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, 1999

                                       OR

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

                        For the transition period from to

                           Commission File No.: 1-5270

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

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

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

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



Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days.

                                    Yes X    No
                                       ---     ---

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

              Class                            Outstanding at January 31, 2000
  -------------------------------             --------------------------------
         Common stock, par                                26,717,707
       value $.01 per share

<PAGE>
                     SoftNet Systems, Inc. and Subsidiaries
                                      Index

PART I - FINANCIAL INFORMATION                                            Page

Item 1.  Financial Statements

         Condensed Consolidated Balance Sheets as of December 31, 1999
         and September 30, 1999                                             2

         Condensed Consolidated Statements of Operations for the three
         months ended December 31, 1999 and 1998                            3

         Condensed Consolidated Statements of Cash Flows for the three
         months ended December 31, 1999 and 1998                            4

         Notes to Condensed Consolidated Financial Statements               5

Item 2.  Management's Discussion and Analysis of Financial
         Condition and Results of Operations                                8

Item 3   Quantitative and Qualitative Disclosures About Market Risk        14

PART II- OTHER INFORMATION

Item 1   Legal Proceedings                                                 15

Item 2   Changes in Securities                                             15

Item 3   Defaults Upon Senior Securities                                   15

Item 4   Submission of Matters to a Vote of Security Holders               15

Item 5   Other Information                                                 16

Item 6   Exhibits and Reports on Form 8-K                                  33


<PAGE>
PART I - FINANCIAL INFORMATION
Item 1.  Financial Statements

                     SoftNet Systems, Inc. and Subsidiaries
                      Condensed Consolidated Balance Sheets
                        (In thousands, except share data)
                                   (Unaudited)

                                                  December 31,     September 30,
                                                        1999             1999
                                                        ----             ----

                                       ASSETS
Current assets:
   Cash and cash equivalents.......................   $  174,351    $   89,499
   Short-term investments..........................       76,576        52,586
   Accounts receivable, net........................        1,150           935
   Notes receivable................................            -         1,000
   Inventory.......................................        2,244         1,991
   Other current assets............................        2,157         1,776
                                                      ----------    ----------

Total current assets...............................      256,478       147,787

Restricted cash....................................          922           922
Property and equipment, net........................       33,305        26,743
Acquired technology and other intangibles, net.....       32,076        24,500
Other assets.......................................        6,542         5,872
                                                      ----------    ----------

                                                      $  329,323    $  205,824
                                                      ==========    ==========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
   Accounts payable and accrued expenses...........   $    9,212    $   15,545
   Current portion of long-term debt...............        2,916         2,084
   Current portion of capital lease obligation.....        3,813         1,760
                                                      ----------    ----------

Total current liabilities..........................       15,941        19,389

Long-term debt, net of current portion.............        6,820        17,281
Capital lease obligation, net of current portion...        5,457         1,945
Business acquisition liability.....................        3,500         3,500

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; 26,664,358 and 17,225,523
     shares issued and outstanding, respectively...          235           172
   Additional paid in capital......................      475,533       327,445
   Deferred stock compensation.....................      (57,025)      (63,346)
   Accumulated other comprehensive loss............         (273)         (315)
   Accumulated deficit.............................     (120,865)     (100,247)
                                                      -----------   ----------

Total stockholders' equity.........................      297,605       163,709
                                                      ----------    ----------

                                                      $  329,323    $  205,824
                                                      ==========    ==========

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

<PAGE>

                     SoftNet Systems, Inc. and Subsidiaries
                 Condensed Consolidated Statements of Operations
                      (In thousands, except per share data)
                                   (Unaudited)

                                                 Three Months Ended December 31,
                                                     1999             1998
                                                     ----             ----

Net sales.........................................   $    1,276    $     444
Cost of sales.....................................        1,510          407
                                                     ----------    ---------
   Gross profit (loss)............................         (234)          37
                                                     ----------    ---------
Operating expenses:
   Selling and marketing (exclusive of
     non-cash compensation expense of
     $1,388 for 1999 and no expense
     for 1998)....................................        5,546        2,008
   Engineering (exclusive of non-cash
     compensation expense of $891 for
     1999 and no expense for 1998)................        4,121          739
   General and administrative (exclusive
     of non-cash compensation expense
     of $3,885 for 1999 and $32 for 1998).........        3,350        1,864
   Depreciation...................................        1,915          399
   Amortization...................................        1,055          711
   Compensation related to stock options..........        6,164           32
                                                     ----------    ---------
Total operating expenses..........................       22,151        5,753
                                                     ----------    ---------
Loss from continuing operations before
   other income (expense), income taxes
   and discontinued operations, net of tax........      (22,385)      (5,716)

Other income (expense):
   Interest expense...............................         (366)        (519)
   Interest income................................        2,142          153
   Other expense, net.............................           (9)          (3)
                                                     ----------    ---------
Loss from continuing operations before
   income taxes and discontinued
   operations, net of tax.........................      (20,618)      (6,085)

Provision for income taxes........................            -            -
                                                     ----------    ---------
Loss from continuing operations...................      (20,618)      (6,085)

Loss from discontinued
   operations, net of tax.........................            -         (138)
                                                     ----------    ---------
Net loss..........................................      (20,618)      (6,223)

Preferred dividends...............................            -         (243)
                                                     ----------    ---------
Net loss applicable to common shares..............   $  (20,618)   $  (6,466)
                                                     ==========    =========

Basic and diluted loss per common share:
   Loss from continuing operations................   $    (1.08)   $   (0.72)

   Loss from discontinued operations..............            -        (0.02)

   Preferred dividends............................            -        (0.03)
                                                     -----------------------
   Net loss applicable to common shares...........   $    (1.08)   $   (0.77)
                                                     ==========    =========
Shares used to compute basic and diluted
   loss per common share..........................       19,164        8,374
                                                     ==========    =========

              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
                                 (In thousands)
                                   (Unaudited)

                                                 Three Months Ended December 31,
                                                           1999          1998
                                                      ------------   ----------

Cash flows from operating activities:
   Net loss........................................   $   (20,618)   $   (6,223)
   Adjustments to reconcile net loss to
   net cash used in operating activities:
     Loss from discontinued operations.............             -           137
     Depreciation and amortization.................         2,970         1,110
     Amortization of deferred stock
       compensation................................         6,164            32
     Amortization of deferred debt
       issuance costs..............................            37             -
     Interest paid with additional
       convertible notes...........................            69             -
     Provision for doubtful accounts...............            67            50
     Provision for inventory losses................            25             -
     Changes in operating assets and
       liabilities (net of effect of
       acquisitions and
       discontinued operations):
         Increase in accounts
           receivable, net.........................          (282)         (200)
         Increase in inventory.....................          (278)         (173)
         Increase in other current assets..........          (381)         (824)
         Increase (decrease) in accounts
           payable and accrued expenses............        (6,332)        1,349
                                                      ------------   ----------

Net cash used in operating activities of
    continuing operations..........................       (18,559)       (4,742)
                                                      -----------    ----------

Net cash provided by operating activities
    of discontinued operations.....................             -           652
                                                      -----------    ----------

Cash flows from investing activities:
   Purchase of short-term investments..............       (23,948)            -
   Purchase of property and equipment..............        (2,298)       (3,114)
   Payment received on note receivable.............         1,000             -
   Acquired technology and other
     intangibles...................................          (100)            -
   Other assets....................................        (3,404)         (100)
                                                      -----------    ----------

Net cash used in investing activities of
    continuing operations..........................       (28,750)       (3,214)
                                                      -----------    ----------

Net cash provided by investing activities
    of discontinued operations.....................             -            18
                                                      -----------    ----------

Cash flows from financing activities:
   Proceeds from issuance of long-term
     debt, net of deferred financing costs.........         3,218             -
   Borrowings under revolving
     credit facility...............................             -         8,697
   Payments under revolving
     credit facility...............................             -        (9,030)
   Additional costs of issuance of
     redeemable convertible preferred stock........             -           (54)
   Proceeds from sale of common stock,
     net of selling costs..........................       128,750             -
   Proceeds from exercise of warrants..............           280           190
   Proceeds from exercise of options...............           826             -
   Principal payments of long-term debt............          (298)          (45)
   Principal payments of capital
     lease obligations.............................          (615)         (240)
                                                      -----------    ----------

Net cash provided by (used in) financing
    activities of continuing operations............       132,161          (482)
                                                      -----------    -----------

Net cash used in financing activities of
    discontinued operations........................             -          (407)
                                                      -----------    ----------

Net increase (decrease) in cash and
    cash equivalents...............................        84,852        (8,175)
Cash and cash equivalents,
    beginning of period............................        89,499        12,504
                                                      -----------    ----------

Cash and cash equivalents,
    end of period..................................   $   174,351    $    4,329
                                                      ===========    ==========


              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  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, 1999 and 1998.

SoftNet  Systems,  Inc.'s  annual  report on Form 10-K for the fiscal year ended
September 30, 1999, 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, 1999
was derived from SoftNet Systems,  Inc. and Subsidiaries (the "Company") audited
consolidated financial statements.

The results of operations for the three months ended December 31, 1999 are based
in part on  estimates  that may be subject to year-end  adjustments  and are not
necessarily indicative of the results to be expected for the full year.

The  condensed  consolidated  financial  statements  for the three  months ended
December  31,  1998 have  been  restated  for the  effects  of the  discontinued
operations of the document management segment.

2.       Notes Receivable

During November 1999, Convergent  Communications  Services, Inc. paid the Second
Convergent Note in the amount of $1,000,000.

3.       Long-Term Debt and Debt Issuance Costs

On  October  22,  1999,  all of the 9% Senior  Subordinated  Convertible  Notes,
related  interest  notes  resulting  from the  Secondary  Offering  and  accrued
interest,  net of unamortized debt issuance costs of $2,732,000,  were converted
into 765,201 shares of the Company's common stock valued at $9,886,000.

On December 30, 1999,  the Company  issued a promissory  note to Finova  Capital
Corporation for $3,218,000. The promissory note bears interest at 15.26%, and is
payable in 36 monthly  installments  of $110,000,  consisting  of principal  and
interest, with the final payment due November 30, 2002.

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

                                                December 31,     September 30,
                                                    1999              1999
                                                    ----              ----

       Senior subordinated convertible notes   $            -    $       12,549
       Convertible subordinated debentures              3,461    $        3,461
       Promissory notes                                 6,114             3,194
       Other                                              161               161
                                               --------------    --------------

                                                        9,736            19,365
       Less current portion                            (2,916)           (2,084)
                                               --------------    --------------

                                               $        6,820    $       17,281
                                               ==============    ==============

4.       Common Stock

On November 4, 1999, the Company entered into various definitive agreements with
Mediacom LLC ("Mediacom").  Under the terms of the Affiliate Agreement, Mediacom
agrees to use the Company's  wholly owned  subsidiary,  ISP Channel,  Inc. ("ISP
Channel"),  as the exclusive  provider of Internet access to customers passed by
Mediacom's cable television systems for 10 years, with an option for Mediacom to
terminate the Affiliate Agreement at 5 years. In exchange for the signing of the
Affiliate Agreement by Mediacom,  the Company issued a total of 3,500,000 common
stock  shares,  consisting  of  350,000  unrestricted  common  stock  shares and
3,150,000  restricted  common stock  shares.  The  conversion  of the  3,150,000
restricted common stock shares to unrestricted common stock shares is contingent
upon Mediacom  fulfilling the requirements of the Stockholder  Agreement.  Under
the terms of the Stockholder Agreement,  Mediacom is required to deliver 900,000
two-way  capable homes passed in groups of at least 150,000 homes every 6 months
commencing May 4, 2000, and upon delivery of each group of 150,000 homes passed,
525,000  restricted  common  stock  shares  become  unrestricted.  In the  event
Mediacom  fails to make  available  for ISP Channel  services the 150,000  homes
passed  within  one year of any  applicable  delivery  date,  then  Mediacom  is
required to return 525,000 restricted common stock shares to the Company. In the

<PAGE>

event  Mediacom  delivers more than 900,000  two-way  capable homes passed,  the
Stock Purchase  Agreement  requires the Company to issue additional common stock
shares based on the  calculation  used for the original  900,000 two-way capable
homes passed. Additionally,  Mediacom gained the right to nominate one member to
the Company's board of directors. The cable affiliate launch incentive resulting
from the issuance of the 350,000 unrestricted common stock shares on November 4,
1999 is valued at $8,531,000,  and is being amortized on a  straight-line  basis
over the five year minimum life of the Affiliation Agreement.  No value has been
assigned to the 3,150,000  restricted common stock shares due to the requirement
for Mediacom to earn the shares by  delivering  900,000  two-way  capable  homes
passed in groups of at least  150,000  homes  every 6 months  commencing  May 4,
2000. The 3,150,000  restricted  common stock shares will be valued and recorded
as cable affiliate launch incentive upon conversion to unrestricted common stock
shares.  Additionally,  upon  conversion  of  restricted  common stock shares to
unrestricted  common stock shares,  the cable launch incentive will be amortized
on a  straight-line  basis over the  remaining  minimum life of the  Affiliation
Agreement.

On October 12, 1999, the Company entered into memorandum of  understanding  with
Pacific Century CyberWorks Limited ("Pacific  Century") to form a joint venture,
Pacific Century  SoftNet,  to market products and services to cable operators in
50 countries  throughout  Asia.  On December 13, 1999 in  conjunction  with this
joint venture,  the Company  completed a private  placement of 5,000,000  common
stock shares for $128,750,000 to Pacific  Century,  and entitled Pacific Century
to designate two persons for election to the Board of Directors.  The Company is
in the process of drafting definitive  agreements and establishing the strategy,
business plan and  operational  processes of this joint venture.  As of December
31, 1999, the $128,750,000 is reflected in cash and cash equivalents.

5.       Supplemental Cash Flow Information

The supplemental cash flow information is as follows (in thousands):

                                                               Three Months
                                                            Ended December 31,
                                                            1999         1998
                                                          --------     --------
Cash paid during the period for:
   Interest............................................  $     349    $      246
   Income taxes........................................          -             -

Non-cash investing and financing activities:
   Common stock issued for-
     Conversion of redeemable convertible
        preferred stock................................          -         2,600
     Conversion of subordinated notes..................      9,886             -
   Value assigned to intangible assets
     in connection with common stock issued
     for cable affiliate launch incentives.............      8,531             -
   Value assigned to conversion feature of new debt....         35             -
   Equipment acquired by capital lease.................      6,179           717
   Deferred compensation associated with the
     issuance of common stock options..................        157           146
   Preferred dividends paid with the issuance of -
     Additional redeemable convertible preferred stock.          -           221
     Common stock......................................          -            22
   Unrealized loss on short-term investments...........         42             -

<PAGE>


6.       Segment Information

The Company  operates  principally  in two business  segments:  (i)  cable-based
Internet  services  through its wholly  owned  subsidiary,  ISP Channel and (ii)
satellite-based   Internet   services  through  its  wholly  owned   subsidiary,
Intelligent  Communications,   Inc.  ("Intellicom").  The  Company  entered  the
Internet  business  in June  1996 with the  purchase  of the  Internet  services
business and only began  offering  cable-based  Internet  services in the fourth
quarter of fiscal 1997. In February 1999, the Company  completed the purchase of
Intellicom and its operating results are included since it was acquired. Segment
information  for  continuing  operations  as of and for the three  months  ended
December 31, is as follows (in thousands):

                                                 Three Months Ended December 31,
                                                          1999           1998
                                                      -----------     ---------

  Net Sales:
     Internet Services - cable based..............    $       958     $     444
     Internet Services - satellite based..........            318             -
                                                      -----------     ---------

                                                      $     1,276     $     444
                                                      ===========     =========

  Loss from  continuing  operations
     before  income taxes and  discontinued
     operations, net of tax:
     Internet Services - cable based..............    $   (11,078)    $  (4,335)
     Internet Services - satellite based..........         (2,268)            -
     Corporate....................................         (2,875)       (1,349)
     Compensations expense related to
        stock options.............................         (6,164)          (32)
     Other........................................          1,767          (369)
                                                      -----------     ---------

                                                      $   (20,618)    $  (6,085)
                                                      ===========     =========


7.       Subsequent Events

On February 8, 2000,  the Company  entered into an agreement to purchase  Laptop
Lane, Ltd. for 1,000,000  common stock shares and the assumption of $3.5 million
in debt. Additionally, in connection with acquisition, the Company has agreed to
provide up to $6,500,000 in working capital to Laptop Lane, Ltd. under a secured
promissory note prior to the close of the transaction.  As of February 10, 2000,
the Company has funded $4,000,000 of this working capital.

In connection  with the Company's  proposed  purchase of Laptop Lane,  Ltd., the
Company  announced  on February 9, 2000 that it,  together  with CMGI,  Inc. and
Compaq Computer  Corporation,  will provide equity funding and services to a new
initiative  called SoftNet Zone,  contingent on completing the Laptop Lane, Ltd.
acquisition  and  other  customary  closing  conditions.   In  addition  to  its
contribution  of funding and services,  the Company also announced that it plans
to contribute its interest in Laptop Lane,  Ltd. to this new venture.  It is the
Company's  intention  to  maintain a majority  interest  in  SoftNet  Zone.  The
proposed  strategy of SoftNet  Zone is to offer  mobile  computing  and Internet
services, both wired and wireless, to global business travelers.



<PAGE>


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

This  Form 10-Q  contains  forward-looking  statements  that  involve  risks and
uncertainties.  The actual results of SoftNet Systems, Inc. and its subsidiaries
could differ significantly from those set forth herein. Factors that could cause
or  contribute  to such  differences  include,  but are not  limited  to,  those
discussed in "Factors Affecting the Company's Operating Results" as set forth in
the Company's  annual report on Form 10-K for the year ended September 30, 1999,
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 our actual  results  for fiscal  2000 and beyond to differ
materially   from  past   results  and  those   expressed   or  implied  in  any
forward-looking  statements  made  by us,  or on our  behalf.  We  undertake  no
obligation   to  release   publicly  the  results  of  any  revisions  to  these
forward-looking  statements that may be made to reflect events or  circumstances
after the date hereof or to reflect the occurrence of unanticipated events.

The following discussion of the financial condition and results of operations of
the Company should be read in conjunction with, and is qualified in its entirety
by reference to, the  Consolidated  Financial  Statements of the Company and the
related Notes  thereto  appearing in our annual report on Form 10-K for the year
ended  September 30, 1999, as filed with the Securities and Exchange  Commission
and our Condensed  Consolidated  Financial  Statements and related Notes thereto
appearing  elsewhere in this quarterly report. The Company's fiscal year ends on
September 30 of each year and the first quarter of the fiscal year ends December
31.  "Fiscal  2000" refers to the twelve  months ended  September  30, 2000 with
comparable references for other twelve month periods ending September 30.

Overview

The Company currently operates through two subsidiaries. The first, ISP Channel,
Inc. ("ISP  Channel") is a leading  provider of high speed Internet  access over
cable to both residential and commercial customers while the second, Intelligent
Communications,  Inc.  ("Intellicom"),   provides  two-way  broadband  satellite
connectivity  utilizing very small aperture  terminal  ("VSAT")  technology to a
wide  variety of business  customers,  the  majority of whom are rural  Internet
service  providers  ("ISPs"),  which use  Intellicom's  service to connect  from
remote points of presence,  through  Intellicom's  network  operations center in
Livermore,  California,  to  the  Internet.  ISP  Channel  is  currently  one of
Intellicom's larger customers and, as of December 31, 1999, 34 of the 73 systems
deployed  by  ISP  Channel,  utilized  Intellicom's  service  in  preference  to
terrestrial lines such as T1s.

The revenue for ISP Channel  comprises  (i) monthly  access fees  received  from
cable modem customers,  (ii) one-off  installation  charges,  (iii) revenue from
cable modem rental and sales, and (iv) revenue generated by traditional  dial-up
ISP services and business  services.  Revenue  generated through the cable modem
business is generally split equally with the cable operator  (though ISP Channel
usually  takes a higher split for the first 200  customers on any given  system)
and is reported in our financial statements net of the portion paid to the cable
operator.

The  revenue for  Intellicom  comprises  (i)  monthly  fees paid by users of the
satellite service on a per VSAT basis, (ii) VSAT-related  equipment sales, (iii)
revenue from  sub-leasing of excess  satellite  transponder  space and (iv) data
center  processing  fees.  The last  category  represents  legacy  business that
Intellicom  exited from on September  30, 1999, to focus on its core business of
providing high-speed Internet access using two-way satellite  technology.  While
Intellicom  receives revenue from ISP Channel in return for satellite  services,
such revenue is not reported as it is eliminated in the  consolidated  financial
statements.

Cost of sales is reported as a single  line item and  primarily  consists of the
cost of connectivity  for both ISP Channel and  Intellicom.  Within ISP Channel,
these costs  include the links between the cable  headends  where it has systems
deployed and a central office of the public switched  telephone  network,  links
between  the  central  office and ISP  Channel's  network  operations  center in
Mountain  View and, in the case of one-way  cable  systems where the return path
from the customer to the cable headend is through a dial-up connection, the cost
of telephone lines into the headend.  It is ISP Channel's  intention to minimize
further deployments of one-way systems,  however,  due to the higher cost to the
Company in providing  such  service and the fact that the  customer  offering is
substantially less compelling than in a two-way system.  Intellicom's  principal
cost of sales comprises satellite transponder fees.  Currently,  the Company has
transponder  space on two  satellites,  GE-3 and SatMex 5, both of which provide
coverage over the continental United States and beyond.
<PAGE>

The Company reports operating  expenses in several  categories:  (i) selling and
marketing,  includes,  in  addition to the costs of selling  and  marketing  the
Company's services to end users,  customer care, content  production,  and cable
partnering costs; (ii) engineering,  which includes the costs of maintaining and
manning  the  network  operations  center,  field  engineering  and  information
technology;  and (iii)  general  and  administrative  costs.  Also  included  in
operating  expenses is depreciation  and  amortization.  Amortization  primarily
comprises  the  write off of the cost of  launch  incentives,  which are paid to
cable operators,  usually in the form of stock in the Company,  as an enticement
to enter into long-term contracts with the Company. These payments are amortized
over the life of the  contract  between  the  cable  operator  and the  Company.
Compensation  expense primarily relates to stock options granted between October
1998 and March 1999. Although these options were granted at the then fair market
value of the Company's  common stock at the time of grant,  the  stockholders of
the Company did not formally approve the underlying  option plan until April 13,
1999, the date of the Company's  annual meeting.  Under APB 25, the Company must
recognize as a charge the  difference  between  these  various  grant prices and
$59.875,  the  closing  price on the date of  stockholder  approval of the stock
option plan. This charge, totaling approximately $79 million, will be recognized
as a non-cash  charge  amortized  over a vesting  period of  approximately  four
years.

Results of Operations  for the Three Months Ended  December 31, 1999 compared to
the Three Months Ended December 31, 1998

The  condensed  consolidated  financial  statements  for the three  months ended
December  31,  1998 have  been  restated  for the  effects  of the  discontinued
operations of the document management segment.

Net Sales. Consolidated net sales increased $832,000, or 187%, to $1,276,000 for
the three months ended  December 31, 1999, as compared to $444,000 for the three
months ended December 31, 1998. Net sales for ISP Channel increased $514,000, or
116%,  to $958,000 for the three months ended  December 31, 1999, as compared to
$444,000 for the three months ended December 31, 1998, as a result of signing up
new cable  affiliates and obtaining new  subscribers.  Net sales associated with
ISP Channel's  subscriber fees increased $355,000,  or 198%, to $534,000 for the
three  months ended  December  31,  1999,  as compared to $179,000 for the three
months ended December 31, 1998. Net sales  associated  with the  installation of
cable modems to ISP Channel  subscribers  increased $135,000 to $226,000 for the
three  months  ended  December  31,  1999,  as compared to $91,000 for the three
months ended  December 31, 1998.  The Company  believes that  subscriber fee and
cable  modem  installation  revenues  will  continue  to increase as ISP Channel
continues to rollout its business plan. Net sales  associated with the segment's
non-cable  based  dial-up and  business-to-business  Internet  access  offerings
increased  $24,000 to $198,000 for the three months ended  December 31, 1999, as
compared to $174,000 for the three months ended December 31, 1998.

In addition to the net sales of ISP  Channel,  the  Company's  consolidated  net
sales for the three  months  ended  December 31, 1999 now include the results of
Intellicom,  which the Company  acquired on February 9, 1999.  Intellicom's  net
sales for the three months ended December 31, 1999, was $318,000. Of this total,
$207,000 represents net sales from Intellicom's core business of satellite-based
Internet services.  The remaining $111,000  represents other sources of revenue,
which includes $59,000 from the sale and installation of VSAT related equipment.

Cost of Sales.  Consolidated  cost of sales  increased  $1,103,000,  or 270%, to
$1,510,000 for the three months ended December 3l, 1999, as compared to $407,000
for the three  months ended  December  31,  1998.  Cost of sales for ISP Channel
increased $465,000, or 114%, to $872,000 for the three months ended December 31,
1999, as compared to $407,000 for the three months ended December 31, 1998, as a
result of the corresponding growth in net sales. The single largest component of
ISP Channel's cost of sales are telephony costs,  which amounted to $935,000 for
the three months  ended  December 31, 1999 as compared to $330,000 for the three
months  ended  December  31, 1998.  The Company  believes  that these costs will
remain the same or  decrease as a  percentage  of total net sales as ISP Channel
expects to realize some degree of cost savings in its  telephony  charges due to
the  replacement  of  expensive  T1 lines in  certain  areas  with  Intellicom's
satellite-based technology, which has a lower cost basis in most cases.

In addition to the cost of sales of ISP Channel, the Company's consolidated cost
of sales for the three months ended December 31, 1999 now include the results of
Intellicom, which the Company acquired on February 9, 1999. Intellicom's cost of
sales for the three months  ended  December  31, 1999 was  $638,000.  The single
largest component of Intellicom's cost of sales are the transponder fees that it
pays for leased  satellite  capacity,  which  amounted to $509,000 for the three
months  ended  December  31, 1999.  The Company  believes  that these costs will
increase as Intellicom has plans to lease segment space on additional satellites
in the future in  anticipation  of a more  aggressive  roll-out of  Intellicom's
business plan.

Selling and Marketing. Consolidated selling and marketing expenses (exclusive of
non-cash  compensation  expense of $1,388,000  for 1999 and no expense for 1998)
increased $3,538,000 to $5,546,000 for the three months ended December 31, 1999,

<PAGE>

as compared to $2,008,000 for the three months ended December 31, 1998.  Selling
and marketing  expenses for ISP Channel  increased  $3,052,000 to $5,060,000 for
the three months ended  December 31,  1999,  as compared to  $2,008,000  for the
three months ended  December 31, 1998. The  significant  growth in ISP Channel's
selling and  marketing  expense is a result of the  significant  hiring that the
Company has done to properly staff these departments.  In addition,  ISP Channel
launched numerous national and regional marketing  campaigns in an effort to add
subscribers,  as well as to attract new cable  affiliates.  The Company believes
that these costs will  continue to increase as ISP Channel  continues to develop
its business and enhance its sales efforts with recurring  nationwide  marketing
campaigns.

In addition to the selling and marketing expenses of ISP Channel,  the Company's
consolidated  selling and marketing expenses for the three months ended December
31, 1999 now include the results of  Intellicom,  which the Company  acquired on
February 9, 1999.  Intellicom's  selling and  marketing  expenses  for the three
months ended  December 31, 1999 were $486,000.  The Company  believes that these
costs  will  increase  as  Intellicom   begins  to  staff  these   functions  in
anticipation of rolling out its business plan to generate new customers.

Engineering.   Consolidated   engineering   expenses   (exclusive   of  non-cash
compensation  expense of $891,000  for 1999 and no expense  for 1998)  increased
$3,382,000, or 458%, to $4,121,000 for the three months ended December 31, 1999,
as  compared  to  $739,000  for  the  three  months  ended  December  31,  1998.
Engineering  expenses  for  ISP  Channel  increased  $2,855,000,   or  386%,  to
$3,594,000 for the three months ended December 31, 1999, as compared to $739,000
for the three  months  ended  December  31,  1998.  The growth in ISP  Channel's
engineering  expense  is  largely a result of  round-the-clock  staffing  of the
Company's  Network  Operating Center and the  introduction of field  engineering
services. The Company believes that these costs will continue to increase as ISP
Channel continues to develop its business.

In  addition  to  the  engineering   expenses  of  ISP  Channel,  the  Company's
consolidated  engineering  expenses for the three months ended December 31, 1999
now include the results of Intellicom, which the Company acquired on February 9,
1999. Intellicom's  engineering expenses for the three months ended December 31,
1999 was  $527,000.  The  Company  believes  that these  costs will  increase as
Intellicom  begins to staff these  functions in  anticipation of rolling out its
business plan to generate new customers.

General and  Administrative.  Consolidated  general and administrative  expenses
(exclusive of non-cash  compensation  expense of $3,885,000 for 1999 and $32,000
for 1998) increased $1,486,000, or 80%, to $3,350,000 for the three months ended
December 31, 1999, as compared to $1,864,000 for the three months ended December
31, 1998.  The Company's  corporate and ISP Channel  general and  administrative
expenses increased $1,213,000,  or 65%, to $3,077,000 for the three months ended
December 31, 1999, as compared to $1,864,000 for the three months ended December
31, 1998.  The growth in the  Company's  corporate  and ISP Channel  general and
administrative  expenses are a result of the hiring that the Company has done to
properly staff the Company's  administrative,  executive and finance departments
as the Company  continues to grow.  The Company  believes  that these costs will
continue to increase as a result of the  continued  expansion  of the  Company's
administrative staff and facilities to support growing operations.

In addition to the  general and  administrative  expenses of ISP Channel and the
Company's  corporate   operations,   the  Company's   consolidated  general  and
administrative expenses for the three months ended December 31, 1999 now include
the  results of  Intellicom,  which the  Company  acquired  on February 9, 1999.
Intellicom's  general and  administrative  expenses  for the three  months ended
December  31,  1999 was  $273,000.  The Company  believes  that these costs will
increase  as  Intellicom  begins to staff  these  functions  to support  growing
operations.

Depreciation  and  Amortization.   Consolidated  depreciation  and  amortization
expenses increased $1,860,000, or 168%, to $2,970,000 for the three months ended
December 31, 1999, as compared to $1,110,000 for the three months ended December
31, 1998.  Depreciation and amortization for ISP Channel and corporate increased
$1,199,000, or 108%, to $2,309,000 for the three months ended December 31, 1999,
as compared to  $1,110,000  for the three  months  ended  December 31, 1998 as a
result of increased  depreciation on expanded  property,  plant and equipment as
well as  amortization of costs  associated  with ISP Channel's Cable  Affiliates
Incentive Program. The Company believes that these expenses will increase as the
Company  continues to expand the  Company's  facilities  and  continues to offer
additional  incentives  to acquire  new cable  affiliates.  In  particular,  the
Company  expects the  amortization of the intangible  asset  associated with ISP
Channel's Cable  Affiliates  Incentive  Program to increase  significantly  as a
result  of  the  agreement  with  Mediacom  and  other  new  cable   affiliates.
Additionally,  the  Company  believes  depreciation  expense  will  continue  to
increase as additional headends and cable modems are deployed.

In addition to the depreciation and amortization expenses of ISP Channel and the
Company's  corporate  operations,  the Company's  consolidated  depreciation and
amortization  expenses for the three months ended  December 31, 1999 now include
the  results of  Intellicom,  which the  Company  acquired  on February 9, 1999.
Intellicom's  depreciation and amortization  expenses for the three months ended

<PAGE>

December 31, 1999 was $661,000,  of which $574,000  represents  amortization  of
acquired  technology,  the  intangible  asset  created  by  the  acquisition  of
Intellicom.  The Company believes that  depreciation will increase as Intellicom
continues to expand its facilities, while amortization is expected to remain the
same.

Compensation  Expense  Related  to Stock  Options.  For the three  months  ended
December  31,  1999,  the Company  recognized  a non-cash  compensation  expense
related to stock options of $6,164,000,  of which $5,764,000 related to employee
stock  options and  $400,000 to  non-employees.  Generally  accepted  accounting
principles  require that options issued to non-employees  be  "marked-to-market"
until such time as the options have been earned.  Therefore, the Company expects
this  amount to either  increase or decrease  based on the  fluctuations  in the
trading price of the  Company's  common  stock.  The amount  related to employee
stock options is also expected to increase in future  periods as a result of the
Company starting to incur this expense in April 1999.

Interest Expense.  Consolidated  interest expense decreased $153,000, or 29%, to
$366,000 for the three months ended  December 31, 1999,  as compared to $519,000
for the three months ended December 31, 1998.  This decrease is primarily due to
the reduction of interest expense resulting from the conversion of the 9% senior
subordinated  convertible  notes,  related  interest  notes  resulting  from the
Secondary  Offering and accrued  interest  into 765,201  shares of the Company's
common stock offset by increased interest expense resulting from increased lease
financing associated with the capital expansion needs of ISP Channel.

Interest  Income.  Consolidated  interest  income was  $2,142,000  for the three
months ended  December  31,  1999,  as compared to $153,000 for the three months
ended  December 31, 1998.  This increase was primarily due to the increased cash
and cash equivalent balances from the proceeds of the Secondary Offering and the
sale of  5,000,000  common  stock  shares for  $128,750,000  to Pacific  Century
CyberWorks Limited on December 13, 1999.

Other  Income  (Expense).  Other  expense was $9,000 for the three  months ended
December 31, 1999, as compared to $3,000 for the three months ended December 31,
1998.

Income  Taxes.  The Company  made no  provision  for income  taxes for the three
months ended  December 31, 1999 and the three months ended December 31, 1998, as
a result of the Company's continuing losses.

Loss from Discontinued Operations. The Company recognized a net loss of $138,000
for the three months ended December 31, 1998.  This consisted of a net loss from
the Company's  document  management  segment of $277,000 and net income from the
Company's  telecommunications  segment of $139,000  for the three  months  ended
December 31, 1998. There is no income from discontinued operations for the three
months  ended  December 31, 1999,  due to the sale of  substantially  all of the
assets of the Company's telecommunications segment, Kansas Communications, Inc.,
on February 12, 1999 and the sale of the Company's document  management segment,
Micrographic Technology Corporation, on September 30, 1999.

Preferred Dividends. The Company paid aggregate dividends of $243,000 during the
three  months  ended  December  31,  1998  on  its   outstanding  5%  Redeemable
Convertible Preferred Stock.

Net Loss.  For the three months ended  December 31, 1999,  the Company had a net
loss applicable to common shares of  $20,618,000,  or a loss per share of $1.08,
compared to a net loss of  $6,466,000  for the three months  ended  December 31,
1998, or a loss per share of $0.77.

Liquidity and Capital Resources

Since September 1998, the Company has funded the significant negative cash flows
from its operating  activities and the associated capital expenditures through a
combination  of public and private  equity  sales,  convertible  debt issues and
equipment  leases.  On October 12, 1999, the Company  entered into memorandum of
understanding  with Pacific Century  CyberWorks  Limited ("Pacific  Century") to
form a joint venture,  Pacific Century SoftNet,  to market products and services
to cable  operators in 50  countries  throughout  Asia.  On December 13, 1999 in
conjunction with this joint venture,  the Company  completed a private placement
of 5,000,000  common  stock  shares for  $128,750,000  to Pacific  Century,  and
entitled  Pacific  Century to designate two persons for election to the Board of
Directors.  To date,  the Company has procured an aggregate of $25.7  million in
capital lease lines and credit  facilities  from various  equipment  vendors and
financial sources, of which,  approximately $7.5 million remains unutilized.  As
of December 31, 1999, the Company had $250,927,000 in cash, cash equivalents and
short-term investments compared with $4,329,000 one year prior.

Net cash used in operating  activities  of continuing  operations  for the three
months ended December 31, 1999 was  $18,559,000.  Of this amount,  approximately
$20,618,000  million  stemmed  from  the  Company's  net  loss  from  continuing
operations  as  reduced  by  approximately  $9,332,000,  for  non-cash  charges,
primarily depreciation ($1,915,000),  amortization ($1,055,000) and compensation

<PAGE>

expense  related  to stock  options  ($6,164,000).  This was  offset  in part by
approximately  $7,273,000,  which was  generated  from an increase in  operating
assets and decrease in operating liabilities.

Net cash used in investing  activities  of continuing  operations  for the three
months ended December 31, 1999 was  approximately  $28,750,000.  Of this amount,
$23,948,000  was used to purchase net short-term  investments and $2,298,000 was
used to purchase  property,  plant and equipment.  Gross  purchases of property,
plant and equipment amounted to $8,477,000,  the difference being funded through
capital lease lines and credit  facilities  from various  equipment  vendors and
financial sources.

Net cash provided by financing  activities  for the three months ended  December
31,  1999 was  $132,161,000  primarily  through the  private  placement  sale of
5,000,000  common  stock  shares  to  Pacific  Century  Cyberworks  Limited  for
$128,750,000, and issuance of promissory note for $3,218,000.

The Company  believes it has sufficient cash and unutilized  lease facilities to
meet its presently anticipated business requirements over the next twelve months
including the funding of net operating  losses,  working  capital  requirements,
capital investments and strategic investments.

Year 2000 Issues

Many  computer  programs  have been written using two digits rather than four to
define the  applicable  year.  This  poses a problem  at the end of the  century
because such computer  programs would not properly  recognize a year that begins
with "20" instead of "19".  This, in turn, could result in major system failures
or miscalculations  that could disrupt the Company's  business.  The Company has
formulated a year 2000  ("Y2K")  plan (the "Y2K Plan") to address the  Company's
Y2K  issues  and have  created  a Y2K  Task  Force  headed  by the  Director  of
Information  Systems and Data Services to implement the plan.  The Company's Y2K
Plan has six phases:

1.   Organizational   Awareness:   educate  the  Company's   employees,   senior
     management, and the board of directors about the Y2K issue.
2.   Inventory:  complete  inventory  of  internal  business  systems  and their
     relative  priority to continuing  business  operations.  In addition,  this
     phase  includes a complete  inventory  of products and  services,  critical
     vendors, suppliers and services providers and their Y2K compliance status.
3.   Assessment:  assessment of internal business systems and external customers
     (including  cable  affiliates),  critical  vendors,  suppliers  and service
     providers and their Y2K compliance status.
4.   Planning:  preparing  the  individual  project  plans and project teams and
     other  required  internal and external  resources to implement the required
     solutions for Y2K compliance.
5.   Execution: implementation of the solutions and fixes.
6.   Validation: testing the solutions for Y2K compliance.

The Company's Y2K Plan will apply to two areas:

1.   Internal business systems

2.   Compliance by external customers and providers

During  the  course  of  addressing  all Y2K  issues,  the  Company  also  added
remediation and contingency planning processes.

Internal Business Systems

The Company's  internal business systems and workstation  business  applications
will be a primary area of focus. The Company is in completing the implementation
of new  enterprise-wide  business solutions to replace existing manual processes
and/or "home grown" applications during 1999. These solutions are represented by
their  vendors  as being  fully Y2K  compliant.  The  Company  has few,  if any,
"legacy" applications that needed to be evaluated for Y2K compliance.

The  Company  completed  all  phases for  substantially  all  critical  internal
business  systems.  The Company  believes it was Y2K  compliant  on all critical
internal  business  systems by December 31, 1999. But in any event,  the Company
will have contingency plans in place to continue  critical  business  operations
should some part of the internal business systems fail.

Some non-critical  systems may not be addressed until after March 2000. However,
the Company believes such systems will not cause significant  disruptions in the
Company's operations.

Compliance by External Customers and Providers

The Company has substantially completed the inventory phase and are in the final
stages of the assessment phase with the Company's  critical  suppliers,  service

<PAGE>

providers and contractors to determine the extent to which the interface systems
are susceptible to those third parties'  failure to remedy their own Y2K issues.
To  the  extent  that   responses   to  Y2K   readiness   responses   have  been
unsatisfactory,  the  Company is working  with these  parties to  remediate  the
issues.

The Company has been in discussions  with the Company's  cable  affiliates  with
regard to the status of their Y2K readiness.  Cable affiliates representing over
50% of our cable  based  Internet  customers  have  provided  written  or verbal
assurances of their Y2K readiness.  However,  there can be no guarantee that the
Y2K compliance  efforts of any of the Company's  cable  affiliates will be fully
successful.

Risks Associated with Y2K

The Company  believes a major risk  associated with the Y2K issue is the ability
of the  Company's  key business  partners  and vendors to resolve  their own Y2K
issues.  The Company has spent a great deal of time over the past several months
working closely with suppliers and vendors to assure their compliance.  However,
should any  problems  occur the Company may lose  significant  revenue and incur
unanticipated  expenses  to remedy the problem and such  problems  could  divert
management's  time and attention,  any of which could have a material  effect on
the Company's business, results of operation and financial condition.

To the extent any of our cable affiliates experience Y2K failures, the Company's
Internet service  customers could experience an interruption or total or partial
failure of  service.  Should  this occur,  the  Company  could lose  significant
revenue as a direct result of the Y2K failure or  indirectly  due to the loss of
customers,  either of which could have material effect on the Company's business
results of operations and financial condition.

Costs to Address Y2K issues

Because the Company is implementing new  enterprise-wide  business  solutions to
replace existing manual processes and/or "home grown"  applications,  there will
be little, if any, Y2K changes required to existing business  applications.  All
of the  new  business  applications  implemented  (or in the  process  of  being
implemented in 1999) are represented as being Y2K compliant.

The Company does not  separately  track the internal  costs incurred for the Y2K
project,  which costs are principally related to payroll costs for the Company's
information systems staff. The external costs, primarily  consultants,  has been
approximately  $300,000  through  December 31, 1999 and it is estimated that the
Company will spend an  additional  $50,000 on its  remediation  and  contingency
plans.

Contingency Plan

The Company has  formulated  a  contingency  plan,  which  includes  maintaining
staffing  during  the  most  critical  times  during  which  the  Company  might
experience Y2K failures.  In addition,  the Company will have field personnel on
standby to assist cable  affiliates  and VSAT  customers  should  assistance  be
required if the interface systems fail. However, the Company's  contingency plan
cannot address problems should its cable affiliates fail to be Y2K compliant.

Summary

There can be no assurance,  that the systems of the Company's  customers,  other
companies or government entities,  on which the Company rely for supplies,  cash
payments,  and future business,  will be timely converted,  or that a failure to
convert by the Company's  customers,  other  companies or  government  entities,
would not have a material adverse effect on the Company's  financial position or
results of operations.  Further, if, due to Y2K issues,  third-party  suppliers,
service  providers and contractors  fail to provide the Company with components,
materials,  or services which are necessary to deliver the Company's service and
product   offerings,   with  sufficient   electrical  power  and  transportation
infrastructure to deliver the Company's service and product offerings,  then any
such failure could have a material  adverse  effect on the Company's  ability to
conduct  business,  as well as the Company's  financial  position and results of
operations.

The  Company  is  continuing  to seek  verification  from  the  Company's  cable
affiliates,  critical suppliers, service providers and contractors that they are
Y2K compliant.  To the extent that any of these business partners fail to be Y2K
compliant,  it may have a significant impact on the Company's  business.  Should
the  Company's  Internet  service  customers  or VSAT  customers  fail to be Y2K
compliant,  it may have a  significant  impact on the  Company's  revenues.  The
Company's inability to correct a significant Y2K problem,  if one exists,  could
result in an  interruption  in or a failure of, certain of the Company's  normal
business  activities  and  operations.  In addition,  a significant  Y2K problem
concerning  the Company's  cable modem  Internet  services or the Company's VSAT
services could cause the Company's users to consider seeking alternate providers
of Internet  services.  Any significant Y2K problem could require the Company to
incur significant  unanticipated expenses to remedy the problem and could divert
management's time and attention, either of which could have a material effect on
the Company's business, results of operation and financial condition.
<PAGE>

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

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

We had  short-term  investments  of  $76,576,000  at December  31,  1999.  These
short-term  investments  consist  of highly  liquid  investments  with  original
maturities at the date of purchase of between three and eighteen  months.  These
investments  are subject to interest  rate risk and will fall in value if market
interest rates increase.  The Company believes a hypothetical increase in market
interest  rates by 10 percent  from levels at December  31, 1999 would cause the
fair value of these  short-term  investments  to fall by an  immaterial  amount.
Since we are not required to sell these investments before maturity, we have the
ability to avoid realizing losses on these investments due to a sudden change in
market interest  rates.  On the other hand,  declines in the interest rates over
time will reduce our interest income.

We had outstanding  convertible debt instruments of approximately  $3,461,000 at
December 31, 1999. These instruments have fixed interest rates ranging from 5.0%
to  9.0%.  Because  the  interest  rates  of  these  instruments  are  fixed,  a
hypothetical  10 percent  decrease  in  interest  rates will not have a material
effect on us.  Increases  in interest  rates,  however,  increase  the  interest
expense  associated with future borrowing by us, if any. We do not hedge against
interest rate fluctuations.

Equity Price Risk

We own 24,925 shares of common stock of Convergent  Communications,  Inc.  These
shares were  obtained as partial  consideration  with respect to the sale of our
wholly owned subsidiary,  Kansas Communications,  Inc. At December 31, 1999, the
closing price of Convergent Communications,  Inc.'s common stock was $15.875, as
listed on the NASDAQ National Market.  As a result, we valued this investment on
our  balance  sheet at  December  31,  1999 at its  market  value  of  $396,000.
Unrealized  gains and losses are excluded  from earnings and are reported in the
"Accumulated Other Comprehensive  Income" component of stockholders'  equity. We
do not hedge against equity price changes.

<PAGE>


PART II - OTHER INFORMATION

Item 1.  Legal Proceedings

The Company has no material pending litigation

Item 2.  Changes in Securities

On November 4, 1999, the Company entered into various definitive agreements with
Mediacom LLC ("Mediacom").  Under the terms of the Affiliate Agreement, Mediacom
agrees to use the Company's  wholly owned  subsidiary,  ISP Channel,  Inc. ("ISP
Channel"),  as the exclusive  provider of Internet access to customers passed by
Mediacom's cable television systems for 10 years, with an option for Mediacom to
terminate the Affiliate Agreement at 5 years. In exchange for the signing of the
Affiliate Agreement by Mediacom,  the Company issued a total of 3,500,000 common
stock  shares,  consisting  of  350,000  unrestricted  common  stock  shares and
3,150,000  restricted  common stock  shares.  The  conversion  of the  3,150,000
restricted common stock shares to unrestricted common stock shares is contingent
upon Mediacom  fulfilling the requirements of the Stockholder  Agreement.  Under
the terms of the Stockholder Agreement,  Mediacom is required to deliver 900,000
two-way  capable homes passed in groups of at least 150,000 homes every 6 months
commencing May 4, 2000, and upon delivery of each group of 150,000 homes passed,
525,000  restricted  common  stock  shares  become  unrestricted.  In the  event
Mediacom  fails to make  available  for ISP Channel  services the 150,000  homes
passed  within  one year of any  applicable  delivery  date,  then  Mediacom  is
required to return 525,000 restricted common stock shares to the Company. In the
event  Mediacom  delivers more than 900,000  two-way  capable homes passed,  the
Stock Purchase  Agreement  requires the Company to issue additional common stock
shares based on the  calculation  used for the original  900,000 two-way capable
homes passed. Additionally,  Mediacom gained the right to nominate one member to
the Company's board of directors. The cable affiliate launch incentive resulting
from the issuance of the 350,000 unrestricted common stock shares on November 4,
1999 is valued at $8,531,000,  and is being amortized on a  straight-line  basis
over the five year minimum life of the Affiliation Agreement.  No value has been
assigned to the 3,150,000  restricted common stock shares due to the requirement
for Mediacom to earn the shares by  delivering  900,000  two-way  capable  homes
passed in groups of at least  150,000  homes  every 6 months  commencing  May 4,
2000. The 3,150,000  restricted  common stock shares will be valued and recorded
as cable affiliate launch incentive upon conversion to unrestricted common stock
shares.  Additionally,  upon  conversion  of  restricted  common stock shares to
unrestricted  common stock shares,  the cable launch incentive will be amortized
on a  straight-line  basis over the  remaining  minimum life of the  Affiliation
Agreement.

On October 12, 1999, the Company entered into memorandum of  understanding  with
Pacific Century CyberWorks Limited ("Pacific  Century") to form a joint venture,
Pacific Century  SoftNet,  to market products and services to cable operators in
50 countries  throughout  Asia.  On December 13, 1999 in  conjunction  with this
joint venture,  the Company  completed a private  placement of 5,000,000  common
stock shares for $128,750,000 to Pacific  Century,  and entitled Pacific Century
to designate two persons for election to the Board of Directors.  The Company is
in the process of drafting definitive  agreements and establishing the strategy,
business plan and operational processes of this joint venture.

Item 3.  Defaults upon Senior Securities

None

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

None



<PAGE>


Item 5.  Other Information

Factors Affecting The Company's Operating Results

The  risks  and  uncertainties  described  below  are not the only ones that the
Company face.  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.

The Company  Cannot Assure You That The Company Will Be  Profitable  Because The
Company Has Operated The Company's  Internet  Services Business Only For A Short
Period Of Time

The Company  acquired ISP Channel,  Inc.  ("ISP  Channel") on June 21, 1996, and
Intelligent  Communications,  Inc.  ("Intellicom") on February 9, 1999. As such,
the Company has very limited  operating  history and  experience in the Internet
services  business and the Company cannot assure you that the Company's  ability
to develop or maintain  strategies  and business  operations  for the  Company's
Internet  services  will  achieve  positive  cash  flow and  profitability.  The
successful  expansion  of both the ISP  Channel  and  Intellicom  services  will
require  strategies and business  operations  that differ from those the Company
has historically employed. To be successful, the Company must develop and market
products and services that are widely  accepted by consumers  and  businesses at
prices that provide cash flow  sufficient  to meet the  Company's  debt service,
capital expenditures and working capital requirements.

The Company's ISP Channel And Intellicom Businesses May Fail If Their Industries
As A Whole Fails Or The Company's  Products And Services Do Not Gain  Commercial
Acceptance

It has become feasible to offer Internet  services over existing cable lines and
equipment  and  satellites  on a broad scale only  recently.  There is no proven
commercial  acceptance of cable-based or  satellite-based  Internet services and
none of the companies  offering such  services are currently  profitable.  It is
currently very difficult to predict whether  providing  cable-modem or satellite
Internet services will become a viable industry.

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

The  Company's  Continued  Negative  Cash Flow And Net Losses May Depress  Stock
Prices

The  Company's  continued  negative  cash  flow and net  losses  may  result  in
depressed  market prices for the  Company's  common  stock.  The Company  cannot
assure you that the Company will ever  achieve  favorable  operating  results or
profitability.  The Company has sustained  substantial losses over the last five
fiscal years.  For the three months ended  December 31, 1999,  the Company had a
net loss of $20,618,000. As of December 31, 1999, the Company had an accumulated
deficit of  $120,865,000.  The Company expects to incur  substantial  additional
losses and experience substantial negative cash flows as the Company expands the
Company's  Internet  service  offerings.  The costs of  expansion  will  include
expenses incurred in connection with:

o    inducing cable affiliates to enter into exclusive multi-year contracts with
     the Company;
o    the amount and timing of capital  expenditures  and other costs  related to
     the Company's operations;
o    research and development of new product and service offerings;
o    the continued  development of the Company's direct and indirect selling and
     marketing efforts; and
o    possible charges related to acquisitions,  divestitures, business alliances
     or changing technologies.

In addition,  the Company's  expense levels are based in part on expectations of
future revenues and, to a large extent,  are fixed. The Company may be unable to
adjust  spending  quickly  enough  to  compensate  for  any  unexpected  revenue
shortfall. The Company's revenues will be dependent upon the growth rates of ISP
Channel's subscribers and Intellicom's customers.

<PAGE>


If The Company Does Not Achieve Cash Flows  Sufficient  To Support The Company's
Operations, The Company May Be Unable To Implement The Company's Business Plan

The  development  of the  Company's  business will require  substantial  capital
infusions as a result of:

o        the Company's need to enhance and expand product and service  offerings
         to maintain the  Company's  competitive  position  and increase  market
         share; and
o        the  substantial   investment  in  equipment  and  corporate  resources
         required by the  continued  national  launching  of the ISP Channel and
         Intellicom services.

In addition,  the Company anticipates that the majority of cable affiliates with
one-way cable systems will  eventually  upgrade  their cable  infrastructure  to
two-way  cable  systems,  at which time the  Company  will have to  upgrade  the
Company's   equipment   on  any  affected   cable   system  to  handle   two-way
transmissions. The Company cannot accurately predict whether or when the Company
will  ultimately  achieve cash flow levels  sufficient  to support the Company's
operations,  development  of new products  and  services,  and  expansion of the
Company's Internet  services.  Unless the Company reaches such cash flow levels,
the Company may require additional  financing to provide funding for operations.
If the Company is required to raise capital  through a long-term debt financing,
the Company will be highly leveraged and such debt securities may have rights or
privileges senior to those of the Company's current stockholders. If the Company
is  required  to raise  capital by issuing  equity  securities,  the  percentage
ownership  of the  Company's  stockholders  will be  reduced,  stockholders  may
experience additional dilution and such securities may have rights,  preferences
and privileges  senior to those of the Company's common stock. In the event that
the Company cannot generate  sufficient cash flow from operations,  or is unable
to borrow or otherwise  obtain  additional  funds on favorable  terms to finance
operations  when  needed,  the  Company's  business,  financial  condition,  and
prospects would be materially adversely affected.

The Unpredictability Of The Company's  Quarter-To-Quarter  Results May Adversely
Affect The Trading Price Of The Company's Common Stock

The  Company  cannot  predict  with any  significant  degree  of  certainty  the
Company's  quarter-to-quarter  operating  results.  As  a  result,  the  Company
believes that period-to-period comparisons of the Company's revenues and results
of operations  are not  necessarily  meaningful and should not be relied upon as
indicators  of  future  performance.  It is  likely  that in one or more  future
quarters the Company's  results may fall below the  expectations of analysts and
investors.  In such event, the trading price of the Company's common stock would
likely decrease. Many of the factors that cause the Company's quarter-to-quarter
operating results to be unpredictable are largely beyond the Company's  control.
These factors include, among others:

o        the number of ISP Channel subscribers and Intellicom customers;
o        the Company's ability to coordinate timely and effective
         marketing strategies;
o        the rate at which ISP Channel and its cable  affiliates, and Intellicom
         can complete the  installations  required to initiate service;
o        the amount and timing of capital  expenditures  and other costs related
         to the expansion and provision of ISP Channel and Intellicom services;
o        competition in the Internet or cable industries; and
o        changes in law and regulation.

Existing Contractual  Obligations Allow For Additional Issuances Of Common Stock
Upon A Market Price  Decline,  Which Could Further  Adversely  Affect The Market
Price For The Company's Common Stock

As of December 31,  1999,  the total  number of shares of the  Company's  common
stock underlying all of the Company's convertible  securities,  including common
stock underlying unvested stock options and grants made under the Company's 1998
Stock   Incentive  Plan  and  1999   Supplemental   Stock  Incentive  Plan,  was
approximately  4,628,000  shares.  This would  have been 14.8% of the  Company's
outstanding  common stock as of December 31,  1999,  assuming  such shares would
have been issued as of such date.  The  issuance of common  stock as a result of
these  obligations  could result in immediate  and  substantial  dilution to the
holders of the  Company's  common  stock.  To the extent any of these  shares of
common  stock are issued,  the market  price of the  Company's  common stock may
decrease because of the additional shares on the market.

<PAGE>


The Company May Not Be Able To Successfully Implement The ISP Channel's Business
Plan If The Company's Cable Affiliates Are Adversely Impacted

The success of the Company's  business  depends upon the Company's  relationship
with the Company's cable affiliates. Therefore, the Company's success and future
business  growth will be  substantially  affected by economic and other  factors
affecting the Company's cable affiliates.

The Company does not have direct contact with the Company's customers

Because  customers  to the ISP Channel  service must  subscribe  through a cable
affiliate,  in many  cases  the  cable  affiliate  (and  not the  Company)  will
substantially control the customer relationship with the end-user customers. For
example,  under some of the Company's existing  contracts,  cable affiliates are
responsible  for important  functions,  such as billing for and  collecting  ISP
Channel  subscription  fees and  providing the labor and costs  associated  with
distribution of local marketing materials.

Failure or delay by cable  operators  to upgrade  their  systems  may  adversely
affect subscription levels

Certain ISP Channel  services are dependent on the quality of the cable networks
of the Company's cable affiliates.  Currently, some cable systems are capable of
providing only information  from the Internet to the subscribers,  and require a
telephone line to carry  information  from the subscriber  back to the Internet.
These systems are called  "one-way" cable systems.  Several cable operators have
announced and begun making upgrades to their systems to increase the capacity of
their  networks and to enable  traffic both to and from the Internet  over their
networks,  so-called "two-way capability".  However, cable system operators have
limited  experience with  implementing  such upgrades.  These  investments  have
placed a significant strain on the financial, managerial,  operational and other
resources  of  cable  system  operators,   many  of  which  already  maintain  a
significant amount of debt.

Further,  cable operators must  periodically  renew their  franchises with city,
county or state governments.  These governmental bodies may impose technical and
managerial  conditions  before  granting a  renewal,  and these  conditions  may
adversely affect the cable  operator's  ability or willingness to implement such
upgrades.

In  addition,   many  cable  operators  may  emphasize   increasing   television
programming  capacity  to compete  with other  forms of  entertainment  delivery
systems, such as direct broadcast satellite, instead of upgrading their networks
for  two-way  Internet  capability.  Such  upgrades  have been,  and the Company
expects will continue to be,  subject to change,  delay or  cancellation.  Cable
operators'  failure to  complete  these  upgrades  in a timely and  satisfactory
manner, or at all, would adversely affect the market for the Company's  products
and services in any such operators' franchise area. In addition, cable operators
may rollout  Internet  access systems that are  incompatible  with the Company's
high-speed Internet access services.  Any of these actions could have a material
adverse effect on the Company's business, financial condition, and prospects.

If The Company Does Not Obtain Exclusive Access To Cable Customers,  The Company
May Not Be Able To Sustain Any Meaningful Growth

The success of the ISP Channel  service is dependent,  in part, on the Company's
ability to gain exclusive  access to cable consumers.  The Company's  ability to
gain exclusive access to cable customers  depends upon the Company's  ability to
develop  exclusive  relationships  with cable operators that are dominant within
their  geographic  markets.  The Company cannot assure you that affiliated cable
operators  will not face  competition  in the future or that the Company will be
able to establish and maintain  exclusive  relationships  with cable affiliates.
Currently,  a number of the  Company's  contracts  with cable  operators  do not
contain  exclusivity  provisions.  Even if the Company is able to establish  and
maintain exclusive relationships with cable operators, the Company cannot assure
the  ability  to do so on  favorable  terms or in  sufficient  quantities  to be
profitable.   In  addition,   the  Company  will  be  excluded  from   providing
Internet-over-cable  in those areas  served by cable  operators  with  exclusive
arrangements with other Internet service providers. The Company's contracts with
cable  affiliates  typically  range from three to seven  years,  and the Company
cannot assure you that such contracts will be renewed on satisfactory  terms. If
the exclusive  relationship  between either the Company and the Company's  cable
affiliates or between the Company's cable affiliates and their cable subscribers
is impaired,  if the Company does not become affiliated with a sufficient number
of cable  operators,  or if the  Company is not able to continue  the  Company's
relationship  with a cable  affiliate  once the initial term of its contract has
expired,  the Company's  business,  financial  condition and prospects  could be
materially adversely affected.

<PAGE>


Failure To Increase Revenues From New Products And Services, Whether Due To Lack
Of Market Acceptance, Competition, Technological Change Or Otherwise, Would Have
A Material  Adverse Effect On The Company's  Business,  Financial  Condition And
Prospects

The Company expects to continue  extensive  research and development  activities
and to evaluate new product and service  opportunities.  These  activities  will
require the Company's continued investment in research and development and sales
and marketing,  which could adversely affect the Company's short-term results of
operations.  The Company  believes that future revenue growth and  profitability
will depend in part on the Company's ability to develop and successfully  market
new products and  services.  Failure to increase  revenues from new products and
services, whether due to lack of market acceptance,  competition,  technological
change or  otherwise,  would have a  material  adverse  effect on the  Company's
business financial condition and prospects.

The  Company's  Purchase Of  Intellicom  Subjects  The Company To Risks In A New
Market

The purchase of Intellicom  involves other risks  including  potential  negative
effects on the Company's reported results of operations from acquisition-related
charges and amortization of acquired  technology and other intangible assets. As
a result of the  Intellicom  acquisition,  the  Company  recorded  approximately
$16,075,000  of intangible  assets,  which will  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 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 Intellicom  acquisition was structured
as a purchase by the Company of all of the outstanding stock of Intellicom. As a
result,  the  Company  could be  adversely  affected  by direct  and  contingent
liabilities of  Intellicom.  It is possible that the Company is not aware of all
of the  liabilities  of Intellicom and that  Intellicom has greater  liabilities
than the Company expected.

In  addition,  the  Company  has  very  little  experience  in the  markets  and
technology in which  Intellicom is focused.  As such,  the Company is faced with
risks that are new to the Company, including the following:

     Dependence on Very Small Aperture Terminal ("VSAT") market

     One of the  reasons  the  Company  purchased  Intellicom  was to be able to
     provide  two-way  satellite   Internet  access  options  to  the  Company's
     customers  using VSAT satellite  technology.  However,  the market for VSAT
     communications  networks  and  services  may not  continue  to grow or VSAT
     technology  may be replaced by an  alternative  technology.  A  significant
     decline in this market or the  replacement of the existing VSAT  technology
     by an alternative technology could adversely affect the Company's business,
     financial condition and prospects.

     Risk of damage, loss or malfunction of satellite

     The  loss,  damage  or  destruction  of  any  of  the  satellites  used  by
     Intellicom,  or a  temporary  or  permanent  malfunction  of any  of  these
     satellites,  would likely result in interruption  of Internet  services the
     Company  provides  over the  satellites  which could  adversely  affect the
     Company's business, financial condition and prospects.

     In addition,  use of the satellites to provide Internet services requires a
     direct line of sight  between the  satellite  and the cable  headend and is
     subject  to  distance  and  rain  attenuation.   In  certain  markets  that
     experience  heavy  rainfall,  transmission  links  must be  engineered  for
     shorter distances and greater power to maintain  transmission quality. Such
     engineering  changes  may  increase  the  cost  of  providing  service.  In
     addition,  such  engineering  changes  may require  FCC  approval,  and the
     Company cannot assure you that the FCC would grant such approval.

     Equipment failure and interruption of service

     The Company's operations will require that the Company's network, including
     the satellite connections, operate on a continuous basis. It is not unusual
     for networks,  including switching facilities and satellite connections, to
     experience  periodic  service  interruption and equipment  failures.  It is
     therefore  possible that the network  facilities  the Company uses may from
     time to time experience  interruptions or equipment  failures,  which would
     negatively  affect  consumer  confidence as well as the Company's  business
     operations and reputation.

     Dependence on leases for satellites

     Intellicom currently leases satellite space from GE Americom and Satmex. If
     for any reason, the leases were to be terminated, the Company cannot assure
     you that the Company could renegotiate new leases with GE Americom,  Satmex

<PAGE>

     or another  satellite  provider on favorable  terms, if at all. The Company
     has not identified  alternative  providers and believes that any new leases
     would  probably be more  costly to the  Company.  In any case,  the Company
     cannot assure you that an alternative  provider of satellite services would
     be available,  or, if available,  would be available on terms  favorable to
     the Company.

     Competition

     The  market  for  Internet  access   services  is  extremely   competitive.
     Intellicom believes that its ability to compete successfully depends upon a
     number of factors, including:  market presence; the capacity,  reliability,
     and  security of its network  infrastructure;  the pricing  policies of its
     competitors  and suppliers;  and the timing and release of new products and
     services by Intellicom and its  competitors.  The Company cannot assure you
     that Intellicom will be able to successfully  compete with respect to these
     factors.

     Government regulation

     The VSAT satellite industry is a highly regulated  industry.  In the United
     States,  operation and use of VSAT  satellites  requires  licenses from the
     FCC;  and Satmex is  licensed  by the  Mexican  government.  As a lessee of
     satellite space,  the Company could in the future be indirectly  subject to
     new laws,  policies  or  regulations  or changes in the  interpretation  or
     application  of  existing  laws,  policies or  regulations  that modify the
     present regulatory environment.

     While the  Company  believes  that the  Company's  lessors  will be able to
     obtain all licenses and  authorizations  necessary to operate  effectively,
     the Company cannot assure you that the Company's lessors will be successful
     in doing  so.  The  Company's  failure  to  indirectly  obtain  some or all
     necessary licenses or approvals could have a material adverse effect on the
     Company's business, financial condition and prospects.

If The Company Fails To Manage The Company's Expanding Business Effectively, The
Company's  Business,  Financial  Condition  And  Prospects  Could  Be  Adversely
Affected

To exploit fully the market for the Company's products and services, the Company
must rapidly  execute the Company's  sales strategy  while managing  anticipated
growth through the use of effective planning and operating procedures. To manage
the Company's anticipated growth, the Company must, among other things:

o    continue to develop and improve the  Company's  operational,  financial and
     management information systems;
o    hire and train  additional  qualified  personnel;
o    continue to expand and upgrade core technologies; and
o    effectively manage multiple relationships with various customers, suppliers
     and other third parties.

Consequently,  such expansion could place a significant  strain on the Company's
services and support  operations,  sales and administrative  personnel and other
resources.  The Company may, in the future, also experience difficulties meeting
demand for the Company's products and services.  Additionally, if the Company is
unable to provide training and support for the Company's products,  it will take
longer to install the Company's products and customer satisfaction may be lower.
The Company  cannot  assure that the Company's  systems,  procedures or controls
will be adequate to support the Company's  operations or that management will be
able to exploit  fully the market for the Company's  products and services.  The
Company's  failure to manage growth  effectively  could have a material  adverse
effect on the Company's business, financial condition and prospects.

The Company's Limited Experience With  International  Operations May Prevent The
Company From Growing The Company's Business Outside The United States

A key  component  of the  Company's  strategy  is to expand  into  international
markets and offer broadband  services in those markets.  The Company has limited
experience  in  developing  localized  versions of the  Company's  products  and
services  and  in  developing  relationships  with  international  cable  system
operators.  The Company may not be successful in expanding the Company's product
and service  offerings  into  foreign  markets.  In addition to the  uncertainty
regarding the Company's ability to generate revenues from foreign operations and
expand the Company's  international  presence,  the Company faces specific risks
related to providing broadband services in foreign jurisdictions, including:

o    regulatory requirements, including the regulation of Internet access;
o    legal  uncertainty   regarding  liability  for  information  retrieved  and
     replicated in foreign jurisdictions; and
o    lack of a developed cable infrastructure in many international markets.
<PAGE>


If Cable  Affiliates  Are Unable To Renew  Their  Franchises  Or The  Company is
Unable  To  Affiliate  With  Replacement  Operators,   The  Company's  Business,
Financial Condition And Prospects Could Be Materially Adversely Affected

Cable television  companies operate under  non-exclusive  franchises  granted by
local or state  authorities that are subject to renewal and  renegotiation  from
time to time.  A franchise  is  generally  granted for a fixed term ranging from
five to 15 years,  but in many  cases the  franchise  may be  terminated  if the
franchisee  fails to comply with the material  provisions of the franchise.  The
Cable  Television  Consumer  Protection and  Competition Act of 1992 (the "Cable
Act") prohibits franchising authorities from granting exclusive cable television
franchises  and  from  unreasonably  refusing  to award  additional  competitive
franchises.  The Cable Act also permits  municipal  authorities to operate cable
television systems in their communities without  franchises.  The Company cannot
assure that cable  television  companies  having contracts with the Company will
retain  or  renew  their  franchises.  Non-renewal  or  termination  of any such
franchises  would result in the  termination of the Company's  contract with the
applicable  cable  operator.  If an affiliated  cable  operator were to lose its
franchise,  the  Company  would  seek to  affiliate  with the  successor  to the
franchisee. The Company cannot, however, assure that ISP Channel will be able to
affiliate with such successor.  In addition,  affiliation with a successor could
result in additional costs to the Company.  If the Company cannot affiliate with
replacement cable operators,  the Company's  business,  financial  condition and
prospects could be materially adversely affected.

The Company May Lose Cable Affiliates Through Their Acquisition Which Could Have
A Material  Adverse Effect On The Company's  Business,  Financial  Condition And
Prospects

Under many of the Company's contracts,  if a cable affiliate is acquired and the
acquiring  company  chooses not to enter into a contract  with the Company,  the
Company may lose the Company's  ability to offer  Internet  services in the area
served by such former cable affiliate  entirely or on an exclusive basis. Such a
loss could have a material adverse effect on the Company's  business,  financial
condition and prospects.

The  Company  Depends  On  Third-Party   Technology  To  Develop  And  Introduce
Technology The Company Uses And The Absence Of Or Any  Significant  Delay In The
Replacement Of Third-Party  Technology  Would Have A Material  Adverse Effect On
The Company's  Business,  Financial  Condition And Prospects The markets for the
products and services the Company uses are characterized by the following:

o        intense competition;
o        rapid technological advances;
o        evolving industry standards;
o        changes in subscriber requirements;
o        frequent new product introductions and enhancements; and
o        alternative service offerings.

Because of these  factors,  the Company has chosen to rely upon third parties to
develop and introduce  technologies  that enhance the Company's  current product
and service offerings.  If the Company's relationship with such third parties is
impaired or terminated,  then the Company would have to find other developers on
a timely  basis or develop the  Company's  own  technology.  The Company  cannot
predict  whether the Company will be able to obtain the  third-party  technology
necessary  for  continued  development  and  introduction  of new  and  enhanced
products and services or whether such technology will gain market acceptance. In
addition, the Company cannot predict whether the Company will obtain third-party
technology on commercially reasonable terms or replace third-party technology in
the event such technology  becomes  unavailable,  obsolete or incompatible  with
future  versions of the  Company's  products or services.  The absence of or any
significant  delay in the  replacement  of third-party  technology  would have a
material  adverse  effect on the  Company's  business,  financial  condition and
prospects.

The Company  Depends On  Third-Party  Suppliers  For Certain  Key  Products  And
Services And Any  Inability To Obtain  Sufficient  Key  Components Or To Develop
Alternative  Sources For Such Components Could Result In Delays Or Reductions In
The Company's Product Shipments

The Company  currently  depends on a limited number of suppliers for certain key
products and services. In particular,  the Company depends on General Instrument
Corporation,  3Com  Corporation  and Com21,  Inc.  for  headend  and cable modem
equipment,  Cisco  Systems,  Inc. for  specific  network  routing and  switching
equipment, and, among others,  MCIWorldCom,  Inc. for national Internet backbone
services.  Additionally,  certain  of the  Company's  cable  modem  and  headend
equipment  suppliers are in  litigation  over their  patents.  The Company could

<PAGE>

experience  disruptions  in the  delivery or increases in the prices of products
and services  purchased from vendors as a result of this  intellectual  property
litigation.  The  Company  cannot  predict  when  delays in the  delivery of key
components  and other  products  may occur due to shortages  resulting  from the
limited  number  of  suppliers,  the  financial  or other  difficulties  of such
suppliers or the possible limited availability in the suppliers'  underlying raw
materials.  In addition, the Company may not have adequate remedies against such
third parties as a result of breaches of their agreements with the Company.  The
inability to obtain sufficient key components or to develop  alternative sources
for such  components  could  result  in delays or  reductions  in the  Company's
product  shipments.  If that were to happen,  it could  have a material  adverse
effect on the Company's customer relationships,  business,  financial condition,
and prospects.

If New Data Over  Cable  System  Interface  Specifications  ("DOCSIS")-Compliant
Cable Modems Are Not Deployed Timely And Successfully,  The Company's Subscriber
Growth Could Be Constrained

Each of the  Company's  subscribers  currently  obtains a cable  modem  from the
Company  to access  the ISP  Channel.  The North  American  cable  industry  has
recently adopted  interface  standards known as DOCSIS for hardware and software
to support the delivery of data services over the cable infrastructure utilizing
compatible  cable  modems.  If the  Company  is not able to obtain a  sufficient
quantity of DOCSIS-compliant modems, the Company's growth will be limited.

The Company also believes that in order to meet the Company's  subscriber goals,
two-way cable modems must also become widely  available in other channels,  such
as  through  personal   computer   manufacturers  and  through  retail  outlets.
Currently, this widespread availability has not yet occurred. In addition, these
modems must be easy for consumers to install themselves, rather than requiring a
customer service  representative to perform the  installation.  If two-way cable
modems do not become  quickly  available  in outlets  other than  through  cable
television  companies,  or if they cannot be installed  easily by consumers,  it
would be  difficult  for the  Company to  attract  large  numbers of  additional
subscribers and the Company's business would be harmed.

The Company  Depends On  Third-Party  Carriers To Maintain  Their Cable  Systems
Which Carry The Company's Data And Any Interruption Of The Company's  Operations
Due To The Failure To Maintain Their Cable Systems Would Have A Material Adverse
Effect On The Company's Business, Financial Condition And Prospects

The Company's success will depend upon the capacity, reliability and security of
the  network  used to carry  data  between  the  Company's  subscribers  and the
Internet.  A significant portion of such network is owned by third parties,  and
accordingly  the Company has no control  over its quality and  maintenance.  The
Company relies on cable operators to maintain their cable systems.  In addition,
the Company relies on other third parties to provide a connection from the cable
system to the  Internet.  Currently,  the Company has  transit  agreements  with
MCIWorldCom,  Sprint,  and others to support the exchange of traffic between the
Company's network operations center, cable system and the Internet.  The failure
of any other link in the  delivery  chain  resulting in an  interruption  of the
Company's  operations  would have a  material  adverse  effect on the  Company's
business, financial condition and prospects.

Any Increase In Competition  Could Reduce The Company's  Gross Margins,  Require
Increased  Spending  By The Company On Research  And  Development  And Sales And
Marketing,  And Otherwise  Materially  Adversely Affect The Company's  Business,
Financial Condition And Prospects

The markets for the Company's  products and services are intensely  competitive,
and the Company  expects  competition  to  increase  in the future.  Many of the
Company's  competitors  and potential  competitors  have  substantially  greater
financial,  technical and marketing  resources,  larger subscriber bases, longer
operating histories, greater name recognition and more established relationships
with  advertisers and content and  application  providers than the Company does.
Such  competitors may be able to undertake more extensive  marketing  campaigns,
adopt more aggressive  pricing policies and devote  substantially more resources
to  developing  Internet  services or online  content  than the Company can. The
Company's  ability to compete  may be further  impeded if, as  evidenced  by the
acquisitions of TCI and MediaOne by AT&T, competitors utilizing different or the
same  technologies  seek to  acquire  or  merge  to  enhance  their  competitive
strengths.  The Company  cannot  predict  whether  the  Company  will be able to
compete  successfully  against current or future competitors or that competitive
pressures  faced  by the  Company  will  not  materially  adversely  affect  the
Company's  business,  financial  condition,  prospects  or  ability to repay the
Company's  debts.  Any increase in competition  could reduce the Company's gross
margins,  require increased  spending by the Company on research and development
and sales and marketing, and otherwise materially adversely affect the Company's
business, financial condition and prospects.



<PAGE>


ISP Channel face competition from many sources, which include:

o    other cable-based access providers;
o    telephone-based access providers; and
o    alternative technologies.

Cable-based access providers

In the cable-based segment of the Internet access industry, the Company competes
with other  cable-based  data  services  that are seeking to contract with cable
system operators. These competitors include:

o    systems  integrators such as Excite@Home,  Roadrunner and High Speed Access
     Corp.; and

o    Internet service providers such as Earthlink  Network,  Inc. and MindSpring
     Enterprises,  Inc. (which two companies are in the process of merging), and
     IDT Corporation.

Most cable system  operators have begun to provide  high-speed  Internet  access
services  over  their  existing  networks.  The  largest of these  cable  system
operators are Adelphia,  CableVision,  Charter,  Comcast, Cox, MediaOne, TCI and
Time Warner. Comcast, Cox and TCI market through Excite@Home,  while Time Warner
plans to market the RoadRunner  service  through Time Warner's own cable systems
as well as to other cable system operators  nationwide.  Adelphia  provides high
speed Internet access through a wholly owned  subsidiary  called  Powerlink.  In
particular,  Excite@Home has announced its intention to compete  directly in the
small- to  medium-sized  cable system market,  where High Speed Access Corp., an
affiliate of Charter, currently competes as well.

Telephone-based access providers

Some  of the  Company's  most  direct  competitors  in the  access  markets  are
telephone-based  access providers,  including incumbent local exchange carriers,
national interexchange or long distance carriers,  fiber-based competitive local
exchange carriers,  ISPs, online service providers,  wireless and satellite data
service providers,  and local exchange carriers that use digital subscriber line
technologies.  Some of these  competitors are among the largest companies in the
country,  including  AT&T,  MCIWorldCom,  Sprint  and Qwest.  Other  competitors
include BBN,  Earthlink/Mindspring,  Netcom, Concentric Network, and PSINet. The
result is a highly competitive and fragmented market.

Some of the Company's potential competitors are offering diversified packages of
telecommunications  services to residential  customers.  If these companies also
offer  Internet  access  service,  then the  Company  would be at a  competitive
disadvantage.  Many  of  these  companies  are  offering  (or  may  soon  offer)
technologies  that will  attempt  to compete  with some or all of the  Company's
Internet  data service  offerings.  The bases of  competition  in these  markets
include:

o   transmission speed;
o   security of transmission;
o   reliability of service;
o   ease of access and use;
o   ratio of price to performance;
o   quality of presentation and content;
o   timeliness of content;
o   customer support;
o   brand recognition; and
o   operating experience and revenue sharing.

Alternative technologies

In  addition,   the  market  for  high-speed  data   transmission   services  is
characterized  by several  competing  technologies  that offer  alternatives  to
cable-modem service and conventional  dial-up access.  Competitive  technologies
include  telecom-related  wireline  technologies,  such as  integrated  services
digital  network  and  digital  subscriber  line   technologies,   and  wireless
technologies  such  as  local  multipoint  distribution  service,   multichannel
multipoint  distribution  service and various types of satellite  services.  The
Company's  prospects  may be  impaired by FCC rules and  regulations,  which are
designed,  at  least in part,  to  increase  competition  in video  and  related
services. The FCC has also created a General Wireless  Communications Service in
which  licensees are afforded  broad latitude in defining the nature and service
area of the  communications  services they offer. The full impact of the General
Wireless Communications Service remains to be seen.  Nevertheless,  all of these
new  technologies  pose  potential   competition  to  the  Company's   business.
Significant  market  acceptance of  alternative  solutions for  high-speed  data
transmission could decrease the demand for the Company's services.
<PAGE>

The Company cannot predict whether and to what extent technological developments
will have a material adverse effect on the Company's competitive  position.  The
rapid development of new competing technologies and standards increases the risk
that current or new competitors  could develop  products and services that would
reduce the competitiveness of the Company's products and services.  If that were
to happen,  it could have a material  adverse effect on the Company's  business,
financial condition and prospects.

A Perceived Or Actual  Failure By The Company To Achieve Or Maintain  High Speed
Data Transmission Could  Significantly  Reduce Consumer Demand For The Company's
Services And Have A Material Adverse Effect On The Company's Business, Financial
Condition And Prospects

Because the ISP Channel and  Intellicom  services  have been  operational  for a
relatively  short period of time, the Company's  ability to connect and manage a
substantial number of online subscribers at high transmission speeds is unknown.
In addition, the Company face risks related to the Company's ability to scale up
to expected subscriber levels while maintaining superior performance. The actual
downstream data  transmission  speeds for each subscriber will be  significantly
slower and will depend on a variety of factors, including:

o    actual speed provisioned for the subscriber's modem;
o    quality of the server used to deliver content;
o    overall Internet traffic congestion;
o    the number of active subscribers on a given channel at the same time;
o    the capability of modems used; and
o    the service quality of the cable networks of ISP Channel's cable affiliates
     and the networks of Intellicom's customers.

As the number of  subscribers  increases,  it may be necessary for the Company's
cable affiliates to add additional 6 MHz channels in order to maintain  adequate
data  transmission  speeds from the Internet.  These additions would render such
channels  unavailable to such cable  affiliates for video or other  programming.
The Company cannot assure you that the Company's  cable  affiliates will provide
additional capacity for this purpose. On two-way cable systems, the transmission
data channel to the Internet (or return path) is located in a range not used for
broadcast by traditional  cable networks and is more susceptible to interference
than the transmission data channel from the Internet, resulting in a slower peak
transmission  speed to the Internet.  In addition to the factors  affecting data
transmission  speeds  from the  Internet,  the  interference  level in the cable
affiliates'  data broadcast  range to the Internet can materially  affect actual
data  transmission  speeds to the  Internet.  The actual  data  delivery  speeds
realized by subscribers will be significantly  lower than peak data transmission
speeds and will vary depending on the  subscriber's  hardware,  operating system
and software configurations. The Company cannot assure you that the Company will
be able achieve or maintain data transmission  speeds high enough to attract and
retain the Company's planned numbers of subscribers, especially as the number of
subscribers to the Company's services grows. Consequently, a perceived or actual
failure by the Company to achieve or maintain high speed data transmission could
significantly  reduce  consumer  demand for the  Company's  services  and have a
material  adverse  effect on the  Company's  business,  financial  condition and
prospects.

Any Damage Or Failure  That Causes  Interruptions  In The  Company's  Operations
Could  Have A  Material  Adverse  Effect On The  Company's  Business,  Financial
Condition And Prospects

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

The Company May Be Vulnerable To Unauthorized Access, Computer Viruses And Other
Disruptive  Problems,  Which  May  Result  In  The  Company's  Liability  To The
Company's Subscribers And May Deter Others From Becoming Subscribers

While the  Company  has  taken  substantial  security  measures,  the  Company's
networks  or  those of the  Company's  cable  affiliates  may be  vulnerable  to
unauthorized access,  computer viruses and other disruptive  problems.  Internet
service providers and online service providers have experienced in the past, and

<PAGE>

may  experience  in the  future,  interruptions  in  service  as a result of the
accidental or  intentional  actions of Internet  users.  Unauthorized  access by
current and former  employees or others could also  potentially  jeopardize  the
security of confidential  information  stored in the Company's  computer systems
and those of the Company's subscribers.  Such events may result in the Company's
liability  to the  Company's  subscribers  and may deter  others  from  becoming
subscribers,  which  could  have a  material  adverse  effect  on the  Company's
business,  financial  condition and prospects.  Although the Company  intends to
continue  using  industry-standard  security  measures,  such measures have been
circumvented  in the past, and the Company cannot assure you that these measures
will not be  circumvented  in the future.  Moreover,  the Company has no control
over  the  security   measures  that  the  Company's  cable  affiliates   adopt.
Eliminating  computer viruses and alleviating  other security problems may cause
the Company's  subscribers  delays due to interruptions or cessation of service.
Such delays  could have a material  adverse  effect on the  Company's  business,
financial condition and prospects.

If The Market For High-Quality Content Fails To Develop, Or Develops More Slowly
Than Expected, The Company's Business, Financial Condition And Prospects Will Be
Materially Adversely Affected

A key  part  of the  Company's  strategy  is to  provide  Internet  users a more
compelling  interactive experience than the one currently available to customers
of dial-up Internet service providers and online service providers.  The Company
believes that, in addition to providing  high-speed,  high-performance  Internet
access,   to  be  successful   the  Company  must  also  develop  and  aggregate
high-quality   multimedia  content.  The  Company's  success  in  providing  and
aggregating such content will depend in part on:

o    the  Company's  ability to develop a customer  base large enough to justify
     investments in the development of such content;
o    the  ability  of  content  providers  to create  and  support  high-quality
     multimedia content; and
o    the  Company's   ability  to  aggregate   content  offerings  in  a  manner
     subscribers find attractive.

The Company  cannot  assure you that the  Company  will be  successful  in these
endeavors.  In addition, the market for high-quality multimedia Internet content
has only  recently  begun to  develop  and is  rapidly  evolving,  and  there is
significant  competition  among  Internet  service  providers and online service
providers  for  obtaining  such  content.  If the market  fails to  develop,  or
develops  more slowly than  expected,  or if  competition  increases,  or if the
Company's  content  offerings do not achieve or sustain market  acceptance,  the
Company's  business,  financial  condition  and  prospects  will  be  materially
adversely affected.

The Company's Failure To Attract Advertising Revenues In Quantities And At Rates
That Are Satisfactory To The Company Could Have A Material Adverse Effect On The
Company's Business, Financial Condition And Prospects

The success of the ISP Channel service depends in part on the Company's  ability
to  draw  advertisers  to  the  ISP  Channel.  The  Company  expects  to  derive
significant  revenues from  advertisements  placed on co-branded and ISP Channel
web pages and "click  through"  revenues  from  products and services  purchased
through  links from the ISP Channel to vendors.  The Company  believes  that the
Company can  leverage  the ISP  Channel to provide  demographic  information  to
advertisers to help them better target prospective customers.  Nonetheless,  the
Company  has not  generated  any  significant  advertising  revenue  yet and the
Company cannot assure you that advertisers will find such information  useful or
will choose to advertise through the ISP Channel.  Therefore, the Company cannot
assure you that the  Company  will be able to attract  advertising  revenues  in
quantities and at rates that are satisfactory to the Company.  The failure to do
so could have a material  adverse  effect on the Company's  business,  financial
condition and prospects.

If The Company Is Unsuccessful  In Establishing  And Maintaining The ISP Channel
Brand, Or If The Company Incurs Excessive  Expenses In Promoting And Maintaining
The ISP  Channel's  Brand,  The  Company's  Business,  Financial  Condition  And
Prospects Would Be Materially Adversely Affected

The Company believes that establishing and maintaining the ISP Channel brand are
critical to attract and expand the Company's  subscriber base.  Promotion of the
ISP Channel brand will depend on several factors, including:

o    the Company's success in providing  high-speed,  high-quality  consumer and
     business Internet products, services and content;
o    the marketing efforts of the Company's cable affiliates; and
o    the reliability of the Company's cable affiliates' networks and services.
<PAGE>

The Company  cannot assure you that any of these  factors will be achieved.  The
Company  has little  control  over the  Company's  cable  affiliates'  marketing
efforts or the reliability of their networks and services.

If consumers and businesses do not perceive the Company's  existing products and
services as high quality or the Company  introduces  new products or services or
enter into new business  ventures that are not  favorably  received by consumers
and  businesses,  then  the  Company  will be  unsuccessful  in  building  brand
recognition  and brand loyalty in the  marketplace.  In addition,  to the extent
that the ISP  Channel  service is  unavailable,  the Company  risks  frustrating
potential  subscribers  who are  unable to access  the  Company's  products  and
services.

Furthermore,  the Company may need to devote substantial resources to create and
maintain  a distinct  brand  loyalty  among  customers,  to  attract  and retain
subscribers,  and to  promote  and  maintain  the ISP  Channel  brand  in a very
competitive   market.   If  the  Company  is  unsuccessful  in  establishing  or
maintaining the ISP Channel brand or if the Company incurs excessive expenses in
promoting and maintaining the Company's brand, the Company's business, financial
condition and prospects would be materially adversely affected.

If The Company  Encounters  Significant  Problems With The Company's Billing And
Collections Process,  The Company's Business,  Financial Condition And Prospects
Could Be Materially Adversely Affected

The  Company is in the  process of  designing  and  implementing  the  Company's
billing and collections system for the ISP Channel service.  The Company intends
to bill for the  Company's  services  primarily  over the Internet  and, in most
cases, to collect these invoices  through  payments  initiated via the Internet.
Such invoices and payments have security risks. Given the complexities of such a
system,  the Company  cannot  assure you that the Company will be  successful in
developing  and launching the system in a timely manner or that the Company will
be able to scale the system quickly and efficiently if the number of subscribers
requiring  such a billing  format  increases.  Currently,  many of the Company's
cable  affiliates are  responsible  for billing and collection for the Company's
Internet access services. As a result, the Company has little or no control over
the accuracy and timeliness of the invoices or over collection efforts.

Given the Company's  relatively  limited history with billing and collection for
Internet  services,  the Company  cannot predict the extent to which the Company
may experience bad debts or the Company's ability to minimize such bad debts. If
the Company  encounters  significant  problems  with the  Company's  billing and
collections process,  the Company's business,  financial condition and prospects
could be materially adversely affected.

The Company May Face  Potential  Liability For  Defamatory Or Indecent  Content,
Which May Cause The Company To Modify The Way The Company Provides Services

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

The  Company  May  Face  Potential  Liability  For  Information   Retrieved  And
Replicated That May Not Be Covered By The Company's Insurance

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

The Company's  Success Depends Upon The Development Of New Products And Services
In The Face Of Rapidly Evolving Technology

The Company's products and services may not be commercially successful

The  Company's  future  development  efforts  may  not  result  in  commercially
successful  products and services or the Company's  products and services may be
rendered obsolete by changing technology,  new industry standards or new product
announcements by competitors.

For example,  the Company  expects  digital  set-top boxes capable of supporting
high-speed Internet access services to be commercially  available in the next 12
months.  Set top boxes will enable  subscribers to access the Internet without a
computer.  Although the widespread  availability of set-top boxes could increase
the demand for the Company's Internet service,  the demand for set-top boxes may
never reach the level the Company and industry  experts have estimated.  Even if
set-top boxes do reach this level of  popularity,  the Company cannot assure you
that the Company will be able to  capitalize  on such demand.  If this  scenario
occurs  or if  other  technologies  or  standards  applicable  to the  Company's
products  or services  become  obsolete  or fail to gain  widespread  commercial
acceptance, then the Company's business,  financial condition and prospects will
be materially adversely affected.

The Company's ability to adapt to changes in technology and industry  standards,
and to develop and  introduce new and enhanced  products and service  offerings,
will  determine  whether  the Company  can  maintain  or improve  the  Company's
competitive  position  and the  Company's  prospects  for growth.  However,  the
following  factors may hinder the  Company's  efforts to introduce  and sell new
products and services:

o    rapid  technological   changes  in  the  Internet  and   telecommunications
     industries;
o    the  lengthy  product  approval  and  purchase  process  of  the  Company's
     customers;  and
o    the Company's reliance on third-party technology for the development of new
     products and services.

The Company's suppliers' products may become obsolete,  requiring the Company to
purchase additional inventory or replacement equipment

The technology underlying the Company's capital equipment,  such as headends and
cable modems,  continues to evolve and,  accordingly,  the  Company's  equipment
could become  out-of-date or obsolete  prior to the time the Company  originally
intended  to  replace it or sell it. If this  occurs,  the  Company  may need to
purchase substantial amounts of new capital equipment or inventory,  which could
have a material adverse effect on the Company's  business,  financial  condition
and prospects.

The  Company's  competitors'  products  may make  the  Company's  products  less
commercially viable

The introduction by the Company's competitors of products or services embodying,
or purporting to embody, new technology could also render the Company's existing
products  and  services,  as well as  products or  services  under  development,
obsolete and unmarketable.  Internet,  telecommunications and cable technologies
are   evolving    rapidly.    Many   large    corporations,    including   large
telecommunications    providers,   regional   Bell   operating   companies   and
telecommunications equipment providers, as well as large cable system operators,
regularly announce new and planned technologies and service offerings that could
impact  the market  for the  Company's  services.  The  announcements  can delay
purchasing  decisions by the  Company's  customers  and confuse the  marketplace
regarding  available  alternatives.  Such  announcements  could,  in the future,
adversely impact the Company's business, financial condition and prospects.

In  addition,  the  Company  cannot  assure you that the  Company  will have the
financial and technical resources  necessary to continue successful  development
of new products or services  based on emerging  technologies.  Moreover,  due to
intense  competition,  there may be a time-limited  market  opportunity  for the
Company's cable- based consumer and business  Internet  services.  The Company's
services may not achieve widespread acceptance before competitors offer products
and  services  with  speed and  performance  similar  to the  Company's  current
offerings. In addition, the widespread adoption of new Internet or telecommuting
technologies or standards,  cable-based or otherwise,  could require substantial
and costly modifications to the Company's  equipment,  products and services and
could   fundamentally   alter  the   character,   viability   and  frequency  of
Internet-based advertising, either of which could have a material adverse effect
on the Company's business, financial condition and prospects.
<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

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

o    potential  disruption  of the Company's  ongoing  business and diversion of
     resources and management time;
o    potential  dilution to  existing  stockholders  if the Company  uses equity
     securities to finance acquisitions;
o    incurrence of unforeseen obligations or liabilities;
o    possible inability of management to maintain uniform  standards,  controls,
     procedures and policies;
o    difficulty assimilating the acquired operations and personnel;
o    risks of  entering  markets  in which the  Company  has little or no direct
     prior experience; and
o    potential  impairment  of  relationships  with  employees or customers as a
     result of changes in management.

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

The Company's Equity Investments In Other Companies May Not Yield Any Returns

The Company has made equity investments in several  Internet-related  companies,
including  joint  ventures  in  other  countries.   In  most  instances,   these
investments are in the form of illiquid  securities of private companies.  These
companies  typically are in an early stage of development and may be expected to
incur substantial  losses. The Company's  investments in these companies may not
yield any  return.  Furthermore,  if these  companies  are not  successful,  the
Company  could incur charges  related to the  write-down or write-off of assets.
The Company  also  records and  continues to record a share of the net losses in
these  companies,  up to the  Company's  cost basis,  if they are the  Company's
affiliates.  The  Company  intends to continue  to make  significant  additional
investments in the future.  Losses or charges  resulting from these  investments
could harm the Company's operating results.

Loss Of Key Personnel May Disrupt The Company's Operations

The loss of key personnel may disrupt the  Company's  operations.  The Company's
success depends,  in large part, on the Company's  ability to attract and retain
qualified  technical,  marketing,  sales  and  management  personnel.  With  the
expansion of the ISP Channel and Intellicom  services,  the Company is currently
seeking new employees. However, competition for such personnel is intense in the
Company's  business,  and thus,  the Company may be  unsuccessful  in its hiring
efforts.  To launch the ISP Channel service concept on a large-scale  basis, the
Company has recently  assembled a new  management  team,  many of whom have been
with the Company for less than twelve months.  The loss of any member of the new
team, or failure to attract or retain other key employees  could have a material
adverse effect on the Company's business, financial condition and prospects.

Direct And Indirect Government Regulation Can Significantly Impact The Company's
Business

Currently,  neither  the FCC nor  any  other  federal  or  state  communications
regulatory  agency directly  regulates  Internet access services provided by the
Company's cable systems.  However,  any changes in law or regulation relating to
Internet  connectivity,  cable  operators or  telecommunications  markets  could
affect the nature,  scope and prices of the  Company's  services.  Such  changes
include  those  that  directly  or  indirectly  affect  costs,  limit  usage  of
subscriber-   related  information  or  increase  the  likelihood  or  scope  of
competition   from   telecommunications   companies  or  other  Internet  access
providers.

Possibility of changes in law or regulation

Because the  provision of Internet  access  services  using cable  networks is a
relatively recent  development,  the regulatory  classification of such services
remains  unsettled.  Some parties  have argued that  providing  Internet  access
services  over a cable  network  is a  "telecommunications  service"  and  that,
therefore,  Internet  access service  providers  should be subject to regulation
which, under the Communications Act of 1934, apply to telephone companies. Other
parties have argued that  Internet  access  services  over the cable system is a
cable service under the Communications Act, which would subject such services to
a  different  set of laws and  regulations.  It is unclear at this time  whether

<PAGE>

federal,  state, or local governing  bodies will adopt one  classification  over
another,  or adopt another regulatory  classification  altogether,  for Internet
access services provided over cable systems. The FCC recently decided to address
Internet  access  issuers in its  February 17, 1999 order  approving  the merger
between AT&T and TCI, which was announced by the two companies on June 24, 1998.
A number of parties had opposed the merger  unless the FCC required the AT&T/TCI
combination  to provide  unaffiliated  ISPs with  unbundled,  open access to the
cable platform whenever that platform is being used by an AT&T/TCI  affiliate to
provide  Internet  service.  Other  parties  argued that the FCC should  examine
industry-wide issues surrounding open access to cable-provided  Internet service
in a generic rulemaking, rather than in the specific,  adjudicatory context of a
merger  evaluation.  The FCC decided  that it would be imprudent to grant either
request for action at this time given the nascent stage in the  development  and
deployment of high-speed  Internet access services.  Certain local jurisdictions
that  approved the AT&T/TCI  merger have imposed open access  conditions on such
approval,  while other such local jurisdictions have rejected such conditions or
have reserved the right to impose such  conditions  in the future.  At least one
federal district court has upheld the local  jurisdiction's  decision to mandate
open access.  The Company  cannot  predict the ultimate  outcome or scope of the
local approval  process.  Nor can the Company  predict the impact,  if any, that
future  federal,  state or local legal or  regulatory  changes,  including  open
access conditions, might have on the Company's business.

Regulations  affecting the cable  industry may discourage  cable  operators from
upgrading their systems

Regulation of cable television may affect the speed at which the Company's cable
affiliates upgrade their cable infrastructures to two-way cable. Currently,  the
Company's cable  affiliates have generally  elected to classify the distribution
of the Company's  services as "additional cable services" under their respective
franchise agreements,  and accordingly pay franchise fees. However, the election
by cable operators to classify  Internet  access as an additional  cable service
may be challenged before the FCC, the courts or Congress,  and any change in the
classification  of  service  could  have a  potentially  adverse  impact  on the
Company.

The Company's  cable  affiliates  may be subject to multiple  franchise fees for
distributing the Company's services

Another possible risk is that local franchise  authorities may subject the cable
affiliates to higher or additional  franchise fees or taxes or otherwise require
them to obtain  additional  franchises in connection  with  distribution  of the
Company's services.  There are thousands of franchise  authorities in the United
States alone, and thus it will be difficult or impossible for the Company or the
Company's  cable  affiliates  to  operate  under  a  unified  set  of  franchise
requirements.

Possible  negative  consequences  if cable  operators  are  classified as common
carriers

If the FCC or another  governmental  agency classifies cable system operators as
"common carriers" or "telecommunications carriers" because they provide Internet
services,  or if cable system operators themselves seek such classification as a
means of limiting their  liability,  the Company could lose the Company's rights
as the exclusive ISP for some of the Company's cable  affiliates and the Company
or the Company's cable affiliates could be subject to common carrier  regulation
by federal and state regulators.

Import restrictions may affect the delivery schedules and costs of supplies from
foreign shippers

In  addition,  the Company  obtains  some of the  components  for the  Company's
products and services from foreign  suppliers,  which may be subject to tariffs,
duties and other import restrictions. Any changes in law or regulation including
those  discussed  above,  whether  in the  United  States  or  elsewhere,  could
materially  adversely  affect the Company's  business,  financial  condition and
prospects.

The Company Does Not Intend To Pay Dividends

The Company has not historically paid any cash dividends on the Company's common
stock and do not expect to declare any such dividends in the foreseeable future.
Payment of any future  dividends  will depend upon the  Company's  earnings  and
capital requirements, the Company's debt obligations and other factors the board
of  directors  deems  relevant.  The  Company  currently  intends  to retain its
earnings,  if any, to finance the  development  and expansion of the ISP Channel
service.

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:
<PAGE>


o    announcements of developments related to the Company's business;
o    fluctuations in the Company's results of operations;
o    sales of substantial amounts of the Company's securities into
     the marketplace;
o    general conditions in the Company's industries or the worldwide economy;
o    an outbreak of war or hostilities;
o    a shortfall in revenues or earnings compared to securities
     analysts' expectations;
o    changes in analysts' recommendations or projections;
o    announcements of new products or services by the Company or
     the Company's competitors; and
o    changes in the Company's relationships with the Company's
     suppliers or customers.

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

Prospective  Anti-Takeover  Provisions  Could  Negatively  Impact The  Company's
Stockholders

The Company is a Delaware  corporation.  The Delaware  General  Corporation  Law
contains  certain  provisions  that may  discourage,  delay or make a change  in
control of the  Company  more  difficult  or prevent  the  removal of  incumbent
directors.  In addition,  the Company's  certificate of incorporation and bylaws
have 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 Year 2000 Issue Could Harm The Company's Operations

Many  computer  programs  have been written using two digits rather than four to
define the  applicable  year.  This  poses a problem  at the end of the  century
because such computer  programs would not properly  recognize a year that begins
with "20" instead of "19".  This, in turn, could result in major system failures
or miscalculations  that could disrupt the Company's  business.  The Company has
formulated a year 2000  ("Y2K")  plan (the "Y2K Plan") to address the  Company's
Y2K  issues  and  has  created  a Y2K  Task  Force  headed  by the  Director  of
Information  Systems and Data Services to implement the plan.  The Company's Y2K
Plan has six phases:

1.       Organizational  Awareness:  educate the  Company's  employees,  senior
         management,  and the board of directors  about the Y2K issue.
2.       Inventory:  complete  inventory of internal  business systems and their
         relative priority to continuing business operations.  In addition, this
         phase includes a complete inventory of products and services,  critical
         vendors,  suppliers  and services  providers  and their Y2K  compliance
         status.
3.       Assessment:  assessment  of  internal  business  systems  and  external
         customers (including cable affiliates), critical vendors, suppliers and
         service providers and their Y2K compliance status.
4.       Planning:  preparing the individual project plans and project teams and
         other  required  internal  and  external  resources  to  implement  the
         required solutions for Y2K compliance.
5.       Execution:  implementation of the solutions and fixes.
6.       Validation:  testing the solutions for Y2K compliance.

The Company's Y2K Plan will apply to two areas:

1.       Internal business systems
2.       Compliance by external customers and providers

During  the  course  of  addressing  all Y2K  issues,  the  Company  also  added
remediation and contingency planning processes.

Internal Business Systems

The Company's  internal business systems and workstation  business  applications
will be a primary area of focus. The Company is completing the implementation of
new  enterprise-wide  business  solutions to replace  existing manual  processes
and/or "home grown" applications during 1999. These solutions are represented by
their  vendors  as being  fully Y2K  compliant.  The  Company  has few,  if any,
"legacy" applications that needed to be evaluated for Y2K compliance.
<PAGE>

The  Company  completed  all  phases for  substantially  all  critical  internal
business  systems.  The Company  believes it was Y2K  compliant  on all critical
internal  business  systems by December 31, 1999. But in any event,  the Company
will have contingency plans in place to continue  critical  business  operations
should some part of the internal business systems fail.

Some non-critical  systems may not be addressed until after March 2000. However,
the Company believes such systems will not cause significant  disruptions in the
Company's operations.

Compliance by External Customers and Providers

The Company has substantially  completed the inventory phase and is in the final
stages of the assessment phase with the Company's  critical  suppliers,  service
providers and contractors to determine the extent to which the interface systems
are susceptible to those third parties'  failure to remedy their own Y2K issues.
To  the  extent  that   responses   to  Y2K   readiness   responses   have  been
unsatisfactory,  the  Company is working  with these  parties to  remediate  the
issues.

The Company has been in discussions with its cable affiliates with regard to the
status of their Y2K readiness;  Cable  affiliates  representing  over 50% of our
cable-based  Internet  customers have provided  written or verbal  assurances of
their Y2K readiness.  However, there can be no guarantee that the Y2K compliance
efforts of any of the Company's cable affiliates will be successful.

Risks Associated with Y2K

The Company  believes a major risk  associated with the Y2K issue is the ability
of its key business  partners and vendors to resolve  their own Y2K issues.  The
Company  has spent a great deal of time over the past  several  months,  working
closely with suppliers and vendors to assure their compliance.  However,  should
any  problems  occur  the  Company  may  lose  significant   revenue  and  incur
unanticipated  expenses to remedy the problem,  and such  problems  could divert
management's  time and attention,  any of which could have a material  effect on
the Company's business, results of operation and financial condition.

To the extent any of our cable affiliates experience Y2K failures, the Company's
Internet service  customers could experience an interruption or total or partial
failure of  service.  Should  this occur,  the  Company  could lose  significant
revenue as a direct result of the Y2K failure or  indirectly  due to the loss of
customers,  either of which could have material effect on the Company's business
results of operations and financial condition.

Costs to Address Y2K issues

Because the Company is implementing new  enterprise-wide  business  solutions to
replace existing manual processes and/or "home grown"  applications,  there will
be little, if any, Y2K changes required to existing business  applications.  All
of the  new  business  applications  implemented  (or in the  process  of  being
implemented in 1999) are represented as being Y2K compliant.

The Company does not  separately  track the internal  costs incurred for the Y2K
project,  which costs are principally related to payroll costs for the Company's
information systems staff. The external costs, primarily  consultants,  has been
approximately  $300,000  through  December  31, 1999 and is  estimated  that the
Company will spend an  additional  $50,000 on its  remediation  and  contingency
plans.

Contingency Plan

The Company has  formulated  a  contingency  plan,  which  includes  maintaining
staffing  during  the  most  critical  times  during  which  the  Company  might
experience Y2K failures.  In addition,  the Company will have field personnel on
standby to assist cable  affiliates  and VSAT  customers  should  assistance  be
required if the interface systems fail. However, the Company's  contingency plan
cannot address problems should its cable affiliates fail to be Y2K compliant.

Summary

There can be no assurance  that the systems of the  Company's  customers,  other
companies or government entities,  on which the Company rely for supplies,  cash
payments,  and future business,  will be timely converted,  or that a failure to
convert by the Company's  customers,  other  companies or  government  entities,
would not have a material adverse effect on the Company's  financial position or
results of operations.  Further, if, due to Y2K issues,  third-party  suppliers,
service  providers and contractors  fail to provide the Company with components,
materials,  or services which are necessary to deliver the Company's service and
product   offerings,   with  sufficient   electrical  power  and  transportation
infrastructure to deliver the Company's service and product offerings,  then any
such failure could have a material  adverse  effect on the Company's  ability to
conduct  business,  as well as the Company's  financial  position and results of
operations.
<PAGE>

The  Company  is  continuing  to seek  verification  from  the  Company's  cable
affiliates,  critical suppliers, service providers and contractors that they are
Y2K compliant.  To the extent that any of these business partners fail to be Y2K
compliant,  it may have a significant impact on the Company's  business.  Should
the  Company's  Internet  service  customers  or VSAT  customers  fail to be Y2K
compliant,  it may have a  significant  impact on the  Company's  revenues.  The
Company's inability to correct a significant Y2K problem,  if one exists,  could
result in an  interruption  in or a failure of, certain of the Company's  normal
business  activities  and  operations.  In addition,  a significant  Y2K problem
concerning  the Company's  cable modem  Internet  services or the Company's VSAT
services could cause the Company's users to consider seeking alternate providers
of Internet  services.  Any significant Y2K problem could require the Company to
incur significant  unanticipated expenses to remedy the problem and could divert
management's time and attention, either of which could have a material effect on
the Company's business, results of operation and financial condition.



<PAGE>


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

(a)  Exhibits

   Exhibit No.
                             Description of Document

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

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

           10.1   Stock Purchase  Agreement by and between SoftNet Systems,  Inc
                  and Pacific  Century  Cyberworks  Limited,  dated  October 12,
                  1999.  Incorporated  by reference to the  Company's  Form 8-K,
                  dated October 21, 1999.

           10.2   Stock Purchase Agreement by and between SoftNet Systems,  Inc.
                  and Mediacom,  LLC,  dated November 4, 1999.  Incorporated  by
                  reference to the  Company's  Annual  Report on Form 10-K filed
                  December 29, 1999.

           10.3   Registration  Rights Agreement by and between SoftNet Systems,
                  Inc. and Mediacom,  LLC, dated November 4, 1999.  Incorporated
                  by reference to the Company's Annual Report on Form 10-K filed
                  December 29, 1999.

           10.4   Stockholder Agreement by and between SoftNet Systems, Inc, and
                  Mediacom,   LLC,  date  November  4,  1999.   Incorporated  by
                  reference to the  Company's  Annual  Report on Form 10-K filed
                  December 29, 1999.

           10.5   Employment letter agreement dated October 29, 1999 from Ronald
                  Simon,  Vice  Chairman  of SoftNet  Systems,  Inc. to Lawrence
                  Brilliant, Chairman and CEO of SoftNet Systems, Inc.

             27   Financial Data Schedule

(b)  Reports on Form 8-K

     Current report on Form 8-K filed with the Commission on October 15, 1999.

     Current report on Form 8-K filed with the Commission on October 21, 1999.

     Current report on Form 8-K filed with the Commission on December 30, 1999.


<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/ Douglas S. Sinclair                       Date:      February 14, 2000
----------------------------------------                 -----------------
Douglas S. Sinclair
Chief Financial Officer



/s/ Susan Dolce                               Date:      February 14, 2000
----------------------------------------                 -----------------
Susan Dolce
Controller