SOFTNET SYSTEMS INC, DEF 14A, 1999-03-17

SOFTNET SYSTEMS INC
DEF 14A, 1999-03-17
TELEPHONE INTERCONNECT SYSTEMS

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SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934
(Amendment no. 1)

Filed by the Registrant [X]
Filed by a party other than the Registrant [ ]

Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the
[X] Definitive Proxy Statement Commission Only (as permitted by
[ ] Definitive Additional Materials Rule 14a-6(e)(2))
[ ] Soliciting Material Pursuant to
Rule 14a-11(c) or Rule 14a-12

SoftNet Systems, Inc.
------------------------------------------------
(Name of Registrant as Specified in Its Charter)

------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of filing fee (Check the appropriate box):

[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.

(1) Title of each class of securities to which transactions applies:

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(2) Aggregate number of securities to which transactions applies:

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(3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is
calculated and state how it was determined):

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(4) Proposed maximum aggregate value of transaction:

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(5) Total fee paid:

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[ ] Fee paid previously with preliminary materials.
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[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.

(1) Amount previously paid:

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(2) Form, Schedule or Registration Statement No.:

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(4) Date filed:

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<PAGE>

To the Shareholders of SoftNet Systems, Incorporated:

As you can see from the Annual Report, 1999 marks a turning point for our
company. We have established a new strategy and installed a new management team.
At the upcoming Shareholders' Meeting, we seek your support for a set of changes
that will enable SoftNet to move forward decisively. Some of the changes are
more formal in nature and others will substantially alter the shape of the
business; but together they will make clear that SoftNet will be a 21st Century
Information Age company, with a focused strategy and the means to execute that
strategy.

The accompanying materials describe the issues for which your approval is
sought. By changing our incorporation from New York to Delaware we can take
advantage of a more modern and flexible set of corporate law provisions.

A new Stock Option Plan will enable us to attract and retain the highest grade
of management talent--which is increasingly difficult in Silicon Valley and San
Francisco--and reduce the tax law complications associated with our current
plan.

Increasing the number of authorized shares will give us the flexibility to grow
the business significantly, through either financing or business combinations.
For example, our recent financing arrangement with Rose Glen allows for the
conversion of preferred stock to common stock, for which approval is also
sought.

Finally, we plan to sell our existing document management business, following
the recent sale of our telecommunications business. In light of the opportunity
in the Internet business and the lack of synergies between the three groups, we
believe that focusing management's energies is critical. Since the document
management and telecommunications divisions constitute a majority of the "old"
company's current assets, your approval is required to make this move to the
"new SoftNet".

In closing, we would like to thank Jack Hamm, who is retiring from the Board
after 17 years of service as a Director of the Company. We have appreciated his
thoughtful contributions as the Company has moved through many transitions.

Overall, we remain confident in our Internet-focused strategy and management's
progress towards achieving our specific business targets in that area. We look
forward to the Company's opportunities and we welcome your continued support.

For the Board of Directors,

Ronald I. Simon, Dr. Lawrence B. Brilliant,
Chairman of the Board President and CEO

<PAGE>

[GRAPHIC OMITTED]

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON APRIL 13, 1999

TO THE STOCKHOLDERS OF SOFTNET SYSTEMS, INC.:

NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of SoftNet
Systems, Inc., a New York corporation (the "Company"), will be held on April
13, 1999, at 10:00 a.m. local time, at the Company's corporate offices located
at 650 Townsend Street, San Francisco, California 94103, for the following
purposes, as more fully described in the Proxy Statement accompanying this
Notice:

1. To elect directors;

2. To increase the number of authorized shares of capital stock;

3. To approve the adoption of the Company's 1998 Stock Incentive Plan
under which 3,350,668 shares of common stock have been reserved for
issuance;

4. To authorize and approve the issuance of the common stock underlying
the Company's convertible preferred stock and related warrants to
purchase common stock, which in the aggregate would represent 20% or
more of the outstanding shares of common stock;

5. To approve the sale of the Company's non-Internet related subsidiary;

6. To approve the Company's reincorporation in Delaware;

7. To appoint PricewaterhouseCoopers LLP as independent auditors of the
Company for the fiscal year ending September 30, 1999; and

8. To conduct such other business as may properly come before the
meeting.

Only stockholders of record at the close of business on February 22, 1999
are entitled to notice of and to vote at this Annual Meeting. The stock
transfer books will not be closed between the record date and the date of the
meeting. A list of stockholders entitled to vote at this Annual Meeting will be
available for inspection at the executive offices of the Company. All
stockholders are cordially invited to attend the meeting in person. Whether or
not you plan to attend, please sign and return the enclosed proxy as promptly
as possible in the envelope enclosed for your convenience. Should you receive
more than one proxy because your shares are registered in different names and
addresses, each proxy should be signed and returned to assure that all your
shares will be voted. You may revoke your proxy at any time prior to this
Annual Meeting. If you attend this Annual Meeting and vote by ballot, your
proxy will be revoked automatically and only your vote at the meeting will be
counted.

WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE SIGN, DATE AND MAIL
THE ENCLOSED PROXY IN THE ENVELOPE PROVIDED WHICH REQUIRES NO POSTAGE FOR
MAILING IN THE UNITED STATES. A PROMPT RESPONSE IS HELPFUL, AND YOUR
COOPERATION WILL BE APPRECIATED.

BY ORDER OF THE BOARD OF DIRECTORS
Steven M. Harris
Vice President and Secretary

March 12, 1999

<PAGE>

SOFTNET SYSTEMS, INC.
650 Townsend Street, Suite 225
San Francisco, California 94103

PROXY STATEMENT

FOR THE 1999 ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON APRIL 13, 1999

General

The enclosed proxy ("Proxy") is solicited on behalf of the Board of
Directors (the "Board of Directors" or the "Board") of SoftNet Systems, Inc., a
New York corporation (the "Company"), for use at the 1999 Annual Meeting of
Stockholders (the "Annual Meeting"). The Annual Meeting will be held at 10:00
a.m. on April 13, 1999 at the Company's corporate offices located at 650
Townsend Street, San Francisco, California 94103. These proxy solicitation
materials were mailed on or about March 15, 1999 to all stockholders entitled
to vote at the Annual Meeting.

Voting

The specific proposals to be considered and acted upon at the Annual
Meeting are summarized in the accompanying Notice and are described in more
detail in this Proxy Statement. On February 22, 1999, the record date for
determination of stockholders entitled to notice of and to vote at the Annual
Meeting (the "Record Date"), 8,844,736 shares of the Company's common stock,
$.01 par value ("common stock"), were issued and outstanding. Each stockholder
is entitled to one vote for each share of common stock held by such stockholder
on February 22, 1999.

A majority of the outstanding shares entitled to vote at the Annual
Meeting and represented in person or by proxy will constitute a quorum. Each
share has one vote on all other matters to be voted upon at the Annual Meeting.
If choices are not specified on the proxy, the shares will be voted for the
proposal described herein. Under New York law, abstentions and broker
"non-votes" will be counted towards determining the presence of a quorum. With
respect to proposals five and six, abstentions and broker "non-votes" will have
the effect of a negative vote. A broker "non-vote" occurs when a nominee
holding shares for a beneficial owner does not vote for a particular proposal
because the nominee does not have discretionary voting power with respect to
that item and has not received instructions from the beneficial owner. Unvoted
shares are termed "non-votes" when a nominee holding shares for beneficial
owners may not have received instructions from the beneficial owner and may not
have exercised discretionary voting power on certain matters, but with respect
to other matters may have voted pursuant to discretionary authority or
instructions from the beneficial owners.

The following outlines the vote required to approve each proposal set
forth in this Proxy:

o Proposal One, to elect directors, requires approval by a plurality of the
shares of common stock present in person or by proxy at the Annual
Meeting.

o Proposal Two, increase of the authorized stock of the Company, requires
approval by at least a majority of the shares of common stock present in
person or by proxy at the Annual Meeting.

o Proposal Three, adoption of the Company's 1998 Stock Incentive Plan,
requires approval by at least a majority of the shares of common stock
present in person or by proxy at the Annual Meeting.

o Proposal Four, authorization and approval of the issuance of the
Company's common stock underlying its Convertible Preferred Stock and
Warrants, requires approval by at least a majority of the shares of common
stock present in person or by proxy at the Annual Meeting.

o Proposal Five, to approve the sale of the Company's non-Internet related
business, requires approval by at least two-thirds of the Company's
outstanding common stock.

<PAGE>

o Proposal Six, reincorporation in Delaware, requires approval by at least
two-thirds of the Company's outstanding common stock.

o Proposal Seven, to appoint PricewaterhouseCoopers LLP as independent
auditors of the Company for the fiscal year ending September 30, 1999,
requires approval by a majority of the shares of common stock present in
person or by proxy at the Annual Meeting.

As of the Record Date, the current Directors and officers of the Company
have the right to vote 217,429 shares, representing 2.5% of the outstanding
common stock, and have advised the Company that their present intent is to vote
in favor of each proposal and all persons nominated as directors.

The Board of Directors recommends a vote FOR each proposal.

Revocability of Proxies

You may revoke or change your Proxy at any time before the Annual Meeting
by filing with the Secretary of the Company at the Company's principal
executive offices, a notice of revocation or another signed proxy with a later
date. You may also revoke your proxy by attending the Annual Meeting and voting
in person.

Solicitation

The Company will bear the entire cost of solicitation, including the
preparation, assembly, printing and mailing of this Proxy Statement, the proxy
and any additional soliciting materials furnished to stockholders. Copies of
solicitation materials will be furnished to brokerage houses, fiduciaries, and
custodians holding shares in their names that are beneficially owned by others
so that they may forward this solicitation material to such beneficial owners.
In addition, the Company may reimburse such persons for their costs in
forwarding the solicitation materials to such beneficial owners. The original
solicitation of proxies by mail may be supplemented by a solicitation by
telephone, telegram, or other means by directors, officers or employees. Except
as described above, the Company does not presently intend to solicit proxies
other than by mail.

RISK FACTORS

The Company faces certain risks in operating its business, and the
Company's securityholders face certain risks in holding the Company's
securities. Please see the Company's Annual Report on Form 10-K/A for the year
ended September 30, 1998, which is being delivered with this Proxy Statement
and is incorporated by reference herein.

MATTERS TO BE CONSIDERED AT ANNUAL MEETING

PROPOSAL ONE

ELECTION OF DIRECTORS

At the Annual Meeting, six directors are to be elected to hold office
until the next annual meeting of shareholders or until their successors are
elected and qualified. The Board of Directors of the Company currently consists
of seven members, but it has voted to amend the Company's Bylaws to provide for
six directors as of the date of the Annual Meeting.

It is intended that the proxies (except proxies marked to the contrary)
will be voted for the nominees listed below, all of whom are members of the
present Board of Directors. It is expected that the nominees will serve, but if
any nominee declines or is unable to serve for any unforeseen cause, the
proxies will be voted to fill any vacancy so arising in accordance with the
discretionary authority of the persons named in the proxies. Under the Bylaws
of the Company, persons must be nominated at least forty-five days prior to the
meeting; accordingly, no additional persons may be nominated at the Annual
Meeting.

<PAGE>

Nominees
<TABLE>
The following table set forth certain information concerning the nominees,
all of whom are members of the present Board of Directors:
<CAPTION>
Name of Nominee Age Position
- ---------------------------------- ----- -------------------------------------------------
<S> <C> <C>
Ronald I. Simon .................. 60 Chairman of the Board
Dr. Lawrence B. Brilliant ........ 54 Vice Chairman of the Board, President and Chief
Executive Officer
Ian B. Aaron ..................... 38 Director, Vice President, President of ISP
Channel, Inc.
Edward A. Bennett ................ 52 Director
Sean P. Doherty .................. 41 Director
Robert C. Harris, Jr. ............ 52 Director

</TABLE>

Ronald I. Simon has served as a member of SoftNet's Board of Directors
since September 1995 and Chairman of the Board since August 1997. Mr. Simon has
served as Vice President and Chief Financial Officer of Western Water Company,
a developer and marketer of water supplies, since May 1997. Mr. Simon has also
served as Director of Westcorp Investments, a wholly-owned subsidiary of
Westcorp, Inc., a holding company for Western Financial Bank and as Director of
Citadel Corporation, a real estate investment company, since 1995. In addition,
Mr. Simon served as Chairman of Sonant Corporation, an interactive voice
response equipment company, from 1993 to 1997.

Dr. Lawrence B. Brilliant has served as a member of SoftNet's Board of
Directors since January 1998 and has served as Vice Chairman of the Board,
President and Chief Executive Officer of SoftNet since April 1998. Prior to
joining SoftNet, Dr. Brilliant served as President and Chief Executive Officer
of Brilliant Color Cards, a telephone debit/calling card company, from 1989 to
1998. Dr. Brilliant is a founder of MultiVox Communications, a switched
telephone reseller. Dr. Brilliant is also a founder of the International
Telecard Association and has served as Director and Chairman Emeritus since
1992. Dr. Brilliant was also a founder of The Well in 1984 when he was CEO of
Network Technologies, Inc. Dr. Brilliant has also been a professor at the
University of Michigan and has served as a medical officer with the United
Nations.

Ian B. Aaron has served as a member of SoftNet's Board of Directors since
October 1994. In addition, Mr. Aaron has served as President of ISP Channel
since June 1996 and as Vice President of SoftNet since December 1997. Prior to
joining SoftNet, Mr. Aaron served as President of Communicate Direct, Inc., a
telecommunications company, from 1988 to October 1994 and as Director of
Marketing, Sales and Product Development at GTE Business Communications.

Edward A. Bennett has served as a member of SoftNet's Board of Directors
since January 1998. Mr. Bennett has served as President and Chief Executive
Officer of Bennett Media Collaborative, a new media/Internet/technology
consulting company, since June 1997, Director and Vice Chairman of methodfive
LLC, an Internet services company, since June 1997 as Director of Spinner
Networks, an Internet music service, since December 1997, and as Director of
MY-CD, an Internet-based custom CD marketing company, since May 1998. Mr.
Bennett also served as President and Chief Executive Officer of Prodigy
Ventures, an Internet/technology investment firm from June 1996 to June 1997
and as President and Chief Executive Officer of Prodigy Services Corporation,
an Internet services company from 1995 to June 1996. Furthermore, Mr. Bennett
served as President and Chief Executive Officer of VH-1 Network, a television
programming company, from 1989 to 1994.

Sean P. Doherty has served as a member of SoftNet's Board of Directors
since May 1998. Mr. Doherty is currently an owner and Managing Partner of
Shoreline Associates I, LLC ("Shoreline Associates"), a private Silicon Valley
investment firm. Shoreline Associates invests in management buyouts, special
equity and venture capital for companies in the telecommunications and
broadcasting industries. Shoreline Associates is unaffiliated with Shoreline
Pacific Institutional Finance, the entity that arranged the five percent
convertible preferred stock offerings. From 1995 to 1997, Mr. Doherty was a
co-founder

<PAGE>

of @Home, serving as @Home's Chief Operating Officer and later as the President
of @Home's business-to-business services division, Work. Mr. Doherty was
previously the founder and Chief Executive Officer of TEAM Software, a
developer of workgroup applications for the Internet and corporate networks.
Mr. Doherty has also served as President of TradeNet, Inc., an on-line
transaction network for commodities traders.

Robert C. Harris, Jr. has served as a member of SoftNet's Board of
Directors since May 1998. Mr. Harris has served as a Senior Managing Director
and Head of Investment Banking in the San Francisco office of Bear, Stearns &
Co. Inc. since November 1997. Mr. Harris also serves as Director of MDSI Mobile
Data Solutions, Inc., N2K, Inc., and Xoom.com. Prior to joining Bear Stearns,
Mr. Harris was a co-founder and a Managing Director of Unterberg Harris, a
registered broker-dealer and investment advisory firm. From 1984 to 1989, Mr.
Harris was a General Partner, Managing Director, and Director of Alex. Brown &
Sons.

Board Meetings and Committees

The Board of Directors held 15 meetings and took action by written consent
eight times during the fiscal year ended September 30, 1998. Each director
attended at least 75% of the meetings of the Board of Directors and the
Committees on which he served.

The Board of Directors has three standing committees: the Audit Committee,
the Compensation/Stock Option Committee and an Executive Committee. There is no
nominating committee, however the Executive Committee performed the tasks of
the nominating committee during the fiscal year.

The Audit Committee, currently consisting of Messrs. Simon and Bennett,
had one meeting in fiscal 1998, which was attended by all of the then directors
of the Committee. The Audit Committee meets with the Company's financial
management and its independent accountants and reviews internal control
conditions, audit plans and results, and financial reporting procedures.

The Compensation/Stock Option Committee, currently consisting of Messrs.
Simon, Harris and Doherty, held informal meetings in fiscal 1998. The
Compensation/Stock Option Committee review and approves the Company's
compensation arrangements for key employees and administers the Company's 1995
Long Term Incentive Plan and, if proposal three is approved, the 1998 Stock
Incentive Plan.

The Executive Committee, currently consisting of Dr. Brilliant and Mr.
Simon, held informal meetings in fiscal 1998. The Executive Committee has all
the authority of the Board, except with respect to items requiring shareholder
approval or submission, the filling of Board or Committee vacancies, fixing
director compensation, amending or adopting Bylaws or amending or appealing
Board resolutions that are not amenable or repealable.

Director Compensation

Members of the Board who are not employees of the Company or of a
subsidiary of the Company are each paid a monthly retainer fee of $1,000 in
connection with their attendance and participation at Board meetings. Mr. Simon
is paid an additional $1,500 per month for his services as Chairman of the
Board. In addition, Board members are reimbursed for certain reasonable
expenses incurred in attending Board or committee meetings. Upon joining the
Board, each non-employee Board member also receives a purchase option grant for
shares of common stock under the 1998 Plan.

Dr. Brilliant and Mr. Aaron each receive compensation for their services
as executive officers of the Company. A description of these compensation
arrangements are set forth under "Executive Compensation--Employment and Change
of Control Agreements."

In addition, subject to approval of proposal three, existing non-employee
directors will each receive options to purchase 20,000 shares of common stock
at the Annual Stockholders Meeting held 2001 and additional options to purchase
20,000 shares of common stock at each third Annual Stockholders Meeting
thereafter if such person continues to be a director. See "Proposal
Three--Automatic Option Grant Program."

<PAGE>

A description of other transactions between directors and the Company is
set forth below in "Certain Relationships and Related Transactions."

Voting

The Company's charter provides for cumulative voting in the election of
directors. Cumulative voting allows a stockholder to give one candidate a
number of votes equal to the number of directors to be elected multiplied by
the number of shares of common stock held by such shareholder, or may
distribute such votes among as many candidates as the shareholder chooses. In
this way, a shareholder with a sufficient minority stake can elect a director.
Election of the named nominees requires approval by at least a majority of the
shares of common stock present in person or by proxy at the Annual Meeting.

THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR"
THE ELECTION OF THE NAMED NOMINEES.

<PAGE>

BENEFICIAL SECURITY OWNERSHIP OF MANAGEMENT
AND CERTAIN BENEFICIAL OWNERS
<TABLE>
The following table sets forth certain information known to the Company
regarding beneficial ownership of the common stock as of March 2, 1999 by (i)
each person known by the Company to be the beneficial owner of more than five
percent of the outstanding shares of the common stock, (ii) each current
director of the Company, (iii) the Chief Executive Officer and each of the
other executive officers of the Company and (iv) all executive officers and
directors of the Company as a group. All shares are subject to the named
person's sole voting and investment power except where otherwise indicated.

<CAPTION>
Number of Shares Percentage of
of Common Stock Outstanding Shares
Name of Beneficial Owner Beneficially Owned(1) Beneficially Owned(1)(2)
- ----------------------------------------------------- ----------------------- --------------------------
<S> <C> <C>
Executive Officers and Directors:
Ronald I. Simon(3) .................................. 15,167 *
Lawrence B. Brilliant(4) ............................ 113,333 1.2%
Garret J. Girvan(5) ................................. 35,000 *
Douglas S. Sinclair ................................. -- --
Steven M. Harris .................................... 4,000 *
Ian B. Aaron(6) .................................... 297,262 3.0%
Edward A. Bennett(7) ................................ 77,667 *
Sean P. Doherty(8) .................................. 118,260 1.2%
John G. Hamm(9) ..................................... 64,430 *
Robert C. Harris, Jr. ............................... -- --
---------- -----
As a Group (ten) ................................. 725,119 7.2%

5% Owners:
White Rock Capital, Inc.(10) ........................ 930,300 9.6%
R.C.W. Mauran(11) ................................... 694,128 6.8%
RGC International Investors, LDC(12)(13) ............ 1,520,484 13.8%
Stark International(13)(14) ......................... 732,514 7.0%
Shepherd Investment International LTD(13)(15) ....... 391,168 3.9%
---------- -----
Subtotal ......................................... 4,268,594 34.4%
<FN>
- ------------
* Less than 1%

(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission, except with respect to RGC (see
footnote 11 below). Shares of common stock which are issued and
outstanding are deemed to be beneficially owned by any person who has or
shares voting or investment power with respect to such shares. Shares of
common stock which are issuable upon exercise of options or warrants are
deemed to be issued and outstanding and beneficially owned by any person
who has or shares voting or investment power over such shares only if the
options or warrants in question are exercisable within 60 days of March 2,
1999 and, in any event, solely for purposes of calculating that person's
percentage ownership of SoftNet's common stock (and not for purposes of
calculating the percentage ownership of any other person).

(2) The number of shares of common stock deemed outstanding and used in the
denominator for determining percentage ownership for each person equals
(i) 9,741,931 shares of common stock outstanding as of March 2, 1999 plus
(ii) such number of shares of common stock as are issuable pursuant to
options, warrants or Preferred Stock held by that person (and excluding
options held by other persons) which may be exercised within 60 days of
March 2, 1999.

(3) Includes 9,167 shares issuable pursuant to options exercisable within 60
days of March 2, 1999.

(4) Includes (i) 103,333 shares issuable pursuant to options exercisable within
60 days of March 2, 1999 and (ii) 10,000 shares previously held jointly
with Dr. Brilliant's mother, Mrs. Sylvia Bloom, which were gifted to her
in December 1998 and for which Dr. Brilliant disclaims beneficial
ownership.

(5) Includes 25,000 shares issuable pursuant to options exercisable within 60
days of March 2, 1999.

<PAGE>

(6) Includes 150,833 shares issuable pursuant to options exercisable within 60
days of March 2, 1999.

(7) Includes 61,667 shares issuable pursuant to options exercisable within 60
days of March 2, 1999.

(8) Includes 20,000 shares issuable upon exercise of warrants held in the name
of Shoreline Associates I, LLC, of which Mr. Doherty is an owner.

(9) Consists of 44,430 shares held jointly with Mr. Hamm's wife and 20,000
shares issuable pursuant to options exercisable within 60 days of March 2,
1999. Mr. Hamm resigned from the Company's Board of Directors, effective
February 16, 1999, and as a result all of his options were vested in full.

(10) Consists of shares of common stock (i) held for the accounts of certain
institutional clients of White Rock Capital Management, L.P., (ii) held by
White Rock Capital Partners, L.P. and (iii) held by White Rock Capital
Management, L.P.

(11) Includes 179,640 shares issuable upon conversion of 9% Convertible
Subordinated Debentures, 175,000 shares issuable upon conversion of 5%
Convertible Subordinated Debentures and 81,481 shares issuable upon
conversion of 6% Convertible Subordinated Secured Debentures issued by
Micrographic Technology Corporation. Shares listed reflect shares held by
Eurocredit Investments, Ltd., a Maltese company that is wholly-owned by
Mr. Mauran.

(12) As of March 2, 1999, RGC held (i) 249,468 shares of common stock, (ii)
423,750 shares of common stock issuable upon exercise of warrants, and
(iii) 847,266 shares of common stock issuable upon conversion of the
Series C Preferred Stock at the conversion price in effect as of March 2,
1999, which is $9.00 per share. The actual number of shares of common
stock issuable upon conversion of the Preferred Stock is indeterminable
and is subject to adjustment based on various factors, including the
floating rate conversion price mechanism contained in the terms of the
Preferred Stock. However, the Series C Preferred Stock cannot convert into
more than 2,000,000 shares of common stock.

(13) The number of shares into which RGC can convert and the manner of such
conversion is limited by SoftNet's Certificate of Incorporation.
Similarly, the number of shares into which Stark International and
Shepherd Investment International can convert and the manner of such
conversion is limited by the 9% senior subordinated convertible notes due
2001. A holder of the Series C Preferred Stock or 9% senior subordinated
convertible notes due 2001 cannot convert its Series C Preferred Stock or
9% senior subordinated convertible notes due 2001 in the event such
conversion would result in beneficial ownership of more than 4.99% of the
common stock (not including shares underlying such securities).
Notwithstanding this limitation, the holders of the Preferred Stock cannot
convert into an aggregate of more than 19.99% of the common stock without
the approval of the common stock shareholders, which is being sought by
proposal four.

Accordingly, the number of shares of common stock and percentage ownership
set forth for RGC, Stark International and Shepherd Investment
International may exceed the number of shares of common stock it
beneficially own as of the date of this Proxy Statement. In that regard,
the table may not adequately represent the beneficial ownership of RGC,
Stark International and Shepherd Investment International.

(14) Includes (i) 61,926 shares of common stock, (ii) 200,000 shares of common
stock issuable upon exercise of warrants, and (iii) 470,588 shares of
common stock issuable upon conversion of the 9% senior subordinated
convertible notes due 2001 at the conversion price in effect as of March
2, 1999, which is $17.00 per share. The actual number of shares of common
stock issuable upon conversion of the 9% senior subordinated convertible
notes due 2001 is indeterminable and is subject to adjustment based on
various factors, including the floating rate conversion price mechanism
contained in the terms of the 9% senior subordinated convertible notes due
2001.

(15) Includes (i) 55,874 shares of common stock, (ii) 100,000 shares of common
stock issuable upon exercise of warrants, and (iii) 235,294 shares of
common stock issuable upon conversion of the 9% senior subordinated
convertible notes due 2001 at the conversion price in effect as of March
2, 1999, which is $17.00 per share. The actual number of shares of common
stock issuable upon conversion of the 9% senior subordinated convertible
notes due 2001 is indeterminable and is subject to adjustment based on
various factors, including the floating rate conversion price mechanism
contained in the terms of the 9% senior subordinated convertible notes due
2001.
</FN>
</TABLE>
7

<PAGE>

EXECUTIVE COMPENSATION

Executive Officers
<TABLE>
The executive officers and certain other key employees of the Company are
listed below:

<CAPTION>
Name Age Positions
- ---------------------------------- ----- -------------------------------------------------------
<S> <C> <C>
Dr. Lawrence B. Brilliant ........ 54 Vice Chairman of the Board, President and
Chief Executive Officer
Garrett J. Girvan ............... 53 Chief Operating Officer
Douglas S. Sinclair .............. 44 Chief Financial Officer
Steven M. Harris ................. 44 Vice President, External Affairs, Secretary, and
General Counsel
Ian B. Aaron ..................... 38 Vice President, President of ISP Channel, Inc.
and Director
Kevin Gavin ...................... 40 Senior Vice President, Marketing of ISP Channel, Inc.
</TABLE>

Dr. Brilliant's and Mr. Aaron's backgrounds are summarized under "Election
of Directors--Nominees" above.

Garrett J. Girvan has served as SoftNet's Chief Operating Officer since
April 1998 and also served as SoftNet's Chief Financial Officer from April 1998
to November 1998. Prior to joining SoftNet, Mr. Girvan held various positions
at Viacom Cable over a 13-year period, including Chief Financial Officer and
Chief Operating Officer. While at Viacom, Mr. Girvan was involved in the
development of Viacom's broadband services.

Douglas S. Sinclair has served as SoftNet's Chief Financial Officer since
November 1998. Prior to joining SoftNet, Mr. Sinclair served as Chief Financial
Officer of Silicon Valley Networks, Inc., a provider of test management
software to telecommunications and networking companies, from April 1998 to
November 1998, Chief Financial Officer of International Wireless
Communications, Inc., an international cellular business operator, from 1995 to
April 1998, Chief Financial Officer of Pittencrieff Communications Inc.
("PCI"), then a leading provider of trunked radio services in the southwest
United States, from 1993 to 1995 and Chief Financial Officer of Pittencrieff
plc., an oil and gas company based in the United Kingdom, from 1990 to 1993.
Mr. Sinclair took both Pittencrieff plc and PCI public during his tenures as
Chief Financial Officer. International Wireless Communications, Inc. filed for
protection under the bankruptcy laws of the United States in September 1998.

Steven M. Harris has served as Vice President, Secretary and General
Counsel to SoftNet since August 1998. Prior to joining SoftNet, Mr. Harris
worked at Pacific Telesis Group, most recently as Vice President-of Broadband
Services, where he was responsible for external affairs and policy planning for
video services and broadband networks. Previously, he was Executive Director of
Regulatory Planning and Policy for Pacific Bell with responsibility for federal
and state regulatory policies relating to competition, corporate structure,
interconnection, privacy and new technologies. He began with Pacific Telesis
Group in 1983 as Executive Director of Regulatory Relations, in Washington,
D.C. Mr. Harris was Commissioner's Assistant and Special Assistant to the
General Counsel at the Federal Communications Commission and was previously in
private practice.

Kevin Gavin has served as SoftNet's Senior Vice President, Marketing since
November 1998. Prior to joining SoftNet, he served as Regional Vice President
of Teligent, Inc. From November 1991 to January 1996, he was Vice President of
Marketing and Product Development at Nextel Communications. From 1981 to 1991,
Mr. Gavin held various marketing and sales positions at Warner Cable
Communications, Inc., American Cablesystems, Inc., and McCaw Cellular
Communications, Inc.

<PAGE>

Summary of Cash and Certain Other Compensation
<TABLE>
The following table sets forth information for the last three fiscal years
concerning compensation paid or accrued by the Company to (i) the current and
former Chief Executive Officer of the Company and (ii) the three other most
highly compensated executive officers of the Company whose total annual salary
and incentive compensation for fiscal year 1998 exceeded $100,000
(collectively, the "Named Officers").

<CAPTION>
Long-Term
Compensation
Awards
--------------
Annual Securities
Compensation Other Annual Underlying
Name and Principal Position Year Salary($) Bonus($) Compensation Options
- ------------------------------- ------ ----------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Dr. Lawrence B. Brilliant(1) 1998 $128,396 -- -- 200,000
President and Chief Executive 1997 -- -- -- --
Officer 1996 -- -- -- --

Garrett J. Girvan(2) 1998 $ 89,623 -- -- 75,000
Chief Operating Officer and 1997 -- -- -- --
Chief Financial Officer 1996 -- -- -- --

Steven M. Harris(3) 1998 $ 22,212 -- -- --
Vice President, Secretary and 1997 -- -- -- --
General Counsel 1996 -- -- -- --

Ian B. Aaron 1998 $202,889 -- -- 174,500
Vice President, President of 1997 $156,000 -- -- 16,000
ISP Channel, Inc. 1996 $189,000 -- -- 31,000

A.J.R. Oosthuizen(4) 1998 $245,820 -- -- 52,400
Former President and 1997 $200,000 -- -- 75,000
Chief Executive Officer 1996 $200,000 $80,000 -- 31,000
<FN>
- ------------
(1) Dr. Brilliant joined the Company as Chief Executive Officer on April 6,
1998. Prior to that he served on the Board of Directors. His annual salary
for fiscal 1998 was $250,000.

(2) Mr. Girvan joined the Company on April 6, 1998. His annual salary for
fiscal 1998 was $200,000.

(3) Mr. Harris joined the Company on August 17, 1998. His annual salary for
fiscal 1998 was $175,000.

(4) Mr. Oosthuizen resigned as a director and from all executive positions with
the Company effective April 6, 1998. On April 6, 1998, pursuant to the
terms of a separation and release agreement (the "Separation Agreement"),
Mr. Oosthuizen resigned as a director and his employment with the Company
terminated. Pursuant to this Separation Agreement, Mr. Oosthuizen became a
consultant to the Company at a monthly salary of $20,000. This consultancy
arrangement was terminated as of October 31, 1998.
</FN>
</TABLE>

<PAGE>

Stock Option Information
<TABLE>
Option Grants in Fiscal 1998. The following table sets forth information
with respect to stock options granted by the Company to the Named Officers
during Fiscal 1998. No stock appreciation rights were granted in Fiscal 1998.

<CAPTION>
Individual Grants
------------------------------------------------------------------ Potential Realizable
Number of Value at Assumed
Annual Rates of Stock
Securities Percent of Total Exercise Price
Underlying Options granted or Base Appreciation for
Options to employees in Price Expiration Option Term(5)
Name Granted(#)(1) fiscal year(2) ($/Sh)(3) Date(4) 5%($) 10%($)
- ----------------------------- --------------- ------------------ ------------ ------------ --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Dr. Lawrence B.
Brilliant(6) ............ 7,500 1% 6.88 1/8/08 32,000 82,000
67,500 6% 6.63 3/5/08 281,000 713,000
125,000 11% 8.45 4/7/08 664,000 1,683,000

Garrett J. Girvan(7) ...... 75,000 7% 8.75 4/6/08 413,000 1,046,000

Steven M. Harris ......... -- -- -- -- -- --

Ian B. Aaron ............... 174,500 16% 6.88 1/8/08 755,000 1,913,000

A.J.R. Oosthuizen(8) ...... 52,400 5% 6.88 1/8/08 227,000 575,000
<FN>
- ------------
(1) Options granted under the 1995 Long-Term Incentive Plan generally become
exercisable at a rate of one-third of the shares of common stock
underlying to the option at the end of each year until fully vested or the
employee leaves the Company. Options granted under the 1998 Stock
Incentive Plan generally become exercisable for 25% of the option shares
upon completion of one (1) year of service measured from the grant date
and for the balance of the option shares in a series of 36 successive
equal monthly installments over the three (3) year period of service
thereafter.

(2) The Company granted options to employees to purchase 1,070,200 shares of
common stock during Fiscal 1998. In addition, options to purchase 73,333
shares were granted to non-employee consultants during fiscal 1998.

(3) The exercise price may be paid in (a) cash, (b) shares of common stock held
for the requisite period to avoid a charge to the Company's earnings for
financial reporting purposes, (c) through a same-day sale program or (d)
subject to the discretion of the Plan Administrator, by delivery of a
full-recourse, secured promissory note payable to the Company.

(4) The term of the options is typically 10 years.

(5) Potential realizable value is based on the assumption that the price of the
common stock underlying the option appreciates at the annual rate shown,
compounded annually from the date of grant until the end of the option
term. The values are calculated in accordance with rules promulgated by
the SEC and do not reflect the Company's estimate of future stock
appreciation.

(6) In Fiscal 1998, Dr. Brilliant received options to purchase 20,000 shares of
common stock pursuant to his nomination to the Board of Directors. Dr.
Brilliant also received an additional option grant of 55,000 shares of
common stock pursuant to a consulting agreement. Subsequently, Dr.
Brilliant was appointed President and Chief Executive Officer of the
Company, pursuant to which he received an additional option grant of
125,000 shares of common stock.

(7) In Fiscal 1998, Mr. Girvan received options to purchase 75,000 shares of
common stock upon his appointment to serve as the Company's Chief
Operating Officer and Chief Financial Officer. Mr. Girvan was replaced as
Chief Financial Officer in November 1998.

(8) Upon his resignation as an officer and director on April 6, 1998, Mr.
Oosthuizen's options were vested in full. In addition, Mr. Oosthuizen
exercised options to purchase 75,000 shares during Fiscal 1998, each with
an exercise price of $4.94.
</FN>
</TABLE>

<PAGE>

<TABLE>
Aggregated Year-End Option Values. The following table sets forth certain
information concerning the number of options exercised by the Named Officers
during the last fiscal year ended September 30, 1998, and the number of shares
covered by both exercisable and unexercisable stock options held by the Named
Officers as of September 30, 1998. Also reported are values for "in-the-money"
options that represent the positive spread between the respective exercise
prices of outstanding options and the fair market value of the Company's common
stock as of September 30, 1998 ($10.125).

<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised Options In-the-Money Options at
at September 30, 1998(#) September 30, 1998($)
Name Exercisable Unexercisable Exercisable Unexercisable
- ---------------------------------- ------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C>
Dr. Lawrence B. Brilliant ........ 55,000 145,000 193,000 279,000
Garrett J. Girvan ................ -- 75,000 -- 103,000
Steven M. Harris ................. -- -- -- --
Ian B. Aaron .................... 92,667 128,833 382,000 429,000
A.J.R. Oosthuizen(1) ............. 83,400 -- 329,000 --
<FN>
- ------------
(1) Upon his resignation as an officer and director on April 6, 1998, Mr.
Oosthuizen's options were vested in full. In addition, Mr. Oosthuizen
exercised options to purchase 75,000 shares during Fiscal 1998, each with
an exercise price of $4.94.
</FN>
</TABLE>

Ten-Year Option Repricings. On November 15, 1996, the Compensation/Stock
Option Committee approved a stock option repricing program to provide employee
option holders additional opportunity and incentive to achieve business plan
goals. All options held by employees on that date were repriced to $4.94 per
share, which was the market price on such date. All other terms of the options
remained the same and, accordingly, there was no change to the vesting or term
of any option.

<TABLE>
The table below presents the required disclosure with respect to any
repricing of options held by any Named Officers during the last ten completed
years.
<CAPTION>
Length of Original
Number of Securities Market Price of Exercise Price Option Term
Underlying Options Stock at Time at Time of Remaining at Date
Repriced or of Repricing or Repricing or New Exercise of Repricing or
Name Date Amended(#) Amendment($) Amendment($) Price($) Amendment (Years)
- -------------------------- ---------- ---------------------- ------------------ ---------------- -------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Ian B. Aaron ............. 2/28/96 31,000 $ 8.25 $ 12.75 $ 8.25 9.6
11/15/96 31,000 (1) $ 4.94 $ 8.25 $ 4.94 8.9

A.J.R. Oosthuizen ........ 2/28/96 31,000 $ 8.25 $ 12.75 $ 8.25 9.6
11/15/96 31,000 (1) $ 4.94 $ 8.25 $ 4.94 8.9
<FN>
- ------------
(1) Options repriced on February 28, 1996 at the then current market price of
$8.25 and were further repriced on November 15, 1996 at the then current
market price of $4.94.
</FN>
</TABLE>

Employment and Change of Control Agreements

On September 15, 1995, MTC entered into an employment agreement with Mr.
Oosthuizen, a director of the Company, pursuant to which Mr. Oosthuizen became
President of MTC. In July 1997, Mr. Oosthuizen was named Chief Executive
Officer of the Company and was granted an annual salary of $200,000 plus a
bonus as determined by the Board of Directors in accordance with the Company's
Incentive Compensation Plan. No bonus was paid to Mr. Oosthuizen with respect
to Fiscal 1997. On October 1, 1997, Mr. Oosthuizen's annual salary was
increased to $240,000. On April 6, 1998, pursuant to the terms of a separation
and release agreement (the "Separation Agreement"), Mr. Oosthuizen resigned as
a director and his employment with the Company terminated. Pursuant to this
Separation Agreement, Mr. Oosthuizen became a consultant to the Company at a
monthly salary of $20,000. This consultancy arrangement was terminated as of
October 31, 1998.

On April 7, 1998, the Company entered into an employment agreement with
Dr. Lawrence B. Brilliant, a director of the Company, pursuant to which Dr.
Brilliant was appointed Vice Chairman of the

<PAGE>

Board, President and Chief Executive Officer of the Company for a term of three
years. Under the terms of this employment agreement, Dr. Brilliant was granted
an annual salary of $250,000 per year plus such bonuses as the Compensation
Committee may establish from time to time. Concurrently with the signing of
this employment agreement, Dr. Brilliant received a Non-Qualified Stock Option
to purchase from the Company a total of 125,000 shares of common stock under
the terms of the Long Term Incentive Plan.

Under the Company's 1998 Stock Incentive Plan, approval of which is being
sought by proposal three, in the event that the Company is acquired by merger
or sale of substantially all of its assets, each outstanding option or other
award under the 1998 Stock Incentive Plan will immediately vest, except to the
extent the Company's obligations under that option or award assumed by the
successor corporation or such successor corporation substitutes an award with
substantially the same economic value.

Under the Company's Amended 1995 Long-Term Incentive Plan (the "1995
Plan"), upon an acquisition of the Company pursuant to a merger or asset sale,
the option will, at the discretion of the Stock Option Committee, either be
assumed by any successor entity, with or without accelerated vesting of the
option shares, or terminate upon the acquisition following a thirty (30)-day
period during which the option will be exercisable in full on an accelerated
basis.

Under the Company's Employee Stock Option Plan (the "Option Plan"), in the
event the Company is acquired by merger or sale of substantially all of its
assets, each outstanding option will be either be assumed by the successor
corporation or replaced by the successor corporation with an option with
substantially the same economic value.

The Company currently has no other compensatory plan or arrangement with
any of the Named Officers where the amounts paid exceed $100,000 and which are
activated upon resignation, termination or retirement of any such Named Officer
upon a change in control of the Company.

Indemnification of Directors and Limitation of Liability

The Company's Bylaws provide that the Company may indemnify its directors,
officers and other employees and agents to the fullest extent permitted by law.
The Company has also entered into agreements to indemnify its directors and
executive officers, in addition to the indemnification provided for in the
Company's Bylaws. The Company believes that these provisions and agreements are
necessary to attract and retain qualified directors and executive officers. At
present, there is no pending litigation or proceeding involving any director,
officer, employee or agent of the Company where indemnification will be
required or permitted. The Company is not aware of any threatened litigation or
proceeding that might result in a claim for such indemnification. Insofar as
indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers or persons controlling the Company pursuant to
the foregoing provisions, the Company has been informed that, in the opinion of
the Commission, such indemnification is against public policy as expressed in
the Securities Act and is therefore unenforceable.

<PAGE>

COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION

The Compensation Committee is responsible for the Company's executive
compensation policies and for annually determining the compensation to be paid
to the executive officers of the Company. During Fiscal 1998, the Board of
Directors assumed all of the responsibilities of the Compensation Committee.

Overview and Philosophy

The executive compensation program of the Company is intended to provide
overall levels of compensation for the executive officers which are competitive
for the industries and the geographic areas within which they operate, the
individual's experience and contribution to long-term success of the Company.
The Board believes that its task of determining fair and competitive
compensation is ultimately judgmental.

The program is composed of base salary, annual incentive compensation,
equity based incentives and other benefits generally available to all
employees. As of September 30, 1998, options on 1,320,125 shares of the
Company's common stock were outstanding and 1,070,200 options were granted to
employees during the fiscal year ended September 30, 1998.

Base Salary

The base salary for each executive is intended primarily to be competitive
with companies in the industries and geographic areas in which the Company
competes. In making annual adjustments to base salary, the Board also considers
the individual's performance over a period of time as well as any other
information which may be available as to the value of the particular
individual's past and prospective future services to the Company. This
information includes comments and performance evaluations by the Company's
Chief Executive Officer and Chief Operating Officer. The Board considers all
such data; it does not prescribe the relative weight to be given to any
particular component.

Annual Incentive Compensation

Annual incentive compensation is ordinarily determined by a formula which
considers the overall operations and financial performance of the Company and
its subsidiaries.

Long-Term Incentives

In general, the Board believes that equity based compensation should form
a part of an executive's total compensation package. Stock options are granted
to executives because they directly relate the executive's earnings to the
stock price appreciation realized by the Company's stockholders over the option
period. Stock options also provide executives the opportunity to acquire an
ownership interest in the Company. The number of shares covered by each
executive's option is determined by factors similar to those considered in
establishing base salary.

Stock Option Repricing Program

On February 28, 1996, the Board of Directors approved a stock option
repricing program to provide employee option holders additional opportunity and
incentive to achieve business plan goals. The exercise prices for all options
held by employees on that date were repriced to $8.25 per share, which was the
market price on that date. All other terms of the options remained the same
and, accordingly, there was no change to the vesting or term of any option. In
addition, on November 15, 1996, the Board of Directors approved an additional
stock option repricing program to further provide employee option holders with
additional opportunity and incentive to achieve business plan goals. All
options held by employees on November 15, 1996 were repriced to $4.94 per
share, which was the market price on that date.

Other

Other benefits are generally those available to all other employees in the
Company, or a subsidiary, as appropriate. Together with perquisites, these
benefits did not exceed 10% of any executive's combined salary and bonus in
Fiscal 1998.

<PAGE>

Compensation for Chief Executive Officer

The Board applies the same standard in establishing the compensation of
the Company's Chief Executive Officer as are used for other executives.
However, there are procedural differences. The Chief Executive Officer does not
participate in setting the amount and nature of the compensation. Mr.
Oosthuizen did not receive a bonus for Fiscal 1998.

Deduction Limit for Executive Compensation

Section 162(m) of the Internal Revenue Code, enacted in 1993, generally
disallows a tax deduction to publicly held companies for compensation exceeding
$1 million paid to certain of the corporation's executive officers. The
limitation applies only to compensation which is not considered to be
performance-based compensation. Compensation which qualifies as
performance-based compensation will not have to be taken into account for
purposes of this limitation. The non-performance based compensation to be paid
to the Company's executive officers for Fiscal 1998 did not exceed the $1
million limit per officer, nor is it expected that the non-performance based
compensation to be paid to the Company's executive officers for Fiscal 1999
will exceed that limit. Because it is very unlikely that the compensation
payable to any of the Company's executive officers in the foreseeable future
will approach the $1 million limit, the Board has not taken any action to limit
or restructure the elements of cash compensation payable to the Company's
executive officers. The Board will reconsider this matter should the individual
compensation of any executive officer ever approach the $1 million level.

This report is submitted by the Compensation Committee of the Board of
Directors of the Company, as of the fiscal year ended September 30, 1998.

Sean P. Doherty, Chairman
Ronald I. Simon
Robert C. Harris, Jr.

<PAGE>

PERFORMANCE GRAPH

Set forth below is a comparison of the total stockholder return on the
Company's common stock for the period beginning September 30, 1993 and ending
September 30, 1998 with the total stockholder return for the same period for
the AMEX Stock Market Index (a broad equity market index which includes the
stock of companies traded on AMEX) and the AMEX Computer Programming, Data
Processing, & Other Computer Related Services Industrial Index (an index
including companies with primary SIC 7370-7379). The total stockholder return
reflects the annual change in share price, assuming an investment of $100.00 on
September 30, 1993 plus the reinvestment of dividends, if any. No dividends
were paid on the Company's common stock during the period shown. The return
shown is based on the annual percentage change during each fiscal year in the
five year period ended September 30, 1998. The stock price performance shown
below is not necessarily indicative of future stock price performance.
<TABLE>
[The following descriptive data is supplied in accordance with Rule 304(d) of
Regulation S-T]
<CAPTION>
Comparison of Five Year Cumulative Total Returns

Sep-30-93 Sep-30-94 Sep-29-95 Sep-29-96 Sep-30-97 Sep-30-98
<S> <C> <C> <C> <C> <C> <C>
SoftNet Systems, Inc. $100.00 ****CUSTOMER TO SUPPLY****
AMEX Stock Market Index $100.00 ****CUSTOMER TO SUPPLY****
AMEX Computer Industrial Index $100.00 ****CUSTOMER TO SUPPLY****
</TABLE>

<PAGE>

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Issuance of 5% Convertible Subordinated Debentures

In fiscal 1998, the Company issued $1,443,750 principal amount of its 5%
Convertible Subordinated Debentures due September 30, 2002 to Mr. R.C.W.
Mauran, a beneficial owner of more than 5% of the Company's common stock, in
exchange for the assignment to the Company of certain equipment leases and
other consideration. The debentures are convertible into common stock of the
Company at $8.25 per share, after December 31, 1998.

Issuance of Preferred Stock

The terms of the five percent convertible preferred stock limit its
holders, such as RGC, from beneficially owning more than 4.99% of the common
stock. Nonetheless, the Company lists the five percent convertible preferred
stock transactions here because RGC has the ability to convert into a
substantial number of shares of common stock in the aggregate.

On December 31, 1997, the Company issued to RGC, 5,000 shares of its
Series A Preferred Stock and warrants to purchase 150,000 shares of common
stock at an exercise price of $7.95 per share (the "Series A Warrants") for an
aggregate purchase price of $5,000,000. As of the Record Date, there were no
shares of Series A Preferred Stock outstanding.

On May 29, 1998, the Company issued to RGC and Shoreline Associates I, LLC
("Shoreline"), 9,000 and 1,000 shares, respectively, of its Series B Preferred
Stock and warrants to purchase 180,000 and 20,000 shares, respectively, of
common stock (the "Series B Warrants"), for an aggregate purchase price of
$10,000,000. The Series B Warrants have an exercise price of $13.75 per share.
Subsequent to the Record Date, all of the Series B Preferred Stock was
converted and no shares remain outstanding.

On August 31, 1998, the Company issued to RGC 7,500 shares of its Series C
Preferred Stock and warrants to purchase 93,750 shares of common stock at an
exercise price of $9.375 per share (the "Series C Warrants") for an aggregate
purchase price of $7,500,000. Prior to May 31, 1999, the conversion price of
the Series C Preferred Stock (the "Series C Conversion Price") is $9.00.
Thereafter, the Series C Conversion Price will be the lower of $9.00 (subject
to an escalation provision pending certain market conditions around such date)
and a five day average market price within a 30-day trading period prior to
conversion, subject to adjustment upon certain conditions. As of the Record
Date, 7,625.39 shares of Series C Preferred Stock were outstanding as a result
of payment of additional shares of Series C Preferred Stock as dividends.

Sale of Certain CDI Assets

During Fiscal 1997, Communicate Direct, Inc., a wholly-owned subsidiary of
the Company ("CDI"), sold the portion of its operations that support its Fujitsu
maintenance base in the Chicago metropolitan area to a new company formed by
John I. Jellinek, a former president and Chief Executive Officer and a then
director of the Company, and Philip Kenny, a then director of the Company. The
buyers acquired certain assets of CDI in exchange for a $209,000 promissory note
and the assumption of trade payables of approximately $750,000. In addition, at
the closing the buyers repaid $438,000 of existing Company bank debt and entered
into a sub-lease of CDI's facility in Buffalo Grove, Illinois. At the closing,
the buyer merged with Telcom Midwest, LLC. and Messrs. Jellinek and Kenny and
two other shareholders of the merged company personally guaranteed obligations
arising out of the promissory note, the sub-lease arrangement and trade
payables. The personal guarantees of the promissory note are several. The
personal guarantees of the sub-lease are limited to $400,000 and are on a joint
and several basis. The personal guarantees of trade payables are on a joint and
several basis but are limited to Messrs. Jellinek and Kenny. Concurrent with
this transaction, Messrs. Jellinek and Kenny resigned from the Company's board.
The transaction was approved by the disinterested members of the Company's
board.

IMNET Software Inc.

In June 1996, the Company acquired the exclusive worldwide manufacturing
rights to IMNET's MegaSAR Microfilm Jukebox (the "IMNET Agreement") and
completed and amended its obligations

<PAGE>

under a previous agreement with IMNET. Per the terms of the IMNET Agreement,
the Company issued a $2.9 million note for prepaid license fees, software
inventory, manufacturing rights, and certain other payables. Approximately $2.5
million was paid on this note during the fourth quarter of Fiscal 1996.
Subsequently, in Fiscal 1997, the outstanding $410,000 promissory note was
further reduced by $249,000, and a new promissory note in the face amount of
$161,000 was executed. This transaction was approved by the disinterested
members of the Company's board. Following the transaction, John J. McDonough
and John I. Jellinek resigned from the Board of Directors of IMNET board and
James Gordon, a director of IMNET, resigned from the Company's board.

During the fourth quarter of Fiscal 1996, the Company decided to integrate
the IMNET microfilm retrieval software with another software developer's
product then being distributed by the Company, requiring less IMNET software
than previously assumed. As a result, the Company recorded a one-time charge of
$1.5 million to write off software inventory. Subsequent to the acquisition of
the manufacturing rights from IMNET, technical difficulties delayed the
transfer of technical and manufacturing know-how. In September 1997, the
Company recorded a one-time charge to write off the remaining $1.0 million in
assets associated with the IMNET Agreement. The Company is currently in
negotiations with IMNET to complete the transfer of the technical and
manufacturing know-how.

During Fiscal 1996, the Company sold its entire holdings in IMNET for net
proceeds of $7.7 million. Accordingly, the Company recorded a gain on the sale
of securities of $5.7 million.

Employment Agreement with Mr. Oosthuizen

Consulting Payments to Mr. Hamm

In Fiscal 1994, the Board voted to compensate Mr. John Hamm, a former
director of the Company, $150,000, payable in installments, for previously
uncompensated services that he rendered to the Company as a consultant over the
prior ten years. The Company's entire obligation to Mr. Hamm with respect to
this unpaid compensation was satisfied as of January 1998.

COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

Under the securities laws of the United States, the Company's directors,
its executive (and certain other) officers, and any person holding more than
ten percent of the Company's common stock are required to report their
ownership of common stock and any changes in that ownership to the Securities
and Exchange Commission (the "Commission") and any exchange or quotation system
on which the common stock is listed or quoted. Specific due dates for these
reports have been established and the Company is required to report in this
proxy statement any failure to file by these dates. During the fiscal year
ended September 30, 1998, to the knowledge of the Company, all of these filings
were satisfied by its directors and officers. In making this statement, the
Company has relied on the written representations of its directors and officers
and copies of the reports they have filed with the Commission. The Company does
not have any ten percent stockholders.

<PAGE>

PROPOSAL TWO

APPROVAL OF AN INCREASE OF
THE AUTHORIZED CAPITAL SHARES

The current authorized capital stock of the Company consists of 25,000,000
shares of common stock, $.01 par value, of which 8,844,736 shares of common
stock were issued and outstanding as of the Record Date. The Board of
Directors, on October 6, 1998, adopted a resolution to increase the authorized
number of shares of common stock from 25,000,000 to 100,000,000. The proposed
increase would change the Company's capitalization and requires approval of the
stockholders.

Holders of common stock are entitled to one vote per share on all matters
submitted to a vote of stockholders of the Company and to ratably receive
dividends, if any, as may be declared from time to time by the Board of
Directors from funds legally available therefor. Upon liquidation, dissolution
or winding up of the Company, holders of common stock are entitled to share
ratably in any assets available for distribution to stockholders after payment
of all obligations of the Company.

If the proposed amendment is approved, all or any part of the authorized
but unissued shares of common stock may thereafter be issued without further
approval from the stockholders, except as may be required by law or the
policies of any stock exchange or stock market on which the shares of stock of
the Company may be listed or quoted, for such purposes and on such terms as the
Board of Directors may determine. Holders of the capital stock of the Company
do not have any preemptive rights to subscribe for the purchase of any shares
of common stock, which means that current stockholders do not have a prior
right to purchase any new issue of common stock in order to maintain their
proportionate ownership.

The proposed amendment will not affect the rights of existing holders of
common stock except to the extent that further issuances of common stock will
reduce each existing stockholder's proportionate ownership.

The Board of Directors has determined that it would be appropriate for the
Company to increase the number of its authorized shares of common stock in
order to have additional shares available for possible future acquisition or
financing transactions and other issuances. The Board of Directors believes
that the complexity of customary financing, employment and acquisition
transactions requires that the Directors be able to respond promptly and
effectively to opportunities that involve the issuance of shares of common
stock. For example, if this proposal two is approved, the Company will have the
flexibility to authorize stock splits and stock dividends and to enter into
joint ventures and corporate financings involving the issuance of shares of
common stock. The Company has no present agreements, understandings or
arrangements regarding transactions expected to require issuance of the
additional shares of common stock that would be authorized by the proposed
amendment. However, the industry in which the Company is operating is changing
rapidly, and the Company is continuously evaluating potential strategic
relationships.

The flexibility of the Board of Directors to issue additional shares of
common stock could enhance the Board of Directors' ability to negotiate on
behalf of stockholders in a takeover situation. Although it is not the purpose
of the proposed amendment, the authorized but unissued shares of common stock
also could be used by the Board of Directors to discourage, delay or make more
difficult a change in control of the Company. For example, such shares could be
privately placed with purchasers who might align themselves with the Board of
Directors in opposing a hostile takeover bid. The issuance of additional shares
of common stock might serve to dilute the stock ownership of persons seeking to
obtain control and thereby increase the cost of acquiring a given percentage of
the outstanding shares. The Board of Directors is not aware of any pending or
proposed effort to acquire control of the Company.

If this proposal two (Approval to Increase the Authorized Capital Shares)
is adopted by the Company's stockholders, it will become effective on either of
(i) the date the merger contemplated by proposal six herein (Reincorporation of
the Company in Delaware) is effected if proposal six is approved by the
Company's stockholders, or (ii) on the date a certificate of amendment is filed
to amend SoftNet-NY's Certificate of Incorporation in New York, if proposal six
is not approved by the Company's stockholders.

<PAGE>

Approval of this proposal two requires the affirmative vote of the holders
of at least a majority of the shares of the common stock present in person or
by proxy at the Annual Meeting.

Recommendation of the Board of Directors

THE BOARD OF DIRECTORS DEEMS PROPOSAL TWO TO BE IN THE BEST INTERESTS OF
THE COMPANY AND ITS STOCKHOLDERS AND RECOMMENDS A VOTE "FOR" APPROVAL THEREOF.
UNLESS AUTHORITY TO DO SO IS WITHHELD, THE PERSON(S) NAMED IN EACH PROXY WILL
VOTE THE SHARES REPRESENTED THEREBY "FOR" THE APPROVAL OF THE INCREASE OF THE
AUTHORIZED CAPITAL SHARES.

<PAGE>

PROPOSAL THREE

APPROVAL OF ADOPTION OF THE 1998
STOCK INCENTIVE PLAN

The Company's stockholders are being asked to approve the adoption of the
Company's new 1998 Stock Incentive Plan (the "1998 Plan") under which 3,350,668
shares of the Company's common stock have been reserved for issuance. The Board
of Directors adopted the 1998 Plan on October 8, 1998 (the "Effective Date"),
subject to stockholder approval. The 1998 Plan is intended to serve as a
comprehensive equity incentive program for the Company's officers, employees,
and non-employee Board members that will encourage such individuals to remain
in the Company's service and more closely align their interests with those of
the stockholders.

Upon stockholder approval of this proposal, all outstanding options under
the Company's 1995 Long Term Incentive Plan (the "1995 Plan") will be
incorporated into the 1998 Plan, and no further option grants or stock
issuances will be made under the 1995 Plan. The incorporated options will
continue to be governed by their existing terms, unless the Stock Option
Committee as administrator of the 1998 Plan elects to extend one or more
features of the 1998 Plan to those options.

The following is a summary of the principal features of the 1998 Plan. Any
stockholder of the Company who wishes to obtain a copy of the actual plan
document may do so upon written request to the Company at 650 Townsend Street,
Suite 225, San Francisco, California 94103, Attn: Mr. Steven M. Harris,
Secretary.

Equity Incentive Programs

The 1998 Plan consists of five (5) separate equity incentive programs: (i)
the Discretionary Option Grant Program, (ii) the Stock Issuance Program, (iii)
the Salary Investment Option Grant Program, (iv) the Automatic Option Grant
Program and (v) the Director Fee Option Grant Program. The principal features
of each program are described below. The Stock Option Committee will have the
exclusive authority to administer the Discretionary Option Grant and Stock
Issuance Programs with respect to option grants and stock issuances made to the
Company's executive officers and non-employee Board members. Both the Stock
Option Committee and the full Board will each have separate but concurrent
authority to make option grants and stock issuances under those programs to all
other eligible individuals. The Stock Option Committee will also have complete
discretion to select the individuals who are to participate in the Salary
Investment Option Grant Program, but all grants made to the selected
individuals will be governed by the express terms of that program.

The term Plan Administrator, as used in this summary, will mean either the
Stock Option Committee or the Board, to the extent each such entity is acting
within the scope of its administrative jurisdiction under the 1998 Plan.
However, neither the Stock Option Committee nor the Board will exercise any
administrative discretion under the Automatic Option Grant and Director Fee
Option Grant Programs for the non-employee Board members. All grants under
those latter programs will be made in strict compliance with the express
provisions of each such program.

Share Reserve

A total of 3,350,668 shares of common stock have been authorized for
issuance over the term of the 1998 Plan. Such share reserve consists of (i) the
number of shares that remain available for issuance under the 1995 Plan
(including shares subject to outstanding options) and (ii) an additional
increase of approximately 2,000,000 shares. In addition, the number of shares
of common stock reserved for issuance under the 1998 Plan will automatically be
increased on the first trading day of each calendar year, beginning in calendar
year 2000, by an amount equal to four percent (4%) of the total number of
shares of common stock outstanding on the last trading day of the preceding
calendar year, but in no event will any such annual increase exceed 2,000,000
shares, subject to adjustment for subsequent stock splits, stock dividends and
similar transactions.

No participant in the 1998 Plan may receive option grants, separately
exercisable stock appreciation rights or direct stock issuances for more than
500,000 shares of common stock in the aggregate per

<PAGE>

calendar year, subject to adjustment for subsequent stock splits, stock
dividends and similar transactions. Stockholder approval of this proposal will
also constitute approval of the 500,000-share limitation for purposes of
Internal Revenue Code Section 162(m).

The shares of common stock issuable under the 1998 Plan may be drawn from
shares of the Company's authorized but unissued common stock or from shares of
common stock reacquired by the Company, including shares repurchased on the
open market.

Shares subject to any outstanding options under the 1998 Plan (including
options incorporated from the predecessor 1995 Plan) which expire or otherwise
terminate prior to exercise will be available for subsequent issuance. Unvested
shares issued under the 1998 Plan and subsequently repurchased by the Company
pursuant to its repurchase rights under the 1998 Plan will also be available
for subsequent issuance.

Eligibility

Employees, non-employee Board members and independent consultants in the
service of the Company or its parent and subsidiaries (whether now existing or
subsequently established) will be eligible to participate in the Discretionary
Option Grant and Stock Issuance Programs. The Company's executive officers and
other highly paid employees will also be eligible to participate in the Salary
Investment Option Grant Program, and non-employee members of the Board will
also be eligible to participate in the Automatic Option Grant and Director Fee
Option Grant Programs.

As of December 31, 1998, five executive officers, five non-employee Board
members and approximately 250 other employees and consultants were eligible to
participate in the Discretionary Option Grant and Stock Issuance Programs. The
five executive officers and approximately 20 other individuals were eligible to
participate in the Salary Investment Option Grant Program, and the five
non-employee Board members were also eligible to participate in the Automatic
Option Grant and Director Fee Option Grant Programs.

Valuation

The fair market value per share of common stock on any relevant date under
the 1998 Plan is currently deemed to be equal to the closing selling price per
share on that date on AMEX. However, the Company has filed an application with
NASDAQ to trade the common stock over NASDAQ. Upon the commencement of trading
over NASDAQ, the fair market value per share of common stock on any relevant
date under the 1998 Plan will be deemed equal to the closing price per share on
that date on NASDAQ. On March 2, 1999 the closing selling price per share on
AMEX was $21.06.

Discretionary Option Grant Program

The options granted under the Discretionary Option Grant Program may be
either incentive stock options under the federal tax laws or non-statutory
options. Each granted option will have an exercise price per share not less
than one hundred percent (100%) of the fair market value per share of common
stock on the option grant date, and no granted option will have a term in
excess of ten (10) years. The shares subject to each option will generally vest
in one or more installments over a specified period of service measured from
the grant date.

Upon cessation of service, the optionee will have a limited period of time
in which to exercise any outstanding option to the extent exercisable for
vested shares. The Plan Administrator will have complete discretion to extend
the period following the optionee's cessation of service during which his or
her outstanding options may be exercised and/or to accelerate the
exercisability or vesting of such options in whole or in part. Such discretion
may be exercised at any time while the options remain outstanding, whether
before or after the optionee's actual cessation of service.

The Plan Administrator is authorized to issue two types of stock
appreciation rights in connection with option grants made under the
Discretionary Option Grant Program:

Tandem stock appreciation rights, which provide the holders with the
right to surrender their options for an appreciation distribution from the
Company equal in amount to the excess of (a) the

<PAGE>

fair market value of the vested shares of common stock subject to the
surrendered option over (b) the aggregate exercise price payable for such
shares. Such appreciation distribution may, at the discretion of the Plan
Administrator, be made in cash or in shares of common stock.

Limited stock appreciation rights, which may be granted to officers of
the Company as part of their option grants. Any option with such a limited
stock appreciation right may (whether or not the option is at the time
exercisable for vested shares) be surrendered to the Company upon the
successful completion of a hostile tender offer for more than fifty percent
(50%) of the Company's outstanding voting securities. In return for the
surrendered option, the officer will be entitled to a cash distribution
from the Company in an amount per surrendered option share equal to the
excess of (a) the tender offer price paid per share over (b) the exercise
price payable per share under such option.

The Plan Administrator will have the authority to effect the cancellation
of outstanding options under the Discretionary Option Grant Program which have
exercise prices in excess of the then current market price of common stock and
to issue replacement options with an exercise price based on the market price
of common stock at the time of the new grant.

Salary Investment Option Grant Program

The Plan Administrator will have complete discretion in implementing the
Salary Investment Option Grant Program for one or more calendar years and in
selecting the executive officers and other eligible individuals who are to
participate in the program for those years. As a condition to such
participation, each selected individual must, prior to the start of the
calendar year of participation, file with the Plan Administrator an irrevocable
authorization directing the Company to reduce his or her base salary for the
upcoming calendar year by a specified dollar amount not less than $10,000 nor
more than $50,000 and apply that amount to the acquisition of a special option
grant under the program.

Each selected individual who files such a timly election will
automatically be granted, on the first trading day in January of the calendar
year for which that salary reduction is to be in effect, a non-statutory option
to purchase that number of shares of common stock determined by dividing the
salary reduction amount by two-thirds of the fair market value per share of
common stock on the grant date. The option will be exercisable at a price per
share equal to one-third of the fair market value of the option shares on the
grant date. As a result, the total spread on the option shares at the time of
grant (the fair market value of the option shares on the grant date less the
aggregate exercise price payable for those shares) will be equal to the salary
reduction amount. The option will become exercisable in a series of twelve (12)
equal monthly installments over the calendar year for which the salary
reduction is to be in effect and will become exercisable in full on an
accelerated basis upon certain changes in the ownership or control of the
Company. Each option will remain exercisable for any vested shares subject to
the option until the earlier of (i) the expiration of the ten (10)-year option
term or (ii) the end of the three (3)-year period measured from the date of the
optionee's cessation of service.

Stock Issuance Program

Shares may be issued under the Stock Issuance Program for such valid
consideration under the Delaware General Corporation Law as the Plan
Administrator deems appropriate, provided the value of such consideration is
not less than the fair market value of the issued shares on the date of
issuance. Shares may also be issued solely as a bonus for past services.
The shares issued as a bonus for past services will be fully vested upon
issuance. All other shares issued under the program will be subject to a
vesting schedule tied to the performance of service or the attainment of
performance goals. The Plan Administrator will have the sole and exclusive
authority, exercisable upon a participant's termination of service, to vest any
or all unvested shares of common stock at the time held by that participant, to
the extent the Plan Administrator determines that such vesting provides an
appropriate severance benefit under the circumstances.

Automatic Option Grant Program

Each individual who is first elected or appointed as a non-employee Board
member at any time on or after the Effective Date will automatically be
granted, on the date of such initial election or appointment, a non-statutory
option to purchase 20,000 shares of common stock, provided that individual has
not

<PAGE>

previously been in the employ of the Company (or any parent or subsidiary). In
addition, each such individual will automatically be granted one or more
additional non-statutory options for 20,000 shares of common stock, with the
first such additional 20,000-share grant to be made at the Annual Stockholders
Meeting which is held in the third calendar year after the calendar year in
which he or she received the initial 20,000-share grant, and each such
additional 20,000-share grants to be made at every third Annual Stockholders
Meeting held thereafter. However, such additional 20,000-share option grants
will only be made to each non-employee Board member who is to continue to serve
as such after the Annual Meeting at which the additional 20,000-share option
grant is to be made.

Each individual who is serving as a non-employee Board member as of the
Effective Date will automatically be granted a non-statutory option for 20,000
shares of common stock at the Annual Stockholders Meeting held in 2001 and will
automatically be granted an additional 20,000-share option at every third
Annual Stockholders Meeting held thereafter. However, these 20,000-share
automatic option grants will only be made to non-employee Board members who are
to continue to serve as such following the Annual Meeting at which such option
grants are made.

There will be no limit on the number of such additional 20,000-share
option grants any one non-employee Board member may receive over his or her
period of Board service, and non-employee Board members who have previously
been in the employ of the Company (or any parent or subsidiary) or who have
otherwise received a stock option grant from the Company prior to the Effective
Date will be eligible to receive one or more such additional 20,000-share
option grants over their period of continued Board service. Stockholder
approval of this proposal will also constitute approval of each option grant
made under the Automatic Option Grant Program and the subsequent exercise of
that option in accordance with the terms of the program summarized below.

Each option under the Automatic Option Grant Program will have an exercise
price per share equal to 100% of the fair market value per share of common
stock on the option grant date and a maximum term of ten years measured from
the grant date. The option will be immediately exercisable for all the option
shares, but any purchased shares will be subject to repurchase by the Company,
at the exercise price paid per share, upon the optionee's cessation of Board
service prior to vesting in those shares. The shares subject to each automatic
option grant will vest (and the Company's repurchase rights will lapse) in six
(6) successive equal semi-annual installments upon the optionee's completion of
each six (6) months of Board service over the thirty-six (36)-month period
measured from the option grant date.

The shares subject to each outstanding automatic option grant will
immediately vest should the optionee die or become permanently disabled while a
Board member or should any of the following events occur while the optionee
continues in Board service: (i) an acquisition of the Company by merger or
asset sale, (ii) the successful completion of a tender offer for more than
fifty percent (50%) of the outstanding voting securities or (iii) a change in
the majority of the Board occasioned by one or more contested elections for
Board membership. Each automatic option grant held by an optionee upon his or
her termination of Board service will remain exercisable, for any or all of the
option shares in which the optionee is vested at the time of such termination,
for up to a twelve (12)-month period following such termination date.

Each option granted under the program will have a limited stock
appreciation right which will allow the optionee to surrender that option to
the Company upon the successful completion of a hostile tender offer for more
than fifty percent (50%) of the Company's outstanding voting securities. In
return for the surrendered option, the optionee will be entitled to a cash
distribution from the Company in an amount per surrendered option share equal
to the excess of (a) the tender offer price paid per share over (b) the
exercise price payable per share under such option. Stockholder approval of
this proposal will also constitute pre-approval of the grant of each such
limited stock appreciation right and the subsequent exercise of that right in
accordance with the foregoing provisions.

Director Fee Option Grant Program

For each calendar year that the Director Fee Option Grant Program is in
effect, as determined by the Plan Administrator, each non-employee Board member
may elect to apply all or a portion of his or her annual retainer fee otherwise
payable in cash that year (currently $1,000 for directors and $2,500 for the

<PAGE>

Chairman) to the acquisition of a special option grant under the Director Fee
Option Grant Program. The election must be made prior to the start of the
calendar year for which such election will be in effect, and the grant will
automatically be made on the first trading day in January following the filing
of such election. The option will have an exercise price per share equal to
one-third of the fair market value of the option shares on the grant date, and
the number of option shares will be determined by dividing the dollar amount of
the retainer fee subject to the election by two-thirds of the fair market value
per share of common stock on the option grant date. As a result, the total
spread on the option (the fair market value of the option shares on the grant
date less the aggregate exercise price payable for those shares) will be equal
to the portion of the retainer fee subject to the non-employee Board member's
election. Stockholder approval of this proposal will also constitute approval
of each option grant made pursuant to the provisions of the Director Fee Option
Grant Program and the subsequent exercise of that option in accordance with the
terms of such program.

Each option granted under the program will become exercisable for the
option shares in a series of twelve (12) successive equal monthly installments
upon the optionee's completion of each month of Board service during the
calendar year of the option grant. In the event the optionee ceases Board
service for any reason (other than death or permanent disability), the option
will immediately terminate with respect to any option shares for which the
option is not otherwise at that time exercisable. Should the optionee's service
as a Board member ceases by reason of death or permanent disability, then the
option will immediately become exercisable for all the shares of common stock
subject to the option. Each option may be exercised, for any or all of the
shares for which that option is at the time exercisable, until the earlier of
(i) the expiration of the ten (10)-year option term or (ii) the end of the
three (3)-year period measured from the date of the optionee's cessation of
Board service.

Stock Awards

The table below shows, as to Company's Chief Executive Officer ("CEO"),
the three most highly compensated executive officers of the Company other than
the CEO (with base salary and bonus for the past fiscal year in excess of
$100,000), and the other individuals and groups indicated, the number of shares
of common stock subject to options granted under the 1998 Plan and the
predecessor 1995 Plan between the date of the adoption of the 1995 Plan,
September 15, 1995, and December 31, 1998, together with the weighted average
exercise price payable per share. The Company has not made any direct stock
issuances or granted any SARs to date under either the 1998 Plan or the 1995
Plan.

<PAGE>

<TABLE>
OPTION TRANSACTIONS

<CAPTION>
Weighted
Number of Shares Average
Underlying Options Exercise Price
Name and Position Granted(#) Per Share($)
- --------------------------------------------------------------- -------------------- ----------------
<S> <C> <C>
Dr. Lawrence B. Brilliant
President and Chief Executive Officer ........................ 455,000 $7.55

Garrett J. Girvan
Chief Operating Officer ...................................... 200,000 7.89

Steven M. Harris
Vice President and Secretary ................................. 100,000 7.38

Ian B. Aaron
Vice President, SoftNet Systems, Inc. and
President, ISP Channel, Inc. ................................. 320,000 6.74

All current executive officers as a group (five) .............. 1,255,000 7.81

All current non-employee directors as a group (five)(1) ....... 265,000 8.76

All employees, including current officers who are not
executive officers, as a group .............................. 991,410 9.04
<FN>
- ------------
(1) Includes options to purchase 20,000 shares of common stock owned by John
Hamm who has resigned from the Board of Directors as of February 16, 1999.
</FN>
</TABLE>

Each such option granted under the 1995 Plan has an exercise prices per
share equal to the fair market value of the common stock on the grant date and
no option has a term in excess of ten years measured from the grant date. The
option generally becomes exercisable in a series of installments over the
optionee's period of service with the Company. Upon an acquisition of the
Company pursuant to a merger or asset sale, the option will, at the discretion
of the Stock Option Committee, either be assumed by any successor entity, with
or without accelerated vesting of the option shares, or terminate upon the
acquisition following a thirty (30)-day period during which the option will be
exercisable in full on an accelerated basis.

As of March 2, 1999, 1,201,610 shares of common stock were subject to
outstanding options under the 1995 Plan, 45,601 shares remained available for
future option grant and 252,789 shares have been issued in connection with
option exercises. As of March 2, 1999, 2,511,410 shares of common stock were
subject to outstanding options under the 1998 Plan (including those shares
rolled into the 1998 Plan from the 1995 Plan), and no shares had been issued
under the 1998 Plan.

The Company also maintains the Employee Stock Option Plan (the "Employee
Option Plan") under which 40,000 shares of common stock have been reserved for
issuance to employees of the Company's wholly owned subsidiary, Micrographic
Technology Corporation ("MTC"). As of March 2, 1999, options covering 13,935
shares of common stock were outstanding under the Employee Option Plan, no
shares remained available for future option grant, options covering 17,434
shares had expired without being exercised and 8,631 shares have been issued
under the Employee Option Plan pursuant to option exercises.

New Plan Benefits

The following table lists, as of March 2, 1999, the number of shares
subject to options granted to the CEO, the three most highly compensated
executive officers of the Company other than the CEO (with base salary and
bonus for the last fiscal year in excess of $100,000) and the other groups
indicated which will not become exercisable unless the stockholders approve
this proposal. Such options were initially granted under the 1995 Plan but are
to be incorporated into the 1998 Plan upon stockholder approval of this
proposal. In the event that the stockholders do not approve the adoption of the
1998 Plan, the following options will terminate without ever becoming
exercisable for the option shares.

<PAGE>

<TABLE>
1998 STOCK INCENTIVE PLAN

<CAPTION>
Weighted
Number of Average
Name and Position Option Shares (#) Exercise Price ($)
- ---------------------------------------------------------------- ------------------- --------------------
<S> <C> <C>
Dr. Lawrence B. Brilliant ...................................... 255,000 $ 7.38
President and Chief Executive Officer

Garrett J. Girvan ............................................. 125,000 7.38
Chief Operating Officer

Steven M. Harris .............................................. 100,000 7.38
Vice President and Secretary

Ian B. Aaron .................................................. 98,500 7.38
Vice President, SoftNet Systems, Inc. and
President, ISP Channel, Inc.

All current executive officers as a group (five) ............... 758,500 8.12

All current non-employee directors as a group (five)(1) ........ 10,000 7.38

All employees, including current officers who are not
executive officers, as a group ............................... 541,300 10.66
<FN>
- ------------
(1) Includes options to purchase 20,000 shares of common stock owned by John
Hamm who has resigned from the Board of Directors as of February 16, 1999.
</FN>
</TABLE>

General Provisions

Acceleration

In the event that the Company is acquired by merger or asset sale, each
outstanding option under the Discretionary Option Grant Program will
automatically accelerate in full, unless assumed by the successor corporation
or replaced with a cash incentive program which preserves the spread existing
on the unvested option shares (the excess of the fair market value of those
shares over the option exercise price payable for such shares) and provides for
subsequent payout in accordance with the same vesting schedule in effect for
the option. In addition, all unvested shares outstanding under the
Discretionary Option Grant and Stock Issuance Programs will immediately vest,
except to the extent the Company's repurchase rights with respect to those
shares are to be assigned to the successor corporation. The Plan Administrator
will have complete discretion to grant one or more options under the
Discretionary Option Grant Program which will become fully exercisable for all
the option shares in the event those options are assumed in the acquisition and
the optionee's service with the Company or the acquiring entity terminates
within a designated period following such acquisition. The vesting of
outstanding shares under the Stock Issuance Program may also be structured to
accelerate upon similar terms and conditions.

The Plan Administrator will also have the authority to grant options which
will immediately vest upon an acquisition of the Company, whether or not those
options are assumed by the successor corporation. The Plan Administrator is
also authorized under the Discretionary Option Grant and Stock Issuance
Programs to grant options and to structure repurchase rights so that the shares
subject to those options or repurchase rights will immediately vest in
connection with a change in control of the Company (whether by successful
tender offer for more than fifty percent (50%) of the outstanding voting stock
or a change in the majority of the Board by reason of one or more contested
elections for Board membership), with such vesting to occur either at the time
of such change in control or upon the subsequent termination of the
individual's service within a designated period (not to exceed eighteen months)
following such change in control.

Each option outstanding under the Salary Investment Option Grant,
Automatic Option Grant and Director Fee Option Grant Programs will also
automatically accelerate in the event the Company should be acquired or other
change in control of the Company occur.

The outstanding options under the 1995 Plan which are to be incorporated
into the 1998 Plan will, at the discretion of the Stock Option Committee,
either be assumed by the successor entity in any

<PAGE>

acquisition of the Company, with or without accelerated vesting of the option
shares, or terminate upon the acquisition following a thirty (30)-day period
during which the option will be exercisable in full on an accelerated basis. In
addition, the Plan Administrator will have the discretion to extend one or more
of the vesting acceleration provisions of the 1998 Plan to those options.

The acceleration of vesting in the event of a change in the ownership or
control of the Company may be seen as an anti-takeover provision and may have
the effect of discouraging a merger proposal, a takeover attempt or other
efforts to gain control of the Company.

Financial Assistance

The Plan Administrator may institute a loan program to assist one or more
participants in financing the exercise of outstanding options or the purchase
of shares under the 1998 Plan. The Plan Administrator will determine the terms
of any such assistance. However, the maximum amount of financing provided any
participant may not exceed the cash consideration payable for the issued shares
plus all applicable taxes incurred in connection with the acquisition of the
shares.

Changes in Capitalization

In the event any change is made to the outstanding shares of common stock
by reason of any recapitalization, stock dividend, stock split, combination of
shares, exchange of shares or other change in corporate structure effected
without the Company's receipt of consideration, appropriate adjustments will be
made to (i) the maximum number and/or class of securities issuable under the
1998 Plan, (ii) the number and/or class of securities for which any one person
may be granted stock options, separately exercisable stock appreciation rights
and direct stock issuances under the 1998 Plan per calendar year, (iii) the
maximum number and/or class of securities by which the share reserve is to
increase each calendar year by reason of the automatic share increase
provisions of the 1998 Plan, (iv) the number and/or class of securities for
which grants are subsequently to be made under the Automatic Option Grant
Program to new and continuing non-employee Board members and (v) the number
and/or class of securities and the exercise price per share in effect under
each outstanding option (including the options incorporated from the 1995 Plan)
in order to prevent the dilution or enlargement of benefits thereunder.

Amendment and Termination

The Board may amend or modify the 1998 Plan in any or all respects
whatsoever subject to any required stockholder approval. The Board may
terminate the 1998 Plan at any time, and the 1998 Plan will in all events
terminate on October 8, 2008.

Federal Income Tax Consequences

Option Grants

Options granted under the 1998 Plan may be either incentive stock options
which satisfy the requirements of Section 422 of the Internal Revenue Code or
non-statutory options which are not intended to meet such requirements. The
Federal income tax treatment for the two types of options differs as follows:

Incentive Options. No taxable income is recognized by the optionee at the
time of the option grant, and no taxable income is generally recognized at the
time the option is exercised. The optionee will, however, recognize taxable
income in the year in which the purchased shares are sold or otherwise disposed
of. For Federal tax purposes, dispositions are divided into two categories: (i)
qualifying and (ii) disqualifying. A qualifying disposition occurs if the sale
or other disposition is made after the optionee has held the shares for more
than two (2) years after the option grant date and more than one (1) year after
the exercise date. If either of these two holding periods is not satisfied,
then a disqualifying disposition will result.

Upon a qualifying disposition, the optionee will recognize long-term
capital gain in an amount equal to the excess of (i) the amount realized upon
the sale or other disposition of the purchased shares over (ii) the exercise
price paid for the shares. If there is a disqualifying disposition of the
shares, then the

<PAGE>

excess of (i) the fair market value of those shares on the exercise date over
(ii) the exercise price paid for the shares will be taxable as ordinary income
to the optionee. Any additional gain or loss recognized upon the disposition
will be recognized as a capital gain or loss by the optionee.

If the optionee makes a disqualifying disposition of the purchased shares,
then the Company will be entitled to an income tax deduction, for the taxable
year in which such disposition occurs, equal to the excess of (i) the fair
market value of such shares on the option exercise date over (ii) the exercise
price paid for the shares. If the optionee makes a qualifying disposition, the
Company will not be entitled to any income tax deduction.

Non-Statutory Options. No taxable income is recognized by an optionee upon
the grant of a non-statutory option. The optionee will in general recognize
ordinary income, in the year in which the option is exercised, equal to the
excess of the fair market value of the purchased shares on the exercise date
over the exercise price paid for the shares, and the optionee will be required
to satisfy the tax withholding requirements applicable to such income.

If the shares acquired upon exercise of the non-statutory option are
unvested and subject to repurchase by the Company in the event of the
optionee's termination of service prior to vesting in those shares, then the
optionee will not recognize any taxable income at the time of exercise but will
have to report as ordinary income, as and when the Company's repurchase right
lapses, an amount equal to the excess of (i) the fair market value of the
shares on the date the repurchase right lapses over (ii) the exercise price
paid for the shares. The optionee may, however, elect under Section 83(b) of
the Internal Revenue Code to include as ordinary income in the year of exercise
of the option an amount equal to the excess of (i) the fair market value of the
purchased shares on the exercise date over (ii) the exercise price paid for
such shares. If the Section 83(b) election is made, the optionee will not
recognize any additional income as and when the repurchase right lapses.

The Company will be entitled to an income tax deduction equal to the
amount of ordinary income recognized by the optionee with respect to the
exercised non-statutory option. The deduction will in general be allowed for
the taxable year of the Company in which such ordinary income is recognized by
the optionee.

Stock Appreciation Rights

No taxable income is recognized upon receipt of an SAR. The holder will
recognize ordinary income, in the year in which the SAR is exercised, in an
amount equal to the excess of the fair market value of the underlying shares of
common stock on the exercise date over the base price in effect for the
exercised right, and the holder will be required to satisfy the tax withholding
requirements applicable to such income.

The Company will be entitled to an income tax deduction equal to the
amount of ordinary income recognized by the holder in connection with the
exercise of an SAR. The deduction will be allowed for the taxable year in which
such ordinary income is recognized.

Direct Stock Issuances

The tax principles applicable to direct stock issuances under the 1998
Plan will be substantially the same as those summarized above for the exercise
of non-statutory option grants.

Deductibility of Executive Compensation

The Company anticipates that any compensation deemed paid by it in
connection with disqualifying dispositions of incentive stock option shares or
exercises of non-statutory options will qualify as performance-based
compensation for purposes of Code Section 162(m) and will not have to be taken
into account for purposes of the $1 million limitation per covered individual
on the deductibility of the compensation paid to certain executive officers of
the Company. Accordingly, all compensation deemed paid with respect to those
options will remain deductible by the Company without limitation under Code
Section 162(m).

<PAGE>

Accounting Treatment

Under current accounting principles, neither the grant nor the exercise of
options granted under the 1998 Plan with exercise prices equal to the fair
market value of the option shares on the grant date will generally result in
any charge to the Company's reported earnings. However, the Company must
disclose, in footnotes and pro-forma statements to the Company's financial
statements, the impact those options would have upon the Company's reported
earnings were the fair value of those options at the time of grant treated as a
compensation expense. In addition, the number of outstanding options under the
1998 Plan may be a factor in determining the Company's earnings per share on a
fully-diluted basis.

However, all options granted under the 1998 Plan prior to shareholder
approval, including the options listed in the "New Plan Benefits" section
above, will result in a direct charge to the Company's reported earnings in an
amount equal to the fair market price of the shares subject to those options on
the date of shareholder approval minus the fair market price of the option
shares on the date of grant. Such charge will be amortized against the
Company's reported earnings over the vesting period in effect for those
options.

Under a recently-proposed amendment to the current accounting principles,
option grants made to non-employee Board members or consultants after December
15, 1998 will result in a direct charge to the Company's reported earnings
based upon the fair value of the option measured on the vesting date of each
installment of the underlying option shares. Such charge will accordingly
include the appreciation in the value of the option shares over the period
between the grant date of the option (or, if later, the effective date of the
final amendment) and the vesting date of each installment of the option shares.
In addition, if the proposed amendment is adopted, any options which are
repriced after December 15, 1998 will also trigger a direct charge to Company's
reported earnings measured by the appreciation in the value of the underlying
shares over the period between the grant date of the option (or, if later, the
effective date of the final amendment) and the date the option is exercised for
those shares.

Should one or more optionees be granted stock appreciation rights under
the 1995 Plan that have no conditions upon exercisability other than a service
or employment requirement, then such rights would result in a compensation
expense to be charged against the Company's reported earnings. Accordingly, at
the end of each fiscal quarter, the amount (if any) by which the fair market
value of the shares of common stock subject to such outstanding stock
appreciation rights has increased from the prior quarter-end would be accrued
as compensation expense, to the extent such fair market value is in excess of
the aggregate exercise price in effect for those rights.

Vote Required

The affirmative vote of at least a majority of the shares of common stock
present in person or by proxy at the Annual Meeting is required for approval of
the adoption of the 1998 Plan. If such approval is obtained, then all
outstanding options under the 1995 Plan will be incorporated into the 1998
Plan, and the 1995 Plan will terminate. Should such stockholder approval not be
obtained, then any stock options granted under the 1998 Plan will terminate
without ever becoming exercisable for the shares of common stock subject to
those options, and no further option grants will be made under the 1998 Plan.
In addition, the option grants made under the 1995 Plan which are contingent
upon their incorporation into the 1998 Plan with its increased share reserve
will also terminate prior to their becoming exercisable for any of the option
shares. However, the 1995 Plan will remain in effect as last approved by the
stockholders, and option grants and direct stock issuances may continue to be
made under that Plan until the available share reserve has been issued.

Recommendation of the Board of Directors

THE BOARD OF DIRECTORS DEEMS PROPOSAL THREE TO BE IN THE BEST INTERESTS OF
THE COMPANY AND ITS STOCKHOLDERS AND RECOMMENDS A VOTE "FOR" APPROVAL OF SUCH
PROPOSAL. UNLESS AUTHORITY TO DO SO IS WITHHELD, THE PERSON(S) NAMED IN EACH
PROXY WILL VOTE THE SHARES REPRESENTED THEREBY "FOR" THE APPROVAL OF THE
ADOPTION OF THE SOFTNET SYSTEMS, INC. 1998 STOCK INCENTIVE PLAN.

<PAGE>

PROPOSAL FOUR

AUTHORIZATION AND APPROVAL OF THE ISSUANCE OF THE COMMON STOCK UNDERLYING
CONVERTIBLE PREFERRED STOCK AND WARRANTS TO PURCHASE COMMON STOCK, THAT IN THE
AGGREGATE WOULD REPRESENT 20% OR MORE OF THE OUTSTANDING SHARES OF COMMON STOCK
OF THE COMPANY, WHICH APPROVAL IS NECESSARY IN ORDER TO MEET THE CONTINUED
LISTING REQUIREMENTS FOR THE COMMON STOCK ON THE AMERICAN STOCK EXCHANGE

The following contains a summary of the material information relating to
certain transactions involving the Company's preferred stock. Copies of the
Securities Purchase Agreements, Certificate of Incorporation of the Company
setting forth the rights and privileges of the preferred stock, and the form of
warrant for each series of preferred stock are being filed with the SEC as
exhibits to this Proxy Statement.

General

Since December 31, 1997, the Company has issued three series of its five
percent convertible preferred stock denominated Series A Convertible Preferred
Stock, Series B Convertible Preferred Stock and Series C Convertible Preferred
Stock. In addition, the Company has agreed to issue, pursuant to a mutually
binding stock purchase agreement, a fourth series of its five percent
convertible preferred stock denominated Series D Convertible Preferred Stock.
In connection with the issuance of the five percent convertible preferred
stock, the Company has also issued (or, in the case of the Series D Preferred
Stock, agreed to issue) warrants to purchase its common stock.

The Series A Preferred Stock and Series B Preferred Stock have been fully
converted into an aggregate 1,495,316 shares of common stock. Such conversions
did not require stockholder approval.

Each series of the five percent convertible preferred stock has similar
rights and privileges, and each share of the five percent convertible preferred
stock has a face amount of $1,000. The five percent convertible preferred stock
is convertible into the number of shares of common stock determined by dividing
the face amount of the five percent convertible preferred stock being converted
by the applicable conversion price.

Each series of the five percent preferred stock was issued with an initial
conversion price that was greater than the market price of the common stock on
the date of issuance. However, because the conversion price of each series of
the five percent convertible preferred stock is initially fixed at a certain
price and then floats with the market price, subject to a maximum conversion
price, for a certain number of days prior to conversion, there is the
possibility that the five percent preferred stock may convert at a conversion
price at or below the market price. Currently, the conversion price of the
Series C Preferred Stock is $9.00, which is below the market price of the
common stock as of March 2, 1999, which was $21.06. On May 31, 1999, the
maximum potential conversion price of the Series C Preferred Stock will be
$9.75.

On December 31, 1997, the Company issued to RGC International Investors,
LDC, 5,000 shares of its Series A Preferred Stock and warrants to purchase
150,000 shares of common stock at an exercise price of $7.95 per share for an
aggregate purchase price of $5,000,000. As of the Record Date, there were no
shares of Series A Preferred Stock outstanding.

On May 29, 1998, the Company issued to RGC International Investors and
Shoreline Associates I, LLC, 9,000 and 1,000 shares, respectively, of its
Series B Preferred Stock and warrants to purchase 180,000 and 20,000 shares,
respectively, of common stock, for an aggregate purchase price of $10,000,000.
The warrants issued in connection with the Series B Preferred Stock have an
exercise price of $13.75 per share. Subsequent to the Record Date, both RGC
International Investors and Shoreline Associates converted all of their Series
B Preferred Stock into an aggregate 782,352 shares of common stock. Sean
Doherty, a director of the Company, is an owner of Shoreline Associates.

On August 31, 1998, the Company issued to RGC International Investors
7,500 shares of its Series C Preferred Stock and warrants to purchase 93,750
shares of common stock at an exercise price of $9.375

<PAGE>

per share for an aggregate purchase price of $7,500,000. As of the Record Date,
RGC International Investors owned 7,625.39 shares of Series C Preferred Stock
as a result of payment of additional shares of Series C Preferred Stock as
dividends, which was all of the Series C Preferred Stock outstanding as of such
date.

Also on August 31, 1998, the Company entered into a stock purchase
agreement whereby the Company agreed, subject to certain conditions, including
the stockholder approval being solicited hereby, to issue to RGC International
Investors 7,500 shares of its Series D Preferred Stock and warrants to purchase
93,750 shares of common stock for an aggregate purchase price of $7,500,000.
The warrants issued in connection with the Series D Preferred Stock will be
exercisable at 125% of the average closing bid price of the common stock on the
five days prior to the date the Series D Preferred Stock is issued.

Messrs. Wayne Bloch, Gary Kaminsky and Steve Katznelson control RGC
International Investors through their ownership and management of RGC General
Partner Corp. RGC General Partner Corp. is the general partner of Rose Glen
Capital Management, L.P., which is the investment manager of RGC International
Investors. Messrs. Bloch, Kaminsky and Katznelson each disclaim beneficial
ownership of the common stock owned by RGC International Investors.

The following table sets forth for each holder of the five percent
convertible preferred stock, and for all holders of the five percent
convertible preferred stock as a group, the number of shares of the Company's
common stock underlying, or issued upon conversion of, the five percent
convertible preferred stock and related warrants issued to such holder, and the
percentage of the Company's outstanding common stock that each represents as of
March 2, 1999.

The shares of Common Stock underlying the Series A Preferred Stock and
Series B Preferred Stock represent the number of shares of Common Stock
actually issued upon conversion of the Series A Preferred Stock and Series B
Preferred Stock, respectively. Most of these shares were subsequently sold by
such investors in the market. The shares of Common Stock underlying the Series
C Preferred Stock are based on the conversion prices in effect as of March 2,
1999, which is $9.00. The shares underlying, or issued for conversion of, the
Series D Preferred Stock is based on the conversion price that would be in
effect if the Series D Preferred Stock was issued on March 2, 1999, which is
$23.51. See "Five Percent Convertible Preferred Stock-Conversion Prices;
Factors Affecting the Company's Operating Results-Issuance of Common Stock
Pursuant to Existing Obligations Will Result in Dilution to the Common
Stockholders" and "Beneficial Security Ownership of Management and Certain
Beneficial Owners."

Percentage ownership is based upon 9,741,931 shares of common Stock
outstanding on March 2, 1999. The denominator used for percentage ownership of
the shares actually issued upon conversion of the Series A Preferred Stock and
Series B Preferred Stock is 9,741,931. The denominator used for the percentage
ownership for the Series C Preferred Stock, Series D Preferred Stock and
warrants is the sum of 9,741,931 and the number of shares of common stock
issuable upon conversion or exercise of the Series C Preferred Stock, Series D
Preferred Stock and warrants, respectively. The denominator used for the
percentage ownership of total shares of common stock is the sum of 9,741,931
and the aggregate common stock issuable upon conversion of the Series C
Preferred Stock and Series D Preferred Stock and exercise of the warrants.

The table may not present the beneficial ownership of the holders of the
preferred stock in accordance with Rule 13d-3 under the Exchange Act because of
the floating conversion price feature of the five percent convertible preferred
stock and certain limitations on conversion and ownership contained in the
Company's certificate of incorporation. Please see "Five Percent Convertible
Preferred Stock-Limitations on Conversion" for a more detailed discussion of
these limitations. In addition, the number of shares actually issued upon
conversion of the Series A Preferred Stock and Series B Preferred Stock does
not represent the number of shares beneficiary owned by RGC International
Investors and Shoreline Associates because they may have transferred such
shares.

<PAGE>

<TABLE>
<CAPTION>
Shares of Shares of Shares of
common stock common stock common stock
issued upon conversion of issued upon conversion Underlying Series C
Series A Preferred Stock Series B Preferred Stock Preferred Stock
------------------------- ------------------------ --------------------
# % # % # %
<S> <C> <C> <C> <C> <C> <C>
RGC International Investors,
LDC(1) ............................ 712,964 7.3 704,092 7.2 847,266 8.0
Shoreline Associates I, LLC ........ 0 0 78,260 0.8 0 0
Preferred Stockholders as a
Group ............................. 712,964 7.3 782,352 8.0 847,266 8.0

Shares of
common stock Shares of
Underlying Series D common stock Total Shares
Preferred Stock Underlying Warrants Common Stock
------------------- ------------------- ------------
# % # % # %
<S> <C> <C> <C> <C> <C> <C>
RGC International Investors,
LDC(1) ............................ 319,014 3.2 423,750 4.2 3,007,086 26.5
Shoreline Associates I, LLC ........ 0 0 20,000 0.2 98,260 1.0
Preferred Stockholders as a
Group ............................. 319,014 3.2 443,750 4.4 3,105,346 27.4
<FN>
- ------------
* Less than 1%
(1) As of March 2, 1999, RGC held 245,468 shares of common stock.
</FN>
</TABLE>

<PAGE>

In the event all such shares of five percent convertible preferred stock
were so converted, and taking into account the 712,964 shares of common stock
already issued upon conversion of the Series A Preferred Stock and the 782,352
shares of common stock already issued upon conversion of the Series B Preferred
Stock, the common stock issuable under the five percent convertible preferred
stock and warrants issued in connection with the five percent convertible stock
would equal 44.5% of the 6,974,967 shares of common stock outstanding on the
date the Series A Preferred Stock was issued, 40.8% of the 7,607,462 shares of
common stock outstanding on the date the Series B Preferred Stock was issued,
37.9% of the 8,190,711 shares of common stock outstanding on the date the
Series C Preferred Stock was issued and 31.9% of the 9,741,931 shares
outstanding as of March 2, 1999.

Certain Considerations and Risks

While the Board of Directors is of the opinion that the five percent
convertible preferred stock transactions, and the resulting issuance of common
stock upon conversion or exercise, as applicable, of the five percent
convertible preferred stock and 5% Preferred Warrants, are fair to, and are
advisable and in the best interests of the Company and its stockholders,
stockholders should consider the following possible factors, as well as the
other information contained in this proxy statement, in evaluating this
proposal four. In particular, please review the factors affecting the Company's
operating results contained in the Company's Annual Report on Form 10-K/A,
which is being delivered with this Proxy Statement and is incorporated herein
by reference.

o The conversion of the five percent convertible preferred stock and
exercise of the warrants will result in substantial dilution to current
shareholders.

o The conversion of the five percent convertible preferred stock and
exercise of the warrants may depress the market price of the common stock
by increasing the amount of shares of common stock held publicly. In
addition, any significant downward pressure on the market price of the
common stock that may be caused by the holders of the five percent
convertible preferred stock converting and selling material amounts of
common stock could encourage short sales by such holders or others. Such
short sales could place further downward pressure on the price of common
stock.

o The current aggregate liquidation preference of the five percent
convertible preferred stock, without giving effect to any accrued but
unpaid dividends, is $7,625,390 million ($15,125,390 taking into account
the Series D transaction). In the event of the liquidation, dissolution or
winding up of the Company, these amounts would be paid on a priority over
the holders of common stock and will reduce the amounts, if any, which
would otherwise be payable to the holders of common stock.

AMEX and NASDAQ Voting Requirements

The common stock is listed on the American Stock Exchange, the market
rules of which require stockholder approval if the Company issues common stock
or securities exercisable for 20% or more of the Company's outstanding shares
of common stock or voting power at a price that is below the greater of book
value or market value per share. The Company intends to list its common stock
on NASDAQ, which has a similar rule.

Currently, and at the time of their consummation, none of the series of
five percent convertible preferred stock, individually, would result in the
issuance of 20% or more of the common stock. However, the floating conversion
price mechanism contained in each series of the five percent convertible
preferred stock could result in 20% or more of the common stock being issued on
the conversion of any series of the five percent convertible preferred stock.
It is likely that the holders of the five percent convertible preferred stock
would convert their shares only if the conversion price were lower than the
market price. In addition, the conversion of the five percent convertible
preferred stock, in the aggregate, would exceed 20% of the common stock. To
comply with the rules of the American Stock Exchange, the terms of each series
of five percent convertible preferred stock prohibit conversions resulting in
more than 19.99% of the common stock being issued, unless stockholder approval
is obtained.

Therefore, the stockholders must vote in favor of this proposal four in
order for the holders of the five percent convertible preferred stock to be
able to convert their shares of Preferred Stock without restriction.

<PAGE>

The laws of the State of New York do not require stockholder approval of
the issuance of the five percent convertible preferred stock, the 5% Preferred
Warrants, or the common stock underlying such securities.

Reason for the Transactions and Use of Proceeds

Proceeds from the sale of the five percent convertible preferred stock and
warrants are being used to fund the expenditures incurred in the continuing
expansion of ISP Channel, Inc., particularly the ISP Channel service, and for
general corporate purposes. Such expenditures include procuring the equipment
necessary to deliver Internet services to subscribers, hiring additional
personnel and sales and marketing efforts.

The Five Percent Convertible Preferred Stock

The Series A Preferred Stock has been converted into 712,964 shares of
common stock and is no longer outstanding. The Series B Preferred Stock has
been converted into 782,352 shares of common stock and is no longer
outstanding. As such, the description below does not include the Series A
Preferred Stock or the Series B Preferred Stock.

Dividends

The holders of the five percent convertible preferred stock are entitled
to receive dividends at a rate of 5% per annum, payable quarterly. The Company
may pay this dividend in cash or additional shares of the applicable series of
five percent convertible preferred stock. Unpaid dividends are cumulative. Any
accrued and unpaid dividends are payable only in the event of a liquidation,
dissolution or winding up of the Company.

The Company has issued 100.78 shares of Series A Preferred Stock, 251.56
shares of Series B Preferred Stock and 125.39 shares of Series C Preferred
Stock as dividends. Because the Series A Preferred Stock and Series B Preferred
Stock have now been converted fully into common stock, no additional dividends
will be paid with respect to these series.

Limitations on Conversion

The Company's Certificate of Incorporation defines the rights and
privileges of the five percent convertible preferred stock. These rights and
privileges follow the five percent convertible preferred stock if it is
transferred, but do not affect common stock issued upon conversion. Certain
provisions of the Certificate of Incorporation are discussed below.

A holder of the Series C Preferred Stock or Series D Preferred Stock
cannot convert its Series C Preferred Stock or Series D Preferred Stock in the
event such conversion would result in it beneficially owning more than 4.99% of
the Company's common stock. Notwithstanding this limitation, the holders of the
preferred stock cannot convert into an aggregate of more than 19.99% of the
Company's common stock without the approval of the Company's common stock
shareholders, which is being sought by this proposal four, or the approval of
the American Stock Exchange. In addition, even if such shareholder approval is
obtained, the Series C Preferred Stock and Series D Preferred Stock each cannot
convert into more than 2,000,000 shares of common stock without the Company's
consent. In the event the 2,000,000 share cap for the Series C Preferred Stock
or the Series D Preferred Stock is reached, the Company must either honor
conversion requests over the 2,000,000 share cap or redeem the remaining Series
C Preferred Stock at its stated value of $1,000 plus accrued and unpaid
dividends.

The 2,000,000 share cap provides common shareholders protection against
dilution upon conversion of the five percent convertible preferred stock. In
the event the company obtains shareholder approval for issuance of more than
19.99% of its common stock upon conversion of the five percent convertible
preferred stock, the 4.99% restriction does not protect common shareholders
from dilution to the extent the preferred shareholders convert and sell shares
to keep at or under these relevant limits, and the 2,000,000 share cap would
not provide protection against dilution in the event the company decides to
continue to honor conversions of the Series C Preferred Stock or Series D
Preferred Stock after the 2,000,000 share cap is reached.

<PAGE>

To the extent any of these shares of common stock are issued, the market
price of the common stock may decrease because of the additional shares on the
market. If the actual price of the common stock decreases, the holders of the
five percent convertible preferred stock could convert into greater amounts of
common stock, the sales of which could further depress the stock price.

The following table sets forth the number of shares of common stock
issuable upon conversion of 7,625.39 shares of Series C Preferred Stock, which
is all of the outstanding preferred stock, and 7,500 shares of Series D
Preferred Stock and percentage ownership that each represents as of March 2,
1999 assuming:

o the Series D Preferred Stock was issued on March 2, 1999;

o the floating conversion price feature of the five percent convertible
preferred stock was in effect;

o the maximum conversion prices of the five percent convertible preferred
stock was not adjusted as provided in the Company's certificate of
incorporation; and

o the market price of the common stock is 25%, 50%, 75% and 100% of the
market price of the common stock on March 2, 1999, which was $21.06 per
share.
<TABLE>
In the event that more than 2,000,000 shares of common stock would be
required to fully convert the Series C Preferred Stock, we must either honor
conversion requests over the 2,000,000 share limit or redeem the remaining
Series C Preferred Stock for cash, at its stated value of $1,000 per share plus
accrued but unpaid dividends.

<CAPTION>
Series C Preferred Series D Preferred
Stock Stock Total
Percent of --------------------- --------------------- ---------------------
Market Shares Shares Shares
Price Underlying % Underlying % Underlying %
----- ---------- ------ ----------- ------ ---------- ------
<S> <C> <C> <C> <C> <C> <C>
25% ........ 1,448,318 14.9 1,424,502 14.6 2,872,820 29.5
50% ........ 847,266 8.7 712,251 7.3 1,559,517 16.0
75% ........ 847,266 8.7 474,834 4.9 1,322,100 13.6
100% ........ 847,266 8.7 356,126 3.7 1,203,392 12.4
</TABLE>

The Company issued an aggregate of 1,417,056 shares of common stock to RGC
International Investors upon conversion of the Series A Preferred Stock and
Series B Preferred Stock. Assuming RGC International Investors converted in
accordance with the above table, then it would have converted into the
following aggregate amounts and percentages of the common stock based on
9,741,931 shares of common stock outstanding as of March 2, 1999:

Percent of Number of Shares Percentage of
Market Price of Common Stock Common Stock
------------ --------------- ------------
25% ............... 4,289,876 44.0%
50% ............... 2,976,573 30.6%
75% ............... 2,739,156 28.1%
100% ............... 2,620,448 26.9%

Conversion Prices

The stated value of each series of outstanding preferred stock is $1,000
per share. The actual number of shares of common stock that the Company will
issue upon conversion of the Series C Preferred Stock is indeterminable as of
the date of this proxy statement and is subject to adjustment. The number of
shares underlying the Series C Preferred Stock would increase if the conversion
price decreased. The actual number of shares of common stock issuable upon
conversion of the Series C Preferred Stock will be determined by the following
formula:

(The aggregate stated value of the shares of preferred stock thus being
converted at $1,000 per share)
divided by
(The applicable conversion price of the series of the preferred stock being
converted).

Prior to May 31, 1999, the conversion price of the Series C Preferred
Stock is equal to $9.00 per share, which is 120% of the market price of the
common stock when the Series C Preferred Stock was issued.

<PAGE>

Thereafter, the conversion price of the Series C Preferred Stock is equal to
the lower of $9.00 per share and the lowest five day average closing price of
the common stock during the 30-day trading period immediately prior to such
conversion. The maximum conversion price of the Series C Preferred Stock would
increase to $9.75 in the event the average closing bid prices of the common
stock over the 20 consecutive trading days immediately prior to May 31, 1999 is
greater than $9.75. The conversion price is subject to adjustment as set forth
in the Certificate of Incorporation.

Prior to the nine month anniversary of the issuance of the Series D
Preferred Stock, the Series D Conversion Price will be the Initial Series D
Conversion Price. After such anniversary, the Series D Conversion Price will be
the lower of the Initial Series D Conversion Price (subject to an escalation
provision pending certain market conditions around such anniversary) and a five
day average market price within a 30-day trading period prior to conversion.
The conversion price is subject to adjustment as set forth in the Certificate
of Incorporation.

Voting Rights

Holders of the five percent convertible preferred stock do not have voting
rights, except for certain protective provisions relating to changes in the
rights of holders of the five percent convertible preferred stock or otherwise
required by law. Consent of a majority in interest of each effected series of
the five percent convertible preferred stock is required prior to (i) changing
the rights or privileges of such series; (ii) creating any new class or series
of stock with preferences above or on par with those of such series; (iii)
increasing the authorized number of such series; (iv) any act which would
result in a negative tax consequence to the holders of such series pursuant to
Section 305 of the Internal Revenue Code; (iv) changing the rights, preferences
or privileges of any capital stock of the Company so as to effect adversely
such series; and (vi) changing the par value of the common stock.

Priority

Each series of the five percent convertible preferred stock is pari passu
with each other series of five percent convertible preferred stock, and ranks
senior to the common stock as to dividends, distributions and distribution of
assets upon liquidation, dissolution or winding up of the Company.

Liquidation

In the event of any liquidation, dissolution or winding up of the Company,
holders of the five percent convertible preferred stock will be entitled to be
paid out of the assets of the Company legally available for distribution to its
stockholders, an amount equal to the liquidation value per share of the five
percent convertible preferred stock, but only after and subject to the payment
in full of all amounts required to be distributed to the holders of any other
capital stock of the Company ranking in liquidations senior to such five
percent convertible preferred stock, but before any payment will be made to the
holders of the common stock. Certain mergers or consolidations of the Company
into or with another corporation or the sale of all or substantially all of the
assets of the Company may be deemed to be a liquidation of the Company
triggering the rights of the holders of the five percent convertible preferred
stock.

Redemption

Each series of the five percent convertible preferred stock is subject to
redemption upon certain circumstances, including, among other circumstances,
the Company's (i) failure to convert the five percent convertible preferred
stock when required and in the proper manner, (ii) lapse of effectiveness of
the registration statement covering the common stock underlying the five
percent convertible preferred stock, (iii) suspension of the common stock from
trading on AMEX or New York Stock Exchange or NASDAQ, (iv) breach of the stock
purchase agreement pursuant to which the Series C Preferred Stock was issued or
the registration rights agreement pursuant to which the common stock underlying
the Series C Preferred Stock was registered with the Commission.

The Company will have the right to redeem the Series C Preferred Stock on
or after the earlier of (i) an underwritten public offering or a Rule 144A
offering in the amount of at least $10,000,000, or (ii) February 29, 2000, at a
price equal to 110% of its face value if such redemption is made prior to
September 1, 1999 and 120% of the face value thereafter. Once issued, the
Company will have the right to redeem the Series D Preferred Stock on or after
the earlier of (i) an underwritten public offering or a Rule 144A

<PAGE>

offering in the amount of at least $10,000,000, or (ii) the eighteen-month
anniversary of the date of its issuance at a price equal to 110% of its face
value if such redemption is made in the first 12 months that the Series D
Preferred Stock is outstanding and 120% of the face value thereafter.

Maturity

The Company, in its sole discretion, must either redeem or convert the 5%
Preferred Stock on the three year anniversaries of issuance (the "Maturity
Date"). The Company's ability to convert the 5% Preferred Stock on the Maturity
Date is subject to (i) shareholder approval in the event such conversion
(aggregated with all previous conversions of 5% Preferred Stock) would result
in the issuance of more than 19.99% of the outstanding common stock, and (ii)
the shares of common stock issuable upon such conversion being authorized,
registered and eligible for trading over AMEX or NASDAQ. In the event
shareholder approval is not obtained, or the common stock issuable upon such
conversion is not authorized, registered and eligible for trading over AMEX or
NASDAQ, then the Company must redeem the 5% Preferred Stock in cash. The
Maturity Date of the Series C Preferred Stock is August 31, 2001.

The Warrants

The warrants issued in connection with each series of the five percent
convertible preferred stock have a term of four years, contain certain
anti-dilution provisions and permit cashless exercise. The warrants issued in
connection with the Series A Preferred Stock, Series B Preferred Stock and
Series C Preferred Stock are currently exercisable. The Company can call the
warrants issued in connection with the Series B Preferred Stock and Series C
Preferred Stock any time after the first year anniversary of their issuance,
but only in the event the market price of the common stock over the twenty days
prior to such call is 150% of the exercise price of the warrants being called.
The warrants issued in connection with the Series A Preferred Stock have an
exercise price of $7.95 per share and expire on December 31, 2001. The warrants
issued in connection with the Series B Preferred Stock have an exercise price
of $13.75 per share and expire on May 28, 2002. The warrants issued in
connection with the Series C Preferred Stock have an exercise price of $9.375
per share and expire on August 31, 2002. The exercise price of the warrants to
be issued in connection with the Series D Preferred Stock will be 125% of the
market price of the common stock on the date of issuance, and will expire four
years after such issuance.

Absence of Appraisal Rights

Under New York and Delaware law, objecting stockholders will have no
appraisal, dissenters' or similar rights (i.e., the right to seek a judicial
determination of the "fair value" of the common stock and to compel the Company
to purchase their common stock for cash in that amount) with respect to matters
presented at the Annual Meeting or otherwise with respect to the five percent
convertible preferred stock transactions, nor will the Company voluntarily
accord such rights to stockholders.

Therefore, approval by the requisite number of shares of the matters
presented at the Annual Meeting will bind all stockholders and objecting
stockholders will be able to liquidate their common stock only by selling it in
the market.

Consequences if this Proposal Four is not Approved

If stockholder approval is not obtained for this proposal four, the
Company will be required to make cash payments to holders of the five percent
convertible preferred stock once such holders have converted into 19.99% of the
common stock. Cash payments would be equal to the number of shares of common
stock that could not be issued because of such restriction multiplied by the
average market price of the common stock on the five days prior to the date of
attempted conversion. In addition, the Company would not be able to complete
the Series D Preferred Stock financing, in which the Company would raise
$7,500,000.

The following table sets forth the amount of such cash payment assuming:

o the market price of such common stock is 25%, 50%, 75%, 100%, 125%, 150%
and 175% of the market price of the common stock on March 2, 1999, which
was $21.06 per share;

<PAGE>

o the floating rate mechanism of the Series C Preferred Stock was in
effect;

o the maximum conversion price of the Series C Preferred Stock was not
increased; and

o the conversion price was equal to the market price at the time of
conversion in the event the market price was less than the maximum
conversion price.
86.

In addition, the floating conversion price feature is based on the average
market prices of the common stock for a number of trading days immediately
prior to conversion. Therefore, cash payments may also be significantly greater
than those listed if the market price of the common stock at the time of
attempted conversion was not equal to the conversion price.

The actual cash payments may be significantly greater than those listed in
the event the market price of the common stock increases above $36.86.

Cash Payment for Attempted Conversions
Percentage of Market Price of the Series C Preferred Stock
- -------------------------- --------------------------------------
25% ($5.27) .......................... $ 7,491,577
50% ($10.53) .......................... 8,654,079
75% ($15.80) .......................... 12,981,119
100% ($21.06) .......................... 17,308,159
125% ($26.33) .......................... 21,635,199
150% ($31.59) .......................... 25,962,238
175% ($36.86) .......................... 30,289,278

Such cash payments and inability to complete the Series D Preferred Stock
Financing will adversely effect the Company's financial condition and ability
to implement its business plan for ISP Channel, Inc. In addition, the Company
will be required to raise funds elsewhere, which could be difficult in the
event stockholder approval is not obtained. If the Company does not receive
stockholder approval, there can be no assurance that the Company would be able
to obtain adequate sources of additional capital. "Factors Affecting the
Company's Operating Results--We May Be Required to Make Cash Payments to
Holders of Preferred Stock."

Vote Required

The affirmative vote on this proposal four by the holders of a majority of
shares of common stock present in person or by proxy at the Annual Meeting is
required to approve the issuance of the common stock underlying the five
percent convertible preferred stock and 5% Preferred Warrants, which in the
aggregate would represent 20% or more of the outstanding shares of common
stock, which approval is necessary to meet the continued listing requirements
for the common stock on the American Stock Exchange. Such approval would permit
the holders of such preferred stock to convert their preferred stock into
common stock without the 19.99% limitation. For purposes of calculating votes
cast, abstentions are included as votes cast while broker non-votes are not
included as votes cast.

Recommendations of Board of Directors

The Board of Directors has reviewed and considered the terms and
conditions of the five percent convertible preferred stock transactions and
believes that such transactions, and the resulting issuance of common stock
upon conversion or exercise, as applicable, of the five percent convertible
preferred stock and 5% Preferred Warrants, are fair to, and are advisable and
in the best interests of, the Company and its stockholders. The Board of
Directors has unanimously approved the five percent convertible preferred stock
transactions, and the issuance of the common stock pursuant to their conversion
or exercise, as applicable, and unanimously recommends that the stockholders
vote FOR approval of this proposal four. As of the Record Date, the current
directors and executive officers of the Company have the right to vote 217,429
shares, representing approximately 2.5% of the outstanding common stock, and
have advised the Company that their present intent is to vote in favor of
approval of this proposal four. The Board of Directors, in recommending
stockholder approval of this proposal four, considered a number of factors,

<PAGE>

including (a) the substantial increase in the working capital of the Company
that has resulted from such transactions and the prospect that, as a result of
the increase in working capital resulting from such transactions, the Company
will be able to expand its operations, improve its access to capital markets
and, if appropriate, make certain strategic acquisitions, (b) the terms of the
transactions pursuant to which the five percent convertible preferred stock was
issued, and (c) the alternatives to the five percent convertible preferred
stock transactions, including alternative public or private financing.

THE BOARD OF DIRECTORS BELIEVES THAT THE FIVE PERCENT CONVERTIBLE
PREFERRED STOCK TRANSACTIONS, AND THE RESULTING ISSUANCE OF COMMON STOCK UPON
CONVERSION OR EXERCISE, AS APPLICABLE, OF THE FIVE PERCENT CONVERTIBLE
PREFERRED STOCK AND WARRANTS, ARE FAIR TO, AND ARE ADVISABLE AND IN THE BEST
INTERESTS OF, THE COMPANY AND ITS STOCKHOLDERS AND HAS UNANIMOUSLY APPROVED THE
FIVE PERCENT CONVERTIBLE PREFERRED STOCK TRANSACTIONS AND UNANIMOUSLY
RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR APPROVAL OF PROPOSAL FOUR.

<PAGE>

PROPOSAL FIVE

SALE OF THE COMPANY'S WHOLLY-OWNED SUBSIDIARY,
MICROGRAPHIC TECHNOLOGY CORPORATION

The Company has made a strategic decision to focus on its Internet related
businesses. As such, it has sold one of its two non-Internet related
subsidiaries, Kansas Communications, Inc. ("KCI") and has decided to sell the
other non-Internet related subsidiary, Micrographic Technology Corporation
("MTC").

The Company sold substantially all of the assets of KCI to Convergent
Communications Services, Inc. on February 12, 1999. The Company has entered
into formal negotiations with Global Information Distribution GmbH ("GID") for
the sale of MTC. The Company executed a term sheet with GID on November 5,
1998, which was subsequently modified in March 1998 (the "GID Term Sheet").

The Company and MTC are currently negotiating with GID to execute
definitive agreements regarding the sale, which may not come to fruition.
However, the Company intends to sell MTC, whether on the terms stated in the
GID Term Sheet or otherwise, and a Yes vote on this Proposal Five will
authorize the Company to dispose of MTC on whatever terms and to whatever
parties the Board of Director deems appropriate. Because KCI and MTC, together,
constitute a substantial majority of the historic assets and revenues of the
Company, the sale of both KCI and MTC requires shareholder approval. The
Company did not require shareholder approval to sell KCI because it alone did
not constitute substantially all of its assets. A "no" vote does not prohibit
the Company from selling MTC at such time as MTC and KCI no longer constitute a
substantial majority of the Company's assets and revenues.

The Company

The following is a brief description of the Company. A comprehensive
description of the Company can be found in the Company's Annual Report on Form
10-K/A, which is being delivered with this Proxy Statement and is incorporated
by reference herein.

SoftNet Systems, Inc.

The Company's current principal executive office is located at 650
Townsend Street, Suite 225, San Francisco, California 94103, (415) 365-2500.

ISP Channel, Inc.

ISP Channel, Inc. provides residential and business subscribers access to
the Internet over the existing cable television infrastructure at speeds up to
100 times faster than 28.8 kilobits per second dial-up access. ISP Channel's
core products and services include high-speed Internet Access, broadband
Internet access for residential, small office/home office and commercial
customers, World Wide Web ("Web") site development, Web hosting and
collocation, on-line commerce applications, virtual private networks, IP
telephony, video conferencing and other collaborative multimedia applications
using the Company's servers, and local content, including planned on-line
communities, Remote Local Area Networks and dial-up Internet access.

Intelligent Communications, Inc.

The Company acquired Intelligent Communications, Inc. ("Intellicom"), the
former Xerox Skyway Network, on February 9, 1999. Intellicom offers Internet
services including Internet access via two way satellite which uses a
proprietary VSAT (Very Small Aperture Terminal) technology and hardware
manufactured by Intellicom. In conjunction with its two way VSAT Internet
connectivity, Intellicom also provides a caching service designed to ease
Internet congestion and speed the performance of delivering web traffic by up
to 60%.

Micrographic Technology Corporation

MTC designs, develops, and manufactures sophisticated, automated
electronic document management and film-based imaging solutions for customers
with large-scale, complex, document-intensive requirements. MTC's hardware and
software products are based on an industry standard client-server

<PAGE>

architecture, providing flexibility to connect to a wide variety of information
systems and produce output to various storage media, including optical disk,
magnetic disk and tape, CD-ROM, and microfilm and microfiche, spanning the
entire document lifecycle. MTC manufactures a family of Computer Output to
Microfilm ("COM") production systems, from which it has historically derived
the majority of its revenues. MTC's proprietary software captures information
from a variety of sources, then intelligently indexes and directs the data for
storage, distribution and retrieval. MTC expects that its business will
increasingly be focused on the distribution and retrieval of electronically
captured information over a variety of communications media, such as the
Internet, LANs and wide area networks ("WANs"). To this end, MTC is pursuing a
strategy of partnering with providers of features or elements that enhance
MTC's electronic data distribution solutions.

Proposed Sale Transaction

The Company decided to sell KCI and MTC to focus on its Internet related
businesses. While the Company has entered into the GID Term Sheet, the
transactions contemplated in GID Term Sheet may not be consummated. In the
event such transactions are not consummated, the Company will continue to seek
to divest itself of MTC. There can be no assurance that in such instance, the
Company will be able to find another buyer or that it will be able to sell MTC
on terms similar to the transactions described herein. By voting for this
proposal five, shareholders are consenting to the sale of MTC on any terms and
to any parties deemed advisable by the Board of Directors of the Company.

The terms of each proposed sale are the result of arms-length negotiations
between the Company and each respective purchaser.

Background

In October 1998, the Company approached GID with a proposal to sell MTC to
GID. During October 1998 and November 1998, the Company and GID met and
discussed the possible acquisition of MTC by GID.

On October 6, 1998, the Board of Directors of the Company authorized the
officers to enter into a letter of intent with GID upon the fulfillment of
certain conditions.

On November 5, 1998, the Company and GID signed a term sheet for the sale
of MTC to GID, which was ratified by the Board of Directors of the Company on
November 13, 1998.

In March 1998, the Company and GID modified the purchase price in the term
sheet.

Terms of the GID Term Sheet

Pursuant to the GID term sheet, as such terms were modified, the Company
has agreed to sell MTC to GID for an aggregate purchase price of US$4,865,000.
The purchase price is to be paid as follows:

1. GID paid the Company US$100,000 as a non-refundable deposit upon
acceptance of the GID Term Sheet;

2. GID shall pay to the Company at the Closing US$4,765,000 in readily
available funds.

Company's Reason for the Sale

The Company considered many factors in deciding to sell KCI and MTC. The
primary reasons for selling the two divisions are:

1. Additional Funds for the Company to Fuel the Growth of ISP Channel,
Inc. The Company expects to incur substantial losses and experience
substantial negative cash flows as it expands ISP Channel, Inc. The Company
has sustained substantial losses over the last five fiscal years. For the
fiscal year ended September 30, 1998, the Company had a net loss of $17.3
million and an accumulated stockholders' deficit of approximately $6.2
million.

<PAGE>

The sale price of KCI was approximately $6.3 million. The sale price of
MTC is approximately $4.865 million. The proceeds from the sale of KCI and
MTC will be used to partially fund the continued expansion of the Internet
Services.

2. Limited Growth Potential of MTC. MTC faces increased competition from
emerging technologies that are perceived to offer advantages over the
traditional methods of managing records and documents that MTC currently
uses. The Board of Directors believes that the current product and services
offerings of MTC have limited growth potential. While the Board of
Directors believes that MTC can adapt and thrive in this increasingly
competitive environment, the Board of Directors has decided to focus on the
growth possibilities of ISP Channel, Inc.

3. Management Focus. ISP Channel, Inc. is a growing company in a very
competitive and growing industry. As such, implementation of the Company's
business plan for ISP Channel, Inc. will require substantial attention from
the Board of Directors and substantially all of the management of the
Company.

Possible Disadvantages of Selling MTC

Although management of the Company recommends approval of the sale,
management recognizes that there may be certain uncertainties or other
disadvantages associated with a sale of MTC. In addition to the factors
affecting the Company's operating results beginning on page 19 of the
accompanying Annual Report on Form 10-K/A, management also considered the
following uncertainties and
disadvantages:

1. Limited Operating History of ISP Channel, Inc. The Company's current
strategy for growth is to focus on substantially expanding the business of
ISP Channel, Inc., which was acquired in June 1996. The Company has very
limited operating history and experience in the Internet services business,
and the successful expansion of the Company's ISP Channel, Inc. will
require strategies and operations that are different from those
historically employed by the Company. There can be no assurance that the
Company will be able to develop or maintain strategies and business
operations that are necessary to increase the revenues of the Company's ISP
Channel, Inc. sufficiently to enable it to achieve positive cash flow and
profitability.

2. Failure to Consummate Sale of MTC. If the Company is unable to
consummate a sale of MTC on terms it believes are satisfactory, it will not
obtain the proceeds anticipated from such sale, which will correspondingly
diminish the capital available to the Company to implement its business
plan for the Internet Service Division. In the absence of such sale,
management's attention could be substantially diverted to operate or
otherwise dispose of MTC. If a sale of MTC is delayed, its value could be
diminished. Moreover, MTC could incur losses and operate on a cash flow
negative basis in the future.

3. Disposal of the Source of Substantially All of the Company's
Revenues. To date, virtually all of the Company's revenues have been
derived from KCI and MTC. The sale of either, or both, of these divisions
would have an adverse short-term effect on the Company's financial
condition, including cash flow from operations.

Potential Effects of the Sales Upon the Stockholders

The Company intends to sell MTC for cash or cash equivalents. The Company
intends to use the proceeds therefrom to implement its business plan for ISP
Channel, Inc. The Company does not plan to make any distribution to
shareholders as a result of the sale of MTC. The shareholders of the Company
will continue to hold the same common stock of the Company without change.

<PAGE>

Effect of Sales of MTC and KCI
And Intellicom Acquisition

For a discussion of the anticipated financial effect of the acquisition of
Intellicom the sale of KCI and the proposed sale of MTC, please refer to the
Management's Discussion and Analysis of Financial Condition and Results of
Operations set forth in the Company's Annual Report on Form 10-K/A for the year
ended September 30, 1998, which is being delivered with this Proxy Statement
and is incorporated by reference herein.

Accounting and Tax Treatment of the Sale

Accounting Treatment of the Sale

The Company does not expect to sustain a loss on the sale of MTC. The sale
will be treated as a sale of securities for financial reporting purposes, which
will be reflected in the financial statements of the Company in the quarter it
is consummated.

Federal Income Tax Consequences of the Sale

The sale of MTC will be reported as a sale of securities for federal
income tax purposes in the fiscal year ending September 30, 1999. However, the
federal income tax effect of the sale transaction cannot be estimated at this
time.

Federal and State Regulatory Requirements

At this time, the Company is not required to obtain the approval of any
state or federal regulatory agencies in order to consummate the sale of MTC.
However, there can be no assurances that the Company will not be required to
obtain such approvals in the future; nor, if such approvals are necessary, that
the Company will be able to obtain such approvals.

Principal Accountants

PricewaterhouseCoopers LLP, independent auditors for the Company for the
fiscal year ending September 30, 1998, is (i) expected to be present at the
Shareholders' Meeting, (ii) will have the opportunity to make a statement if
they so desire, and (iii) are expected to be available to answer appropriate
questions.

VOTE REQUIRED

The affirmative vote of at least two-thirds of the Company's outstanding
common stock is required to approve this proposal five. Such approval will
authorize the Board to sell MTC on the terms described herein or on such other
terms and to such other parties as the Board of Directors of SoftNet deems
advisable. In the event this proposal five is not approved, the Company
reserves the right to sell MTC at such time that MTC and KCI do not represent a
substantial majority of the assets and revenues of the Company.

RECOMMENDATION OF THE BOARD OF DIRECTORS

THE BOARD OF DIRECTORS DEEMS PROPOSAL FIVE TO BE IN THE BEST INTERESTS OF
THE COMPANY AND ITS STOCKHOLDERS AND RECOMMENDS A VOTE "FOR" APPROVAL THEREOF.
UNLESS AUTHORITY TO DO SO IS WITHHELD, THE PERSON(S) NAMED IN EACH PROXY WILL
VOTE THE SHARES REPRESENTED THEREBY "FOR" THE APPROVAL TO SELL MTC.

<PAGE>

PROPOSAL SIX

REINCORPORATION IN DELAWARE

General

On October 6, 1998, the Board of Directors adopted a plan, subject to
approval by the stockholders, to reincorporate the Company under the laws of
the State of Delaware (the "Reincorporation"). The Company was incorporated
under the laws of the State of New York in 1956 under the name Tensor Electric
Development Co. Inc. The Board of Directors believes Delaware corporate law
will better serve the stockholders' interests and provide the Company with
advantages not available under New York corporate law. Therefore, the Board of
Directors recommends the stockholders approve the form of Merger Agreement that
appears as Appendix A at the end of this Proxy Statement (the "Merger
Agreement") to effect a transaction commonly called a "reincorporation."

The Company will continue to be called "SoftNet Systems, Inc." after the
reincorporation. To explain the proposal, however, this Proxy Statement will
call the Company that exists today as a New York corporation either "the
Company" or "SoftNet-NY," while "SoftNet-DE" will refer to the new Delaware
corporation that will initially be organized as a wholly-owned subsidiary of
SoftNet-NY. If the holders of at least two-thirds of all outstanding shares of
the common stock approve the Merger Agreement, SoftNet-NY will be merged into
SoftNet-DE. The effective date will be when the necessary documents have been
filed in both New York and Delaware. SoftNet-DE will be the surviving
corporation, and the charter and Bylaws of the new corporation will be
substantially the same as those of SoftNet-NY today, except as otherwise
discussed below.

Reasons for the Change

The Company has not maintained its principal office in New York for some
time. It is anticipated that SoftNet-DE will have its principal corporate
offices at SoftNet-NY's address in California, and will appoint a registered
agent to represent it in Delaware. SoftNet-NY's current address is 650 Townsend
Street, Suite 225, San Francisco, California 94103. The Company moved into the
new space in February 1999. Reincorporation in Delaware will not change the
business plan, management, assets, liabilities, net worth, capitalization or
employee benefit plans of the Company. Each outstanding share of SoftNet-NY's
common stock and preferred stock (hereinafter referred to as the "common stock"
and "Preferred Stock," respectively) will automatically become one share of the
common stock or preferred stock, respectively, of SoftNet-DE. Furthermore, each
stock option, warrant or convertible security that would be, or later becomes,
exercisable for, or convertible into, shares of the common stock will
automatically be, or later become, exercisable for, or convertible into, the
same number of shares of the common stock of SoftNet-DE on the same terms and
conditions.

For many years, Delaware has encouraged incorporation in that state by
adopting modern, comprehensive and flexible corporate laws, and it periodically
updates and revises them to meet changing business needs. The Delaware General
Corporation Law (the "DGCL") is considered a sophisticated statute, highly
conducive to business. That is why many corporations choose Delaware initially
as their place of incorporation, and why many others have reincorporated in
Delaware by means of transactions like the one now proposed. Because of
Delaware's policy of encouraging incorporation and its preeminence as the most
popular state of incorporation for major corporations, the courts of Delaware
have developed considerable expertise in dealing with corporate issues. As a
result, Delaware's case law interpreting its corporate laws is more developed
than that of any other state. This gives Delaware corporate law an extra
measure of predictability that is useful and often crucial in our
precedent-based judicial system.

For the board of directors and the management of a Delaware corporation,
these features of Delaware law allow greater certainty in managing the
corporation. The state's court system also provides for relatively prompt
resolution of most corporate disputes. For example, Delaware has a specialized
Court of Chancery that hears cases involving corporate law. The Court of
Chancery has no jurisdiction over most other kinds of cases, and therefore its
dockets are not as backlogged as many other states. In addition, the Supreme
Court of Delaware hears and decides important corporate appeals rapidly.

<PAGE>

The Board of Directors considered the predictability and flexibility of
Delaware law and the efficiency of its judicial process when it approved the
present proposal. The Board of Directors also recognized the possibility that
choosing to be governed by the corporate law of Delaware, as so many other
corporations have done, may further enhance the reputation of the Company.

Authorized Shares of Capital Stock

After the Reincorporation, and depending on stockholder approval of
proposal two herein, the authorized capital stock of SoftNet-DE will consist of
100,000,000 shares of common stock, par value $.01 per share and 4,000,000
shares of preferred stock, par value $.10 per share (see the section "Changes
in Authorized Capital Stock" under this proposal six for additional
discussion). SoftNet-DE will not issue any shares of stock in connection with
the Reincorporation, other than the shares into which the outstanding shares of
SoftNet-NY will convert. In the event the stockholders do not approve proposal
two, the authorized shares of common stock of SoftNet-DE will be 25,000,000.

Conversion of Shares

As soon as the Reincorporation becomes effective, SoftNet-DE will issue a
press release announcing that the transaction has occurred. At the same time,
the holders of the old shares of SoftNet-NY will become holders of the new
shares of SoftNet-DE. Shares of SoftNet-NY will automatically convert into
shares of SoftNet-DE, on these terms:

o The conversion will be on a one-for-one basis.

o Each share of the common stock of SoftNet-NY which is outstanding at the
effective date will become one share of the new common stock, par value
$.01 per share, of SoftNet-DE.

o Each share of the Preferred Stock of SoftNet-NY which is outstanding at
the effective date will become one share of the new preferred stock, par
value $.10 per share, of SoftNet-DE.

o Each share of the common stock and Preferred Stock held in the treasury
of SoftNet-NY will become a share held in the treasury of SoftNet-DE.

THIS MEANS THAT, BEGINNING ON THE EFFECTIVE DATE, EACH SOFTNET-NY STOCK
CERTIFICATE WHICH WAS OUTSTANDING JUST BEFORE THE REIN-CORPORATION WILL
AUTOMATICALLY REPRESENT THE SAME NUMBER OF SOFTNET-DE SHARES. THEREFORE,
STOCKHOLDERS OF SOFTNET-NY NEED NOT EXCHANGE THEIR STOCK CERTIFICATES FOR NEW
SOFTNET-DE STOCK CERTIFICATES. LIKEWISE, STOCKHOLDERS SHOULD NOT DESTROY THEIR
OLD CERTIFICATES AND SHOULD NOT SEND THEIR OLD CERTIFICATES TO THE CORPORATION,
EITHER BEFORE OR AFTER THE EFFECTIVE DATE OF REINCORPORATION.

Trading of the Stock

After the Reincorporation, those who were formerly stockholders of
SoftNet-NY may continue to make sales or transfers using their SoftNet-NY stock
certificates. SoftNet-DE will issue new certificates representing shares of
SoftNet-DE common stock for transfers occurring after the effective date of the
Reincorporation. On request, SoftNet-DE will issue new certificates to anyone
who holds SoftNet-NY stock certificates. Any request for new certificates will
be subject to normal stock transfer requirements including proper endorsement,
signature guarantee, if required, and payment of applicable taxes.

Stockholders whose shares of SoftNet-NY were freely tradable before the
Reincorporation will own shares of SoftNet-DE that are freely tradable after
the Reincorporation. Similarly, any Stockholders holding securities with
transfer restrictions before the Reincorporation will hold shares of SoftNet-DE
which have the same transfer restrictions after the Reincorporation. For
purposes of computing the holding period under Rule 144 of the Securities Act
of 1933, as amended, those who hold SoftNet-DE stock certificates will be
deemed to have acquired their shares on the date they originally acquired their
shares in SoftNet-NY.

<PAGE>

After the Reincorporation, SoftNet-DE will continue to be a publicly held
company, with its common stock tradable on the American Stock Exchange
("AMEX"), or tradable over the Nasdaq Stock Market ("NASDAQ"). SoftNet-DE will
also file with the Securities and Exchange Commission (the "Commission") and
provide to its stockholders the same types of information that SoftNet-NY has
previously filed and provided.

Certain Federal Income Tax Consequences

The following is a brief summary of the principal federal income tax
consequences of the Reincorporation under current law to holders of the common
stock and Preferred Stock. This summary is for general information only. It
does not address potential legislative changes that may affect these
consequences, and it does not address any state, local or foreign tax
consequences of reincorporation. The Company has not obtained, and does not
intend to obtain, a ruling from the Internal Revenue Service to the effect that
the Reincorporation is nontaxable.

Neither the Company nor its stockholders will recognize any gain or loss
by reason of the Reincorporation. The tax basis of the shares of SoftNet-DE
common stock and preferred stock received by a stockholder of SoftNet-NY
through the Reincorporation will be the same as the tax basis of SoftNet-NY
common stock and Preferred Stock prior to Reincorporation. A stockholder of
SoftNet-NY who holds the stock as a capital asset should include the period he
or she has held the common stock and Preferred Stock in determining the holding
period for his or her SoftNet-DE shares.

STOCKHOLDERS SHOULD CONSULT THEIR PERSONAL TAX ADVISERS TO DISCUSS THEIR
OWN TAX SITUATIONS AND ANY POTENTIAL CHANGES IN FEDERAL, STATE AND LOCAL LAWS
AND OTHER APPLICABLE TAX MATTERS RELATING TO THE REINCORPORATION.

Abandonment

The Board of Directors will have the right to abandon the Merger Agreement
and take no further action towards reincorporating the Company in Delaware at
any time before the Reincorporation becomes effective, even after stockholder
approval, if for any reason the Board of Directors determines that it is not
advisable to proceed with the Reincorporation, including considering the number
of shares for which appraisal rights have been exercised and the cost to the
Company thereof.

Comparison of New York and Delaware Corporate Laws

If this proposal six is approved by the holders of at least two-thirds of
the Company's outstanding common stock, and if the Company reincorporates in
Delaware as described above, then the stockholders of the Company will become
stockholders of the new Delaware corporation, SoftNet-DE. There are differences
between the Business Corporation Law of New York (the "NYBCL") and the DGCL
that will affect the rights of stockholders in certain respects. Some of these
differences define the particular provisions a corporation may choose to put
into its certificate of incorporation, commonly called the "charter," and other
differences may not affect the Company in a material way.

The following is a summary of the material differences between the rights
of shareholders under the NYBCL and the DGCL. This summary reflects certain
amendments to the NYBCL that became effective on June 15, 1998.

Amendment of Charter

Both the NYBCL and the DGCL allow a board of directors to recommend a
charter amendment for approval by stockholders, and a majority of the shares
entitled to vote at a stockholders' meeting are normally enough to approve that
amendment. Both bodies of law require that a majority of the holders of any
particular class of stock must approve the amendment if it would have an
adverse effect on the holders of that class. In addition, both bodies of law
allow a corporation to require a vote larger than a majority on special types
of issues.

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Amendment of Bylaws

The Bylaws of SoftNet-NY provide, as permitted by the NYBCL, that the
Board of Directors may amend, adopt or repeal the Company's Bylaws, subject to
the rights of stockholders to alter, amend, or repeal those Bylaws made by the
Board of Directors except that the Board of Directors shall have no power to
alter, amend or repeal a Bylaw adopted by the stockholders. Under the DGCL,
however, the board of directors may amend, adopt or repeal Bylaws only if
permitted by the charter. Additionally, both the NYBCL and the DGCL allow
stockholders to further amend or repeal Bylaws adopted or amended by the board
of directors. The charter of SoftNet-DE will specifically permit amendment of
the Bylaws by the Board of Directors.

Special Meetings of Stockholders

Under both the NYBCL and the DGCL, the board of directors or anyone
authorized in the charter or Bylaws may call a special meeting of stockholders.
Currently the Bylaws of SoftNet-NY allow the Chairman of the Board of
Directors, the President or the Board of Directors to call a special meeting.
The Bylaws further provide that upon written request to the Company by
stockholders who hold not less than 662|M/3% of the outstanding shares of
capital stock of the Company entitled to vote for the election of directors,
the Company shall call a special meeting. The provision in the Bylaws of
SoftNet-DE will be comparable, except that only 15% of the outstanding shares
of the common stock of the Company entitled to vote for the election of
directors will be required to call a special meeting.

Corporate Action without Stockholders' Meeting

The NYBCL and DGCL differ concerning corporate action by written consent
and without a stockholders meeting. Under the NYBCL, the corporation's charter
may permit the holders of at least the minimum number of votes required to
authorize such an action to take the action. Otherwise, the consent must be
unanimous. The DGCL, on the other hand, permits stockholders to take action by
the written consent of at least the minimum number of votes required to act at
a stockholders meeting, unless the charter forbids it.

Inspection of Stockholders List

The NYBCL requires five days' written notice from a stockholder of record
to inspect the list of record stockholders for any purpose reasonably related
to the person's interest as a stockholder. Under the DGCL, any stockholder may
inspect the stockholders list for any purpose reasonably related to the
person's interest as a stockholder. In addition, for at least ten days prior to
each stockholders meeting, a Delaware corporation must make available for
examination a list of stockholders entitled to vote at the meeting.

Vote Required for Certain Transactions

Until February 1998, the NYBCL required the holders of two-thirds of the
outstanding stock of a New York corporation to approve certain mergers,
consolidations or sales of all or substantially all the corporation's assets
that may occur outside the ordinary course of business. Since February 1998,
however, a New York corporation may provide in its charter that the holders of
a majority of the outstanding stock may approve such transactions. The Company
has not adopted such a charter provision. Under the DGCL, holders of a majority
of the outstanding stock entitled to vote on such transactions have the power
to approve a merger, consolidation or sale of all or substantially all the
assets without a special provision in the charter, unless the charter provides
otherwise. Furthermore, in the case of a merger under the DGCL, stockholders of
the surviving corporation do not have to approve the merger at all, unless the
charter provides otherwise, if these three conditions are met:

o No amendment of the surviving corporation's charter is made by the
merger agreement; and

o Each share of the surviving corporation's stock outstanding or in the
treasury immediately prior to the effective date of the merger is to be an
identical outstanding or treasury share of the surviving corporation after
the effective date; and

o Either no shares of common stock of the surviving corporation and no
shares, securities or obligations convertible into such stock are to be
issued or delivered under the plan of merger, or the

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authorized unissued shares or the treasury shares of common stock of the
surviving corporation to be issued or delivered under the plan of merger
plus those initially issuable upon conversion of any other shares,
securities or obligations to be issued or delivered under such plan do not
exceed 20% of the shares of common stock of such constituent corporation
outstanding immediately prior to the effective date of the merger.

Special vote requirements may apply to certain business combinations with
interested stockholders. See the discussion below under the heading "Business
Combinations with Interested Stockholders."

Classification of Directors

Both the NYBCL and the DGCL permit "classified" boards of directors, which
means the directors have staggered terms that do not all expire at the same
time. The NYBCL permits as many as four classes, the DGCL permits as many as
three. SoftNet-NY currently has one class of directors, and the same will be
true for SoftNet-DE.

Number of Directors

Under the NYBCL, the number of directors may be one or more, and any
number may be fixed by the Bylaws or by the action of the stockholders or of
the board of directors under the specific provisions of the Bylaws adopted by
the stockholders, and if not so fixed the number of directors shall be one. The
number of directors may be increased or decreased by amendment of the Bylaws or
by action of the stockholders or of the board of directors under the specific
provisions of a Bylaw adopted by the stockholders, subject to certain
limitations. Under the DGCL, a corporation may have as few as one director and
there is no statutory upper limit on the number of directors. The specific
number may be fixed in the Bylaws or the charter, but if fixed in the charter,
may be changed only by amendment of the charter. If the charter is silent as to
the number of directors, the board of directors may fix or change the
authorized number of directors pursuant to a provision of the Bylaws. The
charter of SoftNet-NY provides that the Board of Directors shall determine the
size of the Board of Directors; provided, however, that the Board of Directors
size may not be less than five members. Currently, there are six members of the
Board of Directors. While the Board of Directors has no current plans to
otherwise change the number of directors, it may decide to do so in the future.

Removal of Directors

Under the NYBCL, directors may be removed by the stockholders for cause,
or by either the stockholders or the directors if the charter so provides.
Furthermore, if the charter or Bylaws so provide, directors may be removed
without cause by a vote of the stockholders. The Company's Bylaws provide that
a director may not be removed prior to the expiration of his term except for
cause by a vote of the stockholders. Directors under the DGCL would generally
be subject to removal with or without cause by a majority of the stockholders,
unless the charter provides otherwise. The Bylaws of SoftNet-DE will allow for
removal of directors for reasons other than cause as provided for in the DGCL.

Limitation of Directors' Liability

Both states permit the limitation of a director's personal liability while
acting in his or her official capacity. Under the NYBCL, a director is not
liable to the corporation or to its stockholders for monetary damages if the
director has acted in good faith and with the same degree of care that an
ordinarily prudent person would exercise in similar circumstances. The DGCL, on
the other hand, requires a charter provision in order to limit a director's
liability for breach of his or her fiduciary duty to the corporation. The
Company's current charter limits liability of directors for any breach of duty
to the extent permitted by the Section 402(b) of the NYBCL, and the charter of
SoftNet-DE will likewise limit such liability to the fullest extent permitted
by the DGCL.

In some cases, directors may be liable despite these limitations. Under
the NYBCL, for example, a director is not immune from liability if he or she
violates applicable statutes which expressly make directors liable. The DGCL
forbids any limitation of liability if the director breached his or her duty of
loyalty to the corporation or its stockholders, or if he or she failed to act
in good faith, received an improper personal benefit from the corporation, or
authorized a dividend or stock repurchase that was forbidden by the DGCL.

<PAGE>

Indemnification of Directors and Officers, and Insurance

With some variations, both the NYBCL and the DGCL allow a corporation to
"indemnify," that is, to make whole, any person who is or was a director,
officer, employee or agent of the corporation if that person is held liable for
something he or she did or failed to do in an official capacity. Besides
covering court judgments, out-of-court settlements, fines and penalties, both
laws also allow the corporation to advance certain reasonable expenses the
person will incur or to reimburse the person's expenses after he or she incurs
them, even if liability is not actually proven. The right to indemnification
under both laws does not normally exclude other rights of recovery the
indemnified person may have.

Additionally, both the NYBCL and the DGCL permit a corporation to purchase
insurance for its directors, officers, employees and agents against some or all
of the costs of such indemnification or against liabilities arising from
actions and omissions of the insured person, even though the corporation may
not have power to indemnify the person against such liabilities. The NYBCL,
however, restricts the kinds of claims that may be made under insurance
purchased by the corporation against these liabilities. For example, there
would be no insurance coverage if the person to be indemnified was guilty of
deliberate dishonesty and that dishonesty was material to the event that
produced the claim, or if the person gained some financial profit or other
advantage that he or she was not entitled to.

However, neither the NYBCL nor the DGCL permits indemnification of a
director, officer, employee or agent if a court finds the person liable to the
corporation itself, unless the court determines otherwise. Furthermore, if the
corporation sues the person because of some act or omission, the corporation
does not need to indemnify the person unless a court determines the person was
not liable. Furthermore, the DGCL generally requires that the person to be
indemnified must have acted in good faith and in a manner he or she reasonably
believed was consistent with the best interests of the corporation.

If this proposal six is approved by the Company's Stockholders, the
indemnification provisions of the NYBCL, and not the DGCL, will apply to acts
and omissions that occurred before the effective date of the Reincorporation.

Loans and Guarantees of Obligations for Directors

Under the NYBCL, the holders of a majority of the shares entitled to vote,
excluding any shares of the director who is the proposed borrower, are required
to approve any loans to, or guarantees of obligations of, a director. Under the
DGCL, a board of directors may authorize loans or guarantees of indebtedness to
employees and officers, including any employee or officer who is a director.

Issuance of Rights and Options to Directors, Officers and Employees

Under the NYBCL, the issuance of any stock rights or stock options, as
well as plans to issue rights or options, to directors, officers or employees
must be approved by a majority of votes cast at a stockholders meeting. The
DGCL does not require stockholder approval of such transactions.

Consideration for Shares

Under the NYBCL, stock certificates cannot be issued until full payment
has been made, except for shares purchased under a stock option plan permitting
installment payments. Under the DGCL, however, a corporation can receive cash,
services, personal or real property, leases of real property or any combination
of these as payment in full or in part for the shares. A purchaser of shares
under the DGCL may pay an amount equal to or greater than the par value of such
shares if the corporation receives a binding obligation of the purchaser to pay
the balance of the purchase price.

Dividends and Redemption of Stock

Subject to its charter provisions, a corporation may generally pay
dividends, redeem shares of its stock or make other distributions to
stockholders if the corporation is solvent and would not become insolvent
because of the dividend, redemption or distribution. The assets applied to such
a distribution may not be greater than the corporation's "surplus." The NYBCL
defines surplus as the excess of net assets over stated capital, and allows the
board to adjust stated capital. The DGCL defines surplus as the excess of net
assets over capital, and allows the board to adjust capital (for shares with
par value, the capital need only equal the aggregate par value of such shares).
If there is no surplus, the DGCL allows

<PAGE>

the corporation to apply net profits from the current or preceding fiscal year,
or both, unless the corporation's net assets are less than the capital
represented by issued and outstanding stock which has a preference on any
distribution of assets.

Both the NYBCL and the DGCL permit redemptions only when the corporation
has outstanding shares of at least one class of voting stock which is not
subject to the redemption.

Appraisal Rights

Generally, "appraisal rights" entitle dissenting stockholders to receive
the fair value of their shares in the merger or consolidation of a corporation
or in the sale of all or substantially all its assets. The NYBCL also extends
appraisal rights to an exchange of a corporation's shares.

The NYBCL provides that dissenting stockholders have no appraisal rights
if their shares are listed on a national securities exchange. If shares are not
listed on an exchange, appraisal rights under the NYBCL allow any stockholder
of a New York corporation, with various exceptions, to receive fair value for
his or her shares in such transactions. Regardless of listing on an exchange,
appraisal rights are available under the NYBCL in a merger between a parent
corporation and its subsidiary where only one of them is a New York
corporation, or in a merger between a parent and subsidiary where both are New
York corporations and the parent owns at least 90% of the subsidiary. Also,
appraisal rights are available to stockholders who are not allowed to vote on a
merger or consolidation and whose shares will be canceled or exchanged for cash
or other value other than shares of the surviving corporation or another
corporation. When appraisal rights are available, the stockholder may have to
request the appraisal and follow other required procedures. See the discussion
of appraisal rights under the section heading "Rights of Dissenting
Stockholders."

Similarly, under the DGCL, appraisal rights are not available to a
stockholder if the corporation's shares are listed on a national securities
exchange or held by more than 2,000 stockholders of record, or if the
corporation will be the surviving corporation in a merger which does not
require the approval of the surviving corporation's stockholders. However,
regardless of listing on an exchange, a dissenting stockholder in a merger or
consolidation has appraisal rights under the DGCL if the transaction requires
him or her to exchange shares for anything of value other than one or more of
the following:

o Shares of stock of the surviving corporation or of a new corporation
which results from the merger or consolidation.

o Shares of another corporation which will be listed on a national
securities exchange or held by more than 2,000 stockholders of record
after the merger or consolidation occurs.

o Cash instead of fractional shares of the surviving corporation or another
corporation.

Business Combinations with Interested Stockholders

Provisions in both laws may help to prevent or delay changes of corporate
control. In particular, both the NYBCL and the DGCL restrict or prohibit an
interested stockholder from entering into certain types of business
combinations unless the board of directors approves the transaction in advance.

Under the NYBCL, an interested stockholder is generally prohibited from
entering into certain types of business combinations with a New York
corporation for a period of five years after becoming an interested
stockholder, unless the board of directors approved either the business
combination or the acquisition of stock by the interested stockholder before
the interested stockholder acquired his or her shares. An "interested
stockholder" under the NYBCL is generally a beneficial owner of at least 20% of
the corporation's outstanding voting stock. "Business combinations" under the
NYBCL include mergers and consolidations between corporations or with an
interested stockholder; sales, leases, mortgages or other dispositions to an
interested stockholder of assets with an aggregate market value which either
(1) equals 10% or more of the corporation's consolidated assets or outstanding
stock, or (2) represents 10% or more of the consolidated earning power or net
income of the corporation; issues and transfers of stock with an aggregate
market value of at least 5% in relation to the outstanding stock of the
corporation; liquidation or dissolution of the corporation proposed by or in
connection with an interested stockholder; reclassification or recapitalization
of stock that would increase the proportionate stock ownership of an

<PAGE>

interested stockholder; and the receipt by an interested stockholder of benefit
from loans, guarantees, pledges or other financial assistance or tax benefits
provided by the corporation.

After the five-year period referred to in the NYBCL, the law allows such
business combinations if either the board of directors or a majority of the
outstanding voting stock not owned by the interested stockholder have approved
the business combination or the purchase of stock by the interested stockholder
before the interested stockholder acquired his or her shares. Business
combinations are also permitted when certain statutory "fair price,"
requirements are met.

Section 203 of the DGCL generally prohibits an interested stockholder from
entering into certain types of business combinations with a Delaware
corporation for three years after becoming an interested stockholder. An
"interested stockholder" under the DGCL is any person other than the
corporation and its majority-owned subsidiaries who owns at least 15% of the
outstanding voting stock, or who owned at least 15% within the preceding three
years, and this definition includes affiliates of the corporation. The
prohibited combinations include:

o Mergers or consolidations.

o Sales, leases, exchanges or other dispositions of 10% or more of (1) the
aggregate market value of all assets of the corporation or (2) the
aggregate market value of all the outstanding stock of the corporation.

o Issuances or transfers by the corporation of its stock that would
increase the proportionate share of stock owned by the interested
stockholder.

o Receipt by the interested stockholder of the benefit of loans, advances,
guarantees, pledges or other financial benefits provided by the
corporation.

o Any other transaction, with certain exceptions, that increases the
proportionate share of the stock owned by the interested stockholder.

A Delaware corporation may choose not to be subject to Section 203. The
Company has chosen, however, to accept the protections of Section 203, and
therefore the charter of SoftNet-DE will not waive those protections.
Nevertheless, Section 203 will not apply in the following cases:

o If, before the stockholder became an interested stockholder, the board of
directors approved the business combination or the transaction that
resulted in the stockholder becoming an interested stockholder.

o If, after the transaction that resulted in the stockholder becoming an
interested stockholder, the interested stockholder owned at least 85% of
the voting stock of the corporation outstanding at the time the
transaction commenced, subject to technical calculation rules.

o If, on or after the time the interested stockholder became an interested
stockholder, the board of directors approved the business combination, and
at least two-thirds of the outstanding voting stock which is not owned by
the interested stockholder also ratified the business combination at a
stockholders, meeting.

Material Changes in the SoftNet-DE Charter and Bylaws from the SoftNet-NY
Charter and Bylaws

The SoftNet-DE charter and Bylaws will be in effect and will govern the
rights of stockholders in the event this proposal six is approved and the
merger of SoftNet-NY into SoftNet-DE takes place. The SoftNet-DE charter is
substantially similar to the SoftNet-NY charter. Except for the provisions
relating to indemnification and limitation of liability, authorized stock,
stockholders' ability to present proposals at stockholder meetings and nominate
directors, stockholders' ability to call special meetings, cumulative voting,
and the ability to remove directors, the differences between the two are
primarily as a result of differences between the NYBCL and the DGCL as
discussed above. Set forth below is a summary of the material changes in the
SoftNet-DE charter and Bylaws from the current SoftNet-NY charter and Bylaws.
The Bylaws of SoftNet-DE and SoftNet-NY are substantially similar except that
the Bylaws of SoftNet-DE reflect the DGCL and the provisions of the SoftNet-DE
charter, as well as certain administrative differences described below. Copies
of the charter and Bylaws of SoftNet-NY are available for

<PAGE>

inspection at the principal office of SoftNet-NY and copies will be sent to
stockholders upon request.

Indemnification and Limitation of Liability

The SoftNet-DE charter and Bylaws provide for indemnification of directors
and officers (including provisions authorizing the advancement of expenses
incurred in connection with certain applicable proceedings) to the fullest
extent permitted by the DGCL.

Provisions relating to indemnification of directors and officers of
SoftNet-NY are included in SoftNet-NY's Bylaws rather than in the SoftNet-NY
charter. Such provisions provide for indemnification of directors and officers
in certain situations.

The SoftNet-DE Bylaws expressly authorize the Company to purchase and
maintain directors and officers liability insurance to insure against
liabilities or losses incurred in such capacities whether or not the
corporation would have the power to indemnify the individual under the DGCL.
There are similar provisions in the SoftNet-NY Bylaws.

Furthermore, the SoftNet-DE charter provides that a director of the
corporation shall not be liable to the corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director to the fullest
extent permitted by Delaware Law. This provision in the SoftNet-DE charter is
intended to afford directors additional protection and limit their potential
liability from suits alleging a breach of the duty of care by a director. As a
result of the inclusion of such a provision, stockholders may be unable to
recover monetary damages against directors for actions taken by them that
constitute negligence or that are otherwise in violation of their duty of care,
although it may be possible to obtain injunctive or other equitable relief with
respect to such actions. If equitable remedies are found not to be available to
stockholders in any particular situation, stockholders may not have an
effective remedy against a director in connection with such conduct.

In general, the purpose of the changes in the SoftNet-DE charter is to
provide indemnification and exculpation provisions that are customary in modern
charter documents of Delaware corporations (particularly in charter documents
of major, public corporations that have incorporated in Delaware).

Changes in Authorized Capital Stock

The SoftNet-NY charter authorizes the Company to issue Twenty-Five Million
(25,000,000) common shares, having a par value of $0.01 per share, and Four
Million (4,000,000) preferred shares, having a par value of $0.10 per share.

The SoftNet-DE charter authorizes SoftNet-DE to issue One Hundred Million
(100,000,000) common shares, having a par value of $0.01 per share, and Four
Million (4,000,000) preferred shares, having a par value of $0.10 per share.

Paragraph Third of the SoftNet-NY charter now provides that the Company
has the authority to issue two classes of stock, consisting of 25,000,000
shares of common stock and 4,000,000 shares of Preferred Stock. Subject to
approval of proposal two by the stockholders, the SoftNet-DE charter will
authorize 100,000,000 shares of common stock and 4,000,000 shares of preferred
stock, with no change in the voting powers, qualifications, rights and
privileges of such shares. If proposal two is not approved by the stockholders,
SoftNet-DE's charter will authorize 25,000,000 shares of common stock and
4,000,000 shares of Preferred Stock. All classes of preferred stock authorized
in the SoftNet-DE charter will continue to be equal to each other with respect
to voting rights, liquidation rights and dividend rights. The increase in the
number of shares of authorized common stock will give the Company better
flexibility to engage in certain transactions. See proposal two.

Stockholder Proposals and Nominating Directors

The SoftNet-NY Bylaws require that, to be effective, stockholders provide
to the Company written nominations of directors at least 45 days in advance of
the annual meeting of stockholders, or other meeting where the election of
directors is scheduled to occur, and is silent as to stockholder presentation
of proposals to be considered at annual or special meetings of stockholders.
The SoftNet-DE charter

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requires stockholders to provide to the Company written nominations of
directors and proposals to be considered at meetings of shareholders at least
60 days in advance of the proposed record date of such meeting.

Stockholder Ability to call Special Meetings

The SoftNet-NY Bylaws permit the Chairman of the Board of Directors, the
President or the Board of Directors to call special meetings of shareholders.
In addition, the SoftNet-NY Bylaws require the Secretary to call a special
meeting of shareholders upon a written request setting forth the purpose of
such meeting of not less than 662|M/3% of the outstanding shares of the Company
entitled to vote for the election of directors. The SoftNet-DE Bylaws will
contain similar provisions, except that the Secretary will be required to call
a special meeting of shareholders upon written request of not less than 15% of
the outstanding shares of common stock. Such request must be made to the Board
of Directors at least 60 days prior to the proposed record date of such special
meeting.

Cumulative Voting

The SoftNet-NY charter provides for cumulative voting in the election of
directors. Cumulative voting allows a stockholder to give one candidate a
number of votes equal to the number of directors to be elected multiplied by
the number of shares of common stock held by such shareholder, or may
distribute such votes among as many candidates as the shareholder chooses. In
this way, a shareholder with a sufficient minority stake can elect a director.
The SoftNet-DE charter does not provide for cumulative voting.

Ability to Remove Directors

The SoftNet-NY charter permits removal of directors only for cause. The
SoftNet-DE charter will not contain such a provision, and shareholders will be
able to remove directors for reasons other than cause.

Other Changes to Reflect Technical Differences Between Delaware Law and
New York Law

In addition to the changes described above, certain technical changes have
been made in the SoftNet-DE charter and Bylaws from the SoftNet-NY charter and
Bylaws to reflect differences between the DGCL and the NYBCL. Such technical
changes include: designation of a registered office and registered agent in the
State of Delaware; changes in the minimum and maximum number of days applicable
for giving notice of meetings and for setting record dates; and changing
references in the Bylaws to place or to applicable law from New York to
Delaware.

Rights of Dissenting Stockholders

Section 910 of the NYBCL sets forth the rights of stockholders of the
Company who object to the Merger. Any stockholder of the Company who does not
vote in favor of this proposal six or who duly revokes his or her vote in favor
of the transaction may, if the Merger is consummated, have the right to seek to
obtain payment in cash of the fair value of his shares by strictly complying
with the requirements of Section 623 of the New York NYBCL ("Section 623").

The dissenting stockholder must file with the Company before the taking of
the vote on this proposal six a written objection including statement of
election to dissent, such stockholder's name and residence address, the number
and classes of shares of stock as to which dissent is made (which number may
not be less than all of the shares as to which such stockholder has a right to
dissent) and a demand for payment of the fair value of such shares if the
Merger is consummated. Any such written objection should be addressed to:
SoftNet Systems Inc., 650 Townsend Street, Suite 225, San Francisco, California
94103. Attention: Steven M. Harris, Secretary.

Within ten (10) days after the vote of stockholders authorizing this
proposal six, the Company must give written notice of such authorization to
each such dissenting stockholder. Within twenty (20) days after the giving of
such notice, any stockholder to whom the Company failed to give notice of the
Annual Meeting who elects to dissent from the Merger must file with the Company
a written notice of such election, stating such stockholder's name and
residence address, the number and classes of shares of stock

<PAGE>

as to which dissent is made (which number may not be less than all of the
shares as to which such stockholder has a right to dissent) and a demand for
payment of the fair value of such shares if the Merger is consummated.

At the time of filing the notice of election to dissent or within one
month thereafter, dissenting stockholders must submit certificates representing
the applicable shares to the Company or its transfer agent, ChaseMellon
Shareholder Services for notation thereon of the election to dissent, after
which such certificates will be returned to the stockholder. Any stockholder
who fails to submit his or her share certificates for such notation shall, at
the option of the Company exercised by written notice to the stockholder within
forty-five (45) days from the date of filing of the notice of election to
dissent, lose such stockholder's appraisal rights unless a court, for good
cause shown, shall otherwise direct.

Within fifteen (15) days after the expiration of the period within which
stockholders may file their notices of election to dissent, or within fifteen
(15) days after consummation of the Merger, whichever is later (but not later
than ninety days after the stockholders, vote authorizing the Merger), the
Company must make a written offer (which, if the Merger has not been
consummated, may be conditioned upon such consummation) to each stockholder who
has filed such notice of election to pay for the shares at a specified price
which the Company considers to be their fair value. If the Company and the
dissenting stockholder are unable to agree as to such value, Section 623
provides for judicial determination of fair value. In the event of such a
disagreement, a proceeding shall be commenced by the Company in the Supreme
Court of the State of New York, County of New York, or by the dissenting
stockholder if the Company fails to commence the proceeding within the time
period required by Section 623 of the NYBCL. The Company intends to commence
such a proceeding in the event of such a disagreement.

A negative vote on this proposal six does not constitute a "written
objection" filed by an objecting stockholder. Failure by a stockholder to vote
against this proposal six will not, however, constitute a waiver of rights
under Section 623 provided that a written objection has been properly filed and
such stockholder has not voted in favor of this proposal six.

A copy of Section 623 is attached in full as Appendix B. Each stockholder
considering whether to exercise dissenter's rights should review Appendix B
carefully and consult such stockholder's advisors for advice regarding the
dissenter's rights.

Because this proposal six does not involve any change in the nature of the
Company's business, but only involves technical corporate matters such as the
Reincorporation, the Merger and the charter amendments described herein,
management hopes that no stockholder will exercise a dissenter's right. Under
the Merger Agreement, the Board of Directors may abandon the Merger, even after
stockholder approval, if for any reason the Board of Directors determines that
it is inadvisable to proceed with the Merger, including considering the number
of shares for which appraisal rights have been exercised and the cost to the
Company hereof.

Vote Required for Approval of this Proposal Six

Approval of this proposal six will require the affirmative vote of at
least two-thirds of the outstanding shares of SoftNet-NY common stock entitled
to vote thereon at the Annual Meeting. As of the Record Date, the current
directors and officers of the Company have the right to vote 217,429 shares,
representing approximately 2.5% of the outstanding common stock, and have
advised the Company that their present intent is to vote in favor of the
proposal to reincorporate in Delaware. Proxies solicited by the Board of
Directors will be voted FOR this proposal six, unless a shareholder specifies
otherwise.

Recommendation of the Board of Directors

THE BOARD OF DIRECTORS DEEMS PROPOSAL SIX TO BE IN THE BEST INTERESTS OF
THE COMPANY AND ITS STOCKHOLDERS AND RECOMMENDS A VOTE "FOR" APPROVAL THEREOF.
UNLESS AUTHORITY TO DO SO IS WITHHELD, THE PERSON(S) NAMED IN EACH PROXY WILL
VOTE THE SHARES REPRESENTED THEREBY "FOR" THE APPROVAL OF THE MERGER AGREEMENT
TO EFFECT THE REINCORPORATION IN DELAWARE.

<PAGE>

PROPOSAL SEVEN

CONFIRMATION OF APPOINTMENT OF INDEPENDENT AUDITORS

The Board of Directors has selected PricewaterhouseCoopers LLP to audit
the financial statements of the Company for the year ending September 30, 1999,
and recommends that the stockholders confirm the selection. Confirmation of
this selection requires approval by at least a majority of the shares of common
stock present in person or by proxy at the Annual Meeting. In the event of a
negative vote, the Board will reconsider its selection. Representatives of
PricewaterhouseCoopers LLP are expected to be present at the Annual Meeting,
will have the opportunity to make a statement if they so desire, and are
expected to be available to respond to appropriate questions.

THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR"
THE CONFIRMATION OF THE APPOINTMENT OF INDEPENDENT AUDITORS.

STOCKHOLDERS' PROPOSALS

Stockholders are entitled to present proposals for action at a forthcoming
meeting if they comply with the requirements of the proxy rules promulgated by
the Securities and Exchange Commission. Proposals of stockholders of the
Company intended to be presented for consideration at the Company's 2000 Annual
Meeting of Stockholders must be received by the Company no later than October
1, 1999, in order that they may be included in the proxy statement and form of
proxy related to that meeting.

The attached proxy card grants the proxy holders discretionary authority
to vote on any matter raised at the Annual Meeting. If a stockholder intends to
submit a proposal at the 2000 Annual Meeting, which is not eligible for
inclusion in the proxy statement and form of proxy relating to that meeting,
the stockholder must do so no later than December 15, 1999. If such stockholder
fails to comply with the foregoing notice provision, the proxy holders will be
allowed to use their discretionary voting authority when the proposal is raised
at the 2000 Annual Meeting.

OTHER MATTERS

Management knows of no matters, other than those referred to in this proxy
statement, which will be presented to the Annual Meeting. However, if any other
matters properly come before the Annual Meeting or any adjournment, the persons
named in the accompanying proxy will vote it in accordance with their best
judgment on such matters.

The Company has furnished its financial statements to stockholders in its
1998 Annual Report which accompanies this Proxy Statement. The 1998 Annual
Report contains a complete copy of the Company's Form 10-K/A for the year ended
September 30, 1998. In addition, the Company will provide, for a fee, on the
request of such stockholder, copies of exhibits to the Form 10-K/A. Requests
for copies of such exhibits should be directed to Steven M. Harris, Secretary,
650 Townsend Street, Suite 225, San Francisco, California 94103; telephone
number (415) 365-2500.

<PAGE>

DOCUMENTS INCORPORATED BY REFERENCE

The following documents filed by the Company with the Commission (File No.
1-5270) pursuant to the Exchange Act are incorporated herein by reference:

1. The Company's Annual Report on Form 10-K/A for the fiscal year ended
September 30, 1998.

2. The Company's Current Report on Form 8-K filed with the Commission on
January 26, 1999.

3. The Company's Current Report on Form 8-K filed with the Commission on
February 24, 1999.

4. The Company's Current Report on Form 8-K/A filed with the Commission on
February 26, 1999.

5. The Company's Current Report on Form 8-K filed with the Commission on
February 26, 1999.

6. The Company's Current Report on Form 8-K filed with the Commission on
March 5, 1999.

7. The Company's Current Report on Form 8-K/A filed with the Commission on
March 12, 1999.

The Company will provide, without charge, a copy of any document hereby
incorporated by reference to each stockholder who requests copies of such
documents. Requests should be made to the Company at 650 Townsend Street, Suite
225, San Francisco, California, 94103; ATTN: Steven M. Harris, Secretary.

<PAGE>

APPENDIX A

AGREEMENT AND PLAN OF MERGER

AGREEMENT AND PLAN OF MERGER, dated as of , 1999, pursuant to
Section 252 of the Delaware General Corporation Law (the "DGCL") and Section
907 of the New York Business Corporation Law (the "NYBCL"), between SoftNet
Systems, Inc., a New York corporation having its principal place of business at
650 Townsend Street, San Francisco, CA 94103 (the "Company"), and SoftNet
Systems, Inc., a Delaware corporation and wholly-owned subsidiary of the
Company, having its principal place of business at 650 Townsend Street, San
Francisco, CA 94103 (the "Surviving Company").

W I T N E S S E T H:

WHEREAS, the Company is a corporation duly organized and existing under
the laws of the State of New York with total authorized capital stock of
Twenty-Nine Million (29,000,000) shares, consisting of Twenty-Five Million
(25,000,000) shares of common stock, $.01 par value per share (the "Company
Common Stock") and Four Million (4,000,000) shares of preferred stock, $.10 par
value per share (the "Company Preferred Stock").

WHEREAS, the Surviving Company is a corporation duly organized and
existing under the laws of the State of Delaware and will have, effective at
the Effective Date (as defined below) total authorized capital stock of One
Hundred Four Million (104,000,000) shares, consisting of One Hundred Million
(100,000,000) shares of common stock, $.01 par value per share (the "Surviving
Company Common Stock"), and Four Million (4,000,000) shares of preferred stock,
$.10 par value per share (the "Surviving Company Preferred Stock").

WHEREAS, the Boards of Directors of the Company and the Surviving Company
have each adopted resolutions approving this Agreement and Plan of Merger.

NOW THEREFORE, in consideration of the foregoing and the undertakings
herein contained and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:

1. Merger. The Company shall be merged into the Surviving Company
pursuant to Section 252 of the DGCL and Section 907 of the NYBCL. The
Surviving Company shall survive the merger herein contemplated and shall
continue to be governed by the laws of the State of Delaware. The separate
corporate existence of the Company shall cease forthwith upon the Effective
Date. The merger of the Company into the Surviving Company shall
hereinafter be referred to as the "Merger."

2. Shareholder Approval. As soon as practicable after the execution of
this Agreement and Plan of Merger, the Company and the Surviving Company
shall, if necessary under the DGCL and NYBCL, submit this Agreement and
Plan of Merger to their respective shareholders for approval.

3. Effective Date. The Merger shall be effective upon the filing of this
Agreement and Plan of Merger with the Secretaries of State of the States of
Delaware and New York, which filings shall be made as soon as practicable
after all required shareholder approvals have been obtained. The time of
such effectiveness shall hereinafter be referred to as the "Effective
Date."

4. Common Stock and Preferred Stock of the Company. On the Effective
Date, by virtue of the Merger and without any action on the part of the
holder thereof, (1) each share of common stock of the Company shall cease
to exist and shall be changed and converted into one fully paid and
non-assessable share of the Surviving Company Common Stock and (2) each
share of the Company Preferred Stock shall cease to exist and shall be
changed and converted into one fully paid and non-assessable share of the
Surviving Company Preferred Stock.

5. Stock Certificates. On and after the Effective Date, all of the
outstanding certificates which prior to that time represented shares of
Company Common Stock and Company Preferred Stock shall be deemed for all
purposes to evidence ownership of and to represent the shares of the

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Surviving Company Common Stock and Surviving Company Preferred Stock into
which the shares of the Company represented by such certificates have been
converted as herein provided. The registered owner on the books and records
of the Surviving Company or its transfer agent of any such outstanding
stock certificate shall, until such certificate shall have been surrendered
for transfer or conversion or otherwise accounted for to the Surviving
Company or its transfer agent, have and be entitled to exercise any voting
and other rights with respect to and to receive any dividend and other
distributions upon the shares of the Surviving Company evidenced by such
outstanding certificate as above provided.

6. Stock Option Plans.

(a) On the Effective Date, if any options or rights granted under
either the Company's 1998 Stock Incentive Plan or the Amended 1995 Long
Term Incentive Plan remain outstanding, then the Surviving Company shall
assume the outstanding and unexercised portions of such options and such
options shall be changed and converted into options to purchase common
stock of the Surviving Company, such that an option to purchase one (1)
share of common stock of the Company shall be converted into an option to
purchase one (1) share of common stock of the Surviving Company. No other
changes in the terms and conditions of such options shall occur.

(b) One (1) share of the Surviving Company's Common Stock shall be
reserved for issuance upon the exercise of each option to purchase one
(1) share of the Surviving Company's Common Stock so reserved immediately
prior to the Effective Date.

(c) No "additional benefits" within the meaning of Section 424(a)(2)
of the Internal Revenue Code of 1986 (as amended) shall be accorded to
the optionholders pursuant to the assumption of their Options.

7. Warrants.

(a) On the Effective Date, all outstanding and unexercised warrants
issued by the Company shall be charged and converted into warrants to
purchase common stock of the Surviving Company, such that a warrant to
purchase one (1) share of common stock of the Company shall be converted
into a warrant to purchase one (1) share of common stock of the Surviving
Company. No other changes in the terms and conditions of such warrants
shall occur.

(b) One (1) share of the Surviving Company's Common Stock shall be
reserved for issuance upon the exercise of each warrant to purchase one
(1) share of the Surviving Company's Common Stock so reserved immediately
prior to the Effective Date.

8. Subordinated Convertible Debentures. On the Effective Date, the
Surviving Company shall assume all obligations of the Company in connection
with the Company's issuance of 9% Convertible Subordinated Debentures due
2000, 6% Convertible Subordinated Debentures due 2002 and 5% Convertible
Subordinated Debentures due 2002 (the "Debentures"), and the Debentures
shall be convertible into shares of the common stock of the Surviving
Company rather than shares of the common stock of the Company. No other
changes in the terms and conditions of the Debentures shall occur.

9. Cable Affiliate Incentive Plan. On the Effective Date, the Surviving
Company shall assume all obligations of the Company under the Company's
Cable Affiliate Incentive Plan (the "Incentive Plan"). For every share of
the Company's Common Stock reserved for issuance under the Incentive Plan,
a share of the Surviving Company's Common Stock shall similarly be reserved
for issuance under the Incentive Plan.

10. Employee Benefit Plans. On the Effective Date, the Surviving Company
shall assume all obligations of the Company under any and all employee
benefit plans in effect as of such date with respect to which employee
rights or accrued benefits are outstanding as of such date. On the
Effective Date, the Surviving Company shall adopt and continue in effect
all such employee benefit plans upon the same terms and conditions as were
in effect immediately prior to the Merger.

11. Succession. On the Effective Date, the Surviving Company shall
succeed to all of the rights, privileges, debts, liabilities, powers and
property of the Company in the manner of and as

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more fully set forth in Section 259 of the DGCL. Without limiting the
foregoing, upon the Effective Date, all property, rights, privileges,
franchises, patents, trademarks, licenses, registrations, and other assets
of every kind and description of the Company shall be transferred to,
vested in and developed upon the Surviving Company without further act or
deed and all property, rights, and every other interest of the Company and
the Surviving Company shall be as effectively the property of the Surviving
Company as they were of the Company and the Surviving Company,
respectively. All rights of creditors of the Company and all liens upon any
property of the Company shall be preserved unimpaired, and all debts,
liabilities and duties of the Company shall attach to the Surviving Company
and may be enforced against it to the same extent as if said debts,
liabilities and duties had been incurred or contracted by it.

12. Certificate of Incorporation and Bylaws. From and after the
Effective Date, the Certificate of Incorporation and Bylaws of the
Surviving Company shall continue in full force and effect until further
amended in accordance with the provisions thereof and applicable law.

13. Directors and Officers. The members of the Board of Directors and
the officers of the Surviving Company on the Effective Date shall continue
in office until the expiration of their respective terms of office and
until their successors have been elected and qualified.

14. Further Assurances. From time to time, as and when required by the
Surviving Company or by its successors and assigns, there shall be executed
and delivered on behalf of the Company such deeds and other instruments,
and there shall be taken or caused to be taken by it such further and other
action as shall be appropriate or necessary in order to best or perfect in
or to confirm of record or otherwise in the Surviving Company the title to
and possession of all the property, interests, assets, rights, privileges,
immunities, powers, franchises and authority of the Company, and otherwise
to carry out the purposes of this Agreement and Plan of Merger, and the
officers and directors of the Company are fully authorized in the name and
on behalf of the Company or otherwise to take any and all such action and
to execute and deliver any and all such deeds and other instruments.

15. Abandonment. Notwithstanding the approval of this Merger Agreement
by the shareholders of the Company or by the sole stockholder of the
Surviving Company, at any time before the Effective Date, (a) this Merger
Agreement may be terminated and the Merger may be abandoned by the Board of
Directors of either the Company or the Surviving Company or both, including
by reason of a determination, in the sole discretion of either Board of
Directors, that holders of an unacceptable number of shares intend to
exercise their statutory appraisal rights pursuant to Section 623 of the
New York Business Corporation Law, or (b) the consummation of the Merger
may be deferred for a reasonable period of time if, in the opinion of the
Boards of Directors of the Company and the Surviving Company, such action
would be in the best interests of such corporations. In the event of
termination of this Merger Agreement, this Merger Agreement shall become
void and of no effect and there shall be no liability on the part of either
corporation or their respective Board of Directors or stockholders with
respect thereto, except that the Company shall pay all expenses incurred in
connection with the Merger or in respect of this Merger Agreement or
relating thereto.

16. Conditions to Merger. The obligation of the corporations to effect
the transactions contemplated hereby is subject to satisfaction of the
following conditions (any or all of which may be waived by either of the
corporations in its sole discretion to the extent permitted by law):

(a) the Merger shall have been approved by the shareholders of the
Company in accordance with applicable provisions of the New York Business
Corporations Law;

(b) The Company, as sole stockholder of the Surviving Company, shall
have approved the Merger in accordance with the Delaware General
Corporation Law; and

(c) any and all consents, permits, authorizations, approvals, and
orders deemed in the sole discretion of the Company to be material to the
consummation of the Merger shall have been obtained.

18. Amendment. This Agreement and Plan of Merger may be amended by the
Boards of Directors of the Company and the Surviving Company at any time
prior to the Effective Date,

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provided that an amendment made subsequent to the approval of this
Agreement and Plan of Merger by the shareholders of either the Company or
the Surviving Company shall not (1) alter or change the amount or kind of
shares, securities, cash, property and/or rights to be received in exchange
for or on conversion of all or any of the shares of any class or series
thereof of such corporation, (2) alter or change any term of the
Certificate of Incorporation of the Surviving Company to be effected by the
Merger or (3) alter or change any of the terms and conditions of this
Agreement and Plan of Merger if such alteration or change would adversely
affect the holders of any class or series of the stock of such corporation.

19. Governing Law. This Agreement and Plan of Merger and the legal
relations between the parties shall be governed by and construed in
accordance with the laws of the State of Delaware.

20. Counterparts. In order to facilitate the filing and recording of
this Agreement and Plan of Merger, the same may be executed in any number
of counterparts, each of which shall be deemed to be an original.

IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement
and Plan of Merger to be executed and attested on its behalf by its officers
hereunto duly authorized, as of the date first above written.

SoftNet Systems, Inc.,
a New York corporation

By:___________________________________

Name:_________________________________

Title:________________________________

ATTESTED:

By:___________________________________

Name:_________________________________

Title:________________________________

SoftNet Systems, Inc.,
a Delaware corporation

By:___________________________________

Name:_________________________________

Title:________________________________

ATTESTED:

By:___________________________________

Name:_________________________________

Title:________________________________

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<PAGE>

APPENDIX B

SECTION 623 PROCEDURE TO ENFORCE SHAREHOLDER'S RIGHT
TO RECEIVE PAYMENT FOR SHARES.

(a) A shareholder intending to enforce his right under a section of this
chapter to receive payment for his shares if the proposed corporate action
referred to therein is taken shall file with the corporation, before the
meeting of shareholders at which the action is submitted to a vote, or at such
meeting but before the vote, written objection to the action. The objection
shall include a notice of his election to dissent, his name and residence
address, the number and classes of shares as to which he dissents and a demand
for payment of the fair value of his shares if the action is taken. Such
objection is not required from any shareholder to whom the corporation did not
give notice of such meeting in accordance with this chapter or where the
proposed action is authorized by written consent of shareholders without a
meeting.

(b) Within ten days after the shareholders' authorization date, which term
as used in this section means the date on which the shareholders' vote
authorizing such action was taken, or the date on which such consent without a
meeting was obtained from the requisite shareholders, the corporation shall
give written notice of such authorization or consent by registered mail to each
shareholder who filed written objection or from whom written objection was not
required, excepting any shareholder who voted for or consented in writing to
the proposed action and who thereby is deemed to have elected not to enforce
his right to receive payment for his shares.

(c) Within twenty days after the giving of notice to him, any shareholder
from whom written objection was not required and who elects to dissent shall
file with the corporation a written notice of such election, stating his name
and residence address, the number and classes of shares as to which he dissents
and a demand for payment of the fair value of his shares. Any shareholder who
elects to dissent from a merger under section 905 (Merger of subsidiary
corporation) or paragraph (c) of section 907 (Merger or consolidation of
domestic and foreign corporations) or from a share exchange under paragraph (g)
of section 913 (Share exchanges) shall file a written notice of such election
to dissent within twenty days after the giving to him of a copy of the plan of
merger or exchange or an outline of the material features thereof under section
905 or 913.

(d) A shareholder may not dissent as to less than all of the shares, as to
which he has a right to dissent, held by him of record, that he owns
beneficially. A nominee or fiduciary may not dissent on behalf of any
beneficial owner as to less than all of the shares of such owner, as to which
such nominee or fiduciary has a right to dissent, held of record by such
nominee or fiduciary.

(e) Upon consummation of the corporate action, the shareholder shall cease
to have any of the rights of a shareholder except the right to be paid the fair
value of his shares and any other rights under this section. A notice of
election may be withdrawn by the shareholder at any time prior to his
acceptance in writing of an offer made by the corporation, as provided in
paragraph (g), but in no case later than sixty days from the date of
consummation of the corporate action except that if the corporation fails to
make a timely offer, as provided in paragraph (g), the time for withdrawing a
notice of election shall be extended until sixty days from the date an offer is
made. Upon expiration of such time, withdrawal of a notice of election shall
require the written consent of the corporation. In order to be effective,
withdrawal of a notice of election must be accompanied by the return to the
corporation of any advance payment made to the shareholder as provided in
paragraph (c,). If a notice of election is withdrawn, or the corporate action
is rescinded, or a court shall determine that the shareholder is not entitled
to receive payment for his shares, or the shareholder shall otherwise lose his
dissenter's rights, he shall not have the right to receive payment for his
shares and he shall be reinstated to all his rights as a shareholder as of the
consummation of the corporate action, including any intervening preemptive
rights and the right to payment of any intervening dividend or other
distribution or, if any such rights have expired or any such dividend or
distribution other than in cash has been completed in lieu thereof, at the
election of the corporation, the fair value thereof in cash as determined by
the board as of the time of such expiration or completion, but without
prejudice otherwise to any corporate proceedings that may have been taken in
the interim.

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(f) At the time of filing the notice of election to dissent or within one
month thereafter the shareholder of shares represented by certificates shall
submit the certificates representing his shares to the corporation, or to its
transfer agent, which shall forthwith note conspicuously thereon that a notice
of election has been filed and shall return the certificates to the shareholder
or other person who submitted them on his behalf. Any shareholder of shares
represented by certificates who fails to submit his certificates for such
notation as herein specified shall, at the option of the corporation exercised
by written notice to him within forty-five days from the date of filing of such
notice of election to dissent, lose his dissenter's rights unless a court, for
good cause shown, shall otherwise direct. Upon transfer of certificate bearing
such notation, each new certificate issued therefor shall bear a similar
notation together with the name of the original dissenting holder of the shares
and a transferee shall acquire no rights in the corporation except those which
the original dissenting shareholder had at the time of the transfer.

(g) Within fifteen days after the expiration of the period within which
shareholder,, may file their notices of election to dissent, or within fifteen
days after the propose( corporate action is consummated. whichever is later
(but in no case later than ninety days from the shareholders' authorization
date), the corporation or, in the case of a merger or consolidation, the
surviving or new corporation, shall make a written offer by registered mail to
each shareholder who has filed such notice of election to pay for his shares at
a specified price which the corporation considers to be their fair value. Such
offer shall be accompanied by a statement setting forth the aggregate number of
shares with respect to which notices of election to dissent have been received
and the aggregate number of holders of such shares. If the corporate action has
been consummated, such offer shall also be accompanied by (1) advance payment
to each such shareholder who has submitted the certificates representing his
shares to the corporation, as provided in paragraph (f), of an amount equal to
eighty percent of the amount of such offer, or (2) as to each shareholder who
has not yet submitted his certificates a statement that advance payment to him
of an amount equal to eighty percent of the amount of such offer shall be made
by the corporation promptly upon submission of his certificates. If the
corporate action has not been consummated at the time of the making of the
offer, such advance payment or statement as to advance payment shall be sent to
each shareholder entitled thereto forthwith upon consummation of the corporate
action. Every advance payment or statement as to advance payment shall include
advice to the shareholder to the effect that acceptance of such payment does
not constitute a waiver of any dissenters' rights. If the corporate action has
not been consummated upon the expiration of the ninety day period after the
shareholders' authorization date, the offer may be conditioned upon the
consummation of such action. Such offer shall be made at the same price per
share to all dissenting shareholders of the same class, or if divided into
series, of the same series and shall be accompanied by a balance sheet of the
corporation whose shares the dissenting shareholder holds as of the latest
available date, which shall not be earlier than twelve months before the making
of such offer, and a profit and loss statement or statements for not less than
a twelve month period ended on the date of such balance sheet or, if the
corporation was not in existence throughout such twelve month period, for the
portion thereof during which it was in existence. Notwithstanding the
foregoing, the corporation shall not be required to furnish a balance sheet or
profit and loss statement or statements to any shareholder to whom such balance
sheet or profit and loss statement or statements were previously furnished, nor
if in connection with obtaining the shareholders' authorization for or consent
to the proposed corporate action the shareholders were furnished with a proxy
or information statement, which included financial statements, pursuant to
Regulation 14A or Regulation 14C of the United States Securities and Exchange
Commission. If within thirty days after the making of such offer, the
corporation making the offer and any shareholder agree upon the price to be
paid for his shares, payment therefor shall be made within sixty days after the
making of such offer or the consummation of the proposed corporate action,
whichever is later, upon the surrender of the certificates for any such shares
represented by certificates.

(h) The following procedure shall apply if the corporation fails to make
such offer within such period of fifteen days, or if it makes the offer and any
dissenting shareholder or shareholders fail to agree with it within the period
of thirty days thereafter upon the price to be paid for their shares:

(1) The corporation shall, within twenty days after the expiration of
whichever is applicable of the two periods last mentioned. institute a
special proceeding in the supreme court in the judicial

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district in which the office of the corporation is located to determine the
rights of dissenting shareholders and to fix the fair value of their
shares. If, in the case of merger or consolidation, the surviving or new
corporation is a foreign corporation without an office in this state, such
proceeding shall be brought in the county where the office of the domestic
corporation, whose shares are to be valued, was located.

(2) If the corporation fails to institute such proceeding within such
period of twenty days, any dissenting shareholder may institute such
proceeding for the same purpose not later than thirty days after the
expiration of such twenty day period. If such proceeding is not instituted
within such thirty day period, all dissenter's rights shall be lost unless
the Supreme court, for good cause shown, shall otherwise direct.

(3) All dissenting shareholders, excepting those who, as provided in
paragraph (g), have agreed with the corporation upon the price to be paid
for their shares, shall be made parties to such proceeding, which shall
have the effect of an action quasi in rem against their shares. The
corporation shall serve a copy of the petition in such proceeding upon
each dissenting shareholder who is a resident of this state in the manner
provided by law for the service of a summons, and upon each nonresident
dissenting shareholder either by registered mail and publication, or in
such other manner as is permitted by law. The jurisdiction of the court
shall be plenary and exclusive.

(4) The court shall determine whether each dissenting shareholder, as to
whom the corporation requests the court to make such determination, is
entitled to receive payment for his shares. If the corporation does not
request any such determination or if the court finds that any dissenting
shareholder is so entitled, it shall proceed to fix the value of the
shares, which, for the purposes of this section, shall be the fair value
as of the close of business on the day prior to the shareholders'
authorization date. In fixing the fair value of the shares, the court
shall consider the nature of the transaction giving rise to the
shareholder's right to receive payment for shares and its effects on the
corporation and its shareholders, the concepts and methods then customary
in the relevant securities and financial markets for determining fair
value of shares of a corporation engaging in a similar transaction under
comparable circumstances and all other relevant factors. The court shall
determine the fair value of the shares without a jury and without referral
to an appraiser or referee. Upon application by the corporation or by any
shareholder who is a party to the proceeding, the court may, in its
discretion, permit pretrial disclosure, including, but not limited to,
disclosure of any expert's reports relating to the fair value of the
shares whether or not intended for use at the trial in the proceeding and
notwithstanding subdivision (d) of section 3101 of the civil practice law
and rules.

(5) The final order in the proceeding shall be entered against the
corporation in favor of each dissenting shareholder who is a party to the
proceeding and is entitled thereto for the value of his shares so
determined.

(6) The final order shall include an allowance for interest at such rate
as the court finds to be equitable, from the date the corporate action was
consummated to the date of payment. In determining the rate of interest,
the court shall consider all relevant factors, including the rate of
interest which the corporation would have had to pay to borrow money
during the pendency of the proceeding. If the court finds that the refusal
of any shareholder to accept the corporate offer of payment for his shares
was arbitrary, vexatious or otherwise not in good faith, no interest shall
be allowed to him.

(7) Each party to such proceeding shall bear its own costs and expenses,
including the fees and expenses of its counsel and of any experts employed
by it. Notwithstanding the foregoing, the court may, in its discretion,
apportion and assess all or any part of the costs, expenses and fees
incurred by the corporation against any or all of the dissenting
shareholders who are parties to the proceeding, including any who have
withdrawn their notices of election as provided in paragraph (e), if the
court finds that their refusal to accept the corporate offer was
arbitrary, vexatious or otherwise not in good faith. The court may, in its
discretion, apportion and assess all or any part of the costs, expenses
and fees incurred by any or all of the dissenting shareholders who are
parties to the proceeding against the corporation if the court finds any
of the following: (A) that the fair value of the shares as

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determined materially exceeds the amount which the corporation offered to
pay; (B) that no offer or required advance payment was made by the
corporation; (C) that the corporation failed to institute the special
proceeding within the period specified therefor; or (D) that the action of
the corporation in complying with its obligations as provided in this
section was arbitrary, vexatious or otherwise not in good faith. In making
any determination as Provided in clause (A), the court may consider the
dollar amount or the percentage, or both, b which the fair value of the
shares as determined exceeds the corporate offer.

(8) Within sixty days after final determination of the proceeding, the
corporation s pay to each dissenting shareholder the amount found to be
due him, upon surrender of certificate for any such shares represented by
certificates.

(i) Shares acquired by the corporation upon the payment of the agreed
value there or of the amount due under the final order, as provided in this
section, shall become treasury shares or be, cancelled as provided in section
515 (Reacquired shares), except that, in case of a merger or consolidation,
they may be held and disposed of as the plan of me or consolidation may
otherwise provide.

(j) No payment shall be made to a dissenting shareholder under this
section at a time when the corporation is insolvent or when such payment would
make it insolvent. In such event, the dissenting shareholder shall, at his
option:

(1) Withdraw his notice of election, which shall in such event be deemed
withdrawn with the written consent of the corporation; or

(2) Retain his status as a claimant against the corporation and, if it
is liquidated, subordinated to the rights of creditors of the corporation,
but have rights superior to the non-dissenting shareholders, and if it is
not liquidated, retain his right to be paid for shares, which right the
corporation shall be obliged to satisfy when the restrictions of paragraph
do not apply.

(3) The dissenting shareholder shall exercise such option under
subparagraph (1) or (2) by written notice filed with the corporation
within thirty days after the corporation h given him written notice that
payment for his shares cannot be made because of restrictions of this
paragraph. If the dissenting shareholder fails to exercise such option
provided, the corporation shall exercise the option by written notice
given to him within twenty days after the expiration of such period of
thirty days.

(k) The enforcement by a shareholder of his right to receive payment for
his shares in the manner provided herein shall exclude the enforcement by such
shareholder of an other right to which he might otherwise be entitled by virtue
of share ownership, except as provided in paragraph (e), and except that this
section shall not exclude the right of such shareholder to bring or maintain an
appropriate action to obtain relief on the ground that such corporate action
shall be or is unlawful or fraudulent as to him.

(l) Except as otherwise expressly provided in this section, any notice to
be given by a corporation to a shareholder under this section shall be given in
the manner provided in section 605 (Notice of meetings of shareholders).

(m) This section shall not apply to foreign corporations except as
provided in subparagraph (e)(2) of section 907 (Merger or consolidation of
domestic and foreign corporations) (Last amended by Ch. 117, L. `86, eff.
9-1-86.)

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