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 JUNE 30, 1999

 [ ] 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 July 31, 1999 there were 4,372,375 shares of Common Stock, $.01 par value
per share, and 562,836 shares of Series C 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>
                                                                                                                        Page No.
<S>                                                                                                                         <C>
PART I.  FINANCIAL INFORMATION

Item 1.  FINANCIAL STATEMENTS
         Balance Sheets as of June 30, 1999 (unaudited) and December 31, 1998 ...............................................3

         Statements of Operations for the three and six months ended June 30, 1999 and 1998 (unaudited) .....................4

         Statement of Stockholders' Equity (Deficiency) for the six months ended June 30, 1999 (unaudited)
         and for the year ended December 31, 1998 ...........................................................................5

         Statements of Cash Flows for the six months ended June 30, 1999 and 1998 (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..................................................................................................14

Item 2.  Changes in Securities and Use of Proceeds..........................................................................14

Item 3.  Defaults Upon Senior Securities....................................................................................14

Item 4.  Submission of Matters to a Vote of Security Holders................................................................14

Item 5.  Other Information..................................................................................................15

Item 6.  Exhibits and Reports on Form 8-K...................................................................................15

SIGNATURES..................................................................................................................16

</TABLE>

<PAGE>

                       NETWORK-1 SECURITY SOLUTIONS, INC.
                                 BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                             June 30, 1999      December 31, 1998
                                                                              (Unaudited)           (Audited)
                                                                               ----------           ----------
<S>                                                                            <C>                  <C>
ASSETS
Current assets:
   Cash and cash equivalents                                                   $2,667,000           $6,423,000
   Accounts receivable - net of allowance for doubtful accounts
      of $160,000 and $151,000 respectively                                       492,000              249,000
   Prepaid expenses and other current assets                                      234,000              119,000
                                                                               ----------           ----------
      Total current assets                                                      3,393,000            6,791,000

Equipment and fixtures                                                            697,000              415,000
Capitalized software costs - net                                                  855,000              925,000
Security deposits                                                                  82,000               37,000
                                                                               ----------           ----------
                                                                               $5,027,000           $8,168,000
                                                                               ==========           ==========
LIABILITIES
Current liabilities:
   Accounts payable                                                              $494,000             $420,000
   Accrued expenses and other current liabilities                                 683,000              406,000
   Deferred revenue                                                                78,000              103,000
                                                                               ----------           ----------
      Total current liabilities                                                 1,255,000              929,000
                                                                               ----------           ----------
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 - 500,000 shares, none issued and outstanding
   Series C - 562,836 shares issued and outstanding                                 6,000                6,000
Common stock - $.01 par value; authorized 25,000,000 shares;
   4,372,375 and 4,366,520 shares issued and outstanding                           44,000               44,000
Additional paid-in capital                                                     20,896,000           20,819,000
Unearned portion of compensatory stock options                                   (220,000)            (383,000)
Accumulated deficit                                                           (16,954,000)         (13,247,000)
                                                                               ----------           ----------
                                                                                3,772,000            7,239,000
                                                                               ----------           ----------
                                                                               $5,027,000           $8,168,000
                                                                               ==========           ==========
</TABLE>
See notes to financial statements

                                      -3-
<PAGE>

                       NETWORK-1 SECURITY SOLUTIONS, INC.
                            STATEMENTS OF OPERATIONS
                                    UNAUDITED
<TABLE>
<CAPTION>

                                                         Three Months Ended June 30,        Six Months Ended June 30,
                                                         --------------------------         --------------------------
                                                             1999          1998                 1999          1998
                                                         ------------  ------------         ------------  ------------
<S>                                                         <C>          <C>                  <C>           <C>
Revenues:
   Licenses                                                 $ 43,000     $ 217,000            $ 113,000     $ 412,000
   Services                                                  477,000       346,000              790,000       490,000
                                                         ------------  ------------         ------------  ------------
          Total revenues                                     520,000       563,000              903,000       902,000

Cost of revenues:
   Amortization of software development costs                135,000       134,000              270,000       267,000
   Cost of licenses                                           13,000        84,000               30,000       128,000
   Cost of services                                          460,000       197,000              774,000       272,000
                                                         ------------  ------------         ------------  ------------
          Total cost of revenues                             608,000       415,000            1,074,000       667,000
                                                         ------------  ------------         ------------  ------------
Gross (loss) profit                                          (88,000)      148,000             (171,000)      235,000

Operating expenses:
   Product development                                       384,000        75,000              776,000       283,000
   Selling and marketing                                     933,000       211,000            1,824,000       351,000
   General and administrative                                501,000       941,000            1,030,000     1,153,000
                                                         ------------  ------------         ------------  ------------
          Total operating expenses                         1,818,000     1,227,000            3,630,000     1,787,000
                                                         ------------  ------------         ------------  ------------
Loss from operations                                      (1,906,000)   (1,079,000)          (3,801,000)   (1,552,000)

Interest income (expense) - net                               29,000      (214,000)              94,000      (438,000)
                                                         ============  ============         ============  ============
Net loss                                                 $(1,877,000)  $(1,293,000)         $(3,707,000)  $(1,990,000)
                                                         ============  ============         ============  ============

Loss per share - basic and diluted                           $ (0.43)      $ (0.76)             $ (0.85)      $ (1.17)
                                                         ============  ============         ============  ============

Weighted average number of shares
     outstanding - basic and diluted                       4,372,375     1,706,037            4,371,957     1,699,120
                                                         ============  ============         ============  ============
</TABLE>

See notes to financial statements

                                      -4-
<PAGE>

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

<TABLE>
<CAPTION>

                                                   Common Stock       Preferred Stock
                                               -------------------   -----------------
                                                 Shares    Amount     Shares    Amount
                                               ---------  --------   -------    ------
<S>                                            <C>        <C>        <C>        <C>
Balance - December 31, 1997                    1,706,037  $ 17,000   500,000    $5,000
Common stock options issued to Chief
  Executive Officer
Amortization of compensatory stock options
Issuance of Series C preferred stock                                 562,836     6,000


Issuance of common stock, warrants and
  options for services rendered and payment
  of liability                                    51,256     1,000


Warrants issued in connection with debt
  financing
Repurchase and retirement of common shares       (62,080)

Conversion of warrants to stock at discount
  as part of debt re-financing                   596,741     6,000

Conversion of Series B Preferred Stock           310,399     3,000  (500,000)   (5,000)

Acquisition of CommHome                           64,167

Issuance of common stock for cash - initial
    public offering                            1,700,000    17,000

Net loss
                                               ---------  --------   -------    ------
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                               5,855

Net Loss
                                               ---------  --------   -------    ------
Balance - June 30, 1999 (Unaudited)            4,372,375  $ 44,000   562,836    $6,000
                                               =========  ========   =======    ======
</TABLE>


<PAGE>

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

<TABLE>
<CAPTION>
                                                                                Unearned
                                                  Additional                   Portion of
                                                   Paid-in     Accumulated    Compensatory
                                                   Capital       Deficit     Stock Options     Total
                                                 -----------  ------------     ----------  -----------
<S>                                              <C>          <C>              <C>         <C>
Balance - December 31, 1997                      $ 7,373,000  $ (7,470,000)                  $ (75,000)
Common stock options issued to Chief
  Executive Officer                                  938,000                     (938,000)           0
Amortization of compensatory stock options                                        555,000      555,000
Issuance of Series C preferred stock               2,949,000                                 2,955,000


Issuance of common stock, warrants and
  options for services rendered and payment
  of liability                                       499,000                                   500,000


Warrants issued in connection with debt
  financing                                          766,000                                   766,000
Repurchase and retirement of common shares            (1,000)                                   (1,000)

Conversion of warrants to stock at discount
  as part of debt re-financing                        (6,000)                                        0

Conversion of Series B Preferred Stock                 2,000                                         0

Acquisition of CommHome                              385,000                                   385,000

Issuance of common stock for cash - initial
    public offering                                7,914,000                                 7,931,000
                                                                                               0
Net loss                                                        (5,777,000)                 (5,777,000)
                                                 -----------  ------------     ----------  -----------
Balance - December 31, 1998                       20,819,000   (13,247,000)      (383,000)   7,239,000

Amortization of compensatory stock options                                        163,000      163,000
Issuance of common stock and options for
   services rendered                                  77,000                                    77,000

Net Loss                                                        (3,707,000)                 (3,707,000)
                                                 -----------  ------------     ----------  -----------
Balance - June 30, 1999 (Unaudited)              $20,896,000  $(16,954,000)    $ (220,000) $ 3,772,000
                                                 ===========  ============     ==========  ===========
</TABLE>

See notes to financial statements

                                      -5-
<PAGE>

                       NETWORK-1 SECURITY SOLUTIONS, INC.
                STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED

<TABLE>
<CAPTION>
                                                                                        June 30,
                                                                          -----------------------------------
                                                                              1999                   1998
                                                                           (Unaudited)            (Unaudited)
                                                                          ------------           ------------
<S>                                                                       <C>                    <C>
Cash flows from operating activities:
Net loss                                                                  $ (3,707,000)          $ (1,990,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
   Amortization of debt discount                                                                      364,000
   Issuance of common stock, options and
      warrants for services rendered                                           240,000                583,000
   Provision for doubtful accounts                                               9,000                 18,000
   Depreciation and amortization                                               367,000                346,000
Changes in:
   Accounts receivable                                                        (252,000)              (192,000)
   Prepaid expenses and other current assets                                  (115,000)                (5,000)
   Accounts payable, accrued expenses and
      other current liabilities                                                351,000                 (1,000)
   Deferred revenue                                                            (25,000)                29,000
                                                                          ------------           ------------
Net cash used in operating activities                                       (3,132,000)              (848,000)
                                                                          ------------           ------------
Cash flows from investing activities:
   Acquisitions of equipment and fixtures                                     (379,000)                (3,000)
   Capitalized software costs                                                 (200,000)               (50,000)
   Security deposit                                                            (45,000)                (5,000)
                                                                          ------------           ------------
Net cash used in investing activities                                         (624,000)               (58,000)
                                                                          ------------           ------------
Cash flows from financing activities:
   Proceeds from issuance of notes payable and
      warrants                                                                                      1,750,000
   Repayment of capital lease obligations                                                              (8,000)
   Purchase of Treasury Shares                                                                         (1,000)
   Deferred Offering Costs                                                                           (261,000)
                                                                          ------------           ------------
Net cash provided by financing activities                                            0              1,480,000
                                                                          ------------           ------------
Net increase (decrease) in cash and cash equivalents                        (3,756,000)               574,000
Cash and cash equivalents - beginning of period                              6,423,000                 60,000
                                                                          ------------           ------------
Cash and cash equivalents - end of period                                 $  2,667,000           $    634,000
                                                                          ============           ============
Supplemental disclosures of cash flow information:
Cash paid during the period for Interest                                  $          -           $      1,000
                                                                          ============           ============
</TABLE>

See notes to financial statements

                                      -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 10-KSB for the year ended December 31, 1998.
         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 six months ended June 30,
         1999 presented herein are not necessarily indicative of the results of
         operations that may be expected for the year ending December 31, 1999.

                  c. Basic loss per share is calculated by dividing 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. As all potential common shares are
         anti-dilutive, 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 FACTORS, RISKS AND UNCERTAINTIES,
         INCLUDING BUT NOT LIMITED TO RISKS ASSOCIATED WITH THE COMPANY'S FUTURE
         GROWTH AND OPERATING RESULTS, THE UNCERTAINTY OF MARKET ACCEPTANCE OF
         THE COMPANY'S PRODUCTS, TECHNOLOGICAL CHANGE, COMPETITIVE FACTORS AND
         GENERAL ECONOMIC CONDITIONS.

         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 also offers to
         its customers a full range of consulting services in network security,
         network design and support. From inception (July 1990) through December
         31, 1994, the Company was primarily engaged in providing consulting and
         training services. In 1995, the Company began to shift its focus from
         consulting and training to the development and marketing of network
         security software products. The Company introduced its first network
         software product (Firewall/Plus) in June 1995. In January 1999, the
         Company introduced its CyberwallPLUS(TM) family of network security
         products. Accordingly, the Company has a limited relevant operating
         history as a software developer 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 operation and expansion of a new business 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. There can be no assurance that the
         Company can 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
         June 30, 1999, had an accumulated deficit of $ 16,954,000. In addition,
         since June 30, 1999, the Company has continued to incur significant
         losses. Inasmuch as the Company has increased its level of activities
         following the consummation of its initial public offering in November
         1998 and will be required to make significant expenditures in
         connection with its sales and marketing and continuing research and
         product development efforts, the Company anticipates that losses will
         continue until such time, if ever, as the Company is able to attain
         sales levels sufficient to support its operations. There can be no
         assurance that the Company will ever achieve profitable operations.

                                      -8-

<PAGE>

                  During the period May 1998 through November 1998, the Company
         first employed certain members of senior management, including Avi A.
         Fogel, President and Chief Executive Officer, Robert P. Olsen, Vice
         President of Marketing, Murray P. Fish, Chief Financial Officer and
         Secretary, Joseph A. Donohue, Vice President of Engineering, and Lance
         Westbrook, Vice President of Sales.

                  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(TM) family of software products.
         While the Company believes that its CyberwallPLUS(TM) family of
         software products offer advantages over competing products for network
         security, license revenue from network security software products since
         their introduction (June 1995) through June 30, 1999 has only been
         $2,775,000, including a non-refundable pre-paid royalty of $500,000 in
         1997. In addition, during the three and six month periods ended June
         30, 1999 and the year ended December 31,1998 license revenues from
         software products decreased as compared to the three and six month
         periods ended June 30, 1998 and the year ended December 31,1997,
         respectively. Since its introduction in March 1999, license revenue
         from CyberwallPLUS(TM) has been only $54,000. Service revenues from
         product maintenance were $63,000 for the six months ended June 30,
         1999.

                  There can be no assurance that CyberwallPLUS(TM) will gain
         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(TM) 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(TM) 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. The Company has used a portion of the proceeds from its
         public offering to significantly increase its product development
         expenditures.

                  During the three month period ended June 30, 1999 the Company
         completed several strategic alliances:

                  o   A co-marketing agreement with Entrust(R) Technologies,
                      that will use Network-1's CyberwallPLUS technology to
                      enhance the security of the Entrust/ PKI(TM) Server
                      products running on Windows NT;

                  o   A partnership with EnerNet Associates, Inc. to provide
                      secure networking solutions for the power industry; and

                  o   A strategic relationship with Microsoft through
                      Microsoft's Security Partners Program to enhance the
                      security of Windows NT.

                  The Company also continued to expand its Professional Services
         team to meet its customers needs. Professional services revenues
         increased 52% for the quarter ended June 30, 1999 as compared to the
         quarter ended March 31, 1999 and increased 61% for the six months ended
         June 30, 1999 as compared to the six months ended June 30, 1998.


                                      -9-
<PAGE>

         RESULTS OF OPERATIONS

         SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30,
         1998

                  Revenues increased by $1,000, from $902,000 for the six months
         ended June 30, 1998 to $903,000 for the six months ended June 30, 1999,
         primarily as a result of an increase in consulting revenues during the
         six months ended June 30, 1999 which were offset by lower product
         revenues.

                  License revenues decreased by $299,000 or 73%, from $412,000
         for the six months ended June 30, 1998 to $113,000 for the six months
         ended June 30, 1999, primarily due to lower product licensing revenue
         from FireWallPlus which was replaced by its successor product line,
         CyberwallPLUS which was announced in January 1999 and commenced
         shipping in March 1999.

                  Service revenues increased by $300,000 or 61%, from $490,000
         for the six months ended June 30, 1998 to $790,000 for the six months
         ended June 30, 1999. Service revenues from consulting increased by
         $303,000 or 71%, from $424,000 for the six months ended June 30, 1998
         to $727,000 for the six months ended June 30, 1999. The increase in
         service revenues was attributable to three large consulting projects
         serviced during the six months ended June 30, 1999. Service revenues
         from product maintenance decreased by $3,000 or 5%, from $66,000 for
         the six months ended June 30, 1998 to $63,000 for the six months ended
         June 30, 1999.

                  The Company's revenues from customers in the United States
         represented 98% and 99% of the Company's revenues during the six months
         ended June 30, 1998 and 1999, respectively.

                  Cost of revenues consists of cost of licenses, amortization of
         software development costs and cost of services. Cost of licenses
         consist of software media (disks), documentation, product packaging,
         production costs, product royalties and the cost of hardware associated
         with sales of FireWall/Plus Premier Version. Cost of licenses decreased
         by $98,000 or 77%, from $128,000 for the six months ended June 30, 1998
         to $30,000 for the six months ended June 30, 1999, representing 31% and
         27% of license revenues, respectively. The decrease in cost of licenses
         in dollar amount was due to the decrease in license revenue and a
         decrease in royalties due on third party product sales. 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.

                  Amortization of software development costs increased by $3,000
         from $267,000 for the six months ended June 30, 1998 to $270,000 for
         the six months ended June 30, 1999, representing 65% and 239% of
         license revenues, respectively.

                  Cost of services consist of salaries, benefits and overhead
         associated with consulting services and maintenance. Cost of services
         increased by $502,000 or 185%, from $272,000 for the six months ended
         June 30, 1998 to $774,000 for the six months ended June 30, 1999,
         representing 56% and 98% of service revenues, respectively. The
         increase in cost of services in dollar amount resulted primarily from
         hiring and travelling costs related to increases in employees and
         consulting time expended which was not billable to the customer. Cost
         of services as a percentage of license revenues may fluctuate from
         period to period due to changes in consultant headcount, costs relating
         to hiring new consultants or an increase or decrease in number of
         projects being worked.

                  Gross profit (loss) decreased from $235,000 for the six months
         ended June 30, 1998 to ($171,000) for the six months ended June 30,
         1999, representing 26% and (19%) of revenues,

                                      -10-
<PAGE>

         respectively. The decrease in gross profit was due to decreased license
         revenues and the increase in cost of services as a result of increased
         hiring costs.

                  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 and third-party development
         contracts. Product development expenses increased $493,000 or 174%,
         from $283,000 for the six months ended June 30, 1998 to $776,000 for
         the six months ended June 30, 1999, representing 31% and 86% of
         revenues, respectively. Total product developments costs, including
         capitalized costs of $50,000 and $200,000, were $333,000 and $976,000
         for the six months ended June 30, 1998 and June 30, 1999, respectively.
         The increase in total product development costs was due to the
         salaries, related employment costs and operational costs of
         establishing the new development team in Waltham, MA.

                  Sales 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 $1,473,000 or 420%, from $351,000 for the six months ended
         June 30, 1998 to $1,824,000 for the six months ended June 30, 1999,
         representing 39% and 202% of revenues, respectively. The increase in
         selling and marketing expenses was due primarily to available funding
         for marketing as a result of the Company's completion of its initial
         public offering and the release of its new product line, CyberwallPLUS.

                  General and administrative expenses include employee costs,
         including salary, benefits, bonuses, 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 $123,000 or 11%, from
         $1,153,000 for the six months ended June 30, 1998 to $1,030,000 for the
         six months ended June 30, 1999, representing 128% and 114% of revenues,
         respectively. The decrease in general and administrative expenses was
         due primarily to decreases in non-cash compensation for services of
         $343,000 which was offset by increased salaries and expenses related to
         the hiring of the executive officers of the Company in May 1998,
         increased professional fees and recruiting fees, telephone and the
         costs associated with moving and setting up the new corporate
         headquarters.

                  Interest expense was $438,000 for the six months ended June
         30, 1998 and the Company had interest income of $94,000 for the six
         months ended June 30, 1999. The decrease in interest expense and the
         increase in interest income was due to the conversion of the majority
         of the Company's debt to equity concurrent with the consumation of the
         Company's initial public offering and the utilization of a portion of
         the proceeds of the offering to pay the remaining debt.

                  No provision for or benefit from federal, state or foreign
         income taxes was recorded for the six months ended June 30, 1998 or the
         six months ended June 30, 1999 because the Company incurred net
         operating losses during each period and fully reserved its deferred tax
         assets as their future realization could not be determined.

                  As a result of the foregoing, the net loss increased by
         $1,717,000 or 86%, from $1,990,000 for the six months ended June 30,
         1998 to $3,707,000 for the six months ended June 30, 1999.

                                      -11-

<PAGE>

         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 June 30, 1999, the Company had $2,667,000
         of cash and cash equivalents and a working capital of $2,138,000. The
         Company has financed its operations primarily through net proceeds from
         the consummation of its initial public offering in November 1998, and
         prior thereto by private sales of equity and debt securities. Net cash
         used in operating activities was $848,000 and $3,132,000 during the six
         months ended June 30, 1998 and 1999, respectively. Net cash used in
         operating activities for the six months ended June 30, 1998 was
         primarily attributable to a net loss of $1,990,000 and an increase in
         accounts receivable of $192,000 which was partially offset by
         amortization of debt discount of $364,000, issuance of Common Stock and
         warrants for services rendered of $583,000 and depreciation and
         amortization of $346,000. Net cash used in operating activities for the
         six months ended June 30, 1999 was primarily attributable to a net loss
         of $3,707,000 and an increase in accounts receivable of $252,000 which
         was partially offset by increases in accounts payable, accrued expenses
         and other current liabilities of $351,000, issuance of Common Stock and
         warrants for services rendered of $240,000 and depreciation and
         amortization of $367,000.

                  The Company's operating activities during the six months ended
         June 30, 1998 were financed primarily with $1,750,000 of proceeds from
         the issuance of $1,750,000 principal amount of notes and warrants to
         purchase 325,919 shares of Common Stock. The Company's operating
         activities for the six months ended June 30, 1999 were primarily
         financed with the proceeds from the initial public offering consummated
         in November 1998. 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 relating to the implementation of its business plan
         (including the timetable of, costs and expenses associated with, and
         success of, its marketing efforts), that the net proceeds of its public
         offering, together with projected revenues from operations, will be
         sufficient to satisfy the Company's operations and capital requirements
         through November 1999. There can be no assurance, however, that such
         funds will not be expended prior thereto due to unanticipated changes
         in economic conditions or other unforeseen circumstances. 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) or projected revenues otherwise prove to be insufficient to
         fund the implementation of the Company's business plan or working
         capital requirements, the Company could be in need of additional
         financing sooner than currently anticipated. The Company is currently
         seeking additional financing but the Company has no current commitment
         with respect to any additional financing. Consequently, there can be no
         assurance that any additional financing will be available to the
         Company when needed, on commercially reasonable terms or at all. Any
         inability to obtain additional financing when needed would 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.

                  In June and July 1999, the Company took certain steps to
         reorganize its operations in order to reduce expenses. Such
         reorganization included the closing of its Texas office and
         consolidation of its operations in Massachusetts, closing of certain
         sales offices and the reduction of the number of employees from 46 to
         34 or a 26 percent reduction.

                                      -12-
<PAGE>

         Year 2000 Issue

                  The Company has assessed the potential software issues
         associated with the Year 2000 and believes its software products are
         Year 2000 compliant and, therefore, does not expect to incur material
         costs related thereto. With regard to internal computing resources
         utilized in its operations, the Company does not expect to incur
         material costs to make such resources year 2000 compliant.

         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. In
         addition, the Company's consulting revenues tend to fluctuate as
         projects, which may continue over several quarters, are undertaken or
         completed. 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.



                                      -13-
<PAGE>


         PART II. OTHER INFORMATION

         Item 1.  LEGAL PROCEEDINGS.

                  None


         Item 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS.

                  Use of Proceeds.

                  On November 12, 1998, the Company's registration statement on
         Form SB-2, as amended (file number 333-59617), relating to its initial
         public offering (the "Offering") was declared effective by the
         Securities and Exchange Commission. Whale Securities Co., L.P. acted as
         the underwriter in connection with the Offering which was consummated
         on November 17, 1998. In connection with the Offering, the Company
         registered, issued and sold 1,700,000 shares of Common Stock (excluding
         255,000 shares of Common Stock subject to the underwriter's
         over-allotment option which was not exercised), at an initial public
         offering price of $6.00 per share resulting in net proceeds of
         $7,931,000, after payment of underwriting discounts and commissions and
         offering expenses of $2,269,000. Additionally, the Company registered
         170,000 shares of Common Stock underlying warrants to purchase Common
         Stock sold by the Company to the underwriter for $100. The warrants are
         exercisable for a four-year period commencing on November 12, 1999 at a
         price of $9.30 per share. Since November 17, 1998 (the date of
         consummation of the Offering) through June 30, 1999, the Company used
         the net proceeds of the Offering as follows: $2,247,000 for sales and
         marketing, $1,160,000 for software development, $546,000 for payment of
         past due trade payables, $585,000 for repayment of outstanding
         indebtedness (including $132,000 for repayment of indebtedness to
         officers, directors and 10% or more stockholders and affiliates)
         $200,000 for purchase of office, telecommunications and computer
         equipment, $158,000 for expenses related to establishing new executive
         offices and $1,692,000 for working capital and general corporate
         purposes.

         Item 3.  DEFAULTS UPON SENIOR SECURITIES.

                  None.

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

                  On June 25, 1999, the Company's annual meeting of stockholders
         was held. At the annual meeting, the stockholders approved the
         following matters:

                  1. The following individuals listed below were elected
         directors of the Company to serve until the next annual meeting of
         stockholders and the election and qualification of their successors.
         The number of votes cast for or withheld were as follows:

                  Nominee                        For                  Withheld
                  -------                        ---                  --------
                  Avi A. Fogel               4,322,173                 20,470
                  William Hancock            4,336,643                  6,000
                  Corey M. Horowitz          4,336,643                  6,000
                  Barry Rubenstein           4,336,643                  6,000
                  Irwin Lieber               4,336,643                  6,000
                  Marcus J. Ranum            4,336,643                  6,000


                                      -14-
<PAGE>


                  2. An amendment to the Company's 1996 Stock Option Plan to
         increase the number of shares available for issuance thereunder by
         750,000 shares to an aggregate of 1,800,000 shares. 3,205,871 shares
         were voted in favor of the amendment, 44,220 shares were voted against
         the amendment, and 4,454 shares abstained from voting.


         Item 5.  OTHER INFORMATION.

                  None.

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

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

                Exhibit Number               Description of Exhibit
                ---------------------        -------------------------------
                    10.28                    Employment Agreement, dated May 15,
                                             1999, between the Company and
                                             Robert Russo.

                    27                       Financial data schedule for six
                                             month period ended June 30, 1999.

                  No reports on Form-8-K were filed during the six months ended
         June 30, 1999.

                                      -15-
<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)

                           Date: August 12, 1999



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

                           Date: August 12, 1999


                                      -16-
<PAGE>



         EXHIBIT INDEX



                Exhibit Number               Description of Exhibit
                ---------------------        -------------------------------
                    10.28                    Employment Agreement, dated May 15,
                                             1999, between the Company and
                                             Robert Russo.

                    27                       Financial data schedule for six
                                             month period ended June 30, 1999.





                                      -17-