or achieve material additional revenue from our existing license
agreements would have a material adverse effect on our operations.




Our
success and ability to generate revenue is largely dependent on our ability to
consummate licensing arrangements with third parties.  In November
2004, we entered into an agreement with ThinkFire Services USA, Ltd.
(“ThinkFire”) pursuant to which ThinkFire has been granted the exclusive
worldwide rights to negotiate license agreements for our Remote Power Patent
with certain agreed-upon potential licensees.  We agreed to pay
ThinkFire a fee ranging from 5% to 20% of the royalty payments received from
license agreements consummated by ThinkFire on our behalf after we recover our
expenses.




In
February 2008, we commenced litigation against eight major data networking
equipment manufacturers in the United States District Court for the Eastern
District of


19


Texas,
Tyler Division, for infringement of our Remote Power Patent.  The
complaint named as defendants Cisco Systems, Inc., Cisco Linksys, LLC, Enterasys
Networks, Inc., 3COM Corporation, Inc., Extreme Networks, Inc., Foundry
Networks, Inc., Netgear, Inc. and Adtran, Inc.  We seek injunctive
relief and monetary damages for infringement based upon reasonable royalties as
well as treble damages for the defendant’s continued willful infringement of our
Remote Power Patent.  The defendants answered the complaint and
asserted that they do not infringe any valid claim of our Remote Power Patent,
and further asserted that, based on several different theories, the patent
claims are invalid or unenforceable.  In addition to these defenses,
the defendants also asserted counterclaims for, among other things,
non-infringement, invalidity, and unenforceability of our Remote Power
Patent.  A Markman hearing, a hearing on claim construction of our
Remote Power Patent, was held in December, 2009. On February 16, 2010, the
United States District Court for the Eastern District of Texas, Tyler Division,
issued its Markman Order in which the Court adopted a number of constructions
proposed by us, while also adopting constructions proposed by defendants as well
as effectively invalidating two of our claims at issue.  A Markman
Order that does not entirely adopt either the plaintiff’s or defendants’
position is common in patent litigation.  A trial date has been set
for July, 2010.  In the event that the Court determines that our
Remote Power Patent is not valid or enforceable, and/or that the defendants do
not infringe, any such determination would have a material adverse effect on
us.




On May
29, 2009 we announced that we had agreed to settle the above referenced
litigation with respect to Netgear, Inc. (“Netgear”).  As part of the
settlement and under our Special Licensing Program, Netgear entered into a
license agreement with us for our Remote Power Patent.  Under the
terms of the license, Netgear licenses the Remote Power Patent from us for its
full term (which expires in March 2020), and pays quarterly royalties (which
began as of April 1, 2009) based on its sales of Power over Ethernet products,
including those Power over Ethernet products which comply with the Institute of
Electrical and Electronic Engineers 802.3af and 802.3at
Standards.  Licensed products include Netgear’s Power over Ethernet
enabled switches and wireless access points.  The royalty rates
included in the license are 1.7% of the sales price of Power Sourcing Equipment,
which includes Ethernet switches, and 2% of the sales price of Powered Devices,
which includes wireless access points.   The royalty rates are
subject to adjustment, under certain circumstances, if we grant a license to
other licensees with lower royalty rates and Netgear is able to and agrees to
assume all material terms and conditions of the other license. In addition,
Netgear made a payment to us of $350,000 with respect to the
settlement.




In August
2007 we finalized the settlement of our patent litigation against D-Link in the
United States District Court for the Eastern District of Texas, Tyler Division,
for infringement of our Remote Power Patent (U.S. Patent No.
6,218,930).  Under the terms of the settlement, D-Link licenses our
Remote Power Patent the terms of which include monthly royalty payments of 3.25%
(as adjusted as noted below) of the net sales of D-Link branded Power over
Ethernet products, including those products which comply with the IEEE 802.3af
and 802.3at Standards, for the full life of our Remote Power Patent, which
expires in March 2020.  The royalty rate is subject to adjustment to a
rate consistent with other similarly situated licensees of our Remote Power
Patent based on units of shipments of licensed products.  In addition,
D-Link paid us $100,000 upon signing the settlement agreement.  In
June 2009, based upon several licenses issued to third parties under our Special
Licensing Program, we agreed with D-Link to adjust the royalty rate to 1.7% of
the sales price for Power Servicing Equipment (which includes Ethernet switches)
and 2.0% of the sales price for Powered Devices (which includes wireless access
points).


20


As part
of our Special Licensing Program and our agreement with Microsemi Corp-Analog
Mixed Signal Group Ltd. (“Microsemi-Analog”) entered into in June 2008,
Microsemi Corporation (“Microsemi”), the parent company of Microsemi-Analog,
entered into a license agreement, dated August 13, 2008, with us with
respect to the Remote Power Patent.  The license agreement provides
that Microsemi is obligated to pay us quarterly royalty payments of 2% of the
sales price for certain of Microsemi’s Midspan PoE products for the full term of
the Remote Power Patent (through March 2020).




Notwithstanding
our license agreements, including those with D-Link, Microsemi and Netgear
described above, there is no assurance that we will achieve significant royalty
revenue from such licenses, that we will be able to achieve additional material
license agreements with third parties relating to our Remote Power Patent or our
other patents, or that such license arrangements will result in material revenue
to us.




RESULTS
OF OPERATIONS




Year
Ended December 31, 2009 Compared To Year Ended December 31,
2008




We had
revenue of $811,000 for the year ended December 31, 2009 (“2009”) as
compared to revenues of $349,000 for the year ended December 31, 2008
(“2008”), which increase in revenues was due primarily to the $350,000 payment
from the settlement of our litigation with Netgear, Inc., as well as additional
royalties from our licensees.




We had a
cost of royalties of $76,000 and $18,000 for 2009 and 2008, respectively, which
increase of $58,000 was related to additional compensation payable to our
Chairman and Chief Executive Officer pursuant to his employment agreement, and
contingent legal fees paid to Dovel & Luner, our patent litigation
counsel.




The gross
profit for 2009 increased $404,000 from $331,000 for 2008 to $735,000 for
2009.  Such increased gross profit was the result of increased revenue
for 2009 due primarily to the $350,000 settlement income of our litigation with
Netgear, Inc., as well as additional royalties from our licensees.




General
and administrative expenses include overhead expenses, and finance, accounting,
legal and other professional services incurred by us.  General and
administrative expenses increased by $640,000 from $1,773,000 for 2008 to
$2,413,000 for 2009 due primarily to increased fees and expenses from our patent
litigation.


21


We
incurred an operating loss of ($2,579,000) for 2009 compared with an operating
loss of ($1,729,000) for 2008.  Included in the operating loss for
2009 was $901,000 in charges relating to non-cash compensation expenses
primarily related to the adjustment of exercise prices and extension of terms
for outstanding options and warrants (see Note D to our financial statements
included in this annual report) as compared to $287,000 for such non-cash
compensation expenses for 2008.




No
provision for or benefit from federal, state or local income taxes was recorded
for 2009 and 2008 because we incurred net operating losses and fully reserved
our deferred tax assets as their future realization could not be
determined.




As a
result of the foregoing, we incurred a net loss of $(2,578,000) for 2009
compared with a net loss of $(1,618,000) for 2008.




LIQUIDITY
AND CAPITAL RESOURCES




We have
financed our operations primarily from the sale of equity securities and royalty
revenue from licensing our Remote Power Patent.  We anticipate, based
on currently proposed plans and assumptions, relating to our operations, that
our cash and cash equivalents of approximately $2,264,000 as of March 16,
2010 will more likely than not be sufficient to satisfy our operations and
capital requirements until at least June 30, 2011.  There can be no
assurance, however, that such funds will not be expended prior thereto. In the
event our plans change, or our assumptions change, or prove to be inaccurate
(due to unanticipated expenses, difficulties, delays or otherwise), we may have
insufficient funds to support our operations prior to June 30,
2011.  Our inability to consummate additional material licensing
arrangements with respect to our Remote Power Patent and generate revenues
therefrom, achieve a material increase in revenue from our existing licenses or
obtain additional financing when needed, would have a material adverse effect on
our company, requiring us to curtail or cease operations. In addition, any
equity financing may involve substantial dilution to our current
stockholders.




OFF-BALANCE
SHEET ARRANGEMENTS




We do not
have any off-balance sheet arrangements.


22


Critical Accounting
Policies:




Patents:




We own
patents that relate to various telecommunications and data networking
technologies.  We capitalize the costs associated with acquisition,
registration and maintenance of the patents and amortize these assets over their
remaining useful lives on a straight-line basis.  Any further payments
made to maintain or develop the patents would be capitalized and amortized over
the balance of the useful life for the patents.




Impairment
of long-lived assets:




We record
impairment losses on long-lived assets used in operations or expected to be
disposed of when indicators of impairment exist and the cash flows expected to
be derived from those assets are less than carrying amounts of those
assets.




Use of
estimates:




The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period.  Actual results could differ from those
estimates.




Recently Issued Accounting
Pronouncements:




See Note
B[11]  to the Financial Statements.









ITEM
6A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKETRISK




We are a
"smaller reporting company" as defined in Rule 12b-2 promulgated under the
Securities Exchange Act of 1934, as amended, and as such, are not providing the
information contained in this item pursuant to Item 305 of Regulation
S-K.




ITEM
7.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA




The
financial statements required hereby are located on pages F-1 through F-16 which
follow Part III.




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




None.


23
 
 ITEM
8A.   CONTROLS AND PROCEDURES.




(a)     Evaluation
of Disclosure Controls and Procedures.




Our Chief
Executive Officer and Chief Financial Officer have evaluated the effectiveness
of our disclosure controls and procedures (as defined




in Rule
13a-15(e) of the Securities Exchange Act of 1934) as of the end of the period
covered by this Annual Report on Form 10-K.  Based upon this review,
our officers concluded that, as of the end of the period covered by this Annual
Report on Form 10-K, our disclosure controls and procedures are effective to
ensure that information required to be disclosed by us in the reports we file or
submit under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported, within the time periods specified in applicable rules
and forms and is accumulated and communicated to management, including our Chief
Executive Officer and Chief Financial Officer, to allow timely decisions
regarding required disclosure.




(b) Internal
Control Over Financial Reporting




Our
management is also responsible for establishing and maintaining adequate
“internal control over financial reporting” of the company, as defined in Rule
13a-15(f) of the Exchange Act.  Internal control over financial
reporting is defined as a process designed by, or under the supervision of, the
issuer’s principal executive and principal financial officer and effected by our
board of directors, management and other personnel, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally
accepted accounting principles.  A company’s internal control over
financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial
statements.




Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements.  Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.




Management,
our Chief Executive Officer and Chief Financial Officer, conducted an evaluation
of the effectiveness of our internal control over financial reporting as of
December 31, 2009 using the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission in Internal Control - Integrated
Framework.  Management believes that this evaluation provides a
reasonable basis for its opinion.  In connection with this evaluation,
our management did not identify any material deficiencies.  Based upon
that evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that our internal controls over financial reporting were effective as
of the end of the period covered by this report.


24


This
annual report does not include an attestation report of our independent
registered public accounting firm regarding internal control over financial
reporting.  Management’s report was not subject to attestation by our
independent registered public accounting firm pursuant to temporary rules of the
SEC that permit the Company to provide only management’s report in this annual
report.




(c) Changes
in Internal Control over Financial Reporting




There was
no change in our internal control over financial reporting that occurred during
the fiscal quarter ended December 31, 2009, that has materially affected,
or is reasonably likely to materially affect, our internal control over
financial reporting.




ITEM 8B.OTHER
INFORMATION.




None.
       25


PART
III




ITEM
9.   DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE.




NAME
            AGE
            POSITIONCorey
      M. Horowitz
            55
            Chairman,
      Chief Executive Officer and Secretary, Chairman of the Board of
      DirectorsDavid
      C. Kahn
            58
            Chief
      Financial OfficerRobert
      M. Pons
            53
            DirectorLaurent
      Ohana
            46
            Director







Corey M. Horowitzbecame our
Chairman and Chief Executive Officer in December 2003.  Mr. Horowitz
has also served as our Chairman of our Board of Directors since January 1996 and
has been a member of our Board of Directors since April 1994.  In
January 2003, Mr. Horowitz also became our
Secretary.  Mr. Horowitz is also President and sole shareholder
of CMH Capital Management Corp. (“CMH”), a New York investment advisory and
merchant banking firm, which he founded in September 1991. During the period
June 2001 through December 2003, CMH rendered financial advisory services to
us.  From January 1986 to February 1991, Mr. Horowitz was a general
partner in charge of mergers and acquisitions at Plaza Securities Co., a New
York investment partnership.




David C. Kahn, CPA, became
our Chief Financial Officer in January 2004.  Since December 1989, Mr.
Kahn has provided accounting and tax services on a consulting basis to private
and public companies.  He also serves as a faculty member of Yeshiva
University in New York, a position he has held since August 2000.




Robert M. Pons became a
director of our company in December 2003.  Mr. Pons is currently
Senior Vice President of TMNG Global (NasdaqGM:TMNG), a leading provider of
professional services to the converging communications media and entertainment
industries and the capital formation firms that support it.  From
January 2004 until April 2007, Mr. Pons served as President and Chief Executive
Officer of Uphonia, Inc. (PK:UPHN) (previously SmartServ Online, Inc.), a
wireless applications service provider.  From August 2003 until
January 2004, Mr. Pons served as Interim Chief Executive Officer of SmartServ
Online, Inc. on a consulting basis.  From March 1999 to August 2003,
he was President of FreedomPay, Inc., a wireless device payment processing
company.  During the period January 1994 to March 1999, Mr. Pons was
President of Lifesafety Solutions, Inc., an enterprise software
company.  Mr. Pons has over 20 years of management experience with
telecommunications companies including MCI, Inc., Sprint, Inc. and Geotek,
Inc.




Laurent Ohana became a
director of our company in September 2005.  Mr. Ohana is currently the
Managing Partner of Parkview Ventures LLC (“Parkview”), a company engaged in
merchant banking activities, including making investments in and providing
strategic advisory services to information technology firms in the US and
internationally.  From 1999 to 2002, Mr. Ohana was the CEO of Inlumen,
Inc., a


26


company
engaged in providing private label web-based financial portals to financial
institutions.  From 1994 to 2004, Mr. Ohana was the managing partner
of New Media Capital LLC, a technology venture capital and advisory
firm.  From 1987 to 1993, Mr. Ohana was a corporate attorney at Fried
Frank Harris Shriver & Jacobson.




Key
Consultant




Jonathan Greene has served as
a consultant to our company since December 2004 providing technical and
marketing analysis for our intellectual property.  Mr. Greene
also serves as a member of our Technical Advisory Board.  Since April
2006, Mr. Greene has also served as a marketing consultant for Avatier
Corporation, a developer of identity management software.  From August
2003 until December 2004, he served as a consultant to Neartek, Inc., a storage
management software company (August 2003 until October 2003) and Kavado Inc., a
security software company (November 2003 until December 2004).  From
January 2003 until July 2003, Mr. Greene served as Director of Product
Management for FalconStor Software, Inc., a storage management software
company.  From December 2001 through December 2002, Mr. Greene
served as our Senior Vice President of Marketing and Business Development, at a
time when we were engaged in the development, marketing and licensing of
security software.  From December 1999 until September 2001, he served
as Senior Vice President of Marketing for Panacya Inc., a vendor of service
management software.  Mr. Greene has also held positions at
System Management ARTS (SMARTS), Computer Associates, Cheyenne Software and Data
General.




Committees
of the Board of Directors




Audit Committee




We do not
have a separate audit committee.  Our Board of Directors functions as
our audit committee in accordance with Section 3(a)58(A) of the Securities
Exchange Act of 1934.  While we are not listed on AMEX, our Board has
adopted its independence rules in making its determination of director
independence.  Two of our three directors, Robert Pons and Laurent
Ohana, are considered independent directors based upon the standard of
independence adopted by the Board of Directors as promulgated under Rule 121A of
the Company Guide of the American Stock Exchange (“AMEX”).  Corey M.
Horowitz, who does not meet the AMEX requirement for director independence, is
also a board member.




As part
of our internal control procedures, our two independent directors (Robert Pons
and Laurent Ohana) receive quarterly and annual financial statements and consult
with our independent accountants prior to filing such financial statements with
the SEC.  In addition, Robert Pons, an independent director, receives
monthly financial information from our Chief Financial Officer also as part of
our internal control procedures.  The Company does not have an audit
committee financial expert serving on its Board of Directors.


27


Compensation
Committee




Robert
Pons is currently the sole member of our Compensation Committee and served in
that capacity for 2009 and 2008.  The Compensation Committee is
responsible for recommending compensation for our executive officers (subject to
Board approval), including bonuses and benefits, and administration of our
compensation programs, including our Stock Option Plan.




Limitation
on Liability and Indemnification Matters




Our
Certificate of Incorporation limits the liability of directors to the maximum
extent permitted by Delaware law.  Delaware law provides that
directors of a corporation will not be personally liable for monetary damages
for breach of their fiduciary duties as directors, except for liability (i) for
any breach of their duty of loyalty to the corporation or its stockholders, (ii)
for acts or omissions not in good faith or that involve intentional misconduct
or a knowing violation of law, (iii) for unlawful payments of dividends or
unlawful stock repurchases or redemptions as provided in Section 174 of the
Delaware General Corporation Law or (iv) for any transaction from which the
director derived an improper personal benefit.  Our Bylaws provide
that we shall indemnify our directors, officers, employees and agents to the
fullest extent permitted by law.  Our Bylaws also permit us to secure
insurance on behalf of any officer, director, employee or other agent for any
liability arising out of his or her actions in such capacity.  We
currently maintain directors’ and officers’ liability insurance.  At
present, there is no pending litigation or proceeding involving any of our
directors, officers, employees or agents where indemnification will be required
or permitted.  We are not aware of any threatened litigation or
proceeding that might result in a material claim for such
indemnification.




Technical
Advisory Board




In
November 2004 we established a Technical Advisory Board to assist us with our
strategic business plan of maximizing the value of our intellectual
property.  Each member of the Technical Advisory Board was issued a
five (5) year option to purchase 17,500 shares (fully vested) of our common
stock at an exercise price equal to the closing price of the shares on the date
of appointment to the Technical Advisory Board.




The
members of the Technical Advisory Board include:




George Conant, former CEO and
Chairman of the Board of Directors of Merlot Communications, Inc., a
broadband communications solutions provider, during the period 2000 –
2006.  Prior to joining Merlot Communications, Inc., Mr. Conant
co-founded Xyplex, Inc., a manufacturer of data communications equipment and
network management software, where he held the positions of Vice President of
Engineering, Vice President of Technology and Chief Technology Officer. Prior to
Xyplex, Mr. Conant was employed by Digital Equipment Corporation, where he
worked as a network architect. Mr. Conant received a BS and a Masters in
theoretical mathematics from the University of Michigan.




Ron Keenan, Electrical Engineer,
Dapco Industries,a developer and
manufacturer of ultrasonic test systems.  From 2006 to 2008, he was
CEO of IP Infotainment, Limited,a network services
company.  From 1997 until 2006, Mr. Keenan served as Chief
Technology Officer of Merlot Communications, Inc.  Mr. Keenan is an


28


expert on
the convergence of telecommunications and data who, prior to co-founding Merlot,
founded QFR USA Corporation, a high-tech firm engaged in developing custom ASICs
for advanced and cost-effective communications systems.  He had
previously founded two other development firms.  He also served as
advanced engineering project director at TIE/Communications, Inc., where he
developed the TIE 612 Electronic Key System, the first "skinny wire" telephone
system and one of the largest selling key systems in history.  Mr.
Keenan received his BS in Electrical Engineering from the Milwaukee School of
Engineering and has more than 20 years experience in advanced analog and digital
design techniques.




Andrew Maslow, Director of
Industrial Affairs, Memorial Sloan-Kettering Cancer
Center.  Mr. Maslow heads the intellectual property activities
of Sloan-Kettering which includes licensing activities of the Center’s
technology and management of its patent portfolio.  Annual licensing
revenue exceeds $60 million.  Prior to joining Sloan-Kettering, Mr.
Maslow was Associate Director of the Office of Science and Technology of
Columbia University where he was responsible for the development, patenting and
licensing of inventions originating at the university.  Mr. Maslow is
a Registered Patent Attorney.




Boris Katzenberg, independent
electrical engineering consultant.  From 2008 to 2009, he was
Vice President Engineering, Aventura Technology, Inc., a manufacturer of next
generation video surveillance solutions.  From 2003 to 2008, he was
Senior Electrical Engineer, Ortronics,Inc., a structured cabling
solutions provider.  Mr. Katzenberg has held numerous positions during
his 28-year career in the Telecom and Datacom industries.  He has been
a force in the fields of power delivery and signal integrity systems, and has
lent his expertise in the development of many innovative and cutting-edge
technologies.  From 1997 to 2002, he was a senior electrical engineer
at Merlot Communications, Inc., where he invented the technology underlying our
Remote Power Patent.  He has also been active in the IEEE 802.3at Task
Force, developing the next generation Power over Ethernet standard and continues
to be responsible for the evaluation of new technologies and their development
into viable products for Aventura Technology, Inc.




Jonathan Greenealso serves
as a member of the Technical Advisory Board (see page 27 hereof for a
description of Mr. Greene’s background).




Section
16(a) Beneficial Ownership Reporting Compliance




Section
16(a) of the Exchange Act requires our officers and directors, and persons who
own more than ten percent (10%) of a registered class of our equity securities
to file reports of ownership and changes in ownership with the SEC. Officers,
directors and greater than ten percent (10%) stockholders are required by SEC
regulations to furnish us with copies of all Section 16(a) forms they file. To
the best of our knowledge, based solely on review of the copies of such forms
furnished to us or amendments thereto, we believe that all Section 16(a) filing
requirements applicable to its officers, directors and greater than ten percent
(10%) stockholders were complied with during 2008. With respect to any of our
former directors, officers, and ten percent (10%) stockholders, we do not have
any knowledge of any known failures to comply with the filing requirements of
Section 16(a).


29


Code
of Ethics




The Board
of Directors has adopted a Code of Ethics that applies to the principal
executive officers, principal financial officer, principal accounting officer or
controller, or persons performing similar functions.  The Code of
Ethics is incorporated by reference as Exhibit 14 to this Annual Report on Form
10-K.




ITEM
10.  EXECUTIVE COMPENSATION




The
following table summarizes compensation, for the years ended December 31, 2009
and December 31, 2008, awarded to, earned by or paid to our Chief Executive
Officer (“CEO”) and to each of our executive officers who received total
compensation in excess of $100,000 for the year ended December 31, 2009 for
services rendered in all capacities to us (collectively, the “Named Executive
Officers”).






Summary
Compensation Table





Annual
      Compensation
            Long
      Term Compensation AwardsName and Principal Position
            Year
            Salary ($)
            Bonus ($)
            Option Awards($)
            All OtherCompensation($)(1)
            Total($)Corey
      M. Horowitz
              Chairman
      and ChiefExecutive
      Officer
              
              David
      C. Kahn
              Chief
      Financial Officer
            2009
              2008
              
              2009
              2008
            $369,681
              $298,947
              
              $87,504(4)
              $83,340(4)
            $190,458(2)
              $168,000(2)
              
              $17,500
              $15,000
            $1,047,000(3)
              $191,000(3)
              
              $14,000(5)
              $32,000(5)
            —
              
              
              —
            $1,607,139
              $657,947
              
              $119,004
              $130,340







(1)
            We
      have concluded that the aggregate amount of perquisites and other personal
      benefits paid in 2009 and 2008 to either Mr. Horowitz or Mr. Kahn did not
      exceed $10,000.




(2)
            Mr.
      Horowitz received the following bonus payments for 2009: (i) a
      discretionary annual bonus of $150,000 for 2009 which was paid in January
      2010 and (ii) royalty bonus compensation of $40,458 pursuant to his
      employment agreement.  Mr. Horowitz received the following bonus
      payments for 2008: (i) a discretionary annual bonus of $150,000 for 2008
      which was paid in January 2009 and (ii) royalty bonus compensation of
      $18,000 pursuant to his employment
agreement.




(3)
            In
      determining the aggregate grant date fair value in accordance with FASB
      ASC Topic 718 of a ten (10) year option issued in June 2009 to Mr.
      Horowitz to purchase 750,000 shares of common stock, we made the following
      assumptions: expected term of options – 10 years; risk free interest rate
      for the expected term of the options – 2.950%; expected volatility of the
      underlying stock – 62.04%; no expected dividends.  In
      determining the aggregate grant date fair value in accordance with FASB
      ASC Topic 718 of a five (5) year option issued in February 2008 to Mr.
      Horowitz to purchase 375,000 shares of common stock, we made the following
      assumptions: expected term of options – 5 years; risk free interest rate
      for the expected term of the options – 2.73%; expected volatility of the
      underlying stock – 39.35%; no expected dividends. The aggregate grant date
      fair value for 2009 reflects an incremental value of $464,000 due to
      exercise price adjustments on March 11, 2009 to an adjusted exercise price
      of $0.68 per share with respect to options and warrants to purchase an
      aggregate of 4,031,195 shares with exercise prices ranging from $0.70 to
      $6.00 per share. The aggregate grant date fair value for 2009 also
      reflects an incremental value of $132,000 due to five-year extensions,
      approved on June 8, 2009, of options to purchase an aggregate 417,500
      shares which were to expire in 2009.  The aggregate grant date
      fair value for 2009 also reflects an incremental value of $6,000 due to
      removal in December 2009 of contingent vesting provisions of options to
      purchase 10,625 shares of common stock at an exercise price of $0.68 per
      share granted in January, 2001 (so as to make such options immediately
      exercisable).




(4)
            Consists
      of consulting fees paid to Mr. Kahn for his services as Chief Financial
      Officer.




30


(5)
            In
      determining the aggregate grant date fair value in accordance with FASB
      ASC Topic 718 of a five (5) year option issued in December 2008 to Mr.
      Kahn to purchase 100,000 shares of common stock, we made the following
      assumptions: expected term of options – 5 years; risk free interest rate
      for the expected term of the options – 1.55%; expected volatility of the
      underlying stock – 69.45%; no expected dividends.  The aggregate
      grant date fair value reflects an incremental value of $14,000 due to
      exercise price adjustments on March 11, 2009 to $0.68 per share of the
      following options:  Options to purchase 75,000 shares of common
      stock at an exercise price of $3.0625 per share granted in August, 2005;
      and options to purchase 75,000 shares of common stock at an exercise price
      of $1.50 per share granted in December,
2006.






Narrative Disclosure to Summary
Compensation Table




Employment
Agreements, Termination of Employment and Change-In-Control
Arrangements




On
June 8, 2009, we entered into an Employment Agreement (the “Agreement”)
with Corey M. Horowitz pursuant to which he continues to serve as our Chairman
and Chief Executive Officer for a three year term at an annual base salary of
$375,000 (retroactive to April 1, 2009) for the first year and increasing
5% on each of April 1, 2010 and April 1,
2011.  Mr. Horowitz also receives a cash bonus in an amount no
less than $150,000 on an annual basis for the three year term of the
Agreement.  In connection with the Agreement, Mr. Horowitz was issued
a ten (10) year option to purchase 750,000 shares of our common stock at an
exercise price of 0.83 per share, which vests in equal quarterly amounts of
62,500 shares beginning June 30, 2009 through March 31, 2012, subject
to acceleration upon a change of control.  Mr. Horowitz shall forfeit
the balance of unvested shares if his employment has been terminated “For Cause”
(as defined) by us or without Good Reason (as defined) by
Mr. Horowitz.  In addition to the aforementioned option grant, we
extended for an additional five (5) years the expiration dates of all options
(an aggregate of 417,500 shares) expiring in the calendar year 2009 owned by
Mr. Horowitz.




Under the
terms of the Agreement, Mr. Horowitz shall also receive additional bonus
compensation in an amount equal to 5% of our royalties or other payments
(exclusive of proceeds from the sale of our patents which is covered below) with
respect to our remote power patent (U.S. Patent No. 6,218,930), (the “Remote
Power Patent”) and 12.5% of our royalties and other payments with respect
to our other patents besides the Remote Power Patent (the “Additional
Patents”) (all before deduction of payments to third parties including, but not
limited to, legal fees and expenses and third party license fees) actually
received from licensing its patented technologies (including patents owned as of
the date of the Agreement and acquired or licensed on an exclusive basis during
the period in which Mr. Horowitz continues to serve as an executive officer
of our company) (the “Royalty Bonus Compensation”).  In addition,
during the term of his employment, Mr. Horowitz shall also be entitled to
additional bonus compensation equal to (i) 5% of the gross proceeds from the
sale of our Remote Power Patent and 12.5% of the gross proceeds from the sale of
the Additional Patents, and (ii) 5% of the gross proceeds from the merger of our
company with or into another entity.  The Royalty Bonus Compensation
shall continue to be paid to Mr. Horowitz for the life of each of our
patents with respect to licenses entered into with third parties during
Mr. Horowitz’s term of employment or at anytime thereafter, whether Mr.
Horowitz is employed by us or not; provided, that, Mr. Horowitz’s


31


employment
has not been terminated by us “For Cause” (as defined) or terminated by Mr.
Horowitz without “Good Reason” (as defined).  In the event that Mr.
Horowitz’s employment is terminated by us “Other Than For Cause” (as defined) or
by Mr. Horowitz for “Good Reason” (as defined), Mr. Horowitz shall also be
entitled to (i) a lump sum severance payment of 12 months base salary, (ii) the
minimum annual bonus of $150,000 and (iii) accelerated vesting of all unvested
options and warrants.




In connection with the Agreement, Mr.
Horowitz has agreed not to compete with us as follows: (i) during the term of
the agreement and for a period of 12 months thereafter if his employment is
terminated “Other Than For Cause” (as defined) provided he is paid his 12 month
base salary severance amount and (ii) for a period of two years from the
termination date, if terminated “For Cause” by the Registrant or “Without Good
Reason” by Mr. Horowitz.




On
December 18, 2008, we entered into an agreement with David C. Kahn
pursuant to which he continues to serve as our Chief Financial Officer through
December 31, 2010.  In consideration for his services, Mr. Kahn
was compensated at the rate of $7,292 per month for the year ended
December 31, 2009 and is compensated at the rate of $7,657 per month for
the year ended December 31, 2010.  In connection with the
agreement, Mr. Kahn was also issued a five (5) year option (the “Option”) to
purchase 100,000 shares of our common stock at an exercise price of $0.54 per
share.  The option vested 40,000 shares on the date of grant and the
balance of the shares (60,000) will vest on a quarterly basis in equal amounts
of 7,500 shares beginning March 31, 2009 through December 31,
2010.  Upon a “Change in Control” (as defined) all of the unvested
shares underlying the Option shall become 100% vested and immediately
exercisable.  The agreement further provides that we may terminate the
agreement at any time for any reason.  In the event Mr. Kahn’s
services are terminated without “Good Cause” (as defined), he will be entitled
to accelerated vesting of all unvested shares underlying the Option and the
lesser of (i) six months base monthly compensation or (ii) the remaining balance
of the monthly compensation payable through December 31, 2010.




Director
Compensation




We
compensate each director who is not an employee of our company by granting to
each such outside director (upon his or her joining the Board) stock options to
purchase 50,000 shares of our common stock, at an exercise price equal to the
closing price of our common stock on the date of grant, with the options vesting
over a one year period in equal quarterly amounts.  In addition,
subject to the discretion of the Compensation Committee and the Board of
Directors, each non-employee director is eligible to receive option grants for
each year of service as a director.  In December 2008, for services as
a Director for 2009, each member of the Board of Directors was granted a five
(5) year option to purchase 25,000 shares at an exercise price of $0.51 per
share (closing price of our common stock on the date of grant) which option
vests on a monthly basis over a one year period subject to continued service on
the Board of Directors.  On March 11, 2009, as part of our
Board’s adjustment of exercise prices (See Note D to our Financial Statements),
options to purchase 100,000 shares previously issued to Robert Pons and options
to purchase 150,000 shares issued to Laurent Ohana were adjusted to $0.68 per
share.  In addition, we made cash payments for director fees to Mr.
Pons and Mr. Ohana of $2,500 per quarter for each of the first two quarters of
2009, and $5,000 per quarter for each of the latter two quarters of
2009.


32


The
following table sets forth the compensation paid to all persons who served as
members of our board of directors (other than our Named Executive Officers)
during the year ended December 31, 2009.  No director who is also
a Named Executive Officer received any compensation for services as a director
in 2009.




Name
            Option
      Awards
                ($)
            All
      other
                Compensation
      ($)
            Total
                ($)Robert
      Pons(1)
            $18,000(2)
      (3)
            $15,000(4)
            $33,000(3)Laurent
      Ohana(1)
            $20,000(2)
      (3)
            $15,000
      (4)
            $35,000(3)


___________________________


(1)
            In
      December 2008, Robert Pons and Laurent Ohana were each granted a five (5)
      year option to purchase 25,000 shares of our common stock (which vested on
      a quarterly basis beginning March 1, 2009), at an exercise price of
      $1.45 per share (reduced to  $0.68 per share by action of our
      Board in March, 2009) for services to be rendered as a Board member during
      2009.




(2)
            Includes
      the fair value of options to purchase 25,000 shares of our common stock
      granted on December 1, 2008 to each of Robert Pons and Laurent Ohana
      since the options vest on a quarterly basis beginning March 1,
      2009.




(3)
            In
      determining the aggregate grant date fair value of the options granted in
      December, 2008 in accordance with FASB ASC topic 718, we made the
      following assumptions:  expected term of the options – five
      years; risk free interest rate for the expected term of the options –
      1.710%; expected volatility of the underlying stock – 69.45%; no expected
      dividends.  The aggregate grant date fair value for each
      director’s December 2008 option grant reflects an incremental value of
      $22,000 due to exercise price adjustments on March 11, 2009 to $0.68 per
      share to the following options:  options to purchase 50,000
      shares of common stock at  an exercise price of $0.80 per share
      granted to Mr. Ohana on September 16, 2005; options to purchase 50,000
      shares of common stock at an exercise price of $1.50 per share granted to
      Mr. Ohana on December 20, 2006; options to purchase 25,000 shares of
      common stock at an exercise price of $1.45 per share granted to Mr. Ohana
      on December 28, 2007; options to purchase an additional 25,000 shares of
      common stock at an exercise price of $1.45 per share granted to Mr. Ohana
      on January 2, 2008; options to purchase 50,000 shares of common stock at
      an exercise price of $1.50 per share granted to Mr. Pons on December 20,
      2006; options to purchase 25,000 shares of common stock at an exercise
      price of $1.45 per share granted to Mr. Pons on December 28, 2007; and
      options to purchase an additional 25,000 shares of common stock at an
      exercise price of $1.45 per share granted to Mr. Pons on January 2,
      2008.




(4)
            Represents
      director fees payable in cash to each of Mr. Pons and Mr. Ohana of $2,500
      per quarter for each of the first two quarters of 2009, and $5,000 per
      quarter for each of the latter two quarters of
  2009.




Option
Grants in 2009




The
following stock options were granted to the Named Executive Officers during the
year ended December 31, 2009:




Name
            Number
      of
                Securities
                Underlying
      Options
                Granted
            Percent
      of Total
                Options
      Granted to
                Employees
      in 2009
            Exercise
      Price
            Expiration
      DateCorey
      M. Horowitz
              Chairman and CEO
            750,000
            100%
            $0.83
            6/8/2019





33


Outstanding
Equity Awards at December 31, 2009




The
following table sets forth information relating to unexercised and outstanding
options for each Named Executive Officer as of December 31,
2009:




Number
      of Securities
                Underlying
      Unexercised OptionName
            
            Exercisable
            
            
            Unexercisable
            
            
            Option
      Exercise Price ($)
            
            Option
      Expiration DateCorey
      M. Horowitz
              Chairman and CEO
            
            
            250,000
            (1)
            
            
            500,000
            
            
            $
            $.83.68
            
            06/08/19375,000
            
            
            
            --
            
            
            
            
            
            02/28/12732,709
            (3)
            
            
            --
            
            
            $
            .68
            
            04/16/121,195,361
            (4)
            
            
            --
            
            
            $
            .68
            
            03/16/12400,000
            (5)
            
            
            --
            
            
            $
            .68
            
            11/26/141,100,000
            (6)
            
            
            --
            
            
            $
            .25
            
            11/26/14515,218
            (7)
            
            
            --
            
            
            $
            .13
            
            12/22/111,084,782
            (8)
            
            
            --
            
            
            $
            .23
            
            12/22/11750,000
            (9)(21)
            
            
            --
            
            
            $
            .68
            
            04/18/10250,000
            (10)(21)
            
            
            --
            
            
            $
            .68
            
            10/08/11300,000
            (11)(21)
            
            
            --
            
            
            $
            .68
            
            07/11/1110,625
            (12)
            
            
            --
            
            
            $
            .68
            
            01/19/1120,000
            (13)
            
            
            --
            
            
            $
            .68
            
            10/20/1110,000
            (14)
            
            
            --
            
            
            $
            .68
            
            06/22/147,500
            (15)
            
            
            --
            
            
            $
            .68
            
            10/25/145,000
            (16)
            
            
            --
            
            
            $
            .68
            
            09/19/10375,000
            (17)
            
            
            --
            
            
            $
            .68
            
            02/28/13David
      Kahn
              Chief Financial Officer
            
            
            75,000
            (18)
            
            
            --
            
            
            $
            .68
            
            12/20/1175,000
            (19)
            
            
            --
            
            
            $
            .68
            
            08/04/1077,500
            (20)
            
            
            22,500(20)
            
            
            $
            .54
            
            12/18/1335,000
            (22)
            
            
            --
            
            
            $
            .35
            
            01/22/14


The
vesting dates of the foregoing options are as follows:  (1) 62,500
shares on a quarterly basis beginning June 30, 2009 through March 31,
2012.  (2) 93,750 shares on a quarterly basis beginning March 31, 2007
through December 31, 2007; (3) April 16, 2007; (4) March 16, 2005; (5) 200,000
shares on November 26, 2004 and 200,000 shares on November 26, 2005, (6)
November 26, 2004; (7) December 22, 2003; (8) 434,782 shares on December 22,
2003, 250,000 shares on December 22, 2004, 200,000 shares on December 22, 2005,
and 200,000 shares on December 22, 2006; (9) 250,000 shares on April 18, 2003,
250,000 shares on April 18, 2004 and 250,000 shares on April 18, 2005; (10) June
11, 2001; (11) July 11, 2001; (12) December 24, 2009 (13) on a quarterly basis
in equal amounts beginning January 20, 1999 through October 20, 1999; (14) on a
quarterly basis in equal amounts beginning September 12, 1999 through June 22,
2000; (15) on a quarterly basis in equal amounts beginning January 25, 2000
through October 25, 2000; (16) on a quarterly basis in equal amounts beginning
December 19, 2000 through September 19, 2001; (17) 93,750 shares on a quarterly
basis beginning March 31, 2008 through December 31, 2008; (18) December 20,
2006; (19) 30,000 shares on August 4, 2005 and 7,500 shares on a quarterly basis
beginning September 30, 2005 through December 31, 2006; (20) 40,000 shares on
December 18, 2008 and 7,500 shares on a quarterly basis beginning March 31, 2009
through December 31, 2010; (21) includes options or warrants held by CMH
Capital Management Corp., an entity in which Mr. Horowitz is the sole owner,
officer and director; and (22) 20,000 shares on January 21, 2004 and balance on
the last day of each month in equal amounts of 2,500 shares per month beginning
January 31, 2004 and ending on December 31, 2004; consists of options to
purchase 10,000 shares that Mr. Kahn transferred by gift to his son, and options
to purchase 25,000 shares that he transferred by gift to his
daughter.
 34




ITEM
11.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS




The
following table sets forth information regarding the beneficial ownership of our
common stock as of March 31, 2010 (i) each person known by us to be the
beneficial owner of more than 5% of our outstanding shares of common stock, (ii)
each of our directors, (iii) each of our executive officers, and (iv) all of our
executive officers and directors as a group.




NAME
      AND ADDRESS OF
              BENEFICIAL OWNER
            AMOUNT
      AND NATURE OF BENEFICIAL
      OWNERSHIP
            
            
            PERCENTAGE
      OF
              COMMON
      STOCK BENEFICIALLY OWNED(2)Corey
      M. Horowitz(3)
            10,427,560
            
            
            33.1
            %CMH
      Capital Management Corp(4)
            3,767,800
            
            
            14.8
            %Jonathan
      Auerbach(5)
            3,279,917
            
            
            13.0
            %Hound
      Partners, LLC(5)
            3,279,917
            
            
            13.0
            %Hound
      Performance, LLC(5)
            3,279,917
            
            
            13.0
            %Steven
      D. Heinemann(6)
            2,360,252
            
            
            9.7
            %Barry
      Rubenstein (7)
            2,063,271
            
            
            8.5
            %Hound
      Partners Offshore Fund, L.P.(8)
            1,737,802
            
            
            7.0
            %Hound
      Partners, L.P.(9)
            1,542,115
            
            
            6.3
            %Woodland
      Services Corp. (10)
            1,376,209
            
            
            5.7
            %Emigrant
      Capital Corporation (11)
              Paul Milstein Revocable 1998 Trust
              New York Private Bank & Trust Corporation
              Emigrant Bancorp. Inc.
              Emigrant Savings Bank
            1,312,500
            
            
            5.4
            %David
      C. Kahn(12)
            227,500
            
            
            *Laurent
      Ohana(13)
            225,000
            
            
            *Robert
      Pons(14)
            175,000
            
            
            *All
      officers and directors as a group
              (4
      Persons)
            11,055,060
            
            
            34.4
            %


______________________________




*                 Less
than 1%.





(1)
            Unless
      otherwise indicated, we believe that all persons named in the above table
      have sole voting and investment power with respect to all shares of common
      stock beneficially owned by them.  Unless otherwise indicated
      the address for each listed beneficial owner is c/o Network-1 Security
      Solutions, Inc., 445 Park Avenue, Suite 1018, New York, New York
      10022.




35


(2)
            A
      person is deemed to be the beneficial owner of securities that can be
      acquired by such person within 60 days from the date hereof upon the
      exercise of options, warrants or convertible securities. Each beneficial
      owner's percentage ownership is determined by assuming that options,
      warrants and convertible securities held by such person (but not those
      held by any other person) and which are exercisable or convertible within
      60 days have been exercised and converted.  Assumes a base of
      24,135,557 shares of our common stock
  outstanding.




(3)
            Includes
      (i) 268,803 shares of common stock held by Mr. Horowitz, (ii) 6,081,195
      shares of common stock subject to currently exercisable stock options held
      by Mr. Horowitz, (iii) 2,467,800 shares of common stock held by CMH
      Capital Management Corp. (“CMH”), an entity solely owned by Mr. Horowitz,
      (iv) 550,000 shares of common stock subject to currently exercisable
      warrants held by CMH, (v) 750,000 shares of common stock subject to
      currently exercisable options held by CMH, (vi) 67,471 shares of common
      stock owned by Donna Slavitt, the wife of Mr. Horowitz, (vii) 240,000
      shares of common stock held by two trusts and a custodian account for the
      benefit of Mr. Horowitz’s three children and (viii) 2,291 shares of common
      stock held by Horowitz Partners, a general partnership of which Mr.
      Horowitz is a partner. Does not include options to purchase 500,000 shares
      of common stock which are not currently
  exercisable.




(4)
            Includes
      (i) 2,467,800 shares of common stock, (ii) 550,000 shares of common
      stock subject to currently exercisable warrants and (iii) 750,000 shares
      of common stock subject to currently exercisable stock
      options.  Corey M. Horowitz, by virtue of being the sole
      officer, director and shareholder of CMH, has the sole power to vote and
      dispose of the shares of common stock owned by
  CMH.




(5)
            Includes
      (i) 1,057,215 shares of common stock and 484,900 shares of common stock
      subject to currently exercisable warrants held by Hound Partners, L.P. and
      (ii) 1,139,368 shares of common stock and 598,434 shares of common stock
      subject to currently exercisable warrants held by Hound Partners Offshore
      Fund, L.P.  Jonathan Auerbach is the managing member of Hound
      Performance, LLC and Hound Partners, LLC.  Hound Performance,
      LLC is the general partner of Hound Partners, L.P. and Hound Partners
      Offshore Fund, L.P.  Hound Partners, LLC is the investment
      manager of Hound Partners, L.P. and Hound Partners Offshore Fund,
      L.P.  The securities may be deemed to be beneficially owned by
      Hound Performance, LLC, Hound Partners LLC and Jonathan
      Auerbach.  The aforementioned beneficial ownership is based upon
      Amendment No.1 to Schedule 13G jointly filed by Hound Partners, LLC, Hound
      Performance, LLC, Jonathan Auerbach, Hound Partners, L.P. and Hound
      Partners Offshore Fund, L.P., with the Securities and Exchange Commission
      on February 13, 2009 and a Form 4 jointly filed by Hound Partners,
      LLC and Hound Performance, LLC and Jonathan Auerbach with the Securities
      and Exchange Commission on August 8, 2008.  Jonathan Auerbach,
      by virtue of being the managing member of Hound Performance, LLC and Hound
      Partners, LLC, may be deemed to have the sole power to vote and dispose of
      the securities held by Hound Partners, L.P. and Hound Partners Offshore
      Fund, L.P.  The address for Hound Partners, LLC is 101 Park
      Avenue, 47th
      Floor, New York, New York 10178.




36


(6)
            Includes
      (i) 2,268,585 shares of common stock and (ii) 91,667 shares of common
      stock subject to currently exercisable warrants owned by
      Mr. Heinemann.  The aforementioned beneficial ownership is
      based upon Amendment No. 1 to Schedule 13G filed by Mr. Heinemann
      with the Securities and Exchange Commission on
      February `11,2009.  The address for Mr. Heinemann is
      c/o First New York Securities, L.L.C., 90 Park Avenue, 5th
      Floor, New York, New York 10016.




(7)
            Includes
      (i) 150,012 shares of common stock held by Mr. Rubenstein, (ii) 31,875
      shares of common stock subject to currently exercisable stock options held
      by Mr. Rubenstein, and (iii) 792,726, 583,483, 309,316, 194,810 and 1,049
      shares of common stock held by Woodland Venture Fund, Seneca Ventures,
      Woodland Partners, Brookwood Partners, L.P. and Marilyn Rubenstein,
      respectively.  The aforementioned beneficial ownership by Mr.
      Rubenstein is based upon Amendment No. 7 to Schedule 13D jointly filed by
      Mr. Rubenstein and related parties with the Securities and Exchange
      Commission on November 14, 2007 and a Form 4 filed by Mr. Rubenstein with
      the Securities and Exchange Commission on October 26,
      2007.  Barry Rubenstein and Woodland Services Corp. are the
      general partners of Woodland Venture Fund and Seneca Ventures. Barry
      Rubenstein is the general partner of Brookwood Partners,
      L.P.  Barry Rubenstein is the President and sole director of
      Woodland Services Corp. Marilyn Rubenstein is the wife of Barry
      Rubenstein.  Barry Rubenstein, by virtue of being a General
      Partner of Woodland Venture Fund, Seneca Ventures and Brookwood Partners,
      L.P. and the President and sole director of Woodland Services Corp., may
      be deemed to have the sole power to vote and dispose of the securities
      held by Woodland Venture Fund, Seneca Ventures, Woodland Partners and
      Brookwood Partners, L.P.  The address of Barry Rubenstein is 68
      Wheatley Road, Brookville, New York
11545.




(8)
            Includes
      (i) 1,139,368 shares of common stock and (ii) 598,434 shares of common
      stock subject to currently exercisable warrants held by Hound Partners
      Offshore Fund, L.P.  Jonathan Auerbach, by virtue of being the
      managing member of Hound Performance, LLC and Hound Partners, LLC, may be
      deemed to have the power to vote and dispose of securities held by Hound
      Partners Offshore Fund, L.P.  The address of Hound Partners
      Offshore Fund, L.P. is c/o Citco Fund Services (Curacao) N.V., P.O. Box
      4774, Willemstad, Curacao, Netherlands
Antilles.




(9)
            Includes
      (i) 1,057,215 shares of common stock and (ii) 484,900 shares of common
      stock subject to currently exercisable warrants owned by Hound Partners,
      LP.  Jonathan Auerbach, by virtue of being the managing member
      of Hound Performance, LLC and Hound Partners, LLC, may be deemed to have
      the sole power to vote and dispose of the securities held by Hound
      Partners, L.P.  The address of Hound Partners, L.P. is 101 Park
      Avenue, 47th
      Floor, New York, New York 10178.




(10)
            Includes
      (i) 792,726 shares of common stock owned by Woodland Venture Fund and (ii)
      583,483 shares of common stock owned by Seneca
      Ventures.  Woodland Services Corp. and Barry Rubenstein are the
      general partners of Woodland Venture Fund and Seneca
      Ventures.  The aforementioned beneficial ownership of Woodland
      Services Corp. is based upon Amendment No. 7 to Schedule 13D




37


jointly
      filed by Woodland Services Corp. and related parties with the Securities
      and Exchange Commission on November 14, 2007.  Barry Rubenstein,
      by virtue of being President and the sole director of Woodland Services
      Corp., may be deemed to have the sole power to vote and dispose of the
      shares owned by Woodland Services Corp.  The address of Woodland
      Services Corp. is 68 Wheatley Road, Brookville, New York
      11545.


(11)
            Includes
      (i) 1,125,000 shares of common stock and (ii) 187,500 shares of common
      stock subject to currently exercisable warrants held by Emigrant Capital
      Corporation (“Emigrant Capital”).  Emigrant Capital is a wholly
      owned subsidiary of Emigrant Savings Bank (“ESB”), which is a wholly-owned
      subsidiary of Emigrant Bancorp, Inc. (“EBI”).  EBI is a
      wholly-owned subsidiary of New York Private Bank & Trust Corporation
      (“NYPBTC”).  The Paul Milstein Revocable 1998 Trust (the
      “Trust”) owns 100% of the voting stock of NYPBTC.  ESB, EBI,
      NYPBTC and the Trust each may be deemed to be the beneficial owner of the
      shares of common stock and warrants held by Emigrant
      Capital.  The aforementioned is based upon a Schedule 13G/A
      filed jointly by Emigrant Capital, ESB, EBI, NYPBTC, the Trust and others
      with the Securities and Exchange Commission on January 12,
      2005.  Howard Milstein, by virtue of being an officer of New
      York Private Bank and Trust Corporation and trustee of the Paul Milstein
      Revocable 1998 Trust, both indirect owners of Emigrant Capital
      Corporation, may be deemed to have sole power to vote and dispose of the
      securities owned by Emigrant Capital Corporation.  The address
      of Emigrant Capital Corporation is 6 East 43rd
      Street, 8th
      Floor, New York, New York 10017.




(12)
            Includes
      227,500 shares of common stock subject to currently exercisable stock
      options issued to Mr. Kahn.  Does not include options to
      purchase 22,500 shares of common stock which are not currently
      exercisable.




(13)
            Includes
      225,000 shares subject to currently exercisable options and warrants
      issued to Mr. Ohana.




(14)
            Includes
      175,000 shares subject to currently exercisable stock options issued to
      Mr. Pons.




The
Equity Compensation Plan information presented in Item 5 of this Annual Report
is incorporated herein in its entirety.




ITEM
12.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS  AND
DIRECTOR INDEPENDENCE




On March
11, 2009 our Board of Directors approved adjustments to the exercise prices and
terms of certain of our outstanding options and warrants as
follows:




(i)
            the
      exercise prices of certain outstanding compensatory options and warrants
      issued to officers, directors, consultants and others to purchase an
      aggregate of 5,029,945 shares of common stock were adjusted to an exercise
      price of $0.68 per share (closing price of the Company’s common stock on
      March 11, 2009) including options and warrants to purchase an aggregate of
      4,031,195 shares held by Corey M. Horowitz, our Chairman and Chief
      Executive Officer, and an affiliated entity, options to purchase an
      aggregate of 150,000 shares held by David Kahn, our Chief Financial
      Officer, and options and warrants to purchase an aggregate of 200,000 and
      100,000 shares held by Laurent Ohana and Robert Pons, respectively, two of
      our directors;




38


(ii)
            the
      exercise price of outstanding warrants to purchase an aggregate of 473,750
      shares of common stock (including warrants to purchase 187,500 shares
      owned by Emigrant Capital Corporation, one of our principal stockholders),
      issued as part of the Company’s private placement completed in December
      2004 and January 2005, which exercise price is scheduled to increase to
      $2.00 per share on March 31, 2009 (from $1.75 per
      share)  adjusted to an exercise price of $1.75 for the remaining
      exercise period of such warrants (May 21, 2010), subject to the adjustment
      set forth in item (iv) below;




(iii)
            the
      exercise price of warrants to purchase an aggregate of 1,666,667 shares of
      common stock, (including warrants to purchase 484,900 shares owned by
      Hound Partners, L.P., warrants to purchase 598,434 shares owned by Hound
      Partners Offshore Fund, L.P. and warrants to purchase 66,667 shares of
      common stock owned by Steven Heinemann, all such parties are principal
      stockholders of our Company), at an exercise price of $2.00 per share,
      which warrants were issued as part of the Company’s private placement
      completed in April 2007, were adjusted to an exercise price of $1.75 per
      share for the remaining exercise period of such warrants (April 16, 2012),
      subject to the adjustments set forth in item (iv) below;
    and





(iv)
            in
      the event that any holders of the above referenced outstanding warrants,
      issued as part of our December 2004/January 2005 or our April 2007 private
      placements, exercise such warrants at anytime up to and including December
      31, 2009, the exercise price of all such warrants shall adjust to $1.25
      per share.





On
December 24, 2009, as part of adjustments to remove contingent vesting
provisions from options to purchase an aggregate of 54,825 shares of common
stock approved by the Board of Directors of the Company, contingent vesting
provisions relating to options to purchase an aggregate of
10,625  shares of common stock owned by Corey M. Horowitz, our
Chairman and Chief Executive Officer were removed so as to  make those
options immediately exercisable.





On
June 8, 2009, we entered into an Employment Agreement (the “Agreement”)
with Corey M. Horowitz pursuant to which he continues to serve as our Chairman
and Chief Executive Officer for a three year term at an annual base salary of
$375,000 (retroactive to April 1, 2009) for the first year and increasing
5% on each of April 1, 2010 and April 1,
2011.  Mr. Horowitz also receives a cash bonus in an amount no
less than $150,000 on an annual basis for the three year term of the
Agreement.  In connection with the Agreement, Mr. Horowitz was issued
a ten (10) year option to purchase 750,000 shares of our common stock at an
exercise price of 0.83 per share, which vests in equal quarterly amounts of
62,500 shares beginning June 30, 2009 through March 31, 2012, subject
to acceleration upon a change of control.  Mr. Horowitz shall forfeit
the balance of unvested shares if his employment has been terminated “For


39


Cause”
(as defined) by us or without Good Reason (as defined) by
Mr. Horowitz.  In addition to the aforementioned option grant, we
extended for an additional five (5) years the expiration dates of all options
(an aggregate of 417,500 shares) expiring in the calendar year 2009 owned by
Mr. Horowitz.




Under the
terms of the Agreement, Mr. Horowitz shall also receive additional bonus
compensation in an amount equal to 5% of our royalties or other payments
(exclusive of proceeds from the sale of our patents which is covered below) with
respect to our remote power patent (U.S. Patent No. 6,218,930), (the “Remote
Power Patent”) and 12.5% of our royalties and other payments with respect to our
other patents besides the Remote Power Patent (the “Additional Patents”) (all
before deduction of payments to third parties including, but not limited to,
legal fees and expenses and third party license fees) actually received from
licensing its patented technologies (including patents owned as of the date of
the Agreement and acquired or licensed on an exclusive basis during the period
in which Mr. Horowitz continues to serve as an executive officer of our
company) (the “Royalty Bonus Compensation”).  In addition, during the
term of his employment, Mr. Horowitz shall also be entitled to additional
bonus compensation equal to (i) 5% of the gross proceeds from the sale of our
Remote Power Patent and 12.5% of the gross proceeds from the sale of the
Additional Patents, and (ii) 5% of the gross proceeds from our merger with or
into another entity.  The Royalty Bonus Compensation shall continue to
be paid to Mr. Horowitz for the life of each of our patents with respect to
licenses entered into with third parties during Mr. Horowitz’s term of
employment or at anytime thereafter, whether Mr. Horowitz is employed by us or
not; provided,
that, Mr.
Horowitz’s employment has not been terminated by us “For Cause” (as defined) or
terminated by Mr. Horowitz without “Good Reason” (as defined).  In the
event that Mr. Horowitz’s employment is terminated by us “Other Than For Cause”
(as defined) or by Mr. Horowitz for “Good Reason” (as defined), Mr. Horowitz
shall also be entitled to (i) a lump sum severance payment of 12 months base
salary, (ii) the minimum annual bonus of $150,000 and (iii) accelerated vesting
of all unvested options and warrants.




Director
Independence




Two of
our three directors, Robert Pons and Laurent Ohana, are considered independent
directors based upon the standard of independence adopted by the Board of
Directors as promulgated under Rule 121A of the Company Guide of the American
Stock Exchange (“AMEX”).  While our shares are not listed on AMEX, our
Board has adopted its independence rules in making its determination of director
independence.


40


ITEM
13.   PRINCIPAL ACCOUNTANT FEES AND SERVICES




Audit
Fees




Radin,
Glass & Co., LLP, our company’s independent accountant, billed us aggregate
fees of approximately $71,600 and $68,000 for the years ended December 31, 2009
and December 31, 2008, respectively, for review of financial statements included
in our Form 10-Q's and for other services in connection with statutory or
regulatory filings for the year ended December 31, 2009, and for the audit
of our annual financial statements for the year ended December 31, 2009 and
December 31, 2008.




Audit
Related Fees, Tax Fees and All Other Fees




Radin,
Glass & Co., LLP did not render any other professional service (other than
those discussed above for the years ended December 31, 2009 or December 31,
2008) except for review of our documentation pertaining to Section 404 of
Sarbanes-Oxley Act of 2002 for which Radin, Glass & Co., LLP billed us
$7,500.


41


NETWORK-1
SECURITY SOLUTIONS, INC.


PAGEIndex to Financial
      StatementsReport
      of independent registered public accounting firm
                F-1Balance
      sheets as of December 31, 2009 and 2008
                F-2Statements
      of operations for the years ended December 31, 2009 and
      2008
                F-3Statements
      of changes in stockholders' equity for the years ended December 31,
      2009 and 2008
                F-4Statements
      of cash flows for the years ended December 31, 2009 and
      2008
                F-5Notes
      to financial statements
                F-6
 
 
  
 NETWORK-1
SECURITY SOLUTIONS, INC.
 
 
 
 REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 Board of
Directors and Stockholders
 Network-1
Security Solutions, Inc.
 
 We have
audited the accompanying balance sheets of Network-1 Security Solutions, Inc. as
of December 31, 2009 and 2008 and the related statements of operations, changes
in stockholders’ equity and cash flows for the years 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 audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits 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
audits provide 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 Network-1 Security Solutions, Inc.
as of December 31, 2009 and 2008, and the results of its operations and its cash
flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.
 
 
 /s/
Radin, Glass & Co., LLP
 
 
 New York,
New York
 April 8,
2010
 
 
 F-1
 NETWORK-1
SECURITY SOLUTIONS, INC.
 Balance
Sheets
 
 December
      31,2009
              
              
              2008CURRENT
      ASSETSCash and cash
      equivalents
              
              $
              3,022,000
              
              
              $
              4,484,000Royalty and interest
      receivable
              
              
              120,000
              
              
              
              78,000Prepaid
    insurance
              
              
              70,000
              
              
              
              71,000Total current
      assets
              
              
              3,212,000
              
              
              
              4,633,000OTHER
      ASSETS:Patent, net of accumulated
      amortization
                Security
    deposits
              
              
              92,000 6,000
              
              
              
              100,000 6,000Total Other Assets
              
              
              98,000
              
              
              
              106,000TOTAL ASSETS
              
              $
              3,310,000
              
              
              $
              4,739,000LIABILITIES
      AND STOCKHOLDERS’ EQUITYCURRENT
      LIABILITIES:Accounts
payable
              
              $
              324,000
              
              
              $
              86,000Accrued
expenses
              
              
              261,000
              
              
              
              251,000TOTAL
    LIABILITIES
              
              
              585,000
              
              
              
              337,000COMMITMENTS
      AND CONTINGENCIESSTOCKHOLDERS'
      EQUITYCommon
      stock, $0.01 par value; authorized 50,000,000 shares;
                24,135,557 issued and
      outstanding
              
              
              241,000
              
              
              
              241,000Additional paid-in
      capital
              
              
              55,957,000
              
              
              
              55,056,000Accumulated
    deficit
              
              
              (53,473,000
              )
              
              
              (50,895,000
              )TOTAL STOCKHOLDERS’
      EQUITY
              
              
              2,725,000
              
              
              
              4,402,000TOTAL LIABILITIES AND
      STOCKHOLDERS’ EQUITY
              
              $
              3,310,000
              
              
              $
              4,739,000
 
 See
notes to financial statements
 F-2
 
 NETWORK-1
SECURITY SOLUTIONS, INC.
 Statements
of Operations
 
 Years
      Ended
                  December
      31,2009
              
              
              2008ROYALTY
      REVENUE
              
              $
              811,000
              
              
              $
              349,000COST
      OF REVENUE
              
              
              76,000
              
              
              
              18,000GROSS
      PROFIT
              
              
              735,000
              
              
              
              331,000OPERATING
      EXPENSES:General and
      administrative
              
              $
              2,413,000
              
              
              $
              1,773,000Non-cash
      compensation
              
              
              901,000
              
              
              
              287,000TOTAL OPERATING
      EXPENSES
              
              
              3,314,000
              
              
              
              2,060,000OPERATING LOSS
              
              
              (2,579,000
              )
              
              
              (1,729,000
              )OTHER
      INCOME (EXPENSES):Interest income,
      net
              
              
              1,000
              
              
              
              111,000LOSS BEFORE INCOME
      TAXES
              
              
              (2,578,000
              )
              
              
              (1,618,000
              )INCOME
      TAXES
              
              
              —
              
              
              
              —NET LOSS
              
              $
              (2,578,000
              )
              
              $
              ( 1,618,000
              )Net
      Loss Per Share - Basic and Diluted
              
              $
              (0.11
              )
              
              $
              (0.07
              )Weighted
      average common shares outstanding
                Basic and
    Diluted
              
              
              24,135,557
              
              
              
              24,135,557
 
 See
notes to financial statements
 F-3
 NETWORK-1
SECURITY SOLUTIONS, INC.
 
 Statements
of Changes in Stockholders' Equity
 For
the Years Ended December 31, 2009 and 2008
 
 AdditionalCommon
      Stock
              
              
              Paid-in
              
              
              AccumulatedShares
              
              
              Amount
              
              
              Capital
              
              
              Deficit
              
              
              TotalBalance
      – December 31, 2008
              
              
              24,135,557
              
              
              $
              241,000
              
              
              $
              54,769,000
              
              
              $
              (49,277,000
              )
              
              $
              5,773,000Granting
      of options
              
              
              —
              
              
              
              
              
              
              
              287,000
              
              
              
              
              
              
              
              287,000Net
      loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (1,618,000
              )
              
              
              (1,618,000
              )Balance  
      -   December 31, 2009
              
              
              24,135,557
              
              
              
              241,000
              
              
              
              55,056,000
              
              
              
              (50,895,000
              )
              
              
              4,402,000Granting
      of options
              
              
              —
              
              
              
              —
              
              
              
              175,000
              
              
              
              —
              
              
              
              175,000Modifications
      of options and warrants
              
              
              
              
              
              
              
              
              
              
              726,000
              
              
              
              
              
              
              
              726,000Net
      loss
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (2,578,000
              )
              
              
              (2,578,000
              )Balance   -   December
      31, 2009
              
              
              24,135,557
              
              
              $
              241,000
              
              
              $
              55,957,000
              
              
              $
              (53,473,000
              )
              
              $
              2,725,000
 
 
 
 See
notes to financial statements
 F-4
 
 NETWORK-1
SECURITY SOLUTIONS, INC.
 Statements
of Cash Flows
 
 Years
      Ended
                December 31,2009
              
              
              2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net loss
              
              $
              (2,578,000
              )
              
              $
              (1,618,000
              )Adjustments to reconcile net
      loss to net cash provided by (used in) operating
    activities:Depreciation and
      amortization
              
              
              9,000
              
              
              
              7,000Stock-based
      compensation
              
              
              901,000
              
              
              
              287,000Source (use) of cash from
      changes in operating assets and liabilities:Royalty and interest
      receivable
              
              
              (42,000
              )
              
              
              (55,000
              )Prepaid
    insurance
              
              
              1,000
              
              
              
              0Accounts payable and accrued
      expenses
              
              
              248,000
              
              
              
              (30,000
              )NET CASH PROVIDED BY (USED IN)
      OPERATING ACTIVITIES
              
              
              (1,461,000
              )
              
              
              (1,409,000
              )CASH
      FLOWS USED IN INVESTING ACTIVITIES:
                Patent costs
      incurred
              
              
              (1,000
              )
              
              
              (35,000
              )NET INCREASE IN CASH AND CASH
      EQUIVALENTS
              
              
              (1,462,000
              )
              
              
              (1,444,000
              )CASH
      AND CASH EQUIVALENTS, Beginning
              
              
              4,484,000
              
              
              
              5,928,000CASH
      AND CASH EQUIVALENTS, Ending
              
              $
              3,022,000
              
              
              $
              4,484,000SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATION:Cash paid during the years
      for:Interest
              
              $
              2,000
              
              
              $
              4,000Taxes
              
              $
              24,000
              
              
              $
              31,000
 See
notes to financial statements
 F-5
 
 NETWORK-1
SECURITY SOLUTIONS, INC.
  Notes
to Financial Statements
 December
31, 2009and 2008
 Note
A - The Company
 
 Network-1
Security Solutions, Inc. (the "Company") is engaged in the acquisition,
licensing and protection of its intellectual property and proprietary
technologies.  The Company owns six patents covering various
telecommunications and data networking technologies and includes, among other
things, patents covering the control of power delivery over Ethernet networks
for the purpose of remotely powering network devices and systems and methods for
the transmission of audio, video and data over local area networks (LANS) in
order to achieve higher quality of service (QoS).   The Company’s
strategy is to pursue licensing and strategic business alliances with companies
that manufacture and sell products that make use of the technologies underlying
the intellectual property as well as with other users of the technologies who
benefit directly from the technologies including corporate, educational and
governmental entities.  To date, the Company’s efforts with respect to
its intellectual property have focused on licensing its patent (U.S. Patent No.
6,218,930) covering the control of power delivery over Ethernet cables (the
“Remote Power Patent”).  At least for the next twelve months, the
Company does not currently anticipate licensing efforts for its other currently
owned patents besides its Remote Power Patent.  The Company may seek
to acquire additional patents in the future.  The Company continually
reviews opportunities to acquire or license additional intellectual property for
the purpose of pursuing licensing opportunities.
 
 Note B –Summary of Significant
Accounting Policies
 
 [1]
              Cash
      equivalents:
 
 The
Company considers all highly liquid short-term investments purchased with an
original maturity of three months or less to be cash equivalents.
 
 [2]
              Revenue
      recognition:
 
 The
Company recognizes revenue received from the licensing of its intellectual
property portfolio in accordance with Staff Accounting Bulletin No. 104,
"Revenue Recognition" ("SAB No. 104") and related authoritative
pronouncements.  Under this guidance, revenue is recognized when (i)
persuasive evidence of an arrangement exists, (ii) all obligations have been
performed pursuant to the terms of the license agreement, (iii) amounts are
fixed or determinable and (iv) collectibility of amounts is reasonably
assured.
 
 [3]
              Patents:
 
 The
Company owns patents that relate to various telecommunications and data
networking technologies.  The Company capitalizes the costs associated
with acquisition, registration and maintenance of the patents and amortizes
these assets over their remaining useful lives on a straight-line
basis.  Any further payments made to maintain or develop the patents
would be capitalized and amortized over the balance of the useful life of the
patents.
 
 [4]
              Impairment
      of long-lived assets:
 
 Intangible
assets with finite lives are tested for impairment whenever events or
circumstances indicate that the carrying amount may not be
recoverable.  Accordingly, the Company records impairment losses on
long-lived assets used in operations or expected to be disposed of when
indicators of impairment exist and the undiscounted cash flows expected to be
derived from those assets are less than carrying amounts of those
assets.  During the years ended December 31, 2009 and 2008, there
was no impairment to its patents.
 
 [5]
              Income
      taxes:
 
 The
Company utilizes the liability method of accounting for income
taxes.  Under such method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases.  Deferred tax assets and liabilities are
measured using enacted tax rates in effect at the balance sheet
date.  The resulting asset or liability is adjusted to reflect enacted
changes in tax law.  Deferred tax assets are reduced, if necessary, by
a valuation allowance when the likelihood of realization is not
assured.
  F-6
 
 NETWORK-1
SECURITY SOLUTIONS, INC.
  Notes
to Financial Statements
 December
31, 2009and 2008
 Note
B – Summary of Significant Accounting
Policies  (continued)
 
 [6]
              Net
      Loss per share:
 
 Basic net
loss per share is calculated by dividing the net loss by the weighted average
number of outstanding common shares during the year.  Diluted per
share data includes the dilutive effects of options, warrants and convertible
securities.  Potential common shares of 12,579,312 and 12,164,882 at
December 31, 2009 and 2008, respectively, are not included in the
calculation of diluted loss per share because its effect will be
anti-dilutive.  Such potential common shares are options and
warrants.
 
 [7]
              Use
      of estimates:
 
 The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period.  Actual results could differ from those
estimates.
 
 [8]
              Financial
      instruments:
 
 The
carrying amounts of cash and cash equivalents, accounts payable and accrued
expenses approximate their fair value due to the short period to maturity of
these instruments.
 
 [9]
              Stock-based
      compensation:
 
 The
Company accounts for its stock-based compensation at fair value estimated on the
grant date using the Black-Scholes option pricing model. See Note D[1] for
further discussion of the Company’s stock-based compensation.
 
 
 [10]
              Subsequent event
      evaluation:
 
 The
Company has evaluated subsequent events from the balance sheet date through the
date the financial statements were issued and has determined that there are no
such events that would have a material impact on the financial
statements.
 
 [11]
              Recently
      issued accounting standards:
 
 On May
28, 2009 the FASB announced the issuance of FASB ASC 855, “Subsequent Events”, FASB ASC
855 should not result in significant changes in the subsequent events that an
entity reports.  Rather, FASB ASC 855 introduces the concept of financial
statements being available to be issued.  Financial statements are
considered available to be issued when they are complete in a form and format
that complies with generally accepted accounting principles (GAAP) and all
approvals necessary for issuance have been obtained.
 
 In June
2009, the FASB amended ASC 810, Consolidation, to improve how
enterprises disclose their involvement with variable interest entities (VIE),
which are special-purpose entities, and other entities whose equity at risk is
insufficient or lacks certain characteristics. Among other things, ASC 810
changes how an entity determines whether it is the primary beneficiary of a VIE
and whether that VIE should be consolidated. ASC 810 requires an entity to
provide significantly more disclosures about its involvement with a VIE.
Companies must comprehensively review involvements with potential VIEs,
including those previously considered to be qualifying special-purpose entities,
to determine the effect on its consolidated financial statements and related
disclosures. It is effective prospectively for interim or annual reporting
periods beginning after December 15, 2009. The Company does not expect the
adoption of this ASU to have a material impact on its financial
statements.
 F-7
 
 NETWORK-1
SECURITY SOLUTIONS, INC.
  Notes
to Financial Statements
 December
31, 2009and 2008
 Note
B – Summary of Significant Accounting
Policies  (continued)
 
 In August
2009, the FASB issued Accounting Standards Update (ASU) No. 2009-05, “Measuring Liabilities at Fair Value”(ASU 2009-05).  The amendments in this ASU apply to all entities
that measure liabilities at fair value and provide clarification that in
circumstances in which a quoted price in an active market for the identical
liability is not available, an entity is required to measure fair value using
one or more techniques laid out in this ASU.  The guidance provided in this
ASU is effective for the first reporting period beginning after issuance.
 The Company does not expect the adoption of this ASU to have a material
impact on its financial statements.
 
 In
October 2009, the FASB issued ASU No. 2009-13” Revenue recognition-Multiple
deliverable revenue arrangements”.  The ASU provides amendments to
the criteria in Revenue recognition - Multiple deliverable revenue arrangements
for separating consideration in multiple revenue arrangements.  The
amendments in this ASU establish a selling price hierarchy for determining the
selling price of a deliverable.  Further, the term fair value in the revenue
guidance will be replaced with selling price to clarify that
the allocation of revenue is based on entity- specific assumptions rather than
assumptions of a market place participant.  The amendments in this ASU will
be effective prospectively for revenue arrangements entered into or materially
modified in fiscal years beginning on or after June 15, 2010.  Early
adoption is permitted.  The Company does not expect the adoption of this
ASU to have a material impact on its financial statements.
 
 Note
C- Patents
 
 In
November 2003, the Company acquired a portfolio of telecommunications and data
networking patents (six patents) from Merlot Communications, Inc. (the "Seller")
in which certain then principal stockholders of the Company owned a majority of
the Seller's voting stock at the time of the transaction.  The
purchase price for the patent portfolio was $100,000, paid in
cash.  As additional consideration for the purchase, the Company
granted the Seller a nonexclusive, royalty free, perpetual license for the term
of each patent to use the patents for the development, manufacture or sale of
its own branded products to end users.  The cash price has been
capitalized and is being amortized over the remaining useful life of each
patent.  The Company had agreed to pay the Seller 20% of the net
income, as defined, after the first $4,000,000 of net income realized by the
Company on a per patent basis from the sale or licensing of the
patents.  On January 18, 2005, the Company and Seller amended the
Patent Purchase Agreement (the "Amendment") pursuant to which the Company paid
additional purchase price of $500,000 to Seller in consideration for the
restructuring of future contingent payments to Seller from the licensing or sale
of the Patents.  Such $500,000 has been recorded as an expense in the
accompanying statement of operations.  The Amendment provides for
future contingent payments by the Company to Seller of $1.0 million upon
achievement of $25 million of Net Royalties (as defined), an additional $1.0
million upon achievement of $50 million of Net Royalties and an additional
$500,000 upon achievement of $62.5 million of Net Royalties from licensing or
sale of the patents acquired from Merlot.  Amortization expense
amounted to $9,000 and $7,000 for the years ended December 31, 2009 and 2008,
respectively.
 
 Note
D - Stockholders' Equity
 
 [1]
              Stock
      options:
 
 During
1996, the Board of Directors and stockholders approved the adoption of the 1996
Stock Option Plan (the "1996 Plan").  The 1996 Plan, as amended,
provided for the granting of both incentive and non-qualified options to
purchase common stock of the Company.  A total of 4,000,000 were
eligible to be issued under the 1996 Plan.  As of March 2006, in
accordance with the terms of the plan, no further options were eligible to be
issued under the Plan.
 
 The term
of options granted under the 1996 Plan may not exceed ten years (five years in
the case of an incentive stock option granted to an employee/director owning
more than 10% of the voting stock of the Company) ("10%
stockholder").  The option price for incentive stock options cannot be
less than 100% of the fair market value of the shares of common stock at the
time the option is granted (110% for a 10% stockholder).  Option terms
and vesting periods were set by the Compensation Committee in its
discretion.
 F-8
 
 NETWORK-1
SECURITY SOLUTIONS, INC.
  Notes
to Financial Statements
 December
31, 2009and 2008
 Note
D- Stockholders’ equity (continued)
 
 The fair
value of options on the date of grant is estimated using the Black-Scholes
option-pricing model utilizing the following weighted average
assumptions:
 
 Year
      EndedDecember
      31,2009
              
              2008Risk-free
      interest rates
              2.54%
      - 2.95%
              
              1.55
      – 3.28%Expected
      option life in years
              5-10
      years
              
              5
      yearsExpected
      stock price volatility
              62.04%
              
              37.32
      – 69.45%Expected
      dividend yield
              0.00%
              
              0.00%
 
 The
weighted average fair value on the option grant date during the years ended
December 31, 2009 and 2008 were $0.59 and $0.82 per option,
respectively.
 
 The
following table summarizes stock option activity for the years ended
December 31:
 
 2009
              
              
              2008Weighted
              
              
              
              
              
              WeightedAverage
              
              
              
              
              
              AverageOptions
              
              
              Exercise
              
              
              Options
              
              
              ExerciseOutstanding
              
              
              Price
              
              
              Outstanding
              
              
              PriceOptions
      outstanding at beginning of year
              
              
              8,471,965
              
              
              $
              1.00
              
              
              
              7,860,440
              
              
              $
              1.01Granted
              
              
              770,000
              
              
              
              0.83
              
              
              
              667,500
              
              
              
              1.16Cancelled/expired/exercised
              
              
              (138,070
              )
              
              
              3.29
              
              
              
              (55,975
              )
              
              
              4.70Options
      outstanding at end of year
              
              
              9,103,895
              
              
              
              0.61
              
              
              
              8,471,965
              
              
              
              1.00Options
      exercisable at end of year
              
              
              8,445,145
              
              
              $
              0.59
              
              
              
              8,216,340
              
              
              $
              0.99
 
 
 During
the years ended December 31, 2009 and 2008, the Company granted an aggregate of
770,000 and 667,500 5-year or 10-year options to its officers, directors and
consultants, respectively.  The fair value of these options based on
Black-Scholes option-pricing model amounted to $455,000 and $314,000,
respectively, for the 2009 and 2008 grants.  The Company recorded
non-cash compensation of $119,000 and $259,000 for vesting portion of these
options for the years ended December 31, 2009 and 2008,
respectively.  The Company also recognized non-cash compensation of
$56,000 and $28,000 in 2009 and 2008, respectively, for the options that were
granted in prior years but vested in 2009 and 2008.
 
 On March
11, 2009 the Board of Directors of the Company approved to reduce the exercise
prices (ranging from $0.70 to $6.00 per share) of certain outstanding
compensatory options and warrants issued to officers, directors, consultants and
others to purchase an aggregate of 5,029,945 shares of common stock to $0.68 per
share (closing price of the Company’s common stock on March 11,
2009).  The Company recorded additional compensation of $541,000 for
this modification (see Note H).
  On June
8, 2009 the Board of Directors of the Company approved an extension of the
expiration dates of all options owned by the Chairman and Chief Executive
Officer which expire in calendar year 2009 for a period of five
years.  Accordingly, the Company recorded additional compensation of
$132,000 for this extension (see Note H).
 
 On
November 25, 2009, the Board of Directors of the Company extended for three
years the expiration dates of options issued to four holders to purchase an
aggregate of 70,000 shares of common stock at an exercise price of
 F-9
 
 NETWORK-1
SECURITY SOLUTIONS, INC.
  Notes
to Financial Statements
 December
31, 2009and 2008
 Note
D- Stockholders’ equity (continued)
 
 $0.54 per
share, which options had expired on November 25, 2009, and options issued to
three holders to purchase an aggregate of 40,000 shares of common stock at
exercise prices of between $0.68 and $3.75 per share, which options had expired
on December 16, 2009. The Company recorded additional compensation of $13,000
for this modification.
 
 On
November 25, 2009, the Board of Directors of the Company removed the vesting
provision from options issued to eight holders to purchase an aggregate of
54,825 shares of common stock. Such vesting provision is contingent upon the
price of the Company’s common stock reaching $10.00 per share or $15 per share,
thereby making such options immediately exercisable.  The Company
recorded additional compensation of $13,000 for this modification.
 
 The
following table presents information relating to all stock options outstanding
and exercisable at December 31, 2009:
 
 WeightedWeighted
              
              
              Average
              
              
              
              
              
              WeightedRange
      of
              
              
              
              
              
              Average
              
              
              Remaining
              
              
              
              
              
              AverageExercise
              
              
              Options
              
              
              Exercise
              
              
              Life
      in
              
              
              Options
              
              
              ExercisePrice
              
              
              Outstanding
              
              
              Price
              
              
              Years
              
              
              Exercisable
              
              
              Price$0.12
      - $2.91
              
              
              
              8,965,945
              
              
              $
              0.54
              
              
              3.15
              
              
              
              8,307,195
              
              
              $
              0.52$3.00
      - $3.75
              
              
              
              60,950
              
              
              
              3.28
              
              
              1.34
              
              
              
              60,950
              
              
              
              3.28$4.13
      - $5.69
              
              
              
              47,000
              
              
              
              4.98
              
              
              0.66
              
              
              
              47,000
              
              
              
              4.98$6.00
      - $6.88
              
              
              
              20,000
              
              
              
              6.88
              
              
              0.62
              
              
              
              20,000
              
              
              
              6.88$10.00
              
              
              
              10,000
              
              
              
              10.00
              
              
              0.21
              
              
              
              10,000
              
              
              
              10.009,103,895
              
              
              $
              0.61
              
              
              3.12
              
              
              
              8,445,145
              
              
              $
              0.59
 
 [2]
              Warrants:
 
 As of
December 31, 2009, the following are the outstanding warrants to purchase
shares of the Company's common stock:
 
 Number
      of
              
              
              ExerciseWarrants
              
              
              Price
              
              Expiration
      Date300,000
              
              
              $
              0.68
              
              July
      11, 201150,000
              
              
              $
              0.68
              
              May
      21, 2010250,000
              
              
              $
              0.68
              
              October
      8, 2011254,000
              
              
              $
              1.45
              
              June
      30, 2010240,000
              
              
              $
              1.50
              
              April
      16, 2012473,750
              
              
              $
              1.75
              
              May
      21, 20101,666,667
              
              
              $
              1.75
              
              April
      16, 2012121,000
              
              
              $
              2.00
              
              June
      30, 2010120,000
              
              
              $
              2.00
              
              April
      16, 20123,475,417
 
  F-10
 
 NETWORK-1
SECURITY SOLUTIONS, INC.
  Notes
to Financial Statements
 December
31, 2009and 2008
 Note
D- Stockholders’ equity (continued)
 
 On March
11, 2009, the Board of Directors of the Company approved the following
adjustments to the outstanding warrants:
  (i)
              the
      exercise price of outstanding warrants to purchase an aggregate of 473,750
      shares of common stock (including warrants to purchase 187,500 shares
      owned by a principal stockholder of the Company)(see Note H), issued as
      part of the Company’s private placement completed in December 2004/January
      2005, which exercise price was scheduled to increase to $2.00 per share on
      March 31, 2009 (from $1.75 per share)  adjusted to an exercise
      price of $1.75 per share for the remaining exercise period of such
      warrants (May 21, 2010), subject to the adjustment set forth in item (iii)
      below;
  (ii)
              the
      exercise price of warrants to purchase an aggregate of 1,666,667 shares of
      common stock, (including warrants to purchase an aggregate of 1,150,001
      shares owned by three principal stockholders of the Company) (see Note H),
      at an exercise price of $2.00 per share, which warrants were issued as
      part of the Company’s private placement completed in April 2007, were
      adjusted to an exercise price of $1.75 per share for the remaining
      exercise period of such warrants (April 16, 2012), subject to the
      adjustments set forth in item (iii) below;
and
 
 (iii)
              in
      the event that any holders of the above referenced outstanding warrants,
      issued as part of the Company’s December 2004/January 2005 or the April
      2007 private placements, exercised such warrants at anytime up to and
      including December 31, 2009, the exercise price of all such warrants shall
      adjust to $1.25 per share.
 
 None of
the warrants specified under subsection (iii) above were exercised on or before
December 31, 2009.
 
 On
March 17, 2009, the Board of Directors of the Company extended the
expiration dates until December 31, 2009 of outstanding warrants to
purchase an aggregate of 395,000 shares of common stock, exercisable at $1.45
per share, and outstanding warrants to purchase an aggregate of 197,500 shares
of common stock, exercisable at $2.00 per share, which expiration dates were
scheduled to expire on March 17, 2009 and March 31, 2009,
respectively.
 
 On December 24, 2009, the Board of
Directors of the Company agreed to extend until June 30, 2010 the
expiration date of warrants to purchase an aggregate of 375,000 shares of common
stock at exercise prices of between $1.45 and $2.00 per share issued as part of
the Company’s private placement completed in December 2004/January 2005, in
consideration of financial advisory and investor relations services to be
provided by the individual controlling the entities holding the
warrants.  The Company recorded additional compensation of $27,000 in
connection with this extension.
 
 Note
E - Commitments and Contingencies
 
 [1]
              Services
      agreement:
 
 On
November 30, 2004, the Company entered into a master services agreement
(the "Agreement") with ThinkFire Services USA, Ltd. ("ThinkFire") pursuant to
which ThinkFire has been granted the exclusive worldwide rights (except for
direct efforts by the Company and related companies) to negotiate license
agreements for the Remote Power Patent with respect to certain potential
licensees agreed to between the parties.  Either the Company or
ThinkFire can terminate the Agreement upon 60 days' notice for any reason or
upon 30 days' notice in the event of a material breach.  The Company
has agreed to pay ThinkFire a fee not to exceed 20% of the royalty payments
received from license agreements consummated by ThinkFire on its behalf after
the Company recovers its expenses.
 F-11
 
 NETWORK-1
SECURITY SOLUTIONS, INC.
  Notes
to Financial Statements
 December
31, 2009and 2008
 Note
E - Commitments and Contingencies (continued)
 
 [2]
              Legal
      fees:
 
 Dovel
& Luner, LLP provides legal services to the Company with respect to the
Company’s patent Litigation against several major data networking equipment
manufacturers which is pending in the Eastern District of Texas.  (See
Note J).  The terms of the Company’s agreement with Dovel & Luner,
LLP provides for legal fees of a maximum aggregate cash payment of $1.5 million
plus a contingency fee of up to 24% depending upon when an outcome is
achieved.  Total contingency fees paid to Dovel & Luner, LLP
approximated $36,000 during the year ended December 31, 2009.
 
 
 With
respect to the Company’s litigation against D-Link, which was settled in May
2007 (See Note J), the Company utilized the services of Blank Rome, LLP, on a
full contingency basis and also the services of Potter Mitton, P.C. (Tyler,
Texas) on an hourly basis to serve as local counsel.  In accordance
with the Company’s contingency fee agreement with Blank Rome LLP, the Company
will pay legal fees to Blank Rome LLP equal to 25% of the royalty revenue
received by the Company from its license agreement with D-Link after it recovers
its expenses related to the litigation.
 
 [3]
              Operating
      leases:
 
 The
Company leases its principal office space in New York City at a monthly rent of
approximately $3,000 which lease expires in June 2010.
 
 Rental
expense for the years ended December 31, 2009 and 2008 aggregated $41,000
and $39,000, respectively.
 
 [4]
              Savings
      and investment plan:
 
 The
Company has a Savings and Investment Plan which allows participants to make
contributions by salary reduction pursuant to Section 401(k) of the Internal
Revenue Code of 1986.  The Company also may make discretionary annual
matching contributions in amounts determined by the Board of Directors, subject
to statutory limits.  The Company did not make any contributions to
the 401(k) Plan during the years ended December 31, 2009 and
2008.
 
 [5]
              Flex
      Plan
 
 The
Company adopted a Flexible Benefits Plan for the benefit of its employees in
December 2008.
 
 Note
F - Income Taxes
 
 At
December 31, 2009, the Company has available net operating loss
carryforwards to reduce future federal taxable income of approximately
$46,675,000 for tax reporting purposes, which expire from 2010 through
2029.
 
 Pursuant
to the provisions of the Internal Revenue Code, future utilization of these past
losses is subject to certain limitations based on changes in the ownership of
the Company's stock that have occurred.
 F-12
 
 NETWORK-1
SECURITY SOLUTIONS, INC.
  Notes
to Financial Statements
 December
31, 2009and 2008
 Note
F - Income Taxes (continued)
 
 The
principal components of the net deferred tax assets are as follows:
 
 Year
      EndedDecember
      31,2009
              
              
              2008Deferred
      tax assets:Net operating loss
      carryforwards
              
              $
              17,503,000
              
              
              $
              17,300,000Options and warrants not yet
      deducted, for tax purposes
              
              
              970,000
              
              
              
              820,00018,473,000
              
              
              
              18,120,000Valuation
      allowance
              
              
              (18,473,000
              )
              
              
              (18,120,000
              )Net
      deferred tax assets
              
              $
              0
              
              
              $
              0
 
 The
Company has recorded a valuation allowance for the full amount of its deferred
tax assets as the likelihood of the future realization cannot be presently
determined.  The valuation allowance increased by $353,000 in 2009 and
$615,000 in 2008.
 
 The
reconciliation between the taxes as shown and the amount that would be computed
by applying the statutory federal income tax rate to the loss before income
taxes is as follows:
 
 Year
      EndedDecember
      31,2009
              
              
              2008Income
      tax benefit - statutory rate
              
              
              (34.0)%
              
              
              
              (34.0)%State
      and local, net
              
              
              (3.5)%
              
              
              
              (3.5)%Valuation
      allowance on deferred tax assets
              
              
              37.5 %
              
              
              
              37.5 %
 
 
 Note
G - Concentrations
 
 The
Company places its cash investments in high quality financial institutions that,
at times, may exceed the Federal Insurance Deposit Corporation $250,000
limit.
 
 Note
H - Related Party Transactions
 
 As part
of the March 11, 2009 adjustments to the exercise prices and terms of the
outstanding options and warrants (see Note D), the following options and
warrants were held by related parties:
  (i)
              of
      the options and warrants to purchase an aggregate of 5,029,945 shares with
      exercise price adjustments, options and warrants to purchase 4,031,195
      shares were held by the Company’s Chairman and Chief Executive Officer and
      an affiliated entity; options to purchase 150,000 shares were held by the
      Company’s Chief Financial Officer; options to purchase 200,000 and 100,000
      shares were held by two directors of the Company (see Note D[1]);
      and
  (ii)
              of
      the warrants to purchase an aggregate of 473,750 shares with exercise
      price adjustments, warrants to purchase 187,500 shares are owned by a
      principal stockholder of the Company (see Note D[2]);
  and
  F-13
 
 NETWORK-1
SECURITY SOLUTIONS, INC.
  Notes
to Financial Statements
 December
31, 2009and 2008
 Note
H - Related Party Transactions (continued)
 
  (iii)
              of
      the warrants to purchase an aggregate of 1,666,667 shares with exercise
      price adjustments, warrants to purchase 1,150,001 shares are owned by
      three principal stockholders of the Company (see Note
    D[2]).
 
 On June
8, 2009, the Company entered into a new Employment Agreement with Corey M.
Horowitz, Chairman and CEO.  See Note I below.  The Company
also agreed to extend the expiration dates of all options owned by Mr. Horowitz
which expire in calendar year 2009 for a period of five years (see Note
D[1]).
 
 
 Note
I - Employment Arrangements and Other Agreements
 
 [1]
              On
      June 8, 2009, the Company entered into an Employment Agreement (the
      “Agreement”) with Corey M. Horowitz pursuant to which he continues to
      serve as the Company’s Chairman and Chief Executive Officer for a three
      year term at an annual base salary of $375,000 (retroactive to
      April 1, 2009) for the first year and increasing 5% on each of
      April 1, 2010 and April 1, 2011.  Mr. Horowitz
      also receives a cash bonus in an amount no less than $150,000 on an annual
      basis for the three year term of the Agreement.  In connection
      with the Agreement, Mr. Horowitz was issued a ten (10) year option to
      purchase 750,000 shares of common stock at an exercise price of $0.83 per
      share, which vests in equal quarterly amounts of 62,500 shares beginning
      June 30, 2009 through March 31, 2012, subject to acceleration
      upon a change of control.  Mr. Horowitz shall forfeit the
      balance of unvested shares if his employment has been terminated “For
      Cause” (as defined) by the Company or without Good Reason (as defined) by
      Mr. Horowitz.  In addition to the aforementioned option
      grant, the Company extended for an additional five (5) years the
      expiration dates of all options (an aggregate of 417,500 shares) expiring
      in the calendar year 2009 owned by
  Mr. Horowitz.
 
 Under the
terms of the Agreement, Mr. Horowitz  also receives additional bonus
compensation in an amount equal to 5% of the Company’s royalties or other
payments (exclusive of proceeds from the sale of the Company’s patents which is
covered below) with respect to the Company’s remote power patent (U.S. Patent
No. 6,218,930), (the “Remote Power Patent”) and 12.5% of the Company’s royalties
and other payments with respect to the Registrant’s other patents besides the
Remote Power Patent (the “Additional Patents”) (all before deduction of payments
to third parties including, but not limited to, legal fees and expenses and
third party license fees) actually received from licensing its patented
technologies (including patents owned as of the date of the Agreement and
acquired or licensed on an exclusive basis during the period in which
Mr. Horowitz continues to serve as an executive officer of the Company)
(the “Royalty Bonus Compensation”).  In addition, during the term of
his employment, Mr. Horowitz is also entitled to additional bonus
compensation equal to (i) 5% of the gross proceeds from the sale of the
Company’s Remote Power Patent and 12.5% of the gross proceeds from the sale of
the Additional Patents, and (ii) 5% of the gross proceeds from the merger of the
Company with or into another entity.  The Royalty Bonus Compensation
shall continue to be paid to Mr. Horowitz for the life of each of the
Company’s patents with respect to licenses entered into with third parties
during Mr. Horowitz’s term of employment or at anytime thereafter, whether
Mr. Horowitz is employed by us or not; provided, that, Mr. Horowitz’s
employment has not been terminated by the Company “For Cause” (as defined) or
terminated by Mr. Horowitz without “Good Reason” (as defined).  In the
event that Mr. Horowitz’s employment is terminated by the Company “Other Than
For Cause” (as defined) or by Mr. Horowitz for “Good Reason” (as defined), Mr.
Horowitz shall also be entitled to (i) a lump sum severance payment of 12 months
base salary, (ii) the minimum annual bonus of $150,000 and (iii) accelerated
vesting of all unvested options and warrants.
 
 In
connection with the Agreement, Mr. Horowitz has agreed not to compete with the
Company as follows: (i) during the term of the Agreement and for a period of 12
months thereafter if his employment is terminated “Other Than For Cause” (as
defined) provided he is paid his 12 month base salary severance amount and (ii)
for a period of two years from the termination date, if terminated “For Cause”
by the Company or “Without Good Reason” by Mr. Horowitz.
 F-14
 
 NETWORK-1
SECURITY SOLUTIONS, INC.
  Notes
to Financial Statements
 December
31, 2009and 2008
 Note
I - Employment Arrangements and Other Agreements (continued)
 
 
 [2]
              On
      December 18, 2008, the Company entered into an agreement with
      David C. Kahn pursuant to which he continues to serve as the
      Company’s Chief Financial Officer through December 31,
      2010.  In consideration for his services, Mr. Kahn was
      compensated at the rate of $7,292 per month for the year ended
      December 31, 2009 and is compensated at the rate of $7,657 per month
      for the year ended December 31, 2010.  In connection with
      the agreement, Mr. Kahn was also issued a five (5) year option to purchase
      100,000 shares of the Company’s common stock at an exercise price of $0.54
      per share.  The option vested 40,000 shares on the date of grant
      and the balance of the shares (60,000) will vest on a quarterly basis in
      equal amounts of 7,500 shares beginning March 31, 2009 through
      December 31, 2010.  Upon a “Change in Control” (as defined)
      all of the unvested shares underlying the option shall become 100% vested
      and immediately exercisable.  The agreement further provides
      that the Company may terminate the agreement at any time for any
      reason.  In the event Mr. Kahn’s services are terminated
      without “Good Cause” (as defined), he will be entitled to accelerated
      vesting of all unvested shares underlying the option and the lesser of (i)
      six months base monthly compensation or (ii) the remaining balance of the
      monthly compensation payable through December 31,
    2010.
 
 Note
J – Litigation
 
 In
February 2008, the Company commenced litigation against eight major data
networking equipment manufacturers in the United States District Court for the
Eastern District of Texas, Tyler Division, for infringement of the Company’s
Remote Power Patent.  The complaint named as defendants Cisco Systems,
Inc., Cisco Linksys, LLC, Enterasys Networks, Inc., 3COM Corporation, Inc.,
Extreme Networks, Inc., Foundry Networks, Inc., Netgear, Inc. and Adtran,
Inc.  The Company seeks injunctive relief and monetary damages for
infringement based upon reasonable royalties as well as treble damages for the
defendants’ continued willful infringement of the Company’s Remote Power
Patent.  The defendants, in their answers to the Company’s complaint,
asserted that they do not infringe any valid claim of the Company’s Remote Power
Patent, and further asserted that, based
 on
several different theories, the patent claims are invalid or
unenforceable.  In addition to these defenses, the defendants also
asserted counterclaims for, among other things, non-infringement, invalidity,
and unenforceability of the Company’s Remote Power Patent.  A Markman
hearing, a hearing on claim construction of the Remote Power Patent, was held in
December 2009 and a trial date has been set for July, 2010.  On
February 16, 2010, the United States District Court for the Eastern
District of Texas, Tyler Division, issued its Markman Order in which the Court
adopted a number of constructions proposed by the Company, while also adopting
constructions proposed by defendants as well as effectively invalidating two of
the Company’s claims at issue.  A Markman Order that does not entirely
adopt either the plaintiff’s or defendants’ position is common in patent
litigation.  In the event that the Court determines that the Remote
Power Patent is not valid or enforceable, and/or that the defendants do not
infringe, any such determination would have a material adverse effect on our
company.
 
 On May
29, 2009 the Company announced that the Company had agreed to settle the above
referenced litigation with respect to Netgear, Inc. (“Netgear”).  As
part of the settlement and under its Special Licensing Program, Netgear entered
into a license agreement with the Company for the Remote Power Patent and the
Company agreed that all claims and counterclaims involving Netgear in the
litigation would be dismissed with prejudice.  Under the terms of the
license, Netgear licenses the Remote Power Patent from the Company for its full
term (which expires in March 2020), and pays quarterly royalties (beginning as
of April 1, 2009) based on its sales of Power over Ethernet products, including
those Power over Ethernet products which comply with the Institute of Electrical
and Electronic Engineers 802.3af and 802.3at Standards.  Licensed
products include Netgear’s Power over Ethernet enabled switches and wireless
access points.  The royalty rates included in the license are 1.7% of
the sales price of Power Sourcing Equipment, which includes Ethernet switches,
and 2% of the sales price of Powered Devices, which includes wireless access
points.   The royalty rates are subject to adjustment, under
certain circumstances, if the Company grants a license to other licensees with
lower royalty rates and Netgear is able to and agrees to assume all material
terms and conditions of such other license. In addition, Netgear made a payment
of $350,000 to the Company with respect to the settlement.
 F-15
 NETWORK-1
SECURITY SOLUTIONS, INC.
  Notes
to Financial Statements
 December
31, 2009and 2008
 Note
J – Litigation (continued)
  D-Link
Settlement
 
 In August
2005, the Company commenced patent litigation against D-Link Corporation and
D-Link Systems, Incorporated (collectively “D-Link”) in the United States
District Court for the Eastern District of Texas, Tyler division, for
infringement of its Remote Power Patent.  The Company’s complaint
sought, among other things, a judgment that the Remote Power Patent is
enforceable and has been infringed by the defendants.  The Company
also sought a permanent injunction restraining the defendants from continued
infringement, or active inducement of infringement by others, of its Remote
Power Patent.
 
 In August
2007, the Company finalized the settlement of its patent infringement litigation
against D-Link.  Under the terms of the settlement, D-Link entered
into a license agreement for the Company’s Remote Power Patent the
 terms of
which include monthly royalty payments of 3.25% (subject to adjustment as noted
below) of the net sales of D-Link Power over Ethernet products, including those
products which comply with the IEEE 802.3af and 802.3at Standards, for the full
term of the Company’s Remote Power Patent, which expires in March
2020.  In addition, D-Link paid the Company $100,000 upon signing of
the Settlement Agreement.  The royalty rate is subject to adjustment
to a rate consistent with other similarly situated licensees of the Company’s
Remote Power Patent based on units of shipments of licensed
products.  In June 2009, based upon several licenses issued to third
parties under the Company’s Special Licensing Program, the Company agreed with
D-Link to adjust the royalty rate to 1.7% of the sales price for Power Servicing
Equipment (which includes Ethernet switches) and 2.0% of the sales price for
Powered Devices (which includes wireless access points).
 
 Microsemi
- PowerDsine Settlement
 
 On
November 16, 2005, the Company entered into a Settlement Agreement with
PowerDsine, Inc. and PowerDsine Ltd. (collectively, “PowerDsine”) which
dismissed, with prejudice, patent litigation brought by PowerDsine against the
Company in March 2004 in the United States District Court for the Southern
District of New York that sought a declaratory judgment that the Company’s
Remote Power Patent was invalid and not infringed by PowerDsine and/or its
customers.  Under the terms of the Settlement Agreement, the Company
agreed that, under certain circumstances, it would not initiate litigation
against PowerDsine for its sale of Power over Ethernet (PoE) integrated
circuits.  In addition, the Company agreed that it would not seek
damages for infringement from customers that incorporate PowerDsine integrated
circuit products in PoE capable Ethernet switches manufactured on or
before  April 30, 2006. PowerDsine has agreed that it will not
initiate, assist or cooperate in any legal action relating to the Remote Power
Patent.  In June 2008 the Company entered into a new agreement with
Microsemi Corp-Analog Mixed Signal Group Ltd (“Microsemi Analog”), previously
PowerDsine Ltd, a subsidiary of Microsemi Corporation (“Microsemi”), a leading
manufacturer of high performance analog mixed-signal integrated circuits and
high reliability semiconductors, which, among other things, amended the prior
Settlement Agreement entered into between the parties in November
2005.  As part of the Company’s Special Licensing Program and its
agreement with Microsemi Analog entered into in June 2008, Microsemi entered
into a license agreement, dated August 13, 2008, with the Company with
respect to its Remote Power Patent.  The license agreement provides
that Microsemi is obligated to pay the Company quarterly royalty payments of 2%
of the sales price for certain of Microsemi’s Midspan PoE products for the full
term of our Remote Power Patent (March 2020).
   F-16
 PART
IV




ITEM 14.  EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES




(a)           Exhibits




3(i)(a)
            Certificate
      of Incorporation, as amended. Previously filed as Exhibit 3.1 to the
      Company's Registration Statement on Form SB-2 (Registration No.
      333-59617), declared effective by the SEC on November 12,1998 (the "1998
      Registration Statement"), and incorporated herein by
      reference.




3(i)(b)
            Certificate
      of Amendment to the Certificate of Incorporation dated November 27, 2001.
      Previously filed as Exhibit 3.1.1 to the Company's Registration Statement
      on Form S-3 (Registration No. 333-81344) declared effective by the SEC on
      February 12, 2002, and incorporated herein by reference (the "February
      2002 Form S-3").




3(ii)
            By-laws,
      as amended. Previously filed as Exhibit 3.2 to the 1998 Registration
      Statement and incorporated herein by
reference.




4.1
            Form
      of Common Stock certificate. Previously filed as Exhibit 4.1 to the 1998
      Registration Statement and incorporated herein by
    reference.




10.1
            Amended
      and Restated 1996 Stock Option Plan.  Previously filed as an
      attachment to the Company’s Proxy Statement filed on May 28, 1999,
      and incorporated herein by
reference.




10.2
            Patents
      Purchase, Assignment and License Agreement, dated November 18, 2003,
      between the Company and Merlot Communications, Inc.  Previously
      filed as Exhibit 10.10 to the Company’s Current Report on Form 8-K filed
      December 3, 2003 and incorporated herein by
  reference.




10.3
            Master
      Services Agreement, dated November 30, 2004, between the Company and
      ThinkFire Services USA, Ltd.  Previously filed as Exhibit 10.1
      to the Company’s Current Report on Form 8-K filed December 2, 2004 and
      incorporated herein by reference.




10.4
            Securities
      Purchase Agreement, dated December 21, 2004, between Company and the
      investors.  Previously, filed as Exhibit 10.1 to the Company’s
      Current Report on Form 8-K filed December 28, 2004 and incorporated herein
      by reference.




10.5
            Securities
      Purchase Agreement, dated January 13, 2005, between the Company and the
      investors.  Previously filed as Exhibit 10.2 to the Company’s
      Current Report on Form 8-K filed on January 20, 2005 and incorporated
      herein by reference.




10.6
            Amendment
      to Patents Purchase, Assignment and License Agreement, dated January 18,
      2005, between the Company and Merlot Communications,
      Inc.  Previously filed January 24, 2005 as Exhibit 10.1 to the
      Company’s Current Report on Form 8-K filed on January 18, 2005 and
      incorporated herein by reference.




42


10.7+
            Agreement,
      dated August 4, 2005, between the Company and David C.
      Kahn.  Previously filed as Exhibit 10.1 to the Company’s Current
      Report on Form 8-K filed August 9, 2005 and incorporated herein by
      reference.




10.8
            Agreement,
      dated August 9, 2005, between the Company and Blank Rome
      LLP.  Previously filed as Exhibit 10.1 to the Company’s Current
      Report on Form 8-K filed on August 11, 2005 and incorporated herein by
      reference.




10.9
            Settlement
      Agreement, dated November 16, 2005, among the Company, PowerDsine Ltd and
      PowerDsine, Inc.  Previously filed as Exhibit 10.1 to the
      Company’s Current Report on Form 8-K filed November 17, 2005 and
      incorporated herein by reference.




10.10+
            Agreement,
      dated December 20, 2006, between the Company and David C. Kahn,
      previously filed as Exhibit 10.1 to the Company’s Current Report on Form
      8-K filed December 22, 2006 and incorporated herein by
      reference.




10.11+
            Employment
      Agreement, dated February 28, 2007, between the Company and
      Corey M. Horowitz previously filed as Exhibit 10.1 to the Company’s
      Current Report on Form 8-K filed March 6, 2007 and incorporated
      herein by reference.




10.12
            Securities
      Purchase Agreement, dated April 16, 2007, between the Company and the
      investors (including exhibits).  Previously filed as Exhibit
      10.1 to the Company’s Current Report on Form 8-K filed April 20, 2007
      and incorporated herein by
reference.




10.13
            Settlement
      Agreement, dated as of May 25, 2007, between the Company and D-Link Corp.
      and D-Link Systems, Inc., previously filed as Exhibit 10.1 to the
      Company’s Current Report on Form 8-K, filed on August 21, 2007 and
      incorporated herein by reference.




10.14
            Agreement,
      dated February 8, 2008, between the Company and Dovel & Luner,
      previously filed on February 13, 2008 as Exhibit 10.1 to the
      Company's Current Report on Form 8-K and incorporated herein by
      reference.




10.15
            Letter
      Agreement dated June 17, 2008, between the Company and Microsemi
      Corp-Analog Mixed Signal Group Ltd., previously filed on June 23,
      2008 as Exhibit 10.1 to the Company's Current Report on Form 8-K and
      incorporated herein by reference.




10.16
            License
      Agreement, dated August 13, 2008, between the Company and Microsemi
      Corporation, previously filed on August 15, 2008 as Exhibit 10.1 to
      the Company's Current Report on Form 8-K and incorporated herein by
      reference.




10.17+
            Agreement,
      dated December 18, 2008, between the Company and David C. Kahn,
      previously filed on December 19, 2008 as Exhibit 10.1 to the
      Company's Current Report on Form 8-K and incorporated herein by
      reference.




10.18
            Settlement
      Agreement (including Non-Exclusive Patent License Agreement), dated
      May 22, 2009, between the Company and NETGEAR, Inc., previously filed
      as Exhibit 10.1 to the Company’s Current Report on Form 8-K, fled on
      May 29, 2009, and incorporated herein by
  reference.




43


10.19+
            Employment
      Agreement, dated June 8, 2009, between the Company and Corey M.
      Horowitz, previously filed as Exhibit 10.1 to the Company’s Current Report
      on Form 8-K filed on June 12, 2009, and incorporated herein by
      reference.




10.20
            Form
      of stock option agreement, previously filed as Exhibit 4.1 to the
      Company’s Registration Statement on Form S-8, filed on October 14,
      2009 and incorporated herein by
reference.




14
            Code
      of Ethics.  Previously filed as Exhibit 14 to the Company’s
      Annual Report on Form 10-KSB for the year ended December 31, 2004 filed on
      April 14, 2004 and incorporated herein by
  reference.




23.1*
            Consent
      of Radin Glass Co., LLP, Independent Registered Public Accounting
      Firm.




31.1*
            Section
      302 Certification of Chief Executive
Officer.




31.2*
            Section
      302 Certification of Chief Financial
Officer.




32.1*
            Section
      906 Certification of Chief Executive
Officer.




32.2*
            Section
      906 Certification of Chief Financial
Officer.





*Filed
herewith


+Management
contract or compensatory plan or arrangement


44





SIGNATURES




In
accordance with the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York,
State of New York, on the 8th day of April 2010.




NETWORK-1
      SECURITY SOLUTIONS, INC.By:
              /s/ Corey
      M. HorowitzCorey
      M. HorowitzChairman
      and Chief Executive Officer







In
accordance with the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant caused this report to be signed on its
behalf by the following persons in the capacities and on the dates
indicated:








NAME
              
              TITLE
              
              DATE/s/
      Corey
      M. Horowitz
              
              Chairman and Chief Executive Officer, Chairman
              
              April 8,
      2010Corey
      M. Horowitz
              
              of
      the Board of Directors (principal executive officer)/s/
      David
      Kahn
              
              Chief
      Financial Officer (principal financial officer and
              
              April 8,
      2010David
      Kahn
              
              principal
      accounting officer)/s/
      Robert
      Pons
              
              Director
              
              April 8,
      2010Robert
      Pons/s/
      Laurent Ohana
              
              Director
              
              April 8,
      2010Laurent
      Ohana












45