================================================================================

                     U.S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-QSB

     [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
       EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001

     [ ] 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 SMALL BUSINESS ISSUER AS
                            SPECIFIED IN ITS CHARTER)



            DELAWARE                                    11-3027591
 (STATE OR OTHER JURISDICTION OF            (IRS EMPLOYER IDENTIFICATION NO.)
  INCORPORATION OR ORGANIZATION)


        1601 TRAPELO ROAD, RESERVOIR PLACE, WALTHAM, MASSACHUSETTS 02451
                    (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

                                  781-522-3400
                           (ISSUER'S TELEPHONE NUMBER)


Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 / /

As of May 1, 2001 there were 6,458,347 shares of Common Stock, $.01 par value
per share, and 107,023 shares of Series D Convertible Preferred Stock, $.01 par
value per share, outstanding.

Transitional Small Business Disclosure Format (check one):
Yes [  ]  No [X]
================================================================================
<PAGE>



                       NETWORK-1 SECURITY SOLUTIONS, INC.

                                      INDEX



<TABLE><CAPTION>
<S>      <C>                                                                                                                <C>
                                                                                                                            Page No.
PART I.  FINANCIAL INFORMATION

Item 1.  FINANCIAL STATEMENTS
         Balance Sheets as of March 31, 2001 (unaudited) and December 31, 2000..................................................3

         Statements of Operations for the three months ended March 31, 2001 and 2000 (unaudited)................................4

         Statement of Stockholders' Equity for the three months ended March 31, 2001 (unaudited)
         and for the year ended December 31, 2000...............................................................................5

         Statements of Cash Flows for the three months ended March 31, 2001 and 2000 (unaudited)............................... 6

         Notes to Financial Statements..........................................................................................7

Item 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION..............................................................8

PART II.  OTHER INFORMATION

Item 1.  Legal Proceedings.....................................................................................................13

Item 2.  Changes in Securities and Use of Proceeds.............................................................................13

Item 3.  Defaults Upon Senior Securities.......................................................................................13

Item 4.  Submission of Matters to a Vote of Security Holders...................................................................13

Item 5.  Other Information.....................................................................................................13

Item 6.  Exhibits and Reports on Form 8-K......................................................................................13

SIGNATURES.....................................................................................................................14
</TABLE>






                                      -2-
<PAGE>
                       NETWORK-1 SECURITY SOLUTIONS, INC.
                                 BALANCE SHEETS
<TABLE><CAPTION>
                                                                                March 31, 2001     December 31, 2000
                                                                                 ------------         ------------
                                                                                  (Unaudited)
<S>                                                                              <C>                  <C>
ASSETS
Current assets:
   Cash and cash equivalents                                                     $  3,638,000         $  4,425,000
   Accounts receivable - net of allowance for doubtful accounts
      of $90,000 and $80,000 respectively                                             413,000              227,000
   Prepaid expenses and other current assets                                          103,000              153,000
   Due from purchaser of discontinued operations                                       59,000               59,000
                                                                                 ------------         ------------
      Total current assets                                                          4,213,000            4,864,000

Equipment and fixtures                                                                420,000              437,000
Capitalized software costs - net                                                      688,000              625,000
Security deposits                                                                      89,000               81,000
                                                                                 ------------         ------------
                                                                                 $  5,410,000         $  6,007,000
                                                                                 ============         ============
LIABILITIES
Current liabilities:
   Notes payable - related parties                                               $    326,000         $    326,000
   Notes payable - others                                                             338,000              343,000
   Accounts payable                                                                   195,000              224,000
   Accrued expenses and other current liabilities                                     675,000              696,000
   Interest payable - related parties                                                  33,000               27,000
   Interest payable - others                                                           34,000               28,000
   Deferred revenue                                                                   224,000              181,000
                                                                                 ------------         ------------
      Total current liabilities                                                     1,825,000            1,825,000

Commitments and contingencies

STOCKHOLDERS' EQUITY
Preferred stock - $.01 par value; authorized 5,000,000 shares;
Series A -10% cumulative, none issued and outstanding
Series B - none issued and outstanding
Series C - none issued and outstanding
Series D -107,023 and 115,220 shares issued and outstanding, respectively               1,000                1,000
Common stock - $.01 par value; authorized 25,000,000 shares;
    6,458,347 and 6,448,363 shares issued and outstanding, respectively                65,000               65,000
Additional paid-in capital                                                         31,049,000           30,705,000
Accumulated deficit                                                               (27,494,000)         (26,482,000)
Unearned portion of compensatory stock options                                        (36,000)            (107,000)
                                                                                 ------------         ------------
                                                                                    3,585,000            4,182,000
                                                                                 ------------         ------------
                                                                                 $  5,410,000         $  6,007,000
                                                                                 ============         ============
</TABLE>
                                      -3-
<PAGE>

                       NETWORK-1 SECURITY SOLUTIONS, INC.
                            STATEMENTS OF OPERATIONS
<TABLE><CAPTION>
                                                         Three Months Ended March 31,
                                                        -------------------------------
                                                            2001               2000
                                                        -----------         -----------
                                                        (Unaudited)         (Unaudited)
<S>                                                     <C>                 <C>
Revenues:
   Licenses                                             $   396,000         $   157,000
   Services                                                  61,000              35,000
                                                        -----------         -----------
          Total revenues                                    457,000             192,000

Cost of revenues:
   Amortization of software development costs                62,000              61,000
   Cost of licenses                                          14,000               6,000
   Cost of services                                          62,000              28,000
                                                        -----------         -----------
                                                            138,000              95,000
                                                        -----------         -----------
Gross profit                                                319,000              97,000
                                                        -----------         -----------

Operating expenses:
   Product development                                      612,000             293,000
   Selling and marketing                                    896,000             488,000
   General and administrative                               494,000             517,000

                                                        -----------         -----------
                                                          2,002,000           1,298,000
                                                        -----------         -----------
Loss from continuing operations before interest          (1,683,000)         (1,201,000)

Interest income - net                                        41,000              33,000
                                                        -----------         -----------

Loss from continuing operations                          (1,642,000)         (1,168,000)
Income from discontinued operations                         630,000           2,028,000
                                                        -----------         -----------
Net (loss) income                                       $(1,012,000)        $   860,000
                                                        ===========         ===========

Per common share information - basic and diluted
    Loss from continuing operations                     $     (0.26)        $     (0.22)
    Income from discontinued operations                        0.10                0.38
                                                        -----------         -----------
    Net (loss) income                                   $     (0.16)        $      0.16
                                                        ===========         ===========
Weighted average number of common
     shares outstanding                                   6,455,316           5,326,112
                                                        ===========         ===========
</TABLE>

                                      -4-
<PAGE>

                       NETWORK-1 SECURITY SOLUTIONS, INC.
                       STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE><CAPTION>
                                                            Common Stock                     Preferred Stock
                                                    -----------------------------     ------------------------------
                                                       Shares           Amount           Shares            Amount
                                                    ------------     ------------     ------------      ------------
<S>                                                    <C>           <C>                   <C>          <C>
Balance - December 31, 1998                            4,366,520     $     44,000          562,836      $      6,000

Amortization of compensatory stock options                  --               --               --                --
Issuance of common stock and options for
services rendered and payment of liability                 5,855             --               --                --
Conversion of Series C preferred stock                   562,836            6,000         (562,836)           (6,000)
Issuance of Series D preferred stock and
   warrants, net of expense of $34,000                      --               --            491,803             5,000
Beneficial conversion feature of Series D
   preferred stock and related imputed dividend             --               --               --                --

Net loss                                                    --               --               --                --
                                                    ------------     ------------     ------------      ------------
Balance - December 31, 1999                            4,935,211           50,000          491,803             5,000

Amortization of compensatory stock options                  --               --               --                --
Conversion of Series D preferred stock                   376,583            4,000         (376,583)           (4,000)
Exercise of employee & non-employee
   stock options                                         470,051            5,000             --                --
Exercise of Warrants                                     384,091            4,000             --                --
Conversion of Notes and Accrued Interest                 282,427            2,000             --                --
Compensation charge for issuance of non-
   qualified stock options                                  --               --               --                --
Compensation charge for accelerated
   vesting of stock options                                 --               --               --                --
Beneficial conversion feature of Series D
   preferred stock underlying notes payable
   and related debt discount                                --               --               --                --
Issuance of warrants and options for services               --               --               --                --
Unearned portion of compensatory warrants                   --               --               --                --

Net loss                                                    --               --               --                --
                                                    ------------     ------------     ------------      ------------
Balance - December 31, 2000 (Audited)                  6,448,363     $     65,000          115,220      $      1,000

Amortization of compensatory stock options                  --               --               --                --
Conversion of Series D preferred stock                     8,197             --             (8,197)             --
Conversion of Notes and Accrued Interest                   1,787             --               --                --
Amortization of compensatory warrants                       --               --               --                --
Compensation charge for issuance of non-
   qualified stock options                                  --               --               --                --
Compensation charge for issuance of
   warrants                                                 --               --               --                --

Net loss                                                    --               --               --                --
                                                    ------------     ------------     ------------      ------------
Balance - March 31, 2001 (Unaudited)                   6,458,347     $     65,000          107,023      $      1,000
                                                    ============     ============     ============      ============
</TABLE>
<PAGE>

                       NETWORK-1 SECURITY SOLUTIONS, INC.
                  STATEMENTS OF STOCKHOLDERS' EQUITY(continued)

<TABLE><CAPTION>
                                                                                         Unearned
                                                      Additional                        Portion of
                                                       Paid-in        Accumulated      Compensatory
                                                       Capital          Deficit        Stock Options         Total
                                                     ------------     ------------      ------------      ------------
<S>                                                 <C>              <C>               <C>               <C>
Balance - December 31, 1998                         $ 20,819,000     $(13,247,000)     $   (383,000)     $  7,239,000

Amortization of compensatory stock options                  --               --             249,000           249,000
Issuance of common stock and options for
services rendered and payment of liability               161,000             --                --             161,000
Conversion of Series C preferred stock                      --               --                --                   0
Issuance of Series D preferred stock and
   warrants, net of expense of $34,000                 1,461,000             --                --           1,466,000
Beneficial conversion feature of Series D
   preferred stock and related imputed dividend        1,500,000       (1,500,000)             --                   0

Net loss                                                    --         (6,946,000)             --          (6,946,000)
                                                    ------------     ------------      ------------      ------------
Balance - December 31, 1999                           23,941,000      (21,693,000)         (134,000)        2,169,000

Amortization of compensatory stock options                  --               --             108,000           108,000
Conversion of Series D preferred stock                      --               --                --                --
Exercise of employee & non-employee
   stock options                                       2,255,000             --                --           2,260,000
Exercise of Warrants                                   1,207,000             --                --           1,211,000
Conversion of Notes and Accrued Interest                 859,000             --                --             861,000
Compensation charge for issuance of non-
   qualified stock options                               525,000             --                --             525,000
Compensation charge for accelerated
   vesting of stock options                              269,000             --                --             269,000
Beneficial conversion feature of Series D
   preferred stock underlying notes payable
   and related debt discount                           1,500,000             --                --           1,500,000
Issuance of warrants and options for services             68,000             --                --              68,000
Unearned portion of compensatory warrants                 81,000             --             (81,000)             --

Net loss                                                    --         (4,789,000)             --          (4,789,000)
                                                    ------------     ------------      ------------      ------------
Balance - December 31, 2000 (Audited)               $ 30,705,000     $(26,482,000)     $   (107,000)     $  4,182,000

Amortization of compensatory stock options                  --               --              17,000            17,000
Conversion of Series D preferred stock                      --               --                --                --
Conversion of Notes and Accrued Interest                   5,000             --                --               5,000
Amortization of compensatory warrants                       --               --              54,000            54,000
Compensation charge for issuance of non-
   qualified stock options                               230,000             --                --             230,000
Compensation charge for issuance of
   warrants                                              109,000             --                --             103,000

Net loss                                                    --         (1,012,000)             --            (953,000)
                                                    ------------     ------------      ------------      ------------
Balance - March 31, 2001 (Unaudited)                $ 31,049,000     $(27,494,000)     $    (36,000)     $  3,585,000
                                                    ============     ============      ============      ============
</TABLE>
                                      -5-
<PAGE>

                       NETWORK-1 SECURITY SOLUTIONS, INC.
               STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED
<TABLE><CAPTION>
                                                                                        March 31,
                                                                             -------------------------------
                                                                                2001                2000
                                                                             -----------         -----------
                                                                             (Unaudited)         (Unaudited)
<S>                                                                          <C>                 <C>
Cash flows from operating activities:
Loss from continuing operations                                              $(1,642,000)        $(1,168,000)
Adjustments to reconcile net loss from continuing operations
to net cash used in operating activities:
   Issuance of common stock option and warrants for
      services rendered                                                                0              43,000
   Provision for doubtful accounts                                                10,000              (5,000)
   Amortization of compensatory stock options and warrants                       180,000                   0
   Depreciation and amortization                                                  96,000              90,000
Changes in:
   Accounts receivable                                                          (196,000)            (87,000)
   Prepaid expenses and other current assets                                      50,000             (23,000)
   Accounts payable, accrued expenses and
      other current liabilities                                                  (50,000)             21,000
   Interest Payable                                                               13,000              30,000
   Deferred revenue                                                               43,000              22,000
                                                                             -----------         -----------
Net cash used in continuing operations                                        (1,496,000)         (1,077,000)
Cash provided by (used in) discontinued operations                                     0              10,000
                                                                             -----------         -----------
    Net cash used in operating activities                                     (1,496,000)         (1,067,000)

Cash flows from investing activities:
   Acquisitions of equipment and fixtures                                        (18,000)            (49,000)
   Capitalized software costs                                                   (125,000)           (100,000)
   Security deposit                                                               (8,000)
   Loan to officer                                                                     0              88,000
   Net proceeds from sale of professional services group                         860,000           2,700,000
                                                                             -----------         -----------
      Net cash provided by (used in) investing activities                        709,000           2,639,000
                                                                             -----------         -----------
Cash flows provided by financing activities:
   Proceeds from exercise of options and warrants                                      0           2,929,000
                                                                             -----------         -----------

Net increase (decrease) in cash and cash equivalents                            (787,000)          4,501,000
Cash and cash equivalents - beginning of period                                4,425,000           3,023,000
                                                                             -----------         -----------
Cash and cash equivalents - end of period                                    $ 3,638,000         $ 7,524,000
                                                                             ===========         ===========
Supplemental disclosures of noncash investing and financing activity:
   Conversion of notes payable and accrued interest into
      1,787 shares of common stock                                           $     5,000         $      --
                                                                             ===========         ===========
   Compensation charge for non qualified stock options related
      to employees of discontinued operations                                $   230,000         $   794,000
                                                                             ===========         ===========
</TABLE>
                                      -6-
<PAGE>

                       NETWORK-1 SECURITY SOLUTIONS, INC.
                          NOTES TO FINANCIAL STATEMENTS

1.   FINANCIAL STATEMENT PRESENTATION

           a. The financial statements included herein have been prepared by the
           Company, without audit, pursuant to the rules and regulations of the
           Securities and Exchange Commission with respect to Form 10-QSB.
           Certain information and footnote disclosures normally included in
           financial statements prepared in accordance with generally accepted
           accounting principles have been condensed or omitted pursuant to such
           rules and regulations, although the Company believes that the
           disclosures made herein are adequate to make the information
           contained herein not misleading. These interim financial statements
           and the notes thereto should be read in conjunction with the
           financial statements included in the Company's Form 10-KSB filed on
           April 17, 2001 for the year ended December 31, 2000.

                 In the Company's opinion, all adjustments (consisting only of
           normal recurring adjustments) necessary for a fair presentation of
           the information shown have been included.

           b. The results of operations for the three months ended March 31,
           2001 presented herein are not necessarily indicative of the results
           of operations that may be expected for the year ending December 31,
           2001.

           c. Basic loss per share is calculated by dividing the net loss by the
           weighted average number of outstanding common shares during the
           period. Diluted per share data includes the dilutive effects of
           options, warrants and convertible securities. As all potential common
           shares are anti-dilutive to the loss from continuing operations, they
           are not included in the calculation of diluted loss per share.


                                      -7-
<PAGE>


Item 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

THIS QUARTERLY REPORT ON FORM 10-QSB CONTAINS FORWARD-LOOKING STATEMENTS WITHIN
THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED (THE "EXCHANGE ACT"). ACTUAL RESULTS, EVENTS AND CIRCUMSTANCES
(INCLUDING FUTURE PERFORMANCE, RESULTS AND TRENDS) COULD DIFFER MATERIALLY FROM
THOSE SET FORTH IN SUCH STATEMENTS DUE TO VARIOUS RISKS AND UNCERTAINTIES,
INCLUDING, BUT NOT LIMITED TO, THOSE DISCUSSED IN THE COMPANY'S ANNUAL REPORT ON
FORM 10-KSB FOR THE YEAR ENDED DECEMBER 31, 2000 IN THE SECTION ENTITLED "RISK
FACTORS THAT MAY AFFECT FUTURE RESULTS" AS WELL AS THOSE RISKS DISCUSSED
ELSEWHERE IN THIS REPORT.

Overview

           The Company develops, markets, licenses and supports a family of
network security software products designed to provide comprehensive security to
computer networks, including Internet based systems and internal networks and
computing resources. The Company introduced its first network software product
(FireWall/Plus) in June 1995. In January 1999, the Company introduced its
CYBERWALLPLUS family of network security products. The Company has made only
limited sales of its CYBERWALLPLUS product, upon which an evaluation of its
prospects and future performance can be made. Such prospects must be considered
in light of the risks, expenses and difficulties frequently encountered in the
introduction of new products and the shift from research and product development
to commercialization of products based on rapidly changing technologies in a
highly specialized and emerging market. The Company will be required to
significantly expand its product and development capabilities, introduce new
products, introduce enhanced features to existing products, expand its in-house
sales force, establish and maintain distribution channels through third-party
vendors, increase marketing expenditures, and attract additional qualified
personnel. In addition, the Company must adapt to the demands of an emerging and
rapidly changing computer network security market, intense competition and
rapidly changing technology and industry standards. The Company may not be able
to successfully address such risks, and the failure to do so would have a
material adverse effect on the Company's business, results of operations and
financial condition.

           To date, the Company has incurred significant losses and, at March
31, 2001, had an accumulated deficit of $ 27,494,000. In addition, since March
31, 2001, the Company has continued to incur significant operating losses. The
Company expects to incur substantial operating expenses in the future to support
its product development activities, as well as continue to expand its domestic
and international sales activities and marketing capabilities.

           Management believes it currently has cash to fund its operations
until December 31, 2001 (or earlier if the Company does not achieve certain
revenue assumptions) (See "Liquidity and Capital Resources" on page 11 of this
report ). The Company is currently seeking additional financing, but it may not
be able to secure such financing. The inability of the Company to obtain such
financing would have a material adverse effect on the Company requiring it to
curtail or possibly cease operations.

           In February 2000, the Company completed the sale of its professional
services business for a sales price of $3.815 million which included $1.115
million held in escrow subject to certain former employees of the Company
remaining employed by the purchaser for at least one year and the purchaser
securing certain minimum purchase orders within ninety (90) days of the closing.
The Company received $1,000,000 from escrow during the three months ended March
31, 2001 and received the additional $115,000 in April 2001 plus interest. In
connection with the sale, the Company agreed not to offer any professional
consulting services competitive with the purchaser until the second anniversary
of the closing. Effective upon the sale, the Company granted options to acquire
104,063 shares of Common Stock at $2.91 per share to certain employees of the
professional services business. In connection therewith, the Company incurred a
compensation charge of $794,000 based upon the intrinsic value of the portion of
the options vesting at such date and acceleration of other options. The balance
of the options vested one year after the closing and an additional charge of
$230,000 was incurred related to these options. The sale has been accounted for
by the Company as a sale of a discontinued operation.

           The Company's software products have not yet achieved market
acceptance. The future success of the Company is largely dependent upon market
acceptance of its CYBERWALLPLUS family of software products.

                                      -8-
<PAGE>

While the Company believes that its family of software products offer advantages
over competing products for network security, license revenue from network
security software products since the introduction of FireWall/Plus (June 1995),
a predecessor product line, through March 31, 2001 has only been $4,296,000,
including a non-refundable pre-paid royalty of $500,000 in 1997. From January
1999 through March 31, 2001, license revenue from CYBERWALLPLUS has only been
$1,563,000. CYBERWALLPLUS may not achieve significant market acceptance. Revenue
from such commercial products depend on a number of factors, including the
influence of market competition, technological changes in the network security
market, the Company's ability to design, develop and introduce enhancements on a
timely basis, and the ability of the Company to successfully establish and
maintain distribution channels. The failure of CYBERWALLPLUS to achieve
significant market acceptance as a result of competition, technological change
or other factors, would have a material adverse effect on the Company's
business, operating results and financial condition.

           The Company has committed significant product and development
resources to its CYBERWALLPLUS family of products. The Company's anticipated
levels of expenditures for product development are based on its plans for
product enhancements and new product development. The Company capitalizes and
amortizes software development costs in accordance with Statement of Financial
Accounting Standards No. 86. These costs consist of salaries, consulting fees
and applicable overhead.

RESULTS OF OPERATIONS

THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE MONTHS ENDED MARCH  31, 2000

           Revenues increased by $265,000 or 138%, from $192,000 for the three
months ended March 31, 2000 to $457,000 for the three months ended March 31,
2001, primarily as a result of an increase in license revenues during the three
months ended March 31, 2001. License revenues increased by $239,000 or 152%,
from $157,000 for the three months ended March 31, 2000 to $396,000 for the
three months ended March 31, 2001, primarily due to the increased demand in
security products. Revenue for the three months ended March 31, 2001 included a
large CyberwallPLUS server license issued to a major university totaling
$135,000. The Company recognized $103,000 in revenue from its distributor in
China. In addition, management believes that customers are becoming more aware
of the potential impact of security breaches, and that companies are allocating
increasing resources to safeguard their assets. Service revenues increased by
$26,000 or 74%, from $35,000 for the three months ended March 31, 2000 to
$61,000 for the three months ended March 31, 2001 primarily due to increased
training revenue. The Company's revenues from customers in the United States
represented 89% of its revenues during the three months ended March 31, 2000 and
68% of its revenues during the three months ended March 31, 2001, respectively.

           Cost of revenues consists of amortization of software development
costs, cost of licenses and cost of services. Amortization of software
development costs increased by $1,000 or 2%, from $61,000 for three months ended
March 31, 2000 to $62,000 for the three months ended March 31, 2001,
representing 39% and 16% of license revenues, respectively.

           Cost of licenses consist of software media (disks), documentation,
product packaging, production costs and product royalties. Cost of licenses
increased by $8,000 or 133%, from $6,000 for the three months ended March 31,
2000 to $14,000 for the three months ended March 31, 2001, each representing 4%
of license revenues. Cost of licenses as a percentage of license revenues may
fluctuate from period to period due to changes in product mix, changes in the
number or size of transactions recorded in a given period or an increase or
decrease in licenses of products which would require the Company to pay
royalties to third parties.



                                      -9-
<PAGE>

           Cost of services consists of salaries, benefits and overhead
associated with the technical support of maintenance contracts. Cost of services
increased by $34,000 or 121%, from $28,000 for the three months ended March 31,
2000 to $62,000 for the three months ended March 31, 2001, representing 80% and
102% of service revenues, respectively. The increase in cost of services in
dollar amount and as a percentage of service revenues resulted primarily from
increased personnel costs to support the projected sales growth. Cost of
services as a percentage of service revenues may fluctuate from period to period
due to changes in support headcount and related benefit costs.

           Gross profit was $97,000 for the three months ended March 31, 2000
compared to a gross profit of $319,000 for the three months ended March 31,
2001, representing 51% and 70% of revenues, respectively. The increase in gross
profit was primarily due to the increase in license revenue.

           Product development consists of salaries, benefits, bonuses, travel
and related costs of the Company's product development personnel, including
consulting fees, the costs of computer equipment used in product and technology
development. Product development expense increased $319,000 or 109%, from
$293,000 for three months ended March 31, 2000 to $612,000 for the three months
ended March 31, 2001, representing 153% and 133% of revenues, respectively.
Total product development costs, including capitalized costs of $100,000 for the
three months ended March 31, 2000 and $125,000 for the three months ended March
31, 2001, were $393,000 and $737,000 for the three months ended March 31, 2000
and March 31, 2001, respectively. The increase in total product development
costs was due primarily to the use of outside programmers services of $220,000
and non cash warrant compensation of $109,000.

           Selling and marketing expenses consist primarily of salaries,
including commissions, benefits, bonuses, travel, advertising, public relations,
consultants and trade shows. Selling and marketing expenses increased by
$408,000 or 84%, from $488,000 for the three months ended March 31, 2000 to
$896,000 for the three months ended March 31, 2001, representing 254% and 196%
of revenues, respectively. The increase in selling and marketing expenses was
due primarily to an increase of $382,000 in personnel costs and travel
expenditures related to the hiring of a sales force and personnel hired in 2000
which replaced the use of outside consultants in public relations and marketing.

           General and administrative expenses include employee costs, including
salary, benefits, travel and other related expenses associated with management,
finance and accounting operations, and legal and other professional services
provided to the Company. General and administrative expenses decreased by
$23,000 , from $517,000 for the three months ended March 31, 2000 to $494,000
for the three months ended March 31, 2001, representing 269% and 108% of
revenues, respectively. Increases in financing costs of $39,000, non-cash
charges of $54,000 relating to the amortization of the value of warrants granted
to outside consultants in November 2000, and an increase in rent of $22,000
which was offset by decreases in investor relations expenses of $52,000,
telecommunication costs of $13,000, professional fees of $44,000 and non-cash
charges of $26,000 relating to the amortization of the value of stock options
granted to the Company's Chief Executive Officer in May 1998.

           Net interest income increased by $8,000 or 24%, from $33,000 for the
three months ended March 31, 2000 to $41,000 for the three months ended March
31, 2001, representing 17% and 9% of revenues, respectively. The Company
completed a Series D Preferred Stock, warrant and promissory note financing on
December 22, 1999 and recorded interest expense of $30,000 related to offering
of the promissory notes for the three months ended March 31, 2000 and $13,000
for the three months ended March 31, 2001.

           Income from discontinued operations decreased by $1,398,000 or 69%,
from $2,028,000 for the three months ended March 31, 2000 to $630,000 for the
three months ended March 31, 2001. Income from discontinued operations for the
three months ended March 31, 2001 was due to the payment of $1,000,000 for
retention of all the employees of the professional services group for a period
of one year less the $140,000 retention bonus due the employees of the
professional services group and a non-cash charge of $230,000 relating to the
issuance of non-qualified options which were granted on November 8, 2000 at fair
market value but were contingent upon the closing of the transaction which
resulted in an additional charge for the three months ended March 31, 2001.
Additional purchase price of $115,000 plus interest was still being held in
escrow at March 31, 2001 and was received by the Company in April 2001. In
connection with such sale, the Company has agreed not to offer any professional
or consulting services competitive with those services offered by purchaser for
a period of two years from the closing date.

                                      -10-
<PAGE>

           No provision for or benefit from federal, state or foreign income
taxes was recorded for three months ended March 31, 2000 or March 31, 2001
because the Company incurred net operating losses and fully reserved its
deferred tax assets as their future realization could not be determined.

           As a result of the foregoing, the Company had net income of $860,000
for the three months ended March 31, 2000 compared with a net loss of $1,012,000
for the three months ended March 31, 2001.

Liquidity and Capital Resources

           The Company's capital requirements have been and will continue to be
significant, and its cash requirements have been exceeding its cash flow from
operations. At March 31, 2001, the Company had $3,638,000 of cash and cash
equivalents and working capital of $2,388,000. The Company has financed its
operations primarily through private sales of equity and debt securities, the
sale of its professional services division on February 10, 2000. Net cash used
in operating activities from continuing operations was $1,077,000 during the
three months ended March 31, 2000 and net cash used in operating activities from
continuing operations was $1,496,000 during the three months ended March 31,
2001. Net cash used in operating activities from continuing operations for the
three months ended March 31, 2000 was primarily attributable to the net loss
from continuing operations of $1,168,000 and by an increase in accounts
receivable of $87,000 which was partially offset by an increase in depreciation
and amortization of $90,000, the issuance of common stock and warrants for
services rendered of $43,000 and an increase in accrued interest payable of
$30,000. Net cash used in operating activities from continuing operations for
three months ended March 31, 2001 was primarily attributable to the net loss
from continuing operations of $1,642,000, an increase in accounts receivable of
$196,000, and a decrease in accounts payable, accrued expenses and other current
liabilities of $50,000, which was partially offset by the amortization and
expense of compensatory stock options and warrants for services rendered of
$180,000, depreciation and amortization expense of $96,000, an increase in
accrued interest payable of $13,000 and an increase in deferred revenue of
$43,000.

         In February 2000, the Company sold its professional services business
and received proceeds of $2.7 million. In February 2001, the Company received an
additional $1,000,000 from the sale and received an additional $115,000 from
escrow in April 2001. The Company's operating activities during the three months
ended March 31, 2001 were financed primarily with the funds raised in 2000 and
the $1,000,000 received in 2001. The Company does not currently have a line of
credit from a commercial bank or other institution.

           The Company anticipates, based on currently proposed plans and
assumptions (including the timetable of, costs and expenses associated with, and
success of, its marketing efforts), that its current cash balance approximately
$3,638,000 as of March 31, 2001 together with certain revenue assumptions from
operations, will be sufficient to satisfy the Company's operations and capital
requirements through December 2001. There can be no assurance, however, that
such funds will not be expended prior thereto. In the event the Company's plans
change, or its assumptions change, or prove to be inaccurate (due to
unanticipated expenses, difficulties, delays or otherwise), the Company may have
insufficient funds to support its operations prior to December 31, 2001. In
April 2001, the Company instituted certain measures to reduce its overhead. In
addition, the Company is currently seeking financing; however, it does not have
any definitive arrangements with respect to any additional financing.
Consequently, additional financing may not be available to the Company if
needed, on commercially reasonable terms or at all. The inability of the Company
to obtain additional financing could have a material adverse effect on the
Company, requiring it to curtail and possibly cease its operations. In addition,
any additional equity financing may involve substantial dilution to the
interests of the Company's then existing stockholders.

                                      -11-
<PAGE>

Fluctuations in Operating Results

           The Company anticipates significant quarterly fluctuations in its
operating results in the future. The Company generally ships orders for
commercial products as they are received and, as a result, does not have any
material backlog. As a result, quarterly revenues and operating results depend
on the volume and timing of orders received during the quarter, which are
difficult to forecast. Operating results may fluctuate on a quarterly basis due
to factors such as the demand for the Company's products, purchasing patterns
and budgeting cycles of customers, the introduction of new products and product
enhancements by the Company or its competitors, market acceptance of new
products introduced by the Company or its competitors and the size, timing,
cancellation or delay of customer orders, including cancellation or delay in
anticipation of new product introduction or enhancement. Therefore, comparisons
of quarterly operating results may not be meaningful and should not be relied
upon, nor will they necessarily reflect the Company's future performance.
Because of the foregoing factors, it is likely that in some future quarters the
Company's operating results will be below the expectations of public market
analysts and investors. In such event, the price of the Common Stock would
likely be materially adversely affected.

           The sales cycle for the Company's products can be lengthy and
generally commences at the time a prospective customer demonstrates an interest
in licensing a CYBERWALLPLUS solution, typically includes a 28-day free
evaluation period and ends upon execution of a purchase order by the customer.
The length of the sales cycle varies depending on the type and sophistication of
the customer and the complexity of the operating system.


Year 2000 Issue

           The Company did not incur material costs with respect to potential
software issues associated with the Year 2000.
















                                      -12-
<PAGE>



PART II. OTHER INFORMATION

Item 1.  LEGAL PROCEEDINGS.

         None.

Item 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS.

         On January 15, 2001 and March 15, 2001, the Company issued three year
         warrants to Lipman Capital Group, Inc. to purchase 20,000 shares of the
         Company's common stock at $7.50 per share and $10.00 per share,
         respectively. Such warrants were issued in consideration of public
         relations services related to the agreement. On April 12, 2001, the
         Company issued Sage Alliance, Inc. (and or its consultants) five year
         warrants to purchase 179,706 shares of the Company's common stock at
         $2.03 per share. Such warrants were issued in consideration for
         programming services rendered.

Item 3.  DEFAULTS UPON SENIOR SECURITIES.

         None.

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

         None.


Item 5.  OTHER INFORMATION.

         None.

Item 6.  EXHIBITS AND REPORTS ON FORM 8-K.

         a). Exhibits

             The exhibits in the following table have been filed as part of this
             Quarterly Report on Form 10-QSB:

         None


         b). Reports of Form 8-K.

             No reports on Form 8-K were filed during the three (3) months ended
             March 31, 2001




                                      -13-
<PAGE>

                                   SIGNATURES

         In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.



                             NETWORK-1 SECURITY SOLUTIONS, INC.


                             By:  /s/ Avi A. Fogel
                                  -----------------
                             Avi A. Fogel, President and Chief Executive Officer
                             (Principal Executive Officer)


                             By:  /s/ Murray P. Fish
                                  -------------------
                             Murray P. Fish
                             Chief Financial Officer
                             (Principal Financial and Accounting Officer)






Date: May  21, 2001












                                      -14-