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


                     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, 2002

   [_]   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
 INCORPORATION OR ORGANIZATION)                             IDENTIFICATION NO.)



        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 1, 2002 there were 7,701,264 shares of Common Stock, $.01 par value
per share, 231,054 shares of Series D Convertible Preferred Stock, $.01 par
value per share, and 2,790,105 shares of Series E 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



                                                                        Page No.
PART I.  FINANCIAL INFORMATION                                          -------

Item 1.  CONDENSED FINANCIAL STATEMENTS

         Condensed Balance Sheets as of June 30, 2002
           (unaudited) and December 31, 2001................................ 3

         Condensed Statements of Operations for the three
           and six months ended June 30, 2002 and 2001 (unaudited).......... 4

         Condensed Statements of Cash Flows for the six
           months ended June 30, 2002 and 2001 (unaudited).................. 5

         Notes to Condensed Financial Statements............................ 6


Item 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.......... 7



PART II. OTHER INFORMATION

Item 1.  Legal Proceedings..................................................16

Item 2.  Changes in Securities and Use of Proceeds..........................16

Item 3.  Defaults Upon Senior Securities....................................16

Item 4.  Submission of Matters to a Vote of Security Holders................16

Item 5.  Other Information..................................................16

Item 6.  Exhibits and Reports on Form 8-K...................................16




SIGNATURES..................................................................17




                                       -2-
<PAGE>
                       NETWORK-1 SECURITY SOLUTIONS, INC.
                            CONDENSED BALANCE SHEETS

<TABLE><CAPTION>
                                                                                       JUNE 30,        DECEMBER 31,
                                                                                         2002              2001
                                                                                     ------------      ------------
                                                                                      (UNAUDITED)
<S>                                                                                  <C>               <C>
ASSETS
Current assets:
   Cash and cash equivalents                                                         $  4,156,000      $  7,121,000
   Accounts receivable - net                                                               71,000            62,000
   Prepaid expenses and other current assets                                               63,000           113,000
                                                                                     ------------      ------------
       Total current assets                                                             4,290,000         7,296,000

Equipment and fixtures                                                                    327,000           319,000
Capitalized software costs - net                                                          546,000           561,000
Security deposits                                                                          21,000             8,000
                                                                                     ------------      ------------
                                                                                     $  5,184,000      $  8,184,000
                                                                                     ============      ============

LIABILITIES
Current liabilities:
   Accounts payable                                                                  $    211,000      $    405,000
   Accrued expenses and other current liabilities                                         865,000           675,000
   Deferred revenue                                                                       258,000           245,000
                                                                                     ------------      ------------
       Total current liabilities                                                        1,334,000         1,325,000
                                                                                     ------------      ------------

Liability Settled with Equity Instrument                                                  416,000                 0
                                                                                     ------------      ------------
                                                                                        1,750,000         1,325,000
                                                                                     ------------      ------------


Commitments and contingencies

STOCKHOLDERS' EQUITY
Preferred stock - $.01 par value; authorized 10,000,000 shares;
   Series D -231,054 and 231,054 shares issued and outstanding, respectively                2,000             2,000
   Series E -2,790,105 and 3,191,037 shares issued and outstanding, respectively           28,000            32,000
Common stock - $.01 par value; authorized 50,000,000 shares;
    7,701,264 and 6,781,374 shares issued and outstanding, respectively                    77,000            68,000
Additional paid-in capital                                                             41,402,000        41,274,000
Accumulated deficit                                                                   (38,075,000)      (34,517,000)
                                                                                     ------------      ------------
                                                                                        3,434,000         6,859,000
                                                                                     ------------      ------------
                                                                                     $  5,184,000      $  8,184,000
                                                                                     ============      ============
</TABLE>




See notes to condensed financial statements

                                       -3-
<PAGE>
                       NETWORK-1 SECURITY SOLUTIONS, INC.
                       CONDENSED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)

<TABLE><CAPTION>
                                                           THREE MONTHS ENDED JUNE 30,         SIX MONTHS ENDED JUNE 30,
                                                         ------------------------------      ------------------------------
                                                             2002              2001              2002              2001
                                                         ------------      ------------      ------------      ------------
<S>                                                      <C>               <C>               <C>               <C>
Revenues:
   Licenses                                              $    191,000      $    251,000      $    259,000      $    647,000
   Services                                                    52,000            57,000           102,000           118,000
                                                         ------------      ------------      ------------      ------------
          Total revenues                                      243,000           308,000           361,000           765,000

Cost of revenues:
   Amortization of software development costs                 125,000            63,000           195,000           125,000
   Cost of licenses                                             7,000             8,000            10,000            22,000
   Cost of services                                            42,000            57,000            84,000           119,000
                                                         ------------      ------------      ------------      ------------
                                                              174,000           128,000           289,000           266,000

                                                         ------------      ------------      ------------      ------------
Gross profit                                                   69,000           180,000            72,000           499,000
                                                         ------------      ------------      ------------      ------------

Operating expenses:
   Product development                                        397,000           673,000           836,000         1,285,000
   Selling and marketing                                      730,000           816,000         1,349,000         1,712,000
   General and administrative                                 995,000           516,000         1,490,000         1,010,000
                                                         ------------      ------------      ------------      ------------
                                                            2,122,000         2,005,000         3,675,000         4,007,000

                                                         ------------      ------------      ------------      ------------
Loss from continuing operations before interest            (2,053,000)       (1,825,000)       (3,603,000)       (3,508,000)

Interest  income - net                                         19,000            85,000            45,000           126,000
                                                         ------------      ------------      ------------      ------------

Loss from continuing operations                            (2,034,000)       (1,740,000)     $ (3,558,000)     $ (3,382,000)
Income from discontinued operations                                --            19,000                --           649,000
                                                         ------------      ------------      ------------      ------------
Net loss                                                 $ (2,034,000)     $ (1,721,000)     $ (3,558,000)     $ (2,733,000)
                                                         ============      ============      ============      ============

Per common share information - basic and diluted
    Loss from continuing operations                      $      (0.26)     $      (0.27)     $      (0.48)     $      (0.52)
    Income from discontinued operations                            --              0.00                --              0.10
                                                         ------------      ------------      ------------      ------------
   Net loss                                              $      (0.26)     $      (0.27)     $      (0.48)     $      (0.42)
                                                         ============      ============      ============      ============
Weighted average number of common shares outstanding        7,683,900         6,462,852         7,398,221         6,459,105
                                                         ============      ============      ============      ============
</TABLE>




See notes to condensed financial statements

                                       -4-
<PAGE>
                       NETWORK-1 SECURITY SOLUTIONS, INC.
                       CONDENSED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)
<TABLE><CAPTION>
                                                                              SIX MONTHS ENDED JUNE 30,
                                                                           ------------------------------
                                                                               2002              2001
                                                                           ------------      ------------
<S>                                                                        <C>               <C>
Cash flows from operating activities:
Loss from continuing operations                                            $ (3,558,000)     $ (3,382,000)
Adjustments to reconcile net loss from continuing operations
to net cash used in operating activities:
   Issuance of common stock option and warrants for
      services rendered                                                         416,000           225,000
   Provision for doubtful accounts                                                5,000            50,000
   Amortization of compensatory stock options and warrants                           --           107,000
   Depreciation and amortization                                                304,000           194,000
Changes in:
   Accounts receivable                                                          (14,000)          (73,000)
   Prepaid expenses and other current assets                                     50,000            70,000
   Accounts payable, accrued expenses and other current
      liabilities                                                                (4,000)          249,000
   Interest Payable                                                                  --            24,000
   Deferred revenue                                                              13,000           (27,000)
                                                                           ------------      ------------

Net cash used in continuing operations                                       (2,788,000)       (2,563,000)
Cash provided by (used in) discontinued operations                                   --                --
                                                                           ------------      ------------
      Net cash used in operating activities                                  (2,788,000)       (2,563,000)
                                                                           ------------      ------------

Cash flows from investing activities:
   Acquisitions of equipment and fixtures                                      (117,000)          (22,000)
   Capitalized software costs                                                  (180,000)         (235,000)
   Security deposit                                                             (13,000)           (8,000)
   Net proceeds from sale of professional services group                             --           938,000
                                                                           ------------      ------------
      Net cash (used in) provided by investing activities                      (310,000)          673,000
                                                                           ------------      ------------

Cash flows provided by financing activities:
   Proceeds from exercise of options and warrants                               133,000                --
                                                                           ------------      ------------
Net decrease in cash and cash equivalents                                    (2,965,000)       (1,890,000)
Cash and cash equivalents - beginning of period                               7,121,000         4,425,000
                                                                           ------------      ------------
Cash and cash equivalents - end of period                                  $  4,156,000      $  2,535,000
                                                                           ============      ============

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          $         --      $    412,000
                                                                           ============      ============

   Compensation charge for non qualified stock options related
   to employees of discontinued operations                                 $         --      $    230,000
                                                                           ============      ============
</TABLE>


See notes to condensed financial statements

                                       -5-
<PAGE>
                       NETWORK-1 SECURITY SOLUTIONS, INC.
                     NOTES TO CONDENSED FINANCIAL STATEMENTS


1.   FINANCIAL STATEMENT PRESENTATION
     --------------------------------

     a.   The condensed 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 accounting principles generally
     accepted in the United States of America 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, 2001.

          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, 2002
     presented herein are not necessarily indicative of the results of
     operations that may be expected for the year ending December 31, 2002.

     c.   The Company has suffered significant losses, has not generated
     positive cash flow from operations and has an accumulated deficit of
     $38,075,000 at June 30, 2002. Management believes it currently has cash to
     fund its operations until December 31, 2002, or earlier if the Company does
     not achieve certain plans and assumptions (see "Liquidity and Capital
     Resources" on page 11 of this report). The Company is involved in
     substantive discussions with a third party with respect to a strategic
     transaction, which would include financing. There is, however, no assurance
     that the Company will consummate such a strategic transaction or secure
     additional financing.

     d.   Basic loss per share is calculated by dividing the net loss by the
     weighted average number of outstanding common shares during the period.
     Diluted loss 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.

     e.   On April 18, 2002, in consideration of additional consulting and
     financial advisory services, the Company issued to CMH Capital Management
     Corp. ("CMH") an option to purchase 750,000 shares of the Common Stock at
     an exercise price of $1.20 per share which was the market price of the
     Company's Common Stock on the date of issuance. Corey M. Horowitz, Chairman
     of the Board of Directors of the Company, is the sole owner and officer of
     CMH. The shares underlying the option shall vest over a three year period
     in equal amounts of 250,000 shares per year beginning April 18, 2003. In
     addition, the shares underlying the option shall vest in full in the event
     of a "change of control" or in the event that the closing price of the
     Company's common stock reaches a minimum of $3.50 per share for twenty (20)
     consecutive trading days. The options were valued utilizing the Black
     Scholes pricing model resulting in an estimated fair value of $416,000
     which was charged to expense in the quarter ended June 30, 2002. The
     valuation of the option and accordingly, the expense recognized is subject
     to adjustment based on, among other factors, the market price of the option
     at the date of the valuation. The Company will extimate the value of the
     option at each reporting date until they have vested.

                                       -6-
<PAGE>

     f.   The Company paid CMH $94,000 in consulting fees and $36,000 in
     expenses under the agreement for the six months ended June 30, 2002 and had
     a payable due CMH of $14,000 at June 30, 2002. In addition, in January 2002
     CMH was paid $23,000 for consulting fees and expenses incurred in 2001.

     g.   License Revenue includes $95,000 representing 49.7% and 36.7% of
     license revenues for the three and six months ended June 30, 2002,
     respectively, from a reseller located in Singapore and includes $46,000
     representing 24.1% and 17.8% of license revenues for the three and six
     months ended June 30, 2002, respectively, from a major university.

2.   SUBSEQUENT EVENTS
     -----------------

     a.   On July 2, 2002, the Company extended its Consulting Agreement with
     CMH until December 31, 2002. In accordance with the Consulting Agreement,
     CMH will continue to be paid $17,500 per month for consulting and financial
     advisory services and will receive reimbursement of expenses including rent
     for office space in New York City.

     b.   In the third quarter of 2002, the Company instituted measures to
     preserve capital which included the reduction of twenty-one (21) employees
     and the closing of its China development office and its Taiwan sales
     office. The reductions in personnel materially reduce the Company's sales
     and product development efforts.

















                                      -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 BEGINNING ON PAGE 11 OF THIS
REPORT.

Overview

          The Company develops, markets, licenses and supports a suite of
security software products designed to prevent unauthorized access to critical
information residing on networked servers, desktops and laptops. 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,
2002, had an accumulated deficit of $38,075,000. In addition, since June 30,
2002, the Company has continued to incur significant operating losses.
Management believes it currently has cash to fund its operations until December
31, 2002 (or earlier if the Company does not achieve certain plans and
assumptions) (See "Liquidity and Capital Resources" on page 11 of this report).
The Company is actively engaged in substantive discussions with a third party
with respect to a strategic transaction which would include financing. There is,
however, no assurance that the Company will consummate such strategic
transaction or secure additional financing. The inability of the Company to
consummate a strategic transaction or secure additional financing would have a
material adverse effect on the Company requiring it to curtail or possibly cease
operations. In the third quarter of 2002, the Company instituted measures to
preserve capital which included the reduction of twenty-one (21) employees and
the closing of its China development office and its Taiwan sales office. The
reductions in personnel materially reduce the Company's sales and product
development efforts.

          On October 2, 2001, the Company completed a $6.765 million private
offering of Series E Preferred Stock and Warrants pursuant to a Securities
Purchase Agreement with investors (the "Financing"). In accordance with the
Securities Purchase Agreement, an aggregate of 3,191,037 shares of Series E
Preferred Stock were sold to investors at a price of $2.12 per share together
with warrants to purchase 6,882,074 shares of Common Stock at an exercise price
of $1.27 per share. Each share of Series E Preferred Stock is convertible into
two (2) shares of Common Stock, subject to adjustment. As the largest investor
($2,300,000) in the Financing, FalconStor Software, Inc. ("FalconStor"), a
storage networking infrastructure software company, received an additional
warrant to purchase 500,000 shares of the Company's Common Stock (the
"Additional Warrant"). The shares underlying the Series E Preferred Stock and
the warrants (including the Additional Warrant) issued in the Financing were
registered pursuant to a Form S-3 Registration Statement which was declared
effective by the SEC on February 12, 2002. Simultaneously with the closing of
the Financing, the Company and FalconStor entered into a ten year Distribution
and License Agreement pursuant to which FalconStor has the right to distribute
the Company's product offerings in its indirect and OEM channels. As part of the
Distribution and License Agreement, FalconStor paid the Company a non-refundable
advance of $500,000 against future royalty payments of which, in accordance with
accounting principles generally accepted in the United States of America,
$350,000 has been accounted for as the purchase price of the Additional Warrant
and this resulted in total proceeds allocated to the Financing of $7,115,000.
The remaining $150,000 has been recorded as deferred revenue and will be
recognized as revenue when licensed to the customer.

                                       -8-
<PAGE>
          On March 11, 2002, the Company hired Richard Kosinski as Chief
Executive Officer and President pursuant to a two (2) year Employment Agreement
in which Mr. Kosinski receives an annual base salary of $200,000 per year and is
eligible to receive bonus compensation of up to $150,000 per year. In addition,
Mr. Kosinski was issued options to purchase 1,200,000 shares of the Company's
Common Stock, at an exercise price of $1.65 per share (the market price on the
date of grant) which vest over a four (4) year period.

          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 network security, license revenue from network security software
products since the introduction of FireWall/Plus (September 1995), a predecessor
product line, through June 30, 2002 has only been $4,968,000. From January 1999
through June 30, 2002, license revenue from CYBERWALLPLUS has only been
$2,236,000. 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, 2002 COMPARED TO SIX MONTHS ENDED JUNE 30, 2001

          Revenues decreased by $404,000 or 53%, from $765,000 for the six
months ended June 30, 2001 to $361,000 for the six months ended June 30, 2002,
primarily as a result of a decrease in license revenues during the six months
ended June 30, 2002. License revenues decreased by $388,000 or 60%, from
$647,000 for the six months ended June 30, 2001 to $259,000 for the six months
ended June 30, 2002. The Company's revenues for the first six months ended June
30, 2002 were negatively impacted by the lack of enterprise licenses as well as
adverse economic conditions and reduced technology spending. Revenue for the six
months ended June 30, 2001 included two large CyberwallPLUS server licenses
issued to a major university and a major government sub-contractor totaling
$199,000, and $118,000 in license revenue from a distributor in China. Revenue
for the six months ended June 30, 2002 included a large CyberwallPLUS
workstation license issued to an international reseller for $95,000 in Singapore
and CyberwallPLUS server license to a major university for $46,000. Service
revenues decreased by $16,000 or 14%, from $118,000 for the six months ended
June 30, 2001 to $102,000 for the six months ended June 30, 2002 primarily due
to a reduction in training revenue. The Company's revenues from customers in the
United States represented 77% of its revenues during the six months ended June
30, 2001 and 65% of its revenues during the six months ended June 30, 2002,
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 $70,000 or 56%, from $125,000 for six months
ended June 30, 2001 to $195,000 for the six months ended June 30, 2002,
representing 19% and 75% of license revenues, respectively.

                                       -9-
<PAGE>
          Cost of licenses consists of software media (disks), documentation,
product packaging, production costs and product royalties. Cost of licenses
decreased by $12,000 or 55%, from $22,000 for the six months ended June 30, 2001
to $10,000 for the six months ended June 30, 2002, representing 3% and 4% 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.

          Cost of services consists of salaries, benefits and overhead
associated with the technical support of maintenance contracts. Cost of services
decreased by $35,000 or 29%, from $119,000 for the six months ended June 30,
2001 to $84,000 for the six months ended June 30, 2002, representing 101% and
82% of service revenues, respectively. The decrease in cost of services in both
dollar amount and as a percentage of service revenues resulted primarily from
decreased personnel costs in the group as a result of the capital preservation
programs implemented last year. 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 $499,000 for the six months ended June 30, 2001
compared to a gross profit of $72,000 for the six months ended June 30, 2002 ,
representing 65% and 20% of revenues, respectively. The decrease in gross profit
was primarily due to the decrease 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 decreased $449,000 or 35%, from
$1,285,000 for six months ended June 30, 2001 to $836,000 for the six months
ended June 30, 2002, representing 168% and 232% of revenues, respectively. Total
product development costs, including capitalized costs of $235,000 for the six
months ended June 30, 2001 and $180,000 for the six months ended June 30, 2002,
were $1,520,000 and $1,016,000 for the six months ended June 30, 2001 and June
30, 2002, respectively. The decrease in total product development costs was due
primarily to the reduction in the use of outside programmer's services of
$442,000 and non-cash warrant compensation of $225,000. These costs reductions
were partially offset by the establishment of a development team to service the
Asia Pacific region during the six month period ended June 30, 2002 at a cost of
$236,000. The Company closed its China development office in the third quarter
of 2002.

          Selling and marketing expenses consist primarily of salaries,
including commissions, benefits, bonuses, travel, advertising, public relations,
consultants and trade shows. Selling and marketing expenses decreased by
$363,000 or 21%, from $1,712,000 for the six months ended June 30, 2001 to
$1,349,000 for the six months ended June 30, 2002, representing 224% and 374% of
revenues, respectively. The decrease in selling and marketing expenses was due
primarily to a decrease of $355,000 in personnel costs, recruiting and travel
expenditures related to the headcount reduction in 2001 to preserve capital, and
a $48,000 reduction in advertising and direct mail spending. These costs
reductions were partially offset by the establishment of a sales team to service
the Asia Pacific region for the six month period ended June 30, 2002 at a cost
of $96,000. The Company closed its Taiwan sales office in the third quarter of
2002.

          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
$480,000, from $1,010,000 for the six months ended June 30, 2001 to $1,490,000
for the six months ended June 30, 2002, representing 132% and 413% of revenues,
respectively. Increases in non-cash charges of $309,000 attributable to the
expense of the estimated fair value of stock options granted to an entity owned
by the Company's Chairman of the Board of Directors of $416,000, increases in
outside consultants of $241,000 of which $144,000 was to the Company's Chairman
of the Board of Directors, professional fees increased by $55,000, which was
offset by decreases in personnel related costs of $76,000, and investor
relations expenses of $41,000.

          The discontinued operations was sold on February 9, 2000 to Exodus
Communications. The gain from discontinued operations in 2001 was attributed to
the contingent payments and related contingent expenses pertaining to the sale
received or paid in 2001.

          No provision for or benefit from federal, state or foreign income
taxes was recorded for six months ended June 30, 2001 or June 30, 2002 because
the Company incurred net operating losses and fully reserved its deferred tax
assets as their future realization could not be determined.

          As a result of the foregoing, the Company had net loss of $2,733,000
for the six months ended June 30, 2001 compared with a net loss of $3,558,000
for the six months ended June 30, 2002.

                                      -10-
<PAGE>
Liquidity and Capital Resources

          The Company's capital requirements have been and will continue to be
significant and its cash requirements continue to exceed its cash flow from
operations. At June 30, 2002, the Company had $4,156,000 of cash and cash
equivalents and working capital of $2,956,000. In October 2001, the Company
completed a private offering of $6,765,000 of securities. The Company has
financed its operations primarily through sales of equity and debt securities,
and the sale of its professional services group. Net cash used in operating
activities from continuing operations was $2,788,000 during the six months ended
June 30, 2002, which was primarily attributable to the net loss of $3,558,000,
partially offset by the non-cash expense of $416,000 attributable to the
issuance of options and depreciation and amortization expense of $304,000.

          The Company's operating activities during the six months ended June
30, 2002 were financed primarily with the funds raised in 2001. The Company does
not currently have a line of credit from a commercial bank or other institution.

          The Company anticipates, based on currently proposed plans and
assumptions (including the timetable of, costs and expenses associated with, and
success of, its marketing efforts), that its cash balance of approximately
$4,156,000 as of June 30, 2002 will be sufficient to satisfy the Company's
operations and capital requirements through December 31, 2002. There can be no
assurance, however, that such funds will not be expended prior thereto. In the
event the Company's plans change, or its assumptions change, or prove to be
inaccurate (due to unanticipated expenses, difficulties, delays or otherwise),
the Company may have insufficient funds to support its operations prior to
December 31, 2002. In the third quarter of 2002, the Company instituted certain
measures to reduce its overhead including decreasing its headcount by twenty-one
(21) employees and the closing of its China development office and its Taiwan
sales office. The reductions in personnel materially reduce the Company's sales
and product development efforts. The Company is actively engaged in substantive
discussions with a third party with respect to a strategic transaction which
would include financing. There is, however, no assurance that the Company will
consummate such strategic transaction or secure additional financing. The
inability of the Company to consummate a strategic transaction or additional
financing would have a material adverse effect on the Company requiring it to
curtail or possibly cease operations In addition, any additional equity
financing or strategic transaction may involve substantial dilution to the
interests of the Company's then existing stockholders.

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 which 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 environment.

                                      -11-
<PAGE>

          RISK FACTORS THAT MAY AFFECT FUTURE RESULTS

          THE COMPANY OPERATES IN A RAPIDLY CHANGING AND HIGHLY COMPETITIVE
ENVIRONMENT THAT INVOLVES A NUMBER OF RISKS, SOME OF WHICH ARE BEYOND THE
COMPANY'S CONTROL. THE FOLLOWING DISCUSSION HIGHLIGHTS THE MOST MATERIAL OF THE
RISKS.


          WE HAVE A HISTORY OF LOSSES AND IF WE DO NOT ACHIEVE PROFITABILITY, WE
MAY NOT BE ABLE TO CONTINUE OUR BUSINESS IN THE FUTURE.

          We have incurred substantial operating losses since our inception,
which has resulted in an accumulated deficit of $ 38,075,000 as of June 30,
2002. For the year ended December 31, 2001 and the six months ended June 30,
2002, we incurred net losses of $5,872,000 and $3,558,000, respectively. Since
June 30, 2002, we have continued to incur substantial operating losses. We have
financed our operations primarily through the sales of equity and convertible
debt securities as well as the sale of our professional services business in
February 2000. Our expense levels are high and our revenues are difficult to
predict. We anticipate incurring additional losses until we increase our client
base and revenues. We may never achieve or sustain significant revenues or
profitability. If we are unable to achieve increased revenues, we will continue
to have losses and may not be able to continue our operations.


          WE COULD BE REQUIRED TO CUT BACK OR STOP OPERATIONS IF WE ARE UNABLE
TO RAISE OR OBTAIN NEEDED FUNDING.

          We anticipate, based on our currently proposed plans and assumptions
(including the timetable of, costs and expenses associated with, and success of,
our marketing efforts), that our cash balance of approximately $4,156,000 as of
June 30, 2002 will be sufficient to satisfy our operations and capital
requirements through December 31, 2002. There can be no assurance, however, that
such funds will not be expended prior thereto. In the event our plans change, or
our assumptions change or prove to be inaccurate (due to unanticipated expenses,
difficulties, delays or otherwise), we could have insufficient funds to support
our operations prior to December 31, 2002. We are actively engaged in
substantive discussions with a third party with respect to a strategic
transaction which would include financing. There is, however, no assurance that
we will consummate such strategic transaction or secure additional financing.
Any inability to obtain additional financing or consummate a strategic
transaction when needed would have a material adverse effect on our operations,
requiring us to curtail and possibly cease operations.


          WE HAVE NOT ACHIEVED SUBSTANTIAL REVENUE FROM SOFTWARE SALES.

          We have had only limited sales of our products. Our total revenues for
software licenses for the year ended December 31, 2001 and the six months ended
June 30, 2002 were $809,000 and $259,000, respectively.


          OUR REVENUES DEPEND ON SALES OF OUR CYBERWALLPLUS PRODUCTS AND WE ARE
UNCERTAIN WHETHER THERE WILL BE BROAD MARKET ACCEPTANCE OF THESE PRODUCTS.

          Our revenue growth for the foreseeable future is dependent upon
increased sales of our CyberwallPLUS family of software products. Since the
introduction of our CyberwallPLUS suite of products in January 1999 through June
30, 2002, license revenue from our CyberwallPLUS products was only $2,236,000.
Our future financial performance will depend upon the successful introduction
and customer acceptance of our CyberwallPLUS products as well as the development
of new and enhanced versions of this product. Revenue from products such as
CyberwallPLUS depend on a number of factors, including the influence of market
competition, technological changes in the network security market, our ability
to design, develop and introduce enhancements on a timely basis and our ability
to successfully establish and maintain distribution channels. If we fail to
achieve broad market acceptance of our CyberwallPLUS products, it would have a
material adverse effect on our business, operating results and financial
condition.
                                      -12-
<PAGE>
          WE NEED TO ATTRACT AND RETAIN HIGHLY QUALIFIED TECHNICAL, SALES,
MARKETING, DEVELOPMENT AND MANAGEMENT PERSONNEL.

          Our success depends on our ability to attract, train and retain highly
qualified technical, sales, marketing, development and management personnel.
There is considerable and often intense competition for the services of such
personnel. We may not be able either to retain our existing personnel or acquire
additional qualified personnel as and when needed. If we are unable to hire and
retain such personnel, our business, operating results and financial condition
could be materially adversely affected.


          CONTROL BY BARRY RUBENSTEIN, WHEATLEY AFFILIATES AND FALCONSTOR
SOFTWARE, INC.

          Barry Rubenstein, Wheatley Partners II, L.P. and other affiliated and
related entities and parties (the "Wheatley Parties") currently own 32 % of our
outstanding voting stock (exclusive of any securities owned by FalconStor). In
addition, FalconStor currently owns 15.9% of our outstanding voting stock. Barry
Rubenstein owns 15.4% of the outstanding voting securities of FalconStor and
other Wheatley affiliates own an additional 6% of the outstanding voting
securities of FalconStor. Accordingly, Barry Rubenstein and the Wheatley Parties
together with FalconStor currently own 47.9 % of our outstanding voting
securities (and beneficially own options and warrants to purchase an additional
28.2% of our outstanding voting securities) and as a result of their aggregate
holdings would have the ability to control the outcome of all matters submitted
to a vote of our stockholders including the election of directors, amendments to
our Certificate of Incorporation and approval of mergers and a sale of
substantially all of our assets. Such consolidation of voting power could also
have the effect of delaying, deterring or preventing a change in control of our
company that might be beneficial to other stockholders.


          WE REQUIRE THE CONSENT OF THE HOLDERS OF SERIES E PREFERRED STOCK FOR
CERTAIN CORPORATE ACTION.

          In connection with our private offering of Series E Preferred Stock
and warrants completed in October 2001, we agreed that so long as the holders of
the outstanding shares of Series E Preferred Stock own at least 10% of our
outstanding voting stock, we will not take certain actions without the consent
of Wheatley Partners II, L.P., the designee of the holders of Series E Preferred
Stock and one of our principal stockholders. Such actions requiring the consent
of Wheatley Partners II, L.P. include, among others, (i) issuing securities
other than securities to be issued under our stock option plan, (ii) incurring
debt in excess of $250,000, (iii) entering into a merger, acquisition or sale of
substantially all of our assets and (iv) taking any action to amend our
Certificate of Incorporation or By-laws that could in any way adversely affect
the rights of the holders of the Series E Preferred Stock. Accordingly, the
holders of Series E Preferred Stock may not consent to certain actions that we
may consider to be in our best interest and the best interest of the holders of
Common Stock. For more information regarding the rights and preferences of the
Series E Preferred Stock, see our Current Report on Form 8-K filed with the SEC
on October 12, 2001.


          WORLD INSTABILITY - TERRORISM.

          The terrorist attacks on September 11, 2001 in the United States and
the declaration of war by the United States against terrorism has created
significant instability and uncertainty in the world which may continue to have
a material adverse effect on world financial markets, including financial
markets in the United States. In addition, such adverse political events may
have an adverse impact on economic conditions in the United States. Unfavorable
economic conditions in the United States may have an adverse effect on our
financial operations including, but not limited to, our ability to expand the
market for our products, obtain necessary financing, enter into strategic
relationships and effectively compete in the network security market.


                                      -13-
<PAGE>
          OUR INABILITY TO ENTER INTO STRATEGIC RELATIONSHIPS WITH INDIRECT
CHANNEL PARTNERS COULD HAVE A MATERIAL ADVERSE EFFECT ON US.

          As part of our sales and marketing efforts, we are seeking to develop
strategic relationships with indirect channel partners, such as original
equipment manufacturers and resellers. We have limited financial, personnel and
other resources to undertake extensive marketing activities ourselves.
Therefore, our prospects will depend on our ability to develop and maintain
strategic marketing relationships with indirect channel partners and their
ability to market and distribute our products. If we are unable to enter into
and maintain such arrangements or if such arrangements do not result in the
successful commercialization of our products, then this could have a material
adverse effect on our business, operating results and financial condition.


          WE MAY NOT BE ABLE TO SUCCESSFULLY COMPETE IN THE NETWORK SECURITY
MARKET.

          The network security market is characterized by intense competition
and rapidly changing business conditions, customer requirements and
technologies. The principal competitive factors affecting the market for network
security products include security effectiveness, scope of product offerings,
name recognition, product features, distribution channels, price, ease of use
and customer service and support. Most of our current and potential competitors
have longer operating histories, greater name recognition, larger installed
customer bases and possess substantially greater financial, technical and
marketing and other competitive resources than us. As a result, our competitors
may be able to adapt more quickly to new or emerging technologies and changes in
customer requirements or to devote greater resources to the promotion and sale
of their products than we may. In addition, certain of our competitors may
determine for strategic reasons to consolidate, to substantially lower the price
of their network security products or to bundle their products with other
products, such as hardware or other enterprise software products. Our current
and potential competitors may develop products that may be more effective than
our current or future products or that render our products obsolete or less
marketable. Increased competition for network security products may result in
price reductions and reduced gross margins and may adversely effect our ability
to gain market share, any of which would adversely affect the Company's
business, operating results and financial condition.


          WE MAY NOT BE ABLE TO ADEQUATELY PROTECT OUR PROPRIETARY TECHNOLOGY,
WHICH COULD RESULT IN LOWER REVENUES AND/OR PROFITS.

          We do not hold any patents and rely on copyright and trade secret
laws, non-disclosure agreements and contractual provisions to protect our
proprietary technology. These methods afford only limited protection. Despite
the precautions we take, unauthorized parties may attempt to copy or otherwise
obtain and use our proprietary technologies, ideas, know-how and other
proprietary information without authorization or may independently develop
technologies similar or superior to our technologies. Policing unauthorized use
of our products may be difficult and costly. Also, the laws of some foreign
countries do not protect our proprietary rights as much as the laws of the
United States. We are unable to predict whether our means of protecting our
proprietary rights will be adequate.

          We believe that our technologies have been developed independent of
others. Nevertheless, third parties may assert infringement claims against us
and our technologies may be determined to infringe on the intellectual property
rights of others. We could become liable for damages, be required to modify our
technologies or obtain a license if our technologies are determined to infringe
upon the intellectual property rights of others. We may not be able to modify
our technologies or obtain a license in a timely manner, if required, or have
the financial or other resources necessary to defend an infringement action. We
would be materially adversely effected if we fail to do any of the foregoing.



                                      -14-
<PAGE>
          WE CAN BE EXPOSED TO NUMEROUS POTENTIAL LIABILITY CLAIMS FOR DAMAGES
AND, IF OUR INSURANCE DOESN'T ADEQUATELY COVER LOSSES, THIS COULD HAVE A
MATERIAL ADVERSE EFFECT ON US.

          Since our products are used to prevent unauthorized access to and
attacks on critical enterprise information, we may be exposed to potential
liability claims for damage caused as a result of an actual or alleged failure
of an installed product. We cannot assure you that the provisions in our
standard license agreements designed to limit our exposure will be enforceable.
Our personnel often gain access to confidential and proprietary client
information. Any unauthorized use or disclosure of such information could result
in a claim for substantial damages. We can give no assurances that our insurance
policies will be sufficient to cover potential claims or that adequate levels of
coverage will be available in the future at a reasonable cost.

          POSSIBLE DELISTING OF OUR SECURITIES FROM NASDAQ; RISKS RELATING TO
LOW-PRICED STOCKS.

          Our common stock is listed on The Nasdaq Stock Market's SmallCap
Market under the symbol "NSSI." In order for our common stock to continue to be
listed on Nasdaq, however, we must comply with certain maintenance standards
(including, among others, a minimum bid price for our stock of $1.00 and
stockholders equity of a minimum of $2.5 million). On July 9, 2002, 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
January 6, 2003, 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 subject to
delisting 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 our common stock.

          In addition, if our common stock were to become delisted from trading
on Nasdaq and the trading price of our common stock were to then be below $5.00
per share, our common stock could be considered a penny stock. SEC regulations
generally define a penny stock to be an equity security that is not listed on
Nasdaq or a national securities exchange and that has a market value of less
than $5.00 per share, subject to certain exceptions. The SEC regulations would
require broker-dealers to deliver to a purchaser of our common stock a
disclosure schedule explaining the penny stock market and the risks associated
with it. Various sales practice requirements are also imposed on broker-dealers
who sell penny stocks to persons other than established customers and accredited
investors (generally institutions). Broker-dealers must also provide the
customer with current bid and offer quotations for the penny stock, the
compensation of the broker-dealer and monthly account statements disclosing
recent price information for the penny stock held in the customer's account. If
our common stock is no longer traded on Nasdaq and becomes subject to the
regulations applicable to penny stocks, investors may find it more difficult to
obtain timely and accurate quotes and execute trades in our common stock.


          FAVORABLE LICENSE AND DISTRIBUTION AGREEMENT RECEIVED BY FALCONSTOR
SOFTWARE, INC.

          On October 2, 2001, we entered into a License and Distribution
Agreement with FalconStor pursuant to which FalconStor has the right to
distribute, on a non-exclusive basis, our product offerings in its indirect and
OEM channels. Simultaneously and conditioned upon entering into the License and
Distribution Agreement, FalconStor invested $2,300,000 in our private offering
of $6,765,000 of preferred stock and warrants. (See "Management's Discussion and
Analysis or Plan of Operation" at page 7). FalconStor currently owns 15.9% of
our outstanding voting stock (27.4% assuming the exercise of currently
exercisable warrants to purchase 2,169,870 shares of common stock). FalconStor,
as the largest investor in the private offering, was able to negotiate terms
(and may receive additional benefits in the future) with respect to the License
and Distribution Agreement which would likely have not been available to other
licensees and distributors who were not simultaneously making a significant
investment in our securities.


          OUR OPERATING RESULTS MAY FLUCTUATE QUARTERLY AND IF THEY WERE BELOW
THE EXPECTATIONS OF INVESTORS AND ANALYSTS, THE PRICE OF OUR STOCK WOULD LIKELY
BE ADVERSELY EFFECTED.

          We anticipate significant quarterly fluctuations in our operations in
the future, since our results are dependent on the volume and timing of orders,
which are difficult to predict. Customers' purchasing patterns and budgeting
cycles, as well as the introduction of new products, may also cause our
operating results to fluctuate. Therefore, comparing quarterly operating results
may not be meaningful and should not be relied on. Also, our operating results
may be below analysts' and investors' expectations in some future quarters,
which would likely have a material adverse effect on the price of our common
stock.

                                      -15-
<PAGE>
          THE SIGNIFICANT NUMBER OF OPTIONS, WARRANTS AND CONVERTIBLE SECURITIES
OUTSTANDING MAY ADVERSELY AFFECT THE MARKET PRICE FOR OUR COMMON STOCK.

          As of August 1, 2002, there are outstanding (i) options and warrants
to purchase an aggregate of 13,552,564 shares of our common stock at exercise
prices ranging from $.70 to $10.125, (ii) 3,021,159 shares of convertible
preferred stock which are convertible at any time into 5,971,688 shares of our
common stock and (iii) 700,176 additional shares of our common stock which may
be issued in the future under our stock option plan. To the extent that
outstanding options and warrants are exercised or preferred stock is converted,
your percentage ownership will be diluted and any sales in the public market of
the common stock underlying such options, warrants or convertible debt may
adversely affect prevailing market prices for our common stock.


          WE HAVE A SIGNIFICANT AMOUNT OF AUTHORIZED BUT UNISSUED PREFERRED
STOCK, WHICH MAY AFFECT THE LIKELIHOOD OF A CHANGE OF CONTROL IN OUR COMPANY.

          Our Board of Directors has the authority, without further action by
the stockholders, to issue 10,000,000 shares of preferred stock (of which as of
July 20, 2002 only 231,054 shares of Series D Preferred Stock are outstanding
and 2,790,105 shares of Series E Preferred Stock are outstanding) on such terms
and with such rights, preferences and designations as our Board of Directors may
determine. Such terms may include restricting dividends on our common stock,
dilution of the voting power of our common stock or impairing the liquidation
rights of the holders of our common stock. Issuance of such preferred stock,
depending on the rights, preferences and designations thereof, may have the
effect of delaying, deterring or preventing a change in control. In addition,
certain "anti-takeover" provisions in Delaware law may restrict the ability of
our stockholders to authorize a merger, business combination or change of
control.











                                      -16-
<PAGE>
PART II.  OTHER INFORMATION

Item 1.   LEGAL PROCEEDINGS.

          None.


Item 2.   CHANGES IN SECURITIES AND USE OF PROCEEDS.

          On April 18, 2002, the Company issued to CMH Capital Management Corp.
          a five (5) year option to purchase 750,000 shares of the Company's
          common stock at $1.20 per share. Such option was issued pursuant to
          the Company's Stock Option Plan.


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:

               10.8   Extension of Consulting Agreement, dated July 2, 2002,
                      between the Company and CMH Capital Management Corp.

               99.1   Certification of Chief Executive Officer

               99.2   Certification of Chief Financial Officer



          b).  Reports of Form 8-K.

               None.






                                      -17-
<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/ Richard Kosinski
               -------------------------------
               Richard Kosinski, President and
               Chief Executive Officer
               (Principal Executive Officer)



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






Date: August 16, 2002





















                                      -18-