SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                    FORM 10-Q


              [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                For the quarterly period ended March 31, 2001

                                       OR

              [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                        For the transition period from to

                           Commission File No.: 1-5270

                              SOFTNET SYSTEMS, INC.
             (Exact name of registrant as specified in its charter)

              Delaware                                 11-1817252
   --------------------------------        ---------------------------------
   (State or other jurisdiction of        (I.R.S. Employer Identification No.)
     incorporation or organization)

650 Townsend Street, Suite 225, San Francisco, CA          94103
-------------------------------------------------      --------------
   (Address of principal executive offices)              (Zip Code)

Registrant's telephone number, including area code:  (415) 365-2500



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 X    No
                                       ---     ---

Indicate the number of shares  outstanding  of each of the  issuer's  classes of
common stock, as of the latest practicable date.




                   Class                     Outstanding at April 30, 2001
      -------------------------------        -----------------------------
       Common stock, $0.01 par value                   25,167,264
<PAGE>

                     SoftNet Systems, Inc. and Subsidiaries
                                      Index
                                                                            Page

PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements

         Condensed Consolidated Balance Sheets as of March 31, 2001
            and September 30, 2000............................................ 2

         Condensed Consolidated Statements of Operations for the three
            and six months ended March 31, 2001 and 2000...................... 3

         Condensed Consolidated Statements of Cash Flows for the six
            months ended March 31, 2001 and 2000.............................. 4

         Notes to Condensed Consolidated Financial Statements................. 5

Item 2.  Management's Discussion and Analysis of Financial Condition
         and Results of Operations........................................... 10

Item 3   Quantitative and Qualitative Disclosures About Market Risk.......... 16

PART II- OTHER INFORMATION

Item 1   Legal Proceedings................................................... 17

Item 2   Changes in Securities............................................... 17

Item 3   Defaults Upon Senior Securities..................................... 17

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

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

Item 6   Exhibits and Reports on Form 8-K.................................... 26




<PAGE>

PART I - FINANCIAL INFORMATION
Item 1.  Financial Statements

                     SoftNet Systems, Inc. and Subsidiaries
                      Condensed Consolidated Balance Sheets
                        (In thousands, except share data)
<TABLE>
<CAPTION>

                                                                                        March 31,      September 30,
                                                                                           2001            2000
                                                                                      --------------  ---------------
                                     ASSETS
<S>                                                                                   <C>             <C>
Current assets:
   Cash and cash equivalents......................................................    $       13,754  $        44,731
   Short-term investments, available for sale.....................................            74,267          127,403
   Accounts receivable, net of allowance for doubtful accounts of $106 and $68,
     respectively.................................................................             2,376            2,558
   Notes receivable...............................................................             1,000            2,100
   Inventory, net.................................................................             2,007            4,128
   Other current assets...........................................................               537            1,272
                                                                                      --------------  ---------------
Total current assets..............................................................            93,941          182,192

Restricted cash...................................................................             1,512            1,492
Property and equipment, net of accumulated depreciation of $1,847 and $1,172,
   respectively...................................................................             5,088            4,679
Intangibles, net of accumulated amortization of $15,085 and $3,828, respectively..                 -           12,257
Accounts receivable, non current portion..........................................             2,513            3,409
Long-term equity investments......................................................             1,484            7,734
Other assets......................................................................               275              543
                                                                                      --------------  ---------------
                                                                                      $      104,813  $       212,306
                                                                                      ==============  ===============

                        LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable...............................................................    $          335  $         3,530
   Net liabilities associated with discontinued operations........................            11,051           56,595
   Other accrued expenses.........................................................             4,325            6,002
   Current portion of long-term debt..............................................               161            2,161
                                                                                      --------------  ---------------

Total current liabilities.........................................................            15,872           68,288

Long-term debt, net of current portion............................................             1,444            2,104
Business acquisition liability....................................................                 -            2,000
                                                                                      --------------  ---------------

Total liabilities.................................................................            17,316           72,392
                                                                                      --------------  ---------------

Commitments and contingencies

Stockholders' equity:
   Preferred stock, $0.10 par value, 3,970,000 shares designated, no shares issued
     and outstanding..............................................................                 -                -
   Common stock, $0.01 par value, 100,000,000 shares authorized; 27,374,329 and
     28,523,474 shares issued, 25,083,829 and 28,113,974 shares outstanding,
     respectively.................................................................               274              264
   Additional-paid-in capital.....................................................           492,828          503,802
   Deferred stock compensation....................................................           (17,728)         (28,577)
   Accumulated other comprehensive loss...........................................            (4,023)            (696)
   Accumulated deficit............................................................          (374,717)        (332,600)
   Treasury stock, at cost, 2,290,500 and 409,500 shares, respectively............            (9,137)          (2,279)
                                                                                      --------------  ---------------
Total stockholders' equity........................................................            87,497          139,914
                                                                                      --------------  ---------------
                                                                                      $      104,813  $       212,306
                                                                                      ==============  ===============
</TABLE>

              The accompanying notes are an integral part of these
                  condensed consolidated financial statements.

<PAGE>


                     SoftNet Systems, Inc. and Subsidiaries
                 Condensed Consolidated Statements of Operations
                      (In thousands, except per share data)
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                       Three Months Ended March 31,      Six Months Ended March 31,
                                                       ----------------------------      --------------------------
                                                           2001             2000            2001            2000
                                                      --------------   --------------  --------------  --------------
<S>                                                   <C>              <C>             <C>             <C>
Net sales...........................................  $        1,005   $          353  $        2,400  $          672
Cost of sales.......................................           5,243            1,003           6,589           1,641
                                                      --------------   --------------  --------------  --------------
   Gross loss.......................................          (4,238)            (650)         (4,189)           (969)
                                                      --------------   --------------  --------------  --------------
Operating expenses:
   Selling and marketing, exclusive of non-cash
     compensation expense (benefit) of $0, $(256),
     $0 and $(166), respectively....................             669            1,262           1,844           2,357
   Engineering, exclusive of non-cash compensation
     expense (benefit) of $22, $(139), $66 and
     $(31), respectively............................           1,130              692           2,856           1,279
   General and administrative, exclusive of
     non-cash compensation expense (benefit) of
     $(1,237), $5,435, $(1,570) and $9,251,
     respectively...................................           2,856            3,197           6,374           5,740
   Depreciation.....................................             304              221             689             399
   Amortization.....................................             574              574           1,149           1,148
   Non-cash compensation expense (benefit) related
     to stock options...............................          (1,215)           5,040          (1,504)          9,054
   Provision for impaired assets....................          24,869                -          24,869               -
   Restructuring expense............................               -                -           3,900               -
                                                      --------------   --------------  --------------  --------------
Total operating expenses............................          29,187           10,986          40,177          19,977
                                                      --------------   --------------  --------------  --------------
Loss from continuing operations before other income
   (expense), income taxes, discontinued
   operations and extraordinary item................         (33,425)         (11,636)        (44,366)        (20,946)

Other income (expense):
   Interest income..................................           1,646            3,421           4,295           5,563
   Interest expense.................................             (37)            (110)            (85)           (317)
   Equity in net losses of investee companies.......             (20)               -            (394)              -

   Miscellaneous income (expense), net..............             175              (26)           (165)            (35)
                                                      --------------   --------------  --------------  --------------

Loss from continuing operations before income taxes,
   discontinued operations and extraordinary item...         (31,661)          (8,351)        (40,715)        (15,735)

Provision for income taxes..........................               -                -               -               -
                                                      --------------   --------------  --------------  --------------
Loss from continuing operations before discontinued
operations and extraodinary items, net of tax.......         (31,661)          (8,351)        (40,715)        (15,735)

Loss from discontinued operations, net of tax.......               -          (13,767)              -         (27,001)
Loss on disposition of discontinued operations, net
of tax..............................................          (2,728)               -          (2,728)              -
                                                      --------------   --------------  --------------  --------------
Extraordinary Item
Gain on settlements of outstanding obligations......           1,326                -           1,326               -
                                                      --------------   --------------  --------------  --------------

Net loss............................................  $      (33,063)  $      (22,118) $      (42,117) $      (42,736)
                                                      ==============   ==============  ==============  ==============

Basic per common share:
   Loss from continuing operations..................  $        (1.28)  $        (0.35) $        (1.63) $        (0.73)
   Discontinued operations..........................           (0.11)           (0.58)          (0.11)          (1.26)
                                                      --------------   --------------  --------------  --------------
   Extraordinary item...............................             .05                              .05
                                                      --------------   --------------  --------------  --------------
   Net loss.........................................  $        (1.34)  $        (0.93) $        (1.69) $        (1.99)
                                                      ==============   ==============  =============== ==============
Shares used to compute basic per common share.......          24,762           23,732          24,881          21,436
                                                      ==============   ==============  =============== ==============
<FN>

              The accompanying notes are an integral part of these
                  condensed consolidated financial statements.
</FN>
</TABLE>
<PAGE>

                     SoftNet Systems, Inc. and Subsidiaries
                 Condensed Consolidated Statements of Cash Flows
                                 (In thousands)
                                   (Unaudited)
<TABLE>
<CAPTION>

                                                                                        Six months ended March 31,
                                                                                           2001            2000
                                                                                      --------------  ---------------

<S>                                                                                   <C>             <C>
Cash flows from operating activities:
   Net loss.......................................................................    $      (42,117) $       (42,736)
   Adjustments to reconcile net loss to net cash used in operating activities:
     Loss from discontinued operations............................................                 -           27,001
     Loss on disposal of discontinued operations..................................             2,728                -
     Provision for impaired assets................................................            24,869                -
     Gain on settlement of obligation.............................................            (1,326)               -
     Provision for restructuring costs............................................             3,900                -
     Depreciation and amortization................................................             1,838            1,547
     Amortization of deferred stock compensation expense (benefit)................            (1,504)           9,054
     Amortization of deferred debt issuance costs.................................                13               45
     Provision for doubtful accounts..............................................                73              109
     Provision for inventory losses...............................................             4,104                -
     Equity in net losses of investee companies...................................               394                -
     Other........................................................................               (11)               -
     Changes in operating assets and liabilities (net of effect of acquisitions and
       discontinued operations):
       Decrease (increase) in accounts receivable, net............................             1,005             (264)
       Increase in inventory......................................................            (1,983)            (814)
       Decrease (increase) in other current assets................................               644           (3,444)
       Decrease (increase) in other assets........................................                35              (27)
       Decrease in accounts payable and accrued expenses..........................            (8,777)          (3,632)
                                                                                      --------------  ---------------
Net cash used in operating activities of continuing operations....................           (16,115)         (13,161)
Net cash used in operating activities of discontinued operations..................           (47,438)         (20,645)
                                                                                      --------------  ---------------
Net cash used in operating activities.............................................           (63,553)         (33,806)
                                                                                      --------------  ---------------

Cash flows from investing activities:
   Proceeds from maturities and sales (payment for purchases) of short-term
     investments, net.............................................................            43,450          (89,199)
   Payments for purchase of equity investments....................................              (766)          (5,263)
   Payment for purchase of property and equipment.................................            (1,367)          (1,483)
   Disbursement for promissory notes issued.......................................                 -           (5,150)
   Payment for purchase of intangibles............................................                 -              (10)
   Payment received on note receivable............................................                 -            1,000
                                                                                      --------------  ---------------
Net cash provided by (used in) investing activities of continuing operations......            41,317         (100,105)
Net cash provided by (used in) investing activities of discontinued operations....             5,572           (6,743)
                                                                                      --------------  ---------------
Net cash provided by (used in) investing activities...............................            46,889         (106,848)
                                                                                      --------------  ---------------
Cash flows from financing activities:
   Proceeds from sale of common stock, net of selling costs.......................                 -          128,750
   Proceeds from exercise of warrants.............................................                 -            1,538
   Proceeds from exercise of options..............................................                 -            3,161
   Proceeds from purchase by employee stock purchase plan.........................                77                -
   Payment for purchase of treasury stock.........................................            (6,858)               -
   Payment of long-term debt and liability related to anniversary issuance of
     common stock to former Intelligent Communications, Inc. stockholders.........            (2,490)               -
   Payment for fractional shares related to anniversary issuance of common stock to
     former Intelligent Communications, Inc. stockholders.........................                 -               (1)
   Principal payments of long-term debt...........................................              (660)               -
                                                                                      --------------  ---------------
Net cash provided by (used in) financing activities of continuing operations......            (9,931)         133,448
Net cash provided by (used in) financing activities of discontinued operations....            (4,372)             891
                                                                                      --------------  ---------------
Net cash provided by (used in) financing activities...............................           (14,303)         134,339
Foreign exchange effect on cash and cash equivalents..............................               (10)               -
                                                                                      --------------  ---------------
Net decrease in cash and cash equivalents.........................................           (30,977)          (6,315)
Cash and cash equivalents, beginning of period....................................            44,731           89,499
                                                                                      --------------  ---------------
Cash and cash equivalents, end of period..........................................    $       13,754  $        83,184
                                                                                      ==============  ===============
<FN>
              The accompanying notes are an integral part of these
                  condensed consolidated financial statements.
</FN>
</TABLE>
<PAGE>
                     SoftNet Systems, Inc. and Subsidiaries
              Notes to Condensed Consolidated Financial Statements

1.       Basis of Presentation

The  financial   information  included  herein  is  unaudited;   however,   such
information  reflects all  adjustments  (consisting  solely of normal  recurring
adjustments, except as otherwise noted) which are, in the opinion of management,
necessary for a fair  presentation of the condensed  consolidated  statements of
financial  position,  results  of  operations,  and cash flows as of and for the
interim periods ended March 31, 2001 and 2000.

SoftNet  Systems,  Inc.'s  annual  report on Form 10-K for the fiscal year ended
September 30, 2000, as filed with the Securities and Exchange Commission, should
be read in conjunction with the accompanying  condensed  consolidated  financial
statements.  The condensed  consolidated  balance sheet as of September 30, 2000
was derived from SoftNet Systems,  Inc. and Subsidiaries (the "Company") audited
consolidated financial statements.

The results of  operations  for the three  months and the six months ended March
31,  2001  are  based  in part on  estimates  that may be  subject  to  year-end
adjustments and are not necessarily indicative of the results to be expected for
the full year.

The condensed  consolidated  financial statements presented for the three months
and the six months  ended  March 31,  2000 are  restated  for the effects of the
discontinued operations.

Certain  reclassifications  have been made to prior year financial statements in
order to conform to the current year presentation.

In June 1998,  the FASB issued  Statement  of  Financial  Accounting  Standards,
(SFAS) No. 133,  Accounting for Derivative  Instruments and Hedging  Activities.
SFAS No. 133  establishes  accounting  and reporting  standards  for  derivative
financial  instruments and hedging activities  related to those instruments,  as
well as other  hedging  activities.  To date,  the Company  has not  invested in
derivative  instruments and has not engaged in hedging activities.  Accordingly,
the  effects of  adopting  SFAS No. 133 did not have an impact on the  Company's
financial  position,  results of operations or cash flows.  The Company  adopted
SFAS No. 133 in the first  quarter of fiscal  2001 in  accordance  with SFAS No.
137, which delayed the required  implementation of SFAS No. 133 for one year. In
June 2000, the FASB issued Statement No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging  Activities".  FASB 138 addresses certain issues
related to the  implementation of FAS 133, but did not change the basic model of
FAS 133 or further delay the implementation of FAS 133.

2.       Discontinued Operations

Discontinued Operations of Aerzone Corporation ("Aerzone")

On  December  19,  2000,  the Company  decided to  discontinue  the  business of
Aerzone, a Delaware corporation, in light of significant long-term capital needs
and the  difficulty of securing the necessary  financing  because of the current
state of the financial markets. The plan included a reduction in personnel.  The
Company is trying to sell Laptop Lane  Limited  ("Laptop  Lane"),  a part of the
Aerzone  business.  Although it is difficult to predict the final  results,  the
loss from discontinued  operations includes  management's  estimates of costs to
wind  down the  business,  costs to  settle  its  outstanding  liabilities,  and
estimated  proceeds from the sale of assets  including  Laptop Lane.  The actual
results could differ materially from these estimates. The assets and liabilities
of such operations are included in net liabilities  associated with discontinued
operations on the condensed consolidated balance sheets as of March 31, 2001 and
September 30, 2000.

Net liabilities associated with discontinued  operations of Aerzone at March 31,
2001 and September 30, 2000 are as follows (in thousands):

                                                     March 31,       September
                                                        2001         30, 2000
                                                  --------------  -------------
  Current assets..............................    $          480  $       1,851
  Property, plant and equipment, net..........             2,430          4,226
  Other assets................................                90            241
                                                  --------------  -------------
  Total assets................................    $        3,000  $       6,318
                                                  ==============  =============
  Current liabilities.........................    $        6,500  $      25,202
                                                  ==============  =============
  Net liabilities associated with
        discontinued operations...............    $       (3,500) $     (18,884)
                                                  ==============  =============

<PAGE>

Accrued  closure costs were increased by  $8,736,000,  resulting in a recognized
expense in this period,  primarily as the Company reduced the estimated proceeds
from the sale of Laptop  Lane and  increased  estimated  discontinued  operating
costs.  This was offset by a decrease in  liabilities as payments were made from
previously accrued amounts.

Discontinued Operations of ISP Channel, Inc. ("ISP Channel")

On  December  7,  2000,  the  Company's  Board of  Directors  approved a plan to
discontinue providing cable-based Internet services through ISP Channel by March
31, 2001,  due to (1)  consolidation  in the cable  television  industry made it
difficult for ISP Channel to achieve the economies of scale necessary to provide
such  services  profitably,  and (2) the  Company was no longer able to bear the
costs of maintaining ISP Channel. The operating results of ISP Channel have been
segregated from continuing operations and are reported as loss from discontinued
operations,  net of tax on the  consolidated  statements of  operations  for the
three months and the six months  ended March 31, 2000.  Although it is difficult
to predict the final results,  the loss from  discontinued  operations  includes
management's  estimates of costs to wind down the business,  costs to settle its
outstanding  liabilities,  and the proceeds from the sale of assets.  The actual
results could differ materially from these estimates. The assets and liabilities
of such operations are included in net liabilities  associated with discontinued
operations on the condensed consolidated balance sheets as of March 31, 2001 and
September 30, 2000.

Operating  results of ISP Channel for the three  months and the six months ended
March 31, 2000 are as follows (in thousands):

                                                  Three months     Six months
                                                     ended            ended
                                                 March 31, 2000  March 31, 2000
                                                 --------------  -------------
        Revenues.............................    $        1,337  $       2,295
                                                 ==============  =============

        Loss before income taxes.............    $      (13,767) $     (27,001)
        Provision for income taxes...........                 -              -
                                                 --------------  -------------

        Net loss.............................    $      (13,767) $     (27,001)
                                                 ==============  =============


Net liabilities associated with discontinued  operations of ISP Channel at March
31, 2001 and September 30, 2000, are as follows (in thousands):

                                                   March 31,       September
                                                      2001         30, 2000
                                                --------------  -------------
        Current assets.......................   $        1,522  $       4,170
        Property, plant and equipment, net...            2,564         12,890
        Other assets.........................                -            222
                                                --------------  -------------

        Total assets.........................   $        4,086  $      17,282
                                                ==============  =============

        Current liabilities..................   $        7,706  $      47,237
        Long-term debt.......................               15          1,615
        Capital lease obligation.............            3,916          6,141
                                                --------------  -------------

        Total liabilities....................   $       11,637  $      54,993
                                                ==============  =============

        Net liabilities associated with
            discontinued operations..........   $       (7,551) $     (37,711)
                                                ==============  =============

On February 16, 2001, the Company and ISP Channel  entered into  agreements with
Mediacom LLC ("Mediacom"),  to terminate Mediacom's affiliate  relationship with
ISP Channel. As part of these agreements Mediacom released all obligations under
the  affiliate  agreement  with ISP  Channel and in return,  returned  1,300,000
restricted shares of the Company's common stock,  received certain equipment and
a $3,768,000 payment from the Company.
<PAGE>

Mediacom currently holds a total of 2,200,000  unrestricted common stock shares.
Pursuant  to these  agreements,  neither  the  Company  nor ISP  Channel has any
further material obligation to Mediacom.


Accruals  for  shutdown  costs  were  reduced  by  $6,008,000,  resulting  in  a
recognized benefit for this period,  primarily as the Company experienced better
than previously estimated contract settlements.  Liabilities further declined as
payments were made on previously accrued amounts.

3.       Restructuring Charge

On December  28,  2000,  the  Company's  Board of  Directors  approved a plan to
downsize its corporate  headquarters staff in tandem with discontinuing  Aerzone
and ISP Channel.  Because of the layoffs,  the Company  established a $3,900,000
restructuring  reserve, which consists primarily of severance costs for affected
employees,  and  was  reflected  in  other  accrued  expenses  on the  condensed
consolidated  balance  sheet as of December  31, 2000.  Through  March 31, 2001,
severance  payments of  $2,537,000  have been applied to this  reserve,  leaving
$1,363,000  accrued.  This  will  be  utilized  for the  identified  terminating
employees.

4.       Cash, Cash Equivalents and Short-Term Investments, Available-for-Sale,

Cash  equivalents  consist of securities with maturities of three months or less
at date of purchase.  Short-term  investments  as of March 31, 2001,  consist of
$8,213,000 of debt securities that mature in less than one year,  $65,938,000 of
debt  securities  that mature in one to five years,  and $116,000 of  short-term
equity securities,  available-for-sale.  During the three months ended March 31,
2001, the Company recognized a permanent impairment of certain short-term common
stock  investments -  available-for-sale,  of $6,651,000  based on the change in
market value of the  available-for-sale  securities from the date of acquisition
to March 31, 2001. The charge was recorded as a provision for impaired assets on
the condensed  consolidated statement of operations for the three and six months
ended March 31, 2001. Short-term investments,  available-for-sale securities are
carried at fair value based on quoted market prices.  However,  a net unrealized
holding  loss  of   approximately   $3,837,000   has  been  reflected  in  other
comprehensive  income in the equity section of the consolidated balance sheet at
March 31, 2001 based on  management's  assessment of its ability to sell certain
securities  at market value on March 31,  2001.  Cash and cash  equivalents  and
short-term investments,  and available-for-sale consisted of the following as of
March 31, 2001 (in thousands):


                                           Unrealized    Unrealized
                                   Cost       gain          loss        Market
                                ---------  -----------  -----------  -----------
Cash and cash equivalents:
   Cash........................ $   2,849  $         -  $         -  $     2,849
   Municipal securities........     2,010            -            -        2,010
   Money market funds..........     8,895            -            -        8,895
                                ---------  -----------  -----------  -----------
                                $  13,754  $         -  $         -  $    13,754
                                =========  ===========  ===========  ===========
Short-term investments -
   available-for-sale:
   Market auction securities... $  21,052  $         1  $         -  $    21,053
   Mortgage-backed securities..     6,481           37            -        6,518
   Foreign debt securities.....    11,484           17            -       11,501
   Corporate debt securities...    35,314                      (235)      35,079
   Common stock................     3,953            -       (3,837)         116
                                ---------  -----------  -----------  -----------
                                $  78,284  $        55  $    (4,072) $    74,267
                                =========   ==========   ==========   ==========

5.       Inventory

During  the three  months  ended  March 31,  2001,  the  Company  established  a
$4,018,000  reserve  for  inventory,  which  is  comprised  of  two  components:
obsolescence  for inventory  quantities in excess of  anticipated  sales for the
next twelve months and for reduction of inventory to market value.  This reserve
is reflected in inventory, net on the condensed consolidated balance sheet as of
March 31, 2001. The charge for this reserve was recorded to cost of sales on the
condensed  consolidated  statement  of  operations  for the three and six months
ended March 31, 2001.

6.       Equity Investments and Notes Receivable

During the three months ended March 31, 2001, the Company recognized a permanent
impairment  of certain  long-term  equity  investments,  notes  receivable,  and
related interest receivable in the amount of $7,109,000. This is due to problems
facing  these  investee  companies  in  attempting  to  raise  needed  follow-on
financing  to  cover  projected  cash  shortfalls  under  current  stock  market
conditions.  The charge was recorded as a provision  for impaired  assets on the
condensed  consolidated  statement  of  operations  for the three and six months
ended March 31, 2001.
<PAGE>

7.       Intangible Assets

During the three  months  ended  March 31,  2001,  the  Company  determined  the
carrying value of the intangible asset associated with the developed  technology
from the acquisition of Intellicom exceeded its net realizable value. This was a
result of several companies  introducing  competing  products and services,  and
reduced demand.

As an  analysis  of  estimated  undiscounted  future  cash  flows  indicates  an
impairment  provision was necessary.  Accordingly,  the Company provided for the
remaining unamortized intangible amount of $11,108,000.  The charge was recorded
as a provision for impaired  assets on the condensed  consolidated  statement of
operations for the three and six months ended March 31, 2001.

8.       Long-Term Debt and Business Acquisition Liability

On November 15, 2000, the Company repaid $660,000 and accrued  interest  related
to the 6% Convertible Subordinated Secured Debentures.

On  February  7,  2001,  the  Company  made an offer to the  former  Intelligent
Communications,  Inc. ("Intellicom")  stockholders to pay a discounted amount in
lieu of the  Company's  obligation  to pay  cash  and  stock  for the  remaining
consideration which was to be paid in connection with the Intellicom acquisition
and consisted of (i) a $2,000,000  8.5%  promissory  note and accrued  interest,
(ii) the requirement for the Company to issue  $1,500,000 of common stock shares
on the second  anniversary  date of the  Intellicom  acquisition,  and (iii) the
requirement  for the  Company to issue  $500,000 of common  stock  shares on the
third  anniversary  date of the  Intellicom  acquisition.  The parties agreed to
settle the obligation by which the Company paid $2,815,000, issued 99,922 common
stock  shares  valued  at  $199,000,   and  recognized  a  $1,326,000   gain  on
extinguishment of debt.

Long-term debt is summarized as follows (in thousands):

                                                  March 31,      September 30,
                                                     2001            2000
                                                --------------  ---------------

        Convertible subordinated debentures     $            1,4$4        2,104
        Promissory notes                                     -            2,000
        Other                                              161              161
                                                --------------  ---------------
                                                         1,605            4,265
        Less current portion                              (161)          (2,161)
                                                --------------  ---------------
                                                  $      1,444  $         2,104
                                                ==============  ===============

9.       Common Stock

See note 2, discontinued operations of ISP Channel.

10.      Supplemental Cash Flow Information
<PAGE>


The supplemental cash flow information is as follows (in thousands):
<TABLE>
<CAPTION>

                                                                                        Six months ended March 31,
                                                                                           2001            2000
                                                                                      --------------  --------------
<S>                                                                                   <C>             <C>
Cash paid during the year for:
   Interest.......................................................................    $          355  $          220
   Income taxes...................................................................                 -               -

Non-cash investing and financing activities:
   Value assigned to debt conversion feature......................................                 -              34
   Common stock issued for-
     Payment of promissory note and related interes, and business acquisition
       liability to former Intelligent Communications, Inc. stockholders..........               199           1,499
     Payment of affiliate contract termination fees with Mediacom LLC.............             1,500               -
     Payment of cable affiliate launch incentives.................................                 -          23,828
     Conversion of subordinated notes.............................................                 -           9,887
   Decrease in additional-paid-in capital associated with termination of common
     stock options................................................................           (12,740)         (7,425)
   Unrealized loss on short-term investments......................................            (3,317)           (131)
</TABLE>

11.      Segment Information

The Company currently operates Intellicom,  a wholly owned subsidiary of SoftNet
Systems,  Inc., a provider of  satellite-based  Internet  services.  Revenue for
Intellicom  consists  primarily of (i) monthly service fees paid by users of the
satellite service on a per VSAT basis, and (ii) VSAT-related equipment sales.

Segment information for continuing operations is as follows (in thousands):
<TABLE>
<CAPTION>

                                                         Three months ended March 31,    Six months ended March 31,
                                                         ----------------------------    --------------------------
                                                              2001           2000           2001            2000
                                                         --------------  -------------  -------------  --------------
<S>                                                      <C>             <C>            <C>            <C>
Net Sales:
   Satellite-based Internet services and VSAT
     equipment sales.................................    $        1,005  $         353  $       2,400  $          672
                                                         --------------  -------------  -------------  --------------
                                                         $        1,005  $         353  $       2,400  $          672
                                                         ==============  =============  =============  ==============
Loss from continuing operations before income taxes:
   Satellite-based Internet services and VSAT
     equipment sales.................................    $       (7,262) $      (3,054) $     (11,461) $       (5,322)
   Corporate.........................................            (2,509)        (3,542)        (5,640)         (6,570)
   Non-cash compensation (expense) benefit related to
     stock options...................................             1,215         (5,040)         1,504          (9,054)
   Provision for impaired assets.....................           (24,869)             -        (24,869)              -
   Restructuring expense.............................                 -              -         (3,900)              -
   Gain on settlement of obligations.................             1,326              -          1,326               -
   Other income (expense), net.......................             1,764          3,285          3,651           5,211
                                                         --------------  -------------  -------------  --------------
                                                         $      (30,335) $      (8,351) $     (39,389) $      (15,735)
                                                         ==============  =============  =============  ==============
</TABLE>
<PAGE>

12.      Comprehensive Loss

SFAS No. 130, Reporting Comprehensive Income, establishes standards of reporting
and display of  comprehensive  income and its components of net income and other
comprehensive  income. Other comprehensive income refers to revenues,  expenses,
gains,  and losses that are not  included in net income but rather are  recorded
directly in stockholders'  equity.  The components of comprehensive  loss are as
follows:
<TABLE>
<CAPTION>

                                                         Three months ended March 31,    Six months ended March 31,
                                                         ----------------------------    --------------------------
                                                              2001           2000           2001            2000
                                                         --------------- -------------  -------------- --------------
<S>                                                      <C>             <C>            <C>            <C>
   Net loss..........................................    $      (33,063) $     (22,118) $     (42,117) $      (42,736)
   Unrealized loss on securities.....................            (1,322)          (173)        (3,317)           (131)
   Foreign currency translation adjustments..........               (38)             -            (10)              -
                                                         --------------- -------------  -------------- --------------
    Comprehensive loss                                   $      (34,423) $     (22,291) $     (45,444) $      (42,867)
                                                         ==============  =============  =============  ==============
</TABLE>

13.      NOTE 10--Recent accounting pronouncements

In December 1999, the Securities and Exchange  Commission,  ("SEC") issued Staff
Accounting  Bulletin  ("SAB") 101, Revenue  Recognition in Financial  Statements
which provides guidance related to revenue  recognition based on interpretations
and  practices  followed by the SEC.  SAB 101  requires  companies to report any
changes in revenue  recognition as cumulative change in accounting  principle at
the time of  implementation  in  accordance  with  Accounting  Principles  Board
Opinion  20,  "Accounting  Changes."  SAB 101 will not be  effective  until  the
Company's fourth fiscal quarter of 2001. The Company is currently in the process
of evaluating the impact, if any, SAB 101 will have on its financial position or
results of operations and does not expect it to be significant.

<PAGE>



Item 2. Management's  Discussion and Analysis of Financial Condition and Results
of Operations

This  Form 10-Q  contains  forward-looking  statements  that  involve  risks and
uncertainties.  The actual results of SoftNet Systems, Inc. and its subsidiaries
could differ significantly from those set forth herein. Factors that could cause
or  contribute  to such  differences  include,  but are not  limited  to,  those
discussed in "Factors Affecting the Company's Operating Results" as set forth in
the Company's  annual report on Form 10-K for the year ended September 30, 2000,
as  filed  with  the  Securities  and  Exchange  Commission,  and  "Management's
Discussion  and Analysis of Financial  Condition and Results of  Operations"  as
well as those discussed elsewhere in this quarterly report. Statements contained
herein that are not historical  facts are  forward-looking  statements  that are
subject to the safe harbor created by the Private  Securities  Litigation Reform
Act of 1995.  Words such as  "believes",  "anticipates",  "expects",  "intends",
"estimates", "unlikelihood", "assessment", "foreseeable" and similar expressions
are intended to identify forward-looking  statements,  but are not the exclusive
means of identifying such statements.  A number of important factors could cause
our actual  results for the year ended  September 30, 2000, and beyond to differ
materially   from  past   results  and  those   expressed   or  implied  in  any
forward-looking  statements  made  by us,  or on our  behalf.  We  undertake  no
obligation   to  release   publicly  the  results  of  any  revisions  to  these
forward-looking  statements that may be made to reflect events or  circumstances
after the date hereof or to reflect the occurrence of unanticipated events.

The following discussion of the financial condition and results of operations of
the Company should be read in conjunction with, and is qualified in its entirety
by reference to, the  Consolidated  Financial  Statements of the Company and the
related Notes  thereto  appearing in our annual report on Form 10-K for the year
ended  September 30, 2000, as filed with the Securities and Exchange  Commission
and our Condensed  Consolidated  Financial  Statements and related Notes thereto
appearing elsewhere in this quarterly report.

Overview

On  December  7,  2000,  the  Company's  Board of  Directors  approved a plan to
discontinue  ISP  Channel,  Inc.  subsidiary  by March 31,  2001  because of (1)
consolidation in the cable industry made it difficult for ISP Channel to achieve
the economies of scale  necessary to provide such services  profitably,  and (2)
the Company was no longer able bearing the costs of maintaining the ISP Channel.
This was followed by an  announcement  on December 19, 2000, to discontinue  the
Aerzone business in light of, among other things,  significant long-term capital
needs and the  difficulty  of securing the  necessary  financing  because of the
financial markets.  As part of the  discontinuance of the Aerzone business,  the
Company announced its intent to sell the Laptop Lane business.

The company is currently exploring whether it will develop new lines of business
as well as other alternative uses for the cash and other assets that will remain
after  the  discontinuance  of ISP  Channel  and  Aerzone.  To date the Board of
Directors has not proposed a new strategic direction for SoftNet Systems.


The Company has one wholly owned subsidiary,  Intelligent  Communications,  Inc.
("Intellicom"),   which  provides  two-way  broadband   satellite   connectivity
utilizing very small aperture terminal ("VSAT")  technology to a wide variety of
business customers.

Revenue for Intellicom  consists  primarily of (i) monthly  service fees paid by
users of the  satellite  service  on a per  VSAT  basis,  and (ii)  VSAT-related
equipment  sales  and  from  time  to  time  contract   termination   fees  from
subscribers.

Cost of sales for Intellicom  consists  primarily of connectivity cost and costs
of VSAT equipment sold.  Intellicom's  connectivity  cost consists  primarily of
satellite  transponder  fees. As of April 30, 2001,  Intellicom has  transponder
space on two  satellites,  GE-3 and SatMex 5, which  provide  coverage  over the
continental United States, Caribbean and Latin America.

The Company reports operating  expenses in several  categories:  (i) selling and
marketing  includes,  in  addition  to the costs of selling  and  marketing  the
Company's  services to end users,  customer care, and content  production;  (ii)
engineering,  which  includes the costs of  maintaining  and manning the network
operations  center,  field  engineering  and information  technology;  and (iii)
general and  administrative  costs.  Also  included in  operating  expenses  are
depreciation,   amortization   and   compensation   related  to  stock  options.
Amortization  expense consists  primarily of the periodic write off of developed
technology acquired.  Compensation related to stock options relates primarily to
the  amortization  of deferred  stock  compensation  expense from stock  options
granted between October 1998 and March 1999.
<PAGE>

In an effort to bring Intellicom to  profitability,  the Company  initatiated an
overall cost cutting program and corporate restructuring. This will impact every
department in the Company,  and  Intellicom's  costs are expected to decrease in
the foreseeable future. In some cases, departments will be eliminated.

The results of  operations  for the three  months ended and the six months ended
March 31, 2000, have been restated for the effects of discontinued operations.

Results of operations  for the three months ended March 31, 2001 compared to the
three months ended March 31, 2000

Net Sales. Consolidated net sales increased $652,000, or 184%, to $1,005,000 for
the three months ended March 31, 2001, compared to $353,000 for the three months
ended March 31, 2000,  primarily as a result of providing VSAT satellite service
and   termination   fees.   Net  sales  from   Intellicom's   core  business  of
satellite-based  Internet services increased $424,000,  or 181%, to $658,000 for
the three months ended March 31, 2001, compared to $234,000 for the three months
ended March 31, 2000, primarily as a result of providing VSAT satellite service.
Equipment sales decreased $1,000 to $53,000 for the three months ended March 31,
2001,  compared to $54,000 for the three  months  ended  March 31,  2000.  Other
sources of sales increased $229,000 to $294,000 for the three months ended March
31,  2001,  compared  to $65,000  for the three  months  ended  March 31,  2000,
primarily as a result of termination fees.

Cost of Sales.  Consolidated  cost of sales  increased  $4,240,000,  or 423%, to
$5,243,000 for the three months ended March 31, 2001, compared to $1,003,000 for
the three  months  ended March 31,  2000,  primarily as a result of writing down
inventory to market value. The largest  component of Intellicom's  cost of sales
is the provision for  obsolescence,  which  amounted to $4,104,000 for the three
months  ended March 31,  2001,  compared to $53,000 for the three  months  ended
March 31,  2000.  Intellicom's  transponder  fees  increased to $885,000 for the
three  months  ended March 31,  2001,  compared to $847,000 for the three months
ended March 31, 2000.

Selling and Marketing. Consolidated selling and marketing expenses (exclusive of
non-cash  compensation expense (benefit) of $0 for 2001 and $(256,000) for 2000)
decreased  $593,000,  or 47%, to $669,000  for the three  months ended March 31,
2001, compared to $1,262,000 for the three months ended March 31, 2000.

Intellicom's  selling  and  marketing  expenses  decreased  $96,000,  or 14%, to
$579,000 for the three months ended March 31, 2001, compared to $675,000 for the
three months ended March 31, 2000, primarily as a result of staff reductions.

Corporate selling and marketing expenses decreased $497,000,  or 85%, to $90,000
for the three months  ended March 31,  2001,  compared to $587,000 for the three
months ended March 31, 2000,  primarily as a result of eliminating  the business
development department and the corporate restructuring.

Engineering.   Consolidated   engineering   expenses   (exclusive   of  non-cash
compensation  expense  (benefit)  of $22,000 for 2001 and  $(139,000)  for 2000)
increased  $438,000,  or 63%, to $1,130,000 for the three months ended March 31,
2001, compared to $692,000 for the three months ended March 31, 2000.

Intellicom's  engineering  expenses increased $377,000,  or 62%, to $980,000 for
the three months ended March 31, 2001, compared to $603,000 for the three months
ended March 31,  2000,  primarily as a result of  increased  personnel  costs to
support ongoing and future business.

Corporate  engineering  expenses increased $61,000,  or 69%, to $150,000 for the
three months  ended March 31, 2001,  as compared to $89,000 for the three months
ended March 31, 2000,  primarily as a result of personnel costs  associated with
the formation of a corporate technology department.

General and  Administrative.  Consolidated  general and administrative  expenses
(exclusive of non-cash  compensation  expense (benefit) of $(1,237,000) for 2001
and $5,435,000 for 2000) decreased $341,000, or 11%, to $2,856,000 for the three
months ended March 31, 2001,  compared to $3,197,000  for the three months ended
March 31, 2000.

Intellicom's general and administrative  expenses increased $264,000, or 61%, to
$692,000 for the three months ended March 31, 2001, compared to $428,000 for the
three months ended March 31, 2000,  primarily as a result of increased personnel
costs to support ongoing and future business,  and leasing an additional  office
facility in Livermore, California.

Corporate general and  administrative  expenses decreased  $605,000,  or 22%, to
$2,164,000 for the three months ended March 31, 2001, compared to $2,769,000 for
the three months ended March 31, 2000, primarily as a result of staff reductions
as part of a corporate restructuring.
<PAGE>

Depreciation  and  Amortization.   Consolidated  depreciation  and  amortization
expenses increased $83,000, or 10%, to $878,000 for the three months ended March
31, 2001, compared to $795,000 for the three months ended March 31, 2000.

Intellicom's depreciation and amortization expense increased $75,000, or 11%, to
$773,000 for the three months ended March 31, 2001, compared to $698,000 for the
three  months  ended  March  31,  2000,  primarily  as  a  result  of  increased
depreciation   related  to  office  furniture  and  equipment  for  the  network
operations  center,  and the second office building.  Amortization  expense will
cease  as a  result  of  recognizing  the  impairment  of the  intangible  asset
associated with the developed technology from the acquisition of Intellicom.

Corporate  depreciation and amortization  expense  increased  $8,000,  or 8%, to
$105,000 for the three months ended March 31, 2001,  compared to $97,000 for the
three  months  ended  March  31,  2000,  primarily  as  a  result  of  increased
depreciation  related to the new  accounting  information  system and  leasehold
improvements and office furniture in its corporate offices.

Non-Cash  Compensation  Expense/Benefit  Related to Stock  Options.  The Company
recognized  a  non-cash   compensation  benefit  related  to  stock  options  of
$1,215,000  for the three months  ended March 31, 2001,  as compared to non-cash
compensation expense related to stock options of $5,040,000 for the three months
ended  March 31,  2000.  For the three  months  ended March 31,  2001,  non-cash
compensation benefit related to stock options consisted of $1,211,000 related to
employee stock  options,  and $4,000 related to  non-employee  options.  For the
three months  ended March 31, 2000,  non-cash  compensation  expense  related to
stock  options  consisted of  $4,754,000  related to employee  stock options and
$286,000 related to non-employee options.

Reversal  of  previously   accrued  expenses  is  in  respect  to  stock  option
terminations as result of corporate restructuring. Non-cash compensation expense
related to stock options should  continue to decrease or generate a benefit,  as
the Company continues to reduce its staff due to its discontinued operations and
corporate restructuring.

Provision for of Impaired Assets. The Company recognized a charge of $24,869,000
for the three months ended March 31, 2001,  consisting  of a  $13,761,000  write
down of short-term  equity  investments,  long-term equity  investments,  a note
receivable  and related  interest,  and a $11,108,000  provision for  intangible
assets  associated  with  the  developed  technology  from  the  acquisition  of
Intellicom.

Interest Income.  Consolidated interest income decreased $1,775,000,  or 52%, to
$1,646,000 for the three months ended March 31, 2001, compared to $3,421,000 for
the three months ended March 31, 2000 as a result of the decrease in cash,  cash
equivalents, and short-term investments.

Interest Expense.  Consolidated  interest expense decreased $73,000,  or 66%, to
$37,000 for the three months ended March 31, 2001,  compared to $110,000 for the
three  months  ended  March 31,  2000.  This  decrease is  primarily  due to the
conversion of the 9% senior  subordinated  convertible notes,  payment of the 6%
subordinated  convertible  notes,  and  payment of the 8.5%  promissory  note to
former Intellicom stockholders.

Miscellaneous  Income/Expense,  Net.  Miscellaneous  income was $175,000 for the
three months ended March 31, 2001, compared to miscellaneous  expense of $26,000
for the three months ended March 31, 2000.

Income  Taxes.  The Company  made no  provision  for income  taxes for the three
months ended March 31, 2001 and 2000,  as a result of the  Company's  continuing
losses.

Loss from Discontinued Operations. The Company recognized a $2,728,000 loss from
discontinued operations for the three months ended March 31, 2001, compared to a
loss of $13,767,000 for the three months ended March 31, 2000. This consisted of
$6,008,000  gain on the  disposal  of ISP  Channel,  resulting  from  lower than
anticipated  costs of closing ISP Channel and a $8,736,000  loss on the disposal
of Aerzone,  resulting  primarily  from the reduction of the  anticipated  sales
price of Laptop Lane for the three months ended March 31, 2001. This is compared
to a  $13,767,000  net loss from the  operations  of ISP  Channel  for the three
months ended March 31, 2000.

Extraordinary  Item/Gain on Settlement of Obligation.  The Company  recognized a
gain of $1,326,000 for the three months ended March 31, 2001, resulting from the
cash  payment  made in lieu of the  Company's  obligation  to pay of the  common
stock,  8.5%  promissory note and interest,  and to settle business  acquisition
liability to former Intellicom stockholders.

Net Loss. The Company had a net loss applicable to common shares of $33,063,000,
or a net loss per share of $1.34,  for the three  months  ended March 31,  2001,
compared to a net loss applicable to common shares of $22,118,000, or a net loss
per share of $0.93, for the three months ended March 31, 2000.

<PAGE>


Results of  operations  for the six months ended March 31, 2001  compared to the
six months ended March 31, 2000

Net Sales.  Consolidated net sales increased $1,728,000,  or 257%, to $2,400,000
for the six months ended March 31, 2001, compared to $672,000 for the six months
ended  March  31,  2000,  primarily  as a result  of VSAT  equipment  sales  and
termination fees. Net sales from  Intellicom's core business of  satellite-based
Internet services increased $877,000,  or 199%, to $1,318,000 for the six months
ended March 31, 2001, as compared to $441,000 for the six months ended March 31,
2000,  primarily as a result of providing  VSAT  satellite  services.  Equipment
sales  increased  $462,000 to $559,000  for the six months ended March 31, 2001,
compared to $97,000 for the six months ended March 31, 2000, as a result of VSAT
equipment sales.  Other sources of sales increased  $389,000 to $523,000 for the
six months ended March 31,  2001,  compared to $134,000 for the six months ended
March 31, 2000, primarily as a result of termination fees.

Cost of Sales.  Consolidated  cost of sales  increased  $4,948,000,  or 302%, to
$6,589,000  for the six months ended March 31, 2001,  compared to $1,641,000 for
the six months  ended  March 31,  2000,  primarily  as a result of writing  down
inventory,  VSAT  equipment  sales,  and the  space  segment  leasing  of a full
transponder  beginning  on  December  1,  1999,  in  preparation  for  providing
satellite-based  Internet  services to existing and prospective  customers.  The
largest   component  of  Intellicom's   cost  of  sales  is  the  provision  for
obsolescence,  which  amounted to $4,104,000  for the six months ended March 31,
2001, compared to $79,000 for the six months ended March 31, 2000.  Intellicom's
transponder  fees  increased  to  $1,770,000  for the six months ended March 31,
2001, compared to $1,356,000 for the six months ended March 31, 2000.

Selling and Marketing. Consolidated selling and marketing expenses (exclusive of
non-cash  compensation expense (benefit) of $0 for 2001 and $(166,000) for 2000)
decreased  $513,000,  or 22%, to  $1,844,000  for the six months ended March 31,
2001, compared to $2,357,000 for the six months ended March 31, 2000.

Intellicom's  selling and  marketing  expenses  increased  $496,000,  or 43%, to
$1,657,000  for the six months ended March 31, 2001,  compared to $1,161,000 for
the six  months  ended  March  31,  2000,  primarily  as a result  of  increased
personnel costs to support ongoing and future business.

Corporate  selling  and  marketing  expenses  decreased  $1,009,000,  or 84%, to
$187,000 for the six months ended March 31, 2001, compared to $1,196,000 for the
six months ended March 31, 2000,  primarily as a result of  eliminating  the new
business development department and corporate restructuring.

Engineering.   Consolidated   engineering   expenses   (exclusive   of  non-cash
compensation  expense  (benefit)  of $66,000  for 2001 and  $(31,000)  for 2000)
increased $1,577,000,  or 123%, to $2,856,000 for the six months ended March 31,
2001, as compared to $1,279,000 for the six months ended March 31, 2000.

Intellicom's  engineering expenses increased $1,267,000,  or 112%, to $2,398,000
for the six months  ended March 31,  2001,  compared to  $1,131,000  for the six
months ended March 31, 2000,  primarily as a result of increased personnel costs
to support ongoing and future business.

Corporate engineering expenses increased $310,000 to $458,000 for the six months
ended March 31,  2001,  compared to $148,000  for the six months ended March 31,
2000,  primarily as a result of personnel costs associated with the formation of
a corporate technology department.

General and  Administrative.  Consolidated  general and administrative  expenses
(exclusive of non-cash  compensation  expense (benefit) of $(1,570,000) for 2001
and $9,251,000 for 2000) increased  $634,000,  or 11%, to $6,374,000 for the six
months ended March 31,  2001,  compared to  $5,740,000  for the six months ended
March 31, 2000.

Intellicom's general and administrative expenses increased $881,000, or 125%, to
$1,583,000 for the six months ended March 31, 2001, compared to $702,000 for the
six months  ended March 31, 2000,  primarily as a result of increased  personnel
costs to support ongoing and future business.

Corporate general and  administrative  expenses  decreased  $247,000,  or 5%, to
$4,791,000  for the six months ended March 31, 2001,  compared to $5,038,000 for
the six months ended March 31, 2000,  primarily as a result of staff  reductions
as part of a corporate restructuring.

Depreciation  and  Amortization.   Consolidated  depreciation  and  amortization
expenses  increased  $291,000,  or 19%, to  $1,838,000  for the six months ended
March 31, 2001, compared to $1,547,000 for the six months ended March 31, 2000.
<PAGE>

Intellicom's  depreciation and amortization expense increased $275,000,  or 20%,
to  $1,634,000  for the six months ended March 31, 2001,  compared to $1,359,000
for the six months  ended March 31,  2000,  primarily  as a result of  increased
depreciation   related  to  office  furniture  and  equipment  for  the  network
operations  center,  and the second office building.  Amortization  expense will
cease  as a  result  of the  recognition  of a full  impairment  reserve  on the
intangible asset  associated with the developed  technology from the acquisition
of Intellicom.

Corporate  depreciation and amortization  expense increased  $16,000,  or 9%, to
$204,000 for the six months  ended March 31, 2001,  compared to $188,000 for the
six months ended March 31, 2000, primarily as a result of increased depreciation
related to the new accounting information system, and leasehold improvements and
office furniture of its corporate offices.

Non-Cash  Compensation  Expense/Benefit  Related to Stock  Options.  The Company
recognized  a  non-cash   compensation  benefit  related  to  stock  options  of
$1,504,000  for the six  months  ended  March 31,  2001,  compared  to  non-cash
compensation  expense  related to stock options of $9,054,000 for the six months
ended  March  31,  2000.  For the six  months  ended  March 31,  2001,  non-cash
compensation benefit related to stock options consisted of $1,474,000 related to
employee stock options and $30,000 related to non-employee  options, and for the
six months ended March 31, 2000, non-cash  compensation expense related to stock
options  consisted of $8,368,000  related to employee stock options and $686,000
related to non-employee options.

Reversal  of  previously   accrued  expenses  is  in  respect  to  stock  option
terminations as result of corporate restructuring. Non-cash compensation expense
related to stock options should  continue to decrease or generate a benefit,  as
the Company  continues to reduce its staff due its  discontinued  operations and
corporate restructuring.

Provision for Impaired  Assets.  The Company  recognized a charge of $24,869,000
for the six months ended March 31, 2001,  consisting of a $13,761,000 write down
of  short-term  equity  investments,   long-term  equity  investments,   a  note
receivable  and  related  interest,  and a  $11,108,000  impairment  reserve  of
intangible asset  associated with the developed  technology from the acquisition
of Intellicom.

Restructuring Expense. The Company recognized a restructuring charge for the six
months  ended  March 31,  2001,  related  to a plan to  downsize  its  corporate
headquarters  staff.  The charge in the amount of $3,900,000  was  recognized as
restructuring  expense  and  consists  primarily  of  termination  payments  for
affected employees.

Interest Income.  Consolidated  interest income decreased  $1,268,000 or 23%, to
$4,295,000  for the six months ended March 31, 2001,  compared to $5,563,000 for
the six months  ended March 31,  2000,  as a result the  decrease in cash,  cash
equivalents, and short-term investments.

Interest Expense.  Consolidated  interest expense decreased $232,000, or 73%, to
$85,000 for the six months  ended March 31,  2001,  compared to $317,000 for the
six  months  ended  March 31,  2000.  This  decrease  is  primarily  due to, the
reduction of interest  expense  resulting  from the  conversion of the 9% senior
subordinated   convertible  notes,  and  the  payment  of  the  6%  subordinated
convertible  notes and the  payment  of the 8.5%  promissory  note to the former
Intellicom stockholders.

Equity in Net Losses of Investee Companies. The Company recognized equity in net
losses of  investee  companies  of $394,000  for the six months  ended March 31,
2000.

Miscellaneous  Income/Expense,  Net.  Miscellaneous expense was $165,000 for the
six months ended March 31, 2001,  compared to  miscellaneous  expense of $35,000
for the six months ended March 31, 2000.

Income Taxes.  The Company made no provision for income taxes for the six months
ended March 31, 2001 and 2000as a result of the Company's continuing losses.

Loss from Discontinued Operations. The Company recognized a $2,728,000 loss from
discontinued  operations  for the six months ended March 31,  2001,  compared to
$27,001,000  for  the six  months  ended  March  31,  2000.  This  consisted  of
$6,008,000  gain  on  disposal  of  ISP  Channel,   resulting  from  lower  than
anticipated  costs of closing ISP Channel,  and  $8,736,000  loss on disposal of
Aerzone,  resulting  primarily from the reduction of the anticipated sales price
of Laptop Lane for the three months ended March 31, 2001.  This is compared to a
$27,001,000 net loss from the operations of ISP Channel for the six months ended
March 31, 2000.

Extraordinary  Item/ Gain on Settlement of Obligation.  The Company recognized a
gain of $1,326,000  for the six months ended March 31, 2001,  resulting from the
cash payment made in lieu of the Company's pay the common stock, 8.5% promissory
note and  interest,  and to  settle  business  acquisition  liability  to former
Intellicom stockholders.

Net Loss. The Company had a net loss applicable to common shares of $42,117,000,
or a net loss per share of  $1.69,  for the six  months  ended  March 31,  2001,
compared to a net loss applicable to common shares of $42,736,000, or a net loss
per share of $1.99, for the six months ended March 31, 2000.
<PAGE>

Liquidity and Capital Resources

Since September 1998, the Company has funded the significant negative cash flows
from its subsidiary operating activities and the associated capital expenditures
through a  combination  of public and private  equity  sales,  convertible  debt
issues  and  equipment  leases.  On April 28,  1999,  the  Company  completed  a
secondary public offering (the "Secondary Offering"), in which it sold 4,600,000
common stock shares at $33.00 per share.  The Company  received  $141,502,000 in
cash, net of  underwriting  discounts,  commissions and other offering costs. On
December 13, 1999, the Company completed a private placement of 5,000,000 common
stock  shares for net proceeds of  $128,121,000  to Pacific  Century  Cyberworks
Limited ("Pacific  Century").  As of March 31, 2001, the Company had $88,021,000
in cash, cash equivalents, and short-term investments compared with $224,838,000
as of March 31, 2000.

Net cash used in  operating  activities  of  continuing  operations  for the six
months ended March 31, 2001 was  $16,130,000.  This results  from, a net loss of
$39,389,000 from continuing operations, offset by several items including a loss
on   impaired   assets  of   ($24,869,000),   inventory   losses   ($4,104,000),
restructuring  charges  ($3,900,000),  and net  operating  assets  decreasing by
$9,091,000.  Net cash used by operating activities of discontinued operations is
$47,438,000.

Net cash provided by investing  activities of continuing  operations for the six
months ended March 31, 2001 was  $41,317,000.  Of this amount,  $43,450,000  was
provided by proceeds from sales and maturities of short-term investments, net of
purchases,  offset by $1,372,000 used to purchase property, plant and equipment,
and  $766,000  was  used to  acquire  long-term  equity  investments.  Investing
activities of discontinued operations provided $5,572,000 of net cash.

Net cash used in  financing  activities  for the six months ended March 31, 2001
$9,916,000  primarily  from  payoff  of  the  8.5%  promissory  note  to  former
Intellicom stockholders for $2,475,000, principal payments of debt for $660,000,
and payment for purchase of treasury stock of $6,858,000.  Financing  activities
of discontinued operations used $4,372,000 of net cash.

The Company  believes it has sufficient cash and unutilized  lease facilities to
meet its presently anticipated business requirements over the next twelve months
including the funding of net operating losses, discontinued operations,  working
capital requirements, capital investments and strategic investments. The Company
expects  significant  reductions in cash usages from its discontinued  operating
activities in fiscal 2001.



<PAGE>


Item 3.  Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

The  Company's  exposure to market risk for  changes in interest  rates  relates
primarily  to the  increase or  decrease  in the amount of  interest  income the
Company can earn on its investment  portfolio and on the increase or decrease in
the amount of interest  expense the Company must pay with respect to its various
outstanding  debt  instruments.  The risk associated with  fluctuating  interest
expense is limited,  however,  to the exposure related to those debt instruments
and credit facilities,  which are tied to market rates. The Company does not use
derivative  financial  instruments  in its  investment  portfolio.  The  Company
ensures the safety and preservation of its invested  principal funds by limiting
default risks,  market risk and reinvestment risk. The Company mitigates default
risk by investing in safe and high-credit quality securities.

The Company had short-term  investments of $74,267,000 at March 31, 2001. Except
for  investments in common and preferred  stock,  these  short-term  investments
consist of highly liquid  investments  with  original  maturities at the date of
purchase of between three and eighteen months.  These investments are subject to
interest rate risk and will fall in value if market interest rates increase. The
Company  believes a hypothetical  increase in market  interest rates by 10% from
levels  at March  31,  2001,  would  cause  the fair  value of these  short-term
investments to fall by an immaterial  amount.  Since the Company is not required
to sell  these  investments  before  maturity,  we have  the  ability  to  avoid
realizing losses on these  investments due to a sudden change in market interest
rates.  On the other hand,  declines in the interest rates over time will reduce
our interest income.

The Company had an  outstanding  convertible  debt  instrument of  approximately
$1,444,000 at March 31, 2001. This instrument has a fixed interest rate of 5.0%.
Because the  interest  rate of this  instrument  is fixed,  a  hypothetical  10%
increase  in  interest  rates  will not have a material  effect on the  Company.
Interest rate increases, however, will increase interest expense associated with
future  borrowing  by the Company,  if any.  The Company does not hedge  against
interest rate fluctuations.

Equity Price Risk

The Company  through its business  dealings has obtained common stock of various
publicly traded technology companies, which are classified as available-for-sale
securities.  As a result,  the Company  values these  investments on its balance
sheet at March 31, 2001, at market value. Unrealized gains and losses other than
permanent  declines in value,  are  excluded  from  earnings and are reported in
accumulated  other  comprehensive  loss component of stockholders'  equity.  The
Company has not  attempted to reduce or eliminate  its market  exposure on these
securities,  and such  investments  were not  significant  to the Company in the
prior  year.  A 50%  adverse  change in equity  prices,  based on a  sensitivity
analysis of technology stocks,  would result in an approximate  $60,000 decrease
in the fair value of the Company's available-for-sale securities portfolio as of
March 31, 2001.

Currency Exchange Risk

The  Company  has  historically  had very low  exposure  to  changes  in foreign
currency  exchange  rates,  and as  such,  has  not  used  derivative  financial
instruments to manage foreign currency  fluctuation risk. As the Company expands
globally,   the  risk  of  foreign   currency   exchange  rate  fluctuation  may
dramatically  increase.  Therefore,  in the future,  the  Company  may  consider
utilizing derivative instruments to mitigate such risks.



<PAGE>


PART II - OTHER INFORMATION

Item 1.  Legal Proceedings

The Company has no material pending litigation

Item 2.  Changes in Securities

None


Item 3.  Defaults upon Senior Securities

None

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


The following proposals and the related votes thereon were made at the Company's
annual stockholders' meeting held on April 5, 2001:
<TABLE>
<CAPTION>

                                                        Votes         Votes        Votes        Votes       Brokers
              Description of Proposal                    For         Against     Withheld     Abstained    Non-Votes
----------------------------------------------        ----------     ---------   ----------   ---------    ----------
1.   Election of Directors:
<S>                                                   <C>             <C>         <C>            <C>           <C>
     Edward A. Bennett                                19,125,563             -    1,466,468            -            -
     Jeffrey A. Bowden                                19,312,103             -    1,279,928            -            -
     George C. Chan                                   18,832,355             -    1,759,676            -            -
     Robert C. Harris, Jr.                            19,131,791             -    1,460,240            -            -
     Ronald I. Simon                                  18,801,259             -    1,790,772            -            -

2.   Appoint KPMG LLP as independent auditors         20,109,209       358,843            -      123,986        8,884
</TABLE>

Shareholders approved both the election of Directors and the appointment of KPMG
LLP as SoftNet Systems' independent auditors.


<PAGE>


Item 5.  Other Information

                Factors Affecting The Company's Operating Results

The  risks  and  uncertainties  described  below  are not the only ones that the
Company faces.  Additional  risks and  uncertainties  not presently known to the
Company or that the  Company  currently  deems  immaterial  may also  impair the
Company's business operations. If any of the following risks actually occur, the
Company's  business,  financial  condition  or  results of  operations  could be
materially adversely affected.  In such case, the trading price of the Company's
common stock could decline, and you may lose all or part of your investment.

                                  Company Risks

The Company has a Limited History Operating Internet Businesses,  which may make
it Difficult to Evaluate the Company's Performance and Prospects

Any  evaluation of the  Company's  businesses  will be difficult  because of its
limited  operating  history in the Internet  access and services  business.  The
Company  acquired ISP Channel,  Inc. ("ISP  Channel") in June 1996,  Intelligent
Communications,   Inc.  ("Intellicom")  in  February  1999  and  formed  Aerzone
Corporation ("Aerzone") in January 2000. Prior to 1996, the Company did not have
any  experience in businesses  related to the Internet or high  technology,  and
since the acquisition of Intellicom in February 1999 and the  discontinuance  of
the  businesses of ISP Channel and Aerzone in December  2000,  the nature of the
Company's business has changed. As a result, the Company's  historical financial
information  may not be  indicative  of the Company's  future  results,  and the
Company's prospects are difficult to predict and may change rapidly.

In addition,  the Company  confronts  all of the  challenges  and  uncertainties
encountered by growing, early-stage companies, particularly companies in the new
and rapidly evolving international market for Internet connectivity,  access and
related services. These challenges include the Company's ability to:

o    Increase the services  purchased  from the Company by its customers and the
     amount of revenue the Company receives from each of its customers;
o    Satisfy the changing needs of the Company's  existing and future customers;
o    Acquire, develop and market new Internet services;
o    Respond to the changing needs of the Internet  access and content  delivery
     market;
o    Expand Intellicom's international customer base;
o    Develop and maintain strategic and business relationships;
o    Capitalize on the Company's early entrant status; and
o    Recruit and retain key personnel.

The Company has a History of Losses and Expects to Incur Losses in the Future

The Company has sustained substantial losses over the last five fiscal years and
expects to continue to report net losses for the foreseeable future. For the six
months ended March 31, 2001,  the Company had a net loss of  $42,117,000.  As of
March 31, 2001,  the Company had an  accumulated  deficit of  $374,717,000.  The
Company expects to incur  additional  losses and experience  negative cash flows
related to capital expenditures and operating expenses as Intellicom expands its
satellite-based  Internet services. These efforts may be more expensive than the
Company currently anticipates.  The Company cannot guaranty it will ever achieve
profitability or reduce its accumulated deficit.

The Company's  Quarterly  Results are Unpredictable and may Adversely Affect the
Trading Price of the Company's Common Stock

The Company's operating results have fluctuated widely on a quarterly basis, and
we expect to experience  fluctuation in future quarterly  operating results.  In
addition,  the Company cannot predict with any  significant  degree of certainty
the Company's  quarterly  operating results.  Many of the factors that cause the
Company's  quarter-to-quarter  operating results to be unpredictable are largely
beyond the Company's control. Factors that impact operating results include:

o    Demand for the Company's products and services;
o    Conditions in the Internet services industries;
o    Timing of dispositions, acquisitions and capital expenditures;
o    General economic conditions; and
o    Timing and conditions of sales.

As a result,  the Company  believes  that  period-to-period  comparisons  of the
Company's revenues and results of operations are not necessarily  meaningful and
should not be relied upon as indicators of future performance. It is likely that
in one or more  future  quarters  the  Company's  results  may  fall  below  the
expectations of analysts and investors.  In such event, the trading price of the
Company's common stock would likely decrease.
<PAGE>

New Members of the Company's Management Team will have to Effectively  Integrate
to Implement its Strategies

The Company depends on the ability of its management team to effectively execute
its strategies.  Because  certain members of the Company's  management team have
worked together for a short period of time, the Company needs to integrate these
officers into its operations. To integrate into the Company's operations,  these
individuals  must spend a  significant  amount of time  learning  the  Company's
business model and management  system,  in addition to performing  their regular
duties.  Accordingly,  the integration of new personnel has and will continue to
result in some disruption to the Company's  ongoing  operations.  If the Company
fails to  complete  this  integration  in an  efficient  manner,  the  Company's
business and financial results will suffer.

If the Company is unable to Successfully  Integrate Future Acquisitions into the
Company's Operations,  then the Company's Results and Financial Condition may be
Adversely Affected

In  addition to the recent  acquisitions  of  Intellicom  and Laptop  Lane,  the
Company may acquire other businesses.  The Company cannot predict if or when any
prospective  acquisitions  will  occur  or the  likelihood  that  they  will  be
completed  on  favorable  terms.  Acquiring  a  business  involves  many  risks,
including:

o    Disruption of the Company's ongoing business and diversion of resources and
     management time;
o    Dilution to existing  stockholders if the Company uses equity securities to
     finance acquisitions;
o    Incurrence of unforeseen obligations or liabilities;
o    Inability of management to maintain uniform standards, controls, procedures
     and policies;
o    Difficulty assimilating the acquired operations and personnel;
o    Risks of  entering  markets  in which the  Company  has little or no direct
     prior experience; and
o    Impairment  of  relationships  with  employees  or customers as a result of
     changes in management.

The Company cannot assure that it will make any  acquisitions or that it will be
able to obtain additional financing for such acquisitions,  if necessary. If any
acquisitions  are  made,  the  Company  cannot  assure  that  it will be able to
successfully  integrate the acquired  business  into its  operations or that the
acquired business will perform as expected.

The Company's Equity Investments in Other Companies may not yield any Returns

The Company has made equity investments in several  Internet-related  companies,
including  joint  ventures  in  other  countries.   In  most  instances,   these
investments are in the form of illiquid  securities of private companies.  These
companies  typically are in an early stage of development and may be expected to
incur substantial  losses. The Company's  investments in these companies may not
yield any  return.  Furthermore,  if these  companies  are not  successful,  the
Company could incur charges related to the provision for or write-off of assets.
For example,  the Company  wrote down equity  investments  by  $12,993,000.  The
Company  may make  additional  investments  in the  future.  Losses  or  charges
resulting from these investments could harm the Company's operating results.

The Company does not intend to pay Dividends

The Company has not historically paid any cash dividends on the Company's common
stock and does not  expect to  declare  any such  dividends  in the  foreseeable
future.  Payment of any future dividends will depend upon the Company's earnings
and capital  requirements,  the Company's debt obligations and other factors the
board of directors deems relevant.

The Company's Stock Price is Volatile

The volatility of the Company's stock price may make it difficult for holders of
the common stock to transfer  their  shares at the prices they want.  The market
price for the Company's  common stock has been volatile in the past, and several
factors could cause the price to fluctuate  substantially  in the future.  These
factors include:

o    Announcements of developments related to the Company's business;
o    Fluctuations in the Company's results of operations;
o    Sales  of  substantial  amounts  of  the  Company's   securities  into  the
     marketplace;
o    General conditions in the Company's industries or the worldwide economy;
o    An outbreak of war or hostilities;
o    A  shortfall  in revenues or  earnings  compared  to  securities  analysts'
     expectations;
o    Changes in analysts' recommendations or projections;
o    Announcements  of new products or services by the Company or the  Company's
     competitors; and
o    Changes in the  Company's  relationships  with the  Company's  suppliers or
     customers.
<PAGE>

The market price of the Company's  common stock may fluctuate  significantly  in
the  future,   and  these   fluctuations  may  be  unrelated  to  the  Company's
performance.  General market price  declines or market  volatility in the future
could adversely  affect the price of the Company's  common stock,  and thus, the
current market price may not be indicative of future market prices.

Prospective  Anti-Takeover  Provisions  could  Negatively  Impact the  Company's
Stockholders

The Company is a Delaware  corporation.  The Delaware  General  Corporation  Law
contains  certain  provisions  that may  discourage,  delay or make a change  in
control of the  Company  more  difficult  or prevent  the  removal of  incumbent
directors.  In addition,  the Company's  certificate of incorporation and bylaws
has certain  provisions that have the same effect.  These  provisions may have a
negative  impact on the price of the Company's  common stock and may  discourage
third-party bidders from making a bid for the Company or may reduce any premiums
paid to stockholders for their common stock.

                                Intellicom Risks

Intellicom  may  Fail  if its  Products  and  Services  do not  Gain  Commercial
Acceptance

The success of Intellicom  will depend upon the  willingness of new and existing
subscribers to pay the monthly fees and  installation  costs associated with the
service and to purchase or lease the equipment necessary to access the Internet.
Accordingly, the Company cannot predict whether Intellicom's pricing models will
be viable,  whether  demand for  Intellicom's  services will  materialize at the
prices they expect to charge,  or whether  current or future pricing levels will
be sustainable. If Intellicom does not achieve or sustain such pricing levels or
if their  services do not achieve or sustain broad market  acceptance,  then the
Company's  business,  financial  condition,  and  prospects  will be  materially
adversely affected.

An Interruption  in the Supply of Products and Services that Intellicom  Obtains
from Third Parties could cause a Decline in Sales of
Intellicom Services

In  designing,   developing  and  supporting   Intellicom's  Internet  services,
Intellicom relies extensively on third parties. In particular, Intellicom relies
on satellite  providers,  satellite  dish  manufacturers  and Internet  hardware
manufacturers  and  systems  integrators  to  help  build  its  networks.  These
suppliers may experience  difficulty in supplying  Intellicom  with products and
services  sufficient  to meet the needs of  Intellicom  or they may terminate or
fail to renew  contracts for supplying these products and services to Intellicom
on terms that it finds acceptable. Any significant interruption in the supply of
any of these products or services could cause a decline in sales of Intellicom's
services.

Intellicom  Derives  a  Significant  Portion  of  its  Revenues  from  Providing
Equipment and Internet  Services to a Limited Number of Customers which Presents
Credit Risks and could cause Increased Expenses or Losses of Future Revenue

For the six months ended March 31, 2001, sales to Intellicom's largest customer,
Tricom, S.A., accounted for approximately 34% of Intellicom's net revenue and as
of March 31, 2001, Tricom, S. A. accounted for approximately 93% of Intellicom's
total accounts  receivable.  Intellicom expects that a small number of customers
will  continue  to account  for a  significant  portion of its  revenue  for the
foreseeable  future. If any one of Intellicom's  customers,  especially  Tricom,
discontinues  its   relationship  for  any  reason,   Intellicom  may  suffer  a
significant reduction to its future revenue and may incur significant losses.

Intellicom  Depends on  Third-Party  Carriers to Maintain  its  Networks and any
Interruption  of its  Operations  due to the Failure to Maintain  such  Networks
would  have a  Material  Adverse  Effect on the  Company's  Business,  Financial
Condition and Prospects

Intellicom's success will depend upon the capacity,  reliability and security of
the network  used to carry data  between its  subscribers  and the  Internet.  A
portion  of the  network  used by  Intellicom,  is owned by third  parties,  and
accordingly  Intellicom  has  no  control  over  its  quality  and  maintenance.
Currently,  Intellicom has a transit  agreement with  MCIWorldCom to support the
exchange of traffic between its network operations centers and the Internet.  In
addition,  Intellicom has  agreements  with SatMex and GE Americom for satellite
transponder space. The failure of any other link in the delivery chain resulting
in an  interruption  of Intellicom's  operations  would have a material  adverse
effect on the Company's business, financial condition and prospects.
<PAGE>

Intellicom's Services may be Subject to Downward Pricing Pressures,  which would
Negatively Impact its Financial Results

The market for  Internet  access in the U.S.  is  subject  to  downward  pricing
pressure  caused by a number of factors,  including  increased  competition  and
technological  advances.  Pricing  pressures  outside of the U.S. in the markets
Intellicom  serves may develop as  international  Internet  access and  services
become more  available.  To operate,  Intellicom has certain costs,  such as its
lease of  satellite  transmission  capacity,  which  are  relatively  fixed  and
generally not susceptible to downward pricing pressure. As a result,  Intellicom
has little flexibility in lowering the price for its services.  If Intellicom is
affected by downward pricing pressure,  it cannot assure that it will be able to
offer Internet services at prices that are competitive or profitable.

Intellicom has a Lengthy and Complex Sales Cycle, which may Require it to Commit
Significant Resources Prior to Receiving Revenues

Intellicom targets large enterprises as ideal customers. Because the purchase of
Intellicom's products and services is a significant  investment for its customer
base, Intellicom's customers generally take a long time to evaluate Intellicom's
products and services. Most of Intellicom's customers will evaluate its products
and  services  in a  process  involving  multiple  people  and  departments.  In
addition,  Intellicom's  customers may have concerns about the  introduction  or
announcement of new products,  services and technologies,  whether by Intellicom
or by  others,  as  well  as  requests  for  product  or  service  enhancements.
Accordingly,  Intellicom  has and  expects  to  continue  to expend  significant
resources  educating  prospective  customers  about the uses and benefits of its
services.  Intellicom's  limited historical  experience indicates that its sales
cycle can range from three months to twelve months,  although the cycle could be
longer due to significant delays over which Intellicom has little or no control,
such as the budgeting and approval process of its customers. As a result of this
long sales cycle,  Intellicom may take a substantial  amount of time to generate
revenue  from sales  efforts.  In  addition,  any delay in selling  Intellicom's
products and services could lead prospective customers to find alternatives from
a competitor or to develop an in-house solution. Further, Intellicom may spend a
significant  amount of time and money on a potential  customer  that  ultimately
does not purchase its services.

Intellicom's  Business will Suffer and its Financial Results will Deteriorate if
it does not Continue to Expand its Customer Base

Intellicom's  success depends  primarily on the growth of its customer base, the
retention  of its  current  customers  and its  ability  to expand the number of
Internet  services it offers to its  customers  so that revenue per customer and
overall  revenue  increase.  If  Intellicom is unable to maintain and expand its
customer  base its business  and  financial  results  will suffer.  Intellicom's
ability to attract new  customers  and,  to a lesser  degree,  maintain  current
customers,  as well as its ability to increase the amount of revenue it receives
from each customer, depends on a variety of factors, including:

o    Continued growth in demand by international ISPs and corporate  enterprises
     for Internet backbone connectivity;
o    Intellicom's ability to provide adequate bandwidth to all of its customers;
o    Intellicom's ability to provide additional services across its network;
o    Intellicom's ability to broadcast content around the world;
o    The success in Intellicom's development and management of its strategic and
     business relationships;
o    Intellicom's success in establishing and maintaining business relationships
     with  content   aggregators,   Internet  backbone  operators  and  regional
     satellite owners; and
o    The reliability and cost-effectiveness of Intellicom's services.
If   Intellicom   is  unable  to   Maintain,   Expand  and  Adapt  its   Network
Infrastructure, the Demand for its Services may Decrease

Intellicom  must  continue  to expand and adapt its network as the number of its
international customers grows, as users place increasing demands on its network,
and as other requirements  change. As Intellicom grows its customer base, it may
not be  able to  provide  its  customers  with  the  increasing  levels  of data
transmission  capacity  that they may require  for a number of reasons,  such as
Intellicom's possible inability to raise the funds needed to develop the network
infrastructure  to  maintain  adequate  transmission  speeds  and  the  lack  of
additional  network  availability  from  third-party  suppliers of satellite and
fiber  optic cable  transmission  capacity.  Intellicom's  failure to achieve or
maintain high capacity  transmissions could significantly  reduce demand for its
services, decreasing its revenue and harming its business and financial results.
<PAGE>

If Intellicom Fails to Accurately Predict its Satellite  Bandwidth  Requirements
and Effectively  Manage its Fixed Costs,  the Company's  Operating  Results will
Suffer

If  Intellicom  does  not  obtain  adequate  satellite   bandwidth  capacity  on
acceptable terms and realize  corresponding  customer volume for this bandwidth,
it is unlikely that  Intellicom will achieve  positive gross profit.  Intellicom
purchases  this  bandwidth  capacity  based on its  projected  future needs on a
fixed-price  basis in  advance  of the sale of its  services  that  utilize  the
bandwidth. Substantially all of this bandwidth capacity can be purchased only on
a long-term  basis.  Intellicom  sells its services on the basis of actual usage
and total bandwidth capacity used by its customers,  which changes from month to
month and is  difficult  to  predict.  If  Intellicom's  sales fail to match its
projections,  it could be subject to periods of excess satellite capacity, which
could  seriously harm its business.  As a result,  Intellicom must obtain enough
bandwidth to meet its projected  customer  needs,  and  Intellicom  must realize
adequate volume from its customers to support and justify the bandwidth capacity
and expense. If demand from existing or potential customers exceeds Intellicom's
capacity,  the quality of its service may suffer or Intellicom  may be unable to
capitalize on potential business opportunities.  If that happens, Intellicom may
lose existing or potential customers and its operating results would suffer.

Problems  Associated  with  Operating in  International  Markets  could  Prevent
Intellicom from Achieving or Sustaining its Intended Growth

The  majority  of   Intellicom's   business  will  be  derived  from  government
organizations,   ISPs  and  other  businesses   located  in  foreign  countries.
Intellicom's  failure to manage its international  operations  effectively would
limit the future  growth of its  business.  Intellicom  faces  certain  inherent
challenges in conducting international operations, such as:

o    Changes in  telecommunications  regulatory  requirements  or trade barriers
     restricting  Intellicom's  ability  to  deliver  Internet  services  to its
     customers;
o    The  imposition  of   unanticipated   fees,  taxes  and  costs  by  foreign
     governments, which could significantly increase Intellicom's costs;
o    Political   and  economic   instability   disrupting   the   operations  of
     Intellicom's customers;
o    Protectionist  laws  and  business  practices  favoring  local  competition
     potentially giving unequal bargaining leverage to competitors; and
o    Currency  fluctuations  increasing the cost of Intellicom's services to its
     international customers.

Intellicom's  failure to  adequately  respond to any of these  challenges  could
seriously harm its operations and prospects.

Failure to Recruit and Retain Key Management, Technical and Sales Personnel will
Adversely Affect Intellicom's Ability to Operate

Intellicom's  success depends, in large part, on Intellicom's ability to attract
and retain qualified technical,  marketing,  sales and management personnel.  If
Intellicom  does not attract and retain  such  personnel,  it may not be able to
grow its business and may experience  disruptions in operations.  The failure to
attract or retain other key employees  could have a material  adverse  effect on
the Company's business, financial condition and prospects.

Any Damage or Failure that Causes Interruptions in Intellicom's Operations could
have  a  Material  Adverse  Effect  on its  Business,  Financial  Condition  and
Prospects

Intellicom's  operations  are  dependent  upon its  ability  to support a highly
complex network and avoid damages from fires, earthquakes, floods, power losses,
telecommunications and satellite failures,  network software flaws, transmission
cable cuts and similar  events.  The occurrence of any one of these events could
cause  interruptions  in the services  Intellicom  provides.  In  addition,  the
failure of an incumbent  local  exchange  carrier or other  service  provider to
provide  the  communications  capacity  Intellicom  requires,  as a result  of a
natural  disaster,  operational  disruption  or any other  reason,  could  cause
interruptions in the services  Intellicom  provides.  Any damage or failure that
causes  interruptions  in Intellicom's  operations could have a material adverse
effect on the Company's business, financial condition and prospects.

Intellicom may be Vulnerable to Unauthorized Access,  Computer Viruses and Other
Disruptive Problems, which may Result in Intellicom's Liability to its Customers
and may Deter Others from Becoming Customers

While Intellicom has taken substantial  security  measures,  its networks may be
vulnerable  to  unauthorized  access,  computer  viruses  and  other  disruptive
problems.   Internet  service   providers  and  online  service  providers  have
experienced  in the past,  and may  experience in the future,  interruptions  in
service as a result of the accidental or intentional  actions of Internet users.
Unauthorized  access by  current  and  former  employees  or others  could  also
potentially  jeopardize  the  security  of  confidential  information  stored in
Intellicom's computer systems and those of its customers. Such events may result
in  Intellicom's  liability to its  customers and may deter others from becoming
customers, which could have a material adverse effect on the Company's business,
financial condition and prospects. Although Intellicom intends to continue using
industry-standard security measures, such measures have been circumvented in the
past,  and  Intellicom  cannot  assure  you  that  these  measures  will  not be
circumvented in the future.  Eliminating  computer viruses and alleviating other
security problems may cause Intellicom's subscribers delays due to interruptions
or cessation of service. Such delays could have a material adverse effect on the
Company's business, financial condition and prospects.
<PAGE>

Intellicom  may Face  Potential  Liability for  Defamatory or Indecent  Content,
which may cause it to Modify the way it Provides Services

Any  imposition  of  liability  on  Intellicom  for  information  carried on the
Internet  could  have a  material  adverse  effect  on the  Company's  business,
financial  condition  and  prospects.  The law relating to liability of Internet
service  providers and online service  providers for  information  carried on or
disseminated through their networks is currently unsettled. A number of lawsuits
have  sought to  impose  such  liability  for  defamatory  speech  and  indecent
materials.   Congress  has   attempted  to  impose  such   liability,   in  some
circumstances, for transmission of obscene or indecent materials. In one case, a
court  has held  that an  online  service  provider  could be found  liable  for
defamatory  matter provided through its service,  on the ground that the service
provider  exercised  active  editorial  control  over  postings to its  service.
Because of the  potential  liability for  materials  carried on or  disseminated
through  Intellicom's  systems,  the Company may have to  implement  measures to
reduce its exposure to such liability. Such measures may require the expenditure
of substantial resources or the discontinuation of certain products or services.

Intellicom may face Potential Liability for Information Retrieved and Replicated
that may not be Covered by its Insurance

Intellicom's  liability  insurance may not cover  potential  claims  relating to
providing  Internet services or may not be adequate to indemnify  Intellicom for
all liability that may be imposed.  Any liability not covered by insurance or in
excess  of  insurance   coverage  could  have  a  material   adverse  effect  on
Intellicom's  business,  financial condition and prospects.  Because subscribers
download and redistribute  materials that are cached or replicated by Intellicom
in  connection  with  its  Internet  services,  claims  could  be  made  against
Intellicom under both U.S. and foreign law for defamation, negligence, copyright
or trademark infringement,  or other theories based on the nature and content of
such  materials.  These types of claims have been  successfully  brought against
online  service  providers.  In  particular,  copyright and  trademark  laws are
evolving both domestically and internationally,  and it is uncertain how broadly
the rights provided under these laws will be applied to online environments.  It
is impossible for  Intellicom to determine who the potential  rights holders may
be with respect to all materials available through its services.  In addition, a
number of third-party  owners of patents have claimed to hold patents that cover
various forms of online transactions or online technology.  As with other online
service providers, patent claims could be asserted against Intellicom based upon
its services or technologies.

Third  Parties  may  Claim  that   Intellicom's   Product   Infringes  on  their
Intellectual Property, which could Result in Significant Expenses for Litigation
or for Developing or Licensing New Technology

The  Internet  and  telecommunications   industries  are  characterized  by  the
existence  of a large  number  of  patents  and  frequent  litigation  based  on
allegations of patent infringement or other violations of intellectual  property
rights.  Third  parties may assert  claims that  Intellicom's  current or future
products,  networks or ways of doing  business  infringe  on their  intellectual
property.  Intellicom  cannot  predict  whether  third parties will assert these
types of claims  against  Intellicom  or against  the  licensors  of  technology
licensed to Intellicom.  Intellicom cannot predict whether such assertions would
harm its business.

If Intellicom is required to defend against these types of claims,  whether they
are with or without  merit or whether  they are  resolved in favor of or against
Intellicom  or its  licensors,  it may face costly  litigation  and diversion of
management's attention and resources. As a result of these disputes,  Intellicom
may have to develop or otherwise obtain non-infringing  technology or enter into
licensing agreements, any of which may be costly.

A Perceived or Actual  Failure by  Intellicom  to Achieve or Maintain High Speed
Data Transmission  could  Significantly  Reduce Consumer Demand for its Services
and  have a  Material  Adverse  Effect  on  the  Company's  Business,  Financial
Condition and Prospects

Intellicom's  ability  to  connect  and  manage a  substantial  number of online
subscribers  at high  transmission  speeds is  unknown.  Intellicom  faces risks
related  to its  ability  to  scale  up to  potential  subscriber  levels  while
maintaining superior performance. The actual downstream data transmission speeds
for each  customer  may be  slower  and will  depend on a  variety  of  factors,
including:
<PAGE>

o    Actual speed provisioned for the customer's equipment;
o    Quality of the server used to deliver content;
o    Overall Internet traffic congestion;
o    The number of active customers on the network at the same time; and
o    For  Intellicom,  the  service  quality  of the  networks  of  Intellicom's
     customers.

The actual data delivery speeds realized by customers may be significantly lower
than peak data  transmission  speeds and will vary  depending on the  customer's
hardware, operating system and software configurations. Intellicom cannot assure
you that it will be able  achieve or  maintain  data  transmission  speeds  high
enough to attract and retain its planned numbers of  subscribers,  especially as
the number of subscribers to its services  grows.  Consequently,  a perceived or
actual failure by Intellicom to achieve or maintain high speed data transmission
could  significantly  reduce  consumer  demand  for  their  services  and have a
material  adverse  effect on the  Company's  business,  financial  condition and
prospects.

Intellicom  may not be able to keep Pace with  Rapid  Technological  Changes  or
Emerging   Industry   Standards  that  could  make  its  Services  Obsolete  and
Unmarketable

Intellicom's services may become less useful to its customers if it is unable to
respond  to  technological  advances  that  shape the  Internet  or  alternative
technologies   or  services  become   available  to  them.   Keeping  pace  with
technological   advances  in  Intellicom's   industry  may  require  substantial
expenditures  and lead time.  In  addition,  future  advances in  technology  or
fundamental changes in the way Internet access or other Internet services can be
delivered may render  Intellicom's  services  obsolete or less cost competitive.
Intellicom may not be able to adequately respond to or incorporate technological
advances on a cost-effective or timely basis into its businesses.

The Internet  Industry Operates in an Uncertain Legal Landscape and the Adoption
or  Interpretation  of Future or Existing  Regulations  could Harm  Intellicom's
Business

The Internet and the markets in which  Intellicom  offers its Internet  services
are relatively new. Many of the laws and regulations that govern  Intellicom and
the Internet have yet to be  interpreted  or enforced.  It is likely that in the
future many new laws will take effect that will  regulate  the  Internet and the
markets in which the Company  operates.  The  applicability  to the  Internet of
existing laws governing issues such as property ownership,  copyrights and other
intellectual property issues,  taxation and tariffs, libel, consumer protection,
obscenity,  pricing and personal  privacy is uncertain.  Current and future laws
and regulations may:

o    Decrease the growth of the Internet;
o    Regulate  our  customers in ways that harm our ability to sell our services
     to them;
o    Decrease demand for our services; and
o    Impose taxes or other costly requirements or otherwise increase the cost of
     doing business.

Thus,  the adoption  and  interpretation  of any future or existing  regulations
could seriously harm Intellicom's business.

The Legal  Environment  in which  Intellicom  Operates is  Uncertain  and Claims
Against  Intellicom  and other Legal  Uncertainties  could cause its Business to
Suffer

Because most of Intellicom's  business is conducted outside the U.S., Intellicom
is  susceptible  to the  governmental  regulations  and legal  uncertainties  of
foreign countries.  In general, the laws of countries outside the U.S. governing
the  Internet  and  Internet  services,  to the extent  they exist at all,  vary
widely,  are  unclear  and in flux and have  failed  to keep pace with the rapid
advancements in Internet  technology and the expanding  range of  Internet-based
services being offered.  Partly because of these problems, and Intellicom's view
that local  regulatory  compliance  is a greater  issue of  concern  for our ISP
customers,  Intellicom  has not,  and  currently  does not intend to,  determine
conclusively whether it complies with the requirements of any particular foreign
country.

Any one or more of the countries where Intellicom  conducts business may require
that Intellicom  qualifies to do business in that particular  country, is liable
for  certain  taxes  or  tariffs,  is  otherwise  subject  to  regulation  or is
prohibited  from  conducting  its  business  in  that  foreign  country.   Thus,
Intellicom  cannot  assure that it is  currently  in  compliance  with the legal
requirements of any particular  country or all of the countries outside the U.S.
in which it conducts  business,  that Intellicom will be able to comply with any
such  requirements or that the requirements  will not change in a way that would
render the receipt of its services in a particular country illegal. Intellicom's
failure to comply  with  foreign  laws and  regulations  could  cause it to lose
customers,  restrict it from entering  profitable markets and seriously harm its
business.

Intellicom's   customers   also  face  many  of  the   governmental   and  legal
uncertainties  that  Intellicom  faces and  currently  are, or in the future may
become,  subject to many of the same  requirements  to which  Intellicom  may be
subject.  Intellicom  makes no effort to determine  whether its customers comply
with applicable  regulations.  The failure of  Intellicom's  customers to comply
with  applicable  laws  and  regulations  could  cause it to lose  customers  or
otherwise seriously harm its business.
<PAGE>

                                ISP Channel Risks

The Company may face Unexpected  Liabilities in Winding Down the Business of ISP
Channel

The Company has  determined  that it is in the best interests of the Company and
its  shareholders  to wind down the business of ISP  Channel.  While the Company
expects the process of winding down ISP Channel to be substantially  complete by
June 30,  2001,  there can be no  assurances  that it will be able to do so. The
Company  expects  to  incur  significant  costs  related  to  terminating  cable
affiliate  and other  contracts,  reducing  the  workforce  and  recovering  and
disposing of deployed assets. In addition,  the Company may face litigation from
customers,  cable  affiliates  and  others  with  respect to such  winding  down
activities.

                                  Aerzone Risks

The Company may face  Unexpected  Liabilities  in Winding  Down the  Business of
Aerzone

The Company has  determined  that it is in the best interests of the Company and
its shareholders to wind down the business of Aerzone. While the Company expects
the  process of winding  down  Aerzone  (with the  exception  of the sale of the
Laptop Lane business) to be  substantially  complete by June 30, 2001, there can
be no  assurances  that it will be able to do so. The  Company  expects to incur
costs related to terminating airport and other contracts, reducing the workforce
and recovering and disposing of deployed  assets.  In addition,  the Company may
face litigation with respect to such winding down activities.

Further,  the Company may be unsuccessful in its efforts to sell the Laptop Lane
business.  There can be no assurance that a buyer will be found at an acceptable
price  or that  the  business  can be sold for any  particular  amount  of cash,
securities or other consideration.



<PAGE>


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

(a)  Exhibits
     Exhibit No.
                             Description of Document
    ==============

             3.1   Amended and  Restated  Certificate  of  Incorporation  of the
                   Registrant.   Incorporated  by  reference  to  the  Company's
                   Quarterly  Report on Form 10-Q for the quarter ended June 30,
                   1999.

             3.2   By-Laws of the  Company.  Incorporated  by  reference  to the
                   Company's  Registration  Statement  on Form S-3/A dated April
                   22, 1999.



(b)  Reports on Form 8-K:

    Current  report on Form 8-K filed with the  Commission  on January  26, 2001
    Current report on Form 8-K filed with the Commission on February 5, 2001.
    Current  report on Form 8-K filed with the  Commission  on April 10,  2001.
    Current report on Form 8-K filed with the Commission on May 2, 2001.

<PAGE>


SIGNATURES

Pursuant to the  requirements of Section 13 or 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.

SOFTNET SYSTEMS, INC.



/s/ Ronald I. Simon                                    Date:       May 8, 2001
---------------------------------------------------               ------------
Ronald I. Simon
Acting Chief Executive Officer and
Acting Chief Financial Officer


<PAGE>