================================================================================
                     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, 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 August 16, 2001 there were 6,467,547 shares of Common Stock, $.01 par
value per share, and 231,054 shares of Series D Convertible Preferred Stock,
$.01 par value per share, outstanding.

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

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

                                      -1-
<PAGE>

                       NETWORK-1 SECURITY SOLUTIONS, INC.

                                      INDEX

                                                                        Page No.
PART I.  FINANCIAL INFORMATION

Item 1.  FINANCIAL STATEMENTS

         Balance Sheets as of  June 30, 2001 (unaudited) and
         December 31, 2000...................................................3

         Statements of Operations for the three and six months
         ended June 30, 2001 and 2000 (unaudited)............................4

         Statements of Stockholders' Equity for the six months
         ended June 30, 2001 (unaudited) and for the years ended
         December 31, 2000 and 1999..........................................5

         Statements of Cash Flows for the six months ended
         June 30, 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


                                      -2-
<PAGE>

                       NETWORK-1 SECURITY SOLUTIONS, INC.
                                 BALANCE SHEETS

<TABLE><CAPTION>
                                                                                June 30, 2001      December 31, 2000
                                                                                 ------------         ------------
                                                                                 (Unaudited)
<S>                                                                              <C>                  <C>
ASSETS
Current assets:
   Cash and cash equivalents                                                     $  2,535,000         $  4,425,000
   Accounts receivable - net of allowance for doubtful accounts
      of $130,000 and $80,000 respectively                                            250,000              227,000
   Prepaid expenses and other current assets                                           83,000              153,000
   Due from purchaser of discontinued operations                                            0               59,000
                                                                                 ------------         ------------
      Total current assets                                                          2,868,000            4,864,000

Equipment and fixtures - net                                                          390,000              437,000
Capitalized software costs - net                                                      735,000              625,000
Security deposits                                                                      89,000               81,000
                                                                                 ------------         ------------
                                                                                 $  4,082,000         $  6,007,000
                                                                                 ============         ============
LIABILITIES
Current liabilities:
   Notes payable - related parties                                               $     12,000         $    326,000
   Notes payable - others                                                             288,000              343,000
   Accounts payable                                                                   428,000              224,000
   Accrued expenses and other current liabilities                                     741,000              696,000
   Interest payable - related parties                                                   1,000               27,000
   Interest payable - others                                                           35,000               28,000
   Deferred revenue                                                                   154,000              181,000
                                                                                 ------------         ------------
      Total current liabilities                                                     1,659,000            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 -231,054 and 115,220 shares issued and outstanding, respectively               2,000                1,000
Common stock - $.01 par value; authorized 25,000,000 shares;
    6,467,547 and 6,448,363 shares issued and outstanding, respectively                65,000               65,000
Additional paid-in capital                                                         31,756,000           30,705,000
Accumulated deficit                                                               (29,215,000)         (26,482,000)
Unearned portion of compensatory stock options                                       (185,000)            (107,000)
                                                                                 ------------         ------------
                                                                                    2,423,000            4,182,000
                                                                                 ------------         ------------
                                                                                 $  4,082,000         $  6,007,000
                                                                                 ============         ============
</TABLE>
                       SEE NOTES TO FINANCIAL STATEMENTS.

                                       -3-
<PAGE>

                       NETWORK-1 SECURITY SOLUTIONS, INC.
                            STATEMENTS OF OPERATIONS

<TABLE><CAPTION>
                                                      Three Months Ended June 30,       Six Months Ended June 30,
                                                     ----------------------------      ----------------------------
                                                        2001              2000            2001             2000
                                                     -----------      -----------      -----------      -----------
                                                     (Unaudited)      (Unaudited)      (Unaudited)      (Unaudited)
<S>                                                  <C>              <C>              <C>              <C>
Revenues:
   Licenses                                          $   251,000      $   317,000      $   647,000      $   474,000
   Services                                               57,000           35,000          118,000           70,000
                                                     -----------      -----------      -----------      -----------
          Total revenues                                 308,000          352,000          765,000          544,000

Cost of revenues:
   Amortization of software development costs             63,000           63,000          125,000          124,000
   Cost of licenses                                        8,000           23,000           22,000           29,000
   Cost of services                                       57,000           38,000          119,000           66,000
                                                     -----------      -----------      -----------      -----------
                                                         128,000          124,000          266,000          219,000
                                                     -----------      -----------      -----------      -----------
Gross profit                                             180,000          228,000          499,000          325,000
                                                     -----------      -----------      -----------      -----------
Operating expenses:
   Product development                                   673,000          325,000        1,285,000          618,000
   Selling and marketing                                 816,000          689,000        1,712,000        1,177,000
   General and administrative                            516,000          456,000        1,010,000          973,000
                                                     -----------      -----------      -----------      -----------
                                                       2,005,000        1,470,000        4,007,000        2,768,000
                                                     -----------      -----------      -----------      -----------
Loss from continuing operations before interest       (1,825,000)      (1,242,000)      (3,508,000)      (2,443,000)

Interest income (expense) - net                           85,000       (1,435,000)         126,000       (1,402,000)
                                                     -----------      -----------      -----------      -----------

Loss from continuing operations                       (1,740,000)      (2,677,000)      (3,382,000)      (3,845,000)
Income from discontinued operations                       19,000           59,000          649,000        2,087,000
                                                     -----------      -----------      -----------      -----------
Net loss                                             $(1,721,000)     $(2,618,000)     $(2,733,000)     $(1,758,000)
                                                     ===========      ===========      ===========      ===========

Per common share information - basic and diluted
    Loss from continuing operations                  $     (0.27)     $     (0.44)           (0.52)     $     (0.67)
    Income from discontinued operations                     0.00             0.01             0.10             0.36
                                                     -----------      -----------      -----------      -----------
    Net loss                                         $     (0.27)     $     (0.43)     $     (0.42)     $     (0.31)
                                                     ===========      ===========      ===========      ===========
Weighted average number of common
     shares outstanding                                6,462,852        6,124,112        6,459,105        5,722,257
                                                     ===========      ===========      ===========      ===========
</TABLE>
                       SEE NOTES TO FINANCIAL STATEMENTS.

                                       -4-
<PAGE>

                       NETWORK-1 SECURITY SOLUTIONS, INC.
                       STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE><CAPTION>
                                                         Common Stock                 Preferred Stock           Additional
                                                  ---------------------------   ----------------------------      Paid-in
                                                     Shares         Amount         Shares          Amount         Capital
                                                  ------------   ------------   ------------    ------------    ------------
<S>                                                  <C>         <C>                 <C>        <C>             <C>
Balance - December 31, 1998                          4,366,520   $     44,000        562,836    $      6,000    $ 20,819,000

Amortization of compensatory stock options                --             --             --              --              --
Issuance of common stock and options for
   services rendered and payment of liability            5,855           --             --              --           161,000
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       1,461,000
Beneficial conversion feature of Series D
   preferred stock and related imputed dividend           --             --             --              --         1,500,000

Net loss                                                  --             --             --              --              --
                                                  ------------   ------------   ------------    ------------    ------------

Balance - December 31, 1999                          4,935,211         50,000        491,803           5,000      23,941,000

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           --              --         2,255,000
Exercise of Warrants                                   384,091          4,000           --              --         1,207,000
Conversion of Notes and Accrued Interest               282,427          2,000           --              --           859,000
Compensation charge for issuance of non-
   qualified stock options                                --             --             --              --           525,000
Compensation charge for accelerated
   vesting of stock options                               --             --             --              --           269,000
Beneficial conversion feature of Series D
   preferred stock underlying notes payable
   and related debt discount                              --             --             --              --         1,500,000
Issuance of warrants and options for services             --             --             --              --            68,000
Unearned portion of compensatory warrants                 --             --             --              --            81,000

Net loss                                                  --             --             --              --              --
                                                  ------------   ------------   ------------    ------------    ------------
Balance - December 31, 2000 (Audited)                6,448,363   $     65,000        115,220    $      1,000    $ 30,705,000

Amortization of compensatory stock options                --             --             --              --              --
Conversion of Series D preferred stock                   8,197           --           (8,197)           --              --
Conversion of Notes and Accrued Interest                10,897           --          124,031           1,000         411,000
Amortization of compensatory warrants                     --             --             --              --              --
Compensation charge for issuance of non-
   qualified stock options                                --             --             --              --           230,000
Compensation charge for issuance of
   warrants                                               --             --             --              --           225,000
Unearned portion of compensatory warrants                 --             --             --              --           185,000

Net loss                                                  --             --             --              --              --
                                                  ------------   ------------    ------------    ------------   ------------
Balance - June 30, 2001 (Unaudited)                  6,467,457   $     65,000        231,054    $      2,000    $ 31,756,000
                                                  ============   ============   ============    ============    ============
</TABLE>
<PAGE>

                       NETWORK-1 SECURITY SOLUTIONS, INC.
                  STATEMENTS OF STOCKHOLDERS' EQUITY(continued)
<TABLE><CAPTION>
                                                                    Unearned
                                                                   Portion of
                                                                  Compensatory
                                                  Accumulated    Stock Options
                                                    Deficit       and Warrants       Total
                                                  ------------    ------------    ------------
<S>                                               <C>             <C>             <C>
Balance - December 31, 1998                       $(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
Conversion of Series C preferred stock                    --              --                 0
Issuance of Series D preferred stock and
   warrants, net of expense of $34,000                    --              --         1,466,000
Beneficial conversion feature of Series D
   preferred stock and related imputed dividend     (1,500,000)           --                 0

Net loss                                            (6,946,000)           --        (6,946,000)
                                                  ------------    ------------    ------------

Balance - December 31, 1999                        (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                                          --              --         2,260,000
Exercise of Warrants                                      --              --         1,211,000
Conversion of Notes and Accrued Interest                  --              --           861,000
Compensation charge for issuance of non-
   qualified stock options                                --              --           525,000
Compensation charge for accelerated
   vesting of stock options                               --              --           269,000
Beneficial conversion feature of Series D
   preferred stock underlying notes payable
   and related debt discount                              --              --         1,500,000
Issuance of warrants and options for services             --              --            68,000
Unearned portion of compensatory warrants                 --           (81,000)           --

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

Amortization of compensatory stock options                --            26,000          26,000
Conversion of Series D preferred stock                    --              --              --
Conversion of Notes and Accrued Interest                  --              --           412,000
Amortization of compensatory warrants                     --            81,000          81,000
Compensation charge for issuance of non-
   qualified stock options                                --              --           230,000
Compensation charge for issuance of
   warrants                                               --              --           225,000
Unearned portion of compensatory warrants                 --          (185,000)           --

Net loss                                            (2,733,000)           --        (2,733,000)
                                                  ------------    ------------    ------------
Balance - June 30, 2001 (Unaudited)               $(29,215,000)   $   (185,000)   $  2,423,000
                                                  ============    ============    ============
</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,
                                                                              -------------------------------
                                                                                  2001                2000
                                                                              -----------         -----------
                                                                              (Unaudited)         (Unaudited)
<S>                                                                           <C>                 <C>
Cash flows from operating activities:
Loss from continuing operations                                               $(3,382,000)        $(3,845,000)
Adjustments to reconcile net loss from continuing operations
to net cash used in operating activities:
   Interest charge from Preferred D sale                                                0           1,500,000
   Issuance of common stock options and warrants for
      services rendered                                                           225,000              73,000
   Provision for doubtful accounts                                                 50,000              20,000
   Amortization of compensatory stock options and warrants                        107,000                   0
   Depreciation and amortization                                                  194,000             186,000
Changes in:
   Accounts receivable                                                            (73,000)           (279,000)
   Prepaid expenses and other current assets                                       70,000             (14,000)
   Accounts payable, accrued expenses and
      other current liabilities                                                   249,000            (120,000)
   Interest Payable                                                                24,000              51,000
   Deferred revenue                                                               (27,000)             62,000
                                                                              -----------         -----------

Net cash used in continuing operations                                         (2,563,000)         (2,366,000)
Cash provided by discontinued operations                                                0              81,000
                                                                              -----------         -----------
    Net cash used in operating activities                                      (2,563,000)         (2,285,000)
                                                                              -----------         -----------
Cash flows from investing activities:
   Acquisitions of equipment and fixtures                                         (22,000)            (87,000)
   Capitalized software costs                                                    (235,000)           (200,000)
   Security deposit                                                                (8,000)                  0
   Loan to officer                                                                      0              88,000
   Net proceeds from sale of professional services group                          938,000           2,700,000
                                                                              -----------         -----------
      Net cash provided by investing activities                                   673,000           2,501,000
                                                                              -----------         -----------

Cash flows provided by financing activities:
   Proceeds from exercise of options and warrants                                       0           3,100,000
                                                                              -----------         -----------

Net (decrease) increase in cash and cash equivalents                           (1,890,000)          3,316,000
Cash and cash equivalents - beginning of period                                 4,425,000           3,023,000
                                                                              -----------         -----------
Cash and cash equivalents - end of period                                     $ 2,535,000         $ 6,339,000
                                                                              ===========         ===========
Supplemental disclosures of noncash investing and financing activity:
   Conversion of notes payable and accrued interest into 10,897 shares
      of common stock and 124,031 shares of preferred stock in 2001
      and 238,660 shares of common stock in 2000                              $   412,000         $   726,000
                                                                              ===========         ===========
   Compensation charge for non qualified stock options related
      to employees of discontinued operations                                 $   230,000         $   794,000
                                                                              ===========         ===========
</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 Form 10-KSB 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 six months ended June 30, 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 due to the loss from continuing operations,
           they are not included in the calculation of diluted loss per share.

           d. On June 29, 2001 the Company entered into a six month consulting
           arrangement with CMH Capital Management Corp., whose sole shareholder
           is Corey M. Horowitz, the Company's Chairman of the Board of
           Directors, to provide strategic and financing consulting to the
           Company. The agreement is for $17,500 per month plus expenses. In
           addition, 300,000 10 year warrants were granted with an exercise
           price of $.70 which was the fair market price of the Company's common
           stock at date of grant. The warrants were valued utilizing the Black
           Scholes pricing model resulting in an estimated fair value of
           $185,000 which will be amortized and charged to expense over the six
           month period. No amortization expense of the warrants was charged
           during the period due to immateriality.

                                      -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 June 30,
2001, had an accumulated deficit of $ 29,215,000. In addition, since June 30,
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. While the Company
believes that its family of software products offer advantages over competing
products for

                                      -8-
<PAGE>

network security, license revenue from network security software products since
the introduction of FireWall/Plus (June 1995), a predecessor product line,
through June 30, 2001 has only been $4,547,000, including a non-refundable
pre-paid royalty of $500,000 in 1997. From January 1999 through June 30, 2001,
license revenue from CYBERWALLPLUS has only been $1,815,000. 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

SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000

           Revenues increased by $221,000 or 41%, from $544,000 for the six
months ended June 30, 2000 to $765,000 for the six months ended June 30, 2001,
primarily as a result of an increase in license and service revenues during the
six months ended June 30, 2001. License revenues increased by $173,000 or 37%,
from $474,000 for the six months ended June 30, 2000 to $647,000 for the six
months ended June 30, 2001, primarily due to the increased demand in security
products. Revenue for the six months ended June 30, 2001 included a large
CyberwallPLUS server license issued to a major government sub-contractor
totaling $64,000. The Company recognized $118,000 in revenue from its
distributor in China whose contract has been cancelled due to non payment of
additional amounts due. In addition, management believes that customers are
becoming more aware of the potential impact of internal server security
breaches, and that companies are allocating increasing resources to safeguard
their assets. Service revenues increased by $48,000 or 69%, from $70,000 for the
six months ended June 30, 2000 to $118,000 for the six months ended June 30,
2001 primarily due to increased support revenue. The Company's revenues from
customers in the United States represented 93% of its revenues during the six
months ended June 30, 2000 and 77% of its revenues during the six months ended
June 30, 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 1%, from $124,000 for six months ended
June 30, 2000 to $125,000 for the six months ended June 30, 2001, representing
26% and 19% of license revenues, respectively.

           Cost of licenses consists of software media (disks), documentation,
product packaging, production costs and product royalties. Cost of licenses
decreased by $7,000 or 24%, from $29,000 for the six months ended June 30, 2000
to $22,000 for the six months ended June 30, 2001, each representing 6% and 3%
of license revenues, respectively. 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 $53,000 or 80%, from $66,000 for the six months ended June 30, 2000
to $119,000 for the six months ended June 30, 2001, representing 94% and 101% 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 $325,000 for the six months ended June 30, 2000
compared to a gross profit of $499,000 for the six months ended June 30, 2001,
representing 60% and 65% 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 $667,000 or 108%, from
$618,000 for six months ended June 30, 2000 to $1,285,000 for the six months
ended June 30, 2001, representing 114% and 168% of revenues, respectively. Total
product development costs, including capitalized costs of $200,000 for the six
months ended June 30, 2000 and $235,000 for the six months ended June 30, 2001,
were $818,000 and $1,520,000 for the six months ended June 30, 2000 and June 30,
2001, respectively. The increase in total product development costs was due
primarily to the use of outside programmer's services of $691,000 including non
cash compensation of $225,000 recognized for the issuance of warrants.

           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
$535,000 or 45%, from $1,177,000 for the six months ended June 30, 2000 to
$1,712,000 for the six months ended June 30, 2001, representing 216% and 224% of
revenues, respectively. The increase in selling and marketing expenses was due
primarily to an increase of $419,000 in sales personnel and costs related to the
hiring of a direct sales force.

           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 increased by
$37,000, from $973,000 for the six months ended June 30, 2000 to $1,010,000 for
the six months ended June 30, 2001, representing 179% and 132% of revenues,
respectively. Increases in non-cash charges of $81,000 relating to the
amortization of the value of warrants granted to outside consultants in November
2000, which was offset by decreases in non-cash charges of $47,000 relating to
the amortization of the value of stock options granted to the Company's then
Chief Executive Officer in May 1998.

           Net interest expense was $1,402,000 for the six months ended June 30,
2000 as compared to net interest income of $126,000 for the six months ended
June 30, 2001, respectively. The Company completed a Series D Preferred Stock,
warrant and promissory note financing of $3,000,000 on December 22, 1999 and
recorded interest expense of $1,500,000 related to the beneficial conversion
feature of the promissory notes for the six months ended June 30, 2000.

           Income from discontinued operations decreased by $1,438,000 or 69%,
from $2,087,000 for the six months ended June 30, 2000 to $649,000 for the six
months ended June 30, 2001. Income from discontinued operations for the six
months ended June 30, 2001 was due to the receipt of $1,000,000 for retention of
all the employees of the professional services group for a period of one year
and additional contingent purchase price consideration of $56,000 less the
$177,000 retention bonus plus taxes due the employees of the professional
services group and a non-cash charge of $230,000 relating to the vesting of
non-qualified options upon the employees completing a year of service. In
connection with such sale, the Company 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.

           No provision for or benefit from federal, state or foreign income
taxes was recorded for six months ended June 30, 2000 or June 30, 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 a net loss of
$1,758,000 for the six months ended June 30, 2000 compared with a net loss of
$2,733,000 for the six months ended June 30, 2001.

                                      -10-
<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, 2001, the Company had $2,535,000 of cash and cash
equivalents and working capital of $1,209,000. The Company has financed its
operations primarily through private sales of equity and debt securities and the
sale of its professional services division on February 10, 2000. Net cash used
in operating activities from continuing operations was $2,366,000 during the six
months ended June 30, 2000 and net cash used in operating activities from
continuing operations was $2,563,000 during the six months ended June 30, 2001.
Net cash used in operating activities from continuing operations for six months
ended June 30, 2001 was primarily attributable to the net loss from continuing
operations of $3,382,000, an increase in accounts receivable of $73,000, and a
decrease in deferred revenue of $27,000, which was partially offset by the
amortization and expense of compensatory stock options and warrants for services
rendered of $107,000, depreciation and amortization expense of $194,000, the
issuance of common stock and warrants for services rendered of $225,000, an
increase in accounts payable, accrued expenses and other current liabilities of
$249,000 and an increase in accrued interest payable of $24,000.

           Cash provided by investing activities was $673,000 resulting from
$938,000 net proceeds received in 2001 realted to the sale of the Company's
professional services group in February 2000, less capitalized software costs of
$235,000 and $30,000 of other investing expenditures. 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 of
approximately $2,535,000 as of June 30, 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 through to
December 31, 2001. In the second and third quarter of 2001, the Company
instituted certain measures to reduce its overhead and has decreased its
headcount by 20 employees representing an annual payroll savings of $1.6
million. 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.

Possible Delisting of the Company's Securities From Nasdaq

           The Company's common stock is listed on the Nasdaq SmallCap Market
under the symbol "NSSI". In order to continue to be listed on Nasdaq, however,
the Company must comply with certain maintenance standards (including, among
others, a minimum stock price of $1.00 and net tangible assets of a minimum
$2,000,000). On July 31, 2001, the Company was notified by Nasdaq that its
Common Stock failed to maintain a minimum bid price of $1.00 over the previous
30 trading days as required by The Nasdaq SmallCap Market Rules. In accordance
with such rules, the Company has until October 29, 2001, for its Common Stock to
trade at a closing bid price of at least $1.00 for 10 consecutive trading days
or its securities will be delisted from Nasdaq. In the event of a delisting, an
investor could find it more difficult to dispose of or to obtain accurate
quotations as to the market value of the Company's Common Stock.

                                      -12-
<PAGE>

PART II. OTHER INFORMATION

Item 1.  LEGAL PROCEEDINGS.

         None.

Item 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS.

         On April 12, 2001, the Company issued to Sage Alliance, Inc. (and 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. On July 2, 2001, the
         Company issued to Sage Alliance, Inc. (and or its consultants) five
         year warrants to purchase 178,627 shares of the Company's common stock
         at $2.00 per share. Such warrants were issued in consideration for
         programming services rendered. On July 11, 2001, the Company issued to
         CMH Capital Management Corp. 10 year warrants to purchase 300,000
         shares of the Company's common stock at $.70 per share. Such warrants
         were issued pursuant to a financial consulting agreement.

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:

             10.19   Employment Agreement, dated June 29, 2001, between the
                     Company and Murray P. Fish.

             10.20   Consulting Agreement, dated June 29, 2001, between the
                     Company and CMH Capital Management Corp.


           b). Reports of Form 8-K.

           On June 15, 2001 a report on Form 8-K was filed to announce the
resignation of the Company's CEO and President. No other reports on Form 8-K
were filed during the three (3) months ended June 30, 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/ Murray P. Fish
                         ----------------------------------
                         Murray P. Fish, Acting President and Chief Financial
                         Officer (Principal Executive Officer and Principal
                         Financial and Accounting Officer)







Date: August 20, 2001







                                      -14-
<PAGE>


EXHIBIT INDEX

           Exhibit Number              Description of Exhibit
           --------------              ----------------------

           10.19              Employment Agreement, dated June 29, 2001, between
                              the Company and Murray P. Fish.


           10.20              Consulting Agreement, dated June 29, 2001, between
                              the Company and CMH Capital  Management Corp.












                                      -15-