SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                    FORM 10-Q


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

                For the quarterly period ended June 30, 2000

                                       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 July 31, 2000
      -------------------------------        -----------------------------
       Common stock, $0.01 par value                   28,506,891
<PAGE>
                     SoftNet Systems, Inc. and Subsidiaries
                                      Index

                                                                          Page

PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements

     Condensed Consolidated Balance Sheets as of June 30, 2000 and
        September 30, 1999 .............................................   2

     Condensed Consolidated Statements of Operations for the three
        months and nine months ended June 30, 2000 and 1999 ............   3

     Condensed Consolidated Statements of Cash Flows for the nine months
        ended June 30, 2000 and 1999 ...................................   4

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

Item 2.  Management's Discussion and Analysis of Financial Condition
         and Results of Operations......................................  11

Item 3   Quantitative and Qualitative Disclosures About Market Risk.....  21

PART II- OTHER INFORMATION

Item 1   Legal Proceedings..............................................  22

Item 2   Changes in Securities..........................................  22

Item 3   Defaults Upon Senior Securities................................  22

Item 4   Submission of Matters to a Vote of Security Holders............  22

Item 5   Other Information..............................................  23

Item 6   Exhibits and Reports on Form 8-K...............................  40



<PAGE>


PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements

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

                                                                                          June 30,       September 30,
                                                                                            2000             1999
                                                                                            ----             ----
                                       ASSETS

Current assets:
<S>                                                                                    <C>              <C>
   Cash and cash equivalents...................................................        $      41,966    $      89,499
   Short-term investments......................................................              154,841           52,586
   Accounts receivable, net....................................................                2,897              935
   Notes receivable............................................................                    -            1,000
   Inventory...................................................................                5,735            1,991
   Other current assets........................................................                5,145            1,776
                                                                                       -------------    -------------
Total current assets...........................................................              210,584          147,787

Restricted cash................................................................                  992              922
Property and equipment, net....................................................               44,886           26,743
Acquired technology and other intangibles, net.................................               66,592           24,500
Other assets...................................................................               13,882            5,872
                                                                                       -------------    -------------
                                                                                       $     336,936    $     205,824
                                                                                       =============    =============

                        LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable and accrued expenses.......................................        $      18,932    $      15,545
   Current portion of long-term debt...........................................                4,933            2,084
   Current portion of capital lease obligation.................................                4,926            1,760
                                                                                       -------------    -------------
Total current liabilities......................................................               28,791           19,389

Long-term debt, net of current portion.........................................                4,249           17,281
Capital lease obligation, net of current portion...............................                4,958            1,945
Business acquisition liability.................................................                2,000            3,500
                                                                                       -------------    -------------
Total Liabilities..............................................................               39,998           42,115
                                                                                       -------------    -------------

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;
   28,254,723 and 17,225,523 shares issued and outstanding, respectively ......                  256              172
   Additional-paid-in capital..................................................              498,856          327,445
   Deferred stock compensation.................................................              (32,472)         (63,346)
   Accumulated comprehensive loss..............................................                 (729)            (315)
   Accumulated deficit.........................................................             (168,973)        (100,247)
                                                                                       --------------   -------------
Total stockholders' equity.....................................................              296,938          163,709
                                                                                       -------------    -------------
                                                                                       $     336,936    $     205,824
                                                                                       =============    =============
<FN>

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

                                       2
<PAGE>


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

                                                                                      Three Months              Nine Months
                                                                                      Ended June 30,           Ended June 30,
                                                                                   --------------------    --------------------
                                                                                     2000        1999        2000         1999
                                                                                   --------    --------    --------     -------
<S>                                                                                <C>         <C>         <C>         <C>
     Net sales ..................................................................  $  8,574    $  1,317    $ 11,541    $  2,788
     Cost of sales ..............................................................     6,931       1,460      10,474       2,758
                                                                                   --------    --------    --------     -------
     Gross profit (loss) ........................................................     1,643        (143)      1,067          30
                                                                                   --------    --------    --------     -------

     Operating expenses:
       Selling and marketing, exclusive of non-cash
       compensation expense (see table below) ...................................     6,919       4,197      18,991       8,567
       Engineering, exclusive of non-cash compensation
       expense (see table below) ................................................     6,222       1,856      15,478       3,325
       General and administrative, exclusive of non-cash
       compensation expense (see table below) ...................................     5,596       2,439      12,586       6,616
       Depreciation .............................................................     3,565         938       8,484       2,140
       Amortization .............................................................     3,117         872       5,509       1,597
       Compensation related to stock options (see table below)...................     5,039       5,680      16,318       6,721
                                                                                   --------    --------    --------     -------
     Total operating expenses ...................................................    30,458      15,982      77,366      28,966
                                                                                   --------    --------    --------     -------
     Loss from continuing operations before other income
     (expense), income taxes and discontinued
     operations, net of tax......................................................   (28,815)    (16,125)    (76,299)    (28,936)
     Other income (expense):
        Interest expense ........................................................      (381)     (2,453)     (1,159)     (3,580)
        Interest income .........................................................     3,331       1,336       8,894       1,576
        Other expense, net ......................................................      (125)     (1,373)       (162)     (1,405)
                                                                                   --------    --------    --------     -------
     Loss from continuing operations before income taxes
        and discontinued operations, net of tax..................................   (25,990)    (18,615)    (68,726)    (32,345)
     Provision for income taxes .................................................        --          --          --          --
                                                                                   --------    --------    --------     -------
     Loss from continuing operations ............................................   (25,990)    (18,615)    (68,726)    (32,345)
     Loss from discontinued operations, net of tax ..............................        --         (15)         --        (399)
                                                                                   --------    --------    --------     -------
     Net loss ...................................................................   (25,990)    (18,630)    (68,726)    (32,744)
     Preferred dividends ........................................................        --         (59)         --        (473)
                                                                                   --------    --------    --------     -------
     Net loss applicable to common shares .......................................  $(25,990)   $(18,689)   $(68,726)   $(33,217)
                                                                                   ========    ========    ========     =======
     Basic and diluted loss per common share:

       Loss from continuing operations...........................................  $  (1.02)   $  (1.26)   $  (3.02)    $ (2.99)
       Loss from discontinued operations.........................................        --          --          --       (0.04)
       Preferred dividends.......................................................        --       (0.01          --       (0.04)
                                                                                   --------    --------    --------     -------
     Net loss applicable to common shares........................................  $  (1.02)   $  (1.27)   $  (3.02)    $ (3.07)
                                                                                   ========    ========    ========     =======

     Shares used to compute basic and diluted loss per
       common share..............................................................    25,368      14,764      22,742      10,806
                                                                                   ========    ========    ========     =======
Compensation related to stock options:
   Selling and marketing.........................................................  $    249    $  1,252    $  2,154  $    1,252
   Engineering...................................................................       605         954       1,998         954
   General and administrative....................................................     4,185       3,474      12,166       4,515
                                                                                   --------    --------    --------     -------
                                                                                   $  5,039    $  5,680    $ 16,318  $    6,721
                                                                                   ========    ========    ========     =======
<FN>
              The accompanying notes are an integral part of these
                  condensed consolidated financial statements.
</FN>
</TABLE>

                                       3
<PAGE>

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

                                                                                            Nine Months Ended June 30,
                                                                                                 2000         1999
                                                                                              ---------    ---------
<S>                                                                                           <C>          <C>
     Cash flows from operating activities:
        Net loss ..........................................................................   $ (68,726)   $ (32,744)
        Adjustments to reconcile net loss to net cash used in operating activities:
          Loss from discontinued operations ...............................................        --            399
          Depreciation and amortization ...................................................      13,993        3,737
          Amortization of deferred stock compensation .....................................      16,318        6,721
          Loss in equity investment .......................................................         191         --
          Loss on disposition of short-term investments ...................................        --            600
          Amortization of deferred debt issuance costs ....................................          53        2,335
          Interest paid with additional convertible notes .................................          69         --
          Provision for doubtful accounts .................................................         552          186
          Provision for inventory losses ..................................................          85         --
          Charges incurred upon conversion of redeemable convertible preferred stock
            into common stock .............................................................        --            498
          Changes in operating assets and liabilities (net of effect of acquisitions
            and discontinued operations):
              Increase in accounts receivable, net ........................................      (2,374)        (718)
              Increase in inventory .......................................................      (3,271)      (1,376)
              Increase in other current assets ............................................      (3,457)      (1,441)
              Increase in other assets ....................................................      (2,764)        (849)
              Increase (decrease) in accounts payable and accrued expenses ................      (1,070)       2,209
                                                                                              ---------    ---------

     Net cash used in operating activities of continuing operations .......................     (50,401)     (20,443)
                                                                                              ---------    ---------

     Net cash provided by operating activities of discontinued operations .................        --            842
                                                                                              ---------    ---------

     Cash flows from investing activities:

        Payment for purchase of short-term investments ....................................    (102,669)        (600)
        Payment for purchase of Laptop Lane Limited, net of cash acquired .................      (1,166)        --
        Payment for purchase of Intelligent Communications, Inc., net of cash acquired ....        --           (803)
        Proceeds from sale of net assets from discontinued operations, net of selling costs        --          2,694
        Payments for purchase of long-term equity investments .............................      (7,530)        --
        Payment for purchase of property and equipment ....................................     (13,926)      (7,518)
        Payment for purchase of acquired technology and other intangibles .................        (231)      (1,913)
        Disbursement for promissory notes issued ..........................................      (6,600)        --
        Payment received on note receivable ...............................................       1,000         --
                                                                                              ---------    ---------

     Net cash used in investing activities of continuing operations .......................    (131,122)      (8,140)
                                                                                              ---------    ---------

     Net cash provided by investing activities of discontinued operations .................        --            (98)
                                                                                              ---------    ---------

     Cash flows from financing activities:

        Proceeds from sale of common stock, net of selling costs ..........................     128,643      156,492
        Proceeds from exercise of warrants ................................................       1,538        2,454
        Proceeds from exercise of options .................................................       3,655        1,671
        Payment for fractional shares related to anniversary issuance of
          common stock to former Intelligent Communications, Inc. stockholders ............          (1)        --
        Payments for additional costs of issuance of redeemable convertible
          preferred stock .................................................................        --           (152)
        Payment of preferred dividend .....................................................        --            (95)
        Proceeds from issuance of long-term debt, net of deferred financing costs .........       3,128       13,358
        Borrowings under revolving credit facility ........................................        --         18,285
        Payments under revolving credit facility ..........................................        --        (21,215)
        Principal payments of short term and long-term debt ...............................        (929)      (1,567)
        Principal payments of capital lease obligations ...................................      (2,044)        (904)
                                                                                              ---------    ---------

     Net cash provided by financing activities of continuing operations ...................     133,990      168,327
                                                                                              ---------    ---------

     Net cash used in financing activities of discontinued operations .....................        --         (1,038)
                                                                                              ---------    ---------

     Net decrease in cash and cash equivalents ............................................     (47,533)     139,450
     Cash and cash equivalents, beginning of period .......................................      89,499       12,504
                                                                                              ---------    ---------

     Cash and cash equivalents, end of period .............................................   $  41,966    $ 151,954
                                                                                              =========    =========
<FN>
              The accompanying notes are an integral part of these
                  condensed consolidated financial statements.
</FN>
</TABLE>

                                       4
<PAGE>

                     SoftNet Systems, Inc. and Subsidiaries

              Notes to Condensed Consolidated Financial Statements

1.       Basis of Presentation

The  financial   information  included  herein  is  unaudited;   however,   such
information  reflects all  adjustments  (consisting  solely of normal  recurring
adjustments)  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
June 30, 2000 and 1999.

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 and nine months ended June 30,
2000 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.

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

2.       Recent Accounting Pronouncements

In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 ("SAB 101"),  "Revenue  Recognition  in Financial  Statements".
Implementation  is scheduled for fiscal years beginning after December 15, 1999,
which would be effective for the Company  beginning in fiscal year 2001. SAB 101
addresses  various topics in revenue  recognition  including the  recognition of
revenue for contracts involving multiple deliverables.  The Company is currently
analyzing SAB 101,  however,  based on Management's  current  understanding  and
interpretation,  SAB  101 is not  expected  to  have a  material  impact  on the
Company's cosolidated financial statements.


In  March  2000,  the  Financial  Accounting  Standards  Board  ("FASB")  issued
interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions involving
Stock  Compensation - an Interpretation  of Accounting  Principles Board ("APB")
Opinion No. 25". FIN 44  clarifies  the  application  of APB 25 and is effective
July 1, 2000. The Company  believes that FIN 44 will not have a material  effect
on the Company's financial position or results of operations.

In June 2000, the FASB issued  Statement of Financial  Accounting  Standards No.
138 ("FASB 138"),  "Accounting  for Certain  Derivative  Instruments and Certain
Hedging  Activities",  an amendment to FASB Statement No. 133 ("FASB 133"). FASB
138 addresses a limited number of issues causing implementation difficulties for
companies  that are  required  to apply FASB 133.  FASB 133,  as amended by FASB
Statement No. 137, "Accounting for Derivative Instruments and Hedging Activities
- Deferral of the  effective  date of FASB  Statement No. 133", is effective for
all fiscal  quarters of all fiscal  years  beginning  after June 15,  2000.  The
Company  believes that SFAS 133 and SFAS 138 will not have a material  impact on
its financial position, results of operations or cash flows.

3.       Acquisition of Laptop Lane Limited and Formation of SoftNet Zone

On April 21, 2000, the Company  acquired Laptop Lane Limited  ("Laptop Lane"), a
Washington corporation,  under the purchase method of accounting and the results
of Laptop Lane are included in the consolidated  financial  statements since the
date of  acquisition.  Laptop  Lane is a leading  provider  of  business  center
services in airports.  The Company paid approximately  $20,859,000 consisting of
(i) 972,266  common stock shares of the Company  valued at  $15,107,000,  net of
adjustment for expenses paid by the Company on behalf of Laptop Lane,  exchanged
for all outstanding  common stock shares of Laptop Lane, (ii) direct acquisition
costs of approximately $2,100,000, which includes a bonus payment to Laptop Lane
employees for $431,000 in lieu of Laptop Lane stock  options,  and (iii) 250,000
common stock shares of the Company  valued at  $3,652,000 to be issued to former
Laptop Lane stockholders in payment for achieving certain performance  criteria.
As part of the  acquisition,  an additional  333,333  common stock shares of the
Company  will  be  distributed  to former  Laptop Lane  stockholders  if certain
performance  goals are met. As of June 30, 2000,  Laptop Lane has achieved three
of the four  performance  goals,  as a result 250,000 common stock shares of the
Company amounting to $3,652,000 was accrued for and will be issued to the former
Laptop Lane stockholders. The remaining 83,333 common stock shares were unearned
as of June 30, 2000 and accordingly no liability has been accrued. Additionally,
prior to the acquisition the Company  provided  $6,000,000 in working capital to
Laptop Lane under a secured promissory note.


                                       5
<PAGE>



The purchase price,  including direct  acquisition  costs, has been allocated to
assets  acquired  and  liabilities  assumed  based on fair  value at the date of
acquisition.  The  allocation  of purchase  price  includes  goodwill,  which is
amortized on a straight-line basis over four years. The fair value of assets and
liabilities assumed is summarized as follows (in thousands):

Current assets........................    $          1,707
Property and equipment, net...........               4,478
Goodwill..............................              23,195
Other assets..........................                 128
Current liabilities...................                 806
Other liabilities.....................               7,843

The  following   unaudited  pro  forma   financial   information   presents  the
consolidated  results  of the  Company  as if the Laptop  Lane  acquisition  had
occurred as of October 1, 1998, and includes  adjustments  for  amortization  of
goodwill. The pro forma financial results are not necessarily indicative of what
actually would have occurred if the acquisition had been completed as of October
1, 1998, nor are they  necessarily  indicative of future  consolidated  results.
Unaudited  pro forma  consolidated  results of  operations  are as  follows  (in
thousands, except per share data):

                                     Nine Months
                                   Ended June 30,
                             --------------------------
                                  2000       1999
                                  ----       ----
Net Sales...................  $   13,176    $  7,079
                              ===========  =========
Net loss applicable
   to common  shares........  $  (77,373)  $ (40,132)
                              ===========  =========
Basic and diluted net
   loss applicable
   to common shares.........  $    (3.23)  $   (3.34)
                              ===========  =========

In connection with the Company's  proposed  purchase of Laptop Lane, the Company
announced  on  February 9, 2000 that it,  together  with CMGI,  Inc.  and Compaq
Computer Corporation, has signed letters of intent to provide equity funding and
services to a new initiative  called SoftNet Zone,  contingent on completing the
Laptop Lane 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 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.

On April 20, 2000, the Company announced a letter of intent has been signed with
Delta Air Lines Inc.  ("Delta") to provide wireless Internet access and business
services to Delta  customers at Delta's gates and Crown Room Clubs. As a part of
this alliance,  Delta will gain a minority  equity position in SoftNet Zone. The
Company is in the process of completing definitive agreements with Delta.




                                       6
<PAGE>




4.        Cash, Cash Equivalents and Short-Term Investments

Cash  equivalents  consist of securities with maturities of three months or less
at the date of purchase. Short-term investments as of June 30, 2000 consisted of
$106,663,000  of securities that mature in less than one year and $48,178,000 of
securities that mature between one to five years. Cash and cash equivalents, and
short-term  investments  consisted  of the  following  as of June  30,  2000 (in
thousands):

<TABLE>
<CAPTION>

                                                                  Unrealized      Unrealized
                                                      Cost            gain            loss           Market
                                                 -------------   -------------   -------------   -------------
<S>                                              <C>             <C>             <C>             <C>
        Cash and cash equivalents:
           Cash..............................    $       9,675   $           -   $           -   $       9,675
           Municipal securities..............           31,084              58               -          31,142
           Money market funds................            1,149               -               -           1,149
                                                 -------------   -------------   -------------   -------------

                                                 $      41,908   $          58   $           -   $      41,966
                                                 =============   =============   =============   =============

        Short-term investments:
           Municipal securities..............    $      95,915   $           -   $        (339)  $      95,576
           US Treasury securities............           35,834               -             (81)         35,753
           Auction market preferreds.........            3,206               -               -           3,206
           Foreign debt securities...........           20,174               -             (68)         20,106
           Common stock......................              499               -            (299)            200
                                                 -------------   -------------   -------------   -------------

                                                 $     155,628   $           -   $        (787)  $     154,841
                                                 =============    ============    ============    ============
</TABLE>

5.       Notes Receivable

During November 1999,  Convergent  Communications  Services,  Inc. paid its note
outstanding in the amount of $1,000,000.

6.       Long-Term Equity Investments

During  January 2000,  the Company  acquired  337,496  series B preferred  stock
shares of Dotcast.com,  a California  corporation,  for $1,000,000.  Dotcast.com
provides high-speed data transmission technology.

On  February  23,  2000,  the  Company  entered  into an  agreement  to  provide
management consulting advice on strategy, operations,  marketing, technology and
content;  and training  related to high speed  Internet  services  through cable
television  networks to Big Sky Network  Canada,  Ltd.  ("Big  Sky"),  a British
Virgin  Islands  international  business  company.  As part of the agreement the
Company  acquired  10,000 common stock shares of Big Sky for $500,000.  On April
24, 2000, the Company  acquired an additional  40,000 common stock shares of Big
Sky for $2,000,000.

On March 24, 2000, the Company  entered into an agreement to provide  management
consulting advice on strategy,  operations,  marketing,  technology and content;
and training  related to high speed Internet  services  through cable television
networks  to  Interactive  Cable  Communications  Incorporated.  As part of this
agreement,  the Company acquired 4,600 common stock shares of Interactive  Cable
Communications  Incorporated  for  $3,763,000,  and formed a joint  venture with
Marubeni Corporation, a Japan corporation.

All of these  investments  are  accounted  for under the  equity  method and are
included with other assets.

7.       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 $3,128,000. 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.



                                       7
<PAGE>




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

                                                   June 30,       September 30,

                                                    2000              1999
                                                    ----              ----

      Senior subordinated convertible notes    $            -    $       12,549
      Convertible subordinated debentures               3,461             3,461
      Promissory notes                                  5,560             3,194
      Other                                               161               161
                                               --------------    --------------

                                                        9,182            19,365
      Less current portion                             (4,933)           (2,084)
                                               --------------    --------------

                                               $        4,249    $       17,281
                                               ==============    ==============

8.       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
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 was valued at $8,531,000,  and is being amortized on a straight-line  basis
over the five year minimum life of the Affiliation Agreement. On March 29, 2000,
Mediacom delivered the first group of 150,000 homes passed;  accordingly 525,000
restricted  common stock shares valued at $15,225,000  converted to unrestricted
common stock  shares,  with a like amount  recorded as launch  incentives  being
amortized over the remaining  life of the  Affiliation  Agreement.  No value has
been assigned to the remaining 2,625,000  restricted common stock shares at date
of issuance 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 remaining  2,625,000  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 net proceeds of $128,643,000 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.

On  the  first  anniversary  date  of  the  Intelligent   Communications,   Inc.
("Intellicom")  acquisition,  the Intellicom  acquisition agreement requires the
Company to issue $1,500,000 of common stock shares.  Accordingly, on February 8,
2000,  the Company  issued 43,314  common stock shares valued at $1,499,000  and
paid $1,000 for fractional shares to the former shareholders of Intellicom.

                                       8
<PAGE>

9.      Supplemental Cash Flow Information

The supplemental cash flow information is as follows (in thousands):
<TABLE>
<CAPTION>
                                                                              Nine Months Ended June 30,
                                                                                2000            1999
                                                                                ----            ----
Cash paid during the period for:

<S>                                                                        <C>            <C>
   Interest.............................................................   $    1,005     $     1,189
   Income taxes.........................................................            -               -

Non-cash investing and financing activities:
   Acquisition of Laptop Lane Limited:
     Common stock issued ...............................................       16,620               -
     Business acquisition liability.....................................        3,652               -
   Acquisition of Intelligent Communications, Inc.:
     Common stock issued................................................            -          10,819
     Long -term debt issued.............................................            -           3,000
     Debt acquired......................................................            -             600
   Sale of telecommunications segment:
     Promissory notes received..........................................            -           4,500
     Convergent Communications Services Inc. common stock received......            -             498
   Equipment acquired by capital lease..................................        8,222           4,053
   Value assigned to debt conversion feature ...........................           35           1,408
   Repayment of short-term debt with common stock.......................            -             388
   Common stock issued for-
     Conversion of redeemable convertible preferred stock...............            -          18,254
     Conversion of subordinated notes...................................        9,886             488
     Anniversary issuance of common stock to former Intelligent
        Communications, Inc. stockholders...............................        1,500               -
     Cable affiliate launch incentives..................................       24,175           8,925
     Prepayment of license fees.........................................            -           1,000
   Increase (decrease) in additional-paid-in capital associated
     with common stock options..........................................      (14,556)         78,441
   Value assigned to common stock warrants issued upon the
     issuance of long-term debt.........................................            -           4,334
   Preferred dividends paid with the issuance of -
     Additional redeemable convertible preferred stock..................            -             221
     Common stock.......................................................            -             157
   Unrealized loss on short-term investments............................          413               -
</TABLE>

                                       9
<PAGE>

10.      Segment Information

The Company  operates  principally in three business  segments:  (i) cable-based
Internet  services  through  its wholly  owned  subsidiary,  ISP  Channel,  (ii)
satellite-based  Internet  services and VSAT equipment  sales through its wholly
owned  subsidiary,  Intellicom,  and (iii) business center  services,  including
development of wireless broadband  Internet services,  through two of its wholly
owned  subsidiaries,  Laptop Lane and  SoftNet  Zone.  The  Company  entered the
Internet business with the acquisition of ISP Channel on June 21, 1996 and began
offering cable-based Internet services during the fourth quarter of fiscal 1997.
The operating  results of Intellicom have been included since its acquisition on
February 9, 1999,  and Laptop Lane have been included  since its  acquisition on
April 21, 2000. Segment information for continuing  operations for the three and
nine months ended June 30, 2000 and 1999 is as follows (in thousands):

<TABLE>
<CAPTION>

                                                        Three Months Ended June 30,      Nine Months Ended June 30,
                                                        ---------------------------      --------------------------
                                                           2000             1999            2000            1999
                                                      --------------   --------------  --------------  --------------
Net Sales:
<S>                                                   <C>              <C>             <C>             <C>
   Cable-based Internet services..................    $        1,700   $          721  $        3,995  $        1,714
   Satellite-based Internet services and VSAT
   equipment sales................................             5,972              596           6,644           1,074
   Business center services.......................               902                -             902               -
                                                      --------------   --------------  --------------  --------------
                                                      $        8,574            1,317          11,541           2,788
                                                      ==============   ==============  ==============  ==============

Loss from continuing operations before income taxes
   Cable-based Internet services..................    $      (14,277)  $       (6,869) $      (38,742) $      (14,408)
   Satellite-based Internet services and VSAT
   equipment sales................................            (2,927)          (1,343)         (8,248)         (1,948)
   Business center services.......................            (3,678)               -          (3,714)              -
   Corporate......................................            (2,894)          (2,233)         (9,277)         (5,859)
   Compensation related to stock options..........            (5,039)          (5,680)        (16,318)         (6,721)
   Other income (expense), net....................             2,825           (2,490)          7,573          (3,409)
                                                      --------------   --------------- --------------  ---------------
                                                             (25,990)         (18,615)        (68,726)        (32,345)
                                                      ===============  =============== =============== ===============
</TABLE>



                                       10
<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.

Overview

The Company  currently  operates  through  three  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.  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 June 30, 2000, 10 of the 88 systems
deployed  by  ISP  Channel,  utilized  Intellicom's  service  in  preference  to
terrestrial lines such as T1s.

The  third of the  Company's  businesses  is  comprised  of  SoftNet  Zone  Inc.
("SoftNet  Zone") and Laptop Lane  Limited  ("Laptop  Lane"),  which the Company
acquired on April 21, 2000. Laptop Lane is a leading provider of business center
services in airports.  The purchase  price for this  acquisition is described in
"Liquidity and Capital  Resources"  section.  The Company  intends to use Laptop
Lane as the cornerstone of a new venture,  SoftNet Zone,  which intends to offer
global business  travelers  wireless  broadband  Internet  services at airports,
hotels, convention centers, and other high traffic areas. The Company intends to
provide its services in conjunction with strategic partners CMGI, Compaq, Cisco,
Nokia and Delta Air  Lines.  As a result of the  Laptop  Lane  acquisition,  the
Company  recorded  $23,195,000  of goodwill in the third quarter of fiscal 2000,
the amortization of which will adversely  affect our earnings and  profitability
for the foreseeable future. If the amount of such recorded goodwill is increased
or we have future  losses and are unable to  demonstrate  our ability to recover
the  amount of  goodwill  recorded  during  such  time  periods,  the  period of
amortization could be shortened,  which may further increase annual amortization
charges.  Our business and financial condition could be materially and adversely
affected.  As a result of this  business  venture,  management's  attention  and
resources may be diverted from other business  activities,  which may materially
and adversely affect our business and financial condition.

Revenue for ISP Channel  consists  primarily of (i) monthly access fees received
from cable modem customers,  (ii) revenue from cable modem rental and sales, and
(iii)  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.

Revenue  for  Intellicom  consists  of (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 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 eliminated in the consolidated financial statements.

                                       11
<PAGE>

Revenue  for  SoftNet  Zone  consists  of (i)  workstation  fees  received  from
mini-office  rentals  to  travelers  at  airport  sites,  (ii)  promotional  and
sponsorship revenue, and (iii) retail sales.

Cost of sales for ISP Channel  consists  primarily  of  connectivity  cost.  ISP
Channel's  connectivity 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 due to the higher
cost of  providing  such  service  and the fact that the  customer  offering  is
substantially less compelling than in a two-way system.

Cost of sales for Intellicom  consists  primarily of connectivity cost and costs
of VSAT equipment sold.  Intellicom's  connectivity  cost consists  primarily of
satellite transponder fees.  Currently,  Intellicom has transponder space on two
satellites,  GE-3  and  SatMex  5,  both of  which  provide  coverage  over  the
continental United States and beyond.

Cost of sales for SoftNet Zone consists primarily of Laptop Lane's  connectivity
cost, airport concession fees and costs of electronic peripheral equipment sold.
Laptop Lane's  connectivity  cost consists  primarily of T1 line access costs to
telephone carriers at airport locations.

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, amortization and stock compensation expense.
Amortization  expense comprises the write off of the cost of launch  incentives,
developed technology acquired and goodwill.  Launch incentives 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.
Amortization of deferred stock  compensation  expense primarily relates to stock
options granted between October 1998 and March 1999.

Results of  Operations  for the Three Months Ended June 30, 2000 Compared to the
Three Months Ended June 30, 1999

Net Sales.  Consolidated net sales increased $7,257,000,  or 551%, to $8,574,000
for the three  months  ended June 30, 2000,  as compared to  $1,317,000  for the
three months ended June 30, 1999.

Net sales for ISP Channel  increased  $979,000,  or 136%, to $1,700,000  for the
three months  ended June 30, 2000,  as compared to $721,000 for the three months
ended  June 30,  1999,  as a result  of  signing  up new  cable  affiliates  and
obtaining new subscribers.  Net sales  associated with ISP Channel's  subscriber
fees increased $774,000,  or 262%, to $1,069,000 for the three months ended June
30, 2000, as compared to $295,000 for the three months ended June 30, 1999.  Net
sales   associated  with  the  installation  of  cable  modems  to  ISP  Channel
subscribers  increased  $285,000 to $480,000 for the three months ended June 30,
2000,  as compared to $195,000 for the three  months  ended June 30,  1999.  The
Company  believes  that  subscriber  fee and other  revenues  will  continue  to
increase,  however, the Company will focus on contracts that improve the overall
profitability outlook for the business.  Net sales associated with the segment's
non-cable  based  dial-up and  business-to-business  Internet  access  offerings
decreased  $80,000 to $151,000  for the three  months  ended June 30,  2000,  as
compared to $231,000 for the three months ended June 30, 1999.

Net sales for Intellicom  increased  $5,376,000,  or 902%, to $5,972,000 for the
three months  ended June 30, 2000,  as compared to $596,000 for the three months
ended June 30, 1999,  primarily as a result of equipment sales to Tricom,  S.A.,
offset  by no data  processing  fees  due to  Intellicom  exiting  from the data
processing  service  business on September 30, 1999 and no transponder  sublease
income for the three  months ended June 30,  2000.  Net sales from  Intellicom's
core business of satellite-based Internet services decreased $19,000, or 10%, to
$181,000 for the three  months ended June 30, 2000,  as compared to $200,000 for
the three months ended June 30, 1999.  Equipment sales  increased  $5,501,000 to
$5,546,000  for the three months ended June 30, 2000, as compared to $45,000 for
the three  months ended June 30, 1999,  as a result of VSAT  equipment  sales to
Tricom, S.A. Other sources of net sales,  excluding data processing service fees
and transponder  sublease income,  increased  $205,000 to $245,000 for the three
months  ended June 30,  2000,  as compared to $40,000 for the three months ended
June 30, 1999.

                                       12
<PAGE>

SoftNet Zone, which includes the results of Laptop Lane since its acquisition on
April 21, 2000, is included in the  Company's  consolidated  net sales.  SoftNet
Zone's net sales for the seventy days ended June 30, 2000 was $902,000.  Of this
total,  $703,000 primarily represents Laptop Lane's core business of workstation
fees. The remaining  $199,000 is promotional and sponsorship  revenue.  Although
the Company  believes  workstation fees will grow in the future as new sites are
opened,  other revenue sources,  including  wireless  broadband Internet service
fees, are expected to become SoftNet Zone's primary source of revenue.

Cost of Sales.  Consolidated  cost of sales  increased  $5,471,000,  or 375%, to
$6,931,000  for the three months ended June 30, 2000,  as compared to $1,460,000
for the three months ended June 30, 1999.

Cost of sales for ISP Channel increased $366,000,  or 42%, to $1,239,000 for the
three months  ended June 30, 2000,  as compared to $873,000 for the three months
ended June 30, 1999, 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  $1,195,000  for the three  months  ended  June 30,  2000 as
compared to  $696,000  for the three  months  ended June 30,  1999.  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 better negotiated  national  contracts,  scale, and
the  replacement  of  expensive  T1 lines in  certain  areas  with  Intellicom's
satellite-based technology, which is usually lower in cost.

Cost of sales for Intellicom  increased  $4,764,000,  or 812%, to $5,351,000 for
the three  months  ended June 30,  2000,  as compared to $587,000  for the three
months  ended June 30,  1999,  primarily as a result of primarily as a result of
VSAT  equipment  sales to Tricom,  S.A. and the segment  space leasing of a full
transponder   beginning  on  December  1,  1999  in  preparation  for  providing
satellite-based  Internet  services to fulfill  several  large sales  agreements
recently entered into. The largest  component of Intellicom's  cost of sales for
the three months ended June 30, 2000,  are equipment  costs  resulting from VSAT
equipment sales to Tricom,  S.A. Another component of Intellicom's cost of sales
is transponder  fees, which amounted to $847,000 for the three months ended June
30, 2000, as compared to $307,000 for the three months ended June 30, 1999.  The
Company believes that transponder  costs will continue to increase as Intellicom
leases segment space on additional satellites in the future corresponding to the
roll-out of Intellicom's business plan.

SoftNet Zone, which includes the results of Laptop Lane since its acquisition on
April 21, 2000, is included in the Company's consolidated cost of sales. SoftNet
Zone's cost of sales for the seventy days ended June 30, 2000 was $341,000.  The
single largest  component of SoftNet Zone's cost of sales is airport  concession
fees,  which  amounted to $166,000 for the seventy days ended June 30, 2000. The
Company believes these costs will increase in the future as new sites are opened
and as SoftNet  Zone  expands  into the  wireless  broadband  Internet  services
business.

Selling and Marketing. Consolidated selling and marketing expenses (exclusive of
non-cash  compensation  expense of $249,000  for 2000 and  $1,252,000  for 1999)
increased $2,722,000,  or 65%, to $6,919,000 for the three months ended June 30,
2000, as compared to $4,197,000 for the three months ended June 30, 1999.

The Company's corporate and ISP Channel selling and marketing expenses increased
$180,000,  or 4%, to  $4,159,000  for the three months  ended June 30, 2000,  as
compared to $3,979,000  for the three months ended June 30, 1999.  The growth in
the Company's  corporate and ISP  Channel's  selling and marketing  expense is a
result  of hiring  that the  Company  has done to 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.  Going forward,  ISP Channel will continue  launching such campaigns
focused on carefully chosen target markets.

Selling and marketing expenses for Intellicom increased $659,000 to $877,000 for
the three  months  ended June 30,  2000,  as compared to $218,000  for the three
months ended June 30, 1999, primarily as a result of hiring that the Company has
done to staff  these  departments.  The Company  believes  that these costs will
continue to increase as Intellicom continues to develop its business.

SoftNet Zone, which includes the results of Laptop Lane since its acquisition on
April 21, 2000, is included in the Company's  consolidated selling and marketing
expenses.  SoftNet  Zone's  selling and marketing  expenses for the seventy days
ended June 30,  2000 was  $1,883,000,  which are  primarily  personnel  costs at
existing  airport sites and costs of obtaining  additional  airport  sites.  The
Company believes these costs will increase in the future as new sites are opened
and as SoftNet  Zone  expands  into the  wireless  broadband  Internet  services
business.

                                       13
<PAGE>

Engineering.   Consolidated   engineering   expenses   (exclusive   of  non-cash
compensation  expense  of  $605,000  for 2000 and  $954,000  expense  for  1999)
increased $4,366,000, or 235%, to $6,222,000 for the three months ended June 30,
2000, as compared to $1,856,000 for the three months ended June 30, 1999.

The  Company's  corporate  and  ISP  Channel   engineering   expenses  increased
$3,158,000,  or 186%, to $4,854,000 for the three months ended June 30, 2000, as
compared to $1,696,000  for the three months ended June 30, 1999.  The growth in
the  Company's  corporate  and ISP  Channel's  engineering  expense is largely a
result of round-the-clock staffing of the ISP Channel's Network Operating Center
and the introduction of field engineering services. The Company will explore all
opportunities to contain the expansion of these costs going forward.

Engineering  expenses for Intellicom  increased $1,208,000 to $1,368,000 for the
three months  ended June 30, 2000,  as compared to $160,000 for the three months
ended June 30,  1999,  primarily as a result of hiring that the Company has done
to staff these departments.  The Company believes that these costs will continue
to increase as Intellicom continues to develop its business.

To date, SoftNet Zone has incurred no significant  engineering  expenses. As the
Company's wireless broadband Internet services business develops, it is expected
that engineering expense will become a significant cost for SoftNet Zone.

General and  Administrative.  Consolidated  general and administrative  expenses
(exclusive  of  non-cash   compensation  expense  of  $4,185,000  for  2000  and
$3,474,000 for 1999) increased $3,157,000,  or 129%, to $5,596,000 for the three
months ended June 30, 2000, as compared to $2,439,000 for the three months ended
June 30, 1999.

The Company's  corporate  and ISP Channel  general and  administrative  expenses
increased $1,870,000,  or 89%, to $3,972,000 for the three months ended June 30,
2000,  as compared to $2,102,000  for the three months ended June 30, 1999.  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 staff the
Company's  administrative,  executive  and  finance  departments  as the Company
continues to grow. The Company  believes that general and  administrative  costs
will  continue  to  increase  as a  result  of the  continued  expansion  of the
Company's administrative staff and facilities to support growing operations.

General and administrative  expenses for Intellicom increased $227,000,  or 67%,
to $564,000 for the three  months  ended June 30, 2000,  as compared to $337,000
for the three months  ended June 30,  1999,  primarily as a result of leasing an
additional  office  facility in  Livermore,  California;  and the write off of a
customer  receivable.  The Company  believes  that these costs will  continue to
increase as Intellicom continues to develop its business.

SoftNet Zone, which includes the results of Laptop Lane since its acquisition on
April  21,  2000,  is  included  in  the  Company's   consolidated  general  and
administrative expenses.  SoftNet Zone's general and administrative expenses for
the  seventy  days  ended  June 30,  2000  was  $1,060,000,  which is  primarily
personnel costs. The Company believes these costs will increase in the future as
SoftNet Zone begins to staff these functions to support growing operations.

Depreciation  and  Amortization.   Consolidated  depreciation  and  amortization
expenses increased $4,872,000, or 269%, to $6,682,000 for the three months ended
June 30,  2000,  as compared to  $1,810,000  for the three months ended June 30,
1999.

The Company's  corporate and ISP Channel  depreciation and amortization  expense
increased $3,474,000, or 296%, to $4,647,000 for the three months ended June 30,
2000,  as compared to  $1,173,000  for the three months ended June 30, 1999 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. The costs associated with
these  incentives  are carefully  evaluated in the context of the  profitability
outlook for each  additional  contract.  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 increased
costs  recorded in  connection  with 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.

Depreciation and amortization expense for Intellicom increased $102,000, or 16%,
to $739,000 for the three  months  ended June 30, 2000,  as compared to $637,000
for the three months ended June 30,  1999,  primarily as a result of  additional
depreciation expense from leasehold improvements to additional office facilities
in Livermore,  California,  computer  equipment for  additional  personnel,  and
computer  equipment  for  Network  Operating   Center..   The  Company  believes
depreciation  expense  will  increase  as  Intellicom  continues  to expand  its
facilities, while amortization expense is expected to remain the same.

                                       14
<PAGE>

SoftNet Zone, which includes the results of Laptop Lane since its acquisition on
April 21,  2000,  is included in the  Company's  consolidated  depreciation  and
amortization expenses. SoftNet Zone's amortization and depreciation expenses for
the  seventy  days  ended  June 30,  2000  was  $1,296,000,  of  which  $937,000
represents  amortization of goodwill as a result of the Laptop Lane acquisition.
The remaining  $359,000  primarily  represents  depreciation  expense related to
airport leasehold  improvements,  furniture and equipment.  The Company believes
depreciation  expense will increase in the future as new sites are opened and as
SoftNet Zone expands into the wireless broadband Internet services business.

Compensation  Expense Related to Stock Options.  For the three months ended June
30, 2000,  the Company  recognized a non-cash  compensation  expense  related to
stock  options of  $5,039,000,  of which  $5,416,000  related to employee  stock
options offset by $377,000 related to non-employees options.  Generally accepted
accounting  principles require that options issued to non-employees be valued at
the time that the options are 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.

Interest Expense. Consolidated interest expense decreased $2,072,000, or 84%, to
$381,000 for the three months ended June 30, 2000, as compared to $2,453,000 for
the three  months  ended June 30, 1999.  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  $3,331,000  for the three
months ended June 30, 2000, as compared to $1,336,000 for the three months ended
June 30, 1999.  This  increase was primarily  due to the  increased  cash,  cash
equivalent and short-term investment balances from the proceeds of the secondary
offering and the sale of  5,000,000  common  stock  shares for  $128,643,000  to
Pacific Century CyberWorks Limited on December 13, 1999.

Other Income  (Expense).  Other  expense was $125,000 for the three months ended
June 30,  2000,  as compared to  $1,373,000  for the three months ended June 30,
1999.  The  decrease is  primarily  due to the three  months ended June 30, 1999
include indirect expenses  associated with the Company's  financing  activities,
including the secondary offering,  as well as the penalty incurred in connection
with the Series C redeemable convertible preferred stock.

Income  Taxes.  The Company  made no  provision  for income  taxes for the three
months ended June 30, 2000 and the three months ended June 30, 1999, as a result
of the Company's continuing losses.

Loss from Discontinued Operations.  The Company recognized a net loss of $15,000
from its document  management  segment for the three months ended June 30, 1999.
There is no income from discontinued  operations for the three months ended June
30, 2000,  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 $59,000 during the
three  months  ended  June  30,  1999  on its  then  outstanding  5%  Redeemable
Convertible Preferred Stock.

Net Loss.  For the three months ended June 30, 2000,  the Company had a net loss
applicable  to  common  shares  of  $25,990,000,  or a loss per  share of $1.02,
compared to a net loss of $18,689,000  for the three months ended June 30, 1999,
or a loss per share of $1.27.

Results of  Operations  for the Nine Months Ended June 30, 2000  Compared to the
Nine Months Ended June 30, 1999

Net Sales.  Consolidated net sales increased $8,753,000, or 314%, to $11,541,000
for the nine months ended June 30, 2000, as compared to $2,788,000  for the nine
months ended June 30, 1999.

Net sales for ISP Channel increased  $2,281,000,  or 133%, to $3,995,000 for the
nine months ended June 30, 2000, as compared to  $1,714,000  for the nine months
ended  June 30,  1999,  as a result  of  signing  up new  cable  affiliates  and
obtaining new subscribers.  Net sales  associated with ISP Channel's  subscriber
fees increased $1,752,000, or 258%, to $2,430,000 for the nine months ended June
30, 2000,  as compared to $678,000 for the nine months ended June 30, 1999.  Net
sales   associated  with  the  installation  of  cable  modems  to  ISP  Channel


                                       15
<PAGE>

subscribers  increased $551,000 to $1,010,000 for the nine months ended June 30,
2000,  as compared to $459,000  for the nine  months  ended June 30,  1999.  The
Company  believes  that  subscriber  fee and other  revenues  will  continue  to
increase,  however, the Company will focus on contracts that improve the overall
profitability outlook for the business.  Net sales associated with the segment's
non-cable  based  dial-up and  business-to-business  Internet  access  offerings
decreased  $22,000 to  $555,000  for the nine  months  ended June 30,  2000,  as
compared to $577,000 for the nine months ended June 30, 1999.

Net sales for Intellicom  increased  $5,570,000,  or 519%, to $6,644,000 for the
three  months  ended  June  30,  2000,  as  compared  to   $1,074,000   for  the
one-hundred-forty-two  days  ended  June 30,  1999,  primarily  as a  result  of
equipment sales to Tricom, S.A. and an additional one-hundred-thirty-one days of
net sales for nine  months  ended June 30, 2000 as compared to June 30, 1999 due
to the  acquisition  of  Intellicom  on February 9, 1999,  offset by  Intellicom
exiting from the data processing  service  business on September 30, 1999 and no
transponder  sublease  income for the nine months ended June 30, 2000. Net sales
from Intellicom's core business of  satellite-based  Internet services increased
$315,000,  or 102%,  to $622,000  for the nine months  ended June 30,  2000,  as
compared to $307,000  for the  one-hundred-forty-two  days ended June 30,  1999.
Equipment  sales  increased  $5,542,000 to $5,643,000  for the nine months ended
June 30, 2000, as compared to $101,000 for the one-hundred-forty-two  days ended
June 30, 1999, as a result of VSAT equipment sales to Tricom, S.A. Other sources
of sales,  excluding  data  processing  service  fees and  transponder  sublease
income,  increased $258,000 to $379,000 for the nine months ended June 30, 2000,
as compared to $121,000 for the one-hundred-forty-two days ended June 30, 1999.

SoftNet Zone, which includes the results of Laptop Lane since its acquisition on
April 21, 2000, is included in the  Company's  consolidated  net sales.  SoftNet
Zone's net sales for the seventy days ended June 30, 2000 was $902,000.  Of this
total,  $703,000 primarily represents Laptop Lane's core business of workstation
fees. The remaining  $199,000 is promotional and sponsorship  revenue.  Although
the Company  believes  workstation fees will grow in the future as new sites are
opened,  other revenue sources,  including  wireless  broadband Internet service
fees, are expected to become SoftNet Zone's primary source of revenue.

Cost of Sales.  Consolidated  cost of sales  increased  $7,716,000,  or 280%, to
$10,474,000  for the nine months ended June 30, 2000,  as compared to $2,758,000
for the nine months ended June 30, 1999.

Cost of sales for ISP Channel  increased  $1,292,000,  or 70%, to $3,142,000 for
the nine months  ended June 30,  2000,  as compared to  $1,850,000  for the nine
months  ended  June 30,  1999,  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 $2,957,000 for the nine months ended June 30, 2000 as
compared to  $1,469,000  for the nine months  ended June 30,  1999.  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 better negotiated  national  contracts,  scale, and
the  replacement  of  expensive  T1 lines in  certain  areas  with  Intellicom's
satellite-based technology, which is usually lower in cost.

Cost of sales for Intellicom  increased  $6,083,000,  or 669%, to $6,991,000 for
the  nine  months  ended  June  30,  2000,  as  compared  to  $908,000  for  the
one-hundred-forty-two  days ended June 30,  1999,  primarily as a result of VSAT
equipment  sales  to  Tricom,  S.A.  and the  segment  space  leasing  of a full
transponder   beginning  on  December  1,  1999  in  preparation  for  providing
satellite-based  Internet  services to fulfill  several  large sales  agreements
recently entered into. The largest  component of Intellicom's  cost of sales for
the nine months ended June 30, 2000,  are equipment  costs  resulting  from VSAT
equipment sales to Tricom,  S.A. Another component of Intellicom's cost of sales
is transponder fees, which amounted to $2,203,000 for the nine months ended June
30, 2000, as compared to $480,000 for the one-hundred-forty-two  days ended June
30, 1999.  The Company  believes  that these costs will  continue to increase as
Intellicom  leases  segment  space  on  additional   satellites  in  the  future
corresponding to the roll-out of Intellicom's business plan.

SoftNet Zone, which includes the results of Laptop Lane since its acquisition on
April 21, 2000, is included in the Company's consolidated cost of sales. SoftNet
Zone's cost of sales for the seventy days ended June 30, 2000 was $341,000.  The
single largest  component of SoftNet Zone's cost of sales is airport  concession
fees,  which  amounted to $166,000 for the seventy days ended June 30, 2000. The
Company believes these costs will increase in the future as new sites are opened
and as SoftNet  Zone  expands  into the  wireless  broadband  Internet  services
business.

Selling and Marketing. Consolidated selling and marketing expenses (exclusive of
non-cash  compensation  expense of $2,154,000  for 2000 and $1,252,000 for 1999)
increased  $10,424,000,  or 122%, to $18,991,000  for the nine months ended June
30, 2000, as compared to $8,567,000 for the nine months ended June 30, 1999.

                                       16
<PAGE>

The Company's corporate and ISP Channel selling and marketing expenses increased
$6,766,000,  or 81%, to $15,070,000  for the nine months ended June 30, 2000, as
compared to $8,304,000 for the nine months ended June 30, 1999. The  significant
growth in ISP Channel's selling and marketing expense is a result of hiring that
the  Company  has done to 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.  Going  forward,  the
Company will continue launching such campaign focused on carefully chosen target
markets.

Selling and marketing expenses for Intellicom increased $1,775,000 to $2,038,000
for the nine  months  ended June 30,  2000,  as  compared  to  $263,000  for the
one-hundred-forty-two  days ended June 30,  1999,  primarily  as a result of the
hiring  that the  Company  has  done to staff  these  departments.  The  Company
believes that these costs will  continue to increase as Intellicom  continues to
develop its business.

SoftNet Zone, which includes the results of Laptop Lane since its acquisition on
April 21, 2000, is included in the Company's  consolidated selling and marketing
expenses.  SoftNet  Zone's  selling and marketing  expenses for the seventy days
ended June 30,  2000 was  $1,883,000,  which are  primarily  personnel  costs at
existing  airport sites and costs of obtaining  additional  airport  sites.  The
Company believes these costs will increase in the future as new sites are opened
and as SoftNet  Zone  expands  into the  wireless  broadband  Internet  services
business.

Engineering.   Consolidated   engineering   expenses   (exclusive   of  non-cash
compensation  expense of  $1,998,000  for 2000 and $954,000 for 1999)  increased
$12,153,000, or 365%, to $15,478,000 for the nine months ended June 30, 2000, as
compared to $3,325,000 for the nine months ended June 30, 1999.

The  Company's  corporate  and  ISP  Channel   engineering   expenses  increased
$9,817,000,  or 310%, to $12,979,000 for the nine months ended June 30, 2000, as
compared to  $3,162,000  for the nine months ended June 30, 1999.  The growth in
ISP  Channel's  engineering  expense  is  largely  a result  of  round-the-clock
staffing of the ISP Channel's  Network  Operating Center and the introduction of
field  engineering  services.  The Company  will  explore all  opportunities  to
contain the expansion of these costs going forward.

Engineering  expenses for Intellicom  increased $2,336,000 to $2,499,000 for the
nine  months   ended  June  30,   2000,   as   compared  to  $163,000   for  the
one-hundred-forty-two  days ended June 30, 1999, primarily as a result of hiring
that the Company has done to staff these departments.  The Company believes that
these costs will  continue to increase as  Intellicom  continues  to develop its
business.

To date, SoftNet Zone has incurred no significant  engineering  expenses. As the
Company's wireless broadband Internet services business develops, it is expected
that engineering expense will become a significant cost for SoftNet Zone.

General and  Administrative.  Consolidated  general and administrative  expenses
(exclusive  of  non-cash  compensation  expense  of  $12,166,000  for  2000  and
$4,515,000 for 1999) increased  $5,970,000,  or 90%, to $12,586,000 for the nine
months ended June 30, 2000, as compared to $6,616,000  for the nine months ended
June 30, 1999.

The Company's  corporate  and ISP Channel  general and  administrative  expenses
increased $4,241,000,  or 71%, to $10,224,000 for the nine months ended June 30,
2000,  as compared to  $5,983,000  for the nine months ended June 30, 1999.  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 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.

General and administrative  expenses for Intellicom increased $633,000, or 100%,
to  $1,266,000  for the nine months ended June 30, 2000, as compared to $633,000
for the one-hundred-forty-two days ended June 30, 1999, primarily as a result of
leasing an additional office facility in Livermore, California; the write off of
a customer receivable; and an additional  one-hundred-thirty-one days of general
and  administrative  expenses for June 30, 2000 as compared to June 30, 1999 due
to the acquisition of Intellicom on February 9, 1999. The Company  believes that
these costs will  continue to increase as  Intellicom  continues  to develop its
business.

SoftNet Zone, which includes the results of Laptop Lane since its acquisition on
April  21,  2000,  is  included  in  the  Company's   consolidated  general  and
administrative expenses.  SoftNet Zone's general and administrative expenses for
the  seventy  days  ended  June 30,  2000  was  $1,096,000,  which is  primarily
personnel costs. The Company believes these costs will increase in the future as
SoftNet Zone begins to staff these functions to support  growing  operations and
as SoftNet Zone expands into the wireless broadband Internet services business.

                                       17
<PAGE>

Depreciation  and  Amortization.   Consolidated  depreciation  and  amortization
expenses  increased  $10,256,000,  or 274%, to  $13,993,000  for the nine months
ended June 30, 2000,  as compared to  $3,737,000  for the nine months ended June
30, 1999.

Depreciation  and   amortization   for  ISP  Channel  and  corporate   increased
$7,917,000,  or 295%, to $10,599,000 for the nine months ended June 30, 2000, as
compared to  $2,682,000  for the nine months  ended June 30, 1999 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.  The costs  associated  with these
incentives are carefully  evaluated in the context of the profitability  outlook
for  each  additional   contract.   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 increased
costs  recorded in  connection  with 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.

Depreciation and amortization  expense for Intellicom increased  $1,043,000,  or
99%, to  $2,098,000  for the nine  months  ended June 30,  2000,  as compared to
$1,055,000 for the one-hundred-forty-two  days ended June 30, 1999, primarily as
a  result  of an  additional  one-hundred-thirty-one  days of  depreciation  and
amortization  expense  for June 30, 2000 as compared to June 30, 1999 due to the
acquisition of Intellicom on February 9, 1999. The Company believes depreciation
expense will increase as Intellicom  continues to expand its  facilities,  while
amortization expense is expected to remain the same.

SoftNet Zone, which includes the results of Laptop Lane since its acquisition on
April 21,  2000,  is included in the  Company's  consolidated  depreciation  and
amortization expenses. SoftNet Zone's amortization and depreciation expenses for
the  seventy  days  ended  June 30,  2000  was  $1,296,000,  of  which  $937,000
represents  amortization of goodwill as a result of the Laptop Lane acquisition.
The remaining  $359,000  primarily  represents  depreciation  expense related to
airport leasehold  improvements,  furniture and equipment.  The Company believes
depreciation  expense will increase in the future as new sites are opened and as
SoftNet Zone expands into the wireless broadband Internet services business.

Compensation  Expense  Related to Stock Options.  For the nine months ended June
30, 2000,  the Company  recognized a non-cash  compensation  expense  related to
stock options of  $16,318,000,  of which  $16,009,000  related to employee stock
options  and  $309,000  related  to  non-employee  options.  Generally  accepted
accounting  principles require that options issued to non-employees be valued at
the time that the options are 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.

Interest Expense. Consolidated interest expense decreased $2,421,000, or 68%, to
$1,159,000  for the nine months ended June 30, 2000,  as compared to  $3,580,000
for the nine months ended June 30, 1999.  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 $8,894,000 for the nine months
ended June 30, 2000,  as compared to  $1,576,000  for the nine months ended June
30,  1999.  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  $128,643,000 to Pacific  Century  CyberWorks
Limited on December 13, 1999.

Other  Income  (Expense).  Other  expense was $162,000 for the nine months ended
June 30,  2000,  as compared to  $1,405,000  for the nine months  ended June 30,
1999.  The  decrease is  primarily  due to the three  months ended June 30, 1999
include indirect expenses  associated with the Company's  financing  activities,
including the secondary offering,  as well as the penalty incurred in connection
with the Series C redeemable convertible preferred stock.

Income Taxes. The Company made no provision for income taxes for the nine months
ended June 30, 2000 and the nine months ended June 30, 1999,  as a result of the
Company's continuing losses.

Loss from Discontinued Operations. The Company recognized a net loss of $399,000
for the nine months ended June 30, 1999.  This  consisted of a net loss from the
Company's  document  management  segment of  $568,000  and net  income  from the
Company's  telecommunications segment of $169,000 for the nine months ended June
30, 1999.  There is no income from  discontinued  operations for the nine months
ended June 30, 2000, 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.

                                       18
<PAGE>
Preferred Dividends. The Company paid aggregate dividends of $473,000 during the
nine  months  ended  June  30,  1999  on  its  then  outstanding  5%  Redeemable
Convertible Preferred Stock.

Net Loss.  For the nine months ended June 30,  2000,  the Company had a net loss
applicable  to  common  shares  of  $68,726,000,  or a loss per  share of $3.02,
compared to a net loss of  $33,217,000  for the nine months ended June 30, 1999,
or a loss per share of $3.07.
                                       19
<PAGE>


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 net proceeds of  $128,643,000  to Pacific
Century,  and entitled  Pacific Century to designate two persons for election to
the Board of Directors.  As of June 30, 2000,  the Company had  $196,807,000  in
cash, cash equivalents and short-term investments compared with $151,954,000 one
year prior.

Net cash used in operating  activities  of  continuing  operations  for the nine
months  ended  June 30,  2000 was  $50,401,000.  Of this  amount,  approximately
$68,726,000  million  stemmed  from  the  Company's  net  loss  from  continuing
operations  as reduced  by  approximately  $31,261,000,  for  non-cash  charges,
primarily depreciation ($8,484,000),  amortization ($5,509,000) and compensation
expense  related  to stock  options  ($16,318,000).  This was  offset in part by
approximately  $12,936,000,  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 nine
months  ended June 30,  2000 was  approximately  $131,122,000.  Of this  amount,
$102,669,000 was used to purchase short-term  investments,  $13,926,000 was used
to  purchase  property,  plant and  equipment,  $7,530,000  was used to  acquire
long-term equity investments,  $6,000,000 was used to provide working capital to
Laptop  Lane  under  a  secured  promissory  note  prior  to  the  close  of the
acquisition,  and $1,166,000 (net of cash acquired)  payment for the purchase of
Laptop  Lane.  Gross  purchases  of property,  plant and  equipment  amounted to
$22,148,000,  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 nine months ended June 30,
2000 was $133,990,000  primarily through the private placement sale of 5,000,000
common stock shares to Pacific  Century  Cyberworks  Limited for net proceeds of
$128,643,000, proceeds from exercise of warrants and options for $5,193,000, and
issuance of promissory note for $3,128,000, offset by principal payments of debt
and capital lease obligations for $2,973,000.

On April 21, 2000, the Company  acquired Laptop Lane Limited  ("Laptop Lane"), a
Washington corporation,  under the purchase method of accounting and the results
of Laptop Lane are included in the consolidated  financial  statements since the
date of  acquisition.  Laptop  Lane is a leading  provider  of  business  center
services in airports.  The Company paid approximately  $20,859,000 consisting of
(i) 972,266  common stock shares of the Company  valued at  $15,107,000,  net of
adjustment for expenses paid by the Company on behalf of Laptop Lane,  exchanged
for all outstanding  common stock shares of Laptop Lane, (ii) direct acquisition
costs of approximately  of $2,100,000,  which includes a bonus payment to Laptop
Lane  employees  for  $431,000 in lieu of Laptop Lane stock  options,  and (iii)
250,000  common stock shares of the Company valued at $3,652,000 to be issued to
former Laptop Lane  stockholders  in payment for achieving  certain  performance
criteria. As part of the acquisition,  an additional 333,333 common stock shares
of the  Company  would be  distributed  to former  Laptop Lane  stockholders  if
certain performance goals are met. As of June 30, 2000, Laptop Lane has achieved
three of the four performance  goals, as a result 250,000 common stock shares of
the Company  amounting to  $3,652,000  was accrued for and will be issued to the
former Laptop Lane  stockholders.  The remaining 83,333 common stock shares were
unearned as of June 30, 2000 and  accordingly  no  liability  has been  accrued.
Additionally,   in  connection  with  the  acquisition,   the  Company  provided
$6,000,000 in working capital to Laptop Lane, under a secured promissory note.

In connection with the Company's  proposed  purchase of Laptop Lane, the Company
announced  on  February 9, 2000 that it,  together  with CMGI,  Inc.  and Compaq
Computer Corporation, has signed letters of intent to provide equity funding and
services to a new initiative  called SoftNet Zone,  contingent on completing the
Laptop Lane, 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, 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.

On April 20, 2000, the Company announced a letter of intent has been signed with
Delta Air Lines Inc.  ("Delta") to provide wireless Internet access and business
services to Delta  customers at Delta's gates and Crown Room Clubs. As a part of
this alliance,  Delta will gain a minority  equity position in SoftNet Zone. The
Company is in process of completing the definitive agreements with Delta.

                                       20

<PAGE>

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

In the past,  many computer  systems and software  products were designed with a
two-digit  format in the year  portion  of the date  code  field.  This  posed a
problem for dates after  December 31,  1999,  due to many  computer  systems and
software  products  would  turnover to "00" in the year portion of the date code
field, and therefore not distinguish year 2000 from year 1900 (commonly referred
to as the "Year  2000" or "Y2K"  issue).  In order to  distinguish  twenty-first
century dates from twentieth  century  dates,  the year portion of the date code
fields require a four-digit  format. As a result,  computer systems and software
products  used by many  companies  were  upgraded or modified to accept the four
digit format the in year  portion of the date code field.  Prior to December 31,
1999,  the Company  formulated  and  implemented  a  comprehensive  Y2K Plan, as
described in the  Company's  Form 10-K for the fiscal year ended  September  30,
1999,  to comply with Y2K  requirements.  To date,  and with the January 1, 2000
date rollover,  the Company, to its knowledge,  has not experienced any material
disruptions  associated with the Y2K issue internally or externally  through its
cable  affiliates,   critical  suppliers,  service  providers  and  contractors.
However,  the Company cannot  determine if it will be subject to Y2K problems in
the future or if any Y2K problems have arisen that it has failed to detect.  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  cost,  primarily  consultants,   is
approximately $350,000 through June 30, 2000. The failure of one or more systems
of the Company or its business partners due to the Y2K issue may 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.

                                       21
<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 $154,841,000 at June 30, 2000. 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 June 30, 2000 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
June 30, 2000. 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  increase  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 June 30,  2000,  the
closing price of Convergent  Communications,  Inc.'s common stock was $8.000, as
listed on the NASDAQ National Market.  As a result, we valued this investment on
our balance  sheet at June 30, 2000 at its market value of $199,000.  Unrealized
gains and losses are excluded from earnings and are reported in the "Accumulated
Comprehensive  Loss" component of stockholders'  equity. We do not hedge against
equity price changes.


Currency Exchange Risk

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



                                       22
<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 was valued at $8,531,000, and is being amortized on a  straight-line  basis
over the five year minimum life of the Affiliation Agreement. On March 29, 2000,
Mediacom delivered the first group of 150,000 homes passed;  accordingly 525,000
restricted  common stock shares valued at $15,225,000  converted to unrestricted
common stock  shares,  with a like amount  recorded as launch  incentives  being
amortized over the remaining  life of the  Affiliation  Agreement.  No value has
been assigned to the remaining 2,625,000  restricted common stock shares at date
of issuance 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 remaining  2,625,000  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 net proceeds of $128,643,000 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.

On  the  first  anniversary  date  of  the  Intelligent   Communications,   Inc.
("Intellicom")  acquisition,  the Intellicom  acquisition agreement requires the
Company to issue $1,500,000 of common stock shares.  Accordingly, on February 8,
2000,  the Company  issued 43,314  common stock shares valued at $1,499,000  and
paid $1,000 for fractional shares to the former shareholders of Intellicom.

Item 3.  Defaults upon Senior Securities

None

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

None

                                       23
<PAGE>

Item 5.  Other Information

Factors Affecting The Company's Operating Results

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

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,
Intelligent  Communications,  Inc. ("Intellicom") on February 9, 1999 and Laptop
Lane  Limited  ("Laptop  Lane"),  which will serve as the  cornerstone  of a new
wireless  broadband  internet venture called SoftNet Zone, on April 21, 2000. 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 the Company's  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 Fail Or The  Company's  Products And Services Do Not Gain  Commercial
Acceptance

It has become  feasible to offer  Internet  services  wirelessly,  over existing
cable lines and equipment,  and using 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  Purchase Of  Intellicom  Subjects  The Company To Risks In A New
Market

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.

                                       24
<PAGE>

     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
     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.  SatMex  is  licensed  by the  government  of  Mexico.  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.

The Company's  Plan To Offer  Broadband  Wireless  Internet  Service To Business
Travelers Subjects The Company To Risks In A New Market

The  Company  purchased  Laptop Lane to serve as the  cornerstone  of a business
called SoftNet Zone, which will provide mobile computing and Internet  services,
both wired and  wireless,  to global  business  travelers.  The Company has very
little  experience in the markets and technology in which Laptop Lane is focused
and SoftNet Zone intends to be focused. As such, the Company is faced with risks
that are new to the  Company  and  which  may  adversely  affect  the  Company's
business, financial condition, and prospects. These risks include the following:

     The wireless  broadband  Internet services industry may not gain commercial
     acceptance

     The ability to provide wireless broadband Internet access has only recently
     be achieved. There is no proven commercial acceptance of wireless broadband
     Internet  services and none of the  companies  offering  such  services are
     profitable on such  offerings.  It is currently  very  difficult to predict
     whether providing wireless broadband Internet services will become a viable
     industry.  The failure of the wireless broadband Internet services industry
     to  evolve  in the  manner  in which  is it  currently  contemplated  could
     adversely affect the Company's business, financial condition and prospects.

     The Company may not be able to enter into strategic  relationships  to gain
     market share

     To gain market  share,  the Company must partner with  airports,  airlines,
     hotels,  convention  centers and companies in other industries  serving the

                                       25
<PAGE>

     mobile  consumer.  The  Company  may  not be  able to  compete  with  other
     companies that are better  financed or have longer  operating  histories in
     the industry  for these  alliances.  As a result,  to gain market share the
     Company may be forced to enter into arrangements that may not be ideal.

     The Company faces intense  competition in the wireless  broadband  Internet
     services industry

     The wireless broadband Internet services business is intensely competitive.
     Many  of  the  Company's   competitors  and  potential   competitors   have
     substantially greater financial,  technical and marketing resources, longer
     operating   histories,   greater  name  recognition  and  more  established
     relationships  than the Company does. The Company cannot predict whether it
     will be able to compete  successfully against current or future competitors
     or that  competitive  pressures  faced by the  Company  will not  adversely
     affect the Company's business, financial condition or prospects.

     The wireless Internet services industry does not have common standards

     Currently,  there  are  many  technologies  designed  to  provide  wireless
     Internet access.  The Company may adopt a technology that does not prove to
     be the  industry  standard  or leader,  which  would  force the  Company to
     replace equipment or risk not being competitive. The Company cannot predict
     how industry standards will evolve.

     It will be costly to build out a wireless network and support system

     The  Company  intends  to build  the  wireless  infrastructure  to  support
     broadband  Internet  access.  In addition,  the Company will either have to
     build or contract with a third party to provide billing, network operations
     and customer  care  systems.  It will be costly to build such  services and
     provision  such systems.  The Company will incur many of the costs prior to
     achieving meaningful revenue for wireless broadband Internet services.  The
     inability  of the  Company to  achieve  meaningful  revenue to cover  these
     start-up  costs  would have an adverse  effect on the  Company's  financial
     condition and prospects.

     Uneven usage may make it difficult to provide services.

     The Company  anticipates  that  demands  for its  services  will  fluctuate
     throughout the day. For example,  in airports,  demand will be highest when
     the airport is busiest.  If too many users  attempt to access the  Internet
     through the Company's infrastructure at one time, it could result in a poor
     experience for such users,  which may affect long-term demand.  The Company
     cannot  accurately  predict  whether is will be able to keep pace with peak
     demand.

     The Company faces uncertainty because of government regulation

     The Company proposes to provide wireless  broadband Internet services using
     unlicensed frequencies.  There can be no assurance that the government will
     not seek to license or otherwise  regulate such  frequencies  in the future
     and the Company cannot  predict the terms by which the government  would do
     so. In addition, the airports,  airlines, and convention centers with which
     the  Company  seeks  to  partner  in many  cases  are  either  owned by the
     government  or subject to heavy  government  regulation.  As a result,  the
     Company  will be subject to numerous  local,  state and  federal  rules and
     regulations,  which may change in the future.  The Company  cannot  predict
     whether such changes,  if they occur,  would have an adverse  affect on the
     business, financial condition or prospects of the Company.

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 nine months ended June 30,  2000,  the Company had a net
loss of $68,726,000. As of June 30, 2000, the Company had an accumulated deficit
of $168,973,000.  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    the cost to build out the  infrastructure and provision the support systems
     for wireless Internet access;
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


                                       26
<PAGE>

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,  Intellicom's  customers,  and the Company's  ability to
obtain wireless broadband Internet service customers.

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, Intellicom and SoftNet
     Zone 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,  Intellicom  customers  and SoftNet
     Zone customers;
o    the  Company's  ability  to  coordinate  timely  and  effective   marketing
     strategies;
o    the rate at which ISP  Channel  and its cable  affiliates,  Intellicom  and
     SoftNet Zone 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,  Intellicom  and SoftNet Zone
     services;
o    competition in the Internet or cable industries; and
o    changes in law and regulation.

A New Accounting Pronouncement May Cause Our Operating Results to Fluctuate

In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 ("SAB 101"),  "Revenue  Recognition  in Financial  Statements".
Implementation  is scheduled for fiscal years beginning after December 15, 1999,
which would be effective for the Company  beginning in fiscal year 2001. SAB 101
addresses  various topics in revenue  recognition  including the  recognition of
revenue for contracts involving multiple deliverables.  The Company is currently
analyzing SAB 101,  however,  based on Management's  current  understanding  and
interpretation,  SAB  101 is not  expected  to  have a  material  impact  on the
Company's cosolidated financial statements.

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

As of June 30, 2000,  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
7,023,000 shares. This would have been 19.9% of the Company's outstanding common
stock as of June 30,  2000,  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.


                                       27
<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.

                                       28
<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  Purchases Of Intellicom And Laptop Lane May Adversely  Affect the
Company's Financial Condition

The  purchases  of  Intellicom  and Laptop Lane  involve  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.  As a result of the
Laptop Lane  acquisition,  the Company  recorded  approximately  $23,195,000  of
intangible assets. The resulting  amortization expense 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,  both the Intellicom and Laptop
Lane  acquisitions  were  structured  as  purchases by the Company of all of the
outstanding stock of Intellicom and Laptop Lane. As a result,  the Company could
be adversely  affected by direct and  contingent  liabilities  of  Intellicom or
Laptop  Lane.  It is  possible  that  the  Company  is not  aware  of all of the
liabilities of Intellicom and Laptop Lane and that Intellicom or Laptop Lane has
greater liabilities than the Company expected.

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


                                       29
<PAGE>

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.

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.


                                       30
<PAGE>

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,  Radyne Comstream Inc. for satellite equipment,  Nokia and Lucent for
wireless  LAN  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 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


                                       31
<PAGE>

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.

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


                                       32
<PAGE>

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.

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  ISP  Channel  and  Intellicom  services  have  been  operational  for a
relatively  short period of time and because SoftNet Zone's  wireless  broadband
Internet  services have not yet become  operational,  the  Company's  ability to
connect  and  manage  a  substantial   number  of  online  subscribers  at  high
transmission speeds is unknown.  In addition,  the Company faces risk 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,  the  networks of  Intellicom's  customers  and the networks of
     SoftNet Zone'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.

                                       33
<PAGE>

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
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.


                                       34
<PAGE>

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.

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.


                                       35
<PAGE>


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.

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.

                                       36
<PAGE>

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.

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,  Intellicom  and SoftNet  Zone's  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 services 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.


                                       37
<PAGE>

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
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.

                                       38
<PAGE>

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:

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

In the past,  many computer  systems and software  products were designed with a
two-digit  format in the year  portion  of the date  code  field.  This  posed a
problem for dates after  December 31,  1999,  due to many  computer  systems and
software  products  would  turnover to "00" in the year portion of the date code
field, and therefore not distinguish year 2000 from year 1900 (commonly referred
to as the "Year  2000" or "Y2K"  issue).  In order to  distinguish  twenty-first
century dates from twentieth  century  dates,  the year portion of the date code
fields require a four-digit  format. As a result,  computer systems and software
products  used by many  companies  were  upgraded or modified to accept the four
digit format the in year  portion of the date code field.  Prior to December 31,
1999,  the Company  formulated  and  implemented  a  comprehensive  Y2K Plan, as
described in the  Company's  Form 10-K for the fiscal year ended  September  30,
1999,  to comply with Y2K  requirements.  To date,  and with the January 1, 2000
date rollover,  the Company, to its knowledge,  has not experienced any material
disruptions  associated with the Y2K issue internally or externally  through its
cable  affiliates,   critical  suppliers,  service  providers  and  contractors.
However,  the Company cannot  determine if it will be subject to Y2K problems in
the future or if any Y2K problems have arisen that it has failed to detect.  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  cost,  primarily  consultants,   is
approximately $350,000 through June 30, 2000. The failure of one or more systems
of the Company or its business partners due to the Y2K issue may 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.

                                       39
<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.

          27   Financial Data Schedule

(b)  Reports on Form 8-K

     Current report on Form 8-K filed with the Commission on May 9, 2000.


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<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/ Garrett J. Girvan                                 Date:      August 14, 2000
-------------------------------------------------                ---------------
Garrett J. Girvan
Chief Operating Officer

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



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