Edgar Filing: NETWORK 1 SECURITY SOLUTIONS INC

As filed with the Securities and Exchange Commission on May 25, 2007

REGISTRATION NO. 333-126013
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

POST-EFFECTIVE AMENDMENT NO. 1
ON
FORM SB-2
TO
FORM S-2

REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

NETWORK-1 SECURITY SOLUTIONS, INC.
(Exact Name of Registrant as Specified in its Charter)

DELAWARE 6794 11-3027591
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(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)

445 PARK AVENUE, SUITE 1028
NEW YORK, NEW YORK 10022
(212) 829-5700
(Address, including zip code, and telephone number, including area code,
of Registrant's principal executive offices)

COREY M. HOROWITZ
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
445 PARK AVENUE, SUITE 1028
NEW YORK, NEW YORK 10022
(212) 829-5700
(Name, address, including zip code, and telephone number,
including area code, of agent for service)

COPIES TO:
SAM SCHWARTZ, ESQ.
EISEMAN LEVINE LEHRHAUPT & KAKOYIANNIS, P.C.
805 THIRD AVENUE
NEW YORK, NEW YORK 10022
(212) 752-1000

APPROXIMATE DATE OF PROPOSED SALE TO PUBLIC: From time to time after the
effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1993, other than securities offered only in connection with a dividend or
interest re-investment plans, check the following box: |X|

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: |_|
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If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: |_|

If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering |_|

If the delivery of the prospectus is expected to be made pursuant to Rule
434, check the following box: |_|

Note Regarding Registration Fees:
---------------------------------

All fees for the shares registered on this Post-Effective Amendment No. 1 were
paid upon the initial filing of the previously filed registration statement
covering such shares, as noted above. No additional shares are registered and
accordingly no additional fees are payable.

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.

SUBJECT TO COMPLETION, DATED MAY 25, 2007

PROSPECTUS

NETWORK-1 SECURITY SOLUTIONS, INC.

14,127,191 SHARES OF COMMON STOCK

This prospectus covers the resale by the selling stockholders listed on pages 20
to 23 of this Prospectus of up to 14,127,191 shares of our common stock, $.01
per value. which include:

o 2,427,500 shares of common stock and 2,013,750 shares of common stock
issuable upon exercise of warrants issued in our private offering in
December 2004 and January 2005;

o 8,335,941 shares of common stock owned by certain of our stockholders;
and

o 1,350,000 shares of common stock issuable upon exercise of certain
other warrants and options.

We will not receive any proceeds from the sale of these shares of common stock.
We will, however, receive proceeds if warrants and options to purchase common
stock are exercised by payment of cash and those proceeds will be used for our
general corporate purposes. This offering is not being underwritten. The selling
stockholders may sell the shares of common stock on the Over-the-Counter (OTC)
Bulletin Board with the methods and on the terms described in the section of
this prospectus entitled "Plan of Distribution" on pages 30 to 32.

Our common stock is traded on the OTC Bulletin Board under the symbol "NSSI". On
May 21, 2007, the closing price of our common stock, as reported on the OTC
Bulletin Board, was $1.88 per share.

THE SECURITIES OFFERED IN THIS PROSPECTUS INVOLVE A HIGH DEGREE OF
RISK. YOU SHOULD CAREFULLY CONSIDER THE FACTORS DESCRIBED UNDER THE
HEADING "RISK FACTORS" BEGINNING ON PAGE 4 OF THIS PROSPECTUS.

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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE
SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.

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THE DATE OF THIS PROSPECTUS IS MAY 25, 2007

TABLE OF CONTENTS

PAGE
----

PROSPECTUS SUMMARY................................................................................1

RISK FACTORS......................................................................................4

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS................................................10

LEGAL PROCEEDINGS................................................................................18

USE OF PROCEEDS..................................................................................19

SELLING STOCKHOLDERS.............................................................................19

PLAN OF DISTRIBUTION.............................................................................30

MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION........................................32

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.............34

MANAGEMENT.......................................................................................35

EXECUTIVE COMPENSATION...........................................................................39

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...................................43

TRANSACTIONS WITH RELATED PERSONS, PROMOTERS AND CERTAIN CONTROL PERSONS.........................48

DESCRIPTION OF SECURITIES........................................................................49

LEGAL MATTERS....................................................................................50

EXPERTS..........................................................................................50

DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES..............50

WHERE YOU CAN FIND MORE INFORMATION..............................................................51

FINANCIAL INFORMATION......................................................................F-1-F-29

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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus.
It does not contain all of the information that you should consider before
investing in our common stock. You should read the entire prospectus carefully,
including the section entitled "Risk Factors" and our consolidated financial
statements and the related notes.

Unless the context otherwise requires, all references to "we," "us," "our,"
or the "Company" in this prospectus refer to Network-1 Security Solutions, Inc.,
a Delaware corporation.

THE COMPANY

Our principal business is the acquisition, development, licensing and
protection of our intellectual property. We presently own six patents covering
various telecommunications and data networking technologies. Our strategy is to
pursue licensing and strategic business alliances with companies in industries
that manufacture and sell products that make use of the technologies underlying
our patents as well as with other users of the technologies who benefit directly
from such technologies.

We have focused, and are likely to continue to focus, our efforts on
licensing our Remote Power Patent. As of the date of this prospectus, we have
not yet entered into any license agreements with respect to our Remote Power
Patent, although as part of our settlement agreement with respect to our
litigation with D-Link Corporation and D-Link Systems (collectively, "D-Link")
entered in April 2007, D-Link has agreed to enter into a license agreement
pertaining to our Remote Power Patent. (See "D-Link Settlement" below). At least
for the next twelve months, we do not anticipate licensing efforts for our other
patents besides our Remote Power Patent. We may seek to acquire or license
additional patents in the future.

Our Remote Power Patent (U.S. Patent No. 6,218,930) relates to several
technologies which describe a methodology for controlling the delivery of power
to certain devices over an Ethernet network. Ethernet is the leading local area
networking technology in use today. PoE technology allows for the delivery of
power over Ethernet cables rather than by separate power cords. As a result, a
variety of network devices, including IP telephones, wireless LAN Access Points,
web-based network security cameras, data collection terminals and other network
devices, are able to receive power over existing data cables without the need to
modify the existing infrastructure to facilitate the provision of power for such
devices through traditional AC outlets. Advantages of PoE, such as lower
installation costs, remote management capabilities, lower maintenance costs,
centralized power backup, and flexibility of device location as well as the
advent of worldwide power compatibility, create the possibility of PoE becoming
widely adopted in networks throughout the world.
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Our future success is largely dependent upon our proprietary technologies,
our ability to protect our intellectual property rights and to consummate
license agreements with respect to our Patent Portfolio. The complexity of
patent and common law, combined with our limited resources, create risk that our
efforts to protect our proprietary technologies may not be successful. We cannot
be assured that our patents will be upheld or that third parties will not
invalidate our patents.

Besides our Remote Power Patent, we also own five (5) additional patents
covering various methodologies that provide for allocating bandwidth and
establishing Quality of Service for delay sensitive data, such as voice, on
packet data networks. Quality of Service issues become important when data
networks carry packets that contain audio and video which may require priority
over data packets traveling over the same network. Covered within these patents
are also technologies that establish bi-directional communications control
channels between network-connected devices in order to support advanced
applications on traditional data networks. We believe that potential licensees
of the technologies contained in these patents would be vendors deploying
applications that require the low latency transport of delay sensitive data such
as video over data networks.

We were incorporated under the laws of the State of Delaware in July 1990.
Our executive offices are located at 445 Park Avenue, Suite 1028, New York, New
York 10022 and our telephone number is (212) 829-5700. Our web site can be found
at http://www.network-1.com.

D-LINK SETTLEMENT

On August 10, 2005, we commenced patent litigation against D-Link
Corporation and D-Link Systems, Incorporated (collectively "D-Link") in the
United States District Court for the Eastern District of Texas, Tyler division
(Civil Action No. 6:05W291), for infringement of our Remote Power Patent (U.S.
Patent 6,218,930). Our complaint sought, among other things, a judgment that our
Remote Power Patent is enforceable and has been infringed by the defendants. We
also sought a permanent injunction restraining the defendants from continued
infringement, or active inducement of infringement by others, of the Company's
Remote Power Patent. On February 27, 2006, the D-Link defendants filed answers
and asserted counterclaims. In their answers, the D-Link defendants asserted
that they did not infringe any valid claim of the Remote Power Patent, and
further asserted that the asserted patent claims are invalid and/or
unenforceable. In addition to these defenses, the D-Link defendants also
asserted counterclaims for, among other things, non-infringement, invalidity and
unenforceability of the Remote Power Patent.

On April 25, 2007, we agreed to a settlement of our patent infringement
litigation against D-Link. Under the terms of the settlement, D-Link has agreed
to enter into a license agreement for our Remote Power Patent the terms of which
will include monthly royalty payments of 3.25% of the net sales of D-Link
branded Power over Ethernet products, including those products which comply with
the IEEE 802.3af and 802.3at Standards, for the full term of the Remote Power
Patent, which expires in March 2020. The royalty rate is subject to adjustment
beginning after the first quarter of 2008 to a rate consistent with other
similarly situated licensees of the Remote Power Patent based on units of
shipments of licensed products. In addition, D-Link has agreed to pay us
$100,000.
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Shares Being Offered

This prospectus relates to the offering by the selling shareholders of an
aggregate of 14,127,191 shares of our common stock, consisting of (i) 2,427,500
shares of our common stock and 2,013,750 shares of our common stock issuable
upon exercise of warrants issued in our private offering in December 2004 and
January 2005, (ii) 8,335,941 shares of common stock owned by certain of our
stockholders, and (iii) 1,350,000 shares of our common stock issuable upon
exercise of certain other outstanding warrants and options.

Summary Financial Data

The following tables summarize the consolidated statements of operations
and balance sheet data for our business and should be read together with the
section of this prospectus captioned "Management's Discussion and Analysis or
Plan of Operation" and our financial statements and related notes included
elsewhere in this prospectus.

Three Months Year Ended
Ended March December 31,
31, 2007 -------------------------
(Unaudited) 2006 2005
----------- ----------- ----------
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Operating expenses(1) $ 1,075,000 $ 2,027,000 1,756,000
Net loss $(1,060,000) $(1,958,000) (1,332,000)
Basic and diluted loss per share $ (.05) $ (0.10) (0.10)
Weighted-average common shares
outstanding 19,784,724 $18,952,137 17,676,202

CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents $ 1,086,000 $ 1,797,000 938,000
Working capital $ 721,000 $ 1,306,000 660,000
Total assets $ 1,235,000 $ 1,971,000 1,115,000
Total shareholders' equity
(deficit) $ 814,000 $ 1,402,000 752,000

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(1) Includes non-cash compensation of $461,000, $479,000 and $89,000 for the
three months ended March 31, 2007 and the year ended December 31, 2006 and
2005, respectively.

We have incurred substantial operating losses since our inception, which
has resulted in an accumulated deficit of $(47,339,000) as of March 31, 2007.
For the years ended December 31, 2006 and 2005, we incurred net losses of
$(1,958,000) and $(1,332,000), respectively. For the three months ended March
31, 2007, we incurred a net loss of $(1,060,000). We have financed our
operations primarily by sales of equity securities. We have had no revenue from
operations for the years ended December 31, 2005 and December 31, 2006 and for
the three months ended March 31, 2007. Our ability to achieve revenue and
generate positive cash flow from operations is dependent upon consummating
licensing agreements with respect to our patented technologies. We may not be
successful in achieving licensing agreements with third parties and our failure
to do so would have a material adverse effect on our business, financial
condition and results of operations. We believe that we will have enough funding
to meet our cash needs and continue our operations until at least December 31,
2008.
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RISK FACTORS

AN INVESTMENT IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. THE RISK
FACTORS LISTED BELOW ARE THOSE THAT WE CONSIDER TO BE MATERIAL TO AN INVESTMENT
IN OUR COMMON STOCK AND THOSE WHICH, IF REALIZED, COULD HAVE MATERIAL ADVERSE
EFFECTS ON OUR BUSINESS, FINANCIAL CONDITION OR RESULTS OF OPERATIONS AS
SPECIFICALLY DISCUSSED BELOW. IN SUCH AN EVENT, THE TRADING PRICE OF OUR COMMON
STOCK COULD DECLINE, AND YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT. BEFORE
YOU INVEST IN OUR COMMON STOCK, YOU SHOULD BE AWARE OF VARIOUS RISKS, INCLUDING
THOSE DESCRIBED BELOW. YOU SHOULD CAREFULLY CONSIDER THESE RISK FACTORS,
TOGETHER WITH ALL OF THE OTHER INFORMATION INCLUDED OR INCORPORATED BY REFERENCE
IN THIS PROSPECTUS, BEFORE YOU DECIDE WHETHER TO PURCHASE OUR COMMON STOCK. THIS
SECTION INCLUDES OR REFERS TO CERTAIN FORWARD-LOOKING STATEMENTS. YOU SHOULD
REFER TO THE EXPLANATION OF THE QUALIFICATIONS AND LIMITATIONS ON SUCH
FORWARD-LOOKING STATEMENTS DISCUSSED ON PAGE 10.

WE HAVE A HISTORY OF LOSSES AND NO REVENUE FROM CURRENT OPERATIONS.

We have incurred substantial operating losses since our inception, which has
resulted in an accumulated deficit of $(47,339,000) as of March 31, 2007. For
the years ended December 31, 2006 and 2005, we incurred net losses of
$(1,958,000) and $(1,332,000), respectively. For the three months ended March
31, 2007, we incurred a net loss of $(1,060,000). We have financed our
operations primarily by sales of equity securities. Since December 2002, when we
discontinued our security software products and following the commencement of
our new technology licensing business in November 2003, we have had no material
revenue from operations. We had no revenue from operations for the years ended
December 31, 2005 and December 31, 2006 and for the three months ended March 31,
2007. Our ability to achieve revenue and generate positive cash flow from
operations is dependent upon consummating licensing agreements with respect to
our patented technologies. We may not be successful in achieving licensing
agreements with third parties and our failure to do so would have a material
adverse effect on our business, financial condition and results of operations.
We may not be able to achieve revenue or generate positive cash flow from
operations from our licensing business.

WE COULD BE REQUIRED TO STOP OPERATIONS IF WE ARE UNABLE TO DEVELOP OUR
TECHNOLOGY LICENSING BUSINESS OR RAISE CAPITAL WHEN NEEDED.

We anticipate, based on our currently proposed plans and assumptions relating to
our operations (including the timetable of costs and expenses associated with
our continued operations), that our cash position of $5,463,000 at April 30,
2007 will more likely than not be sufficient to satisfy our operations and
capital requirements until at least December 31, 2008. However, we may expend
our funds 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, 2008. Our inability to obtain additional financing when
needed, absent generating sufficient cash from licensing arrangements, would
have a material adverse effect on our company, requiring us to curtail or
possibly cease our operations. In addition, any additional equity financing may
involve substantial dilution to the interests of our then existing stockholders.

OUR LICENSING BUSINESS MAY NOT BE SUCCESSFUL.

In November 2003, we entered the technology licensing business following our
acquisition of six patents relating to various telecommunications and data
networking technologies including, among others, patents covering the delivery
of remote power over Ethernet and the transmission of audio, video and data over
computer and telephony networks. Accordingly, we have a limited history in the
technology licensing business upon which an evaluation of our prospects and
future performance can be made. Our prospects must be considered in light of the
risks, expenses and difficulties frequently encountered in the development,
operation and expansion of a new business based on patented technologies in a
highly specialized and competitive market. We may not be able to achieve revenue
or profitable operations from our new licensing business.

OUR FUTURE SOURCE OF LICENSING REVENUE IS UNCERTAIN.

In February 2004, we initiated our first licensing efforts relating to the
technologies in our remote power patent (U.S. Patent No. 6,218,930) (the "Remote
Power Patent"). To date, we have not entered into any licensing agreements with
third parties with respect to our Remote Power Patent or our other patented
technologies, although D-Link has agreed to enter into a license agreement with
us as part of a settlement agreement regarding pending litigation (See "Legal
Proceedings"). Our inability to consummate licensing agreements and achieve
revenue from our patented technologies would have a material adverse effect on
our operations and our ability to continue our business. In addition, in the
event we consummate license arrangements with third parties, such arrangements
are not likely to produce a stable or predictable stream of revenue in the
foreseeable future. Furthermore, the success of our licensing efforts depends
upon the strength of our intellectual property rights.

WE ARE CURRENTLY RELYING UPON THE EFFORTS OF THINKFIRE TO CONSUMMATE LICENSING
AGREEMENTS FOR OUR REMOTE POWER PATENT WITH CERTAIN SELECT POTENTIAL LICENSEES.

On November 30, 2004, we entered into a Master Services Agreement (the
"Agreement") with ThinkFire Services USA, Ltd. ("ThinkFire") pursuant to which
we granted ThinkFire the exclusive (except for us and related companies)
worldwide rights to negotiate license agreements for our Remote Power Patent
with respect to certain potential licensees agreed to between the parties.
Either we or ThinkFire can terminate the Agreement upon 60 days notice for any
reason or upon 30 days notice in the event of a material breach. We have agreed
to pay ThinkFire a fee not to exceed 20% of the royalty payments received from
license agreements consummated by ThinkFire on our behalf. ThinkFire may not be
successful in consummating license agreements on our behalf and even if such
agreements are consummated they may not result in significant royalty payments
to us.

OUR SUCCESS IS DEPENDENT UPON OUR ABILITY TO PROTECT OUR PROPRIETARY
TECHNOLOGIES.

Our success is substantially dependent upon our proprietary technologies and our
ability to protect our intellectual property rights. We currently hold 6 patents
issued by the U.S. Patent Office that relate to various telecommunications and
data networking technologies and include among other things, patents covering
the transmission of audio, voice and data over computer and telephony networks
and the delivery of remote PoE networks. We rely upon our patents and trade
secret laws, non-disclosure agreements with our employees, consultants and third
parties to protect our intellectual property rights. The complexity of patent
and common law, combined with our limited resources, create risk that our

efforts to protect our proprietary technologies may not be successful. We cannot
assure you that our patents will be upheld or that third parties will not
invalidate our patent rights. In the event our intellectual property rights are
not upheld, such an event would have a material adverse effect on us.

WE ARE CURRENTLY RELYING UPON OUR CONTINGENCY FEE AGREEMENT WITH BLANK ROME.

In August 2005, we entered into an agreement (the "Agreement") with Blank Rome,
LLP ("Blank Rome"), a national law firm, pursuant to which Blank Rome has been
engaged to represent us in connection with all litigation involving our Remote
Power Patent. Blank Rome has agreed to represent us with respect to each
litigation pertaining to the Remote Power Patent on a full contingency basis
(except for any proceeding before the International Trade Commission). As
compensation for its services on a full contingency basis, Blank Rome will
receive from us percentages of Net Consideration (as defined in the Agreement)
ranging from 12.5% to 35% received by us by way of settlement or judgment in
connection with each litigation matter. We have also agreed to compensate Blank
Rome in an amount equal to 10% of the Net Consideration received by us from
certain designated parties mutually agreed upon by us and Blank Rome (the
"Designated Parties") in the event such Designated Parties enter into license
agreements or similar agreements with us during the period of Blank Rome's
engagement.

The Agreement may be terminated by either Blank Rome or us upon 30 days notice.
If we elect to terminate the Agreement, we will compensate Blank Rome in an
amount equal to 5% of the Net Consideration received by us from the Designated
Parties with whom Blank Rome has not commenced litigation on our behalf,
provided that such parties had substantive licensing or settlement discussions
related to our Remote Power Patent during the term of the Agreement and entered
into a license agreement or similar agreement with us providing for Net
Consideration within the 12 month period following termination. In addition, in
the event of termination during the pendency of litigation, Blank Rome will
receive its pro-rata share of Net Consideration based upon its hourly time
charges with respect to parties against whom Blank Rome commenced litigation (or
defended) on our behalf. In the event the Agreement with Blank Rome is
terminated, depending upon our financial resources at the time, we may need to
enter into a contingent fee agreement with a new law firm in order to enforce
and/or defend our Remote Power Patent and our inability to secure such an
arrangement on satisfactory terms and on a timely basis may have a material
adverse effect on us.

ANY LITIGATION TO PROTECT OUR INTELLECTUAL PROPERTY OR ANY THIRD PARTY CLAIMS TO
INVALIDATE OUR PATENTS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS.

Our success depends on our ability to protect our intellectual property rights.
In August 2005, we commenced patent litigation against D-Link Corporation and
D-Link Systems, Incorporated for infringement of our Remote Power Patent and in
April 2007 we entered into a settlement agreement with the D-Link parties (See
"Legal Proceedings"). In the future, it may be necessary for us to commence
patent litigation against additional third parties whom we believe require a
license to our patents. In addition, we may be subject to claims seeking to
invalidate our patents, as had been asserted by D-Link as a defense in their
litigation with us. These types of claims, with or without merit, may subject us
to costly litigation and diversion of management's focus. If we are unsuccessful
in enforcing and validating our patents and/or if third parties making claims
against us seeking to invalidate our patents are successful, they may be able to
obtain injunctive or other equitable relief, which effectively could block our
ability to license or otherwise capitalize on our proprietary technologies.

Successful litigation against us resulting in a determination that our patents
are invalid would have a material adverse effect on us.

OUR SETTLEMENT WITH D-LINK DOES NOT NECESSARILY MEAN WE WILL ACHIEVE ADDITIONAL
MATERIAL LICENSE AGREEMENTS PERTAINING TO OUR REMOTE POWER PATENT.

On April 25, 2007 we entered into a settlement agreement with respect to our
patent litigation against D-Link Corporation and D-Link Systems, Incorporated in
the United States District Court for the Eastern District of Texas, Tyler
Division, for infringement of our Remote Power Patent. Under the terms of the
settlement, D-Link has agreed to enter into a license agreement for our Remote
Power Patent the terms of which will include monthly royalty payments of 3.25%
of the net sales of D-Link branded Power over Ethernet products, including those
products which comply with the IEEE 802.3af and 802.3at Standards, for the full
term of the Remote Power Patent, which expires in March 2020. The royalty rate
is subject to adjustment beginning after the first quarter of 2008 to a rate
consistent with other similarly situated licensees of the Remote Power Patent
based on units of shipments of licensed products. In addition, D-Link has agreed
to pay us $100,000. Notwithstanding our settlement with the D-Link parties,
there is no assurance that we will be able to achieve additional license
agreements with third parties relating to our Remote Power Patent or that such
license arrangements, including the D-Link license, will result in material
revenue to us.

MATERIAL LICENSING REVENUES FROM OUR REMOTE POWER PATENT MAY BE DEPENDENT UPON
THE APPLICABILITY OF THE IEEE STANDARD.

The Institute of Electrical and Electronic Engineers (IEEE) is a non-profit,
technical professional association of more than 360,000 individual members in
approximately 175 countries. The Standards Association of the IEEE is
responsible for the creation of global industry standards for a broad range of
technology industries. In 1999, the IEEE formed a task force to facilitate the
adoption of a standardized methodology for the delivery of remote power over
Ethernet networks which would insure interoperability among vendors of switches
and terminal devices. In June 2003, the IEEE Standards Association approved the
802.3af Power Over Ethernet standard (the "Standard"), which covers technologies
deployed in delivering power over Ethernet cables including whether deployed in
switches or as standalone midspan hubs both of which provide power to remote
devices including wireless access points, IP phones and network based cameras.
The technology is commonly referred to as Power Over Ethernet ("PoE"). We
believe our Remote Power Patent covers several of the key technologies covered
by the Standard. However, there is a risk that as a result of litigation a court
may determine otherwise and such a determination would have a material adverse
effect on our ability to enter into license agreements and achieve revenue and
profits from our Remote Power Patent.

WE FACE INTENSE COMPETITION AND WE MAY NOT BE ABLE TO SUCCESSFULLY COMPETE.

The telecommunications and data networking market is characterized by intense
competition and rapidly changing business conditions, customer requirements and
technologies. Our current and potential competitors have longer operating
histories, greater name recognition and possess substantially greater financial,
technical, marketing and other competitive resources than us. Although we
believe that we have rights to enforceable patents relating to
telecommunications and data networking, there can be no assurance that third
parties will not invalidate any or all of our patents or that such parties may
not be deemed to infringe any or all of our patents. In addition, the

telecommunications and data networking industries may develop technologies that
may be more effective than our proprietary technologies or that render our
technologies less marketable or obsolete.

OUR MARKETS ARE SUBJECT TO RAPID TECHNOLOGICAL CHANGE AND OUR TECHNOLOGIES FACE
POTENTIAL TECHNOLOGY OBSOLESCENCE.

The telecommunications and data networking technology market, including
transmission of audio, video and data over computer and telephony networks and
the delivery of remote power over Ethernet markets, are characterized by rapid
technological changes, changing customer requirements, frequent new product
introductions and enhancements, and evolving industry standards. The
introduction of products embodying new technologies and the emergence of new
industry standards may render our technologies obsolete or less marketable. To
the extent we are able to achieve revenue in the future, such revenue will be
derived from licensing our technologies based on existing and evolving industry
standards.

DEPENDENCE UPON CEO AND CHAIRMAN.

Our success is largely dependent upon the personal efforts of Corey M. Horowitz,
our Chairman and Chief Executive Officer and Chairman of the Board of Directors.
In February 2007, we entered into a new two (2) year employment agreement with
Mr. Horowitz pursuant to which he continues to serve as our Chairman and Chief
Executive Officer (See "Executive Compensation"). We do not maintain key man
life insurance on the life of Mr. Horowitz. The loss of the services of Mr.
Horowitz would have a material adverse effect on our business and prospects.

RISKS RELATED TO LOW PRICED STOCKS.

Our common stock currently trades on the OTC Bulletin Board under the symbol
NSSI. Since the trading price of our common stock is below $5.00 per share, our
common stock is 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. SEC regulations 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.

THE SIGNIFICANT NUMBER OF OPTIONS AND WARRANTS OUTSTANDING MAY ADVERSELY EFFECT
THE MARKET PRICE FOR OUR COMMON STOCK.

As of April 30, 2007, there are outstanding options and warrants to purchase an
aggregate of 12,340,857 shares of our common stock at exercise prices ranging
from $.12 to $10.00. To the extent that outstanding options and warrants are
exercised, stockholder percentage ownership will be diluted and any sales in the
public market of the common stock underlying such options 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 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.

OUR STOCK PRICE MAY BE VOLATILE.

The market price of our common stock is likely to be highly volatile and could
fluctuate widely in price in response to various factors, many of which are
beyond our control, including the following:

o our ability to successfully enforce and/or defend our Remote Power
Patent;

o our ability to enter into favorable license agreements with third
parties with respect to our Remote Power Patent;

o our ability to achieve revenues and profits;

o our ability to raise capital when needed;

o sales of our common stock;

o our ability to execute our business plan;

o technology changes;

o legislative, regulatory and competitive developments; and

o economic and other external factors.

In addition, the securities markets have from time to time experienced
significant price and volume fluctuations that are unrelated to the operating
performance of particular companies. These market fluctuations may also
materially and adversely affect the market price of our common stock.

ADDITIONAL STOCK OFFERINGS MAY DILUTE CURRENT STOCKHOLDERS.

We may need to issue additional shares of our capital stock or securities
convertible or exercisable for shares of our capital stock, including preferred
stock, options or warrants. The issuance of additional capital stock may dilute
the ownership of our current stockholders.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains certain forward-looking statements that are
statements that include information based upon beliefs of our management, as
well as assumptions made by and information available to our management.
Statements containing terms such as "believes," "expects," "anticipates,"
"intends" or similar words are intended to identify forward-looking statements.

Our management, based upon assumptions they consider reasonable, has
compiled these forward-looking statements. Such statements reflect our current
views with respect to future events. These statements involve known and unknown
risks and uncertainties that may cause our actual results in future periods to
differ materially from what is currently anticipated. We make cautionary
statements in certain sections of this prospectus, including under "Risk
Factors." You should read these cautionary statements as being applicable to all
related forward-looking statements wherever they appear in this prospectus, the
materials referred to in this prospectus or the materials incorporated by
reference into this prospectus.

You are cautioned that no forward-looking statement is a guarantee of
future performance and you should not place undue reliance on any
forward-looking statement. Such statements speak only as of the date of this
prospectus and we are not undertaking any obligation to publicly release any
revisions to these forward-looking statements to reflect events or circumstances
after the date of this prospectus or to reflect the occurrence of unanticipated
events.

PRICE RANGE OF OUR COMMON STOCK

Our common stock currently trades on the OTC Bulletin Board under the
symbol NSSI. The following table sets forth, for the periods indicated, the
range of the high and low closing bid prices for our common stock as reported by
the Pink Sheets LLC quotation service. Such prices reflect inter-dealer
quotations, without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions.

THREE MONTHS ENDED MARCH 31, 2007 HIGH LOW
---- ---

$1.75 $1.35

YEAR ENDED DECEMBER 31, 2006 HIGH LOW
---- ---

Fourth Quarter $1.65 $1.06
Third Quarter $1.37 $1.00
Second Quarter $1.42 $1.02
First Quarter $1.48 $ .93

YEAR ENDED DECEMBER 31, 2005 HIGH LOW
---- ---
Fourth Quarter $1.44 $1.00
Third Quarter $1.55 $0.66
Second Quarter $1.12 $0.66
First Quarter $1.45 $0.92

On May 21, 2007, the closing price for our common stock as reported on the
OTC Bulletin Board was $1.88 per share. The number of record holders of our
common stock was 117 as of May 9, 2007.

DIVIDEND POLICY

We have never declared or paid any cash dividends on our common stock and
do not intend to declare or pay cash or other dividends in the foreseeable
future. The Board of Directors currently expects to retain any future earnings,
if any, for use in the operation and expansion of its business. The declaration
and payment of any future dividends will be at the discretion of the Board of
Directors and will depend upon a variety of factors, including future earnings,
if any, operations, capital requirements, our general financial condition, the
preferences of any series of preferred stock, our general business conditions
and future contractual restrictions on payment of dividends, if any.

EQUITY COMPENSATION PLAN INFORMATION

The following table summarizes share and exercise price information about
our equity compensation plans as of December 31, 2006.

---------------------------------------------------------------------------------------------------------------------------------
Number of securities to be Number of securities remaining
issued upon exercise of Weighted-average exercise available for future issuance under
outstanding options, price of outstanding equity compensation plans
(a) rights column (a)) warrants and rights options, warrants and (excluding securities reflected in
---------------------------------------------------------------------------------------------------------------------------------

Equity compensation plans approved
by security holders 3,992,370 $.93 0(1)
---------------------------------------------------------------------------------------------------------------------------------
Equity compensation plans not
approved by security holders 0 -- --
---------------------------------------------------------------------------------------------------------------------------------
Total 3,992,370 $.93 0(1)
---------------------------------------------------------------------------------------------------------------------------------

------------
(1) Our 1996 Amended and Restated Stock Option Plan provided for the
issuance of options to purchase up to 4,000,000 shares of our common stock. As
of March 2006, no additional options could be issued under the plan in
accordance with its terms.
--------------------------------------------------------------------------------

BUSINESS

OVERVIEW

Our principal business is the acquisition, development, licensing and
protection of our intellectual property. We presently own six patents covering
various telecommunications and data networking technologies. Our strategy is to
pursue licensing and strategic business alliances with companies in industries
that manufacture and sell products that make use of the technologies underlying
our patents as well as with other users of the technologies who benefit directly
from the technologies including corporate, educational and governmental
entities.

On November 18, 2003, we acquired a portfolio of telecommunications and
data networking patents (the "Patent Portfolio") from Merlot Communications,
Inc., a broadband communications solutions provider. In February 2004, following
the acquisition of the Patent Portfolio and our review of applicable markets, we
commenced efforts to license our patent (U.S. Patent No. 6,218,930) covering the
control of power delivery over Ethernet cables (the "Remote Power Patent"). Our
Patent Portfolio consists of six patents (including the Remote Power Patent)
issued by the U.S. Patent Office that relate to various telecommunications and
data networking technologies and includes, among other things, patents covering
systems and methods for the transmission of audio, video and data over local
area networks (LANS) in order to achieve higher quality of service (QoS) and the
control of power delivery over LANs for the purpose of remotely powering network
devices.

We have focused, and are likely to continue to focus, our efforts on
licensing our Remote Power Patent. We have not entered into any license
agreements with respect to our Remote Power Patent, although we are pursuing
such arrangements with third parties. At least for the next twelve months, we do
not anticipate engaging in licensing efforts for our other patents besides our
Remote Power Patent. We may seek to acquire additional patents in the future.

THE PATENTS

Our Patent Portfolio consists of the following patents:

U.S. PATENT NO. 6,218,930: APPARATUS AND METHOD FOR REMOTELY POWERING
ACCESS EQUIPMENT OVER A 10/100 SWITCHED ETHERNET NETWORK;

U.S. PATENT NO. 6,577,631: COMMUNICATION SWITCHING MODULE FOR THE
TRANSMISSION AND CONTROL OF AUDIO, VIDEO, AND COMPUTER DATA OVER A SINGLE
NETWORK FABRIC;

U.S. PATENT NO. 6,574,242: METHOD FOR THE TRANSMISSION AND CONTROL OF
AUDIO, VIDEO, AND COMPUTER DATA OVER A SINGLE NETWORK FABRIC;

U.S. PATENT NO. 6,570,890: METHOD FOR THE TRANSMISSION AND CONTROL OF
AUDIO, VIDEO, AND COMPUTER DATA OVER A SINGLE NETWORK FABRIC USING ETHERNET
PACKETS;

U.S. PATENT NO. 6,539,011: METHOD FOR INITIALIZING AND ALLOCATING BANDWIDTH
IN A PERMANENT VIRTUAL CONNECTION FOR THE TRANSMISSION AND CONTROL OF AUDIO,
VIDEO, AND COMPUTER DATA OVER A SINGLE NETWORK FABRIC; AND

U.S. PATENT NO. 6,215,789: LOCAL AREA NETWORK FOR THE TRANSMISSION AND
CONTROL OF AUDIO, VIDEO, AND COMPUTER DATA.

Our future success is largely dependent upon our proprietary technologies,
our ability to protect our intellectual property rights and to consummate
license agreements with respect to our Patent Portfolio. The complexity of
patent and common law, combined with our limited resources, create risk that our
efforts to protect our proprietary technologies may not be successful. We cannot
be assured that our patents will be upheld, or that third parties will not
invalidate our patents.

The Remote Power Patent application was filed on March 11, 1999 and the
patent was granted by the U.S. Office of Patent and Trademark on April 21, 2001.
The Remote Power Patent expires on March 11, 2020.

To date we have not entered into any license agreements with third parties,
although as part of our April 2007 settlement agreement with respect to our
litigation with D-Link Corporation and D-Link Systems (collectively "D-Link"),
D-Link has agreed to enter into a license agreement pertaining to our Remote
Power Patent (See "Legal Proceedings").

We were incorporated under the laws of the State of Delaware in July 1990.
Our offices are located at 445 Park Avenue, Suite 1028, New York, New York 10022
and our telephone number is (212) 829-5770.

MARKET OVERVIEW - REMOTE POWER PATENT

Our licensing efforts are currently focused on our Remote Power Patent. Our
Remote Power Patent (U.S. Patent No. 6,218,930) relates to several technologies
which describe a methodology for controlling the delivery of power to certain
devices over an Ethernet network.

The Institute of Electrical and Electronic Engineers (IEEE) is a
non-profit, technical professional association of more than 360,000 individual
members in approximately 175 countries. The Standards Association of the IEEE is
responsible for the creation of global industry standards for a broad range of
technology industries. In 1999, at the urging of several industry vendors, the
IEEE formed a task force to facilitate the adoption of a standardized
methodology for the delivery of remote power over Ethernet networks which would
insure interoperability among vendors of switches and terminal devices. On June
13, 2003 the IEEE Standards Association approved the 802.3af Power Over Ethernet
standard (the "Standard"), which covers technologies deployed in delivering
power over Ethernet cables. The Standard provides for the Power Sourcing
Equipment (PSE) to be deployed in switches or as standalone midspan hubs to
provide power to remote devices such as wireless access points, IP phones and
network based cameras. The technology is commonly referred to as Power Over
Ethernet ("PoE"). We believe that our Remote Power Patent covers several of the
key technologies covered by the Standard.

Ethernet is the leading local area networking technology in use today. PoE
technology allows for the delivery of power over Ethernet cables rather than by
separate power cords. As a result, a variety of network devices, including IP
telephones, wireless LAN Access Points, web-based network security cameras, data
collection terminals and other network devices, are able to receive power over
existing data cables without the need to modify the existing infrastructure to
facilitate the provision of power for such devices through traditional AC
outlets. Advantages such as lower installation costs, remote management
capabilities, lower maintenance costs, centralized power backup, and flexibility
of device location as well as the advent of worldwide power compatibility create
the possibility of PoE becoming widely adopted in networks throughout the world.

PoE provides numerous benefits including quantifiable returns on
investment. The cost of hiring electricians to pull power cable to remote
locations used for access points or security cameras can rival or exceed the
cost of the devices. Another key benefit is the need for Voice over IP power
reliability in the face of power failures. Using PoE enables data center power
supply systems to ensure on-going power - a function that would be difficult and
expensive to implement if each phone required AC outlets.

These and other advantages such as remote management capabilities, lower
maintenance costs, and flexibility of device location have led to forecasts that
PoE will be widely adopted in networks throughout the world. The ability to
supply power to end-devices through Ethernet cables can be applied to other
end-devices, such as advanced security cameras, RFID card readers, laptop
computers, personal digital assistants and portable digital music players. As
the desire to connect more end-devices to the Ethernet network grows, we believe
that PoE technology will become more widely used as a method to power these
end-devices.

ADDITIONAL PATENTS

We also own five (5) additional patents covering various methodologies that
provide for allocating bandwidth and establishing Quality of Service for delay
sensitive data, such as voice, on packet data networks. Quality of Service
issues become important when data networks carry packets that contain audio and
video which may require priority over data packets traveling over the same
network. Covered within these patents are also technologies that establish
bi-directional communications control channels between network-connected devices
in order to support advanced applications on traditional data networks. We
believe that potential licensees of the technologies contained in these patents
would be vendors deploying applications that require the low latency transport
of delay sensitive data such as video over data networks.

NETWORK-1 STRATEGY

Our strategy is to capitalize on our Patent Portfolio by entering into
licensing arrangements with third parties including manufacturers and users that
utilize our Patent Portfolio's proprietary technologies as well as any
additional proprietary technologies covered by patents which may be acquired by
us in the future. We will also seek to enter into licensing arrangements with
users of the proprietary technologies, including corporate, educational and
governmental entities in those cases where the patent rights extend to the users
of the technologies contained in manufactured products.

We do not anticipate manufacturing products utilizing the Patent Portfolio
or any of the proprietary technologies contained in our Patent Portfolio.
Accordingly, we do not anticipate establishing a manufacturing, sales or
marketing infrastructure. Consequently, we believe that our capital requirements
will be less than the capital requirements for companies with such
infrastructure requirements.

In connection with our activities relating to the protection of our Patent
Portfolio, it may be necessary to assert patent infringement claims against
third parties that we believe are infringing our Patent Portfolio, as was the
case with our litigation against D-Link (See Item 3 "Legal Proceedings - D-Link
Litigation").

MARKETING AND DISTRIBUTION

In February 2004, we commenced licensing efforts with respect to our Remote
Power Patent. We believe that potential licensees include, among others,
Wireless Local Area Networking (WLAN) equipment manufacturers, Local Area
Networking (LAN) equipment manufacturers, Voice Over IP Telephony (VOIP)
equipment manufacturers, and Network Camera manufacturers. In addition, we
believe that additional potential licensees include users of the equipment
embodying the PoE technology covered by our Remote Power Patent, including
corporate, educational and federal, state and local government users, as we
believe that they are significant beneficiaries of the technologies covered by
our Remote Power Patent.

ThinkFire Agreement

On November 30, 2004, we entered into a Master Services Agreement (the
"Agreement") with ThinkFire Services USA, Ltd. ("ThinkFire") pursuant to which
ThinkFire has been granted the exclusive (except for direct efforts by us and
related companies) worldwide rights to negotiate license agreements for our
Remote Power Patent with respect to certain potential licensees agreed to
between the parties. Either we or ThinkFire may terminate the Agreement upon 60
days notice for any reason or upon 30 days notice in the event of a material
breach. We have agreed to pay ThinkFire a fee not to exceed 20% of the royalty
payments received from license agreements consummated by ThinkFire on our
behalf.

LEGAL REPRESENTATION

In August 2005, we entered into an agreement with Blank Rome, LLP ("Blank
Rome"), a national law firm, pursuant to which Blank Rome has been engaged to
represent us in connection with all litigation involving our Remote Power
Patent. Blank Rome has agreed to represent us with respect to each litigation
pertaining to our Remote Power Patent on a full contingency basis (except for
any proceeding before the International Trade Commission). As compensation for
its services on a full contingency basis, Blank Rome will receive from us
percentages of Net Consideration (as defined in the agreement) ranging from
12.5% to 35% received by us by way of settlement or judgment in connection with
each litigation matter. We have also agreed to compensate Blank Rome in an
amount equal to 10% of the Net Consideration received by us from certain
designated parties mutually agreed upon by us and Blank Rome (the "Designated
Parties") in the event that prior to commencement of litigation such Designated
Parties enter into license agreements or similar agreements with us during the
period of Blank Rome's engagement.

The agreement may be terminated by either Blank Rome or us upon 30 days
notice. If we elect to terminate the agreement, we will compensate Blank Rome in
an amount equal to 5% of the Net Consideration received by us from the
Designated Parties with whom Blank Rome has not commenced litigation on our
behalf; provided, that, such parties had substantive licensing or settlement
discussions related to our Remote Power Patent during the term of the agreement
and entered into a license agreement or similar agreement with us providing for
Net Consideration within the 12 month period following termination. In addition,
in the event of termination, Blank Rome will receive its pro-rata share of Net
Consideration based upon its hourly time charges with respect to parties against
whom Blank Rome commenced litigation (or defended) on our behalf. In the event
our agreement with Blank Rome is terminated, depending upon our financial
resources at the time, we may need to enter into a contingent fee agreement with
a new law firm in order to enforce and/or defend our Remote Power Patent and our
inability to secure such an arrangement on satisfactory terms and on a timely
basis may have a material adverse effect on our ability to achieve license
arrangements with respect to our Remote Power Patent.

With respect to our litigation with D-Link relating to our Remote Power
Patent (see "Legal Proceedings - D-Link Litigation"), in addition to the
services of Blank Rome on a contingency basis, we also used the services of
Potter Mitton, P.C. (Tyler, Texas) on an hourly basis to serve as local counsel.

COMPETITION

The telecommunications and data networking licensing market is
characterized by intense competition and rapidly changing business conditions,
customer requirements and technologies. Our current and potential competitors
have longer operating histories, greater name recognition and possess
substantially greater financial, technical, marketing and other competitive
resources than us. Although we believe that we have enforceable patents relating
to telecommunications and data networking, there can be no assurance that our
Patent Portfolio will be upheld or that third parties will not invalidate any or
all of the patents in our Patent Portfolio. In addition, our current and
potential competitors may develop technologies that may be more effective than
our proprietary technologies or that would render our technologies less
marketable or obsolete. We may not be able to compete successfully.

In addition, other companies may develop competing technologies that offer
better or less expensive alternatives to PoE and the other technologies covered
by our Patent Portfolio. Several companies have notified the IEEE that they may
have patents and proprietary technologies that are covered by the Standard. In
the event any of those companies asserts claims relating to our patents, the
licensing royalties available to us may be limited. Moreover, technological
advances or entirely different approaches developed by one or more of our
competitors or adopted by various standards groups could render our Remote Power
Patent obsolete, less marketable or unenforceable.

EMPLOYEES AND CONSULTANTS

As of May 15, 2007, we had one full time employee, no part time employees
and three consultants.

LEGAL PROCEEDINGS

D-LINK LITIGATION

On August 10, 2005, we commenced patent litigation against D-Link
Corporation and D-Link Systems, Incorporated (collectively, D-Link) in the
United States District Court for the Eastern District of Texas, Tyler division
(Civil Action No. 6:05W291), for infringement of our Remote Power Patent (U.S.
Patent No. 6,218,930). Our complaint sought, among other things, a judgment that
our Remote Power Patent is enforceable and has been infringed by the defendants.
We also sought a permanent injunction restraining the defendants from continued
infringement, or active inducement of infringement by others, of our Remote
Power Patent. On February 27, 2006, the D-Link defendants filed answers and
asserted counterclaims. In their answers, the D-Link defendants asserted that
they did not infringe any valid claim of our Remote Power Patent, and further
asserted that the asserted patent claims are invalid and/or unenforceable. In
addition to these defenses, the D-Link defendants also asserted counterclaims
for, among other things, non-infringement, invalidity and unenforceability of
our Remote Power Patent.

On April 25, 2007, we agreed to a settlement of our patent infringement
litigation against D-Link. Under the terms of the settlement, D-Link has agreed
to enter into a license agreement for the Remote Power Patent the terms of which
will include monthly royalty payments of 3.25% of the net sales of D-Link
branded Power over Ethernet products, including those products which comply with
the IEEE 802.3af and 802.3at Standards, for the full term of the Remote Power
Patent, which expires in March 2020. The royalty rate is subject to adjustment
beginning after the first quarter of 2008 to a rate consistent with other
similarly situated licensees of the Remote Power Patent based on units of
shipments of licensed products. In addition, D-Link has agreed to pay us
$100,000.

POWERDSINE SETTLEMENT

On November 16, 2005, we entered into a Settlement Agreement with
PowerDsine, Inc. (NASDAQ: PDSN) and PowerDsine Ltd. (collectively, "PowerDsine")
which dismissed, with prejudice, patent litigation brought by PowerDsine against
us in March 2004 in the United States District Court for the Southern District
of New York that sought a declaratory judgment that our Remote Power Patent
(U.S. Patent No. 6,218,930) was invalid and not infringed by PowerDsine and/or
its customers.

Under the terms of the Settlement Agreement, we agreed that we will not
initiate litigation against PowerDsine for its sale of Power over Ethernet (PoE)
integrated circuits. In addition, we agreed that we will not seek damages for
infringement from customers that incorporate PowerDsine integrated circuit
products in PoE capable Ethernet switches manufactured on or before April 30,
2006. PowerDsine has agreed that it will not initiate, assist or cooperate in
any legal action relating to the Remote Power Patent. We also agreed that we
will not initiate litigation against PowerDsine or its customers for
infringement of our Remote Power Patent arising from the manufacture and sale of
PowerDsine Midspan products for three years following the dismissal date.
Following such three year period, we may seek damages for infringement of our
Remote Power Patent from PowerDsine or its customers with respect to the
purchase and sale of Midspan products beginning 90 days following the dismissal
date of the litigation. The benefits afforded to PowerDsine under the Settlement
Agreement will cease in the event PowerDsine institutes, assists or cooperates
in any legal proceeding related to our Remote Power Patent adverse to us (unless
otherwise required by

law to do so) and PowerDsine customers will also forfeit benefits under the
Settlement Agreement if they engage in similar action.

No licenses to use the technologies covered by our Remote Power Patent were
granted to PowerDsine or its customers under the terms of the settlement. The
Settlement Agreement further provides that PowerDsine is obligated to provide
each of its customers with written notice of the settlement which notice shall
disclose that no license for our Remote Power Patent has been provided to
PowerDsine's customers and that in order to combine, modify or integrate any
PowerDsine product with or into any other device or software, PowerDsine's
customers may need to receive patent license(s) for such third party patents
which is the customer's responsibility. For the full text of our Settlement
Agreement with PowerDsine, see Exhibit 10.1 of our Current Report on Form 8-K
filed with the Securities and Exchange Commission on November 17, 2005.

USE OF PROCEEDS

We will not receive any proceeds from the sale of the shares of our common
stock by the selling stockholders. All proceeds from the sale of such shares
will be for the accounts of the selling stockholders. We will receive proceeds
from the exercise of all warrants and options held by the selling stockholders
(assuming such securities are exercised on a cash basis). Cash proceeds that we
may receive upon exercise of the warrants and options will be used for working
capital purposes.

SELLING STOCKHOLDERS

The following table set forth the names of the selling stockholders who may
sell their shares under this prospectus from time to time. The selling
stockholders are not obligated to sell any of the shares offered by this
prospectus. The number of shares sold by each selling stockholder may depend on
a number of factors, such as the market price of our common stock.

We are registering 14,127,191 shares of our common stock for resale by the
selling stockholders. We agreed to file a registration statement under the
Securities Act of 1933, as amended (the "Securities Act") with the Securities
and Exchange Commission, of which this prospectus is a part, with respect to the
resale of:

o 2,427,000 shares of our common stock and 2,013,750 shares of our
common stock issuable upon exercise of warrants issued in our private
offering completed in December 2004 and January 2005;

o 8,335,941 additional shares of our common stock issued to certain of
our stockholders; and

o 1,350,000 shares of our common stock issuable upon exercise of certain
other outstanding warrants and options, all as disclosed in the table
below.

The number of shares of our common stock shown in the following table as
being offered by the selling stockholders do not include such presently
indeterminate number of additional shares of our common stock that may be
issuable as a result of stock splits, stock dividends and similar transactions.
Pursuant to Rule 416 under the Securities Act, however, such shares are included
in the Registration Statement of which this prospectus is a part.

The selling stockholders may sell any or all of their shares listed below
from time to time. Accordingly, we cannot estimate how many shares the selling
stockholders will own upon consummation of any such sales. Also, the selling
stockholders may have sold, transferred or otherwise disposed of all or a
portion of their shares since the date on which the information was provided in
transactions exempt from the registration requirements of the Securities Act.

Of the selling stockholders listed in the table below, Singer Opportunity
Fund, L.P., Singer Fund, L.P., Hilary Bergman, Steven Goldfarb, Scott Zelnick
and Steven Heinemann are believed by us to be affiliates of broker-dealers, who
purchased the shares in the ordinary course of business and at the time of the
purchase of the securities to be resold, such selling stockholders did not have
any agreements or understandings, directly or indirectly, with any person to
distribute the securities.

None of the selling stockholders has had a material relationship with us
within the past three years other than as a result of the ownership of our
securities except: (i) Corey M. Horowitz is our Chairman and Chief Executive
Officer and (ii) Mr. Horowitz, Robert Graifman and Laurent Ohana serve as our
directors.

NUMBER OF SHARES
BENEFICIALLY NUMBER OF SHARES PERCENTAGE OF
OWNED PRIOR NUMBER OF SHARES BENEFICIALLY OWNED OUTSTANDING COMMON STOCK
NAME TO OFFERING(1) BEING OFFERED AFTER OFFERING(1)(2) AFTER OFFERING(1)
----- -------------- ------------- -------------------- -----------------

Barry Rubenstein 3,743,251(3) 3,695,751(4) 47,500 *

Irwin Lieber 2,048,338(5) 2,000,838(6) 47,500 *

Barry Fingerhut 2,008,598(7) 2,008,598(7) 0 0%

Seth Lieber 1,632,300(8) 1,632,300(8) 0 0%

Jonathan Lieber 1,630,748(9) 1,630,748(9) 0 0%

Wheatley Partners II, L.P. 1,280,207(10) 1,280,207(10) 0 0%

Wheatley Partners, L.P. 194,280(11) 194,280(11) 0 0%

Wheatley Foreign Partners, L.P. 16,868(12) 16,868(12) 0 0%

Woodland Venture Fund 829,226(13) 829,226(13) 0 0%

Seneca Ventures 619,983(13) 619,983(13) 0 0%

Woodland Partners 309,316(13) 309,316(13) 0 0%

Brookwood Partners, L.P. 294,810(13) 294,810(13) 0 0%

Marilyn Rubenstein 1,049 1,049 0 0%

Corey M. Horowitz 9,604,435(14) 4,346,365(15) 5,258,070 17.8%

CMH Capital Management Corp. 3,767,800(16) 3,767,800(16) 0 0%

Donna Slavitt 67,471 67,471 0 0%

Logan Zev Horowitz 1999 Trust 42,500(17) 42,500 0 0%

Dylan Max Horowitz 1999 Trust 42,500(17) 42,500 0 0%

Corey M. Horowitz Custodian for
Zachary Jordon Horowitz 42,500(17) 42,500 0 0%

Horowitz Partners 2,291(18) 2,291 0 0%

Emigrant Capital Corporation 1,312,500(19) 1,312,500(19) 0 0%

Singer Opportunity Fund, L.P. 785,785(20) 625,625(21) 160,160 *

Singer Fund, L.P. 286,375(22) 249,375(23) 37,000 *

David M. Seldin 474,000(24) 455,000(25) 19,000 *

Robert Graifman 344,777(26) 175,000(27) 169,777 *

Gilbert S. Stein 175,000(28) 175,000(28) 0 0%

John R. Hart 175,000(29) 175,000(29) 0 0%

Granite Bridge Fund, L.P. 131,250(30) 131,250(30) 0 0%

CGA Resources, LLC 87,500(31) 87,500(31) 0 0%

Barry S. Friedberg 87,500(32) 87,500(32) 0 0%

Dasa Sada, LLC 87,500(33) 87,500(33) 0 0%

Steven Ackerman 87,500(34) 87,500(34) 0 0%

Francis May 43,750(35) 43,750(35) 0 0%

Matthew Balk 7,500(36) 7,500(36) 0 0%

Kenneth L. Walters 17,500(37) 17,500(37) 0 0%

Jeb Investment Ltd. 165,450(38) 146,250(39) 19,200 *

Jeb Partners, L.P. 155,050(40) 146,250(41) 8,800 *

Manchester Explorer Limited
Partnership 115,200(42) 105,000(43) 10,200 *

Steven Heineman 1,171,937(44) 75,000(45) 1,096,937 5.0%

Brian Eng 112,500(46) 112,500(47) 0 *

Brad Reifler 13,125(48) 13,125(48) 0 0%

Steven Goldfarb 8,750(49) 8,750(49) 0 0%

Hilary Bergman 5,625(50) 5,625(50) 0 0%

Samuel Solomon 17,500(51) 17,500(51) 0 0%

Jeffrey Finkle 45,000(52) 45,000(52) 0 0%

Edward Sussi 15,000(53) 15,000(53) 0 0%

Alan Friedman 15,000(54) 15,000(54) 0 0%

Alan Weiner 43,750(55) 43,750(55) 0 0%

Laurent Ohana 150,000(56) 50,000(57) 100,000 *

New Dimensions Trading, LTD 114,554(58) 114,554(58) 0 0%

Aaron Wolfson 38,000(59) 38,000(59) 0 0%

Abraham Wolfson 19,000(60) 19,000(60) 0 0%

Gyenes and Co. 7,707(61) 7,707(61) 0 *

Sandler Co-Investment Partners, L.P. 24,665(62) 24,665(62) 0 0%

Gerald Reich 16,862(63) 16,862(63) 0 0%

Patrick McBrien 12,267(64) 12,267(64) 0 0%

Scott Zelnick 12,267(65) 12,267(65) 0 0%

Levitan Family Charitable Trust 12,154(66) 12,154(66) 0 0%

MLPF&S as custodian FBO
Emanuel R. Pearlman, IRA 70,348(67) 4,098(68) 66,250 *

Brad Zelnick 187(69) 187(69) 0 0%

------------------
* Less than 1%

(1) Except as otherwise indicated, the address for each beneficial owner is c/o
Network-1 Security Solutions, Inc., 445 Park Avenue, Suite 1028, New York,
New York 10022.

(2) Unless otherwise indicated, we believe that all persons named in the above
table have sole voting and investment power with respect to all shares of
common stock beneficially owned by them. A person is deemed to be the
beneficial owner of securities that can be acquired by such person within
60 days from the date hereof upon the exercise of options, warrants or
convertible securities. Each beneficial owner's percentage ownership is
determined by assuming that options, warrants and convertible securities
held by such person (but not those held by any other person) and which are
exercisable or convertible within 60 days have been exercised and
converted. Assumes a base of 23,173,057 shares of common stock outstanding.

(3) Includes (i) 1,280,207 shares of common stock held by Wheatley Partners II,
L.P., (ii) 194,280 shares of common stock held by Wheatley Partners, L.P.,
(iii) 16,868 shares of common stock held by Wheatley Foreign Partners,
L.P., (iv) 150,012 shares of common stock held by Mr. Rubenstein, (v)
47,500 shares of common stock subject to currently exercisable stock
options held by Mr. Rubenstein and (vi) 829,226, 619,983, 309,316, 294,810
and 1,049 shares of common stock held by Woodland Venture Fund, Seneca
Ventures, Woodland Partners, Brookwood Partners, L.P. and Marilyn
Rubenstein, respectively. Does not include options to purchase 11,875
shares of common stock held by Mr. Rubenstein which are not currently
exercisable. The aforementioned beneficial ownership by Mr. Rubenstein is
based upon Amendment No. 6 to Schedule 13D jointly filed by Mr. Rubenstein
and related parties with the Securities and Exchange Commission on January
3, 2005 and Form 4s filed by Mr. Rubenstein with the Securities and
Exchange Commission on December 21, 2004 and February 17, 2005. Barry
Rubenstein is a general partner of Wheatley Partners II, L.P. and a member
of the general partner of each of Wheatley Partners, L.P. and Wheatley
Foreign Partners, L.P. Barry Rubenstein and Woodland Services Corp. are the
general partners of Woodland Venture Fund and Seneca Ventures. Barry
Rubenstein is the President and sole director of Woodland Services Corp.
Marilyn Rubenstein is the wife of Barry Rubenstein. Mr. Rubenstein
disclaims beneficial ownership of the shares of common stock held by
Wheatley Partners II, L.P., Wheatley Partners, L.P. and Wheatley Foreign
Partners, L.P., except to the extent of his equity interest therein. The
address of Barry Rubenstein is 68 Wheatley Road,

Brookville, New York 11545. The address of Wheatley Partners II, L.P. and
Wheatley Partners, L.P. is 60 Cuttermill Road, Great Neck, New York 11021.
The address of Wheatley Foreign Partners, L.P. is c/o Fiduciary Trust, One
Capital Place, Snedden Road, P.O. Box 162, Grand Cayman, British West
Indies. The address for Woodland Venture Fund, Seneca Ventures, Brookwood
Partners, L.P. and Woodland Partners is c/o Barry Rubenstein, 68 Wheatley
Road, Brookville, New York 11545.

(4) Includes (i) 1,280,207 shares of common stock held by Wheatley Partners II,
L.P., (ii) 194,280 shares of common stock held by Wheatley Partners, L.P.,
(iii) 16,868 shares of common stock held by Wheatley Foreign Partners,
L.P., (iv) 150,012 shares of common stock held by Mr. Rubenstein, and (v)
829,226, 619,983, 309,316, 294,810 and 1,049 shares of common stock held by
Woodland Venture Fund, Seneca Ventures, Woodland Partners, Brookwood
Partners, L.P. and Marilyn Rubenstein, respectively.

(6) Includes (i) 1,280,207 shares of common stock held by Wheatley Partners II,
L.P., (ii) 194,280 shares of common stock held by Wheatley Partners, L.P.,
(iii) 16,868 shares of common stock held by Wheatley Foreign Partners, L.P.
and (iv) 509,483 shares of common stock owned by Mr. Lieber.

(7) Includes (i) 1,280,207 shares of common stock held by Wheatley Partners,
II, L.P., (ii) 194,280 shares of common stock held by Wheatley Partners,
L.P., (iii) 16,868 shares of common stock held by Wheatley Foreign
Partners, L.P., and (iv) 517,243 shares of common stock owned by Mr.
Fingerhut. Mr. Fingerhut disclaims beneficial ownership of the shares of
common stock held by Wheatley Partners II, L.P., Wheatley Partners, L.P.
and Wheatley Foreign Partners, L.P., except to the extent of his equity
interest therein. The address of Barry Fingerhut is c/o Wheatley Partners,
II, L.P., 80 Cuttermill Road, Great Neck, New York 11021.

shares of common stock held by Wheatley Partners II, L.P., Wheatley
Partners, L.P. and Wheatley Foreign Partners, L.P., except to the extent of
his equity interest therein. The address of Seth Lieber is c/o Wheatley
Partners, II, L.P., 80 Cuttermill Road, Great Neck, New York 11021.

(9) Includes (i) 1,280,207 shares of common stock held by Wheatley Partners,
II, L.P., (ii) 194,280 shares of common stock held by Wheatley Partners,
L.P., (iii) 16,868 shares of common stock held by Wheatley Foreign
Partners, L.P., and (iv) 139,393 shares of common stock owned by Mr.
Lieber. Mr. Lieber disclaims beneficial ownership of the shares of common
stock held by Wheatley Partners II, L.P., Wheatley Partners, L.P. and
Wheatley Foreign Partners, L.P., except to the extent of his equity
interest therein. The address of Jonathan Lieber is c/o Wheatley Partners,
II, L.P., 80 Cuttermill Road, Great Neck, New York 11021.

(10) Includes 1,280,207 shares of common stock. Barry Rubenstein, Irwin Lieber,
Barry Fingerhut, Seth Lieber and Jonathan Lieber, by virtue of each being a
general partner of Wheatley Partners II, L.P., may be deemed to have shared
power to vote and dispose of the shares of common stock owned by Wheatley
Partners II, L.P. Wheatley Partners II, L.P.'s business address is 80
Cuttermill Road, Great Neck, New York 11021.

(11) Includes 194,280 shares of common stock. Barry Rubenstein, Irwin Lieber,
Barry Fingerhut, Seth Lieber and Jonathan Lieber by virtue of being a
member and officer of Wheatley Partners, LLC, the general partner of
Wheatley Partners, L.P., may be deemed to have shared power to vote and to
dispose of the shares of common stock owned by Wheatley Partners, L.P.

(12) Includes 16,868 shares of common stock. Barry Rubenstein, Irwin Lieber,
Barry Fingerhut, Seth Lieber and Jonathan Lieber by virtue of being a
member and officer of Wheatley Partners, LLC, the general partner of
Wheatley Foreign Partners, L.P., may be deemed to have shared power to vote
and to dispose of the shares of common stock owned by Wheatley Foreign
Partners, L.P.

(13) Barry Rubenstein, by virtue of being a General Partner of Woodland Venture
Fund, Seneca Ventures, Woodland Partners and Brookwood Partners L.P., and
Marilyn Rubenstein, by virtue of being an officer of Woodland Services
Corp. (a general partner of Woodland Venture Fund and Seneca Ventures) and
a general partner of Woodland Partners and Brookwood Partners L.P., may be
deemed to have shared power to vote and dispose of the shares of common
stock owned by Woodland Venture Fund, Seneca Ventures, Woodland Partners
and Brookwood Partners L.P.

(14) Includes (i) 381,303 shares of common stock held by Mr. Horowitz, (ii)
5,258,070 shares of common stock subject to currently exercisable stock
options held by Mr. Horowitz, (iii) 2,467,800 shares of common stock held
by CMH Capital Management Corp. ("CMH"), (iv) 550,000 shares of common
stock subject to currently exercisable warrants held by CMH, (v) 750,000
shares of common stock subject to currently exercisable options held by
CMH, (vi) 67,471 shares of common stock owned by Donna Slavitt, the wife of
Mr. Horowitz, (vii) an aggregate of 127,500 shares of common stock held by
two trusts and a custodian account for the benefit of Mr. Horowitz's three
children and (viii)

2,291 shares of common stock held by Horowitz Partners, a general
partnership of which Mr. Horowitz is a partner. Does not include options to
purchase 198,125 shares of common stock which are not currently
exercisable. The address of CMH Capital Management Corp. is 445 Park
Avenue, New York, New York 10022.

(15) Includes (i) 381,303 shares of common stock held by Mr. Horowitz, (ii)
2,467,800 shares of common stock held by CMH Capital Management Corp.
("CMH"), (iii) 550,000 shares of common stock subject to currently
exercisable warrants held by CMH, (iv) 750,000 shares of common stock
subject to currently exercisable options held by CMH, (v) 67,471 shares of
common stock owned by Donna Slavitt, the wife of Mr. Horowitz, (vi) an
aggregate of 127,500 shares of common stock held by two trusts and a
custodian account for the benefit of Mr. Horowitz's three children and
(vii) 2,291 shares of common stock held by Horowitz Partners, a general
partnership of which Mr. Horowitz is a partner.

(16) Includes (i) 2,467,800 shares of common stock, (ii) 550,000 shares of
common stock subject to currently exercisable warrants and (iii) 750,000
shares of common stock subject to currently exercisable options. Corey M.
Horowitz, by virtue of being the sole officer and shareholder of CMH
Capital Management Corp., has sole power to vote and dispose of the shares
of common stock owned by CMH.

(17) Gary Horowitz, by virtue of being the trustee of the Logan Zev Horowitz
1999 Trust and the Dylan Max Horowitz 1999 Trust, has sole power to vote
and dispose of the shares of common stock owned by each of the trusts.
Corey M. Horowitz, by virtue of being custodian for Zachary Jordan
Horowitz, has the sole power to vote and dispose of such shares.

(18) Corey M. Horowitz, Gary Horowitz, Cindy Horowitz and Syd Horowitz, by
virtue of being a general partner of Horowitz Partners, may each be deemed
to have shared power to vote and dispose of the shares owned by Horowitz
Partners.

(19) Includes (i) 750,000 shares of common stock and (ii) 562,500 shares of
common stock subject to currently exercisable warrants. Howard Millstein,
by virtue of being an officer of New York Private Bank and Trust
Corporation and trustee of the Paul Milstein Revocable 1998 Trust, both
indirect owners of Emigrant Capital Corporation, may be deemed to have sole
power to vote and dispose of the securities owned by Emigrant Capital
Corporation. The address of Emigrant Capital Corporation is 6 East 43rd
Street, New York, New York 10017.

(20) Includes (i) 517,660 shares of common stock and (ii) 268,125 shares of
common stock subject to currently exercisable warrants owned by Singer
Opportunity Fund, L.P. Eric Singer, by virtue of being managing member of
Singer Opportunity Fund, L.P. and Singer Fund Management, LLC, has sole
power to vote and dispose of the shares owned by Singer Opportunity Fund,
L.P. The address of Singer Opportunity Fund, L.P. is 650 Fifth Avenue, New
York, New York 10019.

(21) Includes (i) 357,500 shares of common stock and (ii) 268,125 shares of
Common Stock subject to currently exercisable warrants owned by Singer
Opportunity Fund, L.P.

(22) Includes (i) 179,500 shares of common stock and (ii) 106,875 shares of
common stock subject to currently exercisable warrants owned by Singer
Fund, L.P. Eric Singer, by virtue of being managing member of Singer Fund,
L.P. and Singer Fund Management, LLC, has sole power to vote and dispose of
the securities owned by Singer Fund, L.P. The address of Singer Fund, L.P.
is 650 Fifth Avenue, New York, New York 10019.

(23) Includes (i) 142,500 shares of common stock and (ii) 106,875 shares of
common stock subject to currently exercisable warrants owned by Singer
Fund, L.P.

(24) Includes (i) 279,000 shares of common stock and (ii) 195,000 shares of
common stock subject to currently exercisable warrants.

(25) Includes (i) 260,000 shares of common stock and (ii) 195,000 shares of
common stock subject to currently exercisable warrants.

(26) Includes (i) 154,777 shares of common stock and (ii) 75,000 shares of
common stock subject to currently exercisable warrants and (iii) 115,000
shares subject to currently exercisable stock options.

(27) Includes (i) 100,000 shares of common stock and (ii) 75,000 shares of
common stock subject to currently exercisable warrants.

(28) Includes (i) 100,000 shares of common stock and (ii) 75,000 shares of
common stock subject to currently exercisable warrants.

(29) Includes (i) 100,000 shares of common stock and (ii) 75,000 shares of
common stock subject to currently exercisable warrants.

(30) Includes (i) 75,000 shares of common stock and (ii) 56,250 shares of common
stock subject to currently exercisable warrants. Clarke Adams, by virtue of
being managing partner of Granite Bridge Fund, L.P., may be deemed to have
sole power to vote and dispose of the securities owned by Granite Bridge
Fund, L.P.

(31) Includes (i) 50,000 shares of common stock and (ii) 37,500 shares of common
stock subject to currently exercisable warrants. Cass Gunther Adelman, by
virtue of being the sole member of CGA Resources, LLC, may be deemed to
have sole power to vote and dispose of the securities.

(32) Includes (i) 50,000 shares of common stock and (ii) 37,500 shares of common
stock subject to currently exercisable warrants.

(33) Includes (i) 50,000 shares of common stock and (ii) 37,500 shares of common
stock subject to currently exercisable warrants. Allysa Ackerman, by virtue
of being the sole member of Dasa Sada, LLC, may be deemed to have sole
power to vote and dispose of the securities.

(34) Includes (i) 50,000 shares of common stock and (ii) 37,500 shares of common
stock subject to currently exercisable warrants.

(35) Includes (i) 25,000 shares of common stock and (ii) 18,750 shares of common
stock subject to currently exercisable warrants.

(36) Includes 7,500 shares of common stock subject to currently exercisable
warrants.

(37) Includes (i) 10,000 shares of common stock and (ii) 7,500 shares of common
stock subject to currently exercisable warrants.

(38) Includes (i) 94,200 shares of common stock and (ii) 71,250 shares of common
stock subject to currently exercisable warrants. James Bresser, by virtue
of being a partner of the investment advisor of Jeb Investment Ltd., may be
deemed to have sole power to vote and dispose of the securities.

(39) Includes (i) 75,000 shares of common stock and (ii) 71,250 shares of common
stock subject to currently exercisable warrants. James Bresser, by virtue
of being a partner of the investment advisor of Jeb Investment Ltd., may be
deemed to have sole power to vote and dispose of the securities.

(40) Includes (i) 83,800 shares of common stock and (ii) 71,250 shares of common
stock subject to currently exercisable warrants. James Bresser, by virtue
of being an officer of the general partner of Jeb Partners, L.P., may be
deemed to have sole power to vote and dispose of the securities.

(41) Includes (i) 75,000 shares of common stock and (ii) 71,250 shares of common
stock subject to currently exercisable warrants. James Bresser, by virtue
of being an officer of the general partner of Jeb Partners, L.P., may be
deemed to have sole power to vote and dispose of the securities.

(42) Includes (i) 70,200 shares of common stock and (ii) 45,000 shares of common
stock subject to currently exercisable warrants. James Bresser, by virtue
of being an officer of Manchester Explorer Limited Partnership, may be
deemed to have sole power to vote and dispose of the securities.

(43) Includes (i) 60,000 shares of common stock and (ii) 45,000 shares of common
stock subject to currently exercisable warrants. James Bresser, by virtue
of being an officer of Manchester Explorer Limited Partnership, may be
deemed to have sole power to vote and dispose of the securities.

(44) Includes (i) 1,030,270 shares of common stock and (ii) 141,667 shares of
common stock subject to currently exercisable warrants.

(45) Includes 75,000 shares of common stock subject to currently exercisable
warrants.

(46) Includes (i) 75,000 shares of common stock and (ii) 37,500 shares of common
stock subject to currently exercisable warrants.

(47) Includes (i) 75,000 shares of common stock and (ii) 37,500 shares of common
stock subject to currently exercisable warrants.

(48) Includes (i) 7,500 shares of common stock and (ii) 5,625 shares of common
stock subject to currently exercisable warrants.

(49) Includes (i) 5,000 shares of common stock and (ii) 3,750 shares of common
stock subject to currently exercisable warrants.

(50) Includes 5,625 shares of common stock subject to currently exercisable
warrants.

(51) Includes (i) 10,000 shares of common stock and (ii) 7,500 shares of common
stock subject to currently exercisable warrants.

(52) Includes 45,000 shares of common stock subject to currently exercisable
warrants.

(53) Includes 15,000 shares of common stock subject to currently exercisable
warrants.

(54) Includes 15,000 shares of common stock subject to currently exercisable
warrants.

(55) Includes (i) 25,000 shares of common stock and (ii) 18,750 shares of common
stock subject to currently exercisable warrants.

(56) Includes 150,000 shares of common stock subject to currently exercisable
warrants and options.

(57) Includes 50,000 shares of common stock subject to currently exercisable
warrants.

(58) Includes 114,554 shares of common stock. Chanda Edelstein and Isaac
Hebroni, by virtue of being directors of New Dimensions Trading LTD, have
shared power to vote and dispose of the shares.

(59) Includes 38,000 shares of common stock.

(60) Includes 19,000 shares of common stock.

(61) Includes 7,707 shares of common stock.

(62) Includes 24,665 shares of common stock. Michael Marocco by virtue of being
managing director of Sandler Capital Management, the general partner of
Sandler Co-Investment Partners, L.P., may be deemed to have sole power to
vote and dispose of the shares.

(63) Includes 16,862 shares of common stock.

(64) Includes 12,267 shares of common stock.

(65) Includes 12,267 shares of common stock.

(66) Includes 12,154 shares of common stock. Eli Levitan, by virtue of being
trustee of the Levitan Family Charitable trust may be deemed to have sole
power to vote and dispose of the shares.

(67) Includes (i) 4,098 shares of common stock and (ii) 66,250 shares of common
stock subject to currently exercisable options owned by Emanuel Pearlman.

(68) Includes 4,098 shares of common stock.

(69) Includes 187 shares of common stock.

PLAN OF DISTRIBUTION

This offering is self-underwritten; neither we nor the selling stockholders
have employed an underwriter for the sale of common stock by the selling
stockholders. We will bear all expenses in connection with the preparation of
this prospectus. The selling stockholders will bear all expenses associated with
the sale of their common stock including commissions and brokerage fees.

The selling stockholders may offer their shares of common stock directly or
through pledgees, donees, transferees or other successors in interest in one or
more of the following transactions:

o ordinary brokerage transactions in which the broker-dealer solicits
purchasers;

o block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block as
principal to facilitate the transaction;

o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;

o an exchange distribution in accordance with the rules of the
applicable exchange;

o privately negotiated transactions;

o broker-dealers may agree with the selling stockholders to sell a
specified number of such shares at a stipulated price per share;

o a combination of any such methods of sale; and

o any other method permitted pursuant to applicable law.

The selling stockholders may offer their shares of common stock at any of
the following prices:

o fixed prices that may be changed;

o market prices prevailing at the time of sale;

o prices related to such prevailing market prices; and

o at negotiated prices.

The selling stockholders may effect transactions by selling shares to or
through broker-dealers, and all such broker-dealers may receive compensation in
the form of discounts, concessions, or commissions from the selling stockholders
and/or the purchasers of shares of common stock for whom such broker-dealers may
act as agents or to whom they sell as principals, or both (which compensation as
to a particular broker-dealer might be in excess of customary commissions).

Any broker-dealer acquiring common stock from the selling stockholders may
sell the shares either directly, in its normal market-making activities, through
or to other brokers on a principal or agency basis or to its customers. Any such
sales may be at prices then prevailing on the OTC Bulletin Board or at prices
related to such prevailing market prices or at negotiated prices to its
customers or a combination of such methods. The selling stockholders and any
broker-dealers that act in connection with the sale of the common stock
hereunder might be deemed to be "underwriters" within the meaning of Section
2(11) of the Securities Act; any commission received by them and any profit on
the resale of shares as principal might be deemed to be underwriting discounts
and commissions under the Securities Act. Any such commissions, as well as other
expenses incurred by the selling stockholders and applicable transfer taxes, are
payable by the selling stockholders.

The selling stockholders reserve the right to accept, and together with any
agent of the selling stockholder, to reject in whole or in part any proposed
purchase of the shares of common stock. The selling stockholders will pay any
sales commissions or other seller's compensation applicable to such
transactions.

We have not registered or qualified offers and sales of shares of the
common stock under the laws of any country other than the United States. To
comply with certain states' securities laws, if applicable, the selling
stockholders will offer and sell their shares of common stock in such
jurisdictions only through registered or licensed brokers or dealers. In
addition, in certain states the selling stockholders may not offer or sell
shares of common stock unless we have registered or qualified such shares for
sale in such states or we have complied with an available exemption from
registration or qualification.

Any shares of common stock offered under this prospectus that qualify for
sale pursuant to Rule 144 of the Securities Act may also be sold under Rule 144
rather than pursuant to this prospectus.

The selling stockholders with respect to any purchase or sale of shares of
common stock are required to comply with Regulation M promulgated under the
Securities Exchange Act of 1934, as amended. In general, Rule 102 under
Regulation M prohibits any person connected with a distribution of securities
(the "Distribution") from directly or indirectly bidding for, or purchasing for
any account in which he or she has a beneficial interest, any of such securities
or any right to purchase such securities, for a period of one business day
before and after completion of his or her participation in the Distribution (we
refer to that time period as the "Distribution Period").

During the Distribution Period, Rule 104 under Regulation M prohibits the
selling stockholders and any other persons engaged in the Distribution from
engaging in any stabilizing bid or purchasing of our common stock except for the
purpose of preventing or retarding a decline in the open market price of our
common stock. No such person may effect any stabilizing transaction to
facilitate any offering at the market. Inasmuch as the selling shareholders will
be reoffering and reselling our common stock at the market, Rule 104 prohibits
them from effecting any stabilizing transaction in contravention of Rule 104
with respect of our common stock.

There can be no assurance that the selling stockholders will sell any or
all of the shares offered by them hereunder or otherwise.

MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

PLAN OF OPERATION

Our principal business is the acquisition, development, licensing and
protection of our intellectual property. We presently own six patents covering
various telecommunications and data networking technologies (the "Patent
Portfolio") including, among others, patents covering the delivery of power over
Ethernet for the purpose of remotely powering network devices, and the
transmission of audio, video and data over computer and telephony networks. Our
strategy is to pursue licensing and strategic business alliances with companies
in the industries that manufacture and sell products that make use of the
technologies underlying our patents as well as with other users of the
technology who benefit directly from the technology including corporate,
educational and governmental entities.

On November 18, 2003, we acquired the Patent Portfolio from Merlot
Communications, Inc., a broadband communications solutions provider. In February
2004, following our review of applicable markets, we initiated licensing efforts
relating to one of our patents (U.S. Patent No. 6,218,930) covering the remote
delivery of power over Ethernet cable (the "Remote Power Patent"). We have
focused, and will continue to focus, our efforts on licensing our Remote Power
Patent. As of the date of this Prospectus, we have not entered into any license
arrangement with respect to our Remote Power Patent, although as part of our
settlement agreement with respect to our litigation with D-Link reached in April
2007, D-Link has agreed to enter into a license agreement pertaining to our
Remote Power Patent (See "Legal Proceedings - D-Link Litigation"). During the
next 12 months, we do not anticipate engaging in licensing efforts for our other
patents besides our Remote Power Patent.

To date we have incurred significant losses and at March 31, 2007 had an
accumulated deficit of $(47,339,000). For the year ended December 31, 2006, we
incurred a net loss of $(1,958,000) and incurred a net loss of $(1,060,000) for
the three months ended March 31, 2007. We anticipate that we will continue to
incur losses until we enter into material license agreements with respect to our
patented technologies. We have not achieved any revenue from our technology
licensing business as of March 31, 2007. Our inability to consummate license
agreements and achieve revenue from our patented technologies would have a
material adverse effect on our operations and its ability to continue business.

We do not currently have any revenue from operations. Our success and
ability to generate revenue is largely dependent on our ability to consummate
licensing arrangements with third parties. In November 2004, we entered into an
agreement with ThinkFire Services USA, Ltd. ("ThinkFire") pursuant to which
ThinkFire has been granted the exclusive worldwide rights to negotiate license
agreements for our Remote Power Patent with certain agreed-upon potential
licensees. We have agreed to pay ThinkFire a fee not to exceed 20% of the
royalty payments received from license agreements consummated by ThinkFire on
our behalf.

On April 25, 2007 we agreed to a settlement of our patent infringement
litigation against D-Link Corporation and D-Link Systems, (collectively
"D-Link") in the United States District Court for the Eastern District of Texas,
Tyler Division, for infringement of our Remote Power Patent (U.S. Patent No.
6,218,930). Under the terms of the settlement, D-Link has agreed to enter into a
license agreement for the Remote Power Patent the terms of which will include
monthly royalty payments of 3.25% of the net sales of D-Link branded Power over
Ethernet products, including those products which comply with the IEEE 802.3af
and 802.3at Standards, for the full term of the Remote Power Patent, which
expires in March 2020. The royalty rate is subject to adjustment beginning after
the first quarter of 2008 to a rate consistent with other similarly situated
licensees of the Remote Power Patent based on units of shipments of licensed
products. In addition, D-Link has agreed to pay us $100,000.

Our success depends on our ability to protect our intellectual property
rights. In the future, it may be necessary for us to commence patent litigation
against third parties whom we believe require a license to our patents. In
addition, we may be subject to third-party claims seeking to invalidate our
patents. These types of claims, with or without merit, may subject us to costly
litigation and diversion of our focus. In August 2005, we engaged Blank Rome LLP
as litigation counsel with respect to our Remote Power Patent on a contingency
basis pursuant to which Blank Rome is entitled to share in the proceeds of any
successful enforcement of the Remote Power Patent (See Risk Factors - "We are
currently relying upon our contingency fee agreement with Blank Rome"). If third
parties making claims against us seeking to invalidate our Remote Power Patent
are successful, they may be able to obtain injunctive or other equitable relief,
which effectively could block our ability to license or otherwise capitalize on
our patent. Successful litigation against us resulting in a determination that
our Remote Power Patent is invalid would have a material adverse effect on our
company.

We have financed our operations primarily from the sale of equity
securities. On December 21, 2004 and January 13, 2005, we completed a private
offering of equity securities resulting in gross proceeds of $2,685,000. In
addition, during the first quarter of 2006 we received $1,493,726 of cash
proceeds from the exercise of warrants issued in December 1999. In April 2007,
we

completed a private offering of equity securities resulting in gross proceeds of
$5,000,000. We anticipate, based on currently proposed plans and assumptions,
relating to our operations, that our cash and cash equivalents of approximately
$5,463,000 as of April 30, 2007 will more likely than not be sufficient to
satisfy our operations and capital requirements until at least December 31,
2008. 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 may have insufficient funds to support our operations prior to
December 31, 2008. Our inability to consummate licensing arrangements with
respect to our Remote Power Patent and generate revenues therefrom on a timely
basis or obtain additional financing when needed would have a material adverse
effect on our company, requiring us to curtail or cease operations. In addition,
any equity financing may involve substantial dilution to our current
stockholders.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.

On February 2, 2006, we dismissed Eisner LLP, a our principal independent
accountant to audit our financial statements. Eisner LLP's report on our
financial statements for the year ended December 31, 2004 did not contain an
adverse opinion or disclaimer opinion, and was not modified as to uncertainty,
audit scope or accounting principles. Eisner LLP did not audit our financial
statements for the year ended December 31, 2005 or issue a report thereon.
During the year ended December 31, 2005 and the subsequent interim period there
were no disagreements with Eisner LLP, whether or not resolved, on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure, which, if not resolved to the satisfaction of Eisner LLP,
would have caused Eisner LLP to make reference to the subject matter of the
disagreement(s) in connection with its report on our financial statements.

On February 2, 2006, we engaged Radin, Glass & Co., LLP as our new
principal independent accountant to audit our financial statements. We (or
someone on our behalf) did not consult Radin, Glass & Co., LLP with respect to
the application of accounting principles to a specific completed or contemplated
transaction, or the type of audit opinion that might be rendered on our
financial statements.

MANAGEMENT

NAME AGE POSITION
---- --- --------
Corey M. Horowitz 52 Chairman and Chief Executive Officer, Chairman
of the Board of Directors
David C. Kahn 55 Chief Financial Officer
Harry B. Schessel 42 Director
Robert Graifman 50 Director
Robert M. Pons 50 Director
Laurent Ohana 43 Director

COREY M. HOROWITZ became our Chairman and Chief Executive Officer in
December 2003. Mr. Horowitz has also served as our Chairman of our Board of
Directors since January 1996 and has been a member of our Board of Directors
since April 1994. In January 2003, Mr. Horowitz also became our Secretary. Mr.
Horowitz is also President and sole shareholder of CMH Capital Management Corp.
("CMH"), a New York investment advisory and merchant banking firm, which he
founded in September 1991. During the period June 2001 through December 2003,
CMH rendered financial advisory services to us. From January 1986 to February
1991, Mr. Horowitz was a general partner in charge of mergers and acquisitions
at Plaza Securities Co., a New York investment partnership.

DAVID C. KAHN, CPA, became our Chief Financial Officer in January 2004.
Since December 1989, Mr. Kahn has provided accounting and tax services on a
consulting basis to private and public companies. He also serves as a faculty
member of Yeshiva University in New York, a position he has held since August
2000.

HARRY B. SCHESSEL became a director of our company in July 2001. Since
April 2006, Mr. Schessel has been the Chief Executive Officer of AQL Decorating
Co., Inc., a decorator of plastic containers. Since July 2002, Mr. Schessel also
has been a real estate developer. From July 2001 until July 2002, Mr. Schessel
was employed at Kroll, Inc. ("Kroll") as the Global Practice Leader for the
Information Security Group. From June 2000 to July 2001, Mr. Schessel advised
security companies, including Kroll, in the areas of strategy, operations,
marketing and business development and also as a consultant to investment
banking firms and venture capital firms for purposes of evaluating investments
in the information security industry. From March 2000 until June 2000, Mr.
Schessel was Vice President of Cybersafe, Inc., a security software company. In
June 1997, Mr. Schessel co-founded Centrax, Inc., a company engaged in the
development and marketing of intrusion detection software, and was employed from
June 1997 until its sale in March 1999 in various capacities, including Chief
Operating Officer and Executive Vice President.

ROBERT GRAIFMAN became a director of our company in December 2003. Mr.
Graifman currently serves as Executive Chairman of TotalCat Group, Inc., a
company engaged in the recycling and manufacture of catalyst devices and the
management of emissions control systems. Mr. Graifman also currently serves as
Managing Member of Skyfarm Management, LLC, a New

Jersey based investment management company. From June 2000 to August 2003, Mr.
Graifman served as Chief Financial Officer of Gilo Ventures, LLP, a California
based venture capital firm focused on emerging technology companies.

ROBERT M. PONS became a director of our company in December 2003. From
January 2004 until April 2007, Mr. Pons served as President and Chief Executive
Officer of Uphonia, Inc. (PK:UPHN) (previously SmartServ Online, Inc.), a
wireless applications service provider. From August 2003 until January 2004, Mr.
Pons served as Interim Chief Executive Officer of SmartServ Online, Inc. on a
consulting basis. From March 1999 to August 2003, he was President of
FreedomPay, Inc., a wireless device payment processing company. During the
period January 1994 to March 1999, Mr. Pons was President of Lifesafety
Solutions, Inc., an enterprise software company. Mr. Pons has over 20 years of
management experience with telecommunications companies including MCI, Inc.,
Sprint, Inc. and Geotek, Inc.

LAURENT OHANA became a director of our company in September 2005. Mr. Ohana
is currently the Managing Partner of Parkview Ventures LLC ("Parkview"), a
company engaged in merchant banking activities, including making investments in
and providing strategic advisory services to information technology firms in the
US and internationally. From 1999 to 2002, Mr. Ohana was the CEO of Inlumen,
Inc., a company engaged in providing private label web-based financial portals
to financial institutions. From 1994 to 2004, Mr. Ohana was the managing partner
of New Media Capital LLC, a technology venture capital and advisory firm. From
1987 to 1993, Mr. Ohana was a corporate attorney at Fried Frank Harris Shriver &
Jacobson.

The sister of Corey M. Horowitz's wife is married to Robert Graifman.

KEY CONSULTANT

JONATHAN GREENE has served as a consultant to our company since December
2004 providing technical and marketing analysis for our Patent Portfolio. Mr.
Greene also serves as a member of our Technical Advisory Board. From August 2003
until December 2004, he served as a consultant to Neartek, Inc., a storage
management software company (August 2003 until October 2003) and Kavado Inc., a
security software company (November 2003 until December 2004). From January 2003
until July 2003, Mr. Greene served as Director of Product Management for
FalconStor Software, Inc., a storage management software company. From December
2001 through December 2002, Mr. Greene served as our Senior Vice President of
Marketing and Business Development, at a time when we were engaged in the
development, marketing and licensing of security software. From December 1999
until September 2001, he served as Senior Vice President of Marketing for
Panacya Inc., a vendor of service management software. Mr. Greene has also held
positions at System Management ARTS (SMARTS), Computer Associates, Cheyenne
Software and Data General.

COMMITTEES OF THE BOARD OF DIRECTORS

AUDIT COMMITTEE

Robert Graifman and Harry Schessel, are the current members of our Audit
Committee and served on our Audit Committee during 2006. Both Mr. Graifman and
Mr. Schessel are considered independent members of the audit committee in
accordance with the criteria set forth in Section 10(A)(3) of the Securities
Exchange Act of 1934. Our Audit Committee was established by the Board of
Directors in accordance with Section 3(a)58(A) of the Securities Exchange Act of
1934. The duties of our Audit Committee include consultations with our
independent auditors at least annually to review the scope and results of the
annual audit; review with our independent auditors of our quarterly reports on
Form 10-QSB prior to filing, recommendations to the Board regarding the
independent auditors to be retained; and the auditors' comments as to internal
controls, accounting staff and management performance and procedures in
connection with audit and financial controls. The Audit Committee has adopted a
written Audit Committee Charter. Mr. Graifman is our audit committee financial
expert.

COMPENSATION COMMITTEE

Robert Pons is currently the sole member of our Compensation Committee.
Laurant Ohana served with Mr. Pons as a member of our Compensation Committee for
2006. The Compensation Committee is responsible for determining compensation for
our executive officers, including bonuses and benefits, and administration of
our compensation programs, including our Stock Option Plan.

DIRECTOR INDEPENDENCE

Three of our five directors - Robert Pons, Robert Graifman and Harry
Schessel are considered independent directors based upon the standard of
independence adopted by the Board of Directors as promulgated under Rule 121A of
the Company Guide of the American Stock Exchange ("AMEX"). Robert Graifman and
Harry Schessel are considered independent members of our audit committee under
Rule 121A of the Company Guide of AMEX and Rule 10A-3 under the Securities
Exchange Act of 1934. While we are not listed on AMEX, our Board has adopted its
independence rules in making its determination of director independence.

LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS

Our Certificate of Incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that directors
of a corporation will not be personally liable for monetary damages for breach
of their fiduciary duties as directors, except for liability (i) for any breach
of their duty of loyalty to the corporation or its stockholders, (ii) for acts
or omissions not in good faith or that involve intentional misconduct or a
knowing violation of law, (iii) for unlawful payments of dividends or unlawful
stock repurchases or redemptions as provided in Section 174 of the Delaware
General Corporation Law or (iv) for any transaction from which the director
derived an improper personal benefit. Our Bylaws provide that we shall indemnify
our directors, officers, employees and agents to the fullest extent permitted by
law. Our Bylaws also permit us to secure insurance on behalf of any officer,
director, employee or other agent for any liability arising out of his or her
actions in such capacity. We currently maintain directors and officers liability
insurance. At present, there is no pending material litigation or proceeding
involving any of our directors, officers, employees or agents where
indemnification will be required or permitted. We are not aware of any
threatened litigation or proceeding that might result in a material claim for
such indemnification.

TECHNICAL ADVISORY BOARD

In November 2004 we established a Technical Advisory Board to assist us
with our strategic business plan of maximizing the value of its Patent
Portfolio. Each member of the Technical Advisory Board received a five (5) year
option to purchase 17,500 shares (fully vested) of our common stock at an
exercise price of $.54 per share.

The members of the Technical Advisory Board include:

GEORGE CONANT, FORMER CEO AND CHAIRMAN OF THE BOARD OF DIRECTORS OF MERLOT
COMMUNICATIONS, INC., a broadband communications solutions provider, during the
period 2000 - 2006. Prior to joining Merlot Communications, Inc., Mr. Conant
co-founded Xyplex, Inc., a manufacturer of data communications equipment and
network management software, where he held the positions of Vice President of
Engineering, Vice President of Technology and Chief Technology Officer. Prior to
Xyplex, Mr. Conant was employed by Digital Equipment Corporation, where he
worked as a network architect. Mr. Conant received a BS and a Masters in
theoretical mathematics from the University of Michigan.

RON KEENAN, CEO OF IP INFOTAINMENT, LIMITED, a network services company.
From 1997 until 2006, Mr. Keenan served as Chief Technology Officer of Merlot
Communications, Inc. Mr. Keenan is an expert on the convergence of
telecommunications and data who, prior to co-founding Merlot, founded QFR USA
Corporation, a high-tech firm engaged in developing custom ASICs for advanced
and cost-effective communications systems. He had previously founded two other
development firms. He also served as advanced engineering project director at
TIE/Communications, Inc., where he developed the TIE 612 Electronic Key System,
the first "skinny wire" telephone system and one of the largest selling key
systems in history. Mr. Keenan received his BS in Electrical Engineering from
the Milwaukee School of Engineering and has more than 20 years experience in
advanced analog and digital design techniques.

ANDREW MASLOW, DIRECTOR OF INDUSTRIAL AFFAIRS, MEMORIAL SLOAN-KETTERING
CANCER CENTER. Mr. Maslow heads the intellectual property activities of
Sloan-Kettering which includes licensing activities of the Center's technology
and management of its patent portfolio. Annual licensing revenue exceeds $60
million. Prior to joining Sloan-Kettering, Mr. Maslow was Associate Director of
the Office of Science and Technology of Columbia University where he was
responsible for the development, patenting and licensing of inventions
originating at the university. Mr. Maslow is a Registered Patent Attorney.

JONATHAN GREENE also serves as a member of the Technical Advisory Board
(see page 36 hereof for a description of Mr. Greene's background).

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act requires that our executive officers,
directors, and persons who own more than 10% of our outstanding Common Stock
file initial reports of ownership and changes in ownership with the Securities
and Exchange Commission. Officers, directors and greater than 10% stockholders
are required by Commission regulations to furnish us with copies of all Section
16(a) forms they file. We believe that our executive officers, directors, and
greater than 10% stockholders complied with all required filings during the year
ended December 31, 2006.

CODE OF ETHICS

The Board of Directors has adopted a Code of Ethics that applies to the
principal executive officers, principal financial officer, principal accounting
officer or controller, or persons performing similar functions. The Code of
Ethics was filed as Exhibit 14 of the Company's Annual Report on Form 10-KSB for
the year ended December 31, 2003.

EXECUTIVE COMPENSATION

The following table summarizes compensation, for the year ended December
31, 2006, awarded to, earned by or paid to our Chief Executive Officer ("CEO")
and to each of our executive officers who received total compensation in excess
of $100,000 for the year ended December 31, 2006 for services rendered in all
capacities to our company (collectively, the "Named Executive Officers").

SUMMARY COMPENSATION TABLE

ANNUAL COMPENSATION LONG TERM COMPENSATION AWARDS
------------------------------------------ -----------------------------
ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS ($) OPTION AWARDS($) COMPENSATION($)(1) TOTAL($)
--------------------------- ---- --------- --------- ---------------- ------------------ --------

Corey M. Horowitz 2006 $275,000 $75,000(2) -- -- $350,000
Chairman and Chief
Executive Officer
2006 $ 79,100(3) -- $54,000(4) -- $133,100
David C. Kahn
Chief Financial Officer

------------------
(1) We have concluded that the aggregate amount of perquisites and other
personal benefits paid to either Mr. Horowitz or Mr. Kahn did not exceed
$10,000.

(2) The bonus paid to Mr. Horowitz for 2006 was paid in January 2007.

(3) Consists of consulting fees paid to Mr. Kahn.

(4) In determining the grant date fair value under SFAS No. 123R of a five (5)
year option issued in December 2006 to Mr. Kahn to purchase 75,000 shares
of common stock, we made the following assumptions: expected term of the
options - 5 years, risk free interest rate for the expected term of the
options - 4.57%; expected volatility of the underlying stock - 48.5%; no
expected dividends.

NARRATIVE DISCLOSURE TO SUMMARY COMPENSATION TABLE

EMPLOYMENT AGREEMENTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS

During 2006, Corey M. Horowitz served as our Chairman and Chief Executive
Officer pursuant to a two year employment agreement which expired in November
2006. Mr. Horowitz received a base salary for 2006 of $275,000 in accordance
with such employment agreement and received a cash bonus for 2006 of $75,000. In
February 2007, we entered into a new employment agreement with Mr. Horowitz, the
terms and provisions of which are disclosed below.

On February 28, 2007, we entered into a new employment agreement with Corey
M. Horowitz pursuant to which he continued to serve as our Chairman and Chief
Executive Officer for a two year term at an annual base salary of $288,750 for
the first year, increasing by 5% for the second year. In connection with his
employment agreement, Mr. Horowitz was issued a five (5) year option to purchase
375,000 shares of our common stock at an exercise price of $1.46 per share which
vests, on a quarterly basis over a one year period subject to acceleration upon
a change of control. We also agreed to issue to Mr. Horowitz on the one year
anniversary date of his new employment agreement an additional five (5) year
option to purchase a minimum of 375,000 shares of our common stock at an
exercise price equal to the closing price of our common stock on the date of
grant, which option will vest on a quarterly basis over a one year period. In
addition to the aforementioned option grants, we agreed to extend for an
additional three (3) years the expiration dates of all options and warrants (an
aggregate of 2,620,000 shares) expiring in calendar year 2007 and 2008 owned by
Mr. Horowitz and CMH Capital Management Corp. ("CMH"), an affiliate. Under the
terms of his employment agreement, Mr. Horowitz shall receive bonus compensation
in an amount equal to 5% of our royalties or other payments (before deduction of
payments to third parties including, but not limited to, legal fees and expenses
and third party license fees) received from licensing our patents (including
patents currently owned and acquired or licensed on an exclusive basis during
the period in which Mr. Horowitz continues to serve as an executive officer of
our company) (the "Royalty Bonus Compensation"). Mr. Horowitz shall also receive
bonus compensation equal to 5% of the gross proceeds from (i) the sale of any of
our patents or (ii) our merger with or into another corporation or entity. The
Royalty Bonus Compensation shall continue to be paid to Mr. Horowitz for the
life of each of the our patents with respect to licenses entered into by us with
third parties during Mr. Horowitz's term of employment or at anytime thereafter,
whether Mr. Horowitz is employed by us or not, provided, that, Mr. Horowitz's
employment has not been terminated by us "For Cause" (as defined) or terminated
by Mr. Horowitz without "Good Reason" (as defined). In the event that Mr.
Horowitz's employment is terminated by us "Other Than For Cause" (as defined) or
by Mr. Horowitz for "Good Reason" (as defined), Mr. Horowitz shall be entitled
to a severance of 12 months base salary.

In connection with his new employment agreement, Mr. Horowitz has agreed
not to compete with us as follows: (i) during the term of the agreement and for
a period of 12 months thereafter if his employment is terminated other than for
cause (as defined) provided he is paid his 12 month base salary severance amount
and (ii) for a period of two years from the termination date, if terminated "For
Cause" by us or "Without Good Reason" by Mr. Horowitz. In accordance with his
employment agreement, Mr. Horowitz also has certain anti-dilution rights which
provide that if at any time during the period ended December 31, 2008, in the
event that we complete an offering of our common stock or any securities
convertible or exercisable into common stock (exclusive of securities issued
upon exercise of outstanding options, warrants or other convertible securities),
Mr. Horowitz shall receive from us, at the same price as the securities issued
in the financing, such number of additional options to purchase common stock so
that he maintains the same derivative ownership percentage (21.47%) of our
company based upon options and warrants owned by Mr. Horowitz and CMH (exclusive
of ownership of shares of common stock by Mr. Horowitz and CMH) as he and CMH
owned as of the time of execution of his employment agreement; provided, that,
the aforementioned anti-dilution protection was afforded to Mr. Horowitz up to a
maximum financing(s) of $2.5 million. In April 2007, pursuant to the
anti-dilution protection in his employment agreement, Mr. Horowitz was issued a
five (5) year option to purchase 732,709 shares

of our common stock, at an exercise price of $1.67 per share, with respect to
the closing of our $5,000,000 private placement (See "Transactions With Related
Persons, Promoters and Certain Control Persons").

On December 20, 2006, we entered into an agreement with David C. Kahn
pursuant to which he agreed to continue to serve as our Chief Financial Officer
through December 31, 2008. In consideration for his services, Mr. Kahn is
compensated at the rate of $6,615 per month for the period through December 31,
2007 and $6,945 per month for the year ended December 31, 2008. Mr. Kahn was
also issued a five (5) year option (the "Option") to purchase 75,000 shares of
our common stock at an exercise price of $1.50 per share. The option vested
30,000 shares on the date of grant and the balance of the shares (45,000) will
vest on a quarterly basis in equal amounts of 5,625 shares beginning March 31,
2007 through December 31, 2008. Upon a "Change in Control" (as defined) all of
the unvested shares underlying the Option shall become 100% vested and
immediately exercisable. The agreement further provides that we may terminate
the agreement at any time for any reason. In the event Mr. Kahn's services are
terminated without "Good Cause" (as defined), he will be entitled to accelerated
vesting of all unvested shares underlying the Option and the lesser of (i) six
months base monthly compensation or (ii) the remaining balance of the monthly
compensation payable through December 31, 2008.

DIRECTOR COMPENSATION

We compensated each director, who is not an employee of our company, by
granting to each outside director (upon joining the Board) stock options to
purchase 50,000 shares of our common stock, at an exercise price equal to the
closing price of our common stock on the date of grant, with the options vesting
over a one year period in equal quarterly amounts. In addition, subject to the
discretion of the Compensation Committee and the Board of Directors, each
non-employee director is eligible to receive option grants for each year of
service as a director.

The following table sets forth the compensation paid to all persons who
served as members of our board of directors (other than our named executive
officers) during the year ended December 31, 2006. No director who is also a
named executive officer received any compensation for services as a director in
2006.
Option Awards All other Total
($) Compensation ($)
------------------ ------------- ------------ -----
Name
Robert Graifman(1) $48,000 (2) $ -- $48,000
Robert Pons(1) $36,000 (2) -- $36,000
Laurent Ohana(1) $36,000 (2) -- $12,000
Harry Schessel(1) $12,000 (2) -- $12,000

---------------
(1) In December 2006, Robert Graifman, Robert Pons and Laurent Ohana were each
granted a five (5) year option to purchase 50,000 shares of our common
stock (which vested on grant), at an exercise price of $1.50 per share, for
services as a Board member during 2006. In addition, in February 2006
Robert Graifman and Harry Schessel were each issued ten (10) year options
to purchase 15,000 shares, at an exercise price of $1.31 per share, which
options vested over a one year period at the rate of 3,750 shares per
quarter beginning May 4, 2006.

(2) In determining the grant date fair value of the option grants in December
2006 under SFAS No. 123R, we made the following assumptions: expected term
of the options - five years; risk free interest rate for the expected term
of the options - 4.57%; expected volatility of the underlying stock -
48.45%; no expected dividends. In determining the grant date fair value of
the option grant in February 2006 under SFAS No. 123R, we made the
following assumptions: expected term of options - ten years; risk free
interest rate for the expected term of the options - 4.51%; expected
volatility of the underlying stock - 69.82%; no expected dividends.

OPTION GRANTS IN 2006

The following stock options granted to the Named Executive Officers during
the year ended December 31, 2006:

Number of Securities Percent of Total Options
Name Underlying Options Granted Granted to Employees in 2006 Exercise Price Expiration Date
---- -------------------------- ---------------------------- -------------- ---------------

David C. Kahn 75,000 100% $1.50 12/20/2011
Chief Financial
Officer

OUTSTANDING EQUITY AWARDS AT DECEMBER 31, 2006

The following table sets forth information relating to unexercised and
outstanding options for each Named Executive Officers as of December 31, 2006:

Number of Securities Underlying
Unexercised Option Option
------------------------------- Exercise Option
Name Exercisable Unexercisable Price($) Expiration Date
---- ----------- ------------- -------- ---------------

Corey M. Horowitz
Chairman and CEO 1,195,361(1) -- $ 1.18 03/06/12
400,000(2) -- $ .68 11/26/09
1,100,000(3) -- $ .25 11/26/14
515,218(4) -- $ .13 12/22/11
1,084,782(5) -- $ .23 12/22/11
750,000(6)(18) -- $ 1.20 04/18/10
250,000(7)(18) -- $ 1.48 10/08/10
300,000(8)(18) -- $ .70 07/11/11
-- 10,625(16) $ 3.0625 01/19/11
20,000(9) $ 6.00 10/20/11
10,000(10) $ 3.75 6/22/09
7,500(11) $ 4.25 10/25/09
5,000(12) $ 5.50 9/19/10
David Kahn
Chief Financial 30,000(13) 45,000(17) $ 1.50 12/20/14
Officer 75,000(14) -- $ .80 08/04/10
50,000(15) -- $ .35 01/21/14

------------------

The vesting dates of the foregoing options are as follows: (1) March 16,
2005, (2) 200,000 shares on November 26, 2004 and 200,000 shares on November 26,
2005, (3) November 26, 2004, (4) December 22, 2003, (5) 434,782 shares on
December 22, 2003, 250,000 shares on December 22, 2004, 200,000 shares on
December 22, 2005, and 200,000 shares on December 22, 2006, (6) 250,000 shares
on April 18, 2005, 250,000 shares on April 18, 2004 and 250,000 shares on April
18, 2005, (7) June 11, 2001, (8) July 11, 2001, (9) on a quarterly basis in
equal amounts beginning January 20, 1999 through October 20, 1999, (10) on a
quarterly basis in equal amounts beginning September 12, 1999 through June 22,
2000, (11) on a quarterly basis in equal amounts beginning January 25, 2000
through October 25, 2000, (12) on a quarterly basis in equal amounts beginning
December 19, 2000 through September 19, 2000, (13) December 20, 2006, (14)
30,000 shares on August 4, 2005 and 7,500 shares on a quarterly basis beginning
September 30, 2005 through December 31, 2006, (15) 20,000 shares on January 21,
2004, 2,500 shares on the last day of each month beginning January 31, 2004
through December 31, 2004, (16) 5,313 shares if the stock price reaches $10 per
share and 5,312 shares if the stock price reaches $15 per share, (17) 5,625
shares on a quarterly basis beginning March 31, 2007 through December 31, 2008,
and (18) includes options or warrants held by CMH Capital Management Corp., an
entity in which Mr. Horowitz is the sole owner, officer and director.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth information regarding the beneficial
ownership of our common stock as of May 15, 2007 (i) each person known by us to
be the beneficial owner of more than 5% of our outstanding shares of common
stock, (ii) each of our directors, (iii) each of our executive officers, and
(iv) all of our executive officers and directors as a group.

NAME OF NUMBER OF SHARES PERCENTAGE OF SHARES
BENEFICIAL OWNER BENEFICIALLY OWNED BENEFICIALLY OWNED(2)
---------------- ------------------ ---------------------

Corey M. Horowitz(3) 9,604,435 32.3%
CMH Capital Management Corp. (4) 3,767,800 15.4%
Barry Rubenstein(5) 3,743,251 16.1%
Jonathan Auerbach(6) 3,250,001 13.4%
Hound Partners, LLC(6) 3,250,001 13.4%
Hound Performance, LLC(6) 3,250,001 13.4%
Irwin Lieber (7) 2,048,338 8.8%
Barry Fingerhut (8) 2,008,598 8.7%
Hound Partners, L.P. (9) 1,622,726 6.8%
Hound Partners Offshore Fund, L.P. (10) 1,627,275 6.7%
Emigrant Capital Corporation (11)
Paul Milstein Revocable 1998 Trust
New York Private Bank & Trust
Corporation Emigrant Bancorp. Inc.
Emigrant Savings Bank 1,312,500 5.5%

NAME OF NUMBER OF SHARES PERCENTAGE OF SHARES
BENEFICIAL OWNER BENEFICIALLY OWNED BENEFICIALLY OWNED(2)
---------------- ------------------ ---------------------

Wheatley Partners II, L.P. (12) 1,280,207 5.5%
Steve Heinmann(13) 1,171,937 5.0%
Robert Graifman(14) 344,777 1.5%
David C. Kahn(15) 166,250 *
Laurent Ohana(16) 150,000 *
Harry B. Schessel(17) 140,000 *
Robert Pons(18) 100,000 *
All officers and directors as a group 10,505,462 34.6%
(6 Persons)
--------------------
* Less than 1%.

(1) Unless otherwise indicated, we believe that all persons named in the above
table have sole voting and investment power with respect to all shares of
common stock beneficially owned by them.

(2) A person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days from the date hereof upon the
exercise of options, warrants or convertible securities. Each beneficial
owner's percentage ownership is determined by assuming that options,
warrants and convertible securities held by such person (but not those held
by any other person) and which are exercisable or convertible within 60
days have been exercised and converted. Assumes a base of 23,173,057 shares
of common stock outstanding.

(3) Includes (i) 381,303 shares of common stock held by Mr. Horowitz, (ii)
5,258,070 shares of common stock subject to currently exercisable stock
options held by Mr. Horowitz, (iii) 2,467,800 shares of common stock held
by CMH Capital Management Corp. ("CMH"), an entity solely owned by Mr.
Horowitz, (iv) 550,000 shares of common stock subject to currently
exercisable warrants held by CMH, (v) 750,000 shares of common stock
subject to currently exercisable options held by CMH, (vi) 67,471 shares of
common stock owned by Donna Slavitt, the wife of Mr. Horowitz, (vii)
127,500 shares of common stock held by two trusts and a custodian account
for the benefit of Mr. Horowitz's three children and (viii) 2,291 shares of
common stock held by Horowitz Partners, a general partnership of which Mr.
Horowitz is a partner. Does not include options to purchase 198,125 shares
of common stock which are not currently exercisable.

(4) Includes (i) 2,467,800 shares of common stock, (ii) 550,000 shares of
common stock subject to currently exercisable warrants and (iii) 750,000
shares of common stock subject to currently exercisable stock options.
Corey M. Horowitz, by virtue of being the sole officer, director and
shareholder of CMH, has the sole power to vote and dispose of the shares of
common stock owned by CMH.

(5) Includes (i) 1,280,207 shares of common stock held by Wheatley Partners II,
L.P., (ii) 194,280 shares of common stock held by Wheatley Partners, L.P.,
(iii) 16,868 shares of common stock held by Wheatley Foreign Partners,
L.P., (iv) 150,012 shares of common stock held by Mr. Rubenstein, (v)
47,500 shares of common stock subject to currently exercisable stock
options held by Mr. Rubenstein, and (vi) 829,226, 619,983, 309,316, 294,810
and 1,049 shares of common stock held by Woodland Venture Fund, Seneca
Ventures, Woodland Partners, Brookwood Partners, L.P. and Marilyn
Rubenstein, respectively. Does not include options to purchase 11,875
shares of common stock held by Mr. Rubenstein which are not currently
exercisable. The aforementioned beneficial ownership by Mr. Rubenstein is
based upon Amendment No. 6 to Schedule 13D jointly filed by Mr. Rubenstein
and related parties with the Securities and Exchange Commission on January
3, 2005 and Form 4s filed by Mr. Rubenstein with the Securities and
Exchange Commission on December 21, 2004 and February 17, 2005. Barry
Rubenstein is a general partner of Wheatley Partners II, L.P. and a member
of the general partner of each of Wheatley Partners, L.P. and Wheatley
Foreign Partners, L.P. Barry Rubenstein and Woodland Services Corp. are the
general partners of Woodland Venture Fund and Seneca Ventures. Barry
Rubenstein is the President and sole director of Woodland Services Corp.
Marilyn Rubenstein is the wife of Barry Rubenstein. Mr. Rubenstein
disclaims beneficial ownership of the shares of common stock held by
Wheatley Partners II, L.P., Wheatley Partners, L.P. and Wheatley Foreign
Partners, L.P., except to the extent of his equity interest therein.

(6) Includes (i) 1,081,817 shares of common stock and 540,909 shares of common
stock subject to currently exercisable warrants held by Hound Partners, LP
and (ii) 1,084,850 shares of common stock and 542,425 shares of common
stock subject to currently exercisable warrants held by Hound Partners
Offshore Fund, LP. Jonathan Auerbach is the managing member of Hound
Performance, LLC and Hound Partners, LLC. Hound Performance, LLC is the
general partner of Hound Partners, LP and Hound Partners Offshore Fund,
L.P. Hound Partners, LLC is the investment manager of Hound Partners, LP
and Hound Partners Offshore Fund, L.P. The securities may be deemed to be
beneficially owned by Hound Performance, LLC, Hound Partners LLC and
Jonathan Auerbach. The aforementioned beneficial ownership is based upon
Schedule 13G jointly filed by Hound Partners, LLC, Hound Performance, LLC,
Hound Partners, L.P. and Hound Partners Offshore Fund, LP, with the
Securities and Exchange Commission on April 26, 2007 and a Form 3 jointly
filed by Hound Partners, LLC, Hound Performance, LLC and Jonathan Auerbach
with the Securities and Exchange Commission on April 26, 2007. Jonathan
Auerbach by virtue of being the managing member of Hound Performance, LLC
and Hound Partners, LLC has the power to vote and dispose of the securities
held by Hound Partners, LP and Hound Partners Offshore Fund, L.P.

(7) Includes (i) 1,280,207 shares of common stock held by Wheatley Partners II,
L.P., (ii) 194,280 shares of common stock held by Wheatley Partners, L.P.,
(iii) 16,868 shares of common stock held by Wheatley Foreign Partners,
L.P., (iv) 509,483 shares of common stock owned by Mr. Lieber, and (v)
47,500 shares of common stock subject to currently exercisable stock
options owned by Mr. Lieber. Does not include options to purchase 11,875
shares of common stock owned by Mr. Lieber which are not currently
exercisable. The aforementioned beneficial ownership by Mr. Lieber is based
upon Amendment

No. 6 to Schedule 13D jointly filed by Mr. Lieber and related parties with
Securities and Exchange Commission on January 3, 2005 and Form 4s filed
with the Securities and Exchange Commission on December 21, 2004 and
February 17, 2005. Mr. Lieber disclaims beneficial ownership of the shares
of common stock held by Wheatley Partners II, L.P., Wheatley Partners, L.P.
and Wheatley Foreign Partners, L.P., except to the extent of his equity
interest therein.

(8) Includes (i) 1,280,207 shares of common stock held by Wheatley Partners,
II, L.P., (ii) 194,280 shares of common stock held by Wheatley Partners,
L.P., (iii) 16,868 shares of common stock held by Wheatley Foreign
Partners, L.P., and (iv) 517,243 shares of common stock owned by Mr.
Fingerhut. Mr. Fingerhut disclaims beneficial ownership of the shares of
common stock held by Wheatley Partners II, L.P., Wheatley Partners, L.P.
and Wheatley Foreign Partners, L.P., except to the extent of his equity
interest therein.

(9) Includes (i) 1,081,817 shares of common stock and (ii) 540,909 shares of
common stock subject to currently exercisable warrants owned by Hound
Partners, LP.

(10) Includes (i) 1,084,850 shares of common stock and (ii) 542,425 shares of
common stock subject to currently exercisable warrants held by Hound
Partners Offshore Fund, L.P.

(11) Includes (i) 750,000 shares of common stock and (ii) 562,500 shares of
common stock subject to currently exercisable warrants held by Emigrant
Capital Corporation ("Emigrant Capital"). Emigrant Capital is a wholly
owned subsidiary of Emigrant Savings Bank ("ESB"), which is a wholly-owned
subsidiary of Emigrant Bancorp, Inc ("EBI"). EBI is a wholly-owned
subsidiary of New York Private Bank & Trust Corporation ("NYPBTC"). The
Paul Milstein Revocable 1998 Trust (the "Trust") owns 100% of the voting
stock of NYPBTC. ESB, EBI, NYPBTC and the Trust each may be deemed to be
the beneficial owner of the shares of common stock and warrants held by
Emigrant Capital. The aforementioned is based upon a Schedule 13G/A filed
jointly by Emigrant Capital, ESB, EBI, NYPBTC, the Trust and others with
the Securities and Exchange Commission on January 12, 2005. Howard
Milstein, by virtue of being an officer of New York Private Bank and Trust
Corporation and trustee of the Paul Milstein Revocable 1998 Trust, both
indirect owners of Emigrant Capital Corporation, may be deemed to have sole
power to vote and dispose of the securities owned by Emigrant Capital
Corporation.

(12) Includes 1,280,207 shares of common stock. Barry Rubenstein, Irwin Lieber,
Barry Fingerhut, Jonathan Lieber and Seth Lieber, are each a general
partner of Wheatley Partners II, L.P. Each of Messrs. Rubenstein, I.
Lieber, Fingerhut, J. Lieber and S. Lieber disclaims beneficial ownership
of the securities held by Wheatley Partners II, L.P., except to the extent
of their equity interest therein. Jonathan Lieber and Seth Lieber each
beneficially own less than 1% of the outstanding common stock of the
Company exclusive of shares beneficially owned by Wheatley Partners II,
L.P., Wheatley Partners, L.P. and Wheatley Foreign Partners, L.P. and as
such have not been included in the beneficial ownership table. Barry
Rubenstein, Irwin Lieber, Barry Fingerhut, Seth Lieber

and Jonathan Lieber, by virtue of each being a general partner of Wheatley
Partners II, L.P., may be deemed to have shared power to vote and dispose
of the shares of common stock owned by Wheatley Partners II, L.P.

(13) Includes (i) 1,030,270 shares of common stock and (ii) 141,667 shares of
common stock subject to currently exercisable warrants owned by Mr.
Heinemann.

(14) Includes (i) 154,777 shares of common stock, (ii) 75,000 shares subject to
currently exercisable warrants and (iii) 115,000 shares subject to
currently exercisable stock options issued to Mr. Graifman.

(15) Includes 166,250 shares of common stock subject to currently exercisable
stock options issued to Mr. Kahn. Does not include options to purchase
33,750 shares of common stock which are not currently exercisable.

(16) Includes 150,000 shares subject to currently exercisable options and
warrants issued to Mr. Ohana.

(17) Includes 140,000 shares of common stock subject to currently exercisable
stock options issued to Mr. Schessel.

(18) Includes 100,000 shares subject to currently exercisable stock options
issued to Mr. Pons.

TRANSACTIONS WITH RELATED PERSONS, PROMOTERS AND
CERTAIN CONTROL PERSONS

In December 2005, we extended the exercise period for warrants to purchase
an aggregate of 1,352,152 shares of common stock, at exercise prices of $1.00
and $1.11 which were originally issued as part of a private offering completed
in December 1999. Corey M. Horowitz, our Chairman and Chief Executive Officer,
owned 85,200 of such warrants which he exercised in March 2006.

On February 28, 2007, we entered into an employment agreement with Corey M.
Horowitz pursuant to which Mr. Horowitz continues to serve as our Chairman and
Chief Executive Officer for a two year term at an annual base salary of $288,750
for the first year with a 5% increase on the one year anniversary thereof. See
"Executive Compensation-Employment Agreements, Termination of Employment and
Change-In-Control Arrangements" for the detailed terms of our employment
agreement with Mr. Horowitz.

On April 16, 2007, we completed a private placement in which 10 investors
purchased and aggregate of 3,333,333 shares of our common stock, at a price of
$1.50 per share or an aggregate purchase price of $5,000,000, and five (5) year
warrants to purchase 1,666,667 shares of our common stock, at an exercise price
of $2.00 per share. Hound Partners, L.P., one of our principal stockholders,
invested $1,622,725 in the private placement in consideration for 1,108,817
shares of common stock and 540,909 warrants and Hound Partners Offshore Fund,
L.P., also one of our principal stockholders, invested $1,627,275 in the private
placement in consideration for 1,084,850 shares of our common stock and 542,425
warrants. Corey M. Horowitz, our Chairman and Chief Executive Officer, was
issued a five (5) year option to purchase 723,709 shares of our common stock, at
an exercise price of $1.67 per share, with respect to the private placement
pursuant to the anti-dilution provisions of his employment agreement (See
"Executive Compensation - Employment Agreements, Termination of Employment and
Change-in-Control Arrangements").

DESCRIPTION OF SECURITIES

Our authorized capital stock consists of 50,000,000 shares of common stock,
par value $.01 per shares, and 10,000,000 shares of preferred stock, par value
$.01 per share. As of the date of this Prospectus, we have outstanding
23,173,057 shares of common stock and no outstanding shares of preferred stock.

COMMON STOCK

Holders of our common stock are entitled to one vote per share on all
matters submitted to a vote of stockholders. There are no cumulative voting
rights for the election of directors, which means that the holders of more than
50% of such outstanding shares voting for the election of directors can elect
all of the directors standing for election. Subject to the rights of any
outstanding class or series of preferred stock created by the authority of our
Board of Directors, holders of common stock are entitled to receive dividends as
and when declared by our Board of Directors out of funds legally available
therefore. Subject to the rights of any outstanding class or series of preferred
stock created by the authority of our Board of Directors, in the event of the
liquidation, dissolution or winding up of our company, the holder of each share
of common stock is entitled to share equally in the balance of any of the assets
of our company available for distribution to stockholders. Outstanding shares of
common stock do not have subscription or conversion rights and there are no
redemption or sinking fund provisions applicable thereto. Holders of common
stock have no preemptive rights to purchase pro-rata portions of newly issued
common stock or preferred stock.

PREFERRED STOCK

Our Board is authorized, subject to any limitations prescribed by Delaware
law, to provide for the issuance of additional shares of preferred stock in one
or more series, to establish from time to time the number of shares to be
included in each such series, to fix the rights, preferences and privileges of
the shares of each wholly unissued series and any qualifications, limitations or
restrictions thereon, and to increase or decrease the number of shares of any
such series (but not below the number of shares of such series then
outstanding), without any further vote or action by the stockholders. Our Board
may authorize the issuance of preferred stock with voting or conversion rights
that could adversely affect the voting power or other rights of the holders of
our common stock. Thus, the issuance of preferred stock may have the effect of
delaying, deferring or preventing a change in control of our company. Our
company has no current plan to issue any shares of preferred stock.

WARRANTS AND OPTIONS

As of the date of this prospectus, there are outstanding options and
warrants to purchase an aggregate of 12,340,857 shares of our common stock at
exercise prices ranging from $.12 to $10.00. To the extent that outstanding
options and warrants are exercised, stockholder percentage ownership will be
diluted and any sales in the public market of the common stock underlying such
options and warrants may adversely affect prevailing market prices for our
common stock.

With respect to our $2,685,000 private placement completed in December 2004
and January 2005, we issued three (3) year warrants to purchase an aggregate of
2,013,750 shares of common stock which are being registered for resale in this
prospectus. Such warrants include warrants to purchase 1,342,500 shares of
common stock at an exercise price of $1.25 per share and warrants to purchase
671,250 shares of common stock at an exercise price of $1.75 per share. The
warrants expire on December 21, 2007 (1,563,750 shares) and January 13, 2008
(450,000 shares).

TRANSFER AGENT

The Transfer Agent for our common stock is American Stock Transfer and
Trust Company, 59 Maiden Lane, New York, New York 10038.

LEGAL MATTERS

The validity of the securities offered hereby will be passed upon for us by
the law firm of Eiseman Levine Lehrhaupt & Kakoyiannis, P.C., 805 Third Avenue,
New York, New York. Sam Schwartz, a member of such firm, owns 23,584 shares of
our common stock and owns options to purchase 12,500 shares of our common stock
as of the date of this prospectus.

EXPERTS

Our financial statements as of December 31, 2006 and 2005 and for each of
the years then ended appearing in this Prospectus and Registration Statement
have been audited by Radin, Glass Co., LLP, independent registered public
accounting firm, as set forth in their report thereon appearing elsewhere
herein, and are included in reliance upon such report given upon authority of
said firm as experts in accounting and auditing.

DISCLOSURE OF COMMISSION POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES

Our Certificate of Incorporation and Bylaws provide our directors with
protection for breaches of their fiduciary duties to us and our shareholders.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to our directors, officers or persons controlling us, we have been
advised that it is the SEC's opinion that such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.

In the event that a claim for indemnification against such liabilities
(other than the payment by us of expenses incurred or paid by a director,
officer or controlling person in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, we will, unless in the opinion
of our counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.

WHERE YOU CAN FIND MORE INFORMATION

We file annual, quarterly and current reports and other information with
the SEC. You may read and copy any document we file at the SEC's Public
Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain
information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. Our SEC filings are also available to you on the SEC's Internet
site at http://www.sec.gov.

This prospectus is part of a Registration Statement on Form SB-2 filed by
us with the SEC under the Securities Act and therefore omits certain information
in the Registration Statement. We have also filed exhibits with the Registration
Statement that are not included in this prospectus, and you should refer to the
applicable exhibit for a complete description of any statement referring to any
document. You can inspect a copy of the Registration Statement and its exhibits,
without charge, at the SEC's Public Reference Room, and can copy such material
upon paying the SEC's prescribed rates.

You may also request a copy of our filings at no cost by writing or
telephoning us at:

Network-1 Security Solutions, Inc.
445 Park Avenue, Suite 1028
New York, New York 10022
Attention: Corey M. Horowitz, Chairman and
Chief Executive Officer
(212) 829-5770

NETWORK-1 SECURITY SOLUTIONS, INC.
INDEX TO FINANCIAL STATEMENTS
Page
Number
------

Condensed Balance Sheets as of March 31, 2007 (unaudited) and
December 31, 2007........................................................F-2

Condensed Statements of Operations for the three months ended
March 31, 2007 and 2006 (unaudited)......................................F-3

Condensed Statements of Cash Flows for the three months ended
March 31, 2007 and 2006 (unaudited)......................................F-4

Notes to Condensed Financial Statements for the three months ended
March 31, 2007 and 2006 (unaudited)......................................F-5

Report of independent registered public accounting firm.....................F-12

Balance Sheets as of December 31, 2006 and 2005.............................F-13

Statements of Operations for the years ended December 31, 2006
and 2005.................................................................F-14

Statements of Stockholders' Equity for the years ended December 31, 2006
and 2005.................................................................F-15

Statements of Cash Flows for the years ended December 31, 2006 and 2005.....F-16

Notes to Financial Statements for the years ended December 31, 2006
and 2005.................................................................F-17

F-1

NETWORK-1 SECURITY SOLUTIONS, INC.
CONDENSED BALANCE SHEETS
(UNAUDITED)

MARCH 31, DECEMBER 31,
2007 2006
------------ ------------
(UNAUDITED)

ASSETS
------
Current assets:
Cash and cash equivalents $ 1,086,000 $ 1,797,000
Prepaid Insurance 53,000 74,000
Other current assets 3,000 4,000
------------ ------------

Total current assets 1,142,000 1,875,000

Equipment, net 10,000 11,000
Security Deposits 6,000 6,000
Patents 77,000 79,000
------------ ------------

$ 1,235,000 $ 1,971,000
============ ============

LIABILITIES
-----------
Current liabilities:
Accounts payable $ 332,000 $ 350,000
Accrued expenses and other current liabilities 89,000 219,000

Total current liabilities 421,000 569,000
------------ ------------

Commitments and contingencies

STOCKHOLDERS' EQUITY
--------------------
Common stock - $0.01 par value; authorized 50,000,000 shares;
19,839,724 shares issued and outstanding at March 31, 2007 and
19,764,724 at December 31, 2006 198,000 197,000

Additional paid-in capital 47,955,000 47,484,000
Accumulated deficit (47,339,000) (46,279,000)
------------ ------------

814,000 1,402,000
------------ ------------
$ 1,235,000 $ 1,971,000
============ ============

See notes to condensed financial statements

F-2

NETWORK-1 SECURITY SOLUTIONS, INC.
CONDENSED STATEMENTS OF OPERATIONS
UNAUDITED

THREE MONTHS ENDED MARCH 31,
------------------------------
2007 2006
------------ ------------
Operating expenses:

General and administrative $ 614,000 $ 280,000
Non Cash Compensation 461,000 48,000
------------ ------------

LOSS BEFORE INTEREST INCOME (1,075,000) (328,000)
Interest income - net 15,000 12,000
------------ ------------

Net loss $ (1,060,000) $ (316,000)
============ ============

LOSS PER COMMON SHARE - BASIC AND DILUTED $ (0.05) $ (0.02)
============ ============

WEIGHTED AVERAGE COMMON SHARES - BASIC AND DILUTED 19,784,724 17,832,787
============ ============

See notes to condensed financial statements

F-3

NETWORK-1 SECURITY SOLUTIONS, INC.
CONDENSED STATEMENTS OF CASH FLOW
UNAUDITED

THREE MONTHS ENDED MARCH 31,
------------------------------
2007 2006
------------ ------------

Cash flows from operating activities:
Net loss $ (1,060,000) $ (316,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 3,000 2,000

Non Cash Compensation 461,000 48,000
Changes in:
Prepaid expenses and other current assets 22,000 23,000
Accounts payable, accrued expenses and other
current liabilities (148,000) (147,000
------------ ------------

Net cash used in operating activities (722,000) (390,000)
------------ ------------

Cash Flows from Investing Activities __ __

------------ ------------
Cash Flows from Financing Activities
Issuance of Common Stock 11,000 1,494,000
------------ ------------

NET INCREASES [DECREASE] IN CASH AND CASH EQUIVALENTS (711,000) 1,104,000
Cash and cash equivalents, beginning of period 1,797,000 938,000
------------ ------------

CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,086,000 $ 2,042,000
============ ============

See notes to condensed financial statements

F-4

NETWORK-1 SECURITY SOLUTIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE A - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

[1] BASIS OF PRESENTATION:

The accompanying condensed financial statements as of March 31, 2007 and for the
three month periods ended March 31, 2007 and March 31, 2006, are unaudited, but,
in the opinion of the management of Network-1 Security Solutions, Inc. (the
"Company"), contain all adjustments consisting only of normal recurring items
which the Company considers necessary for the fair presentation of the Company's
financial position as of March 31, 2007, and the results of its operations and
its cash flows for the three month periods ended March 31, 2007 and March 31,
2006. The condensed financial statements included herein have been prepared in
accordance with the accounting principles generally accepted in the United
States of America for interim financial information and the instructions to Form
10-QSB. Accordingly, certain information and footnote disclosures normally
included in the financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been omitted
pursuant to such rules and regulations, although management believes that the
disclosures are adequate to make the information presented not misleading. These
financial statements should be read in conjunction with the audited financial
statements for the year ended December 31, 2006 included in the Company's Annual
Report on Form 10-KSB filed with the Securities and Exchange Commission. The
results of operations for the three months ended March 31, 2007 are not
necessarily indicative of the results of operations to be expected for the full
year.

[2] BUSINESS:

(a) The principal business of the Company is the acquisition, development,
licensing and protection of its intellectual property. The Company presently
owns six patents (the "Patent Portfolio") covering various telecommunications
and data networking technologies including, among others, patents covering the
delivery of power over Ethernet cable for the purpose of remotely powering
network devices, and the transmission of audio, video and data over computer and
telephony networks. The Company's strategy is to pursue licensing and strategic
business alliances with companies in the industries that manufacture and sell
products that make use of the technologies underlying its patents as well as
with other users of the technology who benefit directly from the technology
including corporate, educational and governmental entities.

In February 2004, the Company initiated licensing efforts relating to one of its
patents (U.S. Patent No. 6,218,930) covering the remote delivery of power over
Ethernet cables (the "Remote Power Patent"). To date the Company has not entered
into any license agreements with third parties with respect to its Remote Power
Patent, although as part of its settlement agreement with D-Link in April 2007,
D-Link has agreed to enter into a license agreement pertaining to the Company's
Remote Power Patent (See Note E[2] - Subsequent Events).

F-5

NETWORK-1 SECURITY SOLUTIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)

[2] BUSINESS: (CONTINUED)

(b) As reflected in the accompanying financial statements, the Company has
incurred substantial losses and has experienced net cash outflows from
operations for 2006 and the three month period ended March 31, 2007. For the
year ended December 31, 2006 and the three month period ended March 31, 2007,
the Company had no revenue from operations. The Company will continue to have
operating losses for the foreseeable future until it is successful in licensing
its patented technologies. The Company is dependent upon debt and equity
financing until it generates cash flows from operations. During the three month
period ended March 31, 2007, options to purchase 75,000 shares of common stock
were exercised, at exercise prices of $.12, $.14 and $.19 per share, resulting
in aggregate proceeds to the Company of $11,000. On April 16, 2007, the Company
completed a $5 million private placement of its securities (see Note E [1] -
Subsequent Events). The Company had cash and cash equivalents of $5,463,000 as
of April 30, 2007. The Company believes its current cash position will more
likely than not be sufficient to satisfy the Company's operations and capital
requirements until at least December 31, 2008, although there can be no
assurance that such funds will not be expended prior thereto.

[3] STOCK-BASED COMPENSATION:

In December 2004, the FASB issued Statement No. 123 (Revised 2004), "Share-Based
Payment" ("SFAS No. 123R"). SFAS No. 123R supersedes APB 25 and requires the
recognition of the cost of employee services received in exchange for stock
options and awards of equity instruments based on the grant-date fair value of
such options and awards, over the period they vest. Under APB 25, no
compensation was recorded in earnings for the Company's stock-based options
granted under the 1996 Stock Incentive Plan (the "Plan"). The pro forma effects
on net income and earnings per share for the awards issued under the Plan were
instead disclosed in a footnote to the financial statements. Under SFAS No.
123R, all share-based compensation is measured at the grant date, based on the
fair value of the award, and is recognized as an expense in earnings over the
requisite service period. On January 1, 2006, the Company adopted the provisions
of SFAS No. 123R, for its share-based compensations plans and began recognizing
the unvested portion of employee compensation from stock options and awards
equal to the unamortized grant-date fair value over the remaining vesting
period. Furthermore, compensation costs will also be recognized for any awards
issued, modified, repurchased, or canceled after January 1, 2006.

F-6

NETWORK-1 SECURITY SOLUTIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)

[3] STOCK-BASED COMPENSATION: (continued)

On February 2, 2006, the Company granted options to two directors to purchase
15,000 shares each at an exercise price of $1.31 per share and a consultant to
purchase 75,000 shares at an exercise price of $1.20 per share. The director
options vest over one year period at the rate of 3,750 shares per quarter
beginning May 4, 2006 and the consultant options vest over one year period at
the rate of 18,750 shares per quarter beginning March 31, 2006. The Company
recorded compensation expenses of $15,000 for these options during the quarter
ended March 31, 2006 based on the Black-Scholes option-pricing model. In
addition, during the quarter ended March 31, 2006, the Company also recorded
compensation expense of $15,000 and $18,000 for the vested portion of options
granted to directors and consultants, respectively, prior to January 1, 2006.

On February 28, 2007, the Company granted options to its Chairman and CEO to
purchase 375,000 shares each at an exercise price of $1.46 per share in
accordance with a new employment agreement (See Note D - Employment Arrangements
and Other Agreements). Such options vest in equal quarterly amounts of 93,750
shares beginning March 31, 2007 through December 31, 2007. The Company recorded
compensation expenses of $63,000 for these options during the quarter ended
March 31, 2007 based on the Black-Scholes option-pricing model. In addition,
during the quarter ended March 31, 2007, the Company also recorded compensation
expense of $8,000 and 19,000 for the vested portion of options granted to
directors and consultants, respectively, prior to January 1, 2007.

The fair value of each option grant on the date of grant is estimated using the
Black-Scholes option-pricing utilizing the following weighted assumptions:

THREE MONTHS ENDED MARCH 31,
----------------------------

2007 2006
------ ------
Risk-free interest rates 4.52% 4.51%
Expected option life in years 5 yrs. 5 yrs.
Expected stock price volatility 45.92% 69.8%
Expected dividend yield -0- -0-

F-7

NETWORK-1 SECURITY SOLUTIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)

[4] REVENUE RECOGNITION:

The Company plans on recognizing revenue received from the licensing of its
intellectual property portfolio in accordance with Staff Accounting Bulletin No.
104, "Revenue Recognition" ("SAB No. 104") and related authoritative
pronouncements. Revenue is recognized when (i) persuasive evidence of an
arrangement exists, (ii) all obligations have been performed pursuant to the
terms of the license agreement, (iii) amounts are fixed or determinable and (iv)
collectibility of amounts is reasonably assured.

[5] LOSS PER SHARE:

Basic net loss per share is calculated by dividing the net loss by the weighted
average number of outstanding common shares during the period. Diluted per share
data includes the dilutive effects of options, warrants and convertible
securities. Potential shares of 9,581,481 and 9,826,943 at March 31, 2007 and
2006, respectively, are anti-dilutive, and are not included in the calculation
of diluted loss per share. Such potential common shares reflect options and
warrants.

[6] CASH EQUIVALENTS:

The Company places cash investments in high quality financial institutions
insured by the Federal Deposit Insurance Corporation ("FDIC"). At March 31,
2007, the Company maintained cash balance of approximately $1,061,000 in excess
of FDIC limits.

NOTE B - COMMITMENTS AND CONTINGENCIES

On November 30, 2004, the Company entered into a master services agreement (the
"Agreement") with ThinkFire Services USA, Ltd. ("ThinkFire") pursuant to which
ThinkFire has been granted the exclusive worldwide rights (except for direct
efforts by the Company and related companies) to negotiate license agreements
for the Remote Power Patent with respect to certain potential licensees agreed
to between the parties. Either the Company or ThinkFire can terminate the
Agreement upon 60 days' notice for any reason or upon 30 days' notice in the
event of a material breach. The Company has agreed to pay ThinkFire a fee not to
exceed 20% of the royalty payments received from license agreements consummated
by ThinkFire on its behalf.

On January 18, 2005, the Company and Merlot Communications, Inc. ("Merlot")
amended the Patent Purchase Agreement originally entered into in November 2003
(the "Amendment") pursuant to which the Company paid additional purchase price
of $500,000 to Merlot in consideration for the restructuring of future
contingent payments to Merlot from the licensing or sale of the Patents. The
Amendment provides for future contingent payments by the Company to Merlot of
$1.0 million upon achievement of $25 million of Net Royalties (as defined), an
additional $1.0 million upon achievement of $50 million of Net Royalties and an
additional $500,000 upon achievement of $62.5 million of Net Royalties from
licensing or sale of the patents acquired from Merlot. Certain principal
stockholders of the Company and related parties were also principal stockholders
and directors of Merlot at the time of the original agreement in November 2003
and the Amendment.

F-8

NETWORK-1 SECURITY SOLUTIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE B - COMMITMENTS AND CONTINGENCIES: (CONTINUED)

In August 2005, the Company entered into an agreement with Blank Rome, LLP
("Blank Rome"), a national law firm, pursuant to which Blank Rome has been
engaged to represent the Company in connection with all litigation involving the
Company's Remote Power Patent. Blank Rome has agreed to represent the Company
with respect to each litigation pertaining to the Remote Power Patent on a full
contingency basis (except for any proceeding before the International Trade
Commission). As compensation for its services on a full contingency basis, Blank
Rome will receive from the Company percentages of Net Consideration (as defined
in the agreement) ranging from 12.5% to 35% received by the Company by way of
settlement or judgment in connection with each litigation matter. The Company
has also agreed to compensate Blank Rome in an amount equal to 10% of the Net
Consideration received by the Company from certain designated parties mutually
agreed upon by the Company and Blank Rome in the event that prior to
commencement of litigation such designated parties enter into license agreements
or similar agreements with the Company.

In March 2006, the Company entered into a one year agreement with Alliance
Advisors, LLC ("Alliance") pursuant to which Alliance provides financial and
public relations services to the Company. In consideration for such services,
the Company pays Alliance a fee of $7,000 per month. In addition, the Company
issued Alliance 80,000 shares of common stock.

NOTE C - EMPLOYMENT ARRANGEMENTS AND OTHER AGREEMENTS

On February 28, 2007, the Company entered into a new Employment Agreement with
Corey M. Horowitz pursuant to which Mr. Horowitz continued to serve as Chairman
and Chief Executive Officer for a two year term at an annual base salary of
$288,750 for the first year, increasing by 5% for the second year. In connection
with his employment agreement, Mr. Horowitz was issued a five (5) year option to
purchase 375,000 shares of common stock at an exercise price of $1.46 per share
which vests, on a quarterly basis over a one year period subject to acceleration
upon a change of control. The Company also agreed to issue to Mr. Horowitz on
the one year anniversary date an additional five (5) year option to purchase a
minimum of 375,000 shares of our common stock at an exercise price equal to the
closing price of our common stock on the date of grant, which option will vest
on a quarterly basis over a one year period. In addition to the aforementioned
option grants, the Company agreed to extend for an addition three (3) years the
expiration dates of all options and warrants (an aggregate of 2,620,000 shares)
expiring in calendar year 2007 and 2008 owned by Mr. Horowitz and CMH Capital
Management Corp. ("CMH"), an affiliate. In connection with the extension of the
expiration dates of such options and warrants, the Company recorded compensation
expense of $371,000 during the quarter ended March 31, 2007 based on the
Black-Scholes option pricing model. Under the terms of his Employment Agreement,
Mr. Horowitz shall receive bonus compensation in a amount equal to 5% of Company
royalties or other payments (before deduction of payments to third parties
including, but not limited to, legal fees and expenses and third party license
fees) received from licensing its patents (including patents currently owned and
acquired or licensed on an exclusive basis during the period in which Mr.
Horowitz continues to serve as an executive officer of the Company) (the
"Royalty Bonus Compensation"). Mr. Horowitz shall also receive bonus
compensation equal 5% of the gross proceeds from (i) the sale of any of the
Company's patents or (ii) the Company's merger with or into another corporation
or entity. The Royalty Bonus Compensation shall continue to be paid to Mr.
Horowitz for the life of each of the Company's patents with respect to licenses
entered into by us with third parties

F-9

NETWORK-1 SECURITY SOLUTIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE C - EMPLOYMENT ARRANGEMENTS AND OTHER AGREEMENTS: (CONTINUED)

during Mr. Horowitz's term of employment or at anytime thereafter, whether Mr.
Horowitz is employed by the Company or not, provided, that, Mr. Horowitz's
employment has not been terminated by the Company "For Cause" (as defined) or
terminated by Mr. Horowitz without "Good Reason" (as defined). In the event that
Mr. Horowitz's employment is terminated by the Company "Other Than For Cause"
(as defined) or by Mr. Horowitz for "Good Reason" (as defined), Mr. Horowitz
shall be entitled to a severance of 12 months base salary.

In accordance with his employment agreement, Mr. Horowitz also has certain
anti-dilution rights which provide that if at any time during the period ended
December 31, 2008, in the event that the Company completes an offering of its
common stock or any securities convertible or exercisable into common stock
(exclusive of securities issued upon exercise of outstanding options, warrants
or other convertible securities), Mr. Horowitz shall receive from the Company,
at the same price as the securities issued in the financing, such number of
additional options to purchase common stock so that he maintains the same
derivative ownership percentage (21.47%) of the Company based upon options and
warrants owned by Mr. Horowitz and CMH (an affiliated entity) and exclusive of
his ownership of shares of common stock as he and CMH owned as of the time of
execution of his employment agreement; provided, that, the aforementioned
anti-dilution protection shall be afforded to Mr. Horowitz up to maximum future
financings of $2.5 million. (See Note E[1].

NOTE D - LITIGATION

POWERDSINE SETTLEMENT

On November 17, 2005, the Company entered into a Settlement Agreement with
PowerDsine, Inc. (NASDAQ: PDSN) and PowerDsine Ltd. (collectively, "PowerDsine")
which dismissed, with prejudice, patent litigation brought by PowerDsine against
the Company in March 2004 in the United States District Court for the Southern
District of New York that sought a declaratory judgment that the Company's
Remote Power Patent (U.S. Patent No. 6,218,930) was invalid and not infringed by
PowerDsine and/or its customers.

Under the terms of the Settlement Agreement, the Company agreed that it will not
initiate litigation against PowerDsine for its sale of Power over Ethernet (PoE)
integrated circuits. In addition, the Company has agreed that it will not seek
damages for infringement from customers that incorporate PowerDsine integrated
circuit products in PoE capable Ethernet switches manufactured on or before
April 30, 2006. PowerDsine has agreed that it will not initiate, assist or
cooperate in any legal action relating to the Remote Power Patent. The Company
has also agreed that it will not initiate litigation against PowerDsine or its
customers for infringement of the Remote Power Patent arising from the
manufacture and sale of PowerDsine Midspan products for three years following
the dismissal date (November 23, 2005). Following such three year period, the
Company may seek damages for infringement of the Remote Power Patent from
PowerDsine or its customers with respect to the purchase and sale of Midspan
products beginning 90 days following the dismissal date of the litigation. The
benefits afforded to PowerDsine under the Settlement Agreement will cease in the
event PowerDsine institutes, assists or cooperates in any legal proceeding
related to the Remote Power Patent adverse to the Company (unless otherwise
required by law to do so) and PowerDsine customers will also forfeit benefits
under the Settlement Agreement if they engage in similar action.

F-10

NETWORK-1 SECURITY SOLUTIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE D - LITIGATION: (CONTINUED)

No licenses to use the technologies covered by the Remote Power Patent were
granted to PowerDsine or its customers under the terms of the settlement. The
Settlement Agreement further provides that PowerDsine is obligated to provide
each of its customers with written notice of the settlement which notice shall
disclose that no license for the Remote Power Patent has been provided to
PowerDsine's customers and that in order to combine, modify or integrate any
PowerDsine product with or into any other device or software, PowerDsine's
customers may need to receive patent license(s) for such third party patents
which is the customer's responsibility. For the full text of the Company's
Settlement Agreement with PowerDsine, see Exhibit 10.1 of the Company's Current
Report on Form 8-K filed with the Securities and Exchange Commission on November
17, 2005.

D-LINK LITIGATION

On August 10, 2005, the Company commenced patent litigation against D-Link
Corporation and D-Link Systems, Incorporated in the United States District Court
for the Eastern District of Texas, Tyler division (Civil Action No. 6:05W291),
for infringement of the Company's Remote Power Patent. The Company's complaint
sought, among other things, a judgment that its Remote Power Patent is
enforceable and has been infringed by the defendants. The Company also sought a
permanent injunction restraining the defendants from continued infringement, or
active inducement of infringement by others, of the Company's Remote Power
Patent. The litigation was settled in April 2007 (See Note E[2]).

NOTE E - SUBSEQUENT EVENTS

[1] On April 16, 2007, the Company completed a $5 million private placement
of its securities consisting of 3,333,333 shares of its common stock, at a
purchase price of $1.50 per share and five year warrants to purchase an
aggregate of 1,666,667 shares of common stock at an exercise price of $2.00
per share. Pursuant to the anti-dilution provisions of his employment
agreement, Corey M. Horowitz, Chairman and CEO, was issued a 5 year option to
purchase 732,709 shares of common stock, at an exercise price of $1.67 per
share, with respect to the private placement.

[2] On April 25, 2007 the Company agreed to a settlement of its patent
infringement litigation against D-Link Corporation and D-Link Systems,
(collectively "D-Link") in the United States District Court for the Eastern
District of Texas, Tyler Division, for infringement of the Company's Remote
Power Patent (U.S. Patent No. 6,218,930). Under the terms of the settlement,
D-Link has agreed to enter into a license agreement for the Remote Power
Patent the terms of which include monthly royalty payments of 3.25% of the
net sales of D-Link branded Power over Ethernet products, including those
products which comply with the IEEE 802.3af and 802.3at Standards, for the
full term of the Remote Power Patent, which expires in March 2020. The
royalty rate is subject to adjustment beginning after the first quarter of
2008 to a rate consistent with other similarly situated licensees of the
Remote Power Patent based on units of shipments of licensed products. In
addition, D-Link has agreed to pay Network-1 $100,000.

F-11

NETWORK-1 SECURITY SOLUTIONS, INC.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders
Network-1 Security Solutions, Inc.

We have audited the accompanying balance sheets of Network-1 Security Solutions,
Inc. as of December 31, 2006 and 2005 and the related statements of operations,
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements enumerated above present fairly, in all
material respects, the financial position of Network-1 Security Solutions, Inc.
as of December 31, 2006 and 2005, and the results of its operations and its cash
flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.

/s/ Radin, Glass & Co., LLP

New York, New York

March 8, 2007

F-12

NETWORK-1 SECURITY SOLUTIONS, INC.

BALANCE SHEETS

DECEMBER 31,
------------------------------
2006 2005
------------ ------------

ASSETS
Current assets:
Cash and cash equivalents $ 1,797,000 $ 938,000
Prepaid insurance 74,000 85,000
Other current assets 4,000 --
------------ ------------

Total current assets $ 1,875,000 1,023,000

Security Deposits & other assets 17,000 6,000
79,000 86,000
------------ ------------
Patents

1,971,000 $ 1,115,000
============ ============

LIABILITIES
Current liabilities:
Accounts payable $ 350,000 $ 162,000
Accrued expenses and other current liabilities 219,000 201,000
------------ ------------

Total current liabilities 569,000 363,000

Commitments and contingencies

STOCKHOLDERS' EQUITY

Common stock - $.01 par value; authorized 50,000,000 shares;
19,764,724 and 17,697,572 shares issued and outstanding
at December 31, 2006 and 2005, respectively 197,000 177,000

Additional paid-in capital 47,484,000 44,896,000
Accumulated deficit (46,279,000) (44,321,000)
------------ ------------

1,402,000 752,000
------------ ------------

$ 1,971,000 $ 1,115,000
============ ============

See notes to financial statements

F-13

NETWORK-1 SECURITY SOLUTIONS, INC.

STATEMENTS OF OPERATIONS

YEAR ENDED
DECEMBER 31,
------------------------------
2006 2005
------------ ------------

Operating expenses:

General and administrative $ 1,548,000 $ 1,167,000
Non-cash compensation 479,000 89,000
Patent Costs -- 500,000
------------ ------------

Operating Loss (2,027,000) (1,756,000)

Reversal of prior year accruals no longer required -- 385,000
Interest income 69,000 39,000
------------ ------------

Net Loss (1,958,000) (1,332,000)

Deemed dividend on extension of warrants to preferred
stockholders and warrants issued in connection with anti-dilution
provision -- (500,000)
------------ ------------

Net loss attributable to common stockholders (1,958,000) $ (1,832,000)
============ ============

NET LOSS PER COMMON SHARE-BASIC AND DILUTED $ (0.10) $ (0.10)

WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 18,952,137 17,676,202
============ ============

See notes to financial statements

F-14

NETWORK-1 SECURITY SOLUTIONS, INC.

STATEMENTS OF STOCKHOLDERS' EQUITY

COMMON STOCK ADDITIONAL
------------------------------ PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
------------ ------------ ------------ ------------ ------------

BALANCE - JANUARY 1, 2005 17,097,572 171,000 43,951,000 (42,989,000) 1,133,000
Issuance of stock options to
consultants 83,000 83,000
Sale of common stock 600,000 6,000 594,000 600,000
Issuance of options to a director 6,000 6,000
Issuance of options to an employee
Net loss 262,000 262,000
(1,332,000) (1,332,000)
------------ ------------ ------------ ------------ ------------
BALANCE - DECEMBER 31, 2005 17,697,572 177,000 44,896,000 (44,321,000) 752,000

EXERCISE OF WARRANTS 1,352,152 14,000 1,480,000 1,494,000
EXERCISE OF WARRANTS 635,000 6,000 629,000 635,000
GRANTING OF OPTIONS 359,000 359,000
ISSUANCE SHARES FOR SERVICES 80,000 120,000 120,000
NET LOSS (1,958,000) (1,958,000)
------------ ------------ ------------ ------------ ------------

BALANCE DECEMBER 31, 2006 19,764,724 $ 197,000 $ 47,484,000 $(46,279,000) $ 1,402,000
============ ============ ============ ============ ============

See notes to financial statements

F-15

NETWORK-1 SECURITY SOLUTIONS, INC.

STATEMENTS OF CASH FLOWS

YEAR ENDED
DECEMBER 31,
------------------------------
2006 2005
------------ ------------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,958,000) $ (1,332,000)

Adjustments to reconcile net loss to net cash used in operating
activities:
Valuation adjustment for outstanding stock options (32,000)
Issuance of options for services 359,000 89,000
Issuance of shares for services 120,000

Depreciation and amortization 8,000 6,000

Changes in:

Prepaid expenses and other current assets 7,000 15,000
Security deposits and other assets (6,000)
Accounts payable, accrued expenses and other current
liabilities 206,000 (579,000)
------------ ------------

Net cash used in operating activities (1,258,000) (1,839,000)
------------ ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment (12,000)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock 600,000
Proceeds from exercise of warrants 2,129,000
------------

Net cash provided by financing activities 2,129,000 600,000
------------ ------------

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS 859,000 (1,239,000)
Cash and cash equivalents - beginning of year 938,000 2,177,000
------------ ------------

CASH AND CASH EQUIVALENTS - END OF YEAR $ 1,797,000 $ 938,000
============ ============

NON-CASH TRANSACTIONS:
Non-employee compensation paid with stock options $ 353,000 $ 83,000
Liability settled with stock options $ 262,000
Shares issued for services $ 120,000

See notes to financial statements

F-16

NETWORK-1 SECURITY SOLUTIONS, INC.

NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2006 AND 2005

NOTE A - THE COMPANY

Network-1 Security Solutions, Inc. (the "Company") is engaged in the
acquisition, licensing and protection of its intellectual property and
proprietary technologies. The Company owns six patents covering various
telecommunications and data networking technologies (the "Patent Portfolio").
The Company's strategy is to pursue licensing and strategic business alliances
with companies that manufacture and sell products that make use of the
technologies underlying the Patent Portfolio as well as with other users of the
technologies who benefit directly from the technologies including corporate,
educational and governmental entities. In February 2004, the Company initiated
its licensing efforts relating to its remote power patent which pertains to the
control of power delivery over Ethernet networks for the purpose of remotely
powering network devices. As of December 31, 2006, the Company has not entered
into any licensing arrangements with respect to its Patent Portfolio.

NOTE B -SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

[1] CASH EQUIVALENTS:

The Company considers all highly liquid short-term investments purchased
with an original maturity of three months or less to be cash
equivalents.

[2] REVENUE RECOGNITION:

The Company plans on recognizing revenue received from the licensing of
its intellectual property portfolio in accordance with Staff Accounting
Bulletin No. 104, "Revenue Recognition" ("SAB No. 104") and related
authoritative pronouncements. Under this guidance, revenue is recognized
when (i) persuasive evidence of an arrangement exists, (ii) all
obligations have been performed pursuant to the terms of the license
agreement, (iii) amounts are fixed or determinable and (iv)
collectibility of amounts is reasonably assured.

[3] PATENTS:

The Company owns a Patent Portfolio that relates to various
telecommunications and data networking technologies. The Company
capitalizes the costs associated with acquisition, registration and
maintenance of the patents and amortizes these assets over their
remaining useful lives on a straight-line basis. Any further payments
made to maintain or develop the patents would be capitalized and
amortized over the balance of the useful life of the patents.

[4] IMPAIRMENT OF LONG-LIVED ASSETS:

In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," intangible assets with finite lives are tested for impairment
whenever events or circumstances indicate that the carrying amount may
not be recoverable. Accordingly, the Company records impairment losses
on long-lived assets used in operations or expected to be disposed of
when indicators of impairment exist and the undiscounted cash flows
expected to be derived from those assets are less than carrying amounts
of those assets. During the years ended December 31, 2006 and 2005,
there was no impairment to its patents.

[5] INCOME TAXES:

The Company utilizes the liability method of accounting for income
taxes. Under such method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates in effect at the
balance sheet date. The resulting asset or liability is adjusted to
reflect enacted changes in tax law. Deferred tax assets are reduced, if
necessary, by a valuation allowance when the likelihood of realization
is not assured.

F-17

NETWORK-1 SECURITY SOLUTIONS, INC.

NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2006 AND 2005

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

[6] NET LOSS PER SHARE:

Basic net loss per share is calculated by dividing the 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. Potential common shares of
9,281,481 and 11,267,319 at December 31, 2006 and 2005, respectively,
are not included in the calculation of diluted loss per share because
its effect will be anti-dilutive. Such potential common shares are
options and warrants.

[7] USE OF ESTIMATES:

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.

[8] FINANCIAL INSTRUMENTS:

The carrying amounts of cash and cash equivalents, accounts payable and
accrued expenses approximate their fair value due to the short period to
maturity of these instruments.

[9] STOCK-BASED COMPENSATION:

Effective January 1, 2006, the Company adopted SFAS No. 123 (revised
2004), SHARE BASED PAYMENT, or SFAS 123(R), which is a revision of
Statement No. 123 ("SFAS 123") ACCOUNTING FOR STOCK BASED COMPENSATION.
SFAS 123(R) supersedes Accounting Principles Board ("APB") No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES ("APB 25"), and amends
Financial Accounting Standards Board ("FASB") Statement No. 95 STATEMENT
OF CASH FLOWS. SFAS 123(R) requires all share-based payments to
employees, including grants of employee stock options, to be recognized
in the income statement based on their fair values. Pro forma disclosure
is no longer an alternative.

Prior to January 1, 2006, the Company accounted for its employee
stock-based compensation in accordance with the provisions of APB 25 and
FASB Interpretation No. 44, ACCOUNTING FOR CERTAIN TRANSACTIONS
INVOLVING STOCK COMPENSATION -- AN INTERPRETATION OF APB NO. 25, and the
Company complied with the disclosure provisions of SFAS 123, and related
SFAS No. 148, ACCOUNTING FOR STOCK-BASED COMPENSATION -- TRANSACTION AND
DISCLOSURE. Under APB 25, compensation expense is based on the
difference, if any, on the date of the grant, between the fair value of
the Company's stock and the exercise price of the option. The Company
amortized such stock-based compensation, if any, using the straight-line
method over the vesting period. The following table illustrates the
effect on net loss and loss per share if the fair value-based method had
been applied to all awards for the year ended December 31, 2005.

Reported net loss attributable to common
Stockholders (1,832,000)
Stock-based employee compensation expense
included in reported net loss 6,000
Stock-based employee compensation
determined under the fair value-based method (613,000)
------------

Pro forma net loss $ (2,439,000)
============
Net loss per common share (basic and diluted):
As reported $ (0.10)
============

Pro forma $ (0.14)
============

F-18

NETWORK-1 SECURITY SOLUTIONS, INC.

NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2006 AND 2005

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

The fair value of options on the date of grant is estimated using the
Black-Scholes option-pricing model utilizing the following weighted
average assumptions:

YEAR ENDED
DECEMBER 31,
---------------------------------
2006 2005
-------------- --------------
Risk-free interest rates 4.51 - 4.57% 3.87 - 4.15%
Expected option life in years 5 TO 10 YEARS 5.00
Expected stock price volatility 48.45 - 69.82% 195.50 - 237.35%
Expected dividend yield 0.00% 0.00%

The weighted average fair value on the option grant date during the
years ended December 31, 2006 and 2005 were $0.77 and $0.96 per option,
respectively.

[10] RECENTLY ISSUED ACCOUNTING STANDARDS:

In June 2006, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes--an
interpretation of FASB Statement No. 109." This interpretation clarifies
the accounting for uncertainty in income taxes recognized in an
enterprise's financial statements in accordance with FASB Statement No.
109, "Accounting for Income Taxes." This interpretation prescribes a
recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. It also provides guidance on
de-recognition, classification, interest and penalties, accounting in
interim periods, disclosure and transition. This Interpretation is
effective for the Company beginning in fiscal year 2007. The Company
does not expect the adoption of this pronouncement to have a significant
impact on its financial statements.

In February 2006, the FASB issued SFAS No. 155 (FAS 155), "Accounting
for Certain Hybrid Financial Instruments: an amendment of FASB
Statements No. 133 and 140." FAS 155 permits fair value re-measurement
for any hybrid financial instrument that contains an embedded derivative
that otherwise would require bifurcation, clarifies which interest-only
strips and principal-only strips are not subject to the requirements of
Statement 133, establishes a requirement to evaluate interests in
securitized financial assets to identify interests that are freestanding
derivatives or that are hybrid financial instruments that contain an
embedded derivative requiring bifurcation, clarifies that concentrations
of credit risk in the form of subordination are not embedded
derivatives, and amends Statement 140 to eliminate the prohibition on a
qualifying special purpose entity from holding a derivative financial
instrument that pertains to a beneficial interest other than another
derivative financial instrument. FAS 155 is effective for all financial
instruments acquired or issued after the beginning of an entity's first
fiscal year that begins after September 15, 2006. The Company does not
expect the adoption of FAS 155 will have a material impact on its
results of operations, financial position or liquidity.

F-19

NETWORK-1 SECURITY SOLUTIONS, INC.

NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2006 AND 2005

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing
of Financial Assets" ("SFAS NO. 156"), which provides an approach to
simplify efforts to obtain hedge-like (offset) accounting. This
Statement amends FASB Statement No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities", with
respect to the accounting for separately recognized servicing assets and
servicing liabilities. The Statement (1) requires an entity to recognize
a servicing asset or servicing liability each time it undertakes an
obligation to service a financial asset by entering into a servicing
contract in certain situations; (2) requires that a separately
recognized servicing asset or servicing liability be initially measured
at fair value, if practicable; (3) permits an entity to choose either
the amortization method or the fair value method for subsequent
measurement for each class of separately recognized servicing assets or
servicing liabilities; (4) permits at initial adoption a one-time
reclassification of available-for-sale securities to trading securities
by an entity with recognized servicing rights, provided the securities
reclassified offset the entity's exposure to changes in the fair value
of the servicing assets or liabilities; and (5) requires separate
presentation of servicing assets and servicing liabilities subsequently
measured at fair value in the balance sheet and additional disclosures
for all separately recognized servicing assets and servicing
liabilities. SFAS No. 156 is effective for all separately recognized
servicing assets and liabilities as of the beginning of an entity's
fiscal year that begins after September 15, 2006, with earlier adoption
permitted in certain circumstances. The Statement also describes the
manner in which it should be initially applied. The Company does not
believe that SFAS No. 156 will have a material impact on its financial
position, results of operations or cash flows.

In September 2006, the FASB issued SFAS No. 157 "Fair Value Measures"
("SFAS 157"). SFAS 157 defines fair value, establishes a framework for
measuring fair value, and expands disclosures about fair value
measurements. This statement applies under other accounting
pronouncements that require or permit fair value measurements, however
it does not apply to SFAS 123R. This Statement shall be effective for
financial statements issued for fiscal years beginning after November
15, 2007, and interim periods within those fiscal years. The Company
does not believe that SFAS 157 will have a material impact on its
financial position, results of operations or cash flows.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option
for Financial Assets and Financial Liabilities ("SFAS 159"). SFAS 159
provides companies with an option to report selected financial assets
and liabilities at fair value. SFAS 159 also establishes presentation
and disclosure requirements designed to facilitate comparisons between
companies that choose different measurement attributes for similar types
of assets and liabilities and to provide additional information that
will help investors and other financial statement users to more easily
understand the effect of the Company's choice to use fair value on its
earnings. Finally, SFAS 159 requires entities to display the fair value
of those assets and liabilities for which the Company has chosen to use
fair value on the face of the balance sheet. SFAS 159 is effective as of
the beginning of an entity's first fiscal year beginning after November
15, 2007. Early adoption is permitted. The Company does not believe that
SFAS No. 159 will have a material impact on its financial position,
results of operations or cash flows.

In September 2006, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin 108, "Considering the Effects on Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements," ("SAB 108"). SAB 108 requires registrants to quantify
errors using both the income statement method (i.e. iron curtain method)
and the rollover method and requires adjustment if either method
indicates a material error. If a correction in the current year relating
to prior year errors is material to the current year, then the prior
year financial information needs to be corrected. A correction to the
prior year results that are not material to those years would not
require a "restatement process" where prior financials would be amended.
SAB 108 is effective for the Company's year ended December 31, 2006. The
Company does not believe that the adoption of the SAB 108 will have a
material effect on its financial position, results of operations or cash
flows.

F-20

NETWORK-1 SECURITY SOLUTIONS, INC.

NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2006 AND 2005

NOTE C - PATENTS

In November 2003, the Company acquired a portfolio of telecommunications
and data networking patents (six patents) from Merlot Communications,
Inc. (the "Seller") in which certain principal stockholders of the
Company owned a majority of the Seller's voting stock at the time of the
transaction. The purchase price for the Patent Portfolio was $100,000,
paid in cash. The cash price paid has been capitalized and is being
amortized over the remaining useful life of each patent. In addition,
the Company has granted the Seller a nonexclusive, royalty free,
perpetual license for the term of each patent to use the patents for the
development, manufacture or sale of its own branded products to end
users. The Company had agreed to pay the Seller 20% of the net income,
as defined, after the first $4,000,000 of net income realized by the
Company on a per patent basis from the sale or licensing of the patents.
On January 18, 2005, the Company and Seller amended the Patent Purchase
Agreement (the "Amendment") pursuant to which the Company paid
additional purchase price of $500,000 to Seller in consideration for the
restructuring of future contingent payments to Seller from the licensing
or sale of the Patents. Such $500,000 has been recorded as an expense in
the accompanying statement of operations. The Amendment provides for
future contingent payments by the Company to Seller of $1.0 million upon
achievement of $25 million of Net Royalties (as defined), an additional
$1.0 million upon achievement of $50 million of Net Royalties and an
additional $500,000 upon achievement of $62.5 million of Net Royalties
from licensing or sale of the patents acquired from Merlot (see Note
H[5]).

For the years ended December 31, 2006 and 2005, the Company has not
derived any income from sale or licensing of these patents.

Balance - January 1, 2005 $ 92,000
Amortization (6,000)
------------

Balance - December 31, 2005 $ 86,000
Amortization (7,000)
------------

Balance December 31, 2006 $ 79,000
============

NOTE D - STOCKHOLDERS' EQUITY

[1] PRIVATE PLACEMENT:

(a) On January 13, 2005, the Company completed a second closing with
respect to a private placement of $600,000 securities (the first closing of
$2,085,000 of securities was completed on December 21, 2004), which consisted of
600,000 shares of common stock and warrants to purchase an additional 450,000
shares of common stock (warrants to purchase 300,000 shares of common stock at
an exercise price of $1.25 and warrants to purchase 150,000 shares of common
stock at an exercise price of $1.75) for an aggregate purchase price of
$600,000.

(b) In connection with the second closing of the private placement
completed in January 2005 and anti-dilution provisions for the warrants
previously issued to an entity, the Company issued warrants to purchase an
aggregate of 6,287 shares in January 2005 at an exercise price of $1.00 expiring
in October 2006. The associated expenses, which are treated as imputed dividend,
are based on the fair value of these warrants using the Black-Scholes model
utilizing the risk-free interest rate of 2.67% and 3.01% life of 2 years,
volatility of 270% and dividend yield of 0% in 2005 and 2006, respectively. Such
expenses amounted to $6,000 and are presented as deemed dividend in the
accompanying statement of operations for the year ended December 31, 2005.

[2] STOCK OPTIONS:

During 1996, the Board of Directors and stockholders approved the adoption of
the 1996 Stock Option Plan (the "1996 Plan"). The 1996 Plan, as amended,
provided for the granting of both incentive and non-qualified options

F-21

NETWORK-1 SECURITY SOLUTIONS, INC.

NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2006 AND 2005

NOTE D - STOCKHOLDERS' EQUITY (CONTINUED)

to purchase common stock of the Company. A total of 4,000,000 were eligible to
be issued under the 1996 Plan. As of March 2006, in accordance with the terms of
the plan, no further options were eligible to be issued under the Plan.

The term of options granted under the 1996 Plan may not exceed ten years (five
years in the case of an incentive stock option granted to an employee/director
owning more than 10% of the voting stock of the Company) ("10% stockholder").
The option price for incentive stock options cannot be less than 100% of the
fair market value of the shares of common stock at the time the option is
granted (110% for a 10% stockholder). Option terms and vesting periods were set
by the Compensation Committee in its discretion.

The following table summarizes stock option activity for the years
ended December 31:

2006 2005
-------------------------------- --------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
OPTIONS EXERCISE OPTIONS EXERCISE
OUTSTANDING PRICE OUTSTANDING PRICE
------------ ------------ ------------ ------------

Options outstanding at beginning
of year 6,337,731(e) $ 0.87 5,637,998 $ 0.80
Granted 330,000(c)(d) 1.40 699,733(a)(b) 1.04
Cancelled/expired
------------ ------------

Options outstanding at end of year 6,667,731 0.89 6,337,731 0.86
============ ============

Options exercisable at end of year 6,562,106 $ 0.87 5,971,690 0.87
============ ============

(a) Includes 449,733 stock options deemed issued to the Chairman
and Chief Executive Officer in January 2005 in accordance with
an anti-dilution provision of his agreement. No expense has
been recorded as the exercise price exceeded market price on
date of grant in 2005.

(b) Includes an aggregate of 250,000 stock options issued to (i)
the Chief Financial Officer to purchase 75,000 shares of
common stock at an exercise price of $.80 per share (see Note
I[1]), (ii) two consultants to purchase an aggregate of
125,000 shares of common stock at an exercise price of $.80
per share, and (iii) a director to purchase 50,000 shares of
common stock at an exercise price of $.80 per share. 131,667
of such stock options were vested in 2006. Accordingly, the
Company recorded non-cash compensation of $117,000 relating to
these options in accordance with SFAS 123 (R).

(c) Includes an aggregate of 30,000 and 150,000 ten-year and
five-year stock options issued to directors on February 2,
2006 and December 20, 2006, respectively, at exercise prices
of $1.31 and $1.50 per share. The Company recorded non-cash
compensation of $132,000 relating to the issuance of these
options for the year ended December 31, 2006.

(d) Includes 75,000 five-year stock options issued to each of the
Chief Financial Officer and a consultant to the Company on
December 20, 2006 and February 2, 2006, respectively, at
exercise prices of $1.50 and $1.20 per share. The Company
recorded non-cash compensation of $68,000 relating to the
issuance of these options for the year ended December 31,
2006.

(e) In 2003, the Company granted 1,084,782 stock options to the
Chairman and Chief Executive Officer in connection with his
employment agreement, of which 200,000 stock options were
vested in 2006. Accordingly, the Company recorded non-cash
compensation of $42,000 relating to these options in
accordance with SFAS 123 (R).

F-22

NETWORK-1 SECURITY SOLUTIONS, INC.

NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2006 AND 2005

NOTE D - STOCKHOLDERS' EQUITY (CONTINUED)

The following table presents information relating to all stock options
outstanding and exercisable at December 31, 2006:

WEIGHTED
WEIGHTED AVERAGE WEIGHTED
RANGE OF AVERAGE REMAINING AVERAGE
EXERCISE OPTIONS EXERCISE LIFE IN OPTIONS EXERCISE
PRICE OUTSTANDING PRICE YEARS EXERCISABLE PRICE
------------- ------------- ------ ----- ------------- ------

$0.12 - $2.91 6,344,506 $ 0.69 5.18 6,273,256 $ 0.68
$3.00 - $3.75 146,625 3.44 3.31 112,250 3.56
$4.13 - $5.69 77,100 5.08 3.08 77,100 5.08
$6.00 - $6.88 89,500 6.23 3.13 89,500 6.23
$10.00 10,000 10.00 3.21 10,000 10.00
------------- -------------

6,667,731 0.89 5.08 6,562,106 0.87
============= =============

[3] WARRANTS:

As of December 31, 2006, the following are the outstanding warrants to
purchase shares of the Company's common stock:

NUMBER
OF EXERCISE
WARRANTS PRICE EXPIRATION DATE
-------- ----- ---------------

300,000 0.70 July 11, 2011 (a)
250,000 1.48 October 8, 2011 (a)
1,042,500 1.25 December 21, 2007 (b)
521,250 1.75 December 21, 2007 (b)
50,000 1.00 December 21, 2009 (b)
300,000 1.25 January 13, 2008 (c)
150,000 1.75 January 13,2008 (c)
-----------
2,613,750
===========

(a) Issued to CMH Capital Management Corp. in 2001, a company
owned by the Chairman and Chief Executive Officer.

(b) Issued in connection with 2004 private offering of common
stock.

In January 2006 and September 2006, warrants to purchase 1,352,152 and
635,000 shares of common stock were exercised for $1,494,000 and
$635,000, respectively.

F-23

NETWORK-1 SECURITY SOLUTIONS, INC.

NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2006 AND 2005

NOTE E - COMMITMENTS AND CONTINGENCIES

[1] SERVICES AGREEMENT:

On November 30, 2004, the Company entered into a master services
agreement (the "Agreement") with ThinkFire Services USA, Ltd.
("ThinkFire") pursuant to which ThinkFire has been granted the exclusive
worldwide rights (except for direct efforts by the Company and related
companies) to negotiate license agreements for the Remote Power Patent
with respect to certain potential licensees agreed to between the
parties. Either the Company or ThinkFire can terminate the Agreement
upon 60 days' notice for any reason or upon 30 days' notice in the event
of a material breach. The Company has agreed to pay ThinkFire a fee not
to exceed 20% of the royalty payments received from license agreements
consummated by ThinkFire on its behalf.

[2] CONTINGENT LEGAL FEES:

In August 2005, the Company entered into an agreement with Blank Rome,
LLP ("Blank Rome"), a national law firm, pursuant to which Blank Rome
has been engaged to represent the Company in connection with all
litigation involving the Company's remote power patent. Blank Rome has
agreed to represent the Company with respect to each litigation
pertaining to the remote power patent on a full contingency basis
(except for any proceeding before the International Trade Commission).
As compensation for its services on a full contingency basis, Blank Rome
will receive from the Company percentages of Net Consideration (as
defined in the agreement) ranging from 12.5% to 35% received by the
Company by way of settlement or judgment in connection with each
litigation matter. The Company has also agreed to compensate Blank Rome
in an amount equal to 10% of the Net Consideration received by the
Company from certain designated parties mutually agreed upon by the
Company and Blank Rome in the event such designated parties enter into
license agreements or similar agreements with the Company.

[3] OPERATING LEASES:

The Company leases its principal office space in New York City at a
monthly rent of $3,250 for 2006.

Rental expense for the years ended December 31, 2006 and 2005 aggregated
$32,000 and $43,000, respectively.

[4] SAVINGS AND INVESTMENT PLAN:

The Company has a Savings and Investment Plan which allows participants
to make contributions by salary reduction pursuant to Section 401(k) of
the Internal Revenue Code of 1986. The Company also may make
discretionary annual matching contributions in amounts determined by the
Board of Directors, subject to statutory limits. The Company did not
make any contributions to the 401(k) Plan during the years ended
December 31, 2006 and 2005.

[5] SOFTWARE DEVELOPMENT CONTRACT DISPUTE:

The Company has a dispute with a software development company
pertaining to the number of warrants the Company is required to issue
for services rendered. The software development company has claimed
they are entitled to approximately 325,000 additional warrants than the
Company has included in the warrants outstanding in Note D[4]. At
December 31, 2004, the Company has included in accrued expenses
$385,000 and this amount was subsequently reversed in 2005.

NOTE F - INCOME TAXES

At December 31, 2006, the Company has available net operating loss
carryforwards to reduce future federal taxable income of approximately
$43,450,000 for tax reporting purposes, which expire from 2009 through
2026.

F-24

NETWORK-1 SECURITY SOLUTIONS, INC.

NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2006 AND 2005

NOTE F - INCOME TAXES (CONTINUED)

Pursuant to the provisions of the Internal Revenue Code, future utilization of
these past losses is subject to certain limitations based on changes in the
ownership of the Company's stock that have occurred.

The principal components of the net deferred tax assets are as follows:

YEAR ENDED
DECEMBER 31,
------------------------------
2006 2005
------------ ------------

Deferred tax assets:
Net operating loss carryforwards $ 16,136,000 $ 14,615,000
Options and warrants not yet deducted, for
tax purposes 177,800 1,080,000
Other -0- -0-
------------ ------------

16,313,000 15,695,000
Valuation allowance (16,313,000) (15,695,000)
------------ ------------

Net deferred tax assets $ 0 $ 0
============ ============

The Company has recorded a valuation allowance for the full amount of its
deferred tax assets as the likelihood of the future realization cannot be
presently determined. The valuation allowance increased by $618,000 in 2006 and
$2,448,000 in 2005.

The reconciliation between the taxes as shown and the amount that would be
computed by applying the statutory federal income tax rate to the loss before
income taxes is as follows:

YEAR ENDED
DECEMBER 31,
------------------------------
2006 2005
------------ ------------

Income tax benefit - statutory rate (34.0)% (34.0)%
State and local, net (3.5)% (3.5)%
Valuation allowance on deferred tax assets 37.5 % 37.5 %

NOTE G - CONCENTRATIONS

The Company places its cash investments in high quality financial institutions
insured by the Federal Deposit Insurance Corporation ("FDIC"). At December 31,
2006, the Company maintained cash balances of $1,697,000 in excess of FDIC
limits.

NOTE H - RELATED PARTY TRANSACTIONS

On December 21, 2004, the Company extended the exercise period for the
1999 Warrants by an additional year until December 22, 2005. In December
2005, these warrants were further extended for three months until March
22, 2006. The 1999 Warrants were originally issued as part of a private
offering completed by the Company in December 1999. In connection with
these extensions, the change in fair value of $494,000 and $1,032,000
using the Black-Scholes model utilizing the risk-free interest rate of
3.97% and 2.67%, life of 0.25 year and 1 year, volatility of 174% and
dividend yield of 0% was recorded as a deemed dividend in 2005 and 2004,
respectively. Corey M. Horowitz, Chairman and Chief Executive Officer of
the Company, owned 85,220 warrants of the 1999 Warrants which were
exercised in March 2006.

F-25

NETWORK-1 SECURITY SOLUTIONS, INC.

NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2006 AND 2005

[1] On December 21, 2004 and January 13, 2005, the Company completed a
private placement of an aggregate of 2,085,000 shares of common stock
and three year warrants to purchase 1,563,750 shares of common stock for
an aggregate purchase price of $2,035,000, net of $50,000 in issuance
costs. An investor in the above private placement (100,000 shares of
common stock and warrants to purchase 75,000 shares of common stock) is
a director of the Company.

[2] On November 18, 2003, the Company entered into an agreement (the
"Agreement") with Merlot Communications, Inc. ("Merlot"), a broadband
communications solutions provider, pursuant to which the Company
acquired six patents (the "Patent Portfolio") relating to various
telecommunications and data networking technologies from Merlot, for a
purchase price of $100,000 and contingent future payments equal to 20%
of the net income (as defined in the Agreement) of the Company from the
sale or licensing of the Patents after the Company achieves $4.0 million
of net income for each patent comprising the Patent Portfolio ("Future
Contingent Payments"). On January 18, 2005, the Company and Merlot
entered into an amendment to the Agreement (the "Amendment") pursuant to
which the Company paid $500,000 to Merlot in consideration for the
restructuring of the Future Contingent Payments to Merlot from the
licensing or sale of the Patent Portfolio. The Amendment provides for
future contingent payments by the Company to Merlot of $1.0 million upon
achievement of $25 million of Net Royalties (as defined), an additional
$1.0 million upon achievement of $50 million of Net Royalties and an
additional $500,000 upon achievement of $62.5 million of Net Royalties
from licensing or sale of the patents acquired from Merlot. Certain
principal stockholders of the Company, and their affiliates and related
parties, owned a majority of the outstanding voting stock of Merlot at
the time of the Agreement and the Amendment and were also directors of
Merlot at the time of the Agreement and the Amendment but abstained from
voting on the Agreement and the Amendment.

NOTE I - EMPLOYMENT ARRANGEMENTS AND OTHER AGREEMENTS

[1] In August 2005, the Company entered into an agreement with David Kahn to
continue to serve as the Company's Chief Financial Officer ("CFO"). The
agreement expired on December 31, 2006 and provided for a base salary of
$6,000 per month for the period through December 31, 2005 and $6,300 per
month for the year ended December 31, 2006. In connection with the
agreement, Mr. Kahn was issued options to purchase 75,000 shares of
common stock, at an exercise price of $.80 per share, which vested
30,000 shares on the date of grant and the balance of 45,000 shares
vested in equal amounts of 7,500 shares on a quarterly basis beginning
September 30, 2005 through December 31, 2006.

On December 20, 2006, the Company entered into a new agreement with
David Kahn pursuant to which he agreed to continue to serve as Chief
Financial Officer through December 31, 2008. In consideration for his
services, Mr. Kahn is compensated at the rate of $6,615 per month for
the period through December 31, 2007 and $6,945 per month for the year
ended December 31, 2008. Mr. Kahn was also issued a five (5) year option
to purchase 75,000 shares of common stock at an exercise price of $1.50
per share. The option vested 30,000 shares on the date of grant and the
balance of the shares (45,000) vest on a quarterly basis in equal
amounts of 5,625 shares beginning March 31, 2007 through December 31,
2008. The agreement further provides that the Company may terminate the
agreement at any time for any reason. In the event Mr. Kahn's services
are terminated without "Good Cause" (as defined), he will be entitled to
accelerated vesting of all unvested shares underlying the option and the
lesser of (i) six months base monthly compensation or (ii) the remaining
balance of the monthly compensation payable through December 31, 2008.

[2] On November 26, 2004, the Company entered into an employment agreement
with Corey M. Horowitz pursuant to which he agreed to continue to serve
as Chairman and Chief Executive Officer of the Company for a two-year
term at an annual base salary of $250,000 for the first year and
$275,000 for the second year.

F-26

NETWORK-1 SECURITY SOLUTIONS, INC.

NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2006 AND 2005

NOTE I - EMPLOYMENT ARRANGEMENTS AND OTHER AGREEMENTS (CONTINUED)

Mr. Horowitz was also issued options to purchase an aggregate of
1,500,000 shares of the Company's common stock consisting of (i) a ten
year fully vested option to purchase 1,100,000 shares at an exercise
price of $0.25 per share, and (ii) a five-year option to purchase
400,000 shares at an exercise price of $0.68 per share which vested 50%
on the date of grant and 50% one year thereafter, subject to
acceleration upon a change of control. For the year ended December 31,
2005 and December 31, 2006, Mr. Horowitz was paid discretionary cash
bonuses of $100,000 and $75,000, respectively. Mr. Horowitz was also
granted certain anti-dilution rights which provide that if at any time
during the period ending December 31, 2005, in the event that the
Company completes an offering of its common stock or any securities
convertible or exercisable into common stock, he will receive, at the
same price as the securities issued in the financing, such number of
additional stock options so that he maintains the same ownership
percentage of (20.11%) of the Company based upon options and warrants
owned by him and CMH (exclusive of his ownership of shares of common
stock) as he owned as of November 26, 2004. As a result of the closings
of the private placement on December 31, 2004 and January 13, 2005 and
in accordance with the anti-dilution protection afforded to Mr. Horowitz
in his employment agreement, Mr. Horowitz earned seven year options to
purchase an aggregate of 1,195,361 shares at an exercise price of $1.18
per share. The Company entered into a new agreement with Mr. Horowitz in
February 2007 (see Note K).

NOTE J - LITIGATION

[1] On November 17, 2005 the Company entered into a Settlement Agreement
with PowerDsine, Inc and PowerDsine Ltd. which dismisses, with
prejudice, a civil action brought by PowerDsine in the United States
District Court for the Southern District of New York that sought a
declaratory judgment that U.S. Patent No. 6,218,930 (the "Remote Power
Patent") owned by the Company was invalid and not infringed by
PowerDsine and/or its customers. Under the terms of the Settlement
Agreement, the Company has agreed that it will not initiate litigation
against PowerDsine for its sale of Power over Ethernet (PoE) integrated
circuits. In addition, the Company has agreed that it will not seek
damages for infringement from customers that incorporate PowerDsine
integrated circuit products in PoE capable Ethernet switches
manufactured on or before April 30, 2006. PowerDsine has agreed that it
will not initiate, assist or cooperate in any legal action relating to
the Remote Power Patent. The Company also agreed that it will not
initiate litigation against PowerDsine or its customers for infringement
of the Remote Power Patent arising from the manufacture and sale of
PowerDsine Midspan products for three years following the dismissal
date. Following such three year period, the Company may seek damages for
infringement of the Remote Power Patent from PowerDsine or its customers
with respect to the purchase and sale of Midspan products beginning 90
days following the dismissal date.

[2] On August 10, 2005, the Company commenced litigation against D-Link
Corporation and D-Link Systems, Incorporated (collectively, "D-Link") in
the United States District Court for the Eastern District of Texas,
Tyler division (Civil Action No. 6:05W291), for infringement of our
Remote Power Patent. The Company's complaint seeks, among other things,
a judgment that its Remote Power Patent is duly enforceable and has been
infringed by the defendants. The Company also seeks a permanent
injunction restraining defendants from continued infringement, or active
inducement of infringement by others, of the Remote Power Patent. On
February 27, 2006, the D-Link defendants filed answers and asserted
counterclaims. In their answers, the D-Link defendants asserted that
they did not infringe any valid claim of the Remote Power Patent, and
further asserted that the asserted patent claims are invalid and/or
unenforceable. In addition to these defenses, the D-Link defendants also
asserted counterclaims for, among other things, non-infringement,
invalidity and unenforceability of the Remote Power Patent. In the event
that the Court determines that the Company's Remote Power Patent was not
valid or enforceable, and/or that the defendants did not infringe, any
such determination would have a material adverse effect on the Company.

F-27

NETWORK-1 SECURITY SOLUTIONS, INC.

NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2006 AND 2005

NOTE K - SUBSEQUENT EVENTS

[1] On February 28, 2007, the Company entered into a new Employment
Agreement with Corey M. Horowitz pursuant to which Mr. Horowitz
continued to serve as Chairman and Chief Executive Officer for a two
year term at an annual base salary of $288,750 for the first year,
increasing by 5% for the second year. In connection with his employment
agreement, Mr. Horowitz was issued a five (5) year option to purchase
375,000 shares of common stock at an exercise price of $1.46 per share
which vests, on a quarterly basis over a one year period subject to
acceleration upon a change of control. The Company also agreed to issue
to Mr. Horowitz on the one year anniversary date an additional five (5)
year option to purchase a minimum of 375,000 shares of common stock at
an exercise price equal to the closing price of our common stock on the
date of grant, which option will vest on a quarterly basis over a one
year period. In addition to the aforementioned option grants, the
Company agreed to extend for an additional three (3) years the
expiration dates of all options and warrants (an aggregate of 2,620,000
shares) expiring in calendar year 2007 and 2008 owned by Mr. Horowitz
and CMH Capital Management Corp. ("CMH"), an affiliate. Under the terms
of his Employment Agreement, Mr. Horowitz shall receive bonus
compensation in an amount equal to 5% of Company royalties or other
payments (before deduction of payments to third parties including, but
not limited to, legal fees and expenses and third party license fees)
received from licensing its patents (including patents currently owned
and acquired or licensed on an exclusive basis during the period in
which Mr. Horowitz continues to serve as an executive officer of the
Company) (the "Royalty Bonus Compensation"). Mr. Horowitz shall also
receive bonus compensation equal to 5% of the gross proceeds from (i)
the sale of any of the Company's patents or (ii) the Company's merger
with or into another corporation or entity. The Royalty Bonus
Compensation shall continue to be paid to Mr. Horowitz for the life of
each of the Company's patents with respect to licenses entered into by
us with third parties during Mr. Horowitz's term of employment or at
anytime thereafter, whether Mr. Horowitz is employed by the Company or
not, provided, that, -------- ---- Mr. Horowitz's employment has not
been terminated by the Company "For Cause" (as defined) or terminated by
Mr. Horowitz without "Good Reason" (as defined). In the event that Mr.
Horowitz's employment is terminated by the Company "Other Than For
Cause" (as defined) or by Mr. Horowitz for "Good Reason" (as defined),
Mr. Horowitz shall be entitled to a severance of 12 months base salary.

In accordance with his employment agreement, Mr. Horowitz also has
certain anti-dilution rights which provide that if at any time during
the period ended December 31, 2008, in the event that the Company
completes an offering of its common stock or any securities convertible
or exercisable into common stock (exclusive of securities issued upon
exercise of outstanding options, warrants or other convertible
securities), Mr. Horowitz shall receive from the Company, at the same
price as the securities issued in the financing, such number of
additional options to purchase common stock so that he maintains the
same derivative ownership percentage (21.47%) of the Company based upon
options and warrants owned by Mr. Horowitz and CMH (exclusive of
ownership of shares of common stock by Mr. Horowitz and CMH) owned as of
the time of execution of his employment agreement; provided, that, the
aforementioned anti-dilution protection shall be afforded to Mr.
Horowitz up to maximum future financings of $2.5 million.

F-28

NETWORK-1 SECURITY SOLUTIONS, INC.

14,127,191 SHARES
OF
COMMON STOCK

------------------

PROSPECTUS

-----------------

MAY 25, 2007

YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. NO DEALER,
SALESPERSON OR OTHER PERSON IS AUTHORIZED TO GIVE INFORMATION THAT IS NOT
CONTAINED IN THIS PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO SELL NOR IS IT
SEEKING AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR
SALE IS NOT PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT
ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF THE DELIVERY
OF THIS PROSPECTUS OR ANY SALE OF THESE SECURITIES.

PART II.

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Section 145 of the Delaware General Corporations Law (the "DGCL") contains
provisions entitling the Company's directors and officers to indemnification
from judgments, fines, amounts paid in settlement, and reasonable expenses
(including attorneys' fees) as the result of an action or proceeding in which
they may be involved by reason of having been a director or officer of the
Company. In its Certificate of Incorporation, the Company has included a
provision that limits, to the fullest extent now or hereafter permitted by the
DGCL, the personal liability of its directors to the Company or its stockholders
for monetary damages arising from a breach of their fiduciary duties as
directors. Under the DGCL as currently in effect, this provision limits a
director's liability except where such director (i) breaches his duty of loyalty
to the Company or its stockholders, (ii) fails to act in good faith or engages
in intentional misconduct or a knowing violation of law, (iii) authorizes
payment of an unlawful dividend or stock purchase or redemption as provided in
Section 174 of the DGCL, or (iv) obtains an improper personal benefit. This
provision does not prevent the Company or its stockholders from seeking
equitable remedies, such as injunctive relief or rescission. If equitable
remedies are found not to be available to stockholders in any particular case,
stockholders may not have any effective remedy against actions taken by
directors that constitute negligence or gross negligence.

The Certificate of Incorporation also includes provisions to the effect
that (subject to certain exceptions) the Company shall, to the maximum extent
permitted from time to time under the law of the State of Delaware, indemnify,
and upon request shall advance expenses to, any director or officer to the
extent that such indemnification and advancement of expenses is permitted under
such law, as it may from time to time be in effect. In addition, the Bylaws
require the Company to indemnify, to the full extent permitted by law, any
director, office, employee or agent of the Company for acts which such person
reasonably believes are not in violation of the Company's corporate purposes as
set forth in the Certificate of Incorporation. At present, the DGCL provides
that, in order to be entitled to indemnification, an individual must have acted
in good faith and in a manner he or she reasonably believed to be in or not
opposed to the Company's best interests.

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to any charter, provision, by-law, contract, arrangement, statute or
otherwise, the Company has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.

II-1

ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table sets forth the expenses in connection with the offering
described in the Registration Statement, all of which will be borne by the
Company.

SEC registration fee................................. $ 1,450.89
Legal fees and expenses*............................. $ 20,000.00
Accounting fees and expenses*........................ $ 2,500.00
Miscellaneous expenses*.............................. $ 1,500.00
-----------
TOTAL.............................. $ 25,450.89
===========
* Estimated.

ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES

(1) On December 21, 2004 and January 13, 2005, the Registrant sold to 29
accredited investors in a private placement an aggregate of 2,685,000
shares of common stock, at an aggregate purchase price of $2,685,000 or
$1.00 per share of common stock, together with three year warrants to
purchase an aggregate of 2,013,750 shares of common stock, at exercise
prices of $1.25 per share and $1.75 per share. The transaction was
exempt from registration under the Securities Act of 1933, as amended
(the "Act") pursuant to Section 4(2) of the Act and Regulation D
promulgated thereunder.

(2) On April 16, 2007, the Registrant sold to accredited investors in a
private placement an aggregate of 3,333,333 shares of common stock, at
an aggregate purchase price of $5,000,000 or $1.50 per share of common
stock, together with five year warrants to purchase an aggregate of
1,666,667 shares of common stock, at an exercise price of $2.00 per
share. The transaction was exempt from registration under the Securities
Act of 1933, as amended (the "Act") pursuant to Section 4(2) of the Act
and Regulation D promulgated thereunder.

(3) On February 1, 2007, the Registrant issued 80,000 shares of common stock
to Alliance Advisors, LLC pursuant to an advisory agreement, dated March
3, 2006. The transaction was exempt from registration under the
Securities Act of 1933, as amended, under Section 4(2) thereof.

II-2

ITEM 27. EXHIBITS

NO. DESCRIPTION

3.1 Certificate of Incorporation, as amended. Previously filed as
Exhibit 3.1 to the Company's Registration Statement on Form SB-2
(Registration No. 333-59617), declared effective by the SEC on
November 12, 1998 (the "1998 Registration Statement"), and
incorporated herein by reference.

3.1.1 Certificate of Amendment to the Certificate of Incorporation dated
November 27, 2001. Previously filed as Exhibit 3.1.1 to the
Company's Registration Statement on Form S-3 (Registration No.
333-81344) declared effective by the SEC on February 12, 2002, and
incorporated herein by reference (the "February 2002 Form S-3")

3.4 By-laws, as amended. Previously filed as Exhibit 3.2 to the 1998
Registration Statement and incorporated herein by reference.

4.1 Form of Common Stock certificate. Previously filed as Exhibit 4.1 to
the 1998 Registration Statement and incorporated herein by
reference.

5.1* Opinion of Eiseman Levine Lehrhaupt & Kakoyiannis, P.C.

10.1 Patents Purchase, Assignment and License Agreement, dated November
18, 2003, between the Company and Merlot Communications, Inc.
Previously filed as Exhibit 10.10 to the Company's Current Report on
Form 8-K filed December 3, 2003 and incorporated herein by
reference.

10.2 Letter Agreement, dated December 21, 2003, between the Company and
Corey M. Horowitz, including exhibits. Previously filed as Exhibit
10.3 to the Company's Annual Report on Form 10-KSB filed April 14,
2004 and incorporated herein by reference.

10.3 Letter Agreement dated January 22, 2004, between the Company and
David Kahn. Previously filed as Exhibit 10.4 to the Company's Annual
Report on Form 10-KSB filed April 14, 2004 and incorporated herein
by reference.

10.4 Exchange Agreement, dated April 13, 2004, between the Company and
its Preferred Stockholders. Previously filed as Exhibit 10.5 to the
Company's Annual Report on Form 10-KSB filed April 14, 2004 and
incorporated herein by reference.

10.5 Employment Agreement, dated November 26, 2004, between the Company
and Corey M. Horowitz. Previously filed as Exhibit 10.1 to the
Company's Current Report on Form 8-K filed December 1, 2004 and
incorporated herein by reference.

10.6 Master Services Agreement, dated November 30, 2004, between the
Company and ThinkFire Services USA, Ltd. Previously filed as Exhibit
10.1 to the Company's Current Report on Form 8-K filed December 2,
2004 and incorporated herein by reference.

10.7 Securities Purchase Agreement, dated December 21, 2004, between
Company and the investors. Previously, filed as Exhibit 10.1 to the
Company's Current Report on Form 8-K filed December 28, 2004 and
incorporated herein by reference.

10.8 Securities Purchase Agreement, dated January 13, 2005, between the
Company and the investors. Previously filed as Exhibit 10.2 to the
Company's Current Report on Form 8-K filed on January 20, 2005 and
incorporated herein by reference.

II-3

10.9 Amendment to Patents Purchase, Assignment and License Agreement,
dated January 18, 2005, between the Company and Merlot
Communications, Inc. Previously filed January 24, 2005 as Exhibit
10.1 to the Company's Current Report on Form 8-K filed on January
18, 2005 and incorporated herein by reference.

10.10 Agreement, dated August 4, 2005, between the Company and David C.
Kahn. Previously filed as Exhibit 10.1 to the Company's Current
Report on Form 8-K filed August 9, 2005 and incorporated herein by
reference.

10.11 Agreement, dated August 9, 2005, between the Company and Blank Rome
LLP. Previously filed as Exhibit 10.1 to the Company's Current
Report on Form 8-K filed on August 11, 2005 and incorporated herein
by reference.

10.12 Settlement Agreement, dated November 16, 2005, among the Company,
PowerDsine Ltd and PowerDsine, Inc. Previously filed as Exhibit 10.1
to the Company's Current Report on Form 8-K filed November 17, 2005
and incorporated herein by reference.

10.13 Agreement, dated December 20, 2006, between the Company and David C.
Kahn, previously filed as Exhibit 10.1 to the Company's Current
Report on Form 8-K filed December 22, 2006 and incorporated herein
by reference.

10.14 Employment Agreement, dated February 28, 2007, between the Company
and Corey M. Horowitz previously filed as Exhibit 10.1 to the
Company's Current Report on Form 8-K filed March 6, 2007 and
incorporated herein by reference.

10.15 Securities Purchase Agreement, dated April 16, 2007, between the
Company and the investors (including exhibits). Previously filed as
Exhibit 10.1 to the Company's Current Report on Form 8-K filed April
20, 2007 and incorporated herein by reference.

14 Code of Ethics. Previously filed as Exhibit 14 to the Company's
Annual Report on Form 10-KSB for the year ended December 31, 2004
filed on April 14, 2004 and incorporated herein by reference.

23.1* Consent of Radin Glass Co., LLP, Independent Registered Public
Accounting Firm.

23.2 Consent of Eiseman Levine Lehrhaupt & Kakoyiannis, P.C. (included
within Exhibit 5.1).

--------------------------------------------------------------------------------

* Filed herewith

II-4

ITEM 28. UNDERTAKINGS

The undersigned Registrant hereby undertakes that it will:

(1) File, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement to:

(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act;

(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the information in
the registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any deviation
from the low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and price represent no more
than a 20 percent change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective registration
statement;

(iii) Include any additional or changed material information on
the plan of distribution.

(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new Registration Statement of the securities
offered, and the offering of securities at that time to be the initial BONA FIDE
offering.

(3) File a post-effective amendment to remove from registration any
of the securities that remain unsold at the end of this offering.

(4) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Registrant, pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.

II-5

SIGNATURES
----------

Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form SB-2 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of New York, State of New York.

Dated: May 25, 2007

NETWORK-1 SECURITY SOLUTIONS, INC.

By: /s/ Corey M. Horowitz
-------------------------------------
Corey M. Horowitz, Chairman and Chief
Executive Officer

KNOW ALL MEN BY THESE PRESENTS, that each director and officer whose
signature appears below constitutes and appoints Corey M. Horowitz his true and
lawful attorney-in-fact and agent, with full power and substitution and
re-substitution, to sign in any and all capacities any and all amendments or
post-effective amendments to this Registration Statement on Form SB-2 and to
file the same with all exhibits thereto and other documents in connection
therewith with the Securities and Exchange Commission, granting to such
attorney-in-fact and agent, full power and authority to do all such other acts
and execute all such other documents as he may deem necessary or desirable in
connection with the foregoing, as fully as the undersigned might or could do in
person, hereby ratifying and confirming all that such attorney-in-fact and agent
may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:

Signature Title Date
--------- ----- ----

/s/ Corey M. Horowitz Chairman and Chief Executive May 25, 2007
----------------------------------- Officer (principal executive officer)
Corey M. Horowitz

/s/ David C. Kahn Chief Financial Officer May 25, 2007
----------------------------------- (principal financial and accounting
David C. Kahn officer)

/s/ Robert Graifman Director May 25, 2007
-----------------------------------
Robert Graifman

/s/ Robert Pons Director May 25, 2007
-----------------------------------
Robert Pons

/s/ Laurent Ohanal Director May 25, 2007
-----------------------------------
Laurent Ohana

II-6

INDEX TO EXHIBITS

NO. DESCRIPTION

3.4 By-laws, as amended. Previously filed as Exhibit 3.2 to the 1998
Registration Statement and incorporated herein by reference.

4.1 Form of Common Stock certificate. Previously filed as Exhibit 4.1 to
the 1998 Registration Statement and incorporated herein by
reference.

5.1* Opinion of Eiseman Levine Lehrhaupt & Kakoyiannis, P.C.

14 Code of Ethics. Previously filed as Exhibit 14 to the Company's
Annual Report on Form 10-KSB for the year ended December 31, 2004
filed on April 14, 2004 and incorporated herein by reference.

23.1* Consent of Radin Glass Co., LLP, Independent Registered Public
Accounting Firm.

23.2 Consent of Eiseman Levine Lehrhaupt & Kakoyiannis, P.C. (included
within Exhibit 5.1).

--------------------------------------------------------------------------------

* Filed herewith