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                                  UNITED STATES
                       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  JUNE  30,  2002.
                                         ----------------
                                       OR
[ ]  Transition  Report under Section 13 or 15(d) of the Securities Exchange Act
     of  1934.
     For  the  transition  period from __________________ to __________________.

                       Commission File Number:  001-05270
                                                ---------

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

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

650 TOWNSEND STREET, SUITE 225, SAN FRANCISCO, CALIFORNIA           94103
---------------------------------------------------------           -----
        (Address of principal executive offices)                  (Zip Code)

       Registrant's telephone number, including area code:  (415) 354-3900
                                                            --------------

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 JULY 31, 2002
               -----                            ----------------------------
     COMMON STOCK, $0.01 PAR VALUE                      25,183,487


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<PAGE>
                     SOFTNET SYSTEMS, INC. AND SUBSIDIARIES
                                      INDEX
                                                                            PAGE
                                                                            ----

PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements

         Condensed Consolidated Balance Sheets as of June 30, 2002, and
           September 30, 2001 . . . . . . . . . . . . . . . . . . . . . .     2

         Condensed Consolidated Statements of Operations for the three and
           nine months ended June 30, 2002 and 2001 . . . . . . . . . . .     3

         Condensed Consolidated Statements of Cash Flows for the nine
           months ended June 30, 2002 and 2001. . . . . . . . . . . . . .     4

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

Item 2.  Management's Discussion and Analysis of Financial Condition and
         Results of Operations. . . . . . . . . . . . . . . . . . . . . .    12

Item 3.  Quantitative and Qualitative Disclosures About Market Risk . . .    23

PART II - OTHER INFORMATION

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

Item 2.  Changes in Securities. . . . . . . . . . . . . . . . . . . . . .    24

Item 3.  Defaults Upon Senior Securities. . . . . . . . . . . . . . . . .    24

Item 4   Submission of Matters to a Vote of Security Holders. . . . . . .    24

Item 5.  Other Information. . . . . . . . . . . . . . . . . . . . . . . .    24

Item 6.  Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . .    25


                                      -1-
<PAGE>
<TABLE>
<CAPTION>
PART  I  -  FINANCIAL  INFORMATION
ITEM  1.     FINANCIAL  STATEMENTS


                                  SOFTNET SYSTEMS, INC. AND SUBSIDIARIES
                                  CONDENSED CONSOLIDATED BALANCE SHEETS
                                    (In thousands, except share data)
                                               (Unaudited)

                                                                            JUNE 30,       SEPTEMBER 30,
                                                                              2002             2001
                                                                         ---------------  ---------------
<S>                                                                      <C>              <C>
                                         ASSETS
Current assets:
  Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . .  $       28,186   $       14,960
  Short-term investments, available-for-sale. . . . . . . . . . . . . .          41,117           60,494
  Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . .           2,336            2,018
  Other current assets. . . . . . . . . . . . . . . . . . . . . . . . .             429            1,266
                                                                         ---------------  ---------------

Total current assets. . . . . . . . . . . . . . . . . . . . . . . . . .          72,068           78,738

Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . .             800              800
Property and equipment, net of accumulated depreciation of $397
  and $375, respectively. . . . . . . . . . . . . . . . . . . . . . . .             121              691
Accounts receivable, non-current portion. . . . . . . . . . . . . . . .              59            1,566
Long-term equity investments. . . . . . . . . . . . . . . . . . . . . .           1,013            1,484
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           1,203            1,221
                                                                         ---------------  ---------------

                                                                         $       75,264   $       84,500
                                                                         ===============  ===============

                        LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . .  $           69   $          273
  Net liabilities associated with discontinued operations.. . . . . . .           3,698            2,757
  Restructuring accrual . . . . . . . . . . . . . . . . . . . . . . . .           1,449            1,240
  Other accrued expenses. . . . . . . . . . . . . . . . . . . . . . . .           1,249            2,340
  Current portion of long-term debt . . . . . . . . . . . . . . . . . .           1,444            1,444
                                                                         ---------------  ---------------

Total current liabilities . . . . . . . . . . . . . . . . . . . . . . .           7,909            8,054
                                                                         ---------------  ---------------

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; 27,473,987 and 27,461,775
    shares issued; 25,183,487 and 25,171,275 shares outstanding,
    respectively. . . . . . . . . . . . . . . . . . . . . . . . . . . .             275              275
  Additional-paid-in capital. . . . . . . . . . . . . . . . . . . . . .         477,613          477,680
  Deferred stock compensation . . . . . . . . . . . . . . . . . . . . .            (345)          (1,645)
  Accumulated other comprehensive loss. . . . . . . . . . . . . . . . .             (22)            (480)
  Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . .        (401,029)        (390,247)
  Treasury stock, at cost, 2,290,500 and 2,290,500 shares, respectively          (9,137)          (9,137)
                                                                         ---------------  ---------------

Total stockholders' equity. . . . . . . . . . . . . . . . . . . . . . .          67,355           76,446
                                                                         ---------------  ---------------

                                                                         $       75,264   $       84,500
                                                                         ===============  ===============

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


                                      -2-
<PAGE>
<TABLE>
<CAPTION>
                                   SOFTNET SYSTEMS, INC. AND SUBSIDIARIES
                              CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                    (In thousands, except per share data)
                                                (Unaudited)

                                                         THREE MONTHS ENDED JUNE 30,   NINE MONTHS ENDED JUNE 30,
                                                        ----------------------------  ----------------------------
                                                            2002           2001           2002           2001
                                                        -------------  -------------  -------------  -------------
<S>                                                     <C>            <C>            <C>            <C>
Operating expenses:
  Selling and marketing. . . . . . . . . . . . . . . .  $          -   $          9   $          -   $        196
  Engineering. . . . . . . . . . . . . . . . . . . . .             -             71              -            529
  General and administrative, exclusive of non-cash
    compensation expense (benefit) of $400, $483, $1,200
    and $(1,087), respectively . . . . . . . . . . . .         1,265          1,612          4,347          6,403
  Depreciation . . . . . . . . . . . . . . . . . . . .            34             78            160            282
  Non-cash compensation expense (benefit) related to
    stock options. . . . . . . . . . . . . . . . . . .           400            483          1,200         (1,087)
  Provision for impaired assets. . . . . . . . . . . .             -              -            352              -
  Restructuring expense. . . . . . . . . . . . . . . .             -              -            502          3,900
                                                        -------------  -------------  -------------  -------------

Total operating expenses . . . . . . . . . . . . . . .         1,699          2,253          6,561         10,223
                                                        -------------  -------------  -------------  -------------

Loss from continuing operations before other income
  (expense), income taxes, discontinued operations and
  extraordinary item . . . . . . . . . . . . . . . . .        (1,699)        (2,253)        (6,561)       (10,223)

Other income (expense):
  Interest income. . . . . . . . . . . . . . . . . . .           391          1,223          1,423          5,533
  Interest expense . . . . . . . . . . . . . . . . . .           (18)            (4)           (54)           (89)
  Loss on disposition of equity investments, net . . .             -         (3,684)          (701)       (17,445)
  Equity in net losses of investee companies . . . . .             -              -              -           (394)
  Miscellaneous income (expense), net. . . . . . . . .             3            (50)             -           (153)
                                                        -------------  -------------  -------------  -------------

Loss from continuing operations before income taxes,
  discontinued operations and extraordinary item . . .        (1,323)        (4,768)        (5,893)       (22,771)

Provision for income taxes . . . . . . . . . . . . . .             -              -              -              -
                                                        -------------  -------------  -------------  -------------

Loss from continuing operations before discontinued
  operations and extraordinary item. . . . . . . . . .        (1,323)        (4,768)        (5,893)       (22,771)

Discontinued operations:
  Loss from operations . . . . . . . . . . . . . . . .             -         (3,913)        (1,829)       (26,625)
  Loss on disposition, net . . . . . . . . . . . . . .           (70)        (4,100)        (3,060)        (6,828)
Extraordinary item:
  Gain on settlements of outstanding obligations . . .             -              -              -          1,326
                                                        -------------  -------------  -------------  -------------

Net loss . . . . . . . . . . . . . . . . . . . . . . .  $     (1,393)  $    (12,781)  $    (10,782)  $    (54,898)
                                                        =============  =============  =============  =============

Basic and diluted loss per common share:
  Loss from continuing operations. . . . . . . . . . .  $      (0.05)  $      (0.19)  $      (0.23)  $      (0.91)
  Discontinued operations. . . . . . . . . . . . . . .             -          (0.32)         (0.19)         (1.34)
  Extraordinary item . . . . . . . . . . . . . . . . .             -              -              -           0.05
                                                        -------------  -------------  -------------  -------------

  Net loss . . . . . . . . . . . . . . . . . . . . . .  $      (0.05)  $      (0.51)  $      (0.42)  $      (2.20)
                                                        =============  =============  =============  =============

Shares used to compute basic
  and diluted loss per common share. . . . . . . . . .        25,183         25,157         25,178         24,974
                                                       =============  =============  =============  =============

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


                                      -3-
<PAGE>
<TABLE>
<CAPTION>
                                     SOFTNET SYSTEMS, INC. AND SUBSIDIARIES
                                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                 (In thousands)
                                                  (Unaudited)

                                                                                            NINE MONTHS ENDED JUNE 30,
                                                                                           -------------  -------------
                                                                                               2002           2001
                                                                                           -------------  -------------
<S>                                                                                        <C>            <C>
Cash flows from operating activities:
  Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  $    (10,782)  $    (54,898)
  Adjustments to reconcile net loss to net cash used in operating activities:
    Loss from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . .         1,829         26,625
    Loss on disposition of discontinued operations. . . . . . . . . . . . . . . . . . . .         3,060          6,828
    Extraordinary item - gain on settlements of outstanding obligations . . . . . . . . .             -         (1,326)
    Provision for impaired assets . . . . . . . . . . . . . . . . . . . . . . . . . . . .           352              -
    Provision for restructuring costs . . . . . . . . . . . . . . . . . . . . . . . . . .           502          3,900
    Depreciation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           160            282
    Non-cash compensation expense (benefit) related to stock options. . . . . . . . . . .         1,200         (1,087)
    (Gain) loss on disposition of property and equipment. . . . . . . . . . . . . . . . .            51             30
    Equity in net losses of investee companies. . . . . . . . . . . . . . . . . . . . . .             -            394
    Loss on disposition of equity investments, net. . . . . . . . . . . . . . . . . . . .           701         17,445
    Gain on disposition of other short-term investments . . . . . . . . . . . . . . . . .            (6)            (2)
    Changes in operating assets and liabilities (net of effect of acquisitions and
      discontinued operations):
      Decrease in accounts receivable, net. . . . . . . . . . . . . . . . . . . . . . . .         1,189          1,235
      (Increase) decrease in other current assets . . . . . . . . . . . . . . . . . . . .           837           (640)
      Decrease in other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            18             43
      Decrease in accounts payable and accrued expenses . . . . . . . . . . . . . . . . .        (1,587)        (9,234)
                                                                                           -------------  -------------

Net cash used in operating activities of continuing operations. . . . . . . . . . . . . .        (2,476)       (10,405)
Net cash used in operating activities of discontinued operations. . . . . . . . . . . . .        (3,838)       (67,536)
                                                                                           -------------  -------------

Net cash used in operating activities . . . . . . . . . . . . . . . . . . . . . . . . . .        (6,314)       (77,941)
                                                                                           -------------  -------------

Cash flows from investing activities:
  Proceeds from maturities and sales of short-term investments, net . . . . . . . . . . .        19,595         51,648
  Proceeds from sale of property and equipment. . . . . . . . . . . . . . . . . . . . . .             7              5
  Payments for purchase of equity investments . . . . . . . . . . . . . . . . . . . . . .             -           (766)
  Payment for purchase of property and equipment. . . . . . . . . . . . . . . . . . . . .             -           (675)
                                                                                           -------------  -------------

Net cash provided by investing activities of continuing operations. . . . . . . . . . . .        19,602         50,212
Net cash provided by (used in) investing activities of discontinued operations. . . . . .            (2)         9,419
                                                                                           -------------  -------------

Net cash provided by investing activities . . . . . . . . . . . . . . . . . . . . . . . .        19,600         59,631
                                                                                           -------------  -------------

Cash flows from financing activities:
  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)
  Principal payments of long-term debt. . . . . . . . . . . . . . . . . . . . . . . . . .             -           (660)
                                                                                           -------------  -------------

Net cash used in financing activities of continuing operations. . . . . . . . . . . . . .             -         (9,931)
Net cash used in financing activities of discontinued operations. . . . . . . . . . . . .           (60)        (4,467)
                                                                                           -------------  -------------

Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . . .           (60)       (14,398)
Foreign exchange effect on cash and cash equivalents. . . . . . . . . . . . . . . . . . .             -            (24)
                                                                                           -------------  -------------

Net increase (decrease) in cash and cash equivalents. . . . . . . . . . . . . . . . . . .        13,226        (32,732)
Cash and cash equivalents, beginning of period. . . . . . . . . . . . . . . . . . . . . .        14,960         44,731
                                                                                           -------------  -------------

Cash and cash equivalents, end of period. . . . . . . . . . . . . . . . . . . . . . . . .  $     28,186   $     11,999
                                                                                           =============  =============

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


                                      -4-
<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
     balance sheet as of June 30, 2002, and condensed consolidated statements of
     operations  and  cash flows for the interim periods ended June 30, 2002 and
     2001.

     SoftNet  Systems,  Inc.'s  annual  report  on Form 10-K for the fiscal year
     ended  September  30,  2001,  as  amended and 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, 2001 was derived from SoftNet Systems,
     Inc.  and  subsidiaries  (the  "Company")  audited  consolidated  financial
     statements.

     The  results  of operations for the three months and nine months ended June
     30,  2002  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  balance  sheet  as of September 30, 2001, the
     condensed  consolidated  statements  of operations for the three months and
     nine  months ended June 30, 2001, and the condensed consolidated statements
     of  cash  flows  for  the  nine  months  ended  June  30,  2001,  have been
     reclassified  for the effects of the discontinued operations of Intelligent
     Communications, Inc. Additionally, certain reclassifications have been made
     to  prior  period  financial  statements in order to conform to the current
     period  presentation.

2.   DISCONTINUED OPERATIONS

     Discontinued  Operations of Intelligent Communications, Inc. ("Intellicom")

     On March 29, 2002, the Company and its wholly-owned subsidiary, Intellicom,
     entered into an agreement to sell its operating business and certain assets
     to  Loral  Cyberstar, Inc. Following the sale of its operating business and
     certain  assets  to Loral Cyberstar, Inc., the Company's Board of Directors
     unanimously  agreed to cease the operations of Intellicom on April 3, 2002.
     Subsequently  on  April  22,  2002, Intellicom entered into an agreement to
     sell  certain  assets to Native Intellicom, Inc., a wholly-owned subsidiary
     of  the  Pinoleville  Band  of  Pomo  Indians,  for  cash,  subject  to the
     termination  of  Intellicom's  lease  for  its  facility  in  Livermore,
     California.  The  operating results of Intellicom have been segregated from
     continuing  operations  and  are  reported  as  a  loss  from  discontinued
     operations on the condensed consolidated statements of operations. Although
     it  is difficult to predict the final results, the loss on disposition 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 Company recorded an estimated loss on
     disposition  of Intellicom of $3,120,000 for the nine months ended June 30,
     2002.  The  Company  initially  recognized  an  estimated  loss on disposal
     provision  of Intellicom of $3,300,000 for the three months ended March 31,
     2002,  and  subsequently  reduced it by $180,000 for the three months ended
     June, 30, 2002. The assets and liabilities of such operations are reflected
     in  net  liabilities  associated  with  discontinued  operations  of  the
     accompanying condensed consolidated balance sheets as of June 30, 2002, and
     September  30,  2001.

     Operating  results  of  Intellicom  are  as  follows  (in  thousands):

<TABLE>
<CAPTION>
                                      THREE MONTHS ENDED JUNE 30, NINE MONTHS ENDED JUNE 30,
                                      ---------------------------  --------------------------
                                           2002          2001          2002          2001
                                      ------------  -------------  ------------  ------------
<S>                                   <C>           <C>            <C>           <C>
          Revenues . . . . . . . . .  $          -  $        811   $     1,463   $     3,211
                                      ============  =============  ============  ============

          Loss before income taxes .  $          -  $     (3,913)  $    (1,829)  $   (26,625)
          Provision for income taxes             -             -             -             -
                                      ------------  -------------  ------------  ------------

          Net loss . . . . . . . . .  $          -  $     (3,913)  $    (1,829)  $   (26,625)
                                      ============  =============  ============  ============
</TABLE>


                                      -5-
<PAGE>
     Net  assets  (liabilities)  associated  with  discontinued  operations  of
     Intellicom  at  June  30,  2002, and September 30, 2001, are as follows (in
     thousands):

<TABLE>
<CAPTION>
                                                                    JUNE 30,      SEPTEMBER 30,
                                                                      2002             2001
                                                                 ---------------  --------------
<S>                                                              <C>              <C>
          Current assets:
            Accounts receivable, net. . . . . . . . . . . . . .  $           53   $           91
            Inventory, net. . . . . . . . . . . . . . . . . . .               -              537
            Other current assets. . . . . . . . . . . . . . . .               2               66
                                                                 ---------------  --------------

          Total current assets. . . . . . . . . . . . . . . . .              55              694

          Property, plant and equipment, net. . . . . . . . . .               -            1,644
          Restricted cash . . . . . . . . . . . . . . . . . . .               -              639
          Accounts receivable, non current portion. . . . . . .              12                -
          Other assets. . . . . . . . . . . . . . . . . . . . .              39               49
                                                                 ---------------  --------------

          Total assets. . . . . . . . . . . . . . . . . . . . .  $          106   $        3,026
                                                                 ===============  ==============

          Current liabilities:
            Accounts payable. . . . . . . . . . . . . . . . . .  $           25   $          423
            Estimated closure costs . . . . . . . . . . . . . .           1,223                -
            Restructuring accrual . . . . . . . . . . . . . . .               4              512
            Other accrued expenses. . . . . . . . . . . . . . .              22              689
                                                                 ---------------  --------------

          Total liabilities . . . . . . . . . . . . . . . . . .  $        1,274   $        1,624
                                                                 ===============  ==============

          Net assets (liabilities) associated with discontinued
            operations. . . . . . . . . . . . . . . . . . . . .  $       (1,168)  $        1,402
                                                                 ===============  ==============
</TABLE>

     In an effort to bring Intellicom to profitability, the Company initiated an
     overall  cost  cutting  program and organizational restructuring during May
     2001.  As  a  result  of  the  organizational  restructuring,  the  Company
     established  a  $1,290,000  restructuring  reserve,  which  consisted  of
     severance  costs  for  affected  employees  and shut down costs for certain
     offices,  and  is reflected in net liabilities associated with discontinued
     operations of the condensed consolidated balance sheet as of June 30, 2002,
     and  September  30,  2001.  Through  June 30, 2002, $1,286,000 of severance
     payments,  and  write  offs  of leasehold improvements and office furniture
     related  to  the  various  offices  have  been applied to this reserve. The
     remaining  $4,000  will  be  utilized for severance of an identified former
     employee.

     Discontinued  Operations  of  Aerzone  Corporation  ("Aerzone")

     On  December  19,  2000,  the  Company  decided  to discontinue the Aerzone
     business 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  loss  from disposition of discontinued operations
     includes  management's  estimates  of  the remaining costs to wind down the
     business  and  costs  to settle its outstanding liabilities. As of June 30,
     2002,  Aerzone  had  substantially wound down its activities. For the three
     and  nine  months  ended June 30, 2002, the Company increased the estimated
     loss on disposition of Aerzone by $250,000, as a result of a superior court
     decision  related  to  a  breach of contract. The assets and liabilities of
     such  operations  are  reflected  in  net  liabilities  associated  with
     discontinued  operations of the accompanying condensed consolidated balance
     sheets  as  of  June  30,  2002,  and  September  30,  2001.


                                      -6-
<PAGE>
     Net  liabilities  associated  with discontinued operations of Aerzone as of
     June  30,  2002,  and  September  30,  2001, are as follows (in thousands):

<TABLE>
<CAPTION>
                                                                      JUNE 30,     SEPTEMBER 30,
                                                                        2002            2001
                                                                   --------------  --------------
<S>                                                                <C>             <C>
          Current assets:
            Other current assets. . . . . . . . . . . . . . . . .  $            -  $           22
                                                                   --------------  --------------

          Total current assets. . . . . . . . . . . . . . . . . .               -              22

          Other assets. . . . . . . . . . . . . . . . . . . . . .               5               2
                                                                   --------------  --------------

          Total assets. . . . . . . . . . . . . . . . . . . . . .  $            5  $           24
                                                                   ==============  ==============

          Current liabilities:
            Estimated closure costs . . . . . . . . . . . . . . .  $        1,556  $        2,039
            Accrued expenses. . . . . . . . . . . . . . . . . . .              53              54
            Laptop Lane Limited acquisition reserve . . . . . . .              27              27
                                                                   --------------  --------------

          Total liabilities . . . . . . . . . . . . . . . . . . .  $        1,636  $        2,120
                                                                   ==============  ==============

          Net liabilities associated with discontinued operations  $        1,631  $        2,096
                                                                   ==============  ==============
</TABLE>

     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 its ISP Channel
     subsidiary  by December 31, 2000, because of (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 the ISP
     Channel.  The  loss  from  discontinued  operations  includes  management's
     estimates of the remaining costs to wind down the business, costs to settle
     its  outstanding  liabilities, and the proceeds from the sale of assets. As
     of  June 30, 2002, ISP Channel had substantially wound down its activities.
     For  the nine months ended June 30, 2002, the Company reduced the estimated
     loss  on  disposition  reserve  of  ISP Channel by $900,000, primarily as a
     result  of  the  Company  experiencing  better  than  previously  estimated
     contract  settlements.  The  assets  and liabilities of such operations are
     reflected in net liabilities associated with discontinued operations of the
     accompanying condensed consolidated balance sheets as of June 30, 2002, and
     September  30,  2001.

     Net  liabilities  associated with discontinued operations of ISP Channel as
     of  June  30,  2002, and September 30, 2001, are as follows (in thousands):

<TABLE>
<CAPTION>
                                                                      JUNE 30,     SEPTEMBER 30,
                                                                        2002            2001
                                                                   --------------  --------------
<S>                                                                <C>             <C>
          Current assets:
            Short-term investments, available-for-sale. . . . . .  $            -  $           20
            Other current assets. . . . . . . . . . . . . . . . .               1               2
                                                                   --------------  --------------

          Total assets. . . . . . . . . . . . . . . . . . . . . .  $            1  $           22
                                                                   ==============  ==============

          Current liabilities:
            Accrued expenses. . . . . . . . . . . . . . . . . . .  $          314  $          422
            Estimated closure costs . . . . . . . . . . . . . . .             144           1,663
                                                                   --------------  --------------

          Total liabilities . . . . . . . . . . . . . . . . . . .  $          458  $        2,085
                                                                   ==============  ==============

          Net liabilities associated with discontinued operations  $          457  $        2,063
                                                                   ==============  ==============
</TABLE>

     Discontinued  Operations  of  Micrographic  Technology  Corporation ("MTC")

     As a result of a preliminary arbitration decision related to a dispute with
     Applications  Informatiques Multimedia and a dispute related to the sale of
     MTC to Global Information Distribution GmbH ("GID"), the Company recorded a
     $590,000  estimated  loss on disposition reserve of MTC for the nine months
     ended  June 30, 2002. MTC was previously owned by the Company, and was sold
     to  GID on September 30, 1999. The estimated loss on disposition reserve of
     MTC is reflected in net liabilities associated with discontinued operations
     of  the  condensed  consolidated balance sheet as of June 30, 2002, and the
     corresponding  charge  is  reflected in loss on disposition of discontinued


                                      -7-
<PAGE>
     operations  of  the  condensed consolidated statement of operations for the
     nine  months  ended  June  30,  2002.

     Net  liabilities  associated with discontinued operations of MTC as of June
     30,  2002,  and  September  30,  2001,  are  as  follows  (in  thousands):

<TABLE>
<CAPTION>
                                                           JUNE 30,      SEPTEMBER 30,
                                                             2002            2001
                                                        --------------  --------------
<S>                                                     <C>             <C>
          Current liabilities:
            Estimated closure costs. . . . . . . . . .  $          442  $            -
                                                        --------------  --------------

          Net liabilities associated with discontinued
            operations . . . . . . . . . . . . . . . .  $          442  $            -
                                                        ==============  ==============
</TABLE>

3.   RESTRUCTURING CHARGE

     On  December  28, 2000, the Company's Board of Directors approved a plan to
     reduce  its  corporate headquarters staff in conjunction with discontinuing
     the  Aerzone  and  ISP  Channel  businesses.  As a result of this plan, the
     Company  established  a  $3,900,000  restructuring reserve, which consisted
     primarily  of severance costs for affected employees. Subsequently, for the
     nine  months  ended  June 30, 2002, the Company increased the restructuring
     reserve  by  $502,000  for  additional  estimated  lease  termination costs
     associated  with  Company  headquarters.  The  restructuring  reserve  is
     reflected  in  restructuring  accrual on the condensed consolidated balance
     sheet  as  of June 30, 2002, and September 30, 2001. Through June 30, 2002,
     $2,953,000  of  severance  payments  have been applied to this reserve. The
     remaining $1,449,000 will be utilized primarily for lease termination costs
     associated  with  Company  headquarters.

4.   CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS, AVAILABLE-FOR-SALE

     Cash  equivalents  consist of securities with maturities of three months or
     less from date  of purchase. Short-term investments, available-for-sale are
     carried at fair value based on quoted market prices. Net unrealized holding
     losses  amounted  to $22,000, which is based on market value as of June 30,
     2002,  and  is  reflected  in  accumulated  other comprehensive loss on the
     condensed  consolidated  balance  sheet  as  of  June  30,  2002.

     Short-term  investments, available-for-sale as of June 30, 2002, consist of
     $41,100,000  of  debt securities that mature between one to five years, and
     $17,000 of common stock. Cash, cash equivalents and short-term investments,
     available-for-sale  consist  of  the  following  as  of  June  30, 2002 (in
     thousands):

<TABLE>
<CAPTION>
                                                                    UNREALIZED    UNREALIZED
                                                          COST         GAIN          LOSS        MARKET
                                                       -----------  -----------  ------------  -----------
<S>                                                    <C>          <C>          <C>           <C>
          Cash and cash equivalents:
            Cash. . . . . . . . . . . . . . . . . . .  $     2,867  $         -  $         -   $     2,867
            Money market funds. . . . . . . . . . . .       25,319            -            -        25,319
                                                       -----------  -----------  ------------  -----------

                                                       $    28,186  $         -  $         -   $    28,186
                                                       ===========  ===========  ============  ===========

          Short-term investments, available-for-sale:
            Market auction securities . . . . . . . .  $    41,100  $         -  $         -   $    41,100
            Common stock. . . . . . . . . . . . . . .           39            -          (22)           17
                                                       -----------  -----------  ------------  -----------

                                                       $    41,139  $         -  $       (22)  $    41,117
                                                       ===========  ===========  ============  ===========
</TABLE>

5.   EQUITY INVESTMENTS

     The  Company  recognized a loss of $230,000 related to the 1,000,000 SkyNet
     Global  Limited  common  stock  shares  and $471,000 related to the 400,000
     SkyNet  Global  Limited  preference  stock shares for the nine months ended
     June  30,  2002.  The  loss  is  reflected in loss on disposition of equity
     investments  in  the  accompanying  condensed  consolidated  statements  of
     operations  for  the  nine  months  ended  June  30,  2002.

6.   COMMITMENTS AND CONTINGENCIES

     Legal  Proceedings

     On  September  26,  2001,  Lucent  Technologies  Inc. ("Lucent") brought an
     action  in  San Francisco Superior Court against the Company, alleging that
     the  Company  breached a contract by failing to purchase Lucent's shares in


                                      -8-
<PAGE>
     Freewire  Networks, Inc. ("Freewire") and claiming damages of approximately
     $3.5  million,  which may increase over time. On December 31, 2001, the San
     Francisco  Superior  Court issued an order to deny Lucent's application for
     writ  of  attachment,  finding  that  Lucent  had  not  shown a substantial
     probability  that  it  will  prevail on its claim. The Company continues to
     believe  that  Lucent's  claims  are  without  merit and will contest these
     claims  vigorously.

     On  November  9,  2001,  Nokia,  Inc.  ("Nokia") commenced an action in San
     Francisco  Superior  Court against the Company and Aerzone, alleging breach
     of  contract  arising  out  of the Aerzone's proposed operations in certain
     airports.  Nokia  seeks  approximately $2.1 million in damages. The Company
     believes that Nokia's claims are without merit and intends to contest these
     claims  vigorously. Additionally, the Company deposited security collateral
     of  $1,053,000 as required by the performance bond indemnity agreement with
     the  surety company. In the event that the Company prevails, any balance on
     the  collateral  will be returned by the surety company to the Company. The
     security  collateral  is  reflected  in  other  assets  of the accompanying
     condensed  consolidated  balance  sheets as of June 30, 2002, and September
     30,  2001.

     On  October  30,  2001,  GID commenced a demand for arbitration against the
     Company, alleging breach of contract and warranties relating to the sale of
     MTC  to GID on September 30, 1999. GID claims approximately $2.1 million in
     damages. The Company believes GID's claims are without merit and intends to
     contest  these  claims  vigorously.

     The  Company  is also involved in other legal proceedings and claims, which
     arise  in  the  ordinary course of its discontinued businesses. The Company
     believes  the  results  of the above noted legal proceedings, other pending
     legal  proceedings  and  claims are not expected to have a material adverse
     effect  on  its  results  of operations, financial condition or cash flows.

7.   COMPREHENSIVE LOSS

     The  components  of comprehensive loss for the three months and nine months
     ended  June  30,  2002  and  2001,  are  as  follows  (in  thousands):

<TABLE>
<CAPTION>
                                               THREE MONTHS ENDED JUNE 30,  NINE MONTHS ENDED JUNE 30,
                                               ---------------------------  --------------------------
                                                    2002          2001          2002          2001
                                                ------------  ------------  ------------  ------------
<S>                                             <C>           <C>           <C>           <C>
          Net loss . . . . . . . . . . . . . .  $    (1,393)  $   (12,781)  $   (10,782)  $   (54,898)
          Unrealized gain (loss) on securities          (16)        3,589           442           272
          Foreign currency translation
            adjustments. . . . . . . . . . . .            -           (15)           16           (25)
                                                ------------  ------------  ------------  ------------

          Comprehensive loss . . . . . . . . .  $    (1,409)  $    (9,207)  $   (10,324)  $   (54,651)
                                                ============  ============  ============  ============
</TABLE>

8.   SUPPLEMENTAL CASH FLOW INFORMATION

     The  supplemental  cash flow information for the nine months ended June 30,
     2002  and  2001,  is  as  follows  (in  thousands):

<TABLE>
<CAPTION>
                                                                                 NINE MONTHS ENDED JUNE 30,
                                                                                 --------------------------
                                                                                      2002        2001
                                                                                   ----------  ----------
<S>                                                                                <C>         <C>
     Cash paid:
       Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  $      72   $     355
       Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          -           -

     Non-cash investing and financing activities:
       Common stock issued for-
       Acquisition of Laptop Lane Limited . . . . . . . . . . . . . . . . . . . .          -         332
       Payment of promissory note and related interest, and business acquisition
         Liability to former Intelligent Communications, Inc. stockholders. . . .          -         199
       Payment of affiliate contract termination fees with Mediacom LLC . . . . .          -       1,500
     Decrease in additional-paid-in capital associated with termination of common
       stock options. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        (65)    (25,644)
     Unrealized gain on short-term investments. . . . . . . . . . . . . . . . . .        442         272
</TABLE>


                                      -9-
<PAGE>
9.   SEGMENT INFORMATION

     As  a result of the April 3, 2002, unanimous consent by the Company's Board
     of  Directors  to  cease  the  operations  of  Intellicom,  the  Company
     discontinued its last business segment. Accordingly, no segment information
     is  disclosed  in  the  accompanying  notes to these condensed consolidated
     financial  statements.

10.  SUBSEQUENT EVENTS

     On  July  29,  2002, the Company entered into an agreement to acquire First
     Security  Holdings  Corporation  ("FSHC") from Independence Holding Company
     ("IHC")  for  $31.9 million in cash. FSHC and its wholly-owned subsidiaries
     are  engaged in the insurance and reinsurance business. Upon closing of the
     transaction,  the  Company  will  become  an insurance holding company, the
     employment  of  all  of the Company's current employees will terminate, and
     substantially  all  of  the  Company's  operations  will be directed by IHC
     management  and  employees  pursuant  to  a  services agreement between the
     Company  and  IHC.  Consummation  of  this  acquisition  is  subject  to
     satisfaction  of  certain  conditions,  including  approval  by  insurance
     regulators  and  the  Company's  stockholders.  The Company anticipates the
     completion  of  the  transaction  by  December  31,  2002.

     In  a  separate  transaction,  IHC  acquired  Pacific  Century  Cyberworks
     Limited's  ("PCCW")  entire interest in the Company consisting of 5,000,000
     common stock shares at $3.00 per share for a total value of $15,000,000. As
     a result of this transaction, Pacific Century Cyberworks Limited appointees
     Linus  W.L.  Cheung  and Jeffrey A. Bowden have resigned from the Company's
     Board  of  Directors,  and  Edward  Netter, Chairman of IHC, and Roy Thung,
     Chief  Executive Officer of IHC, have been appointed to the Company's Board
     of Directors. Additionally, upon closing of the transaction, IHC has agreed
     to  make  a  cash  tender  offer  at $3.00 per share for at least 3,000,000
     outstanding  common  stock  shares  of  the  Company,  subject  to  certain
     limitations.

     Separately,  the  Company's  Board of Directors also approved a shareholder
     rights  plan  (the  "Plan"). Pursuant to the Plan's approval, the Company's
     Board  of Directors declared a dividend distribution of one Preferred Share
     Purchase  Right  (the "Rights") on each outstanding common stock share. The
     dividend  distribution  of  the  Rights  will  be  payable  to common stock
     stockholders  of  record on August 14, 2002. The Rights distribution is not
     taxable  to stockholders. Subject to limited exceptions, the Rights will be
     exercisable  if  a person or group acquires or announces a tender offer for
     4.99%  or  more of the Company's common stock. Under certain circumstances,
     each Right will entitle shareholders to buy one one-hundredth of a share of
     newly  created Series A Junior Participating Preferred Stock of the Company
     at  an  exercise  price  of $3.00. The Company's Board of Directors will be
     entitled  to  redeem  the  Rights  at  $0.01 per Right at any time before a
     person  has  acquired  4.99%  or  more  of  the  outstanding  common stock.

     The  Rights  designed  to inhibit some acquisitions of the Company's common
     stock  shares that could result in the imposition of limitations on the use
     of  its  Federal  net  operating  loss carryforwards and certain income tax
     credits. The Rights are also intended to enable all stockholders to realize
     the  long-term value of their investment in the Company. The Rights are not
     being  distributed in response to any specific effort to acquire control of
     the  Company.  The  Rights  are  designed  to help protect the tax benefits
     associated  with  the  Company's  net  operating  loss  carryforwards.

     If a person becomes an Acquiring Person, each Right will entitle its holder
     to  purchase,  at  the Right's then-current exercise price, a number of the
     Company's  common  shares  having  a market value at that time of twice the
     Right's exercise price. The Rights held by the Acquiring Person will become
     void and will not be exercisable to purchase shares at the bargain purchase
     price.  If  Company  is  acquired in a merger or other business combination
     transaction  which  has  not  been  approved  by  the  Company's  Board  of
     Directors,  each  Right will entitle its holder to purchase, at the Right's
     then-current  exercise  price,  a  number of the acquiring company's common
     shares  having  a  market  value at that time of twice the Right's exercise
     price.

     The Plan will expire on the close of business on the earliest date that (a)
     a  vote  of  Company's  stockholders  does  not  approve an amendment or an
     amendment  and  restatement  of  the Company's Certificate of Incorporation
     proposed  by  the Company's Board of Directors providing for limitations on
     the  acquisition  of  the  Company's  common  stock  in  excess  of certain
     percentage amounts, (b) such restated Certificate of Incorporation is filed
     with  the  Secretary of State of the State of Delaware or (c) the Company's
     stock  purchase  agreement with SSH Corp. and IHC is terminated, subject to
     the  Company's  right  to  extend  such  date  and  the  Company's  earlier
     redemption  or  exchange  of  such  rights  or  termination  of  the  Plan.


                                      -10-
<PAGE>
     On  May  17, 2002, the Company received a NASDAQ Staff Determination Letter
     stating that the Company's common stock is no longer eligible for continued
     listing  on  the NASDAQ National Market, as a result of the Company ceasing
     the  operations  of  its  last  business  segment, Intellicom, and that the
     Company  therefore does not meet the requirements for continued listing set
     forth  in  Marketplace  Rules  4300  and  4330.  Subsequently,  the Company
     requested  and  was  granted  an  oral  hearing  before  a  NASDAQ  Listing
     Qualifications Panel to appeal the NASDAQ Staff Determination Letter, which
     stayed  the  delisting of the Company's common stock pending the outcome of
     the  hearing.  On  July  12,  2002,  the Company appeared before the NASDAQ
     Listing Qualifications Panel to present the Company's plan to acquire FSHC,
     which would allow the Company to comply with the Marketplace Rules 4300 and
     4330.  The  Company  is  awaiting  a  decision  from  the  NASDAQ  Listing
     Qualifications  Panel.


                                      -11-
<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  consolidated  results  of SoftNet Systems, Inc. and
Subsidiaries  (the  "Company")  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  fiscal  year  ended  September  30,  2001, 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",  "likelihood",
"unlikelihood",  "assessment",  and  "foreseeable" and other 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
the  Company's actual results for the year ending September 30, 2002, and beyond
to  differ  materially  from  past results and those expressed or implied in any
forward-looking  statements  made by the Company, or on its behalf.  The Company
undertakes  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 fiscal
year  ended  September  30,  2001,  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  July  29,  2002,  the  Company  entered  into  an agreement to acquire First
Security Holdings Corporation ("FSHC") from Independence Holding Company ("IHC")
for  $31.9  million in cash.  FSHC and its wholly-owned subsidiaries are engaged
in the insurance and reinsurance business.  Upon closing of the transaction, the
Company  will  become an insurance holding company, the employment of all of the
Company's  current  employees  will  terminate,  and  substantially  all  of the
Company's  operations  will be directed by IHC management and employees pursuant
to  a  services  agreement  between  the  Company and IHC.  Consummation of this
acquisition is subject to satisfaction of certain conditions, including approval
by insurance regulators and the Company's stockholders.  The Company anticipates
the  completion  of  the  transaction  by  December  31,  2002.

In  a  separate  transaction,  IHC acquired Pacific Century Cyberworks Limited's
("PCCW")  entire  interest  in  the Company consisting of 5,000,000 common stock
shares at $3.00 per share for a total value of $15,000,000.  As a result of this
transaction, Pacific Century Cyberworks Limited appointees Linus W.L. Cheung and
Jeffrey  A.  Bowden  have  resigned  from  the Company's Board of Directors, and
Edward  Netter,  Chairman of IHC, and Roy Thung, Chief Executive Officer of IHC,
have  been  appointed  to  the Company's Board of Directors.  Additionally, upon
closing  of the transaction, IHC has agreed to make a cash tender offer at $3.00
per share for at least 3,000,000 outstanding common stock shares of the Company,
subject  to  certain  limitations.

Separately,  the Company's Board of Directors also approved a shareholder rights
plan  (the  "Plan").  Pursuant  to  the  Plan's approval, the Company's Board of
Directors declared a dividend distribution of one Preferred Share Purchase Right
(the  "Rights")  on  each  outstanding  common  stock  share.  The  dividend
distribution  of  the  Rights  will  be  payable to common stock stockholders of
record  on  August  14,  2002.  The  Rights  distribution  is  not  taxable  to
stockholders.  Subject  to limited exceptions, the Rights will be exercisable if
a  person or group acquires or announces a tender offer for 4.99% or more of the
Company's  common  stock.  Under  certain circumstances, each Right will entitle
shareholders  to  buy  one  one-hundredth  of  a share of newly created Series A
Junior  Participating  Preferred  Stock  of  the Company at an exercise price of
$3.00.  The  Company's  Board of Directors will be entitled to redeem the Rights
at $0.01 per Right at any time before a person has acquired 4.99% or more of the
outstanding  common  stock.

The  Rights  designed to inhibit some acquisitions of the Company's common stock
shares  that  could  result  in  the imposition of limitations on the use of its
Federal  net  operating  loss carryforwards and certain income tax credits.  The
Rights  are  also  intended  to enable all stockholders to realize the long-term
value  of their investment in the Company.  The Rights are not being distributed
in  response  to  any  specific  effort  to  acquire  control  of  the  Company.


                                      -12-
<PAGE>
The  Rights  are  designed  to help protect the tax benefits associated with the
Company's  net  operating  loss  carryforwards.

If  a  person becomes an Acquiring Person, each Right will entitle its holder to
purchase,  at the Right's then-current exercise price, a number of the Company's
common  shares  having a market value at that time of twice the Right's exercise
price.  The Rights held by the Acquiring Person will become void and will not be
exercisable  to  purchase  shares  at the bargain purchase price.  If Company is
acquired  in  a  merger  or other business combination transaction which has not
been  approved  by the Company's Board of Directors, each Right will entitle its
holder  to purchase, at the Right's then-current exercise price, a number of the
acquiring  company's  common  shares having a market value at that time of twice
the  Right's  exercise  price.

The  Plan  will  expire on the close of business on the earliest date that (a) a
vote of Company's stockholders does not approve an amendment or an amendment and
restatement  of  the  Company's  Certificate  of  Incorporation  proposed by the
Company's Board of Directors providing for limitations on the acquisition of the
Company's  common  stock  in  excess  of  certain  percentage  amounts, (b) such
restated  Certificate  of  Incorporation is filed with the Secretary of State of
the  State  of  Delaware  or (c) the Company's stock purchase agreement with SSH
Corp.  and IHC is terminated, subject to the Company's right to extend such date
and  the  Company's earlier redemption or exchange of such rights or termination
of  the  Plan.

On  May  17,  2002,  the  Company  received  a NASDAQ Staff Determination Letter
stating  that  the  Company's  common  stock is no longer eligible for continued
listing  on  the  NASDAQ  National Market as a result of the Company ceasing the
operations  of  its  last  business  segment,  Intellicom,  and that the Company
therefore  does  not  meet  the  requirements for continued listing set forth in
Marketplace  Rules  4300  and 4330.  Subsequently, the Company requested and was
granted  an  oral hearing before a NASDAQ Listing Qualifications Panel to appeal
the  NASDAQ  Staff  Determination  Letter,  which  stayed  the  delisting of the
Company's  common  stock  pending the outcome of the hearing.  On July 12, 2002,
the  Company  appeared before the NASDAQ Listing Qualifications Panel to present
the Company's plan to acquire FSHC, which would allow the Company to comply with
the  Marketplace  Rules  4300 and 4330.  The Company is awaiting a decision from
the  NASDAQ  Listing  Qualifications  Panel.

On  December  7,  2000,  the  Company's  Board  of  Directors approved a plan to
discontinue  its ISP Channel, Inc. ("ISP Channel") operations because of (1) the
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 to bear the costs of maintaining the ISP Channel.
Subsequently  on  December 19, 2000, the Company's Board of Directors approved a
plan  to  discontinue  its Aerzone Corporation ("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.  In
conjunction  with  discontinuing  the  ISP  Channel  and Aerzone businesses, the
Company's Board of Directors on December 28, 2000, approved a plan to reduce its
corporate  headquarters  staff.

As  a  result  of  the Company's Board of Directors decisions, the Company wound
down  the  ISP  Channel  and  Aerzone  businesses,  and  reduced  its  corporate
headquarters  staff.  As  of  June  30,  2002,  the  ISP  Channel  and  Aerzone
businesses,  including  Laptop  Lane  Limited,  were  substantially  wound down.

On  March  29,  2002,  the  Company and its wholly-owned subsidiary, Intelligent
Communications,  Inc.  ("Intellicom"),  entered  into  an  agreement to sell its
operating  business  and  certain assets to Loral Cyberstar, Inc.  Following the
sale  of its operating business and certain assets to Loral Cyberstar, Inc., the
Company's  Board  of  Directors  unanimously  agreed  to cease the operations of
Intellicom on April 3, 2002.  Subsequently on April 22, 2002, Intellicom entered
into  an  agreement  to  sell  certain  assets  to  Native  Intellicom,  Inc., a
wholly-owned  subsidiary  of  the  Pinoleville  Band  of Pomo Indians, for cash,
subject  to the termination of Intellicom's lease for its facility in Livermore,
California.

The  Company  reports operating expenses in several categories:  (i) selling and
marketing;  (ii)  engineering; and (iii) general and administrative costs.  Also
included  in  operating  expenses  are  depreciation  and  non-cash compensation
expense  related  to  stock  options.  Non-cash  compensation expense related to
stock  options  relates  primarily  to  the  amortization  of  deferred  stock
compensation  resulting  from  below  market value stock options granted between
October  1998  and  March  1999.

The  results  of  operations for the three months and nine months ended June 30,
2001,  have  been  reclassified  for  the  effects of discontinued operations of
Intellicom.


                                      -13-
<PAGE>
CRITICAL  ACCOUNTING  POLICIES

The  preparation of consolidated financial statements and related disclosures in
conformity with generally accepted accounting principles in the United States of
America  requires  management  to make estimates and assumptions that affect the
reported  amounts  of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of  the revenues and expenses during the reporting period.  Actual results could
differ  from  those  estimates.  The  Company  believes  the  following critical
accounting  policies  are  significantly  affected by judgments, assumptions and
estimates  used  in  preparation  of  its  condensed  consolidated  financial
statements.  For  a  detailed  discussion  on the application of these and other
accounting  policies, see Note 2 to the consolidated financial statements in the
Company's  annual  report  on  Form 10-K for the fiscal year ended September 30,
2001.

Discontinued  Operations

The  Company  accounts  for  discontinued operations in accordance to Accounting
Principles  Board Opinion No. 30 ("APB 30"), Reporting the Results of Operations
- Reporting the Effects of Disposal of a Segment of Business, and Extraordinary,
Unusual  and  Infrequently Occurring Events and Transactions.  Under APB 30, the
Company  accrued  estimates  of  expected  liabilities  related  to discontinued
operations  through its eventual discharge.  The estimated remaining liabilities
related to discontinued operations include contract terminations, litigation and
loss  from  operations  subsequent  to  June  30, 2002.  The Company reviews the
estimated  closure  costs liability on a quarterly basis to determine changes in
the  costs  of  the  discontinued  operations  activities.

Restructuring  Expense

The  Company  recorded  restructuring  expenses  related  to an approved plan to
reduce  corporate  headquarters  staff  and to relocate its corporate offices in
conjunction  with  discontinuing  the  Aerzone,  ISP  Channel  and  Intellicom
businesses.  These restructuring expenses are based on estimates of the expected
costs  associated  with  employee  severance,  lease  terminations, and facility
relocation.  The  Company reviews the estimated restructuring costs accrual on a
quarterly  basis  to  determine  changes  in  the  costs  of  the  restructuring
activities.

Impairment  of  Long-lived  Assets

The  Company  evaluates long-lived assets for impairment whenever current events
or  changes  in  circumstances,  as defined in Statement of Financial Accounting
Standards  No.  121  ("SFAS  121"),  Accounting for the Impairment of Long-Lived
Assets  and  for Long-Lived Assets to be Disposed of, indicate that the carrying
value  of  an  asset  may not be recoverable based on expected undiscounted cash
flows  attributable  to that asset.  The amount of any impairment is measured as
the  difference  between  the  carrying value and the fair value of the impaired
asset.

Short-term  Investments

The  Company  accounts  for  its  short-term  investments  in  debt  and  equity
securities  under  Statement  of  Financial  Accounting Standards No. 115 ("SFAS
115"),  Accounting  for  Certain  Investments  in  Debt  and  Equity Securities.
Short-term  investments  generally  consist  of  highly  liquid  securities with
original  maturities  in excess of three months.  The Company has classified its
short-term  investments  as  available-for-sale  securities.  These  short-term
investments  are  carried  at  fair  value  based  on  quoted market prices with
unrealized  gains and losses reported in accumulated other comprehensive loss in
the  accompanying  condensed  consolidated  balance  sheets.  Realized gains and
losses  on short-term investments are computed using the specific identification
method  and  are  reported  in  miscellaneous  income  (expense),  net  in  the
accompanying condensed consolidated statements of operations.  Declines in value
judged  to  be  other-than-temporary  is  determined  based  on  the  specific
identification  method  and  are  reported  in  loss  in  disposition  of equity
investments in the accompanying condensed consolidated statements of operations.


                                      -14-
<PAGE>
RESULTS  OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2002, COMPARED TO THE
THREE  MONTHS  ENDED  JUNE  30,  2001

Selling  and  Marketing.  The Company incurred no selling and marketing expenses
-----------------------
for  the  three  months  ended  June  30, 2002, compared to $9,000 for the three
months  ended  June  30,  2001,  as a result of eliminating the public relations
department  associated with the December 28, 2000, corporate restructuring plan.

Engineering.  The  Company incurred no engineering expenses for the three months
-----------
ended  June  30,  2002,  compared to $71,000 for the three months ended June 30,
2001,  as a result of eliminating the corporate technology department associated
with  the  December  28,  2000,  corporate  restructuring  plan.

General  and  Administrative.  Consolidated  general and administrative expenses
----------------------------
decreased  $347,000,  or  22%, to $1,265,000 for the three months ended June 30,
2002, compared to $1,612,000 for the three months ended June 30, 2001, primarily
due  to  reduced  expenses  resulting  from staff reductions associated with the
December  28,  2000,  corporate  restructuring  plan.

Depreciation.  Consolidated  depreciation  expense decreased $44,000, or 56%, to
------------
$34,000  for  the  three months ended June 30, 2002, compared to $78,000 for the
three  months ended June 30, 2001, primarily due to reduced depreciation expense
resulting  from  sales  and  disposal  of  property.

Non-Cash  Compensation Expense Related to Stock Options.  The Company recognized
-------------------------------------------------------
a  non-cash  compensation  expense  related to stock options of $400,000 for the
three  months  ended  June  30,  2002, compared to non-cash compensation expense
related  to  stock options of $483,000 for the three months ended June 30, 2001.
For the three months ended June 30, 2002 and 2001, non-cash compensation expense
related  to  stock  options  issued  to  employees  relates  primarily  to  the
amortization  of  deferred  stock compensation resulting from below market value
stock  options  granted  between  October  1998  and  March  1999.

Non-cash  compensation  expense  related  to  stock  options  should continue to
decrease  as  the  Company continues to reduce its staff due to its discontinued
operations  and  corporate  restructuring.

Interest  Income.  Consolidated  interest  income decreased $832,000, or 68%, to
----------------
$391,000  for  the  three months ended June 30, 2002, compared to $1,223,000 for
the  three  months ended June 30, 2001, as a result of lower interest rates, and
decrease  in  cash,  cash  equivalents,  and  short-term  investments,
available-for-sale.

Interest  Expense.  Consolidated  interest  expense increased $14,000 to $18,000
-----------------
for  the  three  months  ended  June  30, 2002, compared to $4,000 for the three
months  ended  June  30,  2001.

Loss  on Disposition of Equity Investments.  For the three months ended June 30,
-------------------------------------------
2001,  the  Company  recognized  a  charge  of  $3,684,000  related to its China
Broadband Corporation investment in anticipation of the Company's July 13, 2001,
agreement  to  sell  its  interest  in  China Broadband Corporation to Canaccord
International  Limited.

Miscellaneous  Income/Expense, Net.  Consolidated miscellaneous income increased
----------------------------------
$53,000  to  $3,000  for  the  three  months  ended  June  30, 2002, compared to
consolidated  miscellaneous  expense  of $50,000 for the three months ended June
30,  2001.  This  increase is primarily due to losses incurred from the disposal
of  property  for  the  three  months  ended  June  30,  2001.

Income  Taxes.  The  Company  made  no  provision for income taxes for the three
-------------
months  ended  June  30,  2002 and 2001, as a result of the Company's continuing
losses.

Loss  Attributed  to  Discontinued Operations.  The Company recognized a $70,000
----------------------------------------------
loss  attributed  to discontinued operations for the three months ended June 30,
2002, compared to a loss of $8,013,000 for the three months ended June 30, 2001.
For  the  three  months ended June 30, 2002, the loss attributed to discontinued
operations  consisted of a $180,000 gain on disposition of Intellicom, resulting
from  a  lower than anticipated costs of closing Intellicom, and a $250,000 loss
on disposition of Aerzone, resulting from a superior court decision related to a
breach  of  contract.  For  the  three  months  ended  June  30,  2001, the loss
attributed  to  discontinued  operations  consisted  of  a  $3,913,000 loss from
operations  of  Intellicom, a $3,000,000 gain on the disposition of ISP Channel,
resulting  from  lower  than  anticipated  costs  of  closing ISP Channel, and a
$7,100,000  loss  on  the  disposition  of Aerzone, resulting primarily from the
reduction  of  the  anticipated  sales  price  of  Laptop  Lane  Limited.

Net  Loss.  The Company had a net loss of $1,393,000, or a net loss per share of
---------
$0.05,  for  the  three  months  ended  June 30, 2002, compared to a net loss of
$12,781,000,  or  a net loss per share of $0.51, for the three months ended June
30,  2001.


                                      -15-
<PAGE>
RESULTS  OF  OPERATIONS FOR THE NINE MONTHS ENDED JUNE 30, 2002, COMPARED TO THE
NINE  MONTHS  ENDED  JUNE  30,  2001

Selling  and  Marketing.  The Company incurred no selling and marketing expenses
-----------------------
for  the  nine  months  ended  June  30, 2002, compared to $196,000 for the nine
months  ended  June  30,  2001,  as a result of eliminating the public relations
department  associated with the December 28, 2000, corporate restructuring plan.

Engineering.  The  Company  incurred no engineering expenses for the nine months
-----------
ended  June  30,  2002,  compared to $529,000 for the nine months ended June 30,
2001,  as a result of eliminating the corporate technology department associated
with  the  December  28,  2000,  corporate  restructuring  plan.

General  and  Administrative.  Consolidated  general and administrative expenses
----------------------------
decreased  $2,056,000,  or 32%, to $4,347,000 for the nine months ended June 30,
2002,  compared to $6,403,000 for the nine months ended June 30, 2001, primarily
due  to  reduced  expenses  resulting  from staff reductions associated with the
December  28,  2000,  corporate  restructuring  plan.

Depreciation.  Consolidated  depreciation expense decreased $122,000, or 43%, to
------------
$160,000  for  the nine months ended June 30, 2002, compared to $282,000 for the
nine  months  ended June 30, 2001, primarily due to reduced depreciation expense
resulting  from  sales  and  dispoal  of  property.

Non-Cash  Compensation  Expense/Benefit  Related  to Stock Options.  The Company
------------------------------------------------------------------
recognized  a  non-cash  compensation  expense  related  to  stock  options  of
$1,200,000  for  the  nine  months  ended  June  30,  2002, compared to non-cash
compensation  benefit related to stock options of $1,087,000 for the nine months
ended June 30, 2001.  For the nine months ended June 30, 2002 and 2001, non-cash
compensation  expense/benefit  related  to  stock  options  issued  to employees
relates  primarily  to the amortization of deferred stock compensation resulting
from  below  market  value  stock options granted between October 1998 and March
1999.

Non-cash  compensation  benefits  are  recognized  following  the  reversal  of
previously recognized expenses related to terminated unvested stock options with
a cliff vesting feature.  Non-cash compensation expense related to stock options
should  continue to decrease as the Company continues to reduce its staff due to
its  discontinued  operations  and  corporate  restructuring.

Provision  for Impaired Assets.  The Company recognized a charge of $352,000 for
-------------------------------
the  nine  months ended June 30, 2002, as a result of writing off its accounting
software.  The  Company  migrated  to  an  off-the-shelf  accounting  software.

Restructuring  Expense.  The  Company  recognized a restructuring charge for the
-----------------------
nine  months  ended  June  30, 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  consisted  primarily  of  termination  payments for
affected employees.  The Company increased the restructuring reserve by $502,000
for  the  nine  months  ended June 30, 2002, as a result of additional estimated
lease termination costs associated with Company headquarters.  At June 30, 2002,
a  restructuring  accrual  of  $1,449,000  remained  outstanding.

Interest  Income.  Consolidated interest income decreased $4,110,000, or 74%, to
----------------
$1,423,000  for  the nine months ended June 30, 2002, compared to $5,533,000 for
the  nine  months  ended June 30, 2001, as a result of lower interest rates, and
decrease  in  cash,  cash  equivalents,  and  short-term  investments,
available-for-sale.

Interest  Expense.  Consolidated  interest expense decreased $35,000, or 39%, to
-----------------
$54,000  for  the  nine  months ended June 30, 2002, compared to $89,000 for the
nine  months  ended  June  30,  2001.  This  decrease  is  primarily  due to the
reduction  of interest expense resulting from the payment of the 8.5% promissory
note  to  the  former  Intellicom  stockholders.

Loss  on  Disposition  of  Equity Investments.  The Company recognized a loss on
----------------------------------------------
disposition of equity investments of $701,000 for the nine months ended June 30,
2002,  consisting  of  $230,000  related  to the 1,000,000 SkyNet Global Limited
common  stock  shares  and $471,000 related to the 400,000 SkyNet Global Limited
preference  stock  shares.  For the nine months ended June 30, 2001, the Company
recognized  a  charge  of  $17,445,000, consisting of a $768,000 write down of a
note  receivable  and  related  interest,  and  $16,677,000  of  write-downs and
realized  losses related to various short-term and long-term equity investments.

Equity  in  Net  Losses of Investee Companies.  The Company recognized equity in
----------------------------------------------
net  losses of investee companies of $394,000 for the nine months ended June 30,
2001.  The  Company did not incur any equity in net losses of investee companies


                                      -16-
<PAGE>
for  the nine months ended June 30, 2002, as a result of the sale and write offs
of  investee  companies accounted for under the equity method for the year ended
September  30,  2001.

Miscellaneous  Expense, Net.  The Company incurred no consolidated miscellaneous
---------------------------
expense  for  the  nine  months  ended  June  30, 2002, compared to consolidated
miscellaneous  expense  of  $153,000  for  the  nine months ended June 30, 2001,
primarily  resulting  from  the  write  off  of  costs  associated with a failed
business  acquisition.

Income  Taxes.  The  Company  made  no  provision  for income taxes for the nine
-------------
months  ended  June  30,  2002 and 2001, as a result of the Company's continuing
losses.

Loss Attributed to Discontinued Operations.  The Company recognized a $4,889,000
-------------------------------------------
loss  attributed  to  discontinued operations for the nine months ended June 30,
2002, compared to a loss of $33,453,000 for the nine months ended June 30, 2001.
For  the  nine  months  ended June 30, 2002, the loss attributed to discontinued
operations  consisted  of  a  $3,120,000  loss  on  disposition of Intellicom, a
$1,829,000 loss from operations of Intellicom, a $590,000 loss on disposition of
Micrographic  Technology  Corporation  ("MTC"),  as  a  result  of a preliminary
arbitration  decision  related  to  a  dispute  with  Applications Informatiques
Multimedia  and  a  dispute  related  to  the  sale of MTC to Global Information
Distribution  GmbH  ("GID"),  a  $900,000  gain  on  disposition of ISP Channel,
resulting  from  the  lower than anticipated costs of closing ISP Channel, and a
$250,000  loss  on  disposition  of  Aerzone,  resulting  from  a superior court
decision  related  to  a breach of contract.  For the nine months ended June 30,
2001,  the loss attributed to discontinued operations consisted of a $26,625,000
loss  from operations of Intellicom, a $9,008,000 gain on the disposition of ISP
Channel, resulting from lower than anticipated costs of closing ISP Channel, and
a  $15,836,000  loss on the disposition of Aerzone, resulting primarily from the
reduction  of  the  anticipated  sales  price  of  Laptop  Lane  Limited.

Extraordinary  Item-Gain  on Settlement of Obligation.  The Company recognized a
------------------------------------------------------
gain  of  $1,326,000 for the nine months ended June 30, 2001, resulting from the
cash  payment  made  in  lieu  of  the  Company's obligation to pay off the 8.5%
promissory  note  and  interest, and to settle business acquisition liability to
former  Intellicom  stockholders  with  common  stock.

Net Loss.  The Company had a net loss of $10,782,000, or a net loss per share of
--------
$0.42,  for  the  nine  months  ended  June  30, 2002, compared to a net loss of
$54,898,000,  or  a  net loss per share of $2.20, for the nine months ended June
30,  2001.


                                      -17-
<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.  As of June 30, 2002, the Company had $69,303,000
in  cash, cash equivalents, and short-term investments compared with $75,454,000
as  of  September  30,  2001.

Net  cash  used  in  operating  activities of continuing operations for the nine
months  ended  June  30,  2002, was $2,476,000.  This results from a net loss of
$5,893,000  from  continuing  operations  and  a  net  decrease  in  operating
liabilities  of  $1,587,000,  offset by several non-cash items including loss on
write  down  of  impaired  assets  of  $352,000,  loss  on disposition of equity
investments  of  $701,000,  provision  for  restructuring  costs  of  $502,000,
amortization  of deferred stock compensation expense of $1,200,000, depreciation
expense  of $160,000, and a net decrease in operating assets of $2,044,000.  Net
cash  used  in  operating  activities of discontinued operations was $3,838,000.

Net  cash provided by investing activities of continuing operations for the nine
months  ended  June 30, 2002, was $19,602,000, and was provided by proceeds from
maturities and sales of short-term investments, net of purchases.  Net cash used
in  investing  activities  of  discontinued  operations  was  $2,000.

No  cash  was  provided  by  or used in financing activities for the nine months
ended  June  30,  2002.  Net  cash  used in financing activities of discontinued
operations  was  $60,000.

The  Company  believes  it has sufficient cash to meet its presently anticipated
business  requirements  over  the  next  twelve  months including the funding of
operating  losses,  discontinued  operations,  working capital requirements, and
capital  investments.  The  Company  expects continued reductions in cash usages
from  its  discontinued  operating  activities for the year ending September 30,
2002.


                                      -18-
<PAGE>
                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'S ACQUISITION OF FSHC SUBJECTS THE COMPANY TO RISKS IN A NEW MARKET

On  July  29,  2002,  the  Company  entered  into  an agreement to acquire First
Security Holdings Corporation ("FSHC") from Independence Holding Company ("IHC")
for  $31.9  million in cash.  FSHC and its wholly-owned subsidiaries are engaged
in the insurance and reinsurance business.  Upon closing of the transaction, the
Company  will  become an insurance holding company, the employment of all of the
Company's  current  employees  will  terminate,  and  substantially  all  of the
Company's  operations  will be directed by IHC management and employees pursuant
to  a  services  agreement  between  the  Company and IHC.  Consummation of this
acquisition is subject to satisfaction of certain conditions, including approval
by insurance regulators and the Company's stockholders.  The Company anticipates
the  completion  of  the  transaction by December 31, 2002, although the Company
cannot assure that it will complete the transaction on schedule, if at all.  The
Company  will  rely  on  new  management  to operate the business.  As such, the
Company  is faced with risks that are new to the Company and which may adversely
affect  the  Company's  business,  financial  condition,  and  prospects.

THE  COMPANY'S  ACQUISITION OF FSHC MAY ADVERSELY AFFECT THE COMPANY'S FINANCIAL
CONDITION

The acquisition of FSHC involve other risks including potential negative effects
on the Company's reported results of operations from acquisition-related charges
and  amortization  of  other  intangible  assets.  As  a  result  of  the  FSHC
acquisition, the Company may record additional intangible assets. Such recording
of  intangible  assets  may  adversely  affect  the  Company's  earnings  and
profitability  for  the  foreseeable  future.  If  the  amount  of such recorded
intangible assets is increased or if the Company has future losses and is unable
to  demonstrate the Company's ability to recover the amount of intangible assets
recorded  during  such time periods, the intangible asset can be written down or
the period of amortization could be shortened, which may further increase annual
amortization  charges.  In  such  event,  the  Company's  business and financial
condition  could  be  materially  and  adversely  affected.  In  addition,  the
acquisition of all of the outstanding stock of FSHC was structured as a purchase
by  the  Company. As a result, the Company could be adversely affected by direct
and contingent liabilities of FSHC. It is possible that the Company is not aware
of all of the liabilities of FSHC and that FSHC has greater liabilities than the
Company  expected.

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
nine  months ended June 30, 2002, the Company had a net loss of $10,782,000.  As
of  June  30, 2002, the Company had an accumulated deficit of $401,029,000.  The
Company  expects  to  incur additional losses and experience negative cash flows
related  to  process  of  winding  down  the Intellicom, ISP Channel and Aerzone
businesses.  These  efforts  may  be  more  expensive than the Company currently
anticipates.

THE  COMPANY  MAY  NOT  GENERATE  SUFFICIENT  CASH FLOWS TO SUPPORT ITS EXPENSES

The  Company's  current  expense  levels are based on the resources necessary to
complete  the  process  of  winding down the Intellicom, ISP Channel and Aerzone
Businesses.  Depending  upon  the  costs to complete the process of winding down
Intellicom,  ISP  Channel  and  Aerzone,  the  Company is unlikely to be able to
generate  sufficient  interest  income  to  cover  expenses.


                                      -19-
<PAGE>
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

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:

     -    Diversion of resources and management time;
     -    Dilution to existing stockholders if the Company uses equity
          securities to finance acquisitions;
     -    Incurrence of unforeseen obligations or liabilities;
     -    Inability of management to maintain uniform standards, controls,
          procedures and policies;
     -    Difficulty assimilating the acquired operations and personnel;
     -    Risks of entering markets in which the Company has little or no direct
          prior experience; and
     -    Impairment of relationships with employees 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 Internet-related companies.  In most
instances,  these  investments  are  in  the  form of unregistered 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 and have incurred charges
related  to  the write-down or write-off of these investments.  For example, the
Company wrote down equity investments by $701,000 for the nine months ended June
30,  2002.  The  Company also records and continues to record a share of the net
losses in these companies, up to the Company's cost basis.  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'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:

     -    Announcements of developments related to the Company's business;
     -    Fluctuations in the Company's results of operations;
     -    Sales of substantial amounts of the Company's securities in the
          marketplace;
     -    General conditions in the Company's industries or the worldwide
          economy;
     -    An outbreak of war or hostilities;
     -    A shortfall in earnings compared to securities analysts' expectations;
     -    Changes in analysts' recommendations or projections; and
     -    Changes in the Company's relationships with the Company's suppliers.

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.

On  May  17,  2002,  the  Company  received  a NASDAQ Staff Determination Letter
stating  that  the  Company's  common  stock is no longer eligible for continued
listing  on  the  NASDAQ  National Market as a result of the Company ceasing the
operations  of  its  last  business  segment,  Intellicom,  and that the Company
therefore  does  not  meet  the  requirements for continued listing set forth in
Marketplace  Rules  4300  and 4330.  Subsequently, the Company requested and was
granted  an  oral hearing before a NASDAQ Listing Qualifications Panel to appeal
the  NASDAQ  Staff  Determination  Letter,  which  stayed  the  delisting of the
Company's  common  stock  pending the outcome of the hearing.  On July 12, 2002,
the  Company  appeared before the NASDAQ Listing Qualifications Panel to present
the Company's plan to acquire FSHC, which would allow the Company to comply with
the  Marketplace


                                      -20-
<PAGE>
Rules 4300 and 4330.  The Company is awaiting a decision from the NASDAQ Listing
Qualifications  Panel.  There  can  be  no  assurance  that  the  NASDAQ Listing
Qualifications  Panel  will  grant  the Company's request for continued listing.
Delisting  from  the  NASDAQ  National  Market  could  result in a lower average
trading  volume  of  the  Company's common stock, which in turn could lead to an
increase  in  stock  price  volatility.

PROSPECTIVE  ANTI-TAKEOVER  PROVISIONS  COULD  NEGATIVELY  IMPACT  THE COMPANY'S
STOCKHOLDERS

The  Company  is  a  Delaware  corporation.  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
contain 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.

The  Company's  Board  of Directors also approved a shareholder rights plan (the
"Plan").  Pursuant  to  the  Plan's  approval,  the Company's Board of Directors
declared  a  dividend  distribution  of  one Preferred Share Purchase Right (the
"Rights")  on each outstanding common stock share.  The dividend distribution of
the  Rights will be payable to common stock stockholders of record on August 14,
2002.  The  Rights  distribution  is  not  taxable  to stockholders.  Subject to
limited exceptions, the Rights will be exercisable if a person or group acquires
or  announces  a  tender  offer for 4.99% or more of the Company's common stock.
Under  certain  circumstances,  each  Right will entitle shareholders to buy one
one-hundredth  of  a  share  of  newly  created  Series  A  Junior Participating
Preferred  Stock  of  the Company at an exercise price of $3.00.  The Rights are
designed  to inhibit some acquisitions of the Company's common stock shares that
could  result  in  the  imposition  of limitations on the use of its Federal net
operating  loss  carryforwards  and  certain income tax credits.  The Rights are
also intended to enable all stockholders to realize the long-term value of their
investment  in the Company.  The Rights are not being distributed in response to
any  specific effort to acquire control of the Company.  The Rights are designed
to  help  protect  the  tax benefits associated with the Company's net operating
loss  carryforwards.  If  a  person becomes an Acquiring Person, each Right will
entitle  its  holder  to purchase, at the Right's then-current exercise price, a
number  of  the  Company's  common  shares having a market value at that time of
twice  the Right's exercise price.  The Rights held by the Acquiring Person will
become  void  and  will  not  be  exercisable  to purchase shares at the bargain
purchase  price.  If  Company  is  acquired  in  a  merger  or  other  business
combination  transaction  which  has not been approved by the Company's Board of
Directors,  each  Right  will  entitle  its  holder  to purchase, at the Right's
then-current  exercise  price, a number of the acquiring company's common shares
having  a  market  value  at that time of twice the Right's exercise price.  The
Company's  Board of Directors will be entitled to redeem the Rights at $0.01 per
Right  at any time before a person has acquired 4.99% or more of the outstanding
common  stock.  The  issuance  of  rights  could  have the effect of delaying or
preventing  a  change  in  control  of  the  Company.

                                INTELLICOM RISKS

THE  COMPANY  MAY  FACE  UNEXPECTED  LIABILITIES IN WINDING DOWN THE BUSINESS OF
INTELLICOM

The  Company  has determined that it is in the best interests of the Company and
its  shareholders  to  wind  down the business of Intellicom.  While the Company
expects  the  process of winding down Intellicom to be substantially complete by
September  30,  2002,  there can be no assurances that it will be able to do so.
The Company expects to incur significant costs related to terminating contracts,
reducing  the  workforce  and  recovering  and disposing of deployed assets.  In
addition,  the  Company may face litigation with respect to the wind down of its
activities.

                                ISP CHANNEL RISKS

THE  COMPANY MAY FACE UNEXPECTED LIABILITIES IN WINDING DOWN THE BUSINESS OF ISP
CHANNEL

While  the  business of ISP Channel has been substantially wound down, there can
be no assurance that all claims and issues have been resolved.  In addition, the
Company  may  face  litigation  with respect to the wind down of its activities.


                                      -21-
<PAGE>
                                  AERZONE RISKS

THE  COMPANY  MAY  FACE  UNEXPECTED  LIABILITIES IN WINDING DOWN THE BUSINESS OF
AERZONE

While the business of Aerzone has been substantially wound down, there can be no
assurance  that  all  claims  and  issues  have been resolved.  In addition, the
Company  may  face  litigation  with respect to the wind down of its activities.


                                      -22-
<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  or  engage  in  hedging  activities  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 $41,117,000 at June 30, 2002.  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  thirteen  and  twenty-five 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  June  30,  2002,  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, it has 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  its  interest  income.

The Company had outstanding convertible debt of approximately $1,444,000 at June
30,  2002.  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
borrowings  by the Company, if any.  The Company does not hedge against interest
rate  fluctuations.

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.


                                      -23-
<PAGE>
PART  II  -  OTHER  INFORMATION

ITEM  1.     LEGAL  PROCEEDINGS

On  September 26, 2001, Lucent Technologies Inc. ("Lucent") brought an action in
San Francisco Superior Court against SoftNet Systems, Inc. and subsidiaries (the
"Company"), alleging that the Company breached a contract by failing to purchase
Lucent's shares in Freewire Networks, Inc. ("Freewire")  and claiming damages of
approximately $3.5 million, which may increase over time.  On December 31, 2001,
the  San  Francisco  Superior Court issued an order to deny Lucent's application
for  writ  of  attachment,  finding  that  Lucent  had  not  shown a substantial
probability that it will prevail on its claim.  The Company continues to believe
that Lucent's claims are without merit and will contest these claims vigorously.

On  November  9, 2001, Nokia Inc. ("Nokia") commenced an action in San Francisco
Superior Court against the Company and Aerzone Corporation ("Aerzone"), alleging
breach  of  contract arising out of the Aerzone's proposed operations in certain
airports.  Nokia  seeks  approximately  $2.1  million  in  damages.  The Company
believes  that  Nokia's  claims  are  without merit and intends to contest these
claims  vigorously.  Additionally,  the Company deposited security collateral of
$1,053,000  as  required  by  the performance  bond indemnity agreement with the
surety  company.  In  the  event  that  the Company prevails, any balance on the
collateral  will  be  returned  by  the  surety  company  to  the  Company.

On  October  30,  2001, Global Information Distribution GmbH ("GID") commenced a
demand  for  arbitration  against  the  Company, alleging breach of contract and
warranties  relating  to the sale of Micrographic Technology Corporation ("MTC")
to GID on September 30, 1999.  GID claims approximately $2.1 million in damages.
The Company believes GID's claims are without merit and intends to contest these
claims  vigorously.

The  Company is also involved in other legal proceedings and claims, which arise
in the ordinary course of its discontinued businesses.  The Company believes the
results  of  the  above noted legal proceedings, other pending legal proceedings
and  claims are not expected to have a material adverse effect on its results of
operations,  financial  condition  or  cash  flows.

ITEM  2.     CHANGES  IN  SECURITIES  AND  USE  OF  PROCEEDS

Not  Applicable

ITEM  3.     DEFAULTS  UPON  SENIOR  SECURITIES

Not  Applicable

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

Not  Applicable

ITEM  5.     OTHER  INFORMATION

Not  Applicable


                                      -24-
<PAGE>
ITEM  6.     EXHIBITS  AND  REPORTS  ON  FORM  8-K.

(a)  EXHIBITS

     Not Applicable

(b)  REPORTS ON FORM 8-K:

     Current Report on Form 8-K filed with the Commission on April 11, 2002

     Current Report on Form 8-K filed with the Commission on May 30, 2002


                                      -25-
<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/  Edward  A.  Bennett                               Date: August 14, 2002
-------------------------------------                       -------------------
Edward A. Bennett
Acting Chairman of the Board of Directors


/s/  George  L.  Hernandez                             Date: August 14, 2002
-------------------------------------                       -------------------
George  L.  Hernandez
Acting Chief Operating Officer; Vice President,
Finance and Administration; and Secretary


                                      -26-
<PAGE>