Edgar Filing: NETWORK 1 SECURITY SOLUTIONS INC

NETWORK-1 SECURITY SOLUTIONS, INC.

Filed Pursuant to Rule 424(b)(3)
Registration No. 333-126013

PROSPECTUS SUPPLEMENT NO. 3
(To Prospectus dated June 12, 2007)

This is a prospectus supplement to our prospectus dated June 12, 2007 (the
"Prospectus") relating to the resale from time to time by selling stockholders
of up to 14,127,191 shares of our common stock, including shares issuable upon
exercise of outstanding warrants and options. On November 14, 2007, we filed
with the Securities and Exchange Commission a Quarterly Report on Form 10-QSB.
The text of the Quarterly Report on Form 10-QSB is attached to and a part of
this supplement.

This prospectus supplement should be read in conjunction with the Prospectus and
may not be delivered or utilized without the Prospectus. This prospectus
supplement is qualified by reference to the Prospectus, except to the extent
that the information provided by this prospectus supplement supersedes the
information contained in the Prospectus.

The securities offered by the Prospectus involve a high degree of risk. You
should carefully consider the "Risk Factors" referenced on page 4 of the
Prospectus in determining whether to purchase the Common Stock.

The date of this prospectus supplement is November 14, 2007.

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

U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-QSB

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2007

[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______ TO ______

COMMISSION FILE NUMBER 1-14896

NETWORK-1 SECURITY SOLUTIONS, INC.

(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)

DELAWARE 11-3027591
--------------------------------------------------------------------------------
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)

445 Park Avenue, Suite 1028, New York, New York 10022
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

212-829-5770
(Issuer's Telephone Number)

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [_]

Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

The number of shares of Common Stock, $.01 par value per share, outstanding as
of November 12, 2007 was 23,218,057

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

NETWORK-1 SECURITY SOLUTIONS, INC.

INDEX

Page No.

PART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS
Condensed Balance Sheets as of September 30, 2007
(unaudited) and December 31, 2006................................. 3

Condensed Statements of Operations for the three and
nine months ended September 30, 2007 and 2006 (unaudited)......... 4

Condensed Statements of Cash Flows for the nine months
ended June 30, 2007 and 2006 (unaudited).......................... 5

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

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION......... 14

Item 3. CONTROLS AND PROCEDURES........................................... 24

PART II. OTHER INFORMATION

Item 1. Legal Proceedings................................................. 24

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds....... 25

Item 3. Defaults Upon Senior Securities................................... 25

Item 4. Submission of Matters to a Vote of Security Holders............... 25

Item 5. Other Information................................................. 25

Item 6. Exhibits.......................................................... 25

SIGNATURES................................................................. 26

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

SEPTEMBER 30, DECEMBER 31,
2007 2006
------------ ------------
(UNAUDITED)
ASSETS
------

Current assets:
Cash and cash equivalents $ 4,973,000 $ 1,797,000
Accounts Receivable 40,000
Prepaid Expenses 11,000 71,000
Other current assets 2,000 4,000
------------ ------------
Total current assets 5,026,000 1,875,000

Equipment, net 8,000 11,000
Security Deposits 6,000 6,000
Patents 74,000 79,000
------------ ------------
$ 5,114,000 $ 1,971,000
============ ============

LIABILITIES
-----------

Current liabilities:
Accounts payable $ 83,000 $ 350,000
Accrued expenses and other current liabilities 98,000 219,000
------------ ------------
Total current liabilities 181,000 569,000
------------ ------------

Commitments and contingencies

STOCKHOLDERS' EQUITY
--------------------

Common stock - $0.01 par value ; authorized
50,000,000 shares; 23,198,057 shares issued
and outstanding at September 30, 2007 and
19,764,724 at December 31, 2006 232,000 197,000

Additional paid-in capital 53,511,000 47,484,000
Accumulated deficit (48,846,000) (46,279,000)
------------ ------------
4,933,000 1,402,000
------------ ------------
$ 5,114,000 $ 1,971,000
============ ============

See notes to condensed financial statements

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

THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ -------------------------------
2007 2006 2007 2006
------------ ------------ ------------ ------------

Revenues
Royalties $ 181,000 -- $ 181,000 --
Cost of Royalties 9,000 -- 9,000 --
------------ ------------ ------------ ------------
Gross Margin 172,000 -- 172,000 --
------------ ------------ ------------ ------------

Operating expenses:
General and Administrative 300,000 404,000 1,533,000 $ 949,000
Non Cash Compensation 67,000 54,000 1,294,000 156,000
------------ ------------ ------------ ------------

Total Expenses 367,000 459,000 2,827,000 1,105,000
------------ ------------ ------------ ------------
LOSS BEFORE INTEREST INCOME (195,000) (459,000) (2,655,000) (1,105,000)
Interest income - net 61,000 19,000 124,000 49,000
------------ ------------ ------------ ------------

Net Loss $ (134,000) $ (440,000) $ (2,531,000) $ (1,056,000)
============ ============ ============ ============

LOSS PER COMMON SHARE: BASIC AND DILUTED $ (.01) $ (.02) $ (.12) $ (.06)
============ ============ ============ ============

WEIGHTED AVERAGE SHARES: BASIC AND DILUTED 23,198,057 19,208,474 21,869,913 18,702,034
============ ============ ============ ============

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

NINE MONTHS ENDED SEPTEMBER 30,
------------------------------
2007 2006
------------ ------------

Cash flows from operating activities:
Net loss $ (2,531,000) $ (1,056,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 8,000 5,000

Non-Cash Compensation 1,294,000 156,000
Changes in:
Prepaid expenses and other current assets 25,000 69,000
Accounts payable, accrued expenses and other
current liabilities (387,000) (122,000
------------ ------------

Net cash used in operating activities (1,591,000) (938,000)
------------ ------------

Cash Flows from Investing Activities -- --
------------ ------------

Cash Flows from Financing Activities
Issuance of Common Stock, net of expenses of $275,000 4,767,000 2,129,000
------------ ------------

NET INCREASES IN CASH AND CASH EQUIVALENTS 3,176,000 1,119,000
Cash and cash equivalents, beginning of period 1,797,000 938,000
------------ ------------

CASH AND CASH EQUIVALENTS, END OF PERIOD $ 4,973,000 $ 2,129,000
============ ============

See notes to condensed financial statements

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 September 30, 2007 and for
the three and nine month periods ended September 30, 2007 and September 30,
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 September 30, 2007, and
the results of its operations and its cash flows for the three and nine month
periods ended September 30, 2007 and September 30, 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
nine months ended September 30, 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 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"). In August 2007, as part of its
Settlement Agreement pertaining to the Company's patent infringement litigation
with D-Link Corporation and D-Link Systems (collectively, D-Link), the Company
entered into its first license agreement for its Remote Power Patent with D-Link
(See Note E-Litigation). To date the Company has not entered into any other
license agreements with third parties with respect to its Remote Power Patent or
its other patents.

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

NOTE A - [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 the year ended December 31, 2006 and the three and nine month
period ended September 30, 2007. For the year ended December 31, 2006 the
Company had no revenue and for the three and nine month periods ended September
30, 2007, the Company had revenue of $181,000. 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 equity financing until
it generates cash flows from operations. In April 2007, the Company completed a
$5 million private placement of its securities. (See Note B - Private
Placement). During the nine month period ended September 30, 2007, warrants to
purchase 100,000 shares of common stock were exercised, at exercise prices of
$.12, $.14, $.19 and $1.25 per share, resulting in aggregate proceeds to the
Company of $42,250. The Company had cash and cash equivalents of $4,973,000 as
of September 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.

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

[3] STOCK-BASED COMPENSATION: (continued)

On February 28, 2007, the Company granted options to its Chairman and CEO to
purchase 375,000 shares 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 $189,000 for these options for the nine months ended
September 30, 2007 based on the Black-Scholes option-pricing model. In addition,
during the nine months ended September 30, 2007, the Company also recorded
compensation expense of $16,000 and $19,000 for the vested portion of options
granted to directors and consultants, respectively, prior to January 1, 2007. On
April 18, 2007, the Company issued to its Chairman and CEO a five year option to
purchase 732,709 shares of common stock at an exercise price of $1.67 per share.
Such option was issued pursuant to the anti-dilution provisions of an employment
agreement with the Company's CEO and Chairman as a result of the Company's
completion of a $5 million private offering in April 2007. The Company recorded
an additional expense of $699,000 as a result of such option issuance during the
nine months ended September 30, 2007. (See Notes B and D)

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

NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------

2007 2006
------ ------
Risk-free interest rates 4.62% 4.51%
Expected option life in years 5 yrs. 5 yrs.
Expected stock price volatility 45.92% 69.8%
Expected dividend yield -0- -0-

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

[4] REVENUE RECOGNITION:

The Company recognizes its 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 12,315,857 and 9,060,970 at September 30, 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 September 30,
2007, the Company maintained cash balance of approximately $4,873,000 in excess
of FDIC limits.

NOTE B - PRIVATE PLACEMENT

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. In
connection with the Closing of the private placement, the Company paid placement
agent fees of $275,000 and issued 5 year warrants to purchase 360,000 shares of
common stock (240,000 shares at an exercise price of $1.50 per share and 120,000
shares 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. (See
Note A[3])

NOTE C - 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 up to
20% of the royalty payments received from license agreements consummated by
ThinkFire on its behalf.

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

NOTE C - COMMITMENTS AND CONTINGENCIES: (CONTINUED)

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.

With respect to legal services rendered to the Company by Blank Rome, LLP
("Blank Rome") on a contingency basis pertaining to the Company's patent
infringement litigation against D-Link Corporation and D-Link Systems
(collectively, "D-Link"), after the Company has recovered royalties from D-Link
pursuant to the settlement agreement sufficient to cover its out-of-pocket
expenses related to the litigation, in accordance with its engagement agreement
with Blank Rome the Company is obligated to pay Blank Rome legal fees in an
amount equal to 25% of the royalties received by the Company from D-Link
pursuant to the settlement agreement.

NOTE D - 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 of the employment agreement 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 the Company's 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

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

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

the expiration dates of such options and warrants, the Company recorded
compensation expense of $371,000 during the nine months ended September 30, 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"). With respect to royalties paid for the three
month period ended September 30, 2007 by D-Link pursuant to its settlement
agreement with the Company (See Note E-"Litigation"), Mr. Horowitz earned
Royalty Bonus Compensation of $9,050. 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 the Company 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 (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
financings of $2.5 million. In April 2007, in connection with the Company's
completion of a $5 million private offering, Mr. Horowitz was issued a 5 year
option to purchase 732,709 shares of the Company's common stock, at an exercise
price of $1.67 per share, in accordance with the aforementioned anti-dilution
provisions of his employment agreement. (See Note A[3])

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

NOTE E - LITIGATION

D-LINK LITIGATION

On August 10, 2005, the Company 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 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.

In August 2007 the Company finalized the settlement of its patent infringement
litigation against D-Link. Under the terms of the settlement, D-Link agreed to
license the Remote Power Patent the terms of which include monthly royalty
payments of 3.25% of the net sales of D-Link 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 rates are 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 paid the Company $100,000 upon signing the settlement
agreement.

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 agreed that it will not initiate, assist or cooperate
in any legal action relating to the Remote Power Patent. The Company has also

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

NOTE E - LITIGATION: (CONTINUED)

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 until November 23, 2008 (three years from
the dismissal date). At such time, 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. 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 actions.

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.

ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

THIS QUARTERLY REPORT ON FORM 10-QSB CONTAINS FORWARD-LOOKING STATEMENTS WHICH
ARE STATEMENTS THAT INCLUDE INFORMATION BASED UPON BELIEF OF OUR MANAGEMENT, AS
WELL AS ASSUMPTIONS MADE BY AND INFORMATION AVAILABLE TO MANAGEMENT. STATEMENTS
CONTAINING TERMS SUCH AS "BELIEVES", "EXPECTS", "ANTICIPATES", "INTENDS" OR
SIMILAR WORDS ARE INTENDED TO IDENTIFY FORWARD LOOKING STATEMENTS. ACTUAL
RESULTS, EVENTS AND CIRCUMSTANCES (INCLUDING FUTURE PERFORMANCE, RESULTS AND
TRENDS) COULD DIFFER MATERIALLY FROM THOSE SET FORTH IN SUCH STATEMENTS DUE TO
VARIOUS RISKS AND UNCERTAINTIES, INCLUDING, BUT NOT LIMITED TO, THOSE DISCUSSED
BEGINNING ON PAGES 18-23 OF THIS QUARTERLY REPORT ON 10-QSB FOR THE QUARTERLY
PERIOD ENDED SEPTEMBER 30, 2007.

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 (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. In August 2007, as part of our Settlement Agreement pertaining to our
patent infringement litigation against D-Link Corporation and D-Link Systems
(collectively, "D-Link"), we entered into our first license agreement for our
Remote Power Patent with D-Link. (See Note E - Litigation to our Financial
Statements). During the next 12 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.

To date we have incurred significant losses and at September 30, 2007 had
an accumulated deficit of $(48,810,000). For the year ended December 31, 2006,
we incurred a net loss of $(1,952,000) and incurred a net loss of $(2,531,000)
for the nine months ended September 30, 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 achieved revenue of $181,000 from
our technology licensing business for the nine months ended September 30, 2007.
Our inability to consummate additional material license agreements and

achieve revenue from our patented technologies would have a material adverse
effect on our operations and our 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 the Remote Power Patent with certain agreed-upon potential
licensees. We have agreed to pay ThinkFire a fee of up to 20% of the royalty
payments received from license agreements consummated by ThinkFire on our
behalf.

In August 2007 we finalized the settlement of our patent infringement
litigation against 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 license our 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 paid us $100,000 upon signing the settlement
agreement. Notwithstanding the settlement and our license agreement with D-Link,
there is no assurance that we will achieve significant royalty revenue from
D-Link, that we will be able to achieve additional license agreements with third
parties relating to our Remote Power Patent or our other patents, or that such
license arrangements will result in material revenue to us.

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 for 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. Blank Rome LLP represented us on a
contingency basis with respect to our patent infringement lawsuit against D-Link
and is entitled to receive 25% of royalties received by us from D-Link after our
recovery of out-of-pocket expenses. (See Note C- Commitments and Contingencies
to our Financial Statements). 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 its patent. Successful litigation against
us resulting in a determination that our Remote Power Patent is invalid would
have a material adverse effect on the Company.

RESULTS OF OPERATIONS

THREE MONTHS ENDED SEPTEMBER 30, 2007 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2006

We had revenues of $181,000 for the three months ended September 30, 2007
which were related to the settlement of our patent infringement litigation
against D-Link and the receipt of royalties from D-Link for the three months
ended September 30, 2007 pursuant to our license agreement with D-Link. The
Company had no revenues for the three months ended September 30, 2006.

We had a cost of royalties of $9,000 for the three months ended September
30, 2007 which was related to the payment of bonus compensation on the royalties
pursuant to agreement with our Chief Executive Officer. The gross profit for the
three months ended September 30, 2007 was $172,000 as compared to no gross
profit for the three months ended September 30, 2006.

General and administrative expenses include overhead expenses, and finance,
accounting, legal and other professional services incurred by us. General and
administrative expenses decreased by $104,000, from $404,000 for the three
months ended September 30, 2006 to $300,000 for the three months ended September
30, 2007 due primarily to decreased legal fees and costs.

We incurred an operating loss of ($195,000) for the three months ended
September 30, 2007 compared with an operating loss of ($459,000) for the three
months ended September 30, 2006. Included in the operating loss for the three
months ended September 30, 2007 was $67,000 in charges relating to non-cash
compensation expenses as compared to $54,000 for the three months ended
September 30, 2006. These losses were offset by interest earned of $61,000 and
$19,000 for the three months ended September 30, 2007 and September 30, 2006,
respectively.

No provision for or benefit from federal, state or foreign income taxes was
recorded for three months ended September 30, 2007 and September 30, 2006
because we incurred net operating losses and fully reserved our deferred tax
assets as their future realization could not be determined.

As a result of the foregoing, we incurred a net loss of $(134,000) for the
three months ended September 30, 2007 compared with a net loss of $(440,000) for
the three months ended September 30, 2006.

NINE MONTHS ENDED SEPTEMBER 30, 2007 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2006

We had revenues of $181,000 for the nine months ended September 30, 2007
which were related to the settlement of our patent infringement litigation
against D-Link and the receipt of royalties from D-Link for the nine months
ended September 30, 2007 pursuant to our license agreement with D-Link. We had
no revenues for the nine months ended September 30, 2006.

We had a cost of royalties of $9,000 for the nine months ended September
30, 2007 which was related to the payment of bonus compensation on the royalties
pursuant to agreement with out Chief Executive Officer. The gross profit for the
nine months ended September 30, 2007 was $172,000 as compared to no gross profit
for the nine months ended September 30, 2006.

General and administrative expenses include overhead expenses, and finance,
accounting, legal and other professional services incurred by us. General and
administrative expenses increased by $584,000, from $949,000 for the nine months
ended September 30, 2006 to $1,533,000 for the nine months ended September 30,
2007 primarily due to increased expenses incurred in connection with the D-Link
litigation.

We had an operating loss of $2,655,000 for the nine months ended September
30, 2007 compared with an operating loss of $1,105,000 for the nine months ended
September 30, 2006. Included in the operating loss for the nine months ended
September 30, 2007 was $1,294,000 in charges relating to non-cash compensation
expenses as compared to $156,000 for the nine months ended September 30, 2006.
These losses were offset by interest earned of $124,000 and $49,000 for the nine
months ended September 30, 2007 and September 30, 2006, respectfully.

No provision for or benefit from federal, state or foreign income taxes was
recorded for nine months ended September 30, 2007 and September 30, 2006 because
we incurred net operating losses and fully reserved our deferred tax assets as
their future realization could not be determined.

As a result of the foregoing, we incurred a net loss of $(2,531,000) for
the nine months ended September 30, 2007 compared with a net loss of
$(1,056,000) for the nine months ended September 30, 2006.

LIQUIDITY AND CAPITAL RESOURCES

We have financed our operations primarily from the sale of equity
securities. In April 2007, we completed a private offering of equity securities
resulting in gross proceeds of $5,000,000. 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. We anticipate, based on currently proposed plans and
assumptions, relating to our operations, that our cash and cash equivalents of
approximately $4,866,000 as of November 1, 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.

RISK FACTORS THAT MAY AFFECT FUTURE RESULTS

The Company operates in a highly competitive environment that involves a number
of risks, some of which are beyond our control. The following discussion
highlights the most material of the risks.

WE HAVE A HISTORY OF LOSSES AND MODEST REVENUE FROM CURRENT OPERATIONS.

We have incurred substantial operating losses since our inception, which has
resulted in an accumulated deficit of $(48,810,000) as of September 30, 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 nine months ended September
30, 2007, we incurred a net loss of $(2,531,000). 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 nine months ended September 30, 2007 the revenue was $181,000. Our ability
to achieve revenue and generate positive cash flow from operations is dependent
upon consummating licensing agreements with respect to our patented
technologies. In August 2007, as part of our settlement agreement pertaining to
our patent infringement litigation against D-Link Corporation and D-Link Systems
(collectively, "D-Link"), we entered into our first license agreement for our
Remote Power Patent with D-Link. (See Note E - Litigation to our Financial
Statements). We may not be successful in achieving additional 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 material 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 $4,866,000 at November 1,
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. We have only entered into one license agreement
with a third party with respect to our patented technology (See Note
E-"Litigation" to our Financial Statements). 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
sufficient 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 entered into only one license agreement with
respect to our Remote Power Patent as part of our settlement agreement with
D-Link. (See Note E-Litigation to our Financial Statements). Our inability to
consummate additional licensing agreements and achieve material 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 of up to 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.

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
Note E-Litigation to our Financial Statements). 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 MAY NOT RESULT IN SIGNIFICANT ROYALTIES AND DOES NOT
NECESSARILY MEAN WE WILL ACHIEVE ADDITIONAL LICENSE AGREEMENTS OR MATERIAL
REVENUE.

In August 2007 we finalized the settlement agreement with respect to our patent
litigation against D-Link Corporation and D-Link Systems, Incorporated pending
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 entered into a license agreement for our Remote Power Patent
the terms of which include monthly royalty payments of 3.25% of the net sales of
D-Link Power over Ethernet products, including those products which comply with
the IEEE 802.3af and 802.3at Standards, for the full life of the Remote Power
Patent, which expires in March 2020. The royalty rate will be 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 paid us $100,000 upon
signing of the Settlement Agreement. Notwithstanding the settlement and our
license agreement with the D-Link parties, there is no assurance that we will
achieve significant royalty revenue from D-Link, that we will be able to achieve
additional license agreements with third parties relating to our Remote Power
Patent or any of our other patents, or that such license arrangements 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 370,000 individual members in
approximately 160 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 material 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 Note D to the Financial Statements). 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 November 1, 2007, there are outstanding options and warrants to purchase
an aggregate of 12,280,857 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 material revenue 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.

SALES OF A SUBSTANTIAL NUMBER OF SHARES OF OUR COMMON STOCK MAY CAUSE THE PRICE
OF OUR COMMON STOCK TO DECLINE.

As of November 1, 2007, we have registered for resale 22,221,528 shares of our
common stock, including shares issuable upon exercise of outstanding options and
warrants. If our stockholders sell substantial amounts of our common stock in
the public market, including shares issued upon the exercise of outstanding
options and warrants, the market price of our common stock could fall. These
sales also may make it more difficult for us to sell equity or equity-related
securities in the future at a time and price that we deem reasonable or
appropriate.

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.

ITEM 3. CONTROLS AND PROCEDURES.

(a) Evaluation of Disclosure Controls and Procedures.

Our Chief Executive Officer and Chief Financial Officer have reviewed our
disclosure controls and procedures of the Company as of the end of the period
covered by this Quarterly Report on Form 10-QSB. Based upon this review, these
officers concluded that, as of the end of the period covered by this Quarterly
Report on Form 10-QSB, our disclosure controls and procedures are effective to
ensure that information required to be disclosed by us in the reports we file or
submit under Securities Exchange Act of 1934 is recorded, processed, summarized
and reported, within the time periods specified in applicable rules and forms
and is accumulated and communicated to management, including our Chief Executive
Officer and Chief Financial Officer, to allow timely decisions regarding
required disclosure.

(b) Changes in Internal Controls.

There were no significant changes in our internal controls over financial
reporting that have materially affected, or are reasonably likely to materially
affect these controls, or in other factors that could significantly affect these
controls during the last fiscal quarter included in this report or from the end
of the reporting period to the date of this Quarterly Report on Form 10-QSB.

PART II. OTHER INFORMATION

ITEM 1: LEGAL PROCEEDINGS

In August 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. 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 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 our Remote Power Patent.

In August 2007, we finalized the settlement of our patent infringement
litigation against D-Link. Under the terms of the settlement, D-Link entered
into a license agreement for our Remote Power Patent the terms of which include
monthly royalty payments of 3.25% of the net sales of D-Link Power over Ethernet
products, including those products which comply with the IEEE 802.3af and
802.3at Standards, for the full term of our 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 paid us $100,000 upon signing of the Settlement
Agreement.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

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

None.

ITEM 5. OTHER INFORMATION.

None.

ITEM 6. EXHIBITS

(a) Exhibits

31.1 Controls and Procedure Certification of Chief Executive Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2 Controls and Procedure Certification of Chief Financial Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1 Certification of Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.

32.2 Certification of Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.

SIGNATURES

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

NETWORK-1 SECURITY SOLUTIONS, INC.

BY: /S/ COREY M. HOROWITZ
------------------------------
COREY M. HOROWITZ
CHAIRMAN AND CHIEF EXECUTIVE OFFICER

BY: /S/ DAVID C. KAHN
------------------------------
DAVID C. KAHN
CHIEF FINANCIAL OFFICER

DATE: NOVEMBER 14, 2007

EXHIBIT 31.1
------------

CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C.SS.1350)

I, Corey M. Horowitz, Chairman and Chief Executive Officer of Network-1 Security
Solutions, Inc. (the "Registrant"), certify that:

1. I have reviewed this report on Form 10-QSB of the Registrant;

2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the Registrant as of, and for, the periods presented in this report;

4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f) for the Registrant and have:

(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
Registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;

(c) Evaluated the effectiveness of the Registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the Registrant's internal
control over financial reporting that occurred during the Registrant's
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the Registrant's internal
control over financial reporting; and

5. The Registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the Registrant's auditors and the audit committee of the Registrant's board
of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the Registrant's ability to
record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
control over financial reporting.

DATE: NOVEMBER 14, 2007 /S/ COREY M. HOROWITZ
--------------------------
COREY M. HOROWITZ
CHAIRMAN AND CHIEF EXECUTIVE OFFICER

EXHIBIT 31.2
------------

CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C.SS.1350)

I, David C. Kahn, Chief Financial Officer of Network-1 Security Solutions, Inc.
(the "Registrant"), certify that:

1. I have reviewed this report on Form 10-QSB of the Registrant;

(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
control over financial reporting.

DATE: NOVEMBER 14, 2007 /S/ DAVID C. KAHN
--------------------------
DAVID C. KAHN
CHIEF FINANCIAL OFFICER

EXHIBIT 32.1
------------

CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. SS. 1350)

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. ss. 1350),
the undersigned, Corey M. Horowitz, Chief Executive Officer and Chairman of
Network-1 Security Solutions, Inc., a Delaware corporation (the "Company"), does
hereby certify to his knowledge, that:

The Quarterly Report of Form 10-QSB for the quarter ended September 30, 2007 of
the Company (the "Report") fully complies with the requirements of Section 13(a)
or 15(d) of the Securities Act of 1934, and the information contained in the
Report fairly presents, in all material respects, the financial condition and
results of operations of the Company.

/S/ COREY M. HOROWITZ
------------------------------------
CHIEF EXECUTIVE OFFICER AND CHAIRMAN
NOVEMBER 14, 2007

EXHIBIT 32.2
------------

CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. SS. 1350)

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. ss. 1350),
the undersigned, David C. Kahn, Chief Financial Officer of Network-1 Security
Solutions, Inc., a Delaware corporation (the "Company"), does hereby certify to
his knowledge, that:

/S/ DAVID C. KAHN
-----------------------
CHIEF FINANCIAL OFFICER
NOVEMBER 14, 2007