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

                                  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 December 31, 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 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..................  14
         Item 3.     Quantitative and Qualitative Disclosures About
                       Market Risk..........................................  19


PART II. OTHER INFORMATION

         Item 2.     Changes in Securities and Use of Proceeds..............  21
         Item 6.     Exhibits and Reports on Form 8-K.......................  21
         Signatures  .......................................................  22





                                       i
<PAGE>
                         PART I - FINANCIAL INFORMATION

ITEM 1.        FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
                  COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES
                      Condensed Consolidated Balance Sheets
                  (Dollars in Thousands, Except Share Amounts)

<TABLE>
<CAPTION>
                                                                                 December 31,         March 31,
                                                                                     1999               1999
                                                                                 -----------         -----------
                                         Assets                                  (Unaudited)
   Current assets:
<S>                                                                               <C>                 <C>
        Cash and cash equivalents                                                 $     613           $   1,225
        Receivables net of allowance of $137 at December 31, 1999

        Notes receivable - current                                                       12               2,367
        Deposits and other current assets                                             1,927               4,321
        Net current assets of discontinued operations                                 6,233               5,046
                                                                                  ---------           ---------
            Total current assets                                                     12,110              15,461

   Property and equipment, net                                                        4,464               5,430
   Intangible assets, net                                                             1,912               2,303
   Net long term assets of discontinued operations                                    7,216               7,917
   Notes receivable - non-current                                                       225                 871
   Investments                                                                        1,592               1,550
   Other assets                                                                         561                 619
                                                                                  ---------           ---------
                                                                                  $  28,080           $  34,151
                                                                                  =========           =========
                            Liabilities and Shareholders' Equity
   Current liabilities:
        Lines of credit                                                           $   1,414           $   1,133
        Accounts payable                                                              7,205               8,160
        Deferred revenue and customer deposits                                          760               1,410
        Other accrued liabilities                                                     3,315               4,101
        Current portion of long-term debt and capital lease obligations               3,761               1,316
                                                                                  ---------           ---------
            Total current liabilities                                                16,455              16,120

   Notes payable                                                                        ---               8,183
   Long-term debt                                                                     1,464               1,534
   Capital lease obligations                                                          1,634               1,817
   Other liabilities                                                                    381                 440
   Commitments and contingencies

   Shareholders' equity:
        Preferred stock - $.01 par value:  authorized 5,000,000 shares;
          issued 590 and 700 shares, liquidation preference of $10,000 per share      7,468               7,395
        Common stock - $1 par value.  Authorized 30,000,000 shares,
            issued 14,495,236 and 11,167,456 shares                                  14,495              11,167
        Additional paid-in capital                                                  116,413             109,254
        Accumulated deficit                                                        (124,473)           (116,002)
        Treasury stock at cost                                                       (5,757)             (5,757)
                                                                                  ----------          ----------
            Total shareholders' equity                                                8,146               6,057
                                                                                  ---------           ---------
                                                                                  $  28,080           $  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           9 Months Ended
                                                                        --------------------     --------------------
                                                                        Dec. 31,    Dec. 31,     Dec. 31,    Dec. 31,
                                                                         1999        1998         1999         1998
                                                                        --------    --------     --------    --------

<S>                                                                     <C>         <C>          <C>         <C>
  Net sales                                                             $ 2,858     $ 4,030      $ 7,165     $ 4,879
  Cost of sales                                                           2,578       3,729        6,090       4,780
                                                                        -------     -------      -------     -------
  Gross profit                                                              280         301        1,075          99
  Selling and administrative expenses                                     1,954       2,300        7,574       4,930
                                                                        -------     -------      -------     -------
  Operating loss                                                         (1,674)     (1,999)      (6,499)     (4,831)
  Interest expense                                                         (351)       (221)      (1,031)       (263)
  Other non-operating income (expense):
           Gain on sale of AGT                                             ---         ---         6,209        ---
           Other                                                            (45)         38          138        (213)
                                                                        --------    -------      -------     --------
                                                                            (45)         38        6,347        (213)
                                                                        --------    -------      -------     --------
  Loss from continuing operations                                        (2,070)     (2,182)      (1,183)     (5,307)
  Loss from discontinued operations                                      (2,972)     (1,924)      (7,062)     (1,227)
                                                                        --------    --------     --------    --------
           Net loss                                                     $(5,042)    $(4,106)     $(8,245)    $(6,534)
                                                                        ========    ========     ========    ========
  Preferred stock dividends                                             $   (72)    $  (876)     $  (226)    $(1,167)
  Net loss                                                               (5,042)     (4,106)      (8,245)     (6,534)
                                                                        --------    --------     --------    --------
  Loss applicable to common shareholders                                $(5,114)    $(4,982)     $(8,471)    $(7,701)
                                                                        ========    ========     ========    ========
  Loss per common share (basic & diluted):
           Continuing operations                                        $  (.16)    $  (.30)     $  (.12)    $  (.67)
           Discontinued operations                                         (.23)       (.19)        (.57)       (.13)
                                                                        --------    --------     --------    --------
           Net loss per common share (basic & diluted)                  $  (.39)    $  (.49)     $  (.69)    $  (.80)
                                                                        ========    ========     ========    ========
  Weighted average number of common shares outstanding
    (basic & diluted)                                                    13,257      10,216       12,308       9,604
                                                                        =======     =======      =======     =======
</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>
                                                                                          9 MONTHS ENDED
                                                                                --------------------------------
                                                                                 December 31,       December 31,
Operating activities:                                                                1999               1998
                                                                                 ------------       ------------
<S>                                                                               <C>               <C>
     Net loss                                                                     $ (8,245)         $ (6,534)
Adjustments to reconcile loss to net cash provided (used) by
     Depreciation and amortization                                                     646               353
     Gain on sale of land                                                             ---                (20)
     Gain on sale of AGT                                                            (6,209)             ---
     Provision for loss on discontinued operations                                     314               900
     Provision for common stock warrants issued                                        975               485
     Net change in discontinued operations                                            (703)           (4,117)
     Changes in current assets and liabilities                                      (4,349)           (3,003)
                                                                                  ---------         ---------
Net cash used by operating activities                                              (17,571)          (11,936)
                                                                                  ---------         ---------

Investing activities:
     Purchases of property and equipment                                              (520)             (896)
     Proceeds from sales of marketable securities                                     ---                 16
     Proceeds from sale of land                                                       ---                 67
     Change in notes receivable                                                      1,908                42
     Change in investments in affiliate                                                (42)             (400)
     Cash investment in INET                                                          ---             (1,333)
     Net change in discontinued operations                                            (177)           (1,446)
                                                                                  ---------         ---------
Net cash provided (used) by investing activities                                     1,169            (3,950)
                                                                                  --------          ---------

Financing activities:
     Repayments of long-term debt and capital lease obligations                       (137)             (142)
     Common stock issued net of expenses                                            13,585               752
     Redemption of preferred stock                                                  (4,000)             ---
     Increase in notes payable                                                       6,287             7,442
     Increase in borrowing on line of credit                                           281              ---
     Preference shares dividend                                                       (226)             (117)
     Preference stock issued net of expenses                                          ---              6,345
                                                                                  --------          --------
Net cash provided by financing activities                                           15,790            14,280
                                                                                  --------          --------

Decrease in cash and cash equivalents                                                 (612)           (1,606)

Cash and cash equivalents:
     At beginning of the period                                                      1,225             3,746
                                                                                  --------          --------
     At end of the period                                                         $    613          $  2,140
                                                                                  ========          ========

Non-cash transactions:
     Issuance of common stock warrants                                            $    975          $    485
     Conversion of Class B Units into common stock                                     606                53
     Conversion of convertible preferred stock and interest into common stock          127              ---
     Conversion of convertible notes and interest into common stock                   ---              3,407
     Discount granted for investment in affiliate                                     ---                900
     Gain on sale of AGT                                                             6,209              ---
     Notes receivable off-set against trade payables                                 1,093              ---
     Beneficial conversion feature on preference shares                               ---              1,050
     Equipment acquired through capital lease obligation                               179              ---
     Preferred 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 and nine months ended December 31, 1999, are not
necessarily indicative of 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 disposal 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>
                                                           December 31, 1999    March 31, 1999
                                                           -----------------    --------------
                                                             (Unaudited)
    Current assets:
<S>                                                             <C>                 <C>
         Accounts receivable                                    $1,453              $3,390
         Inventory                                               5,749               2,130
         Accrued liabilities                                      (969)               (474)
                                                                -------             -------
    Net current assets of discontinued operations               $6,233              $5,046
                                                                ======              ======

         Property and equipment, net                            $2,245              $2,763
         Capitalized software development and
    Net long-term assets of discontinued operations             $7,216              $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                     9 Months Ended
                                      -------------------------------     ------------------------------
                                               (Unaudited)                          (Unaudited)
                                      Dec. 31, 1999    Dec. 31, 1998      Dec. 31, 1999    Dec. 31, 1998
                                      -------------    -------------      -------------    -------------
<S>                                     <C>               <C>               <C>              <C>
  Net sales - previously reported       $ 3,964           $ 8,901           $17,580          $30,409
                                        =======           =======           =======          =======
  Net sales - revised                   $   464           $ 1,046           $ 3,980          $20,069
                                        =======           =======           =======          =======
  Income (loss) from discontinued
       operations                       $(2,972)          $(1,924)          $(6,748)         $  (327)
                                        =======           =======           =======          =======
</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 months ended
September 30, 1998 and the nine months ended December 31, 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.


                                       5
<PAGE>
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 nine months ($314,000) ended December 31, 1999.

NOTE 3   DISPOSITION OF ASSETS
------------------------------------------------

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


                                       6
<PAGE>
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.

For the nine months ended December 31, 1999, sales, operating losses,
depreciation and capital expenditures of $425,000, $1,602,000, $59,000 and
$346,000, respectively, of Coyote Gateway are included in the Company's long
distance services business. The identifiable assets as at December 31, 1999,
however, exclude the assets of Coyote Gateway.

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

Options and Warrants
-----------------------

During the quarter ended December 31, 1999, the Board of Directors granted
five-year options to purchase a total of 308,481 shares of the Company's common
stock to certain employees. The per share exercise prices of these grants is
equal to the closing market price of the Company's common stock on the date of
the grant and range from $4.00 to $4.625. These options vest in one-third
increments over three years.

During the quarter ended December 31, 1999, in consideration for administrative
consulting services, the Board of Directors granted to certain outside
consultants fully vested options to purchase 212,000 shares of the Company's
common stock at an exercise price of $4.00 per share and 55,000 shares of the
Company's common stock at $4.50 per share and a three-month term. The per share
exercise prices of these grants is equal to the closing market price of the
Company's common stock on the date of the grant. A fair market value of $224,000
was recorded as administrative expense for these options. The fair market value
was determined using the Black Scholes model.

In December 1999, two employees, David Held and Bruce Thomas, converted their
holdings of 500 Class B Units into 275,624 shares of the Company's common stock
in accordance with the terms of conversion available to the holders.

During the quarter ended December 31, 1999, a total of 524,979 options were
exercised which resulted in proceeds of $2.3 million. These exercises were 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, 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, a
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 December 31, 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, a shareholder of the Company, 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., 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.

                                       8
<PAGE>

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.

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%

                                       9
<PAGE>

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 Leasing. 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.
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   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 due to the
loss from continuing operations as the effect of options and warrants would be
antidilutive.

The beneficial conversion feature ($1.05 million) applicable to the Series A
Convertible Preferred Stock has been accounted for as a dividend to Series A
Convertible Preferred shareholders and has been recorded from the date of the
Series A sale through to the earliest date the preferred shareholders could


                                       10
<PAGE>

convert into common stock (September 1, 1998 to December 31, 1998). 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                     9 Months Ended
                                  -------------------------------     --------------------------------
                                  Dec. 31, 1999     Dec. 31, 1998     Dec. 31, 1999      Dec. 31, 1998
                                  -------------     -------------     -------------      -------------
<S>                                 <C>                <C>               <C>               <C>
Net loss                            $(5,042)           $(4,106)          $(8,245)          $(6,534)
Beneficial conversion feature         ---                 (788)            ---              (1,050)
Preferred dividend                      (72)               (88)             (226)             (117)
                                    --------           --------          --------          --------
                                    $(5,114)           $(4,982)          $(8,471)          $(7,701)
                                    ========           ========          ========          ========
</TABLE>


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

In addition to the subsequent events discussed elsewhere, the following events
have occurred subsequent to December 31, 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


                                       11
<PAGE>

     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.

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.

                                       12
<PAGE>

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.



                                       13
<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 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 nine months ended December 31, 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 December 31, 1999 versus Three Months Ended December 31, 1998
--------------------------------------------------------------------------------
The continuing operations of the two international long distance service
subsidiaries that were acquired during fiscal 1999 generated revenues of $2.9
million in the third quarter of fiscal 2000 compared to $4.0 million for the
third quarter of fiscal 1999, a decrease of $1.1 million, or 29%. This decrease
was primarily due to the decrease of $1.9 million of revenues from AGT between
the two periods as a result of its sale effective September 1999. Revenues of
INET between the two periods increased by $0.7 million, or 32%, primarily due to
increased sales from international long distance services provided to Asia.

Cost of sales for the third quarter of fiscal 2000 were $2.6 million, compared
to $3.7 million for the prior quarter, a decrease of $1.1 million, or 31%. The
decrease in cost of sales primarily results from the sale of AGT effective
September 1999 offset by increases in cost of sales of INET of $0.6 million, or
30%, due to the increase in the volume of traffic carried.

Gross profit on the continuing long distance services was $0.3 million for the
third quarter of fiscal 2000 and of fiscal 1999. The slight improvement in gross
profit as a percentage of revenue was primarily due to more utilization of the
fixed costs of the INET switching equipment.


                                       14
<PAGE>
Selling and administrative expenses of the continuing operations for the third
quarter of fiscal 2000 were $2.0 million, compared to $2.3 million for the third
quarter of fiscal 1999, a decrease of $0.3 million, or 15%. This decrease was
primarily due to the sale of AGT effective September 1999 and reductions in
corporate marketing and administrative expenses. Selling and administrative
expenses as a percentage of revenues for the third quarter of fiscal 2000 were
68%, compared to 57% for the third quarter of fiscal 1999.

The operating loss for the third quarter of fiscal 2000 was $1.7 million,
compared to $2.0 million in the third quarter of fiscal 1999, a decrease of $0.3
million, or 16%. This decrease was primarily due to decreases in cost of sales
and selling and administrative expenses described above.

Interest expense for the third quarter of fiscal 2000 was $0.4 million, compared
to $0.2 million for the third quarter of fiscal 1999. The increased expense
resulted primarily from a $6.3 million increase in notes payable.

Loss from continuing operations for the third quarter of fiscal 2000 was $2.1
million, compared to $2.2 million for the third quarter of fiscal 1999, a
decrease of $0.1 million, or 5%. The decrease resulted primarily from the
reduced level of selling and administrative expenses discussed above.

The loss from discontinued operations for the third quarter of fiscal year 2000
was $3.0 million, compared to $1.9 million in the third quarter of fiscal 1999,
an increase of $1.1 million or 54%. This increase was primarily due to decreases
in revenues of $0.6 million for the period, resulting from a lack of orders 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. During the third quarter of fiscal 2000, we shipped switching
equipment valued at $3.5 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 $2.8 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.

Nine Months Ended December 31, 1999 versus Nine Months Ended December 31, 1998
------------------------------------------------------------------------------
The continuing operations acquired during fiscal 1999 generated revenues of $7.2
million in the first nine months of fiscal 2000 compared to $4.9 million for the
first nine months of fiscal 1999, an increase of $2.3 million, or 47%. This
increase was primarily due to $4.6 million of revenues generated through INET,
which was acquired in September 1998, offset by a decrease in revenues of $2.3
million for AGT. The decrease in revenues of AGT primarily results from its sale
effective September 1999.

Cost of sales for the first nine months of fiscal 2000 were $6.1 million,
compared to $4.8 million for the prior period, an increase of $1.3 million, or
27%. The increase in cost of sales primarily results from our acquisition of
INET and also reflects the increase in the sales volume, offset by decreases in
cost of sales of AGT resulting from its sale.


                                       15
<PAGE>
Gross profit on the continuing long distance services for the first nine months
of fiscal 2000 was $1.1 million, compared to $0.1 million for the prior period.
The improvement in gross profit was primarily due to the increases in revenue
generated by INET, with improved margins from the more profitable international
traffic to Asia.

Selling and administrative expenses of the continuing operations for the first
nine months of fiscal 2000 were $7.6 million, compared to $4.9 million for the
first nine months of fiscal 1999, an increase of $2.7 million, or 54%. This
increase was primarily related to the additional selling and administrative
expenses incurred by INET which was acquired in the third quarter of fiscal
1999, offset by the reduction in expenses related to AGT, which was sold in the
third quarter of fiscal 2000.

The operating loss for the first nine months of fiscal 2000 was $6.5 million,
compared to $4.8 million in the first nine months of fiscal 1999, an increase of
$1.7 million, or 34%. This increase was primarily due to the increase in selling
and administrative expenses described above offset by the improvement in gross
profit.

Interest expense for the first nine months of fiscal 2000 was $1.0 million,
compared to $0.3 million for the first nine months of fiscal 1999. The increased
expense results from a $6.3 million increase in notes payable due to borrowings
required to support the working capital requirements of AGT and a $0.3 increase
in borrowings under a line of credit.

Non-operating income for the first nine months of fiscal 2000 was $6.3 million,
compared to non-operating expense of $0.2 million in the first nine months of
fiscal 1999. Non-operating income in the first nine months of fiscal 2000
included a $6.2 million non-cash gain recorded on our sale of AGT. Non-operating
expense in the first nine months of fiscal 1999 consisted primarily of losses on
the sale of marketable securities.

Loss from continuing operations for the first nine months of fiscal 2000 was
$1.2 million, compared to $5.3 million for the first nine months of fiscal 1999,
a decrease of $4.1 million or 78%. The decrease resulted primarily from the $6.2
million non-cash gain from the sale of AGT and the other reasons discussed
above.

The loss from discontinued operations for the first nine months of fiscal year
2000 was $7.1 million, compared to $1.2 million in the first nine months of
fiscal 1999, an increase of $5.9 million. This increase was primarily due to
decreases in revenues of $16.1 million for the period. This decrease is mainly
due to delays continuing to be 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 nine months of fiscal 2000, we shipped
switching equipment valued at $15.2 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 $11.5 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.



                                       16
<PAGE>

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

As of December 31, 1999, we had a negative working capital of $4.3 million.

During the first nine months of fiscal 2000 we used cash from operating
activities of $17.6 million compared to using $11.9 million during the first
nine 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 as well as increases in working capital
required to support the discontinued switch business operations.

Net cash provided by investing activities was $1.2 million during the first nine
months of fiscal 2000 compared to net cash used for investing activities of $4.0
million used in the corresponding period of fiscal 1999. This change is
primarily due to the payment received of $2.0 million on notes receivable and
reduced spending on capital equipment related to the discontinued operations.
Capital expenditures on equipment purchases of $0.5 million in the first nine
months of fiscal 2000 represented a decrease of $0.4 million from the
corresponding period of the prior fiscal year. Purchases were primarily for
additional switching equipment required to support the expansion of the
international long distance services business. Net cash provided by investing
activities in fiscal 2000 included cash paid in connection with increases in
investments in affiliates of $0.04 million. Investment expenditures on
discontinued operations comprised of capital expenditures for equipment and
software for the first nine months of fiscal 2000 were $0.2 million compared to
$1.4 million in the prior year.

Net cash provided by financing activities for the first nine months of fiscal
2000 was $15.8 million, compared to $14.3 million for the corresponding period
of fiscal 1999. This increase of $1.5 million results primarily from the net
proceeds of a private placement in May 1999 of $10.2 million, $3.4 million from
the exercise of stock options and warrants offset by a $4.0 million cost of
redemption of 100 shares of Series A Preference Shares and an increase of $6.3
million in notes payable, compared to the prior year increase in notes payable
of $7.4 million. Net cash provided by financing activities in the first nine
months of fiscal 1999 included $6.3 million from the issuance of Series A
Convertible Preferred Stock.

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
December 31, 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, our shareholder, in the amount of $225,000 and by three other
shareholders in a combined total amount of $500,000 in November 1999. This loan


                                       17
<PAGE>

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 recognized in the fourth
quarter of fiscal 2000.

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

We had capital lease obligations of $2.6 million at December 31, 1999 payable
through 2004.

We had a $2.2 million revolving line of credit secured against certain trade
receivables. As at December 31, 1999, $1.4 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 December 31, 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 two private placements 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 $14.1 million, net of
fees and expenses of $858,000 associated with the placements. 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 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, 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 $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 net 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.


                                       18
<PAGE>

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

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
--------------------------------------------------------------------------------

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

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 December 31
                                         -------------------------------
                                            (U.S. Dollars - Thousands)
                                       1999      2000      2001     2002
                                       ----      ----      ----     ----

      Line of credit borrowings       $1,414    $3,000    $6,000   $6,000
      Interest expense (A)               124       263       525      525
      Interest expense (B)               138       293       585      585
      Interest expense (C)               110       233       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 December 31, 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%.


                                       19
<PAGE>

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

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







                                       20
<PAGE>
                           PART II. OTHER INFORMATION

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

c)   Information regarding issuances of equity securities not registered under
     the Securities Act of 1933 is incorporated by reference from Notes 4 and 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, filed January 31, 2000 (incorporated herein by
          reference to Exhibit 4.2 of Registrant's Form 8-K filed on February
          14, 2000).

     27   Financial Data Schedule

b)   Reports on Form 8-K:

     (1)  A Form 8-K dated November 18, 1999 was filed by the Company on
          December 1, 1999; reporting the termination of the SEC's previously
          disclosed staff inquiry, under Item 5, Other Events.

     (2)  A Form 8-K dated October 27, 1999 was filed by the Company on November
          12, 1999, reporting the completion of the sale of the Company's
          approximately 80% membership interest in Coyote Gateway to AGTI on
          October 27, 1999, pursuant to a Purchase Agreement dated September 30,
          1999, under Item 2, Acquisitions or Dispositions of Assets, and Item
          7, Financial Statements and Exhibits

     (3)  A Form 8-K/A dated October 27, 1999 was filed by the Company on
          January 10, 2000, amending the Form 8-K filed on November 12, 1999 to
          include pro forma financial information under 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)