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

                                  UNITED STATES

                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

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

                                   FORM 10-Q/A

                                 Amendment No. 2

     |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)

   1640 South Sepulveda Boulevard, Suite 320, Los Angeles, California  90025
   -------------------------------------------------------------------------
         (Address of principal executive offices)                  (Zip Code)

                                 (800) 935-8506
               --------------------------------------------------
              (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 July 12, 2000, the Registrant had issued and outstanding an aggregate of
17,430,451 shares of its common stock.

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


                          COYOTE NETWORK SYSTEMS, INC.
                                AND SUBSIDIARIES

                                                                            Page

PART I.  FINANCIAL INFORMATION

         Item 1.      Financial Statements

                      Balance Sheets........................................   1
                      Statements of Operations..............................   2
                      Statements of Cash Flows..............................   3
                      Notes to Financial Statements.........................   4
         Item 2.      Management's Discussion and Analysis of Financial
                        Condition and Results of Operations.................  13
         Item 3.      Quantitative and Qualitative Disclosures
                        About Market Risk...................................  18


PART II. OTHER INFORMATION

         Item 1.      Legal Proceedings.....................................  20
         Item 2.      Changes in Securities and Use of Proceeds.............  20
         Item 6.      Exhibits and Reports on Form 8-K......................  20
         Signatures   ......................................................  22















                                       i
<PAGE>
                         PART I - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
                  COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES
                      Condensed Consolidated Balance Sheets
                    (In Thousands, Except Per Share Amounts)
<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 $168 at September 30, 1999
     and $377 at March 31, 1999                                                        2,634             2,502
     Notes receivable - current                                                          352             2,367
     Deposits and other current assets                                                 1,548             4,321
     Net current assets of discontinued operations                                     4,059             5,046
                                                                                  ----------         ---------
         Total current assets                                                          9,629            15,461

Property and equipment, net                                                            4,497             5,430
Intangible assets, net                                                                 2,045             2,303
Net long term assets of discontinued operations                                        7,664             7,917
Notes receivable - non-current                                                           928               871
Investments                                                                            1,550             1,550
Other assets                                                                             529               619
                                                                                 -----------         ---------
                                                                                 $    26,842         $  34,151
                                                                                 ===========         =========
                       Liabilities and Shareholders' Equity
Current liabilities:
     Lines of credit                                                             $     1,008         $   1,133
     Accounts payable                                                                  7,551             8,160
     Other accrued liabilities                                                         1,643             4,101
     Deferred revenue and customer deposits                                              761             1,410
     Current portion of long-term debt and capital lease obligations                   1,866             1,316
                                                                                 -----------         ---------
         Total current liabilities                                                    12,829            16,120

Notes payable                                                                           ---              8,183
Long-term debt                                                                         1,464             1,534
Capital lease obligations                                                              1,634             1,817
Other liabilities                                                                        428               440
Commitments and contingencies

Shareholders' equity:
     Preferred stock - $.01 par value:  authorized 5,000,000 shares;
       issued 600 and 700 shares in 2000 and 1999, respectively,
       liquidation preference of $10,000 per share                                     7,595             7,395
     Common stock - $1 par value:  authorized 30,000,000 shares, issued
       13,677,496 and 11,167,456 shares in 2000 and 1999, respectively                13,678            11,167
     Additional paid-in capital                                                      114,330           109,254
     Accumulated deficit                                                            (119,359)         (116,002)
     Treasury stock at cost                                                           (5,757)           (5,757)
                                                                                 ------------        ----------
         Total shareholders' equity                                                   10,487             6,057
                                                                                 -----------         ---------
                                                                                 $    26,842         $  34,151
                                                                                 ===========         =========
</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                                                               $ 2,447     $   721         $ 4,307       $   849
Cost of sales                                                             2,099         889           3,512         1,051
                                                                        -------     -------         -------       -------
Gross profit (loss)                                                         348        (168)            795          (202)
Selling and administrative expenses                                       3,164       1,539           5,620         2,630
                                                                        -------     -------         -------        ------
Operating loss                                                           (2,816)     (1,707)         (4,825)       (2,832)
Interest expense                                                           (328)        (27)           (680)          (42)

Other non-operating income (expense):
         Gain on sale of AGT                                              6,209        ---            6,209          ---
         Interest and other income                                           (1)        (92)            183          (251)
                                                                        --------    --------        -------      ---------
                                                                          6,208         (92)          6,392          (251)
                                                                        -------     --------        -------      ---------
Income (loss) from continuing operations                                  3,064      (1,826)            887        (3,125)
Income (loss) from discontinued operations                               (2,592)        476          (4,090)          697
                                                                        --------    -------         --------      -------
     Net income (loss)                                                  $   472     $(1,350)        $(3,203)      $(2,428)
                                                                        =======     ========        ========      ========
Preferred stock dividends                                               $   (75)    $  (291)        $  (154)      $  (291)
Net income (loss)                                                           472      (1,350)         (3,203)       (2,428)
                                                                        -------     --------        --------       -------
Income (loss) applicable to common shareholders                         $   397     $(1,641)        $(3,357)      $(2,719)
                                                                        =======      =======         =======       =======
Income (loss) per common share - basic:
     Continuing operations                                              $   .23     $  (.22)        $   .06       $  (.37)
     Discontinued operations                                               (.20)        .05            (.34)          .07
                                                                        --------    -------         --------      -------
         Net income (loss) per common share -basic                      $   .03     $  (.17)        $  (.28)      $  (.30)
                                                                        =======     ========        ========      ========
Income (loss) per common share - diluted:
     Continuing operations                                              $   .19     $  (.22)        $   .05       $  (.37)
     Discontinued operations                                               (.16)        .05            (.27)          .07
                                                                        -------     -------         --------      -------
Net income (loss) per common share -diluted                             $   .03     $  (.17)        $  (.22)      $  (.30)
                                                                        =======     ========        ========      ========

Weighted average number of common shares outstanding - 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                                                             351            189
     Gain on sale of land                                                                     ---             (17)
     Gain on sale of AGT                                                                    (6,209)          ---
     Provision for loss on discontinued operations                                             310            900
     Compensation expense related to stock options and warrants                                455            485
     Net change in discontinued operations                                                   1,010            107
     Changes in current assets and liabilities                                              (3,537)         3,963
                                                                                          ---------       -------

Net cash provided (used) by operating activities                                           (10,823)         3,199
                                                                                          ---------       -------
Investing activities:
     Purchases of property and equipment                                                      (570)          (450)
     Proceeds from sales of marketable securities                                             ---              16
     Proceeds from sale of land                                                               ---              67
     Change in notes receivable                                                              1,958            860
     Increase in investments  in affiliate                                                    ---            (400)
     Cash investment in INET                                                                  ---          (1,333)
     Net change in discontinued operations                                                    (171)        (1,129)
                                                                                          ---------       --------
Net cash provided (used) by investing activities                                             1,217         (2,369)
                                                                                          --------        --------
Financing activities:
     Repayments of long-term debt and capital lease obligations                                (60)           (71)
     Common stock issued, net of expenses                                                   11,332            306
     Redemption of preferred stock                                                          (4,000)          ---
     Increase in note payable                                                                2,424          5,097
     Decrease in borrowing on line of credit                                                  (125)          ---
     Preference stock issued net of expenses                                                  ---           6,345
     Preference stock dividends paid                                                          (154)           (29)
                                                                                          ---------       --------
Net cash provided by financing activities                                                    9,417         11,648
                                                                                          --------        -------

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 AGT                                                                     6,209           ---
     Beneficial conversion feature on preference shares                                       ---             262
     Preference stock conversion inducement                                                    200           ---
</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 for the fiscal year ended 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 and annual report on Form 10-K for the fiscal
year ended March 31, 2000.

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                             $  1,472           $  3,390
       Inventory                                          4,992              2,130
       Accrued liabilities                               (2,405)              (474)
                                                       ---------          ---------
  Net current assets of discontinued operations        $  4,059           $  5,046
                                                       ========           ========

       Property and equipment, net                     $  2,442           $  2,763
       Capitalized software development
         and intellectual rights                          5,222              4,920
                                                       --------           --------
  Net long-term assets of discontinued operations      $  7,664           $  7,683
                                                       ========           ========
</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. The Company recorded a charge for estimated loss on disposal of the
switch business of approximately $11.0 million in the fourth quarter of 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 near the end of the second quarter of fiscal 2001.


                                       4
<PAGE>
The Company has reflected certain reclassifications to net sales as previously
reported to reflect the deferral of revenue (1) for shipments to non-credit
worthy customers which were previously recorded as revenue upon shipment and (2)
for the contingencies discussed in revenue recognition in Note 1 in the March
31, 2000 Form 10-K. These reclassifications reduced sales and cost of sales by
equal amounts and did not affect net income, as the margins were fully reserved
for upon shipment. All non-credit worthy customers who received shipments during
the first three quarters of fiscal 1999 and fiscal 2000, obtained third party
lease financing prior to the end of the respective fiscal year except for
shipments totaling approximately $650,000 in fiscal 2000. Warrants given as
incentives to third party leasing companies are presented as reductions of net
sales. The operating results relating to the above discontinued segments 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 - previously reported        $  5,070          $  14,443           $ 13,616          $ 21,508
                                         ========          =========           ========          ========
  Net sales - revised                    $    870          $  11,958           $  3,516          $ 19,023
                                         ========          =========           ========          ========
  Income (loss) from discontinued
       Operations                        $ (2,588)         $   1,376           $ (3,776)         $  1,597
                                         =========         =========           =========         ========
</TABLE>

After the decision to discontinue the switch business, the Company is 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.

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.


                                       5
<PAGE>
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.
("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"). As specified in the Purchase
Agreement, the sale was effective on September 30, 1999 and AGTI established
100% control of the business as of that date.

The book value of AGT's assets and liabilities as at September 30, 1999 was as
follows (dollars in thousands):

      Current assets
            Cash and cash equivalents                 $      80
            Receivables                                     389
            Prepaid and other current assets              3,471
                                                      ---------
                 Total current assets                     3,940
      Property and equipment, net                         1,294
      Intangible assets, net                                116
                                                      ---------
                 Total assets                         $   5,350
                                                      =========
      Current liabilities

            Accounts payable                          $     969
            Other accrued liabilities                       339
                                                      ---------
                 Total current liabilities                1,308
      Notes payable                                      10,251
      Members equity (deficit)
            Capital contributed                             795
            Accumulated deficit                          (7,004)
                                                      ----------
                 Total equity (deficit)                  (6,209)
                                                      ----------
                                                      $   5,350

In consideration for the Sale, the Company is entitled to 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 remained directly liable for its $10.2 million credit
facility (the "Credit Facility") with Prinvest, whose affiliate owns 53.75% of
AGTI. The Company has been relieved of its obligations under its pledge
agreement with Prinvest which secured the Credit Facility and, in connection
therewith, Prinvest has returned 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 is no
longer required to reflect the Credit Facility on its consolidated financial
statements and, accordingly, the Company recognized a gain of $6,209,000 from
the Sale in the quarter ended September 30, 1999. 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 will receive a fifty percent
purchase discount on all Company-manufactured switches it purchases from the
Company during this time period. As of July 10, 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.



                                       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
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.

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, the Company received an offer for a commitment for a stand-by
credit facility from certain shareholders that would provide a funding
commitment to the Company 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. This commitment has
expired.

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 September, 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 (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.



                                       7
<PAGE>
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 resulted in a non-cash interest expense charge of $0.3 million in
the fourth quarter of fiscal 2000.

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.

In January 2000, the Company restructured its management and business strategy.
On January 14, 2000 the Company issued options to Mr. James R. McCullough, the
Company's Chief Executive Officer and a director, 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.

On January 26, 2000, the Company 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. As
compensation for services KRJ provided to the Company on or prior to January 26,
2000, the Company issued to KRJ 2,000,000 shares of common stock. These shares
are non-forfeitable. Of such shares, 1,250,000 were placed 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 March 2000, 416,000
shares were released from escrow as one of the common stock price targets was
met and sustained. In addition, unless there is a change of control of the
Company (as defined in the Consulting Agreement), KRJ 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.
The Company waived this restriction in connection with certain share transfers
made in March and April 2000 by KRJ. Mr. McCullough has an approximately
one-third interest in KRJ and the balance of KRJ is owned by affiliates of First
Venture Leasing, LLC ("First Venture"). First Venture is an entity in which Mr.
James McCullough, the Company's Chief Executive Officer and a director, had a
25% equity interest, which he relinquished effective upon his election to the
Company's Board of Directors on February 2, 2000. 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 recorded a one-time, non-cash charge to earnings of approximately $12.6
million in the fourth quarter of fiscal 2000.

The Company and its subsidiary, Coyote Technologies, LLC, entered into a
Financial Services Agreement, dated as of January 25, 2000 and amended on
February 2, 2000, with First Venture and Coyote Leasing, LLC pursuant to which
Coyote Leasing would be the Company's and Coyote Technologies' preferred but
nonexclusive source for offering certain leasing and credit packages to their
customers.


                                       8
<PAGE>
In connection with the Financial Services Agreement, on January 26, 2000, the
Company and Coyote Technologies entered into a Remarketing Agreement with Coyote
Leasing. Under the Remarketing Agreement, Coyote Leasing appointed the Company
and Coyote Technologies as its agent to remarket Coyote Leasing's equipment, on
a non-priority basis, upon termination of its leases of such equipment to end
users. All costs of refurbishing and updating the equipment would be paid by
Coyote Leasing. In addition, all actual selling costs, including but not limited
to installation, de-installation, sales commissions, brokerage fees,
transportation, storage, insurance and legal fees must be paid to Coyote
Technologies out of the first proceeds of any sale. Coyote Leasing also agreed
to pay Coyote Technologies a remarketing fee of 25% of the proceeds remaining
after payment or credit to Coyote Leasing of any amounts due but unpaid under
user leases and reimbursement of its actual costs.

On January 26, 2000, the Company and Coyote Technologies each also entered into
a License Agreement with Coyote Leasing, pursuant to which each granted Coyote
Leasing an exclusive, perpetual, sublicensable, worldwide, royalty-free right
and license to use certain trademarks, service marks, trade names and other
designations in connection with the services to be provided by Coyote Leasing
under the Financial Services Agreement.

On March 31, 2000, the Company and Coyote Technologies entered into a new
Financial Services Agreement with First Venture, which terminated the January
Financial Services Agreement, Remarketing Agreement and License Agreements.
Under the new Financial Services Agreement, First Venture committed to fully
fund leases, without any holdbacks, for customers in the amount of at least $50
million during calendar year 2000. First Venture also agreed to use its best
efforts to originate leases for products with a value of at least $50 million
during 2000. Coyote Technologies agreed to provide, upon First Venture's request
prior to funding a customer, a guaranty of customer lease payments in the form
of cash or a letter of credit to First Venture in an amount not less than 10% of
the value of the products leased.

As partial consideration for First Venture's commitment to fund at least $50
million in leases for the Company and to purchase $14.27 million of accounts
receivable of Coyote Technologies, the Company issued to First Venture warrants
to purchase 620,000 shares and 261,600 shares of common stock at $5.00 and
$7.35, respectively, per share. The closing price of the Company's common stock
at the date of grant, March 31, 2000, was $11.00. The warrants were vested upon
grant, are non-forfeitable and have a three-year term. Accordingly, based upon
the measurement date of March 31, 2000, the Company recorded a fair value of the
warrants of $6,673,000 using the Black Scholes option pricing model. Assumptions
utilized in the model were:

           Stock price                   $11.00
           Term                          3 years
           Exercise prices               $5.00 and $7.35
           Volatility                    101.5%
           Discount rate                 5.95%
           Illiquidity discount          10%

This amount was classified as a reduction of the discontinued switch equipment
sales in the fourth quarter of fiscal 2000 and reflected in the loss on
discontinued operations.

First Venture paid the Company cash in the amounts of $10.0 million in March and
$1.5 million in April for the accounts receivable, with the remaining balance of
$2.77 million held back as a cash guaranty of such receivables. Such balance
will be due and payable to the Company based upon the performance of the leases
to which the receivables relate and therefore has not been recorded as revenue.

Also on March 31, 2000, Coyote Technologies entered into a new Remarketing
Agreement with First Venture. Under the new Remarketing Agreement, First Venture
appointed Coyote Technologies as its exclusive remarketing agent. Coyote
Technologies agreed to perform the remarketing services on a non-priority basis.


                                       9
<PAGE>
All costs of refurbishing and updating the equipment will be paid by First
Venture. In addition, all actual selling costs, including but not limited to
installation, de-installation, sales commissions, brokerage fees,
transportation, storage, insurance and legal fees must be paid to Coyote
Technologies out of the first proceeds of any sale. The balance of the proceeds
will be paid to First Venture.

The terms of the agreements with First Venture and Coyote Leasing were the
result of arms' length negotiations in which Mr. McCullough did not participate.
The agreements with First Venture and Coyote Leasing were approved by the
Company's Board of Directors.

See Note 7, Paragraph 3 regarding a repricing of options held by Messrs. Fiedler
and Latham.

In June 2000 in consideration of additional services provided under the
consulting agreement with KRJ, the Company's Board of Directors resolved to
present for shareholder approval the issuance of 2,500,000 shares of common
stock and the grant of warrants to purchase 2,400,000 shares of common stock at
an exercise price per share of $7.00. The vesting of the shares and the
exercisability of the warrants would be dependent on the average bid price of
our common stock exceeding certain amounts that range from $12 to $30 per share.
The Company will determine the charge to earnings, if any, if and when
shareholder approval is obtained.

In June 2000 the Board of Directors approved the grant of options to purchase an
additional 750,000 shares of Common Stock to James McCullough, CEO at $7.00 per
share. The exercisability of the options is dependent on the closing bid price
of the Company's Common Stock exceeding certain amounts ranging from $12.00 to
$20.00 per share. All options will vest if Mr. McCullough is terminated without
cause or there is a change in control of the Company (other than as a result of
the HomeAccess Merger described in Note 8, paragraph 7).


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.

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
   common stock                          $  397            $ (1,641)             $  (3,357)          $ (2,719)
                                         -------           ---------              ---------           --------
</TABLE>


                                       10
<PAGE>
NOTE 7            SUBSEQUENT EVENTS
--------------------------------------------------------------------------------

In addition to the subsequent events discussed elsewhere, the following events
have occurred subsequent to September 30, 1999:

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 entered into a private placement
     agreement and sold 3,157,895 shares of 6% Series B Preferred Stock, par
     value $1.00, with a liquidation value of $4.75 per share. Total cash
     received by the Company was $14,142,000 after payment of $858,000 in fees
     and expenses associated with the sale. Sunrise Securities Corp., the
     placement agent, received a commission equal to 7% of the gross proceeds of
     the sale, consisting of $718,500 cash and 75,000 shares of common stock,
     plus reimbursement for expenses. The Preferred Stock has no voting rights.
     At their option, and at any time, the holders may convert any shares of
     Series B Preferred Stock into shares of common stock at a conversion price
     of $4.75 per share. Based upon the market value of the common stock
     (weighted average value of $8.99 per share) on the dates of the issuances
     of the Series B Convertible Preferred Stock, the conversion price of $4.75
     per share represented a discount from market of approximately $4.24 per
     share. As a result of this discount from market, the Company recorded a
     beneficial conversion feature of $13,388,000 which has been accounted for
     as a dividend to preferred shareholders recorded in the fourth quarter of
     fiscal 2000. The holders are entitled to receive 6% cumulative dividends
     per year commencing 90 days from the date of the original issue. However,
     such dividends will not be paid until all amounts then due to the holders
     of Series A Preferred Stock have been paid. No dividends can be paid or
     declared on any common stock unless full cash dividends, including past
     dividends declared, have been paid on the Preferred Stock. At any time
     after the trading price of the Common Stock equals or exceeds $10 for
     twenty consecutive trading days, the Company may, at its option, redeem all
     or any portion of the shares of Series B Preferred Stock then outstanding
     at $4.75 per share, plus any declared and unpaid dividends.

3.   In January 2000, the Board of Directors approved a re-pricing of options to
     purchase 94,500 shares each awarded to Mr. Fiedler and Mr. Latham from an
     exercise price of $6.969 per share to $5.00 per share. The awards are
     subject to shareholder approval of the Company's 2000 Equity Incentive Plan
     at the annual meeting of stockholders. Upon approval, a charge will be
     recorded in general and administrative expense if, and to the extent that
     the market price on the date of stockholder approval (the measurement date)
     exceeds the new exercise price of $5.00 per share.

4.   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 $0.4
     million was recorded in the fourth quarter of fiscal 2000.

5.   On April 30, 2000, the Company purchased certain assets, consisting of a
     customer base of approximately 4,000 residential and small business long
     distance customers (the "Matrix Base") from Group Long Distance, Inc., or
     GLDI, a non-facilities based reseller of long distance services to more
     than 15,000 small and medium-sized businesses and residential customers.
     The Company paid the purchase price for the Matrix Base with $50,000 in
     cash and a promissory note in the principal amount of $950,000 bearing
     interest at 8%, payable monthly, maturing April 30, 2002, secured by the
     assets sold. On May 1, 2000, the Company entered into a Merger Agreement
     with GLDI pursuant to which a subsidiary of the Company would merge into
     GLDI. The Company will issue 750,000 shares of the Company's common stock
     (subject to adjustment based upon the trading price of the common stock
     prior to closing) to GLDI's shareholders upon the consummation of the
     merger. The merger is subject to certain closing conditions, including
     approval of the GLDI shareholders and effectiveness of a registration
     statement registering the 750,000 shares to be issued.


                                       11
<PAGE>
6.   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.)

7.   On May 10, 2000, the Company entered into an Agreement and Plan of Merger,
     subsequently amended on May 26, 2000 (the "Merger Agreement"), under which
     the Company agreed to acquire Primary Knowledge, Inc., a California
     corporation in the process of changing its name to HomeAccess MicroWeb,
     Inc. ("HomeAccess"). HomeAccess is a developer of local community on-line
     exchange services that are expected to enable customers to select, order
     and pay for products and services on-line from local merchants using
     personal computers or less expensive screen phones. Upon consummation of
     the merger, the Company has agreed to issue 1,384,178 shares of Series C
     Preferred Stock and between 3,229,747 and 4,556,250 shares of Common Stock
     (dependent upon the price of the Common Stock on the closing date) to the
     stockholders of HomeAccess. The shares of Series C Preferred Stock are
     convertible into between 1,952,679 and 1,384,178 shares of Common Stock,
     dependent upon the price of the Common Stock on the closing date. For a
     period of four years after consummation of the merger, the Company has
     agreed to issue to the shareholders of HomeAccess, collectively, two shares
     of Common Stock for each new customer acquired by HomeAccess; provided the
     customer has been preapproved by the Company and has met certain
     performance criteria. In no event will the maximum number of shares issued
     under this program exceed 13% of the total number of shares of Common Stock
     outstanding, on a fully diluted basis, on the closing date. The Company has
     also agreed to issue a warrant to purchase up to 3,600,000 shares of Common
     Stock at an exercise price of $20 per share if certain performance criteria
     are met. The consummation of the transactions contemplated by the Merger
     Agreement are subject to certain contingencies, including stockholder
     approval.

8.   The Company entered into a letter of intent effective May 6, 2000 to
     acquire Ariana, Inc., an international and domestic long distance carrier,
     through the issuance of 441,175 shares of Common Stock. The Company could
     issue additional shares of Common Stock valued at up to $3.0 million if
     earn-out targets are met.

9.   The Company entered into Stock Purchase Agreements dated June 1, 2000 to
     acquire PolyLink Gateway International and PolyLink Development, Ltd., two
     Hong Kong based telecommunications providers under common ownership, for an
     aggregate of 258,064 shares of Common Stock and a $250,000 cash payment,
     plus an additional cash payment of $250,000 if an earn-out event occurs.

10.  See Note 5 regarding the Financial Services and Remarketing Agreements the
     Company entered into with First Venture, First Venture's purchase of $14.27
     million of the Company's accounts receivable and the issuance of warrants
     to First Venture.

11.  See Note 5 regarding 2,000,000 shares issued to KRJ, LLC and the $12.6
     million charge taken in connection therewith and Board approval to present
     for a vote of the Company's stockholders an additional 2,500,000 shares and
     warrants to purchase 2,400,000 shares.


                                       12
<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. We recorded a charge for estimated loss on disposal of the switch
business of approximately $11.0 million in the fourth quarter of fiscal 2000,
which includes an estimated $3.0 million of expected losses of the segment for
the first two quarters of fiscal 2001. We expect to dispose of the segment near
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 three and six months 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 effective September 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. Cost of sales of AGT
decreased to $0.6 million in the second quarter of fiscal 2000 from $0.9 million
in the second quarter of fiscal 1999.

Gross profit for the second quarter of fiscal 2000 was $0.3 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.


                                       13
<PAGE>
Selling and administrative expenses of the continuing operations for the second
quarter of fiscal 2000 were $3.2 million, compared to $1.5 million for the
second quarter of fiscal 1999, an increase of $1.7 million, or 105%. 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 $2.8 million,
compared to a loss of $1.7 million in the second quarter of fiscal 1999, an
increase of $1.1 million, or 65%. 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 $0.3 million,
compared to $0.03 million for the second quarter of fiscal 1999. The increased
expense results from a $2.4 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 $6.2 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 our 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 $3.1
million, compared to a loss from continuing operations of $1.8 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 $2.6 million, compared to income from discontinued operations of $0.5
million in the second quarter of fiscal 1999. This decrease was primarily due to
decreases in revenues of $11.1 million for the period due to a lack of orders
received from creditworthy customers and delays experienced by our customers in
obtaining third party lease financing. The decrease in demand for our
circuit-based switch product is partly due to our customers' demand for a
product that has an integrated Internet Protocol, which the customers view as
more competitively priced. Demand has also been limited by reductions in the
international long distance rates which have reduced the potential profitability
of small and medium sized carriers and hindered their ability to readily obtain
third party lease financing. The second quarter of fiscal 1999 included one
major equipment contract financed by a third party lease prior to shipment
representing $10.6 million of revenues from discontinued operations. During the
second quarter of fiscal 2000, we shipped switching equipment valued at $4.2
million to customers who were in the process of obtaining third party lease
financing. These customers agreed to pay for the equipment pursuant to
promissory notes payable over three years secured by the equipment. Because
these customers are not considered creditworthy, these sales will not be
recognized until the customers obtain lease financing or payments are received
pursuant to the notes. Revenues of $3.4 million for the quarter ended March 31,
2000 are attributable to these customers obtaining lease financing and for which
we received payment in March and April 2000. The income from discontinued
operations of $0.5 million in the second quarter of the 1999 fiscal year was
comprised of income of $1.4 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.


                                       14
<PAGE>
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 the 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. Cost of sales of AGT decreased
to $0.7 million for the first six months of fiscal 2000 from $1.1 million for
the first six months of fiscal 1999.

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.

Selling and administrative expenses of the continuing operations for the first
six months of fiscal 2000 were $5.6 million, compared to $2.6 million for the
first six months of fiscal 1999, an increase of $3.0 million, or 115%. 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 $4.8 million,
compared to a loss of $2.8 million in the first six months of fiscal 1999, an
increase of $2.0 million, or 70%. 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 our 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
$0.9 million, compared to a loss from continuing operations of $3.1 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 $4.1 million, compared to income from discontinued operations of $0.7
million in the first six months of fiscal 1999. This decrease was primarily due
to decreases in revenues of $15.5 million for the period. This decrease in
revenue is mainly due to a lack of equipment orders from credit-worthy customers
and delays experienced by our customers in obtaining third party lease
financing. The decrease in demand for our circuit-based switch product is partly
due to our customers' demand for a product that has an integrated Internet
Protocol, which the customers view as more competitively priced. Demand has also
been limited by reductions in the international long distance rates which have
reduced the potential profitability of small and medium sized carriers and
hindered their ability to readily obtain third party lease financing. During the
first six months of fiscal 2000, we shipped switching equipment valued at $11.7
million to customers who were in the process of obtaining third party lease
financing. These customers agreed to pay for the equipment pursuant to
promissory notes payable over three years, secured by the equipment. Because
these customers are not considered credit worthy, these sales will not be
recognized until the customers obtain lease financing or payments are received
pursuant to the promissory notes. Revenues of $8.7 million for the quarter ended
March 31, 2000 are attributable to these customers obtaining lease financing and
for which we received payment in March and April 2000. During the three months
ended June 30, 1999, we recognized $1.6 million of net sales related to
contingency payments received during the current quarter for installations of
switch equipment shipped in prior quarters. The income from discontinued
operations of $0.7 million in the first six months of the 1999 fiscal year was
comprised of income of $1.6 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.

                                       15
<PAGE>
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 net cash for operating
activities of $10.8 million compared to providing $3.2 million provided by
operating activities 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 generated cash from investing activities of $1.2 million during the first six
months of fiscal 2000 compared to $2.4 million used for investing activities in
the corresponding period of fiscal 1999. In July 1999, we received full payment
of $2.0 million in settlement of an outstanding note receivable. Capital
expenditures on equipment purchases of $0.6 million in the first six months of
fiscal 2000 represented an increase of $0.1 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. Investment expenditure on discontinued operations of
$0.2 million comprised capital expenditure on equipment and software for the
first six months of fiscal 2000 compared to $1.1 million in the prior year.

Financing activities provided cash of $9.4 million during the first six months
of fiscal 2000 compared to $11.6 million during the first six months of fiscal
2000. This decrease of $2.2 million was primarily due to a lower increase in
notes payable in fiscal 2000 of $2.4 million versus an increase in the prior
year of $5.1 million. Financing activities in the first six months of fiscal
2000 included $11.3 million in net proceeds for common stock issued. We used
$4.0 million to redeem Series A Convertible Preferred Stock. Financing
activities in the first six months of fiscal 2000 included $6.3 million of
proceeds for Series A Convertible Preferred Stock issued.

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. This commitment has expired.

During the second and third quarters of fiscal 2000, we completed and received
funding under a series of two demand loans. The first loan for a total amount of
$600,000 was provided to us by Mr. James J. Fiedler, our former Chairman and
Chief Executive Officer, in the amount of $175,000, by Mr. Daniel W. Latham, our
President, Chief Operating Officer and a director, in the amount of $75,000 and
by Mr. Alan J. Andreini, our shareholder, 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 our
investment in Systeam, S.p.A.

The second loan for a total amount of $1,225,000 was provided to us by Mr.
Richard L. Haydon, our shareholder, in the amount of $500,000, by Mr. Alan J.
Andreini in the amount of $225,000 and by three other 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., our wholly owned subsidiary. 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 our common stock at an exercise price
of $4.50 per share. The warrants resulted in a non-cash interest expense charge
of $0.3 million in the fourth quarter of fiscal 2000.


                                       16
<PAGE>

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

As of September 30, 1999, our subsidiary, AGT, had notes payable of $8.2
million. These notes were secured by certain of AGT's assets and by our pledge
of 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
AGT, the buyer of AGT assumed these notes and the pledge of our common stock was
terminated.

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 August 31, 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 January 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 $14.2 million, net of fees and
expenses of $858,000 associated with the placement. Sunrise Securities Corp.,
the placement agent, received a commission equal to 7% of the gross proceeds of
the sale, consisting of $718,500 cash and 75,000 shares of common stock, plus
reimbursement for expenses. The Preferred Stock has no voting rights. At their
option, and at any time, the holders may convert any shares of Series B
Preferred Stock into shares of common stock at a conversion price of $4.75 per
share. As a result of this discount from market of approximately $4.24 per
share, we recorded a beneficial conversion feature of $13,388,000 which has been
accounted for as a dividend to preferred shareholders recorded in the fourth
quarter of fiscal 2000. The holders are entitled to receive 6% cumulative
dividends per year commencing 90 days from the date of the original issue.
However, such dividends shall not be paid until all amounts then due to the
holders of Series A Preferred Stock have been paid. No dividends can be paid or
declared on any common stock unless full cash dividends, including past
dividends declared, have been paid on the Preferred Stock. At any time after the
trading price of the Common Stock equals or exceeds $10 for twenty consecutive
trading days, we may, at our option, redeem all or any portion of the shares of
Series B Preferred Stock then outstanding at $4.75 per share, plus any declared
and unpaid dividends.

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 was recorded in the fourth quarter of fiscal 2000.

In March 2000, four of our customers completed third party lease contracts with
First Venture in respect of $14.3 million of switching equipment previously sold
under three year promissory notes secured by the equipment. In March and April
2000, we received payments of $10.0 and $1.5 million, respectively. We expect to
receive the remaining balance of $2.8 million if and when the lessees complete
their payment obligations to First Venture.

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.


                                       17
<PAGE>
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.

The Company's primary market risk exposure is interest rate risk related to
borrowings under its 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   $2,000    $6,000    $6,000
        Interest expense (A)           88      175       525       525
        Interest expense (B)           98      195       585       585
        Interest expense (C)           78      155       465       465

-    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%.

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


                                       18
<PAGE>

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 and Annual Report on Form 10-K for the fiscal year ended
March 31, 2000. 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.



                                       19
<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 (incorporated herein by
          reference to Exhibit 3.01 of Registrant's Form 10-Q for the quarter
          ended September 30, 1998 filed on November 16, 1998).

     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).

     3.03 Certificate of Designations, Preferences and Rights of Series B
          Preferred Stock (incorporated herein by reference to Exhibit 4.2 of
          Registrant's Form 8-K dated January 31, 2000 filed on February 14,
          2000).

     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.



                                       20
<PAGE>

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
          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.


                                       21
<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:  July 19, 2000           By:  /s/ James R. McCullough
                                   ----------------------
                                   James R. McCullough
                                   Chief Executive Officer
                                   (Principal Executive Officer)



DATE:  July 19, 2000           By:  /s/Cheryl Johnson
                                    -----------------
                                    Cheryl Johnson
                                    Controller
                                    (Principal Financial and Accounting Officer)







                                       22
<PAGE>

                                  EXHIBIT INDEX
                      -------------------------------------


          3.01 Restated Certificate of Incorporation (incorporated herein by
               reference to Exhibit 3.01 of Registrant's Form 10-Q for the
               quarter ended September 30, 1998 filed on November 16, 1998).

          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).

          3.03 Certificate of Designations, Preferences and Rights of Series B
               Preferred Stock (incorporated herein by reference to Exhibit 4.2
               of Registrant's Form 8-K dated January 31, 2000 filed on February
               14, 2000).

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

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

          4.06* 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.


                                       23
<PAGE>