UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~December~~March 31, ~~2011~~2012

¨☐ 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: 001-14753

NETWORK 1 FINANCIAL GROUP, INC.

(Exact Name of Registrant as specified in its charter)

Delaware		11-3423157
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

2 Bridge Avenue, 4thFloor

Red Bank, NJ 07701

(Address of principal executive offices)

(732) 758-9001

(Registrant’s telephone number)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 þ ☑; NO ¨☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ~~YES ¨ NO ¨~~

YES☐ NO☐

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨☐ Accelerated filer ¨☐ Non-accelerated filer ¨☐ Smaller reporting company þ☑

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ~~YES ¨ NO þ~~

~~As of November 10, 2011, the Registrant had 48,635,057 shares of its Common Stock, $.001 par value, outstanding.~~YES☐¨ NO☐

As of May 11, 2012, the Registrant had 56,560,057 shares of its Common Stock, $.001 par value, outstanding.

NETWORK 1 FINANCIAL GROUP, INC.

FORM 10-Q

~~DECEMBER~~March 31, ~~2011~~2012

TABLE OF CONTENTS

		~~Page~~	Page
PART I – FINANCIAL INFORMATION		1		1
ITEM 1.	CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)	1		1
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	2		2
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	5		5
ITEM 4T.	CONTROLS AND PROCEDURES	5
ITEM 4.	CONTROLS AND PROCEDURES			5
PART II – OTHER INFORMATION		6		6
ITEM 1.	LEGAL PROCEEDINGS	6		6
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	6		6
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	6		6
ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	6
ITEM 5.	OTHER INFORMATION			6
ITEM 5.	OTHER INFORMATION	6
ITEM 6.	EXHIBITS			6
ITEM 6.	EXHIBITS	6
SIGNATURES				7
SIGNATURES		7

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

Index to Consolidated Financial Statements

Condensed Consolidated Statement of Financial Condition			F–1

Condensed Consolidated Statements of Operations			F–2

Condensed Consolidated Statement of Equity			F–3

Condensed Consolidated Statement of Cash Flows			F–4

Notes to Condensed Consolidated Financial Statements			F–5

NETWORK 1 FINANCIAL GROUP, INC. AND SUBSIDIARIES

NETWORK 1 FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
March 31, 2012 (unaudited) and June 30, 2011

	MARCH	JUNE
	2012	2011
	(unaudited)
ASSETS
Cash	$ 79,993	$ 58,856
Commission Receivable from Clearing Firm	90,130	78,021
Notes Receivable from affiliates	40,302	59,002
Deposit with clearing organization	317,682	345,137
Due from Affiliates	9,934	45,482
Advances to Registered Representatives: net of reserve
for uncollectible accounts of $ 90,100 and $90,000 respectively	79,981	70,231
Securities held for resale, at market	95,089	83,415
Property and Equipment, net	23,516	17,935
Other Assets	27,000	27,000
TOTAL ASSETS:	$ 763,627	$ 785,079

LIABILITIES AND EQUITY
LIABILITIES
Line of Credit	$ 30,000	$ 30,000
Notes Payable	92,976	4,088
Due to Affiliates	2,840	-
Commissions Payable	158,193	78,943
Capital Leases payable	11,763	18,588
Accounts Payable, accrued expenses and other liabilities	167,651	173,923

TOTAL LIABILITIES	463,423	305,542

Commitments and Contingencies

EQUITY
Common Stock, $.001 par value;
100,000,000 shares authorized; 56,560,057 and 55,560,057 issued and
48,635,057 and 47,635,057 outstanding at March 31, 2012 and June 31, 2011	56,560	55,560
Additional Paid In Capital	2,059,888	2,022,888
Treasury Stock at cost; 7,925,000 shares	(5,129)	(5,129)
Accumulated deficet	(2,113,115)	(1,808,782)
Stock Subscribed	87,000	-
Total stockholders equity	85,204	264,537
Non-controlling interest	215,000	215,000
TOTAL EQUITY	300,204	479,537

TOTAL LIABILITIES AND EQUITY	$ 763,627	$ 785,079

(the accompanying notes are an integral part of these unaudited condensed consolidated financial statements)

CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION

December 31, 2011 (unaudited) and June 30, 2011

	DECEMBER			JUNE
	2011			2011
	(unaudited)
ASSETS
Cash	$	7,759		$	58,856
Commission Receivable from Clearing Firm		63,036			78,021
Note Receivable Network 1 Financial Advisors Inc.		44,600			59,002
Deposit with clearing organization		325,382			345,137
Due from Affiliates		12,183			45,482
Advances to Registered Representatives: net of reserve
for uncollectible accounts of $90,000.		79,982			70,231
Securities held for resale, at market		83,574			83,415
Property and Equipment, net.		26,532			17,935
Other Assets		27,000			27,000
TOTAL ASSETS:	$	670,048		$	785,079
LIABILITIES AND EQUITY
LIABILITIES
Line of Credit	$	30,000		$	30,000
Notes Payable		9,245			4,088
Commissions Payable		95,395			78,943
Capital Leases payable		14,048			18,588
Accounts Payable, accrued expenses and other liabilities		166,315			173,923
		-
TOTAL LIABILITIES		315,003			305,542
Commitments and Contingencies
EQUITY
Common Stock, $.001 par value;					-
100,000,000 shares authorized; 56,560,057 and
55,560,057 issued and 48,635,054 and 47,635,057 outstanding, respectively.		56,560			55,560
Additional Paid In Capital		2,055,538			2,022,888
Treasury Stock at cost; 7,925,000 shares		(5,129	)		(5,129	)
Accumulated deficit		(2,058,274	)		(1,808,782	)
Common stock subscribed		87,000			-
Total stockholders equity		140,045			264,537
Non-controlling interest		215,000			215,000
TOTAL EQUITY		355,045			479,537
TOTAL LIABILITIES AND EQUITY	$	670,048		$	785,079

(the accompanying notes are an integral part of these unaudited condensed consolidated financial statements)

F-1

NETWORK 1 FINANCIAL GROUP, INC. AND SUBSIDIARIES

NETWORK 1 FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND NINE MONTHS ENDED MARCH 31, 2012 AND 2011
(unaudited)

	For The Three Months Ended		For The Nine Months Ended
	March 31,		March 31,
	2012	2011	2012	2011
Revenues:
Commissions	$ 338,796	$ 266,290	$ 1,075,986	$ 663,028
Net dealer inventory gains	46,439	(170,625)	218,111	154,075
Investment banking	107,250	99,262	211,850	227,425
Interest and Dividends	1,617	5,875	9,531	18,973
Transfer fees and clearing services	599	4,827	599	11,460
Investment advisory	109,795	93,377	251,373	478,493
Other	2,000	26,450	2,335	62,950
Total Revenue	606,496	325,456	1,769,785	1,616,404

Operating Expenses:
Commissions	304,833	534,247	824,981	699,717
Compensation and Related Expenses	187,393	220,751	570,409	758,212
Clearing Fees	13,894	41,788	101,907	141,936
Communications and data processing	29,099	44,031	84,308	117,184
Interest	580	609	1,745	4,683
Occupancy and related expenses	26,189	54,616	95,161	150,684
Office Expenses	44,466	24,371	159,423	133,001
Professional Fees	51,865	57,774	228,162	255,370
Depreciation	3,018	-	8,022	3,879
Total Operating Expenses	661,337	978,187	2,074,118	2,264,666

Loss from Operations	(54,841)	(652,731)	(304,333)	(648,262)

Other Income (expenses)
Gain (Loss) on change in derivative liability	-	8,541	-	21,723
Total Other Income (expenses)	-	8,541	-	21,723
				-
Net loss	(54,841)	(644,190)	(304,333)	(626,539)

Loss/Income attributable to non-controlling interest	-	-		-

Net loss attributable to common shareholders	$ (54,841)	$ (644,190)	$ (304,333)	$ (626,539)

Loss per common share (basic and diluted)	$ (0.001)	$ (0.016)	$ (0.006)	$ (0.019)

Weighted average common shares outstanding	48,635,057	41,228,408	48,616,875	32,435,075

(the accompanying notes are an integral part of these unaudited condensed consolidated financial statements)

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

THREE AND SIX MONTHS ENDED DECEMBER 31, 2011 and 2010

(unaudited)

	For The Three Months Ended					For The Six Months Ended
	December 31,					December 31,
	2011			2010		2011			2010
Revenues:
Commissions	$	388,023		$	226,950	$	737,190		$	396,738
Net dealer inventory gains		162,550			178,412		171,672			324,700
Investment banking		101,600			29,100		104,600			128,163
Interest and Dividends		1,769			6,208		7,914			13,098
Transfer fees and clearing services		-			-		-			6,633
Investment advisory		66,629			277,341		141,578			385,116
Other		-			25,500		335			36,500
Total Revenue		720,571			743,511		1,163,289			1,290,948
Operating Expenses:
Commissions		351,103			78,084		520,148			165,470
Compensation and Related Expenses		206,693			283,975		383,016			537,461
Clearing Fees		39,682			52,919		88,013			100,148
Communications and data processing		26,493			39,868		55,209			73,153
Interest		578			676		1,165			4,074
Occupancy and related expenses		46,928			54,315		68,972			96,068
Office Expenses		77,264			59,608		114,957			108,630
Professional Fees		80,954			82,215		176,297			197,596
Depreciation		2,446			1,719		5,004			3,879
Total Operating Expenses		832,141			653,379		1,412,781			1,286,479
(Loss) Income from Operations		(111,570	)		90,132		(249,492	)		4,469
Other Income
Gain on change in derivative liability		-			3,098		-			13,182
Total Other Income		-			3,098		-			13,182
Net (loss) Income		(111,570	)		93,230		(249,492	)		17,651
Loss/Income attributable to non-controlling interest		-			-					-
Net (loss) Income attributable to common shareholders	$	(111,570	)	$	93,230	$	(249,492	)	$	17,651
(Loss) Income per common share (basic and diluted)	$	(0.002	)	$	0.002	$	(0.005	)	$	0.002
Weighted average common shares outstanding		56,058,427			40,360,057		50,144,568			40,360,057

(the accompanying notes are an integral part of these unaudited condensed consolidated financial statements)

F-2

NETWORK 1 FINANCIAL GROUP, INC. and SUBSIDIARIES

NETWORK 1 FINANCIAL GROUP, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF EQUITY
For the nine months ended March 31, 2012
(Unaudited)
						Common
			Additional	Treasury	Accumulated	Stock	Non-Controlling
	Common Stock		paid-in-capital	Stock	Defecit	Subscribed	interest	Total
	Shares	Amount


Balance - June 30, 2011	55,560,057	$ 55,560	$ 2,022,888	$ (5,129)	$ (1,808,782)	$ -	$ 215,000	$ 479,537

Sale of common stock						87,000		87,000

Stock issued for services	1,000,000	1,000	37,000					38,000

Net loss					(304,333)			(304,333)

Balance - March 31, 2012	56,560,057	$ 56,560	$ 2,059,888	$ (5,129)	$ (2,113,115)	$ 87,000	$ 215,000	$ 300,204


(the accompanying notes are an integral part of these unaudited condensed consolidated financial statements)

CONDENSED CONSOLIDATED STATEMENT OF EQUITY

For the six months ended December 31, 2011

(Unaudited)

	Common Stock				Additional paid-in-capital		Treasury Stock			Accumulated Deficit			Common Stock Subscribed		Non-Controlling interest		Total
	Shares		Amount
Balance - June 30, 2011		55,560,057	$	55,560	$	2,022,888	$	(5,129	)	$	(1,808,782	)	$	-	$	215,000	$	479,537
Sale of Common Stock														87,000				87,000
Shares issued for services		1,000,000		1,000		37,000								-				38,000
Net Loss											(249,492	)		-				(249,492	)
Balance - December 31, 2011		57,560,057	$	56,560	$	2,055,538	$	(5,129	)	$	(2,058,274	)	$	87,000	$	215,000	$	355,045

(the accompanying notes are an integral part of these unaudited condensed consolidated financial statements)

F-3

NETWORK 1 FINANCIAL GROUP, INC. AND SUBSIDIARIES.

NETWORK 1 FINANCIAL GROUP, INC. AND SUBSIDIARIES.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
For the Nine months ended March 31, 2012 and 2011
(unaudited)

		2012	2011

CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss attributable to common shareholders		$ (304,333)	$ (626,539)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		8,022	3,879
(Gain) Loss on change in derivative liability		-	(21,723)
Stock based compensation		2,000	248,000

Changes in operating assets and liabilities
Due from clearing organization		(12,109)	(80,178)
Securities held for resale, at market		47,396	10,662
Advances to/from registered representatives		(9,750)	(14,445)
Other assets		-	1,433
Due from affiliates		38,388	-
Due to clearing organization		27,455	325,301
Accounts Payable, accrued expenses & other Liabilities		108,979	537
	TOTAL ADJUSTMENTS	210,381	473,466

	NET CASH (USED IN) OPERATING ACTIVITIES	(93,952)	(153,073)

CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Equipment		(13,602)	(2,181)
	NET CASH (USED IN) INVESTING ACTIVITIES	(13,602)	(2,181)

CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of notes receivable		18,700	-
Advances from affiliated companies		-	20,395
Proceeds from sale of common stock		87,000	360,000
Proceeds (repayment) of Notes Payable		29,818	(5,972)
Repayment of line of credit		-	(25,000)
Repayment of capital lease		(6,827)	(5,210)
	NET CASH PROVIDED BY FINANCING ACTIVITIES	128,691	344,213

NET INCREASE IN CASH		21,137	188,959

CASH - Beginning of Period		58,856	2,635

CASH - End of Period		$ 79,993	$ 191,594

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during year
	Interest	$ 2,837	$ 4,682
	Income Taxes	$ 2,645	$ 2,726

(the accompanying notes are an integral part of these unaudited condensed consolidated financial statements)

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

For the six months ended December 31, 2011 and 2010

(unaudited)

	2011			2010
CASH FLOWS FROM OPERATING ACTIVITIES
Net (Loss) Income attributable to common shareholders		(249,492	)	$	17,651
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		5,004			3,879
(Gain) Loss on change in derivative liability		-			(13,182	)
Stock based compensation		2,000			-
Changes in operating assets and liabilities
Commission Receivable from Clearing Firm		14,985			(25,957	)
Due from clearing organization		19,755			325,352
Securities held for resale, at market		(159	)		(282,204	)
Advances to/from registered representatives		6,701			4,852
Other assets		-			28,059
Due to clearing organization		-			12,822
Accounts Payable, accrued expenses & other Liabilities		28,393			(21,136	)
TOTAL ADJUSTMENTS		76,679			32,485
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES		(172,813	)		50,136
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Equipment		(13,602	)		-
NET CASH (USED IN) INVESTING ACTIVITIES		(13,602	)		-
CASH FLOWS FROM FINANCING ACTIVITIES
Advances to affiliated companies		33,299			2,880
Advances from affiliated companies		-			(1,182	)
Proceeds from sale of common stock		87,000			-
Repayment of notes receivable		14,401			-
Repayment of Notes Payable		5,158			(2,168	)
Repayment of line of credit		-			(25,000	)
Repayment of capital lease		(4,540	)		(3,614	)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES		135,318			(29,084	)
NET (DECREASE) INCREASE IN CASH		(51,097	)		21,052
CASH - Beginning of Year		58,856			2,635
CASH - End of Year	$	7,759		$	23,687
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during year
Interest	$	1,165		$	4,074
Income Taxes	$	2,645		$	2,162

(the accompanying notes are an integral part of these unaudited condensed consolidated financial statements)

F-4

NETWORK 1 FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE ~~SIX~~NINE MONTHS ENDED ~~DECEMBER~~MARCH 31, ~~2011~~2012

(unaudited)

NOTE 1 – Basis of Presentation (Reverse Merger and Corporate Structure)

Network 1 Financial Securities, Inc. (“NETW”) was organized as a Texas corporation on March 15, 1983 and is registered as a broker-dealer with the Securities and Exchange Commission (SEC), the State of Texas and various other states. NETW is an introducing broker-dealer that clears all transactions with and for customers on a fully disclosed basis with a clearing broker. The accompanying unaudited condensed consolidated statement of operations for the six months ended December, 31 2011 consolidate the following variable interest entities (“VIEs”): Network 1 Financial Advisors, Inc, Network 1 Financial Assurance, Inc., National Financial Services Group, Inc. and Shark Rivers Investors, LLC through the companies merger date of June 9, 2009. As of December 31, 2011, none of the assets, liabilities and results of operations of the VIEs are included as part of the consolidation.

On June 9, 2009, NETW completed a merger transaction (the “Reverse Merger”) with International Smart Sourcing, Inc. (“ISSI”), an inactive publicly registered shell corporation with no significant assets or operations. ISSI was incorporated in February 1998 in Delaware. As a result of the Reverse Merger, NETW became a wholly owned subsidiary of ISSI and the current assets of NETW were merged with ISSI. ~~NETW’s shareholders acquired control of ISSI.~~

Upon completion of the Reverse Merger transaction, ISSI changed its name to Network 1 Financial Group, Inc. (the “Company”).

All references to Common Stock, share and per share amounts have been retroactively restated to reflect the exchange ratio of 17.16 shares of ISSI’s Common Stock for one (1) share of the acquirer's Common Stock outstanding immediately prior to the Reverse Merger, as if the exchange had taken place as of the beginning of the earliest period presented.

The accompanying unaudited condensed consolidated financial statements present on a consolidated basis the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

The accompanying unaudited condensed consolidated financial statements for the ~~six~~nine month periods ended ~~December~~March 31, ~~2011~~2012 and ~~2010~~2011 have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission, including Form 10-Q and Regulation S-X. The information furnished herein reflects all adjustments (consisting of normal recurring accruals and adjustments) which are, in the opinion of management, necessary to fairly present the operating results for the respective periods. Certain information and footnote disclosures normally present in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America ~~have~~ have been omitted pursuant to such rules and regulations. The Company believes that the disclosures provided are adequate to make the information presented not misleading. These financial statements should be read in conjunction with the audited financial ~~statements~~ statements and explanatory notes for the year ended June 30, 2011 as disclosed in the Company's 10-K for that year, as filed with the SEC~~, as it may be amended~~.

The results of the ~~six~~nine months ended ~~December~~March 31, ~~2011~~2012 are not necessarily indicative of the results to be expected for the pending full year ending June 30, 2012

F-5

NETWORK 1 FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE ~~SIX~~NINE MONTHS ENDED ~~DECEMBER~~MARCH 31, ~~2011~~2012

(~~unaudited~~Unaudited)

NOTE 2 - Summary of Significant Accounting Policies

Use of Estimates

The preparation of the unaudited condensed consolidated 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 the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Revenue Recognition

Customer security transactions and the related commission income and expense are recorded as of the trade date. Investment banking revenues include gains, losses, and fees, net of syndicate expenses, arising from securities offerings in which the Company acts as an underwriter or agent. Investment banking revenues also include fees earned from providing financial advisory services. Investment banking management fees are recorded on the offering date, sales concessions on the settlement date, and underwriting fees at the time the underwriting is completed and the income is reasonably determinable. Customers who are financing their transaction on margin are charged interest. The Company’s margin requirements are in accordance with the terms and conditions mandated by its clearing firm. The interest is billed on the average daily balance of the margin account.

Net dealer inventory gains result from securities transactions entered into for the account and risk of the Company. Net dealer inventory gains are recorded on a trade date basis. Investment advisory fees are account management fees for high net worth clients based on the amount of the assets under management. These fees are billed quarterly and recognized at such time that the service is performed and collection is probable.

The Company generally acts as an agent in executing customer orders to buy or sell listed and over-the-counter securities in which it does not make a market, and charges commissions based on the services the Company provides to its customers. In executing customer orders to buy or sell a security in which the Company makes a market, the Company may sell to, or purchase from, customers at a price that is substantially equal to the current inter-dealer market price plus or minus a mark-up or mark-down. The Company may also act as agent and execute a customer's purchase or sale order with another broker-dealer market-maker at the best inter-dealer market price available and charge a commission. Mark-ups, mark-downs and commissions are generally priced competitively based on the services it provides to its customers. In each instance the commission charges, mark-ups or mark-downs, are in compliance with guidelines established by ~~the~~ FINRA.

Marketable securities are carried at fair value, with changes in value included in the statement of income in the period of change. Fair value is generally determined by quoted market prices. Non-marketable securities are valued at fair value as determined by management.

F-6

NETWORK 1 FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE ~~SIX~~NINE MONTHS ENDED ~~DECEMBER~~MARCH 31, ~~2011~~ 2012

(~~unaudited~~Unaudited)

Fair Value of Financial Instruments

FASB requires that the Company disclose estimated fair values of financial instruments. The carrying amounts reported in the statement of financial position for current assets and current liabilities qualifying as financial instruments approximate fair value because of their short maturities.

In April 2009, the FASB issued provisions that require that companies also disclose the fair value of financial instruments during interim reporting periods similar to those that are currently provided annually. These pronouncements are effective for interim reporting periods ending after June 15, 2009.

On July 1, 2008, the Company adopted the provisions of Accounting Standard Codification (“ASC”) Topic 820, which defines fair value for accounting purposes, establishes a framework for measuring fair value and expands disclosure requirements regarding fair value measurements. The Company’s adoption of ASC 820 did not have a material impact on its condensed consolidated financial statements. Fair value is defined as an exit price, which is the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date. The degree of judgment utilized in measuring the fair value of assets and liabilities generally correlates to the level of pricing observability. Financial assets and liabilities with readily available, actively quoted prices or for which fair value can be measured from actively quoted prices in active markets generally have more pricing observability and require less judgment in measuring fair value. Conversely, financial assets and liabilities that are rarely traded or not quoted have less price observability and are generally measured at fair value using valuation methods that require more judgment. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency of the asset, liability or market and the nature of the asset or liability. The Company has categorized its financial assets and liabilities measured at fair value into a three level hierarchy in accordance with ASC 820.

Reclassifications

Certain reclassifications have been made in prior year’s financial statements to conform to classifications used in the current year.

F-7

NETWORK 1 FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE ~~SIX~~NINE MONTHS ENDED ~~DECEMBER~~MARCH 31, ~~2011~~2012

(~~unaudited~~Unaudited)

Reclassifications

Certain reclassifications have been made in prior year’s financial statements to conform to classifications used in the current year.

NOTE 3 - Recent Accounting Pronouncements

Management does not believe there are any issued, but not yet effective, accounting standards if currently adopted which would have a material effect on the accompanying unaudited condensed consolidated financial statements.

NOTE 4 - Securities Owned and Securities Sold, But Not Yet Purchased, At Market

The following table shows the market values of the Company's investment securities owned and securities sold, but not yet purchased as of ~~December~~March 31, ~~2011~~2012 and June 30, 2011, respectively:

	December 31, 2011			June 30, 2011
	March 31, 2012		June 30, 2011
	Owned			Owned
Securities:	Owned		Owned
	$	8395,~~574~~089	$	$83,415	~~83,415~~

F-8

NETWORK 1 FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE ~~SIX~~NINE MONTHS ENDED ~~DECEMBER~~MARCH 31, ~~2011~~2012

(~~unaudited~~Unaudited)

NOTE 5 - Due from Clearing Organization

The following represents amounts on deposit with the Company’s former clearing broker, Southwest Securities, Inc. (“Southwest”) and Legent Clearing LLC (“Legent”) ~~with~~for the 9 months ending March 31, 2012 in the Company’s clearing broker inventory account:

	December 31, 2011		June 30, 2011
	March 31, 2012		June 30, 2011
Cash	$	~~268~~224,~~570~~495	$	275,380
Marketable securities		5693,~~812~~187		69,757
Total	$	~~325~~317,~~382~~682	$	345,137
Less: securities sold short		-		-
Total due from clearing organization	$	325,382	$	345,137

The marketable securities are primarily comprised of corporate stocks. Marketable securities on deposit with Legent as of ~~December~~ March 31, ~~2011~~2012 and June 30, 2011 are reflected at fair value. The Company is required to maintain a deposit balance of $100,000 with Legent. Currently Southwest retains $14,495 in deposit and Legent ~~currently~~ currently retains $~~310~~303,000 in deposits for the firm.

For the ~~six~~nine months ending ~~December~~March 31, ~~2011~~2012 the Company used the services of Legent to clear its brokerage business. The Company ceased using Southwest Securities on August 13, 2010 and Legent commenced clearing on August 16, 2010. The Company incurred charges of approximately $4823,~~251~~086 and $9781,~~570~~527 for the three and ~~six~~nine months ended ~~December~~March 31, ~~2011~~2012 and approximately $2322,~~387~~813 with Southwest and $4961,~~252~~280 with Legent for the ~~six~~nine months ended ~~December~~March 31, 2011.

F-9

NETWORK 1 FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE ~~SIX~~NINE MONTHS ENDED ~~DECEMBER~~MARCH 31, ~~2011~~2012

(~~unaudited~~Unaudited)

NOTE 6 - Related Party Transactions

As of ~~December~~March 31, ~~2011~~2012 and June 30, 2011, due to (from) affiliated companies consisted of the following:

	December 31,		June 30,
	March 31,		June 30,
	2011		2011
	2012		2011
Network 1 Financial Advisors Inc.(a) (b)	$	47,900	$	67,095
Network 1 Financial Advisors Inc. (a) (b)	$	41,352	$	67,095
Network 1 Financial Assurance, Inc. (b)	$	-(2,840)	$	200
National Financial Services Group (b)	$	8,884	$	37,189

(a) Represents amounts due in the form of a promissory note from an affiliated company whose officers and shareholders are officers and shareholders’ of the Company.

(b) Represents amounts due ~~in the form of a promissory note~~ from an affiliated company whose officers and shareholders are officers and shareholders’ of the Company.

NOTE 7 - Line of Credit – Bank

The Company’s bank line of credit is payable on demand. The maximum amount the Company could borrow is $100,000. Indebtedness under the line of credit provides for interest at the bank’s prime rate, plus 1.0% (approximately 4.25% at ~~December~~March 31, ~~2011~~2012). As of ~~December~~ March 31, ~~2011~~2012 and June 30, 2011, the amount outstanding under this credit facility was $30,000 and $30,000 respectively. The Company is currently not in default of its line of credit with the bank.

Indebtedness under the credit agreement is collateralized by substantially all of the assets of the Company and an officers’ personal guarantee.

NOTE 8 -– ~~Notes~~Capital ~~Payable~~Lease Obligation

~~Notes~~The ~~payable~~Company ~~include~~has ~~settlement~~equipment ~~agreements~~under ~~entered~~a ~~into~~capital ~~with~~leases ~~FINRA~~ expiring in August 2012 and September ~~2010~~2015. The assets and ~~May~~liabilities ~~2010~~under ~~for~~the ~~monetary~~capital ~~sanctions~~lease ~~imposed~~are ~~against~~recorded at the ~~Company~~lower of the present value of the minimum lease payments or the fair value of the assets. AsThe assets are included in property and equipment and is amortized over the estimated life of ~~2011,~~the ~~notes~~assets. The interest rate under the lease is 6.60% and 6.89% and is imputed based on the lessor’s implicit rate of return. The Capital lease is payable ~~consists~~in monthly installments of ~~the~~$532 ~~following:~~and $214, including interest through August 2012 and September 2015.

	December 31, 2011		June 30,2011
Note payable to FINRA in monthly installments of $500 per month including interest at a rate of 6.25% through January 2012	$	824	$	3,264
Note payable to FINRA in monthly installments of $500 per month including interest at a rate of 6.25% through May 2013.		8,421		-
Note payable to FINRA in monthly installments of $500. per month including interest at a rate of 6.25% through August 2011		-		824
Total notes payable	$	9,245	$	4,088

Amortization of assets held under the capital lease is included in depreciation expense.

At March 31, 2012, annual minimum future lease payments under the capital lease are as follows:

March 31,	Amount

2013	$	5,129
2014		2,517
2015		2,517
2016		1,600

Total minimum lease payments	$	11,763

F-10

NETWORK 1 FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE ~~SIX~~NINE MONTHS ENDED ~~DECEMBER~~MARCH 31, ~~2011~~2012

(~~unaudited~~Unaudited)

NOTE 9 – ~~Capital~~Notes ~~Lease Obligation~~Payable

~~The~~On ~~Company~~January ~~has~~31, ~~equipment~~2012, ~~under~~the aCompany ~~capital~~borrowed ~~leases~~$59,070 ~~expiring~~from ina ~~August~~shareholder ~~2012~~by ~~and~~issuing ~~September~~a ~~2015.~~three ~~The~~(3) ~~assets~~year ~~and~~non-interest ~~liabilities~~bearing, ~~under~~non-recourse ~~the~~promissory ~~capital~~note ~~lease~~maturing ~~are~~on ~~recorded~~February at1, ~~the~~2015 ~~lower~~at ofa ~~the~~face ~~present value~~ of ~~the~~$100,000. ~~minimum~~The ~~lease~~note ~~payments~~will oraccrue ~~the~~36 ~~fair~~equal ~~value~~payments of ~~the assets~~$1,136.95 ~~The~~until ~~assets are included in property and equipment and is amortized over~~ the ~~estimated~~February ~~life~~1, ~~of the assets~~2015. The ~~interest~~firm ~~rate~~also ~~under~~will ~~the~~issue ~~lease~~to isthe ~~6.60%~~investor ~~and~~500,000 warrants ~~6.89%~~to ~~and~~purchase ~~is imputed based on~~ the ~~lessor~~Company’s ~~implicit~~ ~~rate~~common ofstock ~~return~~at $0.10 ~~The~~per ~~Capital~~share ~~lease~~expiring isFebruary ~~payable in monthly installments of $532 and $210~~1, ~~including interest through August 2012 and September~~ 2015.

~~Amortization~~On ofMarch ~~assets~~31, ~~held~~2012, ~~under~~ the ~~capital~~Company ~~lease~~borrowed is$25,000 ~~included~~from an officer inby ~~depreciation~~issuing ~~expense~~a promissory note maturing on March 23, 2013. The promissory note bears interest at 5%.

AtNotes ~~December~~payable ~~31,~~include ~~2011,~~settlement ~~annual~~agreements ~~minimum~~entered ~~future~~into ~~lease~~with ~~payments under~~FINRA in September 2010 and May 2010 for monetary sanctions imposed against the ~~capital~~Company. ~~lease~~As ~~are~~of asMarch ~~follows~~31, 2012 and June 30, 2011, notes payable consists of the following:

June 30,	Amount
	March 31, 2012		June 30, 2011
2012	$	4,897
Promissory Note - Officer	$	25,000	$	-
2013		2,517
Promissory Note - Shareholder		61,344
2014		2,517
Note payable to FINRA in monthly installments of $500 per month including interest at a rate of 6.25% through January 2012		-		3,264
2015		2,517
Note payable to FINRA in monthly installments of $500 per month including interest at a rate of 6.25% through May 2013.		6,632		-
2016		1,600
Note payable to FINRA in monthly installments of $500. per month including interest at a rate of 6.25% through August 2011		-		824
Total minimum lease payments	$	14,048
Total notes payable	$	92,976	$	4,088

NOTE 10 – Capital Stock.

We are authorized to issue 100,000,000 shares of common stock with a par value of $.001 per share.

On March 4, 2011, the Company issued 9,000,000 million shares of $0.001 par value Company common stock to an accredited investor. As consideration for such shares, the investor paid $360,000 in cash.

On July 6, 2011 we issued an aggregate of 900,000 shares of common stock for previously accrued services valued at $36,000 based on the value of the stock at the time of issuance.

On July 6, 2011 the Company issued 100,000 shares of $0.001 par value common stock to a Company director. The services were valued at $2,000 based on the value of the stock at the time of issuance.

On October 28, 2011, the Company authorized the issuance of 4,350,000 share of $0.001 par value common stock valued at $0.02 to an investor for $87,000. As of ~~December~~May 3114, ~~2011~~2012 the authorized stock has not been issued and is listed under Common Stock Subscribed.

F-11

NETWORK 1 FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE ~~SIX~~NINE MONTHS ENDED ~~DECEMBER~~MARCH 31, ~~2011~~2012

(unaudited)

NOTE 11 - Net Capital Requirements

Network 1 Financial Securities, Inc. (“NETW”) is a registered broker-dealer and is subject to the SEC’s Uniform Net Capital Rule 15c3-1. This requires that NETW maintain minimum net capital of $100,000 and also requires that the ratio of aggregate indebtedness, as defined, to net capital, shall not exceed 15 to 1.

As of ~~December~~March 31, ~~2011~~2012 and June 30, 2011, NETW’s net capital exceeded the requirement by approximately $2161,~~514~~ 186 and $65,212, respectively.

Advances, dividend payments and other equity withdrawals are restricted by the regulations of the SEC, and other regulatory agencies are subject to certain notification and other provisions of the net capital rules of the SEC. NETW qualifies under the exemptive provisions of Rule 15c3-3 as NETW does not carry security accounts for customers or perform custodial functions related to customer securities.

NOTE 12 - Fair Value Measurements

The financial assets of the Company measured at fair value on a recurring basis are cash, due from clearing organization, marketable securities, derivatives and debt. The Company’s cash equivalents, due from clearing organization and marketable securities are generally classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency. The Company’s long-term investments, derivative liabilities and debt are classified within level 3 of the fair value hierarchy because they are valued using unobservable inputs, due to the fact that observable inputs are not available, or situations which there is little, if any, market activity for the asset or liability at the measurement date.

· Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical unrestricted assets or liabilities; · Level 2: Quoted prices in markets that are not active or inputs which are observable, either directly or indirectly , for substantially the full term of the asset or liability; or · Level 3: Prices or valuation techniques that require inputs that require inputs that are both significant to the fair value measurement and are unobservable.

·The ~~Level~~following 2:table ~~Quoted~~sets ~~prices~~forth inthe ~~markets~~Company’s ~~that~~short ~~are~~and ~~not~~long term ~~active~~investments oras ~~inputs~~of March 31, 2012, which are ~~observable~~measured at fair value on a recurring basis by level within the fair value hierarchy. As required, ~~either~~by ~~directly~~ASC or820 ~~indirectly~~(formerly SFAS No. 157), ~~for~~these ~~substantially~~are classified based on the ~~full~~lowest ~~term~~level of input that is significant to the fair ~~asset~~value ormeasurement ~~liability;~~(in orthousands):

· Level 3: Prices or valuation techniques that require inputs that require inputs that are both significant to the fair value measurement and are unobservable.

	Level 1		Level 2	Level 3		Total
Due from clearing organization	$	93,187	-		-	$	93,187
Securities owned, at market values		95,089	-		-		95,089
Total assets		188,276					188,276

The following table sets forth the Company’s short and long term investments as of December 31, 2011, which are measured at fair value on a recurring basis by level within the fair value hierarchy. As required, by ASC 820 (formerly SFAS No. 157), these are classified based on the lowest level of input that is significant to the fair value measurement:

	Level 1		Level 2		Level 3		Total
Due from clearing organization	$	254,485		-		-	$	254,485
Securities owned, at market values		83,574		-		-		83,574
	$	338,059		-		-	$	338,059

F-12

NOTE 13 - Subsequent Event

The company secured financing from a minority shareholder via a discounted note maturing on February 1, 2015 for a face amount of $100,000 the total proceeds received by the Company was $59,400 in marketable securities. The note will accrue in 36 equal increments. There is no prepayment penalty. The Company also issued 500,000 options/warrants to purchase its common stock for $0.10 per share expiring February 1, 2015.

F-13

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

Some of the statements contained in this Quarterly Report on Form 10-Q, which are not purely historical, are forward-looking statements, including, but not limited to, statements regarding the Company’s objectives, expectations, hopes, beliefs, intentions or strategies regarding the future. In some cases, you can identify forward-looking statements by the use of the words “may,” “will,” “should,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” or “continue” or the negative of those terms or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, our actual results could differ materially from those disclosed in these statements due to various risk factors and uncertainties affecting our business. We caution you not to place undue reliance on these forward-looking statements. We do not assume responsibility for the accuracy and completeness of the forward-looking statements and we do not intend to update any of the forward-looking statements after the date of this report to conform them to actual results. You should read the following discussion in conjunction with our financial statements and related notes included elsewhere in this report. For a more complete understanding of our industry, the drivers of our business and our current period results, you should read the following Management’s Discussion and Analysis of Financial Condition and Results of Operation in conjunction with the audited financial statements and notes thereto set forth in our Annual Report on Form 10-K for the year ended June 30, ~~2010~~2011and ~~and~~ our other filings with the SEC.

OVERVIEW

On June 9, 2009, the Company (then known as “International Smart Sourcing, Inc.” or “ISSI”) closed certain transactions contemplated in a certain Stock Purchase Agreement dated as of March 26, 2009 (the “Agreement”) which we entered into with Network 1 Financial Securities, Inc., a privately held Texas corporation (“NETW”), and certain former shareholders of NETW. At the closing, we acquired 1,250,528 shares, or approximately 97.55%, of common stock of NETW outstanding on such date (the “Reverse Merger”). In accordance with the terms of the Agreement, we issued 21,460,622 shares of our common stock to the former shareholders of NETW, in exchange for the acquisition, by the Company, of approximately 97.55% of the outstanding common shares of NETW.

As of the closing date, the former shareholders of NETW held approximately 66% of the issued and outstanding common shares of the Company. The issuance of the 21,460,622 common shares to the former shareholders of NETW was deemed to be a reverse acquisition for accounting purposes, by ISSI of NETW, as NETW will control the post-merged company. Accordingly, NETW, the accounting acquirer entity, is regarded as the predecessor entity as of June 9, 2009.

Upon the completion of the Reverse Merger, we became the ultimate parent company of NETW and we changed our name from “International Smart Sourcing, Inc.” to “Network 1 Financial Group, Inc.” (“NETW Group,” the “Company,” “we,” “us,” or “our”).

During the quarter ended ~~December~~March 31, ~~2011~~2012, we had aan increase in ~~our~~ our investment banking fees, aan ~~decrease~~increase in ~~interest~~investment ~~and~~advisory ~~dividends~~consulting fees. In the same period, we ~~experienced~~had an increase in commission income~~, a decrease in net dealer inventory gains investment and investment advisory fees~~. . The increase in investment banking fees was attributable to anthe ~~increase~~increased infees ~~private~~paid ~~placement~~to ~~activity.~~us ~~The~~by ~~firm’s~~investment ~~net~~banking clients ~~dealer~~versus ~~inventory~~the ~~gains~~same ~~showed~~period ain ~~decrease~~2011 Our ~~which offset~~investment ~~the~~advisory fees showed an increase resulting infrom ~~commission’s~~greater ~~income.~~investment banking fees earned. The ~~decrease~~increase in advisory consulting fees was due to ~~less~~an ~~fees~~increase ~~paid~~number ~~in stock~~ of ~~the~~ ~~client~~ companies seeking our services. The increase in commissions earned in NETW’s daily transaction business was due primarily to aan increase in ~~greater~~activity and commissions ~~received~~charged ~~from~~to NETW’s retail clients. The ~~decrease~~increase in trading profits was due to increased market volatility. and mark to market pricing of securities held. Overall, we experienced a ~~loss~~decrease in losses in the quarter ended ~~December~~March 31, ~~2011~~ 2012 compared to the same period in the prior year.

We had a loss from operations of approximately $~~111~~54,~~570~~841 for the ~~quarter~~ quarter ended ~~December~~March 31, ~~2011~~2012 , which represents an decrease of $~~204~~597,~~800~~890 over our ~~profit~~net loss of $93652,~~230~~731 in the same period in the prior year. This decrease in ~~profit~~loss was primarily due to anincreased ~~decrease~~revenues, indecreased ~~payment of~~operating ~~fees~~expenses, inwhich ~~the~~consisted ~~form~~ of ~~stock~~lower ofcommissions ~~client~~paid, lower ~~companies~~compensation and ~~the~~related ~~decrease in the market value of the client companies stock, an increase in operating~~ expenses, ~~which~~lower ~~consisted~~clearing ~~of higher commissions paid~~fees, ~~decrease~~lower in professional fees, ~~decrease~~lower incommunications ~~interest~~and ~~expense~~data processing, offset by ~~increases~~an increase in office expenses. Management continues to seek income stabilization from consulting and investment banking fees as well as by reducing its exposure to market positions. Management believes that in order to expand its ~~marketing~~ marketing and recruitment of experienced registered representatives it will need to seek additional sources of funding.

Critical Accounting Policies and Estimates

Our discussion and analysis of financial condition and results of operations are based upon the unaudited condensed consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles as recognized in the United States of America. The preparation of these financial statements requires that we make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that management believes to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. For a complete description of accounting policies, see Note 2 to our financial statements included in our Form 10-K for the year ended June 30, 2011. There were no significant changes in critical accounting estimates.

Results of Operations

For the ~~six~~nine months ended ~~December~~March 31, ~~2011~~2012 compared to the ~~six~~ nine months ended ~~December~~March 31, ~~2010~~2011

Revenues. Our consolidated income results for the ~~six~~nine months ended ~~December~~March 31, ~~2011~~2012 compared to the ~~six~~nine months ended ~~December~~March 31, ~~2010,~~2011 showed aan ~~decrease~~increase ~~in revenue~~ of $~~127~~153,~~659 or 10%~~381. Total revenue for the ~~six~~nine months ended ~~December~~March 31, ~~2011~~2012 was $ 1,~~163~~769,~~289~~785 versus $1,~~290~~616,~~948~~404 for the ~~six~~nine months ended ~~December~~ March 31, ~~2010~~2011.

~~The~~We ~~decrease~~experienced ~~in revenue for the six month period ended December 31, 2010 was due primarily to~~ an ~~decrease~~increase in ~~investment~~revenue ~~advisory fees~~ of $~~243,538 or 63% and a decrease of $~~153,~~028~~381, or 479% infor ~~net~~the ~~dealer~~nine ~~gains. We~~month ~~experienced~~period aended ~~decrease~~March in31, ~~revenues of $23~~2012,~~563~~ ~~or 18% from our investment banking business~~ compared to ~~our revenues in~~ the ~~corresponding~~nine ~~period~~months ended ~~December~~March 31, ~~2010 due to less private placement activity~~2011.

~~Operating~~The ~~Expenses.~~increase ~~Our~~in ~~consolidated~~revenue ~~operating expenses~~ for the ~~six~~nine month period ended ~~December~~March 31, 2012 ~~2011~~was ~~were~~due primarily to a increase of $1,412,~~782~~968 or ~~121~~62 %, ofin ~~revenue~~commissions ~~versus~~earned in transactions with customers and $164,~~286,479,~~036 orincrease in ~~99%,~~net ofdealer ~~revenue~~inventory gains. ~~This~~ ~~represents~~The an increase ofin ~~$126,303~~commissions orearned 10was %,attributed ~~over~~to higher commission received from customers. for the ~~corresponding~~nine ~~period~~months ended ~~December~~in March 31, ~~2010.~~2012 ~~The~~as ~~increase~~compared ~~was due~~ to anthe ~~increase~~nine inmonths ~~commission~~ended ~~expense~~March 31, 2011. The firm experienced an increase of $~~354~~64,~~678;~~036, ~~offset~~or by42% afor ~~reduction~~net ofdealer ~~clearing~~inventory ~~fees~~gains ofcompared ~~$12,135;~~to aour ~~reduction~~net ofdealer ~~interest expense~~inventory ofgains ~~$2,909;~~in athe ~~reduction~~nine months ofended ~~profession~~March ~~fees of $21~~31,~~299;~~ ~~decreases~~2011. ofThe ~~$154,445~~increase in ~~compensation~~commissions were attributed to increased transactions and ~~related~~higher ~~expenses~~paid ~~;an~~commissions ~~decrease~~by ofour ~~$17,944~~customers ~~for~~and ~~communication~~increased ~~and~~net ~~data~~dealer ~~processing~~inventory ~~and~~gains anwere ~~decrease~~due into ~~occupancy~~increased ~~and~~market ~~related~~volatility. ~~expenses~~This ofwas ~~$27,096~~offset ~~for~~by decreases ~~the~~in ~~six~~investment ~~months~~advisory ~~ended~~of ~~December 31~~$227,120 ~~2011~~or ~~compared~~47% toand ~~the~~decrease ~~corresponding~~in ~~period~~investment inbanking ~~December~~of 31$15,575 ~~2010~~or 7%.

~~The~~Operating ~~increase~~Expenses. inOur ~~commission~~consolidated ~~expense~~operating isexpenses for the nine month period ended March 31, 2012 were $2,074,118, or 117% of revenue versus $2,264,666, or 140% of revenue. This represents a decrease of $190,548 or 8%, over the corresponding period ended March 31, 2011. The decrease was due to ~~higher~~a reduction ~~commissions~~of compensation and related expenses of $187,803; a reduction in fees paid to professionals of $27,808, a reduction ~~charged~~of ~~for~~communication ~~retail~~and ~~customer~~data ~~transactions~~processing of $32,876 and a reduction of clearing expenses in the amount of $40,029. These decreases were offset by an increase of office expense of $26,421, an increase of commissions ~~paid~~of $125,264 for ~~capital~~the ~~placements~~nine months ~~for~~ended ~~client~~March ~~companies~~31, 2012 compared to the corresponding period in March 31, 2011.

~~Profit~~The ~~and~~increase ~~Loss. Our~~in ~~consolidated~~commission ~~loss~~expense ~~was~~is ~~$249,492 for~~due ~~the~~to ~~six~~increased ~~month~~commissions paid due ~~period~~to ~~ended~~higher ~~December~~commissions ~~31,~~earned in ~~2011~~the ~~compared~~nine tomonths aended ~~profit~~March ~~of $4~~31,~~469~~ ~~for~~2012. ~~the~~The ~~corresponding~~increase ~~period~~ in ~~2010. This represents~~office aexpenses ~~decrease~~is ofdue ~~$253,961~~primarily ~~for~~to ~~the~~increase ~~six~~costs ~~months~~associated ~~ended~~with ~~December~~travel ~~31,~~and ~~2011~~meeting ~~compared~~expense tofor the ~~same~~financial ~~period~~placements. The decrease in ~~2010.~~professional ~~The~~fees ~~loss~~ is ~~attributed~~due to ~~increase~~ inthe ~~commission~~hiring ~~expense~~of ~~and~~in-house ~~office expenses~~counsel.

~~For~~Profit and Loss. Our consolidated loss was $304,333 for the ~~three~~nine ~~months~~month period ended ~~December~~March 31, ~~2011compared~~2012 compared to a loss of $626,549, for the corresponding period in 2011. This represents ~~three~~a decrease in loss of $322,206 for the nine months ended ~~December~~March 31, ~~2010~~2012 compared to the same period in 2011.

~~Revenues. Total~~The ~~revenue for the three months ended December 31, 2010 was $720,571 versus $743,511 for the three months ended December 31, 2010. We experienced a~~ decrease in ~~revenue of~~losses ~~$22,940~~is ~~or 3~~attributed %,to ~~for~~higher ~~the~~revenue ~~three~~and ~~months~~increase in ~~ended~~commissions ~~December~~from ~~31,~~customer ~~2011 compared to the same period in 2010~~transactions.

~~The~~For ~~decrease in revenue for~~ the three ~~month~~months ~~period~~ ended ~~December~~ March 31, ~~2011~~2012 ~~was due primarily to a decrease in investment advisory fees of $210,712 or 76% and a reduction of $15,862 or 9%, in net dealer gains and $4,439 in interest and dividends~~ compared to the ~~same period in 2010. We experienced an increase of~~ ~~$72,500 or 249% in our investment banking fees, and an increase of $161,073 or 71% in commission income for the~~ three months ended ~~December~~ March 31, 2011 ~~compared to the same period in 2010. The increase was attributed to higher commissions receive from client transactions and an increase in private placement activity.~~

Revenues. Total revenue for the three months ended March 31, 2012 was $606,496 versus $325,456 for the three months ended March 31, 2011. We experienced an increase in revenue of $281,040, or 86%, for the three months ended March 31, 2012 compared to the same period in 2011.

~~Operating~~The ~~Expenses. Our~~increase ~~consolidated~~in ~~operating expenses~~revenue for the three month period ended March ~~December~~ 31, ~~2011~~2012 ~~were~~was ~~$832,142~~due orprimarily ~~115%~~to ofan ~~revenue~~increase ~~compared~~in tonet dealer inventory gains of $~~653~~217,~~379,~~064; orincrease ~~88%~~in investment banking fees of ~~revenue~~$7, ~~for~~988; and increase ~~the~~of ~~same~~$16,418 ~~period~~in investment advisory fees and increases in ~~2010,~~commissions ~~representing~~earned aon ~~increase~~transactions of $~~178~~16,~~763~~418, orcompared ~~27%,~~to the same period in 2011. The increase was ~~due~~attributed to more antransactions ~~increase~~and inthe ~~commissions~~hiring ~~payable~~ of ~~$273,019;~~additional anregistered representatives. The increase in ~~office~~investment ~~expenses~~banking offees ~~$17,656;~~earned was ~~offset~~attributed byto aincrease ~~reduction~~fees ofearned ~~compensation~~from anclosed ~~related~~financial ~~expensed~~placements. ofThe ~~$77,282;~~increase ain net dealer inventory gains is due ~~decrease~~to involatility ~~clearing~~and ~~fees~~mark to market of ~~$13,237~~securities held in account; athe ~~decrease~~increase in ~~professional~~investment advisory fees ofis ~~$1,261;a~~due ~~decrease~~to a increase in ~~communications~~fees ~~and~~earned ~~data~~from ~~processing of~~consulting. ~~$13,375;~~This was offset by a decrease in ~~occupancy~~interest and ~~related~~dividends ~~expenses~~of $74,~~387~~258; ~~for~~decrease ~~the~~in ~~three~~transfer ~~months~~fees and ~~ended~~clearing ~~December~~services 31of $4,229 ~~2011~~and ~~compared~~decrease toin ~~the~~other ~~same period~~income inof ~~2010~~$24,450.

~~The~~Operating ~~increase~~Expenses. Our inconsolidated ~~commission~~operating expenses ~~expense~~for isthe ~~due~~three tomonth ~~higher commissions~~period ~~received~~ended ~~from~~March ~~retail~~31, ~~customers~~2012 ~~and~~were a$661,337 ~~change~~or in109% ~~the~~of ~~mix~~revenue ofcompared ~~products~~to $978,186 ~~and~~, anor ~~increase~~300% inof ~~office~~revenue, for ~~expense~~the ~~due~~same ~~to expenses~~period ~~associated~~in ~~with~~2011, ~~the~~representing ~~hiring~~an decrease of ~~additional~~$316,850, ~~sales~~or ~~personnel~~32%. ~~This~~The decrease was ~~offset~~due byto aan decrease in ~~professional~~commission ~~fees~~expense of $229,414; ~~communications~~an decrease in compensation and related expenses of $33,858; and a decrease in communication and data processing expenses of $14,932; and a decrease in occupancy and related expenses of $28,427. Such decreased expenses were offset by an increase of $20,094 in office expense . for the three ~~months~~month ended ~~December~~March 31, 2012 compared to the same period in 2011 .

~~Profit~~The ~~and~~decrease ~~Loss Our~~was ~~consolidated~~due ~~loss~~to in ~~was~~part the award of securities in the amount of $~~111~~248,~~570, for~~000 to the ~~three~~new ~~months~~CEO ~~ended~~of ~~December~~the ~~31,~~firm. in January 2011,; ~~compared~~The todecreases ain ~~profit~~expenses were due to reduction of ~~$90~~clearing fees,~~132~~ ~~for~~lower ~~the~~interest ~~same~~rates ~~period~~as inwell ~~2010. This~~as ~~represents a~~lower ~~decrease~~balances ofowed ~~$201,702~~to ~~for~~the bank in the three ~~months~~month ended ~~December~~March 31, ~~2011,~~2012 compared to the same period in ~~2010~~2011.

Profit and Loss. Our consolidated loss was $54,841 for the three months ended March 31, 2011 compared to a loss of $652,731 before adjustment for the gain of $8,541 from the change in derivative liability, for the same period in 2011. This represents a decreased loss of $597,890 for the three months ended March 31, 20121, compared to the same period in 2011. The decrease in losses incurred were attributed to an decrease in commission expense, no stock awards, a decrease in compensation and related expenses and a decrease in occupancy and related expenses and a decrease in communications and data processing expenses.

LIQUIDITY AND CAPITAL RESOURCES

Our primary source of liquidity is cash generated from operations and from short-term financing arrangements. We had $779,~~759~~993 in cash ~~and~~ as of ~~December~~March 31, ~~2011~~2012.

We generated ~~negative~~a deficit in cash flow from operations of $~~172,813~~ 93,952 for the ~~six~~nine months ended ~~December~~March 31, ~~2011~~2012. Cash ~~comprised~~flows ~~primarily~~used ofby ~~cash~~investing ~~proceeds~~activities ~~from~~for the ~~receivables from Legent~~ nine months ended March 31, 2012 ~~Clearing~~were ~~LLC.~~$13,602 ~~Cash~~, and cash flows provided by financing activities for the ~~six~~nine months ended ~~December~~March 31, ~~2011~~2012 ~~were~~was $~~135~~ 128,~~318~~691 , comprised primarily of cash flows from sale of common stock and borrowings.

~~Our~~We ~~business~~believe ~~has~~that ~~experienced~~we ~~difficulty~~will have available resources to meet our liquidity inrequirements, ~~closing~~including ~~sufficient~~debt ~~investment~~service, ~~banking~~for ~~private~~the ~~placements~~next ~~due~~quarter. If our cash flow from operations is insufficient to ~~market~~ ~~conditions~~fund ~~subsequent~~our debt service and other obligations, we may be required to ~~December~~increase 31our borrowings, reduce or delay capital expenditures, and seek additional ~~2011~~capital or refinance our indebtedness. There ~~Accordingly~~can be no assurance, however, that we ~~are~~will ~~experiencing~~continue ~~liquidity~~to ~~and~~generate cash ~~flow~~flows at ~~problems~~or above current levels or that we will be able to maintain our ability to borrow under revolving credit facilities.

In the upcoming year, we plan to finance operations with working capital and external financing. We believe that we will need additional funds in the near term to finance operations and meet revenue, profitability, growth, diversification and other strategic goals for the foreseeable future. We expect to be able to procure financing upon reasonable terms in order to finance operations. However, if we are unable to do so, or if we do not meet anticipated future revenue goals, management is committed to taking actions necessary to ensure the conservation of adequate cash to continue to finance its operations.

Additional financing transactions may include the issuance of equity or debt securities, obtaining credit facilities, or other financing mechanisms. However, the trading price of our common stock and the downturn in the U.S. stock and debt markets could make it more difficult to obtain financing through the issuance of equity or debt securities. Further, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock. If additional financing is not available or is not available on acceptable terms, we will have to curtail our operations. The firm is currently reviewing its options due to its liquidity problems.4

Off Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that we are required to disclose pursuant to these regulations. In the ordinary course of business, we enter into operating lease commitments, purchase commitments and other contractual obligations. These transactions are recognized in our financial statements in accordance with generally accepted accounting principles in the United States.

Inflation

We believe that inflation has not had a material effect on our operations to date.

Recent Accounting Pronouncements

See Note 23 of the Unaudited Condensed Consolidated ~~Financial~~ Financial Statements for a full description of new accounting pronouncements, including the respective expected dates of adoption and effects on results of operations and financial condition.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended). Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were not effective as of ~~December~~March 31, ~~2011~~2012 due to the identification of of a material weakness. A material weakness is a control deficiency or combination of control deficiencies such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or ~~detected~~ detected on a timely basis.

To address the material weakness described below, we performed additional analysis and performed other procedures to ensure our financial statements were prepared in accordance with GAAP. Accordingly, management believes that the financial statements included in this Quarterly Report on Form 10-Q, fairly present, in all material aspects, our financial condition, results of operations and cash flows for the periods presented in accordance with GAAP.

The weakness, identified by management, related to the lack of necessary accounting resources to ensure consistently complete and accurate reporting of financial reporting. To mitigate the current limited resources and limited number of employees, we rely heavily on direct management oversight of transactions. As we grow, we expect to increase our number of employees, which will enable us to implement adequate segregation of duties within the internal control framework.

We believe that for the reasons described above, after we hire additional qualified in-house personnel, we will be able to improve our disclosure controls and procedures, remedy the material ~~weakness identified~~weaknesses identified above and provide reasonable assurance that assets are safeguarded from loss or unauthorized use, that transactions are recorded in accordance with GAAP under management’s directions, and that financial records are reliable to prepare financial statements. However, because of inherent limitations in all control systems, no evaluation can provide absolute assurance that all control issues and instances of fraud, if any, will be or have been detected.

(b) Changes in internal control over financial reporting

There were no changes in the Company’s internal control over financial reporting in the Company’s ~~first~~third fiscal quarter of the fiscal year ending June 30, ~~2011~~2012 covered by this Quarterly Report on Form 10-Q, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

WeOn ~~are~~March ~~not~~31, 2010, the Company, Richard Hunt, William Hunt, and an unaffiliated third party were sued in the Superior Court of New Jersey, Mercer County (Docket No. L-572-10) (the “Complaint”). The Complaint sought to ~~any~~recover ~~material~~$123,307 ~~legal~~of ~~proceedings~~unpaid attorney’s fees allegedly owed to Stark and Stark. The Complaint was reinstated on April 11, ~~nor~~2011. The Company retained counsel to ~~our~~represent ~~knowledge~~the Company and Messrs. Richard and Hunt in this matter. On May 6, 2011 the Company entered into a stipulation of agreement (the “Settlement”) with ~~are~~Stark ~~there~~and ~~any~~Stark ~~proceedings~~whereby ~~threatened~~the ~~against~~Company ushas agreed to pay Stark and Stark $68,999.07 in 18 monthly payments of $3,833.29, which Stark and Stark has agreed to accept as full and final payment. The firm made a payment of $11,499.87 (retroactive payment for February, March, April 2011) upon signing the Settlement and continues to make regular payments pursuant to the Settlement.

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

OnWe ~~October~~have ~~28,~~not ~~2011~~sold ~~the~~any ~~firm~~unregistered ~~sold~~equity ~~4,350,000~~securities ~~shares~~during ofthe ~~its common~~three-month ~~stock~~period tocovered anby ~~affiliated~~this ~~person,~~quarterly ~~for gross proceeds of $87,000~~report.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. ~~SUBMISSION~~(REMOVED OFAND ~~MATTERS TO A VOTE OF SECURITY HOLDERS~~RESERVED).

We have not submitted any matters to a vote of security holders during the three-month period covered by this quarterly report.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

Exhibits:
No.		Description
31.1		Rule 13a – 14(a)/15d – 14(a) Certification, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of 2002
31.2		Rule 13a – 14(a)/15d – 14(a) Certification, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of 2002
32.1		Certification of the Chief Executive Officer pursuant to 18 U.S.C. §Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002
32.2		Certification of the Chief Financial Officer pursuant to 18 U.S.C. §Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002

SIGNATURES

Pursuant to the requirements of Section 13(a) and 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

		NETWORK 1 FINANCIAL GROUP, INC.
February 21, 2012		/s/ Damon D Testaverde
May 16, 2012		/s/ Damon Testaverde
Date		Damon D Testaverde
		Chief Executive Officer, President
		Chief Executive Officer
February 21, 2012		/s/ William R. Hunt, Jr.
May 16, 2012		/s/ William R. Hunt, Jr.
Date		William R. Hunt, Jr.
		Interim Chief Financial Officer
		interim principal financial officer
		Interim Principal Financial Officer

EXHIBIT INDEX

Exhibit		Description
Exhibit No.		Description
31.1		Rule 13a – 14(a)/15d – 14(a) Certification, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of 2002
31.2		Rule 13a – 14(a)/15d – 14(a) Certification, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of 2002
32.1		Certification of the Chief Executive Officer pursuant to 18 U.S.C. §Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002
32.2		Certification of the Chief Financial Officer pursuant to 18 U.S.C. §Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002

Filing Compare · NETWORK 1 FINANCIAL GROUP, INC.