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

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


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

                                    FORM 10-Q


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

                For the quarterly period ended 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 November 9, 1999, the  Registrant had issued and  outstanding an aggregate of
13,094,049 shares of its common stock.

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


                          COYOTE NETWORK SYSTEMS, INC.
                                AND SUBSIDIARIES



                                                                           Page
PART I.  FINANCIAL INFORMATION

     Item 1.    Financial Statements
                Balance Sheets..............................................  2
                Statement of Operations.....................................  3
                Statement of Cash Flows.....................................  4
                Notes to Financial Statements...............................  5
     Item 2.    Management's Discussion and Analysis of Financial Condition
                  and Results of Operations.................................  8


PART II. OTHER INFORMATION

     Item 1.    Legal Proceedings........................................... 11
     Item 2.    Changes in Securities and Use of Proceeds................... 11
     Item 3.    Defaults upon Senior Securities............................. 11
     Item 4.    Submission of Matters to a Vote of Security Holders......... 11
     Item 5.    Other Information........................................... 11
     Item 6.    Exhibits and Reports on Form 8-K............................ 11
     Signatures ............................................................ 13





                                       1
<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 (including deferred profit of $10,550 at 9/30/99), net of
        allowance of $522 at September 30, 1999 and $402 at March 31, 1999             19,447              10,092
     Inventories                                                                        2,392               2,130
     Notes receivable - current                                                           352               2,367
     Other current assets                                                               1,548               4,323
                                                                                    ---------           ---------
         Total current assets                                                          24,775              20,137

Property and equipment, net                                                             6,939               8,192
Capitalized software development                                                        2,008               1,604
Intangible assets, net                                                                  5,259               5,620
Net assets of discontinued operations                                                    ---                  234
Notes receivable - non-current                                                            928                 871
Investments                                                                             1,550               1,550
Other assets                                                                            2,729               2,820
                                                                                    ---------           ---------
                                                                                    $  44,188           $  41,028
                                                                                    =========           =========
                           Liabilities and Shareholders' Equity
Current liabilities:
     Lines of credit                                                                $   1,008           $   1,133
     Accounts payable                                                                   7,551               8,161
     Deferred revenue and customer deposits                                            13,702               5,611
     Accrued professional fees and litigation costs                                       211                 676
     Other accrued liabilities                                                          4,699               3,900
     Current portion of long-term debt and capital lease obligations                    1,004               1,315
                                                                                    ---------           ---------
         Total current liabilities                                                  $  27,975           $  20,796

Notes payable                                                                            ---                8,183
Long-term debt                                                                          1,464               1,534
Capital lease obligations                                                               1,634               1,830
Customer deposits and other liabilities                                                 2,628               2,628
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               7,255
     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             109,394
     Accumulated deficit                                                             (119,359)           (116,002)
     Treasury stock at cost                                                            (5,757)             (5,757)
                                                                                    ----------          ----------
         Total shareholders' equity                                                    10,487               6,057
                                                                                    ---------           ---------

                                                                                    $  44,188           $  41,028
                                                                                    =========           =========
</TABLE>

            See notes to condensed consolidated financial statements.


                                       2
<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             -   product                                   $ 5,069     $14,444           $13,615       $21,508
                      -   long distance services                      2,449         720             4,308           849
                                                                    -------     -------           -------       -------
                      Total                                           7,518      15,164            17,923        22,357
                                                                    -------     -------           -------       -------
Cost of sales         -   product                                     4,285       8,419            10,174        11,477
                      -   long distance services                      2,099         890             3,512         1,052
                                                                    -------     -------           -------       -------
                      Total                                           6,384       9,309            13,686        12,529
                                                                    -------     -------           -------       -------
Gross profit (loss)   -   product                                       784       6,025             3,441        10,031
                      -   long distance services                        350        (170)              796          (203)
                                                                    -------     --------          -------       --------
                      Total                                           1,134       5,855             4,237         9,828
                                                                    -------     -------           -------       -------
Selling and administrative expenses                                   4,594       3,155             8,674         6,095
Engineering, research and development                                 1,944       2,431             4,164         4,368
                                                                    -------     -------           -------       -------

     Total operating expenses                                         6,538       5,586            12,838        10,463
                                                                    -------     -------           -------       -------

Operating income (loss)                                              (5,404)        269            (8,601)         (635)

Interest expense                                                       (482)        (27)             (834)          (42)

Non-operating income (expense)                                        6,287        (721)            6,392          (880)
                                                                    -------     --------          -------       --------
Profit (loss) from continuing operations                                401        (479)           (3,043)       (1,557)

Profit (loss) from discontinued operations                               (4)       (900)             (314)         (900)
                                                                    --------    --------          --------      --------

     Net profit (loss)                                              $   397     $(1,379)          $(3,357)      $(2,457)
                                                                    =======     ========          ========      ========

Profit (loss) per common share (basic & diluted):
     Continuing operations                                          $   .03     $  (.05)          $  (.25)      $  (.17)
     Discontinued operations                                          ---          (.09)             (.03)         (.10)
                                                                    -------     --------         ---------      --------
     Net profit (loss) per common share (basic & diluted)           $   .03     $  (.14)          $  (.28)      $  (.27)
                                                                    =======     ========          ========      ========

Weighted average number of common shares outstanding
     - basic                                                         12,704       9,586            11,960         9,125
     - diluted                                                       15,601       9,586            11,960         9,125

</TABLE>



            See notes to condensed consolidated financial statements.


                                       3
<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                                                                          $(3,357)          $(2,457)
Adjustments to reconcile loss to net cash provided (used) by operating activities:
     Depreciation and amortization                                                       1,057               578
     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               485
     Net change in discontinued operations                                                 (76)             (163)
     Changes in current assets and liabilities                                             (85)           10,319
                                                                                       --------          -------

Net cash provided (used) by operating activities                                        (7,905)            9,645
                                                                                       --------          -------

Investing activities:
     Purchases of property and equipment                                                (1,257)           (2,338)
     Proceeds from sales of marketable securities                                         ---                 16
     Proceeds from sale of land                                                           ---                 67
     Change in notes receivable                                                             40               270
     Increase in investments  in affiliate                                                (383)             (400)
     Cash investment in INET                                                              ---             (1,333)
                                                                                       -------           --------

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                                                      ---                (29)
                                                                                       -------           --------

Net cash provided by financing activities                                                9,316             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              ---

</TABLE>


            See notes to condensed consolidated financial statements.


                                       4
<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 for the fiscal  year ended March 31,
1999.

The  computation  of profit or loss per common share is  determined by using the
weighted  average  number  of shares of common  stock  outstanding  during  each
period.


NOTE 2   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.
("PVC"),  Prinvest  Financial Corp. ("PFC";  together with PVC,  "Prinvest") and
Arnold A. Salinas ("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 the next 18 months,
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.  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 will not receive any immediate cash payments as a result of the Sale.

In addition, for the next 18 months, the Company shall 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.  Coyote  Communications  Services,  LLC,  an
affiliate of the Company,  shall 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.



                                       5
<PAGE>

NOTE 3   BUSINESS SEGMENT INFORMATION
------------------------------------------

In addition to operating the telecom switching  equipment  business segment,  in
fiscal  1999,  the  Company  acquired  Coyote  Gateway  (April  1998)  and  INET
Interactive Network System, Inc. (September 1998) and through these subsidiaries
operates  an  international   long  distance  services  business  segment.   The
accounting  policies  are  the  same  for all  segments;  however,  the  Company
evaluates performance based on operating income. The telecom switching equipment
business segment consists solely of the operations of Coyote Technologies,  LLC.
Information by industry segment is as follows (in thousands):

<TABLE>
<CAPTION>
                                               3 Months Ended                     6 Months Ended
                                      -------------------------------    -------------------------------
                                      Sept. 30, 1999   Sept. 30, 1998    Sept. 30, 1999   Sept. 30, 1998
                                      --------------   --------------    ---------------  --------------

Net Sales:
<S>                                      <C>               <C>              <C>              <C>
         Switching equipment             $ 5,069           $14,444          $13,615          $21,508
         Long distance services            2,449               720            4,308              849
                                         -------           -------          -------          -------
                                         $ 7,518           $15,164          $17,923          $22,357
                                         =======           =======          =======          =======
Operating Profit (Loss):
         Switching equipment              (2,988)            1,133           (4,439)           1,084
         Long distance services           (1,778)             (632)          (2,881)            (947)
         Corporate                          (638)             (232)          (1,281)            (772)
                                         --------          --------         --------         --------
                                         $(5,404)          $   269          $(8,601)         $  (635)
                                         ========          =======          ========         ========
Depreciation and amortization:
         Switching equipment                 271               249              571              510
         Long distance services              271                 3              381               15
         Corporate                            50                50              105               53
                                         -------           -------          -------          -------
                                         $   592           $   302          $ 1,057          $   578
                                         =======           =======          =======          =======
Capital expenditures:
         Switching equipment                 106               358              137              900
         Long distance services              214               484              710              650
         Corporate                             1                11                6               25
                                         -------           -------          -------          -------
                                         $   321           $   853          $   853          $ 1,575
                                         =======           =======          =======          =======
Identifiable assets:
         Switching equipment                                                 27,104           20,784
         Long distance services                                               8,559           13,510
         Discontinued operations                                               ---               172
         Corporate                                                            8,925           13,038
                                                                            -------          -------
                                                                            $44,188          $47,504
                                                                            =======          =======
</TABLE>

Effective  September 30, 1999,  the Company sold its interest in Coyote  Gateway
(See  Note  2  above).  Sales,   operating  losses,   depreciation  and  capital
expenditures of $425, $1,602, $59 and $346, respectively,  of Coyote Gateway are
included in the Company's long distance services business segment information of
Coyote  Gateway.  The  identifiable  assets as at September  30, 1999,  however,
exclude the assets of Coyote Gateway.


                                       6
<PAGE>
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
options to purchase a total of 608,750  shares of the Company's  common stock to
certain employees.

During  the  quarter  ended  on  September  30,  1999,  in   consideration   for
administrative  consulting  services,  the Board of Directors granted options to
purchase  a total of 302,500  shares of the  Company's  common  stock to certain
outside   consultants.   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, an 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 the holder.

In September 1999, an officer exercised warrants to acquire 75,075 shares of the
Company's common stock at an exercise price of $2.86 per share.

During the quarter ended  September 30, 1999, a total of 195,566  vested options
were exercised 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  September  1999,  Mr. James J.  Fiedler,  the  Company's  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.

Since August 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.  This loan bears  interest at bank's prime
rate  plus 1% per year,  is  repayable  on demand  and is  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.  This loan
bears interest at the rate of 17.5% per year and is repayable,  on demand by the
lenders,  no earlier than March 31, 2000.  The maximum term of the loan is three
years to November  2002.  This loan is secured by 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  have been  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 to the quarter
ended  September  30, 1999 and  $1,350,000  was  received by the Company  during
October and November 1999.



                                       7
<PAGE>

ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS
--------------------------------------------------------------------------------

Results of Operations for the Quarter Ended September 30, 1999
--------------------------------------------------------------

For the second  quarter of fiscal year 2000,  we had  revenues of $7.5  million,
representing  a $7.6 million,  or a 50% decrease from the second  quarter of the
prior fiscal year and a 28% decrease from the previous quarter. Shipments of DSS
Switches  and  related  product  services  were $5.1  million  compared to $14.4
million  in the  prior  year and  $8.6  million  in the  previous  quarter.  The
international  long distance service  subsidiaries that were acquired during the
prior fiscal year generated  revenues of $2.4 million,  representing an increase
of 33% over the prior  quarter and an  increase  of 288% over the  corresponding
quarter of the prior year.  Total revenues for the fiscal year to date are $17.9
million,  representing  a decrease of 20% from the first six months of the prior
fiscal year.

Shipments of switching  equipment were supplied under contracts to two customers
during  the  quarter,  representing  $4.7  million  of the  switching  equipment
revenues.  We have granted  extended payment terms to these customers while they
are in the process of seeking lease  financing for their capital  purchases.  In
view of the extended payment terms and the comparatively short operating history
of these  customers,  we have  deferred  recognition  of all of the profit ($3.3
million)  attributable  to these  shipments  until  payment is  received  or all
contingencies are removed.

The revenue  generated from  switching  equipment is $5.1 million in the quarter
with a gross margin of 15%. If the gross margin for the switching  equipment was
not impacted by the $3.3 million  profit  deferral  described  above,  the gross
margin on revenue of $5.1  million  would be 80%  compared  to 42% in the second
fiscal  quarter of the prior  year.  The  international  long  distance  service
subsidiaries  that were acquired  during the prior fiscal year generated a gross
margin of $0.4  million  or 14% of long  distance  service  revenues  during the
quarter  ended  September  30,  1999.  The total  gross  margin for all lines of
business  for the  second  fiscal  quarter  is  $1.1  million,  or 15% of  total
revenues,  as compared to $5.9  million or 41% of total  revenues for the second
quarter of the prior fiscal year.  The total gross margin for the fiscal year to
date is $4.2  million or 24% of total  revenues,  as compared to $9.8 million or
46% of total revenues for the first six months of the prior fiscal year.

Selling and general  administrative  expenses for the second fiscal quarter were
$4.6 million compared to $3.2 million for the second quarter of the prior fiscal
year.  The increase is primarily  related to the additional  operating  expenses
incurred by the long distance  service  providers  acquired in fiscal 1999. As a
proportion of total revenues,  the selling and general  administrative  expenses
increased  to 61%  from 39% in the  prior  quarter  and  from 22% in the  second
quarter of the prior fiscal year.

Engineering,  research and development expenses for the second quarter of fiscal
2000 were $1.9 million,  or 26% of sales, as compared with $2.2 million,  or 21%
of sales,  for the first  quarter  and $2.4  million,  or 16% of sales,  for the
second  quarter of the prior fiscal year. We have  continued to enhance  product
offerings to meet current and anticipated  customer  demand,  including  further
refinement of our  client/server  architecture on our switch and the development
of voice over Internet Protocol.

The operating  loss for the second quarter is $5.4 million versus a loss of $3.2
million in the first  quarter  and an  operating  income of $0.3  million in the
second  quarter of the prior fiscal year. The operating loss for the fiscal year
to date is $8.6 million, an increase of $8.0 million over the operating loss for
the first six months of the prior  fiscal year.  The  increase in the  operating
loss is primarily  the result of the lower  equipment  sales and the lower gross
margin due to the profit  deferrals  referred to above as well as the  increased
operating   expenses   incurred  in  support  of  the  long   distance   service
subsidiaries.

Interest  expense for the quarter is $0.5 million  versus $0.02  million for the
second  quarter of the prior fiscal  year.  The  increased  expense is comprised
entirely of financing costs related to the operations of the international  long
distance  service  subsidiaries.

                                       8
<PAGE>

Non-operating  income for the quarter of $6.3  million  includes a $6.2  million
non-cash  gain  recorded  on the  Company's  sale of its long  distance  service
subsidiary Coyote Gateway. An affiliate of one of our sources of lease financing
owns a majority of the buyer,  AGTI,  and was owed the debt which was assumed by
AGTI in the sale.

The net income from continuing  operations for the second quarter of fiscal 2000
is $0.4 million versus a net loss of $0.5 million for the corresponding  quarter
of the prior year. The income  represents a basic and fully diluted earnings per
common  share of $0.03 versus a loss of $0.05 for the  corresponding  quarter of
the prior year.  The net loss for the six months of fiscal 2000 is $3.4  million
or $0.28 per common  share  compared to a net loss of $2.5  million or $0.27 per
common share for the corresponding six-month period of the prior year.


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

We used cash from operating activities of $3.6 million during the second quarter
of fiscal 2000,  compared to providing $8.7 million during the second quarter of
fiscal  1999.  During the first six months of fiscal  2000 we used $7.9  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
operating  loss and the  increase  in working  capital  required  to support the
extended payment terms granted to our customers while they are in the process of
obtaining lease financing.

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  and  software of $1.3  million in the first six months of fiscal 2000
represented  a reduction of $1.0 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
segment  of  the  business  and  software  for  certain  Internet  Protocol  and
compression  capabilities.  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.

Financing  activities  during the second  quarter of fiscal 2000  provided  $3.0
million,  including  $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 connection  with the sale of our  approximately  80%  membership  interest in
Coyote  Gateway on September 30, 1999,  the Coyote  Gateway  liability for notes
payable of $10.2 million was assumed by the buyer, AGTI.

We have a $2.2 million  revolving line of credit secured  against  certain trade
receivables.  As at September 30, 1999,  $1.0 million has 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 plus 4%. The line of credit  expires on
February 29, 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.

At September 30, 1999, we have a negative working capital of $3.2 million and we
are currently  exploring  means of raising  additional  capital through debt and
equity  financing to fund our immediate  working  capital needs. As part of this
activity, we have recently completed and received $1.8 million in funding on two
demand loans. The first loan, which is for a total amount of $0.6 million, bears
interest at the bank's  prime rate plus 1% per year,  is repayable on demand and
is secured by our investment in Systeam,  S.p.A. The second loan, which is for a
total amount of $1.2 million,  bears  interest at the rate of 17.5% per year and
is repayable  on demand  after March 31, 2000.  The maximum term of this loan is
three  years to  November  2002 and is secured by our  investment  in our wholly
owned subsidiary INET Interactive  Network System,  Inc. Under the terms of this
second loan, the lenders, certain of whom are affiliates of ours, have also been
granted three-year warrants to purchase a combined total of 73,500 shares of our
common stock at an exercise price of $4.50 per share.

                                       9
<PAGE>

We  believe  that  we  will be able to  continue  to  fund  our  operations  and
acquisitions by obtaining additional outside financing; however, there can be no
assurance that we will be able to obtain the necessary  financing when needed on
acceptable terms or at all.


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 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 for the fiscal year ended March 31, 1999.
The  Company  disclaims  any  intention  or  obligation  to update or revise any
forward looking statements whether as a result of new information, future events
or otherwise.


                                       10
<PAGE>

                           PART II. OTHER INFORMATION


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

Please  see Note 7 to the  Consolidated  Financial  Statements  included  in the
Company's  Annual  Report on Form 10-K for the fiscal year ended March 31, 1999,
for information on various legal proceedings. There are no material developments
to report at this time.


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

c)   Issuances of equity  securities not registered  under the Securities Act of
     1933  are  described  in  Note 5 of the  Condensed  Consolidated  Financial
     Statements.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES
---------------------------------------------------

Not applicable.


ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
------------------------------------------------------------

Not applicable.


ITEM 5.  OTHER INFORMATION
---------------------------------------------------
Not applicable.


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



                                       11
<PAGE>

b)   Reports on Form 8-K:

     (1)  A Form 8-K was filed by the Company on July 2, 1999, which covered:

          Item 5. Other Events

          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.  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.

     (2)  A Form 8-K was  filed by the  Company  on  November  12,  1999,  which
          covered:

          Item 2. Acquisition or Disposition of Assets

          Pursuant to the  Purchase  Agreement  dated  September  30,  1999,  on
          October 27, 1999, the Company  completed the sale of its approximately
          80% membership interest in Coyote Gateway to AGTI.



                                       12
<PAGE>

                                   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:  November 15, 1999       By:  /s/ James J. Fiedler
                                    ------------------------------
                                    James J. Fiedler
                                    Chairman of the Board and
                                    Chief Executive Officer
                                    (Principal Executive Officer)




Date:  November 15, 1999       By:  /s/ Brian A. Robson
                                    ------------------------------
                                    Brian A. Robson
                                    Executive Vice President,
                                    Chief Financial Officer and Secretary
                                    (Principal Financial and Accounting Officer)




                                       13
<PAGE>