Internetware can be formed through aggregation of Internetware entities bottom-up to satisfy the user’s requirements. In the process, capability description of Internetware entity plays an important role. This paper proposes a capability description of Internetware entity based on environment ontology. The environment ontology includes environment entities and possible interactions with the environment entities in a particular domain. Tree-like hierarchical state machines are also included in the ontology to describe domain life-cycle of the environment entities. On the basis of the ideas, the capability of Internetware entity is embodied by interacting with environment entities and the changes of the environment entities during the interactions. Finally, this paper describes the matchmaking between capability descriptions of Internetware entities to support the discovery of Internetware entity. An example of online education course is given to illustrate the ideas. Internetware can be formed through aggregation of Internetware entities bottom-up to satisfy the user’s requirements. In the process, capability description of Internetware entity plays an important role. This paper proposes a capability description of Internetware entity based on environment ontology. The environment ontology includes environment entities and possible interactions with the environment entities in a particular domain. Tree-like hierarchical state machines are also included in the ontology to describe domain life-cycle of the environment entities. On the basis of the ideas, the capability of Internetware entity is embodied by interacting with environment entities and the changes of the environment entities during the interaction. Finally, this paper describes the matchmaking between capability descriptions of Internetware entities to support the discovery of Internetware entity. An example of online education course is given to illustrate the ideas .