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 December 31, 1997

                                       OR

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

                        For the transition period from to

                           Commission File No.: 1-5270

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

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

   520 Logue Avenue, Mountain View, California               94043
   -------------------------------------------          --------------
   (Address of principal executive offices)              (Zip Code)

Registrant's telephone number, including area code:  (650) 965-3700

                                 Not Applicable
--------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report


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 December 31, 1997
  -------------------------------             --------------------------------
  Common stock, without par value                       6,974,967

<PAGE>

                              SOFTNET SYSTEMS, INC.

                                      INDEX




PART I        FINANCIAL INFORMATION

     Item 1.  Financial Statements (Unaudited)

         Condensed Consolidated Balance Sheets
               December 31, 1997 and September 30, 1997

         Condensed Consolidated Statements of Operations
               for the Three Months Ended
               December 31, 1997 and December 31, 1996

         Condensed Consolidated Statements of Cash Flows
               for the Three Months Ended
               December 31, 1997 and December 31, 1996

         Notes to Condensed Consolidated Financial Statements
               for the Three Months Ended
               December 31, 1997 and December 31, 1996

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


PART II       OTHER INFORMATION

     Item 2.  Changes in Securities

     Item 6.   Exhibits and Reports on Form 8-K


<PAGE>



                     SOFTNET SYSTEMS, INC. AND SUBSIDIARIES
                      Condensed Consolidated Balance Sheets
                 As of December 31, 1997 and September 30, 1997
                        (In thousands, except share data)



                                                           Dec. 31,   Sept. 30,
                                                            1997        1997
                                                          ---------   ---------
                                                         (Unaudited)
       ASSETS

Current assets:
   Cash ................................................   $     50    $     37
   Restricted cash (cash held in escrow) ...............      4,600          --
   Accounts receivables, net ...........................      6,410       6,983
   Inventories .........................................      4,128       4,310
   Prepaid expenses ....................................        670         473
                                                           --------    --------
       Total current assets ............................     15,858      11,803

Property and equipment, net ............................      1,569       1,637
Costs in excess of fair value of net
  assets acquired, net .................................      6,605       6,900
Other assets ...........................................      3,964       4,037
                                                           --------    --------
                                                           $ 27,996    $ 24,377
                                                           ========    ========

       LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
   Accounts payable and accrued expenses ...............   $  7,813    $  7,264
   Current portion of long term debt ...................      1,390       1,712
   Current portion of capital leases ...................         36          46
   Deferred revenue ....................................      1,486       1,479
                                                           --------    --------
       Total current liabilities .......................     10,725      10,501
                                                           --------    --------

Long term debt, net of current portion .................     12,680      11,747
                                                           --------    --------

Capital Lease obligation, net of current portion .......         92         101
                                                           --------    --------

Commitments and contingencies

Shareholders' equity:
   Preferred stock, $.01 par value,
   4 million shares authorized,
       Series A Convertible, 5,000 shares
       outstanding at December 31, 1997.................         --          --
   Common stock, $.01 par value,
       25 million shares authorized,
       6,974,967 and 6,870,559 shares
       outstanding, respectively .......................         70          69
   Capital in excess of par value ......................     39,227      34,379
   Accumulated deficit .................................    (34,798)    (32,420)
                                                           --------    --------
       Total shareholders' equity ......................      4,499       2,028
                                                           --------    --------
                                                           $ 27,996    $ 24,377
                                                           ========    ========







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

<PAGE>


                     SOFTNET SYSTEMS, INC. AND SUBSIDIARIES
                 Condensed Consolidated Statements of Operations
              For the Three Months Ended December 31, 1997 and 1996
                      (In thousands, except per share data)
                                   (Unaudited)



                                                       1997        1996
                                                    -------    --------

Net sales .......................................   $ 6,870    $ 10,778
Cost of sales ...................................     5,103       6,648
                                                    -------    --------
   Gross profit .................................     1,767       4,130
                                                    -------    --------

Operating expenses:
   Selling ......................................     1,263       1,294
   Engineering ..................................       582         550
   General and administrative ...................     1,694       1,374
   Amortization of goodwill and transaction costs       346         362
                                                    -------    --------
       Total operating expenses .................     3,885       3,580
                                                    -------    --------

   Income (loss) from operations ................    (2,118)        550

Interest expense ................................      (328)       (256)
Other income (expense) ..........................        68         (39)
                                                    -------    --------

   Income (loss) before income taxes ............    (2,378)        255

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

   Net income (loss) ............................   $(2,378)   $    255
                                                    =======    ========

Earnings (Loss) per share:
   Basic ........................................   $ (0.34)   $   0.04
                                                    =======    ========
   Diluted ......................................   $ (0.34)   $   0.04
                                                    =======    ========













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

<PAGE>


                     SOFTNET SYSTEMS, INC. AND SUBSIDIARIES
                 Condensed Consolidated Statements of Cash Flows
              For the Three Months Ended December 31, 1997 and 1996
                                 (In thousands)
                                   (Unaudited)



                                                       1997       1996
                                                    -------    -------
Cash flows from operating activities:
   Net income (loss) ............................   $(2,378)   $   255
     Adjustments to reconcile net income (loss)
       to net cash used by
       operating activities:
         Depreciation and amortization ..........       539        517
         Provision for bad debts ................        16          8
     Changes in operating assets and liabilities:
       Receivables ..............................       556     (1,895)
       Inventories ..............................       182        (87)
       Prepaid expenses .........................      (196)       106
       Accounts payable and accrued expenses ....       548       (311)
       Deferred revenue .........................         7        535
                                                    -------    -------
Net cash used in operating activities ...........      (726)      (872)
                                                    -------    -------

Cash flows from investing activities:
   Purchase of property and equipment ...........      (117)       (55)
   Additions to capitalized product design ......        --       (155)
   Decrease in other assets .....................        15         11
                                                    -------    -------
Net cash used by investing activities ...........      (102)      (199)
                                                    -------    -------

Cash flows from financing activities:
   Repayment of long-term debt ..................      (723)       (33)
   Borrowings under revolving credit note .......     2,017      2,556
   Payments under revolving credit note .........      (475)    (1,769)
   Proceeds from sale of preferred stock ........     4,600         --
   Proceeds held in escrow (restricted cash) ....    (4,600)        --
   Proceeds from exercise of warrants ...........        42         --
   Capitalized lease obligations paid ...........       (20)       (49)
                                                    -------    -------
Net cash provided by financing activities .......       841        705
                                                    -------    -------

Increase (decrease) in cash .....................        13       (366)
Cash, beginning of period .......................        37        426
                                                    -------    -------
Cash, end of period .............................   $    50    $    60
                                                    =======    =======

Cash paid during the period for:
   Interest .....................................   $   422    $   244
   Income taxes .................................        --         --

Supplemental non-cash transactions
   Common stock issued for the conversion
      of subordinated notes .....................   $   208         --
   





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


<PAGE>




                     SOFTNET SYSTEMS, INC. AND SUBSIDIARIES
              Notes to Condensed Consolidated Financial Statements

1.   Basis of Presentation

The  financial  information,  except for the balance  sheet as of September  30,
1997,  included  herein is unaudited;  however,  such  information  reflects all
adjustments  (consisting  solely of normal recurring  adjustments) which are, in
the opinion of management,  necessary for a fair  presentation  of the condensed
consolidated  statements of financial  position,  results of operations and cash
flows as of and for the interim periods ended December 31, 1997 and 1996.

The Company's annual report on Form 10-K for the fiscal year ended September 30,
1997, as filed with the  Securities and Exchange  Commission,  should be read in
conjunction with the accompanying  condensed  consolidated financial statements.
The  condensed  consolidated  balance sheet as of September 30, 1997 was derived
from the Company's audited Consolidated Financial Statements.

The results of operation for the three months ended  December 31, 1997 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.

2.   Restricted Cash

On December  31, 1997,  the Company  sold 5,000  shares of Series A  Convertible
Preferred Stock,  $0.01 par value per share, for a purchase price of $5 million.
The proceeds were delivered by the investor into escrow on this date. On January
2, 1998,  the net proceeds of $4.6 million,  after  issuance  costs of $400,000,
were wired to the  account of the Company and were used to reduce the balance of
the bank revolving credit note.

3.   Debt

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

                                                   Dec. 31,    Sept. 30,
                                                     1997         1997
                                                  ----------   ---------

          Bank Debt (See Note 3) ................   $ 10,204    $  9,026
          Convertible subordinated notes ........      3,416       3,624
          Other .................................        450         809
                                                    --------    --------
                                                      14,070      13,459
          Less current portion ..................     (1,390)     (1,712)
                                                    --------    --------
                                                    $ 12,680    $ 11,747
                                                    ========    ========

4.   Preferred Stock

On December  31, 1997,  the Company  sold 5,000  shares of Series A  Convertible
Preferred Stock,  $0.01 par value per share  ("Convertible  Preferred"),  for an
aggregate purchase price of $5 million. The Convertible  Preferred shares accrue
dividends at a rate of 5% per annum, payable quarterly, at the Company's option,
in cash or additional  Convertible  Preferred shares.  In addition,  the Company
issued  warrants to purchase  170,000  shares of the  Company's  common stock at
prices at or above the  market  price  (20,000  shares  at  $6.625  expiring  on
December 31, 2000 and 150,000 shares at $7.95 expiring on December 31, 2001). On
January 2, 1998,  the  Company  used the net  proceeds  of $4.6  million,  after
issuance costs of $400,000,  to reduce the balance of the bank revolving  credit
note.

Each share of Convertible Preferred is convertible, at the option of the holder,
into the number of shares of common  stock as defined by the stated value of the
Convertible  Preferred  multiplied  by 5% per annum,  less any  dividends  paid,
divided by the conversion  price. The stated value of the Convertible  Preferred
is $1,000 per share and the conversion  price is the lower of $8.28 or a two day
average  market  price within a 20 day trading  period prior to the  conversion.
Pursuant to the Company's Articles of Incorporation,  as amended, the holders of
the Convertible  Preferred stock may only convert their outstanding  Convertible
Preferred  stock into an  aggregate  amount of common stock that does not exceed
19.99% of the  outstanding  common  stock of the Company.  Any excess  shares of
common  stock that are  issuable  upon  conversion  of  outstanding  Convertible
Preferred,  that  exceed  this  19.99%  limitation,  are  subject  to  mandatory

<PAGE>


redemption  at the  option of the  holder of the  Convertible  Preferred  stock,
unless the  Company  either  obtains  stockholder  approval  for the  additional
conversions over 20%, or the Company receives permission to allow such issuances
from  the  American  Stock  Exchange.  All  outstanding  shares  of  Convertible
Preferred, subject to the aforementioned restrictions,  automatically convert to
common stock on December 31, 2000.

Holders of Convertible  Preferred do not have voting rights,  except for certain
protective   provisions  relating  to  changes  in  the  rights  of  holders  of
Convertible  Preferred.  The Convertible Preferred ranks senior to the Company's
common stock as to  dividends,  distributions  and  distribution  of assets upon
liquidation, dissolution or winding up of the Company. The Convertible Preferred
is subject to mandatory  redemption  upon certain  circumstances,  including the
Company's (i) failure to convert the  Convertible  Preferred  when required (ii)
bankruptcy,  and (iii)  suspension  from trading on the American Stock Exchange.
The Company shall have the right to redeem the Convertible Preferred on or after
December 31, 1998 at a price equal to the greater of 130% of the stated value or
the market price  multiplied  by the number of shares of common stock into which
the Convertible Preferred can be converted.


5.   Stock Options and Warrants

Outstanding  options and warrants to purchase shares of common stock at December
31, 1997 were as follows (in thousands, except price per option data):

 

         Outstanding at September 30, 1997                       1,435
              Granted (at $6.625-$7.95) (See Note 4)               170
              Canceled                                             (17)
              Exercised (at $1.75)                                 (64)
                                                              --------
         Outstanding at December 31, 1997                        1,524
                                                               =======

6.   Earnings (Loss) per Share

The Company adopted Statement of Financial  Accounting  Standard (SFAS) No. 128,
"Earnings Per Share," in the quarter ended December 31, 1997.  SFAS 128 requires
the computation of basic and diluted  earnings per share.  Basic earnings (loss)
per  share is  computed  using the  weighted  average  number  of common  shares
outstanding.  Diluted  earnings  (loss) per share is computed using the weighted
average  number of common  shares  outstanding  and the  dilutive  common  stock
equivalents  (using  the  treasury  stock  method  for  warrants  and  options).
Summarized below is the  reconciliation of basic and diluted earnings (loss) per
share for the quarters ended December 31, 1997 and 1996 (in thousands except per
share amounts):

                                             Net Income               Per Share
                                              (Loss)       Shares       Amount
For the Quarter ended December 31, 1997:
  Basic earnings (loss) per share ........   $(2,378)      6,941      $  (0.34)
    Effect of outstanding securities (a)-
      Warrants and options ...............      --          --
      Convertible debt ...................      --          --
      Convertible preferred stock ........      --          --
                                             --------      -----
  Diluted earnings (loss) per share ......   $(2,378)      6,941      $  (0.34)
                                             --------      -----

For the Quarter ended December 31, 1996:
  Basic earnings per share ...............   $   255       6,554      $   0.04
    Effect of outstanding securities (b)-
      Warrants and options ...............        --         252
      Convertible debt ...................        --          --
                                             --------      -----
  Diluted earnings per share .............   $   255       6,806      $   0.04
                                             --------      -----

(a)  As  the  Company  had  a  net  loss,  the   outstanding   securities   were
     antidilutive.
(b)  The remaining  outstanding  warrants and options and the  convertible  debt
     were antidilutive.

<PAGE>

Item 2.

                    Management's Discussion and Analysis of
                  Financial Condition and Results of Operations


General

This  Form 10-Q  contains  forward-looking  statements  that  involve  risks and
uncertainties.  The actual results of SoftNet Systems, Inc. and its subsidiaries
could differ significantly from those set forth herein. Factors that could cause
or  contribute  to such  differences  include,  but are not  limited  to,  those
discussed in "Risk Factors" as set forth in the Company's  annual report on Form
10-K for the fiscal year ended  September 30, 1997, 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"  and similar  expressions  are intended to
identify  forward-looking  statements,  but  are  not  the  exclusive  means  of
identifying  such  statements.  A number of  important  factors  could cause the
Company's  actual results for fiscal 1998 and beyond to differ  materially  from
past results and those expressed in any  forward-looking  statements made by, or
on behalf of, the  Company.  These  factors  include,  without  limitation,  the
following:   limited   operating   history;   lack  of  profitable   operations;
fluctuations in quarterly results; lack of backlog;  rapid technological change;
dependence  on new products;  dependence on the Internet;  ability to expand the
Internet  business;  risks associated with  acquisitions;  and competition.  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 Company's  fiscal year ends September 30 and the first quarter of the fiscal
year ends  December  31.  "Fiscal  1998"  refers  to the  twelve  months  ending
September 30, 1998 with similar  references to other twelve month periods ending
September 30.

Results of operations  for the First Quarter of Fiscal 1998 compared to the same
period in Fiscal 1997

Consolidated  net sales  decreased  $3.9 million (or 36.3%) for the three months
ended  December 31, 1997,  as compared to the same period in 1996.  Sales in the
document  management  segment decreased $2.8 million (or 51.1%),  primarily as a
result  of a  decrease  in the  sale of  computer  output  microfiche  equipment
("COM"). The document management segment entered fiscal year 1998 with a backlog
of $1.4  million  compared  to a backlog of $3.4  million for the same period in
fiscal 1997.  Incoming  COM orders  appear  strong and the Company  expects this
revenue to normalize in the ensuing  quarters.  Sales in the  telecommunications
segment  decreased  by $1.2  million  (22.9%),  primarily as the result of fewer
healthcare  and  major  system  installs  by  both  the  Milwaukee  and  Chicago
divisions.  In  addition,  telecommunication  sales for the three  months  ended
December 31, 1996 included revenues of $148,000 from the Company's  wholly-owned
subsidiary,  Communicate Direct Inc. ("CDI"),  which was completely dissolved by
the Company in fiscal 1997.

Consolidated  gross  profit  decreased  $2.4  million in the three  months ended
December 31, 1997,  with profit  margins  decreasing to 25.7% from 38.3% for the
same  period in 1996.  The  percentage  decrease  is  primarily  related  to the
decrease in the document  management  segment's COM sales,  which contribute the
highest  product  profit  margins.  As  such,  profit  margins  in the  document
management  segment  decreased  for the three months ended  December 31, 1997 to
24.7% from 45.9% in the same period in 1996. Gross profit decreased  $105,000 in
the internet segment for the three months ended December 31, 1997,  primarily as
a result of a reclassification of certain web development expenses being charged
entirely to cost of goods sold. Due to immateriality,  similar expenses in prior
year presentations have not been reclassified.

<PAGE>


Operating expenses, primarily selling, engineering,  general and administrative,
increased  $321,000 to $3.5 million for the three months ended December 31, 1997
from  $3.2  million  for the same  period in 1996.  The  increase  in  operating
expenses is primarily  the result of the  consolidation  and  relocation  of the
Chicago  based  operations to the Company's  existing  headquarters  in Mountain
View,  California.  These  activities  resulted  in the one  time  write-off  of
leasehold  improvements and moving expenses ($240,000 for the three months ended
December 31, 1997). In addition,  the internet  services  segment  increased its
administrative and sales force ($163,000 for the three months ended December 31,
1997).  This  increase  was  offset by the  disposition  in  fiscal  1997 of all
operations  of CDI  (operating  losses of  $75,000  for the three  months  ended
December 31, 1997).

Amortization  expense  decreased $16,000 for the three months ended December 31,
1997, to $346,000 as compared to $362,000 for the same period in 1996.

The  Company  made no  provision  for income  taxes for the three  months  ended
December  31,  1996,  as  a  result  of  the   Company's   net  operating   loss
carry-forward.

Consolidated  interest expense  increased $72,000 (or 28.1%) to $328,000 for the
three months ended December 31, 1997 compared to $256,000 for the same period in
1996.  The  increase  in interest  expense  was the result of a higher  level of
outstanding  indebtedness  on the company's line of credit facility in the first
quarter of fiscal 1998.

For the  first  quarter  of  fiscal  1998,  the  Company  had a net loss of $2.4
million, or a basic loss per share of $0.34,  compared to net income of $255,000
in fiscal 1997, or basic earnings per share of $0.04.


Liquidity and Capital Resources

At December 31, 1997,  the  Company's  current  ratio was 1.48 to 1 with working
capital of $5.1  million.  This  compares  with a current ratio of 1.12 to 1 and
working capital of $1.3 million at September 30, 1997.

For the first  quarter of fiscal 1998,  cash flows used by operating  activities
were  $726,000  compared to $872,000  for the same period in fiscal  1997.  Cash
flows used by investing activities were $102,000 for the first quarter of fiscal
1998  compared  to  $199,000  for the same  period in fiscal  1997.  Cash  flows
provided by financing  activities  were $841,000 for the first quarter of fiscal
1998 compared to $705,000 for the same period in fiscal 1997.

On December  31,  1997,  the Company  sold $5 million of  Convertible  Preferred
stock.  On January 2, 1998,  the net  proceeds of this sale of $4.6 million were
used to reduce the  balance of the bank  revolving  credit  note.  See Note 4 of
Notes to Condensed Consolidated Financial Statements for additional information.

The  Company  expects to be able to  finance  its fiscal  1998  working  capital
requirements  and capital  expenditures  from its operating  income and existing
revolving credit facility.

Other - Year 2000 Issue

Many existing  computer  systems and related  software  applications,  and other
control devices, use only two digits to identify a year in a date field, without
considering  the impact of the  upcoming  change in the century.  Such  systems,
applications  and/or  devices  could  fail or create  erroneous  results  unless
corrected so that they can process  data  related to the Year 2000.  The Company
relies on such  computer  systems,  applications  and devices in  operating  and
monitoring all major aspects of its business, including, but not limited to, its
financial  systems  (such  as  general  ledger,  accounts  payable  and  payroll
modules), customer services, internal networks and telecommunications equipment,
and end  products.  The Company also relies,  directly  and  indirectly,  on the
external  systems  of  various  independent  business  enterprises,  such as its
customers,  suppliers,  creditors, financial organizations,  and of governments,
both  domestically and  internationally,  for the accurate  exchange of data and
related information.

The Company is currently in the process of evaluating  the  potential  impact of
the  Year  2000  issue on its  business  and the  related  expenses  that  would
foreseeably be incurred in attempting to remedy such impact  (including  testing
and  implementation of remedial action).  Management's  current estimate is that
the costs associated with the Year 2000 issue should not have a material adverse
affect on the results of operations or financial  position of the Company in any
given  year.  However,  despite the  Company's  efforts to address the Year 2000
impact  on its  internal  systems,  the  Company  is not sure  that it has fully
identified  such  impact or that it can  resolve  it without  disruption  of its
business and without incurring significant  expenses.  In addition,  even if the
internal  systems of the  Company are not  materially  affected by the Year 2000
issue,  the  Company  could be  affected  as a result of any  disruption  in the
operation  of  the  various  third-party  enterprises  with  which  the  Company
interacts.
<PAGE>



PART II. OTHER INFORMATION

Item 1.  Legal Proceedings.  Not applicable.

Item 2.  Changes in Securities.


         On December  31,  1997,  the Company  issued  5,000  shares of Series A
         Convertible Preferred Stock, $0.01 par value, ("Convertible Preferred")
         and warrants to purchase 150,000 shares of common stock, exercisable at
         $7.95 per share and expiring on December 31, 2001 ("RGC Warrants"),  to
         RGC International Investors, LDC, for an aggregate purchase price of $5
         million. The Convertible Preferred shares accrue dividends at a rate of
         5% per annum,  payable  quarterly,  at the Company's option, in cash or
         additional   Convertible  Preferred  shares.   Holders  of  Convertible
         Preferred  do not have voting  rights,  except for  certain  protective
         provisions  relating to changes in the rights of holders of Convertible
         Preferred.  The  Convertible  Preferred  ranks senior to the  Company's
         common stock as to dividends,  distributions and distribution of assets
         upon  liquidation,  dissolution  or  winding  up of  the  Company.  The
         Convertible  Preferred is subject to mandatory  redemption upon certain
         circumstances,  including  the  Company's  (1)  failure to convert  the
         Convertible Preferred when required (2) bankruptcy,  and (3) suspension
         from trading on the American Stock Exchange. The Company shall have the
         right to redeem the Convertible Preferred on or after December 31, 1998
         at a price equal to the  greater of 130% of the stated  value per share
         ($1,000) or the two day average  market  price  within a 20 day trading
         period  prior to  conversion  multiplied  by the number of shares  into
         which  the  Convertible  Preferred  can be  converted.  The sale of the
         Convertible  Preferred  and the RGC  Warrants was arranged by Shoreline
         Pacific Institutional  Finance, the Institutional Division of Financial
         West Group,  who received a fee of $250,000 plus warrants,  exercisable
         at $6.625 per share and  expiring on  December  31,  2000,  to purchase
         20,000 shares of common stock.


         Each share of Convertible  Preferred is  convertible,  at the option of
         the holder, into the number of shares of common stock as defined by the
         stated value of the Convertible  Preferred  multiplied by 5% per annum,
         less any dividends paid,  divided by the conversion  price.  The stated
         value  of the  Convertible  Preferred  is  $1,000  per  share  and  the
         conversion  price is the  lower of  $8.28 or a two day  average  market
         price  within a 20 day  trading  period  prior to the  conversion.  All
         outstanding shares of Convertible  Preferred  automatically  convert to
         common stock on December 31, 2000.  Depending on market  conditions  at
         the time of  conversion,  the number of common  shares  issuable  could
         prove to be  significantly  greater in the event of a  decrease  in the
         trading  price of the common  stock.  Purchasers  of common stock could
         therefore  experience  substantial  dilution  upon  conversion  of  the
         Convertible Preferred.


         During the quarter ended  December 31, 1997,  the Company issued 48,780
         shares of common  stock  pursuant  to the  conversion  of  $200,000  of
         convertible  debt by a single holder of the  Company's 10%  convertible
         subordinated  notes due  October  31,  1999.  These  10%  notes  have a
         conversion  price of $4.10.  Additionally,  the  Company  issued  1,120
         shares  of  common  stock  pursuant  to the  conversion  of  $7,560  of
         convertible  debt by a single  holder of the  Company's 9%  convertible
         subordinated  notes  due  September  15,  2000.  These 9% notes  have a
         conversion  price of $6.75.  These  shares  are  exempt  under  Section
         3(a)(9) of the Securities Act.

         During the quarter  ended  December  31,  1997,  the  Company  issued a
         combined  total of  64,000  shares of  common  stock to three  separate
         warrant holders,  upon the exercise of outstanding  warrants  (exercise
         price of $1.75 per  share).  These  shares  were  issued in a nonpublic
         offering  pursuant to  transactions  exempt  under  Section 4(2) of the
         Securities Act of 1933, as amended.

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.

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

     (a) Exhibits

         Exhibit 27 - Financial Data Schedule

     (b) Reports on Form 8-K

         No  reports on Form 8-K were filed by the  Company  during the  quarter
         ended  December 31, 1997. On January 12, 1998, the Company filed a Form
         8-K reporting the  designation and issuance of 5,000 shares of Series A
         Convertible   Preferred  Stock.  See  Note  4  of  Notes  to  Condensed
         Consolidated  Financial  Statements.  On February 12, 1998, the Company
         filed a Form 8-K reporting  the  description  of the Company's  capital
         stock.


<PAGE>





SIGNATURES



In accordance with the requirements 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/ A. J. R. Oosthuizen
----------------------------
A. J. R. Oosthuizen
President and
Chief Executive Officer



/s/ Mark A. Phillips
----------------------------
Mark A. Phillips
Principal Accounting Officer


Dated:  February 17, 1998