================================================================================

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                         -------------------------------

                                   FORM 10-Q/A
                                 Amendment No. 1


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

                For the quarterly period ended September 30, 1999

                                       OR

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

            For the transition period from ___________ to ___________


                         -------------------------------

                         Commission file number: 1-5486

                          COYOTE NETWORK SYSTEMS, INC.

              -----------------------------------------------------
             (Exact name of registrant as specified in its charter)


           Delaware                                     36-2448698
-------------------------------            -----------------------------------
(State or other jurisdiction of            (I.R.S. Employer Identification No.)
incorporation or organization)


               4360 Park Terrace Drive, Westlake Village, CA 91361
               ---------------------------------------------------
               (Address of principal executive offices) (Zip Code)

                                 (818) 735-7600
                      ------------------------------------
              (Registrant's telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.                               |X| YES |_| NO

At May 26, 2000, the Registrant had issued and outstanding an aggregate of
17,426,001 shares of its common stock.

================================================================================
<PAGE>

                          COYOTE NETWORK SYSTEMS, INC.
                                AND SUBSIDIARIES

                                                                            Page
                                                                            ----
PART I.  FINANCIAL INFORMATION

         Item 1. Financial Statements

                 Balance Sheets..............................................  1
                 Statement of Operations.....................................  2
                 Statement of Cash Flows.....................................  3
                 Notes to Financial Statements...............................  4

         Item 2. Management's Discussion and Analysis of Financial
                   Condition and Results of Operations....................... 10

         Item 3. Quantitative and Qualitative Disclosures About Market Risk.. 14



PART II. OTHER INFORMATION


         Item 1.  Legal Proceedings.......................................... 16
         Item 2.  Changes in Securities and Use of Proceeds.................. 16
         Item 6.  Exhibits and Reports on Form 8-K........................... 16
         Signatures.......................................................... 18




<PAGE>
                         PART I - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS
------------------------------------

                  COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES
                      Condensed Consolidated Balance Sheets

                                 (In Thousands)
<TABLE>
<CAPTION>
                                                                                 Sept. 30, 1999       March 31, 1999
                                                                                 --------------       --------------
                                        Assets                                    (Unaudited)
Current assets:

<S>                                                                                 <C>                 <C>
     Cash and cash equivalents                                                      $   1,036           $   1,225
     Receivables, net of allowance of $305 at September 30, 1999
     and  $186 at March 31, 1999                                                        2,856               2,502

     Notes receivable - current                                                           352               2,367
     Deposits and other current assets                                                  1,325               4,035
                                                                                    ---------           ---------
         Total current assets                                                           5,569              10,129

Property and equipment, net                                                             3,985               4,807

Intangible assets, net                                                                  5,259               5,619
Net long term assets of discontinued operations                                         5,059               5,312
Notes receivable - non-current                                                            828                 771
Investments                                                                             1,550               1,550
Other assets                                                                              530                 619
                                                                                    ---------           ---------
                                                                                    $  22,780           $  28,807
                                                                                    =========           =========

                       Liabilities and Shareholders' Equity
Current liabilities:

     Lines of credit                                                                $   1,008           $   1,133
     Accounts payable                                                                   3,917               2,885

     Accrued professional fees and litigation costs                                       211                 676
     Other accrued liabilities                                                            810                 384
     Current portion of long-term debt and capital lease obligations                    1,004               1,160
     Net current liabilities of discontinued operations                                 1,819               4,550
                                                                                    ---------           ---------
         Total current liabilities                                                      8,769              10,788

Notes payable                                                                            ---                8,183
Long-term debt                                                                          1,464               1,534
Capital lease obligations                                                               1,634               1,817
Other liabilities                                                                         426                 428
Commitments and contingencies


Shareholders' equity:
     Preferred stock - $.01 par value:  authorized 5,000,000 shares;

       issued 600 and 700 shares, liquidation preference of $10,000 per share           6,000               7,395
     Common stock - $1 par value:  authorized 30,000,000 shares,
       issued 13,677,496 and 11,167,456 shares                                         13,678              11,167
     Additional paid-in capital                                                       115,925             109,254
     Accumulated deficit                                                             (119,359)           (116,002)
     Treasury stock at cost                                                            (5,757)             (5,757)
                                                                                    ----------          ----------

         Total shareholders' equity                                                    10,487               6,057
                                                                                    ---------           ---------

                                                                                    $  22,780           $  28,807
                                                                                    =========           =========

</TABLE>


            See notes to condensed consolidated financial statements.

                                       1
<PAGE>
                  COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES
                 Condensed Consolidated Statements of Operations

                                   (Unaudited)
                    (In Thousands, Except Per Share Amounts)


<TABLE>
<CAPTION>
                                                                    3 MONTHS ENDED                 6 MONTHS ENDED
                                                                ------------------------       -----------------------
                                                                 Sept. 30,     Sept. 30,        Sept. 30,    Sept. 30,
                                                                   1999          1998            1999         1998
                                                                 ---------     ---------        ---------   ---------

<S>                                                              <C>           <C>              <C>            <C>
Net sales                                                        $   2,449     $     720        $  4,308       $   849
Cost of sales                                                        2,099           890           3,512         1,052
                                                                 ---------     ---------        --------       -------
Gross profit (loss)                                                    350          (170)            796          (203)
Selling and administrative expenses                                  2,766         1,294           4,958         2,116
                                                                 ---------     ---------        --------       -------
Operating loss                                                      (2,416)       (1,464)         (4,162)       (2,319)
Interest expense                                                      (407)          (27)           (680)          (42)
Non-operating income (expense):
     Gain on sale of AGT                                             6,209          ---            6,209          ---
     Other                                                              78           (92)            183          (251)
                                                                 ---------     ---------        --------       -------
                                                                     6,287           (92)          6,392          (251)
                                                                 ---------     ----------       --------       --------

Income (loss) from continuing operations                             3,464        (1,583)          1,550        (2,612)
Income (loss) from discontinued operations                          (2,992)          233          (4,753)          184
                                                                 ----------    ---------        ---------      -------
     Net income (loss)                                           $     472     $  (1,350)       $ (3,203)      $(2,428)
                                                                 =========     ==========       =========      ========

Income (loss) per common share - basic:
     Continuing operations                                       $     .27     $    (.20)       $    .12       $  (.32)
     Discontinued operations                                          (.24)          .03            (.40)          .02
                                                                 ----------    ---------        ---------      --------
     Net income (loss) per common share [basic]                  $     .03     $    (.17)       $   (.28)      $  (.30)
                                                                 =========     ==========       =========      ========
Income (loss) per common share - diluted:
     Continuing operations                                       $     .22     $    (.20)       $    .09       $  (.32)
     Discontinued operations                                          (.19)          .03            (.31)          .02
                                                                 ---------     ---------        ---------      -------
Net income (loss) per common share [diluted]                     $    (.03)    $    (.17)       $   (.22)      $  (.30)
                                                                 ==========    ==========       =========      ========
Weighted average number of common shares outstanding
        -  basic                                                    12,704         9,586          11,960         9,125
        -  diluted                                                  15,602         9,586          15,070         9,125

</TABLE>



            See notes to condensed consolidated financial statements.

                                       2
<PAGE>

                  COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES
                 Condensed Consolidated Statements of Cash Flows

                                   (Unaudited)
                                 (In Thousands)
<TABLE>
<CAPTION>
                                                                                           6 MONTHS ENDED
                                                                                  --------------------------------
                                                                                  Sept. 30, 1999    Sept. 30, 1998
                                                                                  --------------    --------------
Operating activities:

<S>                                                                               <C>               <C>
     Net loss                                                                     $   (3,203)       $   (2,428)
Adjustments to reconcile loss to net cash provided (used)
  by operating activities:
     Depreciation and amortization                                                       488                30
     Gain on sale of land                                                               ---                (17)
     Gain on sale of Coyote Gateway, LLC                                              (6,209)             ---
     Provision for loss on discontinued operations                                       310               900
     Provision for common stock warrants issued                                          455              ---
     Net change in discontinued operations                                            (1,920)            8,066
     Changes in current assets and liabilities                                         2,328             3,094
                                                                                  ----------        ----------
Net cash provided (used) by operating activities                                      (7,751)            9,645
                                                                                  -----------       ----------

Investing activities:

     Purchases of property and equipment                                                (715)             (186)
     Proceeds from sales of marketable securities                                       ---                 16
     Proceeds from sale of land                                                         ---                 67
     Change in notes receivable                                                           57               270
     Increase in investments  in affiliate                                              (383)             (400)
     Cash investment in INET                                                            ---             (1,333)
     Net change in discontinued operations                                              (559)           (2,152)
                                                                                  -----------       -----------


Net cash provided (used) by investing activities                                      (1,600)           (3,718)
                                                                                  -----------       -----------
Financing activities:

     Repayments of long-term debt and capital lease obligations                         (309)              (71)
     Common stock issued, net of expenses                                             11,332               306
     Redemption of preferred stock                                                    (4,000)             ---
     Increase in note payable                                                          2,417              ---
     Decrease in borrowing on line of credit                                            (124)             ---
     Preference stock issued net of expenses                                            ---              6,345
     Preference stock dividends paid                                                    (154)              (29)
                                                                                  ----------        ----------
Net cash provided by financing activities                                              9,162             6,551
                                                                                  ----------        ----------

Increase (decrease) in cash and cash equivalents                                        (189)           12,478

Cash and cash equivalents:
     At beginning of the period                                                        1,225             3,746
                                                                                  ----------        ----------
     At end of the period                                                         $    1,036        $   16,224
                                                                                  ==========        ==========
Non-cash transactions:

     Issuance of common stock warrants                                                   455               485
     Conversion of convertible notes and interest into common stock                      ---             3,407
     Discount granted for investment in affiliate                                        ---               900
     Issuance of common stock for INET acquisition                                       ---             1,686
     Conversion of Class B Units into common stock                                       330              ---
     Gain on sale of Coyote Gateway, LLC                                               6,209              ---
     Beneficial conversion feature on preference shares                                  ---               262

</TABLE>

            See notes to condensed consolidated financial statements.

                                       3
<PAGE>
                  COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

NOTE 1   BASIS OF PRESENTATION
--------------------------------------

The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial  information and with the  instructions to Form 10-Q and Article 10 of
Regulation  S-X.  Accordingly,  they do not include all of the  information  and
footnotes  required by generally  accepted  accounting  principles  for complete
financial statements. In the opinion of management,  all adjustments (consisting
of normal recurring accruals)  considered necessary for a fair presentation have
been  included.  Certain prior year balances have been changed to conform to the
current  period  presentation.  Operating  results  for the three  months  ended
September 30, 1999,  are not  necessarily  indicative of the results that may be
expected  for the fiscal year ending March 31,  2000.  For further  information,
refer to the consolidated financial statements and footnotes thereto included in
the  Company's  annual report on Form 10-K/A for the fiscal year ended March 31,
1999.



NOTE 2   DISCONTINUANCE OF SWITCH BUSINESS

-------------------------------------------

In May 2000, the Board of Directors of the Company approved a restructuring plan
that provides for the  discontinuance  and sale of the DSS Switch segment of the
business,  which  includes  Coyote  Technologies,   LLC,  Coyote  Communications
Services,  LLC and  TelecomAlliance.  As a result,  the Company has reported the
operations of the DSS Switch business  separately as discontinued  operations in
the  accompanying  consolidated  statement  of  operations.  Also the assets and
liabilities  of this segment are  presented  separately  and  summarized  in the
accompanying consolidated balance sheets as follows (dollars in thousands):

<TABLE>
<CAPTION>
                                                          September 30, 1999         March 31, 1999
                                                          ------------------         --------------
                                                              (Unaudited)
     Current assets:
<S>                                                               <C>                   <C>
          Accounts receivable                                     $ 16,591              $  9,790
          Inventory                                                  2,392                 2,130
          Prepaids and other current assets                            223                   286
                                                                  --------              --------
                                                                  $ 19,206              $ 12,206
                                                                  --------              --------
     Current liabilities:
          Accounts payable                                           3,634              $  5,275
          Other accrued liabilities                                  3,817                 3,515
          Deferred revenue and customer deposits                    13,502                 7,810
          Current portion capital leases                                72                   156
                                                                  --------              --------
                                                                  $ 21,025              $ 16,756
                                                                  --------              --------

     Net current liabilities of discontinued operations           $  1,819              $  4,550
                                                                  ========              ========

     Non-current assets:
          Property and equipment, net                             $  2,951              $  3,374
          Capitalized software development                           2,008                 1,604
          Notes receivable                                             100                   100
                                                                  --------              --------
     Net long-term assets of discontinued operations              $  5,059              $  5,078
                                                                  ========              ========
</TABLE>

Expected operating results relating to the discontinued operations from April 1,
2000 until the expected  disposal date will be included in the estimated loss on
disposal  and  will  be  recorded  as a  charge  in the  consolidated  financial
statements in the fourth quarter of fiscal 2000. The Company expects to record a

                                       4
<PAGE>

charge for estimated  loss on disposal of the switch  business of  approximately
$10.0  million in fiscal  2000,  which  includes an  estimated  $3.0  million of
expected  losses of the segment for the first two quarters of fiscal  2001.  The
Company  expects to dispose of the  segment by the end of the second  quarter of
fiscal 2001.

The operating results relating to the above discontinued  segment are as follows
(dollars in thousands):

<TABLE>
<CAPTION>
                                                3 Months Ended                       6 Months Ended
                                       -------------------------------      --------------------------------
                                                (Unaudited)                             (Unaudited)
                                       Sept. 30, 1999   Sept. 30, 1998      Sept. 30, 1999    Sept. 30, 1998
                                       --------------   --------------      --------------    --------------
<S>                                       <C>              <C>                 <C>              <C>
  Net sales                               $  5,069         $  13,789           $ 13,615         $ 20,853
                                          ========         =========           ==========       ========
  Income (loss) from discontinued
       operations                         $ (2,988)        $   1,133           $ (4,439)        $  1,084
                                          =========        =========           =========        ========
</TABLE>



After the  decision to  discontinue  the switch  business,  the Company  will be
operating in only one segment, long distance services.


1996 - 1997 Restructuring
-------------------------
In November  1996 (and  revised in February  1997),  the Board of  Directors  of
Coyote Network Systems,  Inc. (the "Company") approved a restructuring plan (the
"Restructuring")  to separate its telecom switching equipment business (the "CTL
Business") from the following businesses:


                  Segment                               Company
                  -------                               -------
   Telecommunications equipment distribution             C&L
   Wire installation and service                         Valley
   Wholesale distribution of meat and seafood            Entree/APC


On  February  3,  1997,  the  Company  sold a  majority  of the assets of APC to
Colorado  Boxed Beef  Company.  On  November  20,  1997,  the  Company  sold its
telecommunications  equipment distributor subsidiary,  C&L Communications,  Inc.
("C&L"), to the management of C&L. In March 1998, the Company sold its 80% owned
wire  installation  and  service  subsidiary,  Valley  Communications  Inc.,  to
Technology Services Corporation.
<PAGE>
As of June 18, 1999,  the Company had  collected all cash related to the sale of
discontinued  operations  of the meat and seafood  segment  except  $410,000 due
under a note and the Company's only remaining asset of  discontinued  operations
was real  estate  related  to the land and  buildings  of the  discontinued  APC
operation.  Based upon an estimate of the market value of the real  estate,  the
Company took an  additional  charge of $900,000 in the second  quarter of fiscal
1999.  This charge is included in the loss from  discontinued  operations in the
condensed  consolidated  statement  of  operations  for the three and six months
ended  September  30,  1998.  The  asset  book  value as of March  31,  1999 was
$234,000,  net of mortgages and reserves applicable to the property.  This value
is included in the net long-term  assets of discontinued  operations as of March
31, 1999.

Prior to the sale of the land and buildings in July 1999, additional expenses of
$314,000 were incurred  related to property  taxes.  These costs are included in
the loss from discontinued operations in the condensed consolidated statement of
operations  for the  three  months  ($4,000)  and six  months  ($314,000)  ended
September 30, 1999.


NOTE 3   DISPOSITION OF ASSETS

--------------------------------------------------------------------------------

On October 27, 1999, pursuant to a Purchase Agreement, dated September 30, 1999,
among the Company,  American Gateway  Telecommunications,  Inc. ("AGTI"), Coyote
Gateway, LLC d/b/a American Gateway Telecommunications,  ("AGT"), Prinvest Corp.


                                       5
<PAGE>

("PVC"),  Prinvest  Financial Corp. ("PFC";  together with PVC,  "Prinvest") and
Arnold A. Salinas , the Company sold its approximately  80% membership  interest
in AGT to AGT's remaining  member,  AGTI, which previously held an approximately
20% membership interest in AGT (the "Sale").


In consideration for the Sale, the Company will receive, for 18 months after the
Sale,  a monthly  margin  participation  payment  from AGT equal to $0.0025  per
minute of  telecommunications  traffic  switched or routed by AGT through  AGT's
telecommunications  network,  which  the  Company  estimates  will be less  than
$50,000 and will record any such revenue upon receipt.  Pursuant to the terms of
the  Agreement,  AGT will remain  directly  liable for its $10.2 million  credit
facility (the "Credit  Facility") with Prinvest,  whose affiliate owns 53.75% of
AGTI. The Company will be relieved of its obligations under its pledge agreement
with Prinvest  which secured the Credit  Facility and, in connection  therewith,
Prinvest will return to the Company the 708,692 treasury shares of the Company's
common stock which had been pledged by the Company as collateral  for the Credit
Facility.  In addition,  as a result of the Sale,  the Company will no longer be
required to reflect the Credit Facility on its consolidated financial statements
and, accordingly, the Company has recognized a gain of $6,209,000 from the Sale.
The Company did not receive any immediate cash payments as a result of the Sale.

In addition, for the 18 months after the Sale, the Company will be the exclusive
supplier  of  telecommunications  switches  to AGT;  AGT  shall  receive a fifty
percent purchase discount on all Company-manufactured switches it purchases from
the Company  during this time period.  As of May 26,  2000,  the Company has not
received any switch purchase orders from AGT and does not anticipate any. Coyote
Communications  Services, LLC, an affiliate included in discontinued operations,
will continue to provide  maintenance and technical support services to AGT on a
month-to-month  renewable basis,  pursuant to the parties' existing  maintenance
and servicing agreement.


NOTE 4   SHAREHOLDERS' EQUITY
-------------------------------------------------------------------------------

Options and Warrants
--------------------
In September  1999,  the Board of  Directors  approved an amendment to the
Coyote  Technologies,  LLC  Employees  Non-Qualified  Stock  Option  Plan,
increasing  the number of  underlying  shares of the Company  common stock
available to be granted under the plan from 2,100,000 to 4,000,000.


During the quarter ended on September 30, 1999,  the Board of Directors  granted
five-year  options to purchase a total of 608,750 shares of the Company's common
stock to certain  employees.  The per share exercise  prices of these grants are
equal to the closing  market  price of the  Company's  common stock on the grant
date and range from $4.50 to $5.75.  These options vest in one-third  increments
over three years.

During  the  quarter  ended  on  September  30,  1999,  in   consideration   for
administrative  consulting services, the Board of Directors granted fully vested
options to purchase a total of 302,500  shares of the Company's  common stock at
an  exercise  price of $4.50 per share and a six month term to  certain  outside
consultants. The closing market price of the Company's common stock on the grant
date was $4.50.  A fair market value of $355,000 was recorded as  administrative
expense for these options.  The fair market value was determined using the Black
Scholes model.

In September  1999,  Mr.  Daniel W. Latham,  the  Company's  President and Chief
Operating  Officer,  converted  174  Class B Units  into  95,813  shares  of the
Company's  common stock in accordance with the terms of conversion  available to
holders of Class B Units.

In September 1999, Mr. James J. Fiedler, the Company's former Chairman and Chief
Executive Officer,  exercised warrants to acquire 75,075 shares of the Company's
common stock at an exercise price of $2.86 per share.

                                       6
<PAGE>

During the quarter ended  September 30, 1999, a total of 195,566  vested options
were  exercised  for $0.9  million  in  accordance  with the terms of the Coyote
Technologies Employees  Non-Qualified Stock Option Plan and Company common stock
was issued for that number of common shares.


NOTE 5            RELATED PARTY TRANSACTIONS
--------------------------------------------------------------------------------

In July 1999,  we  received  an offer for a  commitment  for a  stand-by  credit
facility from certain shareholders that would provide a funding commitment to us
of  $3.5  million.  The  shareholders  offering  this  facility  were  Strategic
Restructuring  Partnership,  Mr. Alan J. Andreini,  Junction  Investors,  Ardent
Research  Partners  and Mr. Fred Stein.  This  facility  would be secured by the
stock of INET, bear 12.5% interest on the outstanding  principal  balance and be
repayable on March 31, 2000. We intend to enter into a definitive agreement only
if these funds are needed to support the operation.

In September 1999, Mr. James J. Fiedler, the Company's former Chairman and Chief
Executive Officer, exercised warrants to acquire 75,075 shares of Company common
stock at an exercise price of $2.86 per share.


In September  1999,  Mr.  Daniel W. Latham,  the  Company's  President and Chief
Operating  Officer,  converted  174 Class B Units into 95,813  shares of Company
common stock.  This conversion was made in accordance with the conversion  terms
available to holders of Class B Units.


In October and November  1999,  the Company has completed  and received  funding
under a series  of two  demand  loans.  The  first  loan for a total  amount  of
$600,000 was  provided to the Company by Mr.  Fiedler in the amount of $175,000,
by Mr. Latham in the amount of $75,000 and by Mr. Alan J. Andreini, an affiliate
shareholder of the Company, in the amount of $350,000 in October 1999. This loan
bore  interest at bank's  prime rate (8.25% at  September  30, 1999) plus 1% per
year, was repayable on demand and was secured  against the Company's  investment
in Systeam, S.p.A.

The second loan for a total amount of $1,225,000  was provided to the Company by
Mr. Richard L. Haydon, an affiliate shareholder of the Company, in the amount of
$500,000,  by Mr.  Alan J.  Andreini  in the  amount  of  $225,000  and by three
non-affiliate  shareholders  in a combined  total amount of $500,000 in November
1999.  This loan bore interest at the rate of 17.5% per year and was  repayable,
on demand by the lenders,  no earlier  than March 31, 2000.  The maximum term of
the loan was three years to November 2002.  This loan was secured by a pledge of
shares of the common stock of INET  Interactive  Network System,  Inc., a wholly
owned subsidiary of the Company.  Under the terms of this loan, the lenders were
granted,  pro-rata,  a combined total of 73,500 three-year  warrants to purchase
shares of common  stock of the Company at an exercise  price of $4.50 per share.
The warrants will result in a non-cash  interest  expense charge of $0.3 million
to be recognized over the term of the debt.

Of the above  funding,  $475,000 was received by the Company  during the quarter
ended  September  30, 1999 and  $1,350,000  was  received by the Company  during
October and November 1999. These  borrowings  together with the accrued interest
were fully repaid in February and April 2000.

On January 25, 2000,  the Company  entered into a Financial  Services  Agreement
with First Venture Leasing LLC,  pursuant to which a limited  liability  company
was formed by First Venture to offer certain  leasing and credit packages to the
Company's  customers.  First Venture is an entity in which Mr. James McCullough,
the Company's Chief Executive Officer and a director, had a 25% interest,  which
he  relinquished  effective  upon his  becoming  a  director  of the  Company on
February 2, 2000.  The terms of the agreement with First Venture were the result
of arms' length  negotiation in which Mr.  McCullough did not  participate.  The
agreement with First Venture was approved by the Company's Board of Directors.

In connection with the Financial  Services  Agreement,  First Venture was issued
620,000 warrants to purchase common stock at $5.00 per share and 261,600 warrant


                                       7
<PAGE>

at $7.35.  The closing price of the Company's  common stock at the date of grant
was $11.00. These warrants vested upon grant.

These warrants are subject to shareholder approval,  therefore, the Company will
determine the charge, if any, to earnings once shareholder approval is obtained.

On January 26, 2000,  the Company also entered into a Remarketing  Agreement and
two separate License  Agreements with the LLC formed by First Venture,  pursuant
to  which  such LLC will act as the  Company's  agent in  remarketing  equipment
leased to third  parties upon the  termination  of such leases and will have the
right  to  use  certain  trademarks,   service  marks,  trade  names  and  other
designations in connection with the services to be provided by the LLC.

On January 26, 2000,  the Company also entered into a Consulting  Agreement with
KRJ,  LLC.  Pursuant to the  Consulting  Agreement,  KRJ provided  assistance in
identifying strategic partners and business opportunities,  making introductions
to IP Telephony  customers,  introducing  new management,  restructuring  vendor
finance programs,  investor  relations,  and identifying credit facilities.  The
Company  issued  to KRJ  2,000,000  shares  of  common  stock.  Of such  shares,
1,250,000  will be held in escrow to be released  to KRJ in three  equal  annual
installments,  subject to acceleration if certain common stock price targets are
met and  sustained.  In  addition,  unless  there is a change of  control of the
Company (as defined in the  Consulting  Agreement),  KRJ has agreed not to sell,
pledge,  hypothecate  or otherwise  transfer any of the  2,000,000  shares for a
period 12 months after the  respective  dates of delivery of any of such shares.
Mr. McCullough has an approximately one-third interest in KRJ and the balance of
KRJ is owned by affiliates  of First  Venture.  The  Consulting  Agreement  also
provides that over the next three years, KRJ will provide  assistance in further
identification  of additional  business  opportunities  both in the domestic and
international  markets.  Compensation  for  these  additional  services  will be
specifically  negotiated  at a future date.  The  Consulting  Agreement has been
approved by the Company's Board of Directors and the terms of the agreement with
KRJ were the result of arms' length  negotiation in which Mr. McCullough did not
participate. In connection with the issuance of the 2,000,000 shares to KRJ, the
Company  anticipates  recording  a  one-time,  non-cash  charge to  earnings  of
approximately $10 million in the fourth quarter of fiscal 2000.

In January 2000, the Company  restructured its management and business strategy.
On January 14, 2000 the Company  issued  options to Mr.  McCullough  to purchase
750,000  shares of common  stock at $5.00 per share.  The  closing  price of the
Company's stock on the date of grant was $5.50.  Three hundred  thousand options
vested upon grant,  with the remaining  options vesting in one-third  increments
over three years, beginning January 14, 2001, subject to acceleration if certain
common  stock price  targets are met and  sustained.  The options are subject to
shareholder approval,  therefore, the Company will determine the charge, if any,
to earnings once shareholder approval is obtained.

NOTE 6   EARNINGS AND LOSS PER COMMON SHARE
--------------------------------------------------------------------------------

The basic loss per common  share is  determined  by using the  weighted  average
number of shares of common stock  outstanding  during each period.  Diluted loss
per  common  share is equal to the basic loss per share for all  periods  with a
loss from  continuing  operations.  The effect of options and warrants  would be
antidilutive.

                                       8
<PAGE>

The  beneficial  conversion  feature  applicable  to the  Series  A  Convertible
Preferred  Stock has been  accounted  for as a dividend to Series A  Convertible
Preferred  shareholders.  In  computing  the  earnings  or net  loss  per  share
applicable to common stock  shareholders,  all dividends on preferred stock have
been deducted from the earnings or added to the losses to arrive at the earnings
or losses applicable to common shares as follows:

<TABLE>
<CAPTION>
                                                3 Months Ended                          6 Months Ended
                                       ----------------------------------    ----------------------------------

                                       Sept. 30, 1999      Sept. 30, 1998    Sept. 30, 1999      Sept. 30, 1998
                                       --------------      --------------    --------------      --------------

<S>                                        <C>                 <C>               <C>                  <C>
Net income (loss)                          $     472           $  (1,350)        $  (3,203)           $  (2,428)

Beneficial conversion feature                  ---                  (262)            ---                   (262)

Preferred dividend                               (75)                (29)             (154)                 (29)
                                           ----------          ----------        ----------           ----------

Net income (loss) applicable to            $     397           $  (1,641)        $  (3,357)           $  (2,719)
  Common stock                             ---------            ---------         ---------            ---------
</TABLE>

NOTE 7            SUBSEQUENT EVENTS
-------------------------------------------------------------------------------

Subsequent to September 30 1999, the following events have occurred:

1.   In December 1999 and January 2000, JNC Opportunity Fund Ltd., the holder of
     600 shares of 5% Series A Convertible Preferred Stock, converted a total of
     356 shares of Series A Preferred Stock and accrued dividends into shares of
     the Company's  common stock. A total of 626,835 shares of common stock were
     issued.

2.   In January and February  2000,  the Company  raised  $13.9  million (net of
     expenses) from the sale of approximately  3.2 million shares of 6% Series B
     Convertible Preferred Stock.

3.   In  February  2000,  the  Company  sold its  approximately  9%  interest in
     Systeam,  S.p.A.  for  $1.2  million  in  cash.  A  gain  on  the  sale  of
     approximately $0.4 million will be recorded in the fourth quarter of fiscal
     2000.

4.   In May 2000,  the Board of  Directors  approved  a plan that  included  the
     discontinuance of the Company's switch business.  The financial  statements
     have been  restated to present  the  operations  of the switch  business as
     discontinued operations (see Note 2.)





                                       9
<PAGE>
ITEM 2.     MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
            AND RESULTS OF OPERATIONS
--------------------------------------------------------------------------------

General

-----------

Discontinuance of Switch Segment
In May 2000,  we  decided to  discontinue  and  dispose  of our switch  business
including the manufacture,  development, sale and service of DSS Switches and IP
Gateway equipment.  Prior to the May 2000 decision, this segment was our largest
segment in terms of revenues.

Expected operating results relating to the discontinued operations from April 1,
2000 until the expected  disposal date will be included in the estimated loss on
disposal  and  will  be  recorded  as a  charge  in the  consolidated  financial
statements in the fourth quarter of fiscal 2000. The Company expects to record a
charge for estimated  loss on disposal of the switch  business of  approximately
$10.0  million in fiscal  2000,  which  includes an  estimated  $3.0  million of
expected  losses of the segment for the first two quarters of fiscal  2001.  The
Company  expects to dispose of the  segment by the end of the second  quarter of
fiscal 2001.

Following this decision to discontinue the operations of the  telecommunications
switching  business,  our business is reported for as one  continuing  operating
segment, long distance services.

As a result of the discontinuances,  dispositions, acquisitions and other events
described above, the comparison of year-to-year results may not be meaningful.

Results of Operations
--------------------------------------------------------------------------

The results for the second  quarter and half-year  ended  September 30, 1999 and
the comparative  historical results have been restated to reflect the operations
of our DSS Switch business segment  separately as discontinued  operations.  The
following  discussion relates to the continuing  operations of the long distance
services and our corporate administration offices.

The long  distance  services  business was comprised of two  subsidiaries:  AGT,
which was acquired in April 1998 and sold in October 1999;  and INET,  which was
acquired in September 1998.

Three Months Ended  September  30, 1999 versus Three Months Ended
September 30, 1998

-------------------------------------------------------------------------------

The  continuing  operations  of the  two  international  long  distance  service
subsidiaries  that were acquired  during fiscal 1999 generated  revenues of $2.4
million in the second  quarter of fiscal 2000  compared to $0.7  million for the
second  quarter of fiscal  1999,  an increase  of $1.7  million,  or 242%.  This
increase was primarily due to $2.1 million of revenues  generated  through INET,
which was acquired after the second quarter of fiscal 1999, offset by a decrease
in revenues of $0.4  million for AGT.  The  decrease in revenues of AGT resulted
from a delay in negotiation of contract renewals.

Cost of sales for the second quarter of fiscal 2000 were $2.1 million,  compared
to $0.9 million for the prior quarter, an increase of $1.2 million, or 133%. The
increase in cost of sales  primarily  results from our acquisition of INET after
the  second  quarter  of fiscal  1999 and also  reflects  lower  costs  obtained
particularly on the traffic routes to customers in Asia.

Gross profit for the second quarter of fiscal 2000 was $0.4 million, compared to
a loss of $0.2  million  for the prior  quarter.  Gross  profit  for the  second
quarter of fiscal 2000  represented 14% of revenues.  The  improvement  over the
loss in the second  quarter of fiscal 1999 was due to the  increases  in revenue
generated by INET at more favorable profit margins.

                                       10
<PAGE>
Selling and administrative  expenses of the continuing operations for the second
quarter of fiscal  2000 were $2.8  million,  compared  to $1.3  million  for the
second  quarter of fiscal  1999,  an increase  of $1.5  million,  or 115%.  This
increase was primarily  related to the additional  personnel related to INET (35
personnel),  which was not  acquired  until the end of the  quarter of the prior
year and increases in advertising and promotional expenses of approximately $0.6
million to promote growth of the long distance service business.

The  operating  loss for the  second  quarter of fiscal  2000 was $2.4  million,
compared  to a loss of $1.5  million in the second  quarter of fiscal  1999,  an
increase  of $0.9  million,  or 60%.  This  increase  was  primarily  due to the
increase in the operating expenses described above,  offset by increased revenue
and lower cost of sales.

Interest  expense  for the  second  quarter  of  fiscal  2000 was $0.4  million,
compared to $0.03 million for the second  quarter of fiscal 1999.  The increased
expense results from a $1.7 million increase in notes payable and a $0.2 million
increase  in  borrowings  under a line of credit to  finance  our long  distance
service operations.

Non-operating  income for the second  quarter of fiscal  2000 was $6.3  million,
compared  to  non-operating  expense of $0.1  million  in the second  quarter of
fiscal 1999.  Non-operating income in the second quarter of fiscal 2000 included
a  $6.2  million   non-cash  gain  recorded  on  the  Company's   sale  of  AGT.
Non-operating  expense in the second quarter of fiscal 1999 consisted  primarily
of losses on marketable securities.

Income from continuing operations for the second quarter of fiscal 2000 was $3.5
million,  compared to a loss from continuing  operations of $1.6 million for the
second quarter of fiscal 1999. The increase resulted primarily from the non-cash
gain from the sale of AGT and the other reasons discussed above.

The loss from discontinued operations for the second quarter of fiscal year 2000
was $3.0  million,  compared  to income  from  discontinued  operations  of $0.2
million in the second quarter of fiscal 1999. This decrease was primarily due to
decreases  in revenues of $8.7  million for the period and a decrease on margins
from 42% to 15%.  This  decrease in margin is mainly due to a deferral of profit
of $3.3 million related to switching  equipment  supplied under extended payment
terms  granted to  customers  in the  process of  obtaining  third  party  lease
financing. This profit will be recognized when the Company receives payment from
these customers.  The income from discontinued operations of $0.2 million in the
second  quarter of the 1999 fiscal year was  comprised of income of $1.1 million
from the discontinued  switch business and a loss of $0.9 million related to the
reduction  in  market  value  of  land  and   buildings  of  the  APC  operation
discontinued in fiscal 1997.

Six Months Ended September 30, 1999 versus Six Months Ended September 30, 1998

--------------------------------------------------------------------------------
The  continuing  operations  of the  two  international  long  distance  service
subsidiaries  that were acquired  during fiscal 1999 generated  revenues of $4.3
million in the first six months of fiscal 2000  compared to $0.8 million for the
first six months of fiscal  1999,  an increase of $3.5  million,  or 437%.  This
increase was primarily due to $3.9 million of revenues  generated  through INET,
which was acquired in September  1998,  offset by a decrease in revenues of $0.4
million  for AGT.  The  decrease  in  revenues  of AGT  results  from a delay in
finalizing negotiations of contract renewals.

Cost of sales  for the  first six  months  of  fiscal  2000  were $3.5  million,
compared to $1.1 million for the prior period,  an increase of $2.4 million,  or
218%. The increase in cost of sales  primarily  results from our  acquisition of
INET after the first six months of fiscal 1999 and also reflects the lower costs
obtained on traffic routes to customers in Asia.

Gross profit on the continuing  long distance  services for the first six months
of fiscal  2000 was $0.8  million,  compared  to a loss of $0.2  million for the
prior period.  Gross profit for the first six months of fiscal 2000  represented
18% of revenues. The improvement over the loss in the first six months of fiscal
1999 was due to the  increases in revenue  generated  by INET at more  favorable
margins.


                                       11
<PAGE>
Selling and administrative  expenses of the continuing  operations for the first
six months of fiscal 2000 were $5.0  million,  compared to $2.1  million for the
first six months of fiscal  1999,  an increase of $2.9  million,  or 138%.  This
increase was primarily related to the additional personnel related to INET which
was not acquired  until the end of the first six months of the prior year and to
increases in advertising and promotional expenses of approximately $0.9 million.

The  operating  loss for the first six months of fiscal  2000 was $4.2  million,
compared to $2.3 million in the first six months of fiscal 1999,  an increase of
$1.9 million, or 83%. This increase was primarily due to the increase in selling
and  administrative  expenses  described above,  offset by increased revenue and
lower cost of sales.

Interest  expense  for the first six  months  of fiscal  2000 was $0.7  million,
compared to $0.04 million for the first six months of fiscal 1999. The increased
expense  results  from a $2.4  million  increase in notes  payable,  offset by a
slight decrease in borrowings under a line of credit.

Non-operating  income for the first six months of fiscal 2000 was $6.4  million,
compared  to  non-operating  expense of $0.3  million in the first six months of
fiscal  1999.  Non-operating  income  in the first  six  months  of fiscal  2000
included a $6.2 million  non-cash gain  recorded on the  Company's  sale of AGT.
Non-operating expense in the first six months of fiscal 1999 consisted primarily
of losses on the sale of marketable securities.

Income from  continuing  operations  for the first six months of fiscal 2000 was
$1.6 million,  compared to a loss from continuing operations of $2.6 million for
the first six months of fiscal 1999.  The increase  resulted  primarily from the
non-cash gain from the sale of AGT and the other reasons discussed above.


The loss from  discontinued  operations  for the first six months of fiscal year
2000 was $4.8 million,  compared to income from discontinued  operations of $0.2
million in the first six months of fiscal 1999.  This decrease was primarily due
to  decreases  in  revenues  of $7.3  million  for the period and a decrease  in
margins from 44% to 25%.  This  decrease in margin is mainly due to deferrals of
profit in the first six months of fiscal year 2000 of $7.3  million  relating to
switching  equipment  supplied under extended payment terms granted to customers
who are in the process of  obtaining  third party lease  financing.  This profit
will be recognized when the Company receives  payment from these customers.  The
income from  discontinued  operations of $0.2 million in the first six months of
the  1999  fiscal  year  was  comprised  of  income  of $1.1  million  from  the
discontinued switch business and a loss of $0.9 million related to the reduction
in market  value of land and  buildings  of the APC  operation  discontinued  in
fiscal 1997.



Liquidity and Capital Resources
-----------------------------------------------------------------

As of September 30, 1999, we had a negative working capital of $3.2 million.

During  the first six months of fiscal  2000 we used $7.8  million  compared  to
providing $9.6 million during the first six months of fiscal 1999.  This decline
in operating  cash flow is due primarily to the increase in the losses  incurred
in the continuing long distance services and in the discontinued switch business
and to the  increases in working  capital  required to support the  discontinued
switch business operations.

We used cash for  investing  activities  of $1.6  million  during  the first six
months of fiscal 2000 compared to $3.7 million used for investing  activities in
the  corresponding  period of fiscal  1999.  Capital  expenditures  on equipment
purchases of $0.7 million in the first six months of fiscal 2000  represented an
increase of $0.5 million from the corresponding period of the prior fiscal year.
Purchases were primarily for additional  switching equipment required to support
the expansion of the  international  long distance services  business.  Net cash
used  in  investing  activities  in  fiscal  2000  also  included  cash  paid in
connection   with  increases  in  investment  in  affiliates  of  $0.4  million.
Investment  expenditure  on  discontinued  operations of $0.6 million  comprised
capital expenditure on equipment and software for the first six months of fiscal
2000 compared to $2.2 million in the prior year.

                                       12
<PAGE>
Financing  activities  provided cash of $9.2 million during the first six months
of fiscal 2000  compared to $6.6  million  during the first six months of fiscal
2000. This increase of $2.6 million  included $1.1 million from the exercises of
stock options and warrants,  $1.7 million from  increases in notes payable and a
$0.2 million increase in borrowings under a line of credit.

In July 1999,  we  received  an offer for a  commitment  for a  stand-by  credit
facility from certain shareholders that would provide a funding commitment to us
of  $3.5  million.  The  shareholders  offering  this  facility  were  Strategic
Restructuring  Partnership,  Mr. Alan J. Andreini,  Junction  Investors,  Ardent
Research  Partners  and Mr. Fred Stein.  This  facility  would be secured by the
stock of INET, bear 12.5% interest on the outstanding  principal  balance and be
repayable on March 31, 2000. We intend to enter into a definitive agreement only
if these funds are needed to support the operation.

In October and November 1999, the Company completed and received funding under a
series of two demand  loans.  The first loan for a total  amount of $600,000 was
provided to the Company by Mr. Fiedler in the amount of $175,000,  by Mr. Latham
in the amount of $75,000 and by Mr. Alan J. Andreini,  an affiliate  shareholder
of the  Company,  in the  amount of  $350,000  in October  1999.  This loan bore
interest at bank's  prime rate plus 1% per year (9.25% at September  30,  1999),
was  repayable on demand and was secured  against the  Company's  investment  in
Systeam, S.p.A.

The second loan for a total amount of $1,225,000  was provided to the Company by
Mr. Richard L. Haydon, an affiliate shareholder of the Company, in the amount of
$500,000,  by Mr.  Alan J.  Andreini  in the  amount  of  $225,000  and by three
non-affiliate  shareholders  in a combined  total amount of $500,000 in November
1999.  This loan bore interest at the rate of 17.5% per year and was  repayable,
on demand by the lenders,  no earlier  than March 31, 2000.  The maximum term of
the loan was three years to November 2002.  This loan was secured by a pledge of
shares of the common stock of INET  Interactive  Network System,  Inc., a wholly
owned subsidiary of the Company.  Under the terms of this loan, the lenders were
granted,  pro-rata,  a combined total of 73,500 three-year  warrants to purchase
shares of common  stock of the Company at an exercise  price of $4.50 per share.
The warrants will result in a non-cash  interest  expense charge of $0.3 million
recognized over the term of the debt.

Of the above  funding,  $475,000 was received by the Company  during the quarter
ended  September  30, 1999 and  $1,350,000  was  received by the Company  during
October and November 1999. These  borrowings  together with the accrued interest
were fully repaid in February and April 2000.

As of March 31, 1999,  we had notes  payable of $8.2  million.  These notes were
secured by certain of our assets and by 708,692  shares of our common  stock and
bore  interest at the bank's prime rate (8.25% at September 30, 1999) plus 1/2%.
These notes were due on demand.  In July 1999,  the payment date was extended to
December 2001. In September  1999, we sold one of our  subsidiaries  (AGT) which
included the assumption of these notes by the buyer. In addition, we had capital
lease obligations of $2.6 million at September 30, 1999, payable through 2004.

We have a $2.2 million  revolving line of credit secured  against  certain trade
receivables.  As at September  30, 1999 $1.0 million had been drawn  against the
line representing the maximum amount available at that time. This line of credit
bears  interest at the bank's prime rate (8.25% at September  30, 1999) plus 4%.
The line of credit  expires on June 30, 2000. We have a long-term  obligation in
the amount of $1.6  million in  connection  with  principal  and interest due on
subordinated debentures,  which bear interest of 11.25% per year. The debentures
mature in the year 2002 and interest only is due until such time.

In January and February 2000, we completed a private  placement with  accredited
investors and sold 3,157,895  shares of our 6% Series B Preferred Stock at $4.75
per  share.  The  total  cash we  received  was $13.9  million,  net of fees and
expenses associated with the placement.  In February 2000, we completed the sale
of our  investment  in  Systeam,  S.p.A.  and  received  a cash  payment of $1.2
million.  A gain on the sale of this  investment of  approximately  $0.4 million
will be recorded in the fourth quarter of fiscal 2000.

                                       13
<PAGE>

In March 2000,  four of our customers  completed  third party lease contracts in
respect of $14.2 million of switching  equipment  previously sold under extended
payment terms. In April 2000, we received  payments of $11.5 million.  We expect
to receive the remaining balance of $2.7 million once the lessees have completed
their payment obligations to the lessors.

We  believe  that  we  will be able to  continue  to  fund  our  operations  and
acquisitions  by obtaining  additional  outside  financing;  however,  we cannot
assure you that we will be able to obtain the necessary financing when needed on
acceptable terms or at all.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

--------------------------------------------------------------------------------

The Company is not  currently  subject to a  significant  level of direct market
risk related to foreign  currency  exchange  rates,  commodity  prices or equity
prices. The Company has no derivative  instruments and does not expect to derive
a material amount of its revenues from interest  bearing  securities.  Currently
the  Company  has no  significant  foreign  operations.  To the extent  that the
Company  establishes  significant  foreign  operations  in the  future,  it will
attempt to mitigate  risks  associated  with  foreign  currency  exchange  rates
contractually  and  through  the  use of  hedging  activities  and  other  means
considered appropriate.  The Company holds no equity market securities, but does
face equity market risk relative to its own equity securities. This risk is most
likely to be manifested by  influencing  the Company's  ability to raise debt or
equity financing, if needed.

Our primary market risk exposure is interest rate risk related to our borrowings
under our revolving line of credit.

Interest Rate Sensitivity Model

--------------------------------------------------------------------------


The table  below  presents  the  principal  (or  notional)  amounts  and related
interest of our borrowings by expected  maturity  dates.  The table presents the
borrowings  that are  sensitive  to changes in interest  rates and the effect on
interest expense of future hypothetical changes in such rates.

                                     Twelve Months Ended September 30
                                     --------------------------------
                                        (U.S. Dollars - Thousands)
                                  ------------------------------------------
                                    1999         2000       2001        2002
                                    ----         ----       ----        ----

   Line of credit borrowings       1,008    $  1,000      $  500      $  500
   Interest expense (A)               85          83          42          42
   Interest expense (B)               93          93          46          46
   Interest expense (C)               73          73          36          36

-    The  borrowings  bear  interest at the bank's  prime rate plus 1/2% for the
     line of credit.

-    The  interest  expense  shown for line (A) is based upon the actual  bank's
     prime rate at September 30, 1999 of 8.25%.

-    The  interest  expense  shown  for line (B) is  based  upon a  hypothetical
     increase of one percentage point in the bank's prime rate to 9.25%.

-    The  interest  expense  shown  for line (C) is  based  upon a  hypothetical
     decrease of one percentage point in the bank's prime rate to 7.25%.


                                       14
<PAGE>

Forward Looking Statements
-----------------------------------------------------------------

All statements other than historical statements contained in this Report on Form
10-Q constitute  "forward looking  statements" within the meaning of the Private
Securities  Litigation  Reform Act of 1995.  Without  limitation,  these forward
looking  statements  include  statements  regarding new products  expected to be
introduced by the Company in the future, statements about the Company's business
strategy  and plans,  statements  about the  adequacy of the  Company's  working
capital and other financial resources, and in general statements herein that are
not of a  historical  nature.  Any Form 10-K,  Annual and  Quarterly  Reports to
Shareholders,  Form 10-Q,  Form 8-K or press  release of the Company may include
forward looking statements.  In addition, other written or oral statements which
constitute  forward  looking  statements  have been made or may in the future be
made  by  the  Company,   including   statements   regarding   future  operating
performance,  short- and long-term revenue and earnings estimates,  backlog, the
status of litigation,  the value of new contract  signings,  and industry growth
rates and the Company's  performance  relative  thereto.  These  forward-looking
statements  rely on a number of assumptions  concerning  future events,  and are
subject  to a number  of  uncertainties  and  other  factors,  many of which are
outside of the  Company's  control,  that could cause  actual  results to differ
materially from such  statements.  These include,  but are not limited to: risks
associated with recent operating losses, no assurance of profitability, the need
to increase sales,  liquidity deficiency and, in general, the other risk factors
set forth in the  Company's  Annual  Report on Form  10-K/A for the fiscal  year
ended March 31, 1999. The Company does not undertake any obligation to update or
revise any forward looking  statements  whether as a result of new  information,
future events or otherwise.



                                       15
<PAGE>

                           PART II. OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS
--------------------------------------------------------------------------------

At a hearing on May 24, 1999,  the district  court granted final approval to the
settlement of the stockholder  class action  litigation  against the Company and
certain of its  officers  and  directors  previously  reported.  The  settlement
consisted of $8,000,000 in cash,  all of which will be provided by the Company's
insurance carriers and three-year warrants to purchase up to 2,225,000 shares of
common stock at (i) $9.00 per share during the first year, (ii) $10.00 per share
during the second year and (iii)  $11.00 per share during the last year prior to
expiration.

Certain charges with respect to the issuance of warrants were fully reserved for
in the Company's financial statements for the fiscal year ended March 31, 1998.


ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS
--------------------------------------------------------------------------------

c)       Information  regarding issuances of securities not registered under the
         Securities Act of 1933 is  incorporated by reference from Note 5 of the
         Condensed  Consolidated  Financial  Statements in Item 1 of Part I. The
         sale of such securities was exempt from registration under Section 4(2)
         of the Securities Act of 1933.




ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------------------------------------------------------

a)   Exhibits:

     3.01 Restated  Certificate of  Incorporation,  as amended September 1, 1992
          (incorporated  herein by  reference  to  Exhibit  4.1 of  Registrant's
          Registration Statement on Form S-8 Reg. No. 333-63017).

     3.02 By-Laws of the Company incorporated herein by reference to Exhibit 3.2
          of the Company's Form 10-K for the year ended March 31, 1997.

     4.01*Form  of  Demand  Loan  Agreement  between  the  Company  and  certain
          affiliate and non-affiliate shareholders dated November 1, 1999.

     4.02*Form of Pledge  Agreement  between the  Company and certain  affiliate
          and non-affiliate shareholders dated November 1, 1999.

     4.03*Form of Common Stock Purchase Warrant  Certificate between the Company
          and certain affiliate and non-affiliate shareholders dated November 1,
          1999.

     27   Financial Data Schedule


--------------------
*   Previously filed.


b)   Reports on Form 8-K:


     (1)  A Form 8-K dated May 24,  1999,  was filed by the  Company  on July 6,
          1999,  reporting  the hearing on May 24,  1999,  at which the district
          court granted  final  approval to the  settlement  of the  stockholder
          class  action  litigation  against  the  Company  and  certain  of its
          officers and  directors.  The  settlement  consisted of  $8,000,000 in


                                       16
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          cash,  all of  which  will  be  provided  by the  Company's  insurance
          carriers and three-year warrants to purchase up to 2,225,000 shares of
          common stock at (i) $9.00 per share during the first year, (ii) $10.00
          per share during the second year and (iii) $11.00 per share during the
          last year prior to expiration.

          Certain  charges with  respect to the issuance of warrants  were fully
          reserved for in the Company's financial statements for the fiscal year
          ended March 31, 1998. The report was filed under Item 5, Other Events,
          and Item 7, Financial Statements and Exhibits.



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                                   SIGNATURES
                     --------------------------------------

          Pursuant to the requirements of the Securities Exchange Act of 1934,
     the Registrant has duly caused this report to be signed on its behalf by
     the undersigned thereunto duly authorized.

                                        COYOTE NETWORK SYSTEMS, INC.

DATE:   May 26, 2000                    By:  /s/ James R. McCullough
                                             ---------------------------------
                                             James R. McCullough

                                             Chief Executive Officer
                                             (Principal Executive Officer)


DATE:   May 26, 2000                    By:  /s/ Brian A. Robson
                                             ---------------------------------
                                             Brian A. Robson
                                             Executive Vice President and
                                             Chief Financial Officer

                                             (Principal Financial and Accounting
                                              Officer)

                                       18
<PAGE>