<PAGE>

                     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 SEPTEMBER 30, 1998

[  ]     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)



             70 Walnut Street, Wellesley Hills, Massachusetts 02481
                    (Address of Principal executive offices)

                                  781-239-8280
                           (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 / / No /X/

As of December 14, 1998 there were 4,362,631 shares of Common Stock, $.01 par
value per share, and 562,836 shares of Series C Convertible Preferred Stock,
$.01 par value per share, outstanding.

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


                                       1

<PAGE>


                       NETWORK-1 SECURITY SOLUTIONS, INC.

                                      INDEX

<TABLE>
<CAPTION>

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

Item 1.  FINANCIAL STATEMENTS
         Balance Sheets as of September 30, 1998 (unaudited) and December 31, 1997.........................3

         Statements of Operations for the three months ended September 30, 1998 and 1997
         (unaudited) and the nine months ended September 30, 1998 and 1997 (unaudited).....................4

         Statements of Cash Flows for the nine months ended September 30, 1998 and 1997
         (unaudited).......................................................................................5

         Statement of Stockholders Equity (Deficiency) for the year ended December 31, 1997
         and for the nine months ended September 30, 1998 (unaudited)......................................6

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

Item 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.........................................9

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..................................................................17

Item 4.  Submission of Matters to a Vote of Security Holders..............................................17

Item 5.  Other Information................................................................................18

Item 6.  Exhibits and Reports on Form 8-K.................................................................18

SIGNATURES................................................................................................19
</TABLE>


                                       2
<PAGE>

                                        NETWORK-1 SECURITY SOLUTIONS, INC.
                                                   Balance Sheet

<TABLE>
<CAPTION>
                                                                      September 30, 1998      December 31, 1997
                                                                         (Unaudited)              (Audited)
                                                                      ------------------      -----------------
<S>                                                                       <C>                    <C>
ASSETS:
Current assets:
     Cash and cash equivalents                                            $    181,000           $     60,000
     Accounts receivable - net allowance for doubtful                          667,000                435,000
        accounts of $100,000 and $70,000, respectively
     Prepaid expenses and other current assets                                  36,000                 30,000
                                                                          ------------           ------------
              Total current assets                                             884,000                525,000

     Equipment and fixtures - net                                              325,000                400,000
     Capitalized software costs - net                                          957,000              1,258,000
     Security deposits                                                         138,000                131,000
     Deferred offering costs                                                   519,000                 90,000
                                                                          ------------           ------------
              Total assets                                                $  2,823,000           $  2,404,000
                                                                          ------------           ------------
                                                                          ------------           ------------
LIABILITIES:
Current liabilities:
     Accounts payable                                                     $    955,000           $    776,000
     Accrued fee - related party                                                                      138,000
     Accrued expenses and other current liabilities                            404,000                201,000
     Notes payable - related parties, net of discount                        1,802,000
     Notes payable - others, net of discount                                 1,011,000
     Interest payable - related parties                                        114,000
     Interest payable - others                                                  79,000
     Current portion of capital lease payable                                                           8,000
     Deferred revenue                                                           73,000                 63,000
                                                                          ------------           ------------
              Total current liabilities                                      4,438,000              1,186,000
     Notes payable - related parties, net of discount                                                 564,000
     Notes payable - others, net of discount                                                          670,000
     Interest payable - related parties                                                                24,000
     Interest payable - others                                                                         35,000
                                                                          ------------           ------------
                                                                             4,438,000              2,479,000
                                                                          ------------           ------------
STOCKHOLDERS' EQUITY (DEFICIENCY)
     Preferred stock - $.01 par value; authorized 5,000,000
     shares
        Series A - 10% cumulative, none issued and outstanding
        Series B - 500,000 shares issued and outstanding (liquidation
        preference $500,000)
        Series C - 750,000 shares authorized, none issued and out-
        standing                                                                 5,000                  5,000
     Common stock - $.01 par value; authorized 25,000,000 shares;
     1,706,037 and 2,274,845 shares issued and outstanding                      23,000                 17,000
     Additional paid-in capital                                              9,452,000              7,373,000
     Accumulated deficit                                                   (10,617,000)            (7,470,000)
     Unearned portion of compensatory stock options                           (478,000)
                                                                          ------------           ------------
                                                                            (1,615,000)               (75,000)
                                                                          ------------           ------------
                                                                          $  2,823,000           $  2,404,000
                                                                          ------------           ------------
                                                                          ------------           ------------
</TABLE>

    The accompanying notes are an integral part of these financial statements



                                       3
<PAGE>

                       NETWORK-1 SECURITY SOLUTIONS, INC.
                      Statements of Operations (Unaudited)

<TABLE>
<CAPTION>



                                                                Three Months Ended                   Nine Months Ended
                                                                  September 30,                        September 30,
                                                         ----------------------------------------------------------------
                                                             1998            1997             1998                 1997
                                                         -----------     -----------      ------------        -----------
<S>                                                       <C>            <C>              <C>                 <C>        
Revenues:
     Licenses                                            $   102,000     $    87,000      $    514,000        $   593,000
     Royalties                                                                                                    500,000
     Services                                                569,000         136,000         1,059,000            557,000
                                                         -----------     -----------      ------------        -----------
         Total revenues                                      671,000         223,000         1,573,000          1,650,000
Cost of Revenues:
     Amortization of software development costs              135,000          63,000           402,000            188,000
     Costs of licenses                                        33,000          11,000           161,000             63,000
     Costs of services                                       230,000         157,000           502,000            369,000
                                                         -----------     -----------      ------------        -----------
         Total cost of revenues                              398,000         231,000         1,065,000            620,000
                                                         -----------     -----------      ------------        -----------

Gross Profit (Loss)                                          273,000         (8,000)           508,000          1,030,000

Operating expenses:
     Product development                                     160,000         189,000           443,000            424,000
     Selling and marketing                                   339,000         226,000           690,000            750,000
     General and Administrative                              647,000         349,000         1,800,000          1,268,000
                                                         -----------     -----------      ------------        -----------
         Total operating expenses                          1,146,000         764,000         2,933,000          2,442,000
                                                         -----------     -----------      ------------        -----------

Loss from operations                                        (873,000)       (772,000)       (2,425,000)        (1,412,000)
Interest expense                                            (284,000)       (157,000)         (722,000)          (298,000)
                                                         -----------     -----------      ------------        -----------
Net Loss                                                 $(1,157,000)    $  (929,000)     $ (3,147,000)       $(1,710,000)
                                                         -----------     -----------      ------------        -----------
                                                         -----------     -----------      ------------        -----------
Loss per share - basic and diluted                           $ (0.52)        $ (0.49)          $ (1.69)           $ (0.89)
                                                         -----------     -----------      ------------        -----------
                                                         -----------     -----------      ------------        -----------

Weighted average number of shares
 outstanding - basic and diluted                           2,222,955       1,902,762         1,861,717          1,919,349
                                                         -----------     -----------      ------------        -----------
                                                         -----------     -----------      ------------        -----------
</TABLE>


    The accompanying notes are an integral part of these financial statements


                                       4
<PAGE>

                       NETWORK-1 SECURITY SOLUTIONS, INC.
                      Statements of Cash Flows (Unaudited)

<TABLE>
<CAPTION>
                                                                                     Nine Months Ended
                                                                                        September 30,
                                                                        ---------------------------------------------
                                                                               1998                        1997
                                                                        -----------------           ---------------- 
<S>                                                                     <C>                         <C>              
Cash flows from operating activities:
     Net loss                                                           $      (3,147,000)          $     (1,710,000)
     Adjustments to reconcile net loss to net cash used in 
        operating activities:
          Amortization of debt discount                                           594,000                    270,000
          Issuance of common stock and warrants for                               703,000                    131,000
              services rendered
          Provision for doubtful accounts                                          30,000                     36,000
          Depreciation and amortization                                           523,000                    300,000
       Changes in:
          Accounts receivable                                                    (262,000)                  (157,000)
          Prepaid expenses and other current assets                                (6,000)
          Accounts payable, accrued expenses and                                  207,000                    388,000
              other current liabilities
          Deferred revenue                                                         10,000                     (3,000)
                                                                        ------------------           ---------------- 
              Net cash used in operating activities                            (1,348,000)                  (745,000)
                                                                        ------------------           ---------------- 
Cash flows from investing activities:
     Acquisitions of equipment and fixtures                                       (47,000)                   (30,000)
     Capitalized software costs                                                  (100,000)                  (789,000)
     Security deposits                                                             (7,000)                    63,000
                                                                        -----------------           -----------------
              Net cash used in investing activities                              (154,000)                  (756,000)
                                                                        -----------------           ---------------- 
Cash flows from financing activities:
     Proceeds from issuance of notes payable                                    1,750,000                  1,500,000
       and warrants
     Repayment of notes payable                                                    (8,000)
     Deferred offering costs                                                     (119,000)                   (25,000)
                                                                        -----------------           ---------------- 
              Net cash provided by financing activities                         1,623,000                  1,475,000
                                                                        ------------------           -----------------
Net increase (decrease) in cash and cash equivalents                              121,000                    (26,000)
Cash and cash equivalents - beginning of period                                    60,000                    217,000
                                                                        ------------------           -----------------
Cash and cash equivalents - end of period                                 $       181,000            $       191,000
                                                                        ------------------           -----------------
                                                                        ------------------           -----------------
</TABLE>

    The accompanying notes are an integral part of these financial statements


                                       5
<PAGE>


                       NETWORK-1 SECURITY SOLUTIONS, INC.
           Statements of Stockholders' Equity (Deficiency)(Unaudited)


<TABLE>
<CAPTION>
                                                            Common Stock                   Preferred Stock             
                                                     ----------------------           -----------------------
                                                     Shares          Amount           Shares           Amount          
                                                     ------          ------           ------           ------          
                                                                                                          
<S>                                                 <C>           <C>                <C>        <C>            
Balance-December 31, 1997                           1,706,037     $   17,000         500,000    $      5,000   
Common stock options issued to
     Chief Executive Officer

Amortization of compensatory stock options
Issuance of common stock, warrants and
     options for services rendered and payment
     of liability                                     34,147
Warrants issued in connection with debt financing
Repurchase and retirement of common shares           (62,080)
Conversion of warrants to stock at discount
     as part of debt re-financing                    596,741           6,000
Net loss
                                                    --------     -----------         -------    ------------
Balance - September 30, 1998                        2,274,845    $    23,000         500,000    $      5,000
</TABLE>

<TABLE>
<CAPTION>


                                                                                 Unearned
                                                Additional                       Portion of
                                                 Paid-In        Accumulated      Compensatory
                                                 Capital          Deficit        Stock Options     Total
                                                 -------          -------        -------------     -----

<S>                                             <C>              <C>             <C>              <C>
Balance-December 31, 1997                       $  7,373,000     $ (7,470,000)                        (75,000)
Common stock options issued to
     Chief Executive Officer                         938,000                        $(938,000)
Amortization of compensatory stock options                                            460,000         460,000
Issuance of common stock, warrants and
     options for services rendered and payment
     of liability                                    382,000                                          382,000
Warrants issued in connection with debt
     financing                                       766,000                                          766,000
Repurchase and retirement of common shares            (1,000)                                          (1,000)
Conversion of warrants to stock at discount 
     as part of debt re-financing                     (6,000)
Net loss                                                         $ (3,147,000)                     (3,147,000)
                                                ------------     ------------       ---------    ------------
Balance - September 30, 1998                    $  9,452,000     $(10,617,000)      $(478,000)   $ (1,615,000)
                                                
</TABLE>

   The accompanying notes are an integral part of these 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 Prospectus dated November 12,
          1998. In the Company's opinion, all adjustments (consisting only of
          normal recurring adjustments) necessary for a fair presentation of the
          information shown have been included.

     b.   The results of operations for the nine months ended September 30,
          1998 presented herein are not necessarily indicative of the results
          of operations that may be expected for the year ending December 31,
          1998.

     c.   During 1997, the Company adopted Statement of Financial Accounting
          Standards No. 128, "Earnings Per Share" ("SFAS No. 128"). SFAS No. 128
          requires the reporting of basic and diluted earnings/loss per share.
          Basic loss per share is calculated by dividing net loss by the
          weighted average number of outstanding common shares during the year.
          Diluted per share data includes the dilutive effects of options,
          warrants and convertible securities. As all potential common shares
          are anti-dilutive, they are not included in the calculation of diluted
          loss per share.

2.   SUBSEQUENT EVENTS

     a.   On October 20, 1998, the Company approved an amendment to its Stock
          Option Plan which provided for an increase to 1,050,000 shares of
          Common Stock, as to the aggregate number of shares reserved for
          issuance upon exercise of options which may be granted under the Plan.

     b.   On November 17, 1998, the Company completed an initial public offering
          (the "Offering") of 1,700,000 shares of its Common Stock (excluding up
          to 255,000 shares of Common Stock, subject to the underwriter's
          over-allotment option). The Company intends to use the net proceeds
          from the Offering in the approximate aggregate amount of $8,000,000
          for: (i) sales and marketing; (ii) software development; (iii) payment
          of trade payables; (iv) repayment of 


                                       7
<PAGE>

          indebtedness; (v) purchase of computer equipment; (vi) establishing a 
          new office facility and (vii) working capital and general corporate
          purposes.

     c. Utilizing proceeds from the Offering, the Company has:

                           (i)      repaid promissory notes in the principal
                                    amount of $575,000 issued from February 1997
                                    through October 1998 plus accrued interest
                                    thereon at the annual rates between 6% and
                                    10% ; and

                           (ii)     repaid past due trade payables of
                                    approximately $500,000 and approximately
                                    $80,000 of liabilities assumed by the
                                    Company in connection with the CommHome
                                    Acquisition (as described below).

     d.   Upon consummation of the Offering the following transactions were
          effective:

                           (i)      500,000 shares of the Company's outstanding
                                    Series B Preferred Stock automatically
                                    converted into 310,399 shares of Common
                                    Stock;

                           (ii)     562,836 shares of Series C Convertible
                                    Preferred Stock were issued in exchange for
                                    the cancellation of outstanding promissory
                                    notes, including accrued interest, of
                                    $2,954,888, (subject to adjustment in the
                                    event the underwriter's overallotment option
                                    is exercised); and

                           (iii)    an aggregate of 64,167 shares of Common
                                    Stock were issued in connection with the
                                    acquisition of CommHome Systems Corporation
                                    and the satisfaction of $105,000 of 
                                    indebtedness of CommHome Systems 
                                    Corporation. In connection with the CommHome
                                    Systems Corporation acquisition, the Company
                                    incurred a charge for purchased research and
                                    development of $469,000.


                                       8
<PAGE>

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

THIS QUARTERLY REPORT ON FORM 10-QSB CONTAINS FORWARD-LOOKING STATEMENTS WITHIN
THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED (THE "EXCHANGE ACT"). ACTUAL RESULTS, EVENTS AND CIRCUMSTANCES
(INCLUDING FUTURE PERFORMANCE, RESULTS AND TRENDS) COULD DIFFER MATERIALLY FROM
THOSE SET FORTH IN SUCH STATEMENTS DUE TO VARIOUS FACTORS, RISKS AND
UNCERTAINTIES, INCLUDING THOSE SET FORTH UNDER THE CAPTION "RISK FACTORS" IN THE
COMPANY'S PROSPECTUS, DATED NOVEMBER 12, 1998. EXCEPT AS OTHERWISE REQUIRED TO
BE DISCLOSED IN PERIODIC REPORTS REQUIRED TO BE FILED BY COMPANIES REGISTERED
UNDER THE EXCHANGE ACT BY THE RULES OF THE SECURITIES AND EXCHANGE COMMISSION
(THE "COMMISSION"), THE COMPANY HAS NO DUTY AND UNDERTAKES NO OBLIGATION TO
UPDATE SUCH STATEMENTS.

Overview

     The Company develops, markets, licenses and supports a family of network
security software products designed to provide comprehensive security to
computer networks, including Internet based systems and internal networks and
computing resources. The Company also offers to its customers a full range of
consulting services in network security, network design and support. From
inception (July 1990) through December 31, 1994, the Company was primarily
engaged in providing consulting and training services. In 1995, the Company
began to shift its focus from consulting and training to the development and
marketing of network security software products. The Company introduced its
first FireWall/Plus software product in June 1995. Accordingly, the Company has
a limited relevant operating history as a software developer upon which an
evaluation of its prospects and future performance can be made. Such prospects
must be considered in light of the risks, expenses and difficulties frequently
encountered in the operation and expansion of a new business and the shift from
research and product development to commercialization of products based on
rapidly changing technologies in a highly specialized and emerging market. The
Company will be required to significantly expand its product and development
capabilities, introduce new products, introduce enhanced features to existing
products, expand its in-house sales force, establish and maintain distribution
channels through third-party vendors, increase marketing expenditures, further
expand its management team and attract additional qualified personnel. In
addition, the Company must adapt to the demands of an emerging and rapidly
changing computer network security market, intense competition and rapidly
changing technology and industry standards. There can be no assurance that the
Company can successfully address such risks, and the failure to do so would have
a material adverse effect on the Company's business, results of operations and
financial condition.


                                       9
<PAGE>

     To date, the Company has incurred significant losses and, at September 30,
1998, had an accumulated deficit of $10,617,000. In addition, since September
30, 1998, the Company has continued to incur significant losses. Inasmuch as the
Company has increased its level of activities following the consummation of the
Offering and will be required to make significant up-front expenditures in
connection with its sales and marketing and continuing research and product
development efforts, the Company anticipates that losses will continue until
such time, if ever, as the Company is able to attain sales levels sufficient to
support its operations. There can be no assurance that the Company will ever
achieve profitable operations.

     The Company (beginning in May 1998) employed certain members of senior
management, including Avi A. Fogel, President and Chief Executive Officer,
Robert P. Olsen, Vice President of Product Management, Murray P. Fish, Chief
Financial Officer, Joseph A. Donohue, Vice President of Engineering, Joseph D.
Harris, Vice President of International Sales and Lance Westbrook, Vice
President of North American Sales. In addition, the Company intends to hire
approximately 10 additional software engineers and developers and 14 additional
sales and marketing personnel during 1999, as well as expand its finance and
administrative staff and increase expenses for employee benefits, facilities,
consulting, insurance, and other general operating expenses.

     The Company's FireWall/Plus family of software products has not yet
achieved market acceptance. The future success of the Company is largely
dependent upon market acceptance of its FireWall/Plus family of software
products. While the Company believes that its FireWall/Plus family of software
products offer advantages over competing products for network security, license
revenue from FireWall/Plus products since their introduction (June 1995) through
September 30, 1998 has only been $2,626,000, including a non-refundable pre-paid
royalty of $500,000 in 1997. In addition, during 1998, license revenues from
FireWall/Plus products have decreased as compared to 1997. There can be no
assurance that FireWall/Plus will gain significant market acceptance. Revenue
from such commercial products depend on a number of factors, including the
influence of market competition, technological changes in the network security
market, the Company's ability to design, develop and introduce enhancements on a
timely basis, and the ability of the Company to successfully establish and
maintain distribution channels. The failure of FireWall/Plus 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 FireWall/Plus family of products. The Company's anticipated levels of
expenditures for product development are based on its plans for product
enhancements and new product development. The Company capitalizes and amortizes
software development costs in accordance with Statement of Financial Accounting
Standards No. 86. These costs consist of salaries, consulting fees and
applicable overhead. The Company will use a portion of the proceeds from the
Offering to significantly increase its product development expenditures.


                                       10
<PAGE>

RESULTS OF OPERATIONS

NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997

     Revenues decreased by $77,000 or 5%, from $1,650,000 for the nine months
ended September 30, 1997 to $1,573,000 for the nine months ended September 30,
1998, primarily as a result of the Company's receipt of a non-refundable prepaid
royalty of $500,000 during the nine months ended September 30, 1997.

     License revenues decreased by $79,000 or 13%, from $593,000 for the nine
months ended September 30, 1997 to $514,000 for the nine months ended September
30, 1998, primarily due to certain initial product licensing payments received
from international resellers during the nine months ended September 30, 1997.
During the nine months ended September 30, 1998, revenue from FireWall/Plus
products and third party virtual private network ("VPN") products accounted for
$384,000 and $118,000 of license revenues, respectively, and during the nine
months ended September 30, 1997, license revenues of $591,000 consisted solely
of licenses of FireWall/Plus products. Royalties were $500,000 for the nine
months ended September 30, 1997 and $0 for the nine months ended September 30,
1998 as a result of receipt of a non-refundable pre-paid royalty of $500,000
from Trusted Information Systems, Inc. ("TIS") in June 1997. The decrease in
FireWall/Plus product sales for the nine months ended September 30, 1998 was
primarily due to a lack of financial resources to market and sell such products.

     Service revenues increased by $502,000 or 90%, from $557,000 for the nine
months ended September 30, 1997 to $1,059,000 for the nine months ended
September 30, 1998. Service revenues from consulting increased by $503,000 or
109%, from $461,000 for the nine months ended September 30, 1997 to $964,000 for
the nine months ended September 30, 1998. The increase in service revenues was
attributable to two large consulting projects serviced during the nine months
ended September 30, 1998.

     The Company's two largest customers during the nine months ended 
September 30, 1997 were TIS and Bowne, Inc. which accounted for 30% and 10% 
of the Company's revenues, respectively. The Company's three largest 
customers, The City of Hope, Fluor Daniel, Inc. and Electronic Data Systems 
Corporation, accounted for 38%, 20% and 11% of the Company's revenues, 
respectively, during the nine months ended September 30, 1998. The Company's 
revenues from customers in the United States represented 84% of its revenues 
during the nine months ended September 30, 1997 and 99% of its revenues 
during the nine months ended September 30, 1998. 

     Cost of revenues consists of cost of licenses, amortization of software
development costs and cost of services. Cost of licenses consist of software
media (disks), documentation, product packaging, production costs, product
royalties and the cost of hardware associated with sales of FireWall/Plus
Premier Version. Cost of licenses increased by $98,000 or 156%, from $63,000 for
the nine months ended September 30, 1997 to $161,000 for the nine months


                                       11
<PAGE>

ended September 30, 1998, representing 11% and 31% of license revenues,
respectively. The increase in cost of licenses in dollar amount and as a
percentage of license revenues resulted primarily from sales of third party VPN
products. Cost of licenses as a percentage of license revenues may fluctuate
from period to period due to changes in product mix, changes in the number or
size of transactions recorded in a given period or an increase or decrease in
licenses of products which would require the Company to pay royalties to third
parties.

     Amortization of software development costs increased by $214,000 or 114%,
from $188,000 for the nine months ended September 30, 1997 to $402,000 for the
nine months ended September 30, 1998, representing 32% and 78% of license
revenues, respectively. The increase in the amortization of software development
costs for the nine months ended September 30, 1998 was due to the commencement
of amortization of costs of the FireWall/Plus Windows NT Version 4.0 upon its
release in September 1997.

     Cost of services consist of salaries, benefits and overhead associated with
consulting services and maintenance. Cost of services increased by $133,000 or
36%, from $369,000 for the nine months ended September 30, 1997 to $502,000 for
the nine months ended September 30, 1998, representing 66% and 47% of service
revenues, respectively, due to increases in employees and outside consultants
required to service the large consulting projects.

     Gross profit decreased from $1,030,000 for the nine months ended September
30, 1997 to $508,000 for the nine months ended September 30, 1998, representing
62% and 32% of revenues, respectively. The decrease in gross profit was due to
the receipt of the non-refundable prepaid royalty of $500,000 in June 1997,
decreased license revenues and the increase in cost of sales as a result of
increased amortization of software costs, licenses of third party VPN products
and hardware costs associated with licenses of FireWall/Plus Premier Version.

     Product development consists of salaries, benefits, bonuses, travel and
related costs of the Company's product development personnel, including
consulting fees, the costs of computer equipment used in product and technology
development and third-party development contracts. Product development expense
increased $19,000 or 4%, from $424,000 for the nine months ended September 30,
1997 to $443,000 for the nine months ended September 30, 1998, representing 26%
and 28% of revenues, respectively. Total product developments costs, including
capitalized costs of $850,000 and $100,000, were $1,274,000 and $543,000 for the
nine months ended September 30, 1997 and September 30, 1998, respectively. The
decrease in total product development costs was due to the significant costs
incurred during the nine months ended September 30, 1997 for the development of
FireWall/Plus Version 4.0 which was released in September 1997, and reduced
expenditures during the nine months ended September 30, 1998 resulting from the
Company's lack of financial resources. The Company currently anticipates that
product development costs will increase as the Company hires additional software
engineers and developers to support the Company's growth.

     Sales and marketing expense's consist primarily of salaries, including
commissions, benefits, bonuses, travel, advertising, public relations,
consultants and trade shows. 


                                       12
<PAGE>

Selling and marketing expenses decreased by $60,000 or 8%, from $750,000 for the
nine months ended September 30, 1997 to $690,000 for the nine months ended
September 30, 1998, representing 45% and 44% of revenues, respectively. The
decrease in selling and marketing expenses was due primarily to a decrease in
marketing efforts during such period resulting from the Company's lack of
financial resources for such purposes.

     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
$532,000 or 42%, from $1,268,000 for the nine months ended September 30, 1997 to
$1,800,000 for the nine months ended September 30, 1998, representing 77% and
114% of revenues, respectively. The increase in general and administrative
expenses was due primarily to non-cash charges of $703,000 during the nine
months ended September 30, 1998 related to the value of stock options issued to
the Company's Chief Executive Officer, and the value of other securities issued
to an affiliate of the Company's Chairman of the Board of Directors and third
parties for services, as compared to non-cash charges of $131,000 during the
nine months ended September 30, 1997 related to consulting services. This
increase was partially offset by reduced postage, shipping, telephone
expenses, professional fees and travel and entertainment expenses during the
nine months ended September 30, 1998. The Company currently anticipates that
general and administrative expenses will increase significantly as the Company
hires additional personnel to support its growth in future periods.

     Interest expense increased by $424,000 or 142%, from $298,000 for the nine
months ended September 30, 1997 to $722,000 for the nine months ended September
30, 1998, representing 18% and 46% of revenues, respectively. The increase in
interest expense was due primarily to an increase in the amortization of debt
discount and interest expense for the nine months ended September 30, 1998
related to private financings consisting of notes and warrants. Interest expense
is expected to be significantly reduced as a result of the Company's 
consummation of the Offering.

     No provision for or benefit from federal, state or foreign income taxes was
recorded for the nine months ended September 30, 1997 or the nine months ended
September 30, 1998 because the Company incurred net operating losses during each
period and fully reserved its deferred tax assets as their future realization
could not be determined.

     As a result of the foregoing, the net loss increased by $1,437,000 or 84%,
from $1,710,000 for the nine months ended September 30, 1997 to $3,147,000 for
the nine months ended September 30, 1998.


                                       13
<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 September 30, 1998, the Company had $181,000 of cash and cash
equivalents and a working capital deficit of $3,554,000. Prior to its initial
public offering (November 1998), the Company has financed its operations
primarily through private sales of equity and debt securities. Net cash used in
operating activities was $745,000 and $1,348,000 during the nine months ended
September 30, 1997 and 1998, respectively. Net cash used in operating activities
for the nine months ended September 30, 1998 was primarily attributable to a net
loss of $3,147,000 and an increase in accounts receivable of $262,000, which was
partially offset by increases in accounts payable, accrued expenses and other
current liabilities of $207,000, and by amortization of debt discount of
$594,000, issuance of Common Stock and warrants for services rendered of
$703,000 and depreciation and amortization of $523,000. Net cash used in
operating activities for the nine months ended September 30, 1997 was primarily
attributable to a net loss of $1,710,000 and an increase in accounts receivable
of $157,000 which was partially offset by increases in accounts payable, accrued
expenses and other current liabilities of $388,000, and amortization of debt
discount of $270,000 and depreciation and amortization of $300,000.

     The Company's operating activities during the nine months ended September
30, 1997 were financed primarily with $1,500,000 of net proceeds from the
issuance of $1,500,000 principal amount of notes and warrants to purchase
210,628 shares of Common Stock and during the nine months ended September 30,
1998 with $1,750,000 of net proceeds from the issuance of $1,750,000 principal
amount of notes and warrants to purchase 325,919 shares of Common Stock. Upon
consummation of the Company's public offering (November 17, 1998), outstanding
promissory notes, including accrued interest, of $2,954,888, were cancelled in
exchange for the issuance of 562,836 shares of Series C Preferred Stock (subject
to adjustment in the event the underwriter's over-allotment option is exercised)
and promissory notes in the principal amount of $575,000 plus accrued interest
were repaid in full. The Company incurred aggregate non-cash charges of
approximately $231,000 during the three month period ended September 30, 1998
and will incur additional non-cash charges of approximately $437,000 during the
three months ended December 31, 1998 relating to the amortization of debt
discount with respect to an aggregate of $3,250,000 principal amount of
promissory notes which were repaid or cancelled in exchange for shares of Series
C Preferred Stock. The Company does not currently have a line of credit from a
commercial bank or other institution.

     In November 1998 the Company completed an initial public offering of
1,700,000 shares of its Common Stock which resulted in net proceeds of
approximately $8,000,000. The Company is dependent on the proceeds from its
initial public offering (the "Offering") to implement its business plan and
finance its working capital requirement. The Company anticipates, based on
currently proposed plans and assumptions relating to the implementation of its
business plan (including the timetable of, costs and expenses associated with,
and success of, its marketing efforts), that the net proceeds of the Offering,
together with projected 


                                       14
<PAGE>

revenues from operations, will be sufficient to satisfy the Company's operations
and capital requirements for approximately twelve months following the
consummation of the Offering in November 1998. There can be no assurance,
however, that such funds will not be expended prior thereto due to unanticipated
changes in economic conditions or other unforeseen circumstances. In the event
the Company's plans change or its assumptions change or prove to be inaccurate
(due to unanticipated expenses, difficulties, delays or otherwise) or the net
proceeds of the Offering and projected revenues otherwise prove to be
insufficient to fund the implementation of the Company's business plan or
working capital requirements, the Company could be required to seek additional
financing sooner than currently anticipated. The Company has no current
arrangements with respect to any additional financing. Consequently, there can
be no assurance that any additional financing will be available to the Company
when needed, on commercially reasonable terms or at all. Any inability to obtain
additional financing when needed would have a material adverse effect on the
Company, requiring it to curtail and possibly cease its operations. In addition,
any additional equity financing may involve substantial dilution to the
interests of the Company's then existing stockholders.

Year 2000 Issue

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

Fluctuations in Operating Results

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


                                       15
<PAGE>

PART II. OTHER INFORMATION

Item 1.  LEGAL PROCEEDINGS.

     None.

Item 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS.

         (A) In connection with the Offering, on July 20, 1998, the Company
amended its Certificate of Incorporation to provide for a 1-for-1.61083 reverse
stock split of its outstanding Common Stock.

         (B) On October 23, 1998, the Company filed a Certificate of Designation
of Series C Preferred Stock pursuant to which the Company designated 750,000
shares of Series C Convertible Preferred Stock, $.01 per value. At December 15,
1998, there were 562,836 shares of Series C Convertible Preferred Stock
outstanding (subject to adjustment if the underwriter exercised its
over-allotment option). The Series C Convertible Preferred Stock is convertible
on a 1-to-1 basis into shares of Common Stock and has identical voting rights as
the Company's Common Stock. Holders of the Series C Preferred Stock will be
entitled to equivalent dividends and distributions as those paid on shares of
Common Stock. In addition, the Series C Preferred Stock has a liquidation
preference of $5.25 per share plus any declared but unpaid dividends before any
payments are made to holders of Common Stock, in the event of liquidation,
dissolution or winding up of the Company or if elected by a majority of the
outstanding shares of the Series C Preferred Stock, upon the sale of all or
substantially all of the assets of the Company or the merger of the Company into
another entity.

         (C) On September 11, 1998, the Company entered into a merger 
agreement with CommHome Systems Corporation ("CommHome"), effective upon 
consummation of the Offering, pursuant to which the following CommHome 
stockholders exchanged all of the outstanding Common Stock of CommHome for 
46,667 shares of Common Stock of the Company valued at $280,000:

<TABLE>
<CAPTION>

                                                                Company
                                                               Shares of
                                                              Common Stock
                         Name                                   Received
                       ---------------                        ------------
                       <S>                                        <C>
                       Avi Fogel                                  23,876

                       Nachum Sadan                               14,470

                       Russell L. Rivin                            2,171

                       Robert Quinn                                2,171

                       David Chhoeum                               1,808

                       Uri Guttman                                 2,171

</TABLE>

                                       16
<PAGE>

         In addition, in connection with the merger agreement, the Company
assumed liabilities of CommHome on the effective date of the merger of
approximately $200,000 which included $55,000 and $50,000 owed to Avi A. Fogel
and Robert P. Olsen, respectively. Messrs, Fogel and Olsen received 9,167 and
8,333 shares, respectively, of the Company's Common Stock in full satisfaction
of such indebtedness. Avi A. Fogel, President, Chief Executive Officer and a
director of the Company, was also President, Chief Executive Officer and a
director of CommHome and owned 51% of the outstanding shares of CommHome. Mr.
Olsen, Vice President of Product Management of the Company, is the former Vice
President of Marketing of CommHome.

         (D) On November 12, 1998, the Company's registration statement on Form
SB-2, as amended (file number 333-59617), relating to the Offering was declared
effective by the Commission. Whale Securities Co., L.P. acted as the underwriter
in connection with the Offering which was consummated on November 17, 1998. In
connection with the Offering, the Company registered, issued and sold 1,700,000
shares of Common Stock (excluding 255,000 shares of Common Stock subject to the
underwriter's over-allotment option), at an initial public offering price of
$6.00 per share resulting in proceeds to the Company (net of underwriting
discount, commissions and other expenses payable by the Company) in the
aggregate approximate amount of $8,000,000. Additionally, the Company registered
170,000 shares of Common Stock underlying warrants to purchase Common Stock sold
by the Company to the underwriter for $100. The warrants are exercisable for a
four-year period commencing on November 12, 1999 at a price of $9.30 per share.

         The Registration Statement was declared effective subsequent to the end
of the nine month period ended September 30, 1998 for which this Quarterly
Report on Form 10-QSB is being filed. Through the end of the nine month period
ended September 30, 1998, the Company had incurred deferred costs relating to
the Offering in the amount of $519,000. Such expenses related to legal,
accounting, underwriting and registration fees. During the nine month period
ended September 30, 1998, the Company did not receive, and as a result did not
use, any proceeds from the Offering.

Item 3.  DEFAULTS UPON SENIOR SECURITIES.

         None.

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

                (A) On July 8, 1998 and July 15, 1998, the holders of a majority
of the issued and outstanding Common Stock acted pursuant to written Consent of
Majority Stockholders of the Company.

                (B) Not applicable.

                (C) (i) On July 8, 1998, pursuant to a written consent, the
holders of a majority of the issued and outstanding voting stock of the Company
approved the Company 


                                       17
<PAGE>

entering into an Exchange Agreement with certain holders of outstanding warrants
and options pursuant to which the Company issued an aggregate of 596,741 shares
of its Common Stock in exchange for cancellation of outstanding warrants and
options to purchase 789,521 shares of Common Stock of the Company.

                         (b) On July 15, 1998, pursuant to a written consent, 
the holders of a majority of the issued and outstanding voting stock of the 
Company approved (i) a reverse split of the Company's issued and outstanding 
Common Stock at the rate of 1-for-1.61083 shares of Common Stock and (ii) an 
amendment to the Company's Stock Option Plan to provided for an increase to 
750,000 shares of Common Stock, as to aggregate number of shares reserved for 
issuance upon exercise of options which may be covered under the Plan.

Item 5.  OTHER INFORMATION.

         None.

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

         Exhibits

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

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

              <S>                          <C>
              27                           Financial data schedule for
                                           nine month period ended
                                           September 30, 1998
</TABLE>

         No reports on Form-8-K were filed during the nine months ended 
September 30, 1998.



                                       18
<PAGE>

                                   SIGNATURES

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


                           NETWORK-1 SECURITY SOLUTIONS, INC.


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


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


Date: December 24, 1998


                                       19
<PAGE>


                                  EXHIBIT INDEX

<TABLE>
<CAPTION>

         Exhibit Number                    Description of Exhibit
         --------------                    ----------------------
              <S>                          <C>
              27                           Financial data schedule for
                                           nine month period ended
                                           September 30, 1998
</TABLE>





                                       20