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

                                    FORM 10-K


[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
    of 1934   For the fiscal year ended                March 31, 1998
                                         ---------------------------------------
                                                                 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
  incorporation or organization)                          Identification No.)

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

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

Securities registered pursuant to Section 12(b) of the Act:        None

Securities registered pursuant to 
     Section 12(g) of the Act:                     Common Stock, $1.00 Par Value

     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

     Indicate by check mark if disclosure of delinquent  files  pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K                                                                  [ X ]

On July  9,  1998,  the  aggregate  market  value  of the  voting  stock  of the
Registrant  held by  stockholders  who were not affiliates of the Registrant was
$73,145,000,  based on a closing sale price of $8.375 of the Registrant's common
stock on the NASD OTC Bulletin Board. At July 9, 1998, the Registrant had issued
and  outstanding  an  aggregate  of 9,583,628  shares of its common  stock.  For
purposes  of this  Report,  the  number of  shares  held by  non-affiliates  was
determined by aggregating the number of shares held by Officers and Directors of
Registrant,  and by others who, to Registrant's knowledge,  own more than 10% of
Registrant's common stock, and subtracting those shares from the total number of
shares outstanding.

                   DOCUMENTS INCORPORATED BY REFERENCE - NONE

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<PAGE>
                                     PART I

Forward-Looking Statements

     All statements other than historical statements contained in this Report on
Form 10-K  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 Report 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 sales and earnings estimates,  backlog, the status of litigation,  the
value  of new  contract  signings,  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 herein (see
Item 7 - Risk  Factors).  The Company  disclaims  any intention or obligation to
update or  revise  any  forward-looking  statements  whether  as a result of new
information, future events or otherwise.

ITEM 1.  BUSINESS

A.       General Development of Business

     Coyote Network Systems, Inc.  ("Company"),  formerly The Diana Corporation,
is a Delaware corporation  incorporated in 1961. The Company is engaged, through
Coyote  Technologies,  LLC ("CTL"),  formerly Sattel  Communications LLC, in the
provision of scalable  telecommunications  switches and Internet  Protocol  (IP)
based gateway systems to  telecommunications  service providers.  The Company is
also engaged, through American Gateway Telecommunications,  Inc., in wholesaling
international long distance services to telecom carriers.

     In November 1996, the Company  announced its strategic  decision to dispose
of  all  of   its   non-telecommunications   switch   business   segments   (the
"Restructuring"). In February 1997, the Company completed the sale of a majority
of the  assets  of  Atlanta  Provision  Company,  Inc.  ("APC"),  the  wholesale
distribution  of meat  and  seafood  segment.  In  November  1997,  the  Company
completed the sale of C&L Communications,  Inc. ("C&L"), its  telecommunications
equipment  distribution  segment,  and in March  1998,  the  Company  reached an
agreement  on the  sale of  Valley  Communications,  Inc.  ("Valley"),  its wire
installation and service  segment.  The results of APC, C&L and Valley have been
reported  separately as discontinued  operations (see Note 2 to the Consolidated
Financial  Statements).  As part of the  Restructuring,  the Company's  Board of
Directors  approved  plans to change the name of the Company.  At the  Company's
Annual  Shareholders  Meeting  held  in  November  1997,  shareholders  approved
changing  the  Company's  name from The  Diana  Corporation  to  Coyote  Network
Systems,  Inc.  Subsequently,   the  name  of  the   telecommunications   switch
subsidiary, Sattel Communications LLC, was changed to Coyote Technologies,  LLC.
CTL has granted  subordinated equity  participation  interests,  which amount to
approximately a 20% effective ownership interest in CTL, to certain employees of
the Company.  These  participation  interest are convertible  into shares of the
Company's common stock at the option of the holder.

     In April 1998, the Company  announced that Coyote Gateway,  LLC ("CGL") had
acquired  substantially  all of the assets of privately  held  American  Gateway
Telecommunications,  Inc.  (AGT),  a provider of  wholesale  international  long
distance  services.  In consideration of the asset transfer,  AGT received a 20%
ownership interest in CGL. CGL continues to operate under the name of AGT. Based
in Houston,  Texas, AGT provides wholesale international long distance services.
AGT  operates an  international  network  that  consists  of domestic  switching
facilities.  AGT has  contracts for more than 31 million  international  minutes
monthly to 11 countries originating from its New York City-area gateway.

                                       1
<PAGE>
  
     AGT plans to leverage Coyote Technologies' scalable DSS Switches to process
international traffic using least cost routing, in some cases over the Internet.
The  switching  capacity  will  enable AGT to enter new  expanding  markets  and
capture  calls  at a low per  port,  per  minute  cost  creating  a  competitive
advantage  over  traditional  wireline  carriers.  International  simple resale,
refile  services,  voice  over  frame  relay and  voice  over the  Internet  all
represent an opportunity for AGT to participate in telecom arbitrage.  AGT plans
to build out carrier grade termination services via the Internet,  intranets and
virtual private networks in Latin America and Southeast Asia.

B.       Industry Segments

     For the year ended March 31, 1998,  the Company's  business is reported for
the  operating  segment  of  telecommunications   switches  that  are  designed,
developed,  manufactured,  engineered,  marketed and  distributed by CTL and the
Company's  corporate  headquarters  expense.  Future  segments  will  include IP
gateway systems provided by CTL and  international  based long distance services
provided by AGT. (See Note 12 to the Consolidated Financial Statements)

C.       Narrative Description of Business

Principal Products

     Primary   products  of  CTL  include   telecommunications   switches  ("DSS
Switches")  and  Internet   Protocol  (IP)  gateway  systems   ("SSA/IP  Gateway
Systems"),  designed to route voice traffic over the Public  Switched  Telephone
Network  (PSTN),  IP Networks,  and the Internet.  CTL's primary  business is to
design, develop, manufacture, engineer, market and distribute telecommunications
switches  and IP  gateway  systems.  The  DSS  Switch  is  designed  to  provide
cost-effective   and  versatile  access  to  the  PSTN.   Examples  of  specific
applications of DSS Switches include facilities-based domestic and international
long distance  carriers that use DSS Switches to provide long distance  services
with least-cost routing,  calling card, 800 number in-bound  translation as well
as equal and dedicated access services.  DSS Switches enable telecom carriers to
provide local and long distance  telecommunications  services  including calling
card,  domestic and international  800,  dedicated access and Signaling System 7
("SS7") capabilities. Basic features of the DSS Switch include:

                   DSS Switch
     T1s (Min./Max)(1)                   1-160
     E1s (Min./Max)(1)                   1-120
     Lines/Ports (Max.)(1)               10,240
     Busy Hour Call Attempts            375,000
     Physical Size & Dimensions         2-10 Racks (Each Rack is 19"x 30"x 23")

     (1) Actual maximum varies with mix of numbers of lines and T1/E1 trunks.

     The SSA/IP  Gateway  System is a scalable,  open  standards-based  Internet
Protocol  solution  designed  to meet the needs of  competitive  local  exchange
carriers (CLECs),  domestic and international long distance  carriers,  Internet
Service Providers (ISPs), and Internet  Telephony Service Providers (ITSPs),  by
improving the  efficiency of long distance  trunks up to 75%. The SSA/IP Gateway
System  seamlessly  routes voice and fax traffic over IP and ATM  networks,  the
Internet,  and the PSTN. The SSA/IP Gateway System routes voice and data traffic
from costly dedicated T1 links and combines the high bandwidth utilization of an
IP link with voice compression  (8:1) and  packetization for reducing  bandwidth
requirements.  When used in conjunction with the DSS Switch,  the SSA/IP Gateway
System  scales from 8 T1s to 80 T1s,  supporting  up to 1,920  compressed  voice
channels.  The SSA/IP Gateway System is  standards-based  and communicates  with
virtually any Class 4 or 5 switch via inband E&M signaling.

                                       2
<PAGE>
           
     AGT is a provider of wholesale  international long distance  services.  AGT
operates  an   international   network  that  consists  of  domestic   switching
facilities.  AGT plans to deliver Voice over Internet (VoN)  services,  Fax over
Internet (FoN)  services and other  innovative  services.  AGT has contracts for
more than 31 million  international  minutes monthly to 11 countries originating
from its New York City-area gateway.

Industry Background

     The  Telecommunications  Act of 1996 opened one of the last regulated areas
of the U.S.  telecom  industry to competition and has created a new paradigm for
the industry.  According to industry analysts,  the worldwide market for telecom
equipment  and  services  is more  than  $700  billion.  Evolving  technologies,
pro-competitive  legislation,  privatization,  the build out of new  networks in
developing countries,  new carrier services,  and changing customer demands mark
today's telecom  industry.  As  communications  carriers expand into new markets
with  new   revenue-generating   services,  the  Company  believes  that  to  be
successful,  carriers need to differentiate  with solutions for voice,  data and
video  services and provide  "bundled"  local,  international  and domestic long
distance, and Internet access.

     Telecom  Reform is one of the  major  trends  in the  information  services
market in the last 50 years.  Industry analysts believe that 20% of today's $100
billion domestic local market will go to CLECs over the next five years.  Today,
industry analysts say that CLECs have approximately a 2% market share.

     In  the  United  States,   due  to  regulatory   restrictions,   historical
monopolies,  and limited access to the PSTN, the provision of telephone services
traditionally  has been the  domain of larger  long  distance  or  InterExchange
Carriers  (IXCs)  and  Regional  Bell  Operating  Companies  (RBOCs)  conducting
business in defined markets and providing defined services.  Regulatory  changes
enacted  in the  Telecommunications  Act  have  fundamentally  altered  the PSTN
landscape by permitting  companies other than Incumbent Local Exchange  Carriers
(ILECs)  such  as  the  RBOCs,   to  provide   customer   access  to  the  PSTN.
Internationally,  deregulation,  privatization,  and the  build-out  of  telecom
networks are creating opportunities for entrepreneurial  companies that can move
quickly with new products, technologies, and services.

     The Company  believes  that these changes have created an  opportunity  for
telecommunications  companies to expand beyond their  traditional  markets.  For
example,  RBOCs are planning to expand beyond their traditional local markets to
compete with ILECs or establish  international  gateways in different geographic
markets. IXCs are planning to provide local exchange services.  Similarly, RBOCs
or ISPs are  providing  additional  services  such as long  distance  service or
Internet  access (in the case of an RBOC) or long distance and/or local exchange
service (in the case of an ISP). New entrants in international  telecom markets,
such as Emerging International Carriers (EICs) are competing with existing local
and international service providers.  Competitive Access Providers (CAPs), Cable
Television  Companies,  and  Utility  Companies  are also  competing  to provide
telecom services.

     The Company believes that these developments are creating a new paradigm, a
new market for emerging  domestic and  international  long distance carriers and
CLECs. According to industry analysts,  today's emerging international telephone
services  market is $70 billion and is expected to grow in the mid-teen rate (in
terms of minutes of use) over the next several years.

     These emerging carriers also have a need for small-to-medium sized scalable
telecommunications  switches  that  are open and can add  services  quickly  and
cost-effectively.  These smaller,  scalable switches can be cost-justified  with
less than one million minutes of use per month and  revenue-generating  services
can be added quickly, enabling service providers to match their costs with their
revenue streams.  Traditional larger,  proprietary  switches typically need more
than five million minutes per month to cost justify,  and adding services can be
costly and take more than one year.

                                       3
<PAGE>
          
     As a player in the telecom  industry,  the Company is  benefiting  from the
Telecom Act of 1996 that  substantially  deregulated the domestic local exchange
industry  and opened up markets for  companies  like Coyote  Network  Systems to
compete.  The  Company  is  committed  to  leading  edge  technologies,  such as
compressed  voice over IP. The Company is targeting  specific  market  segments:
International  long distance,  telecom  switching,  IP gateway services and CLEC
services.  The Company is  authorized  to provide CLEC  services in the State of
California.

Business Strategy

     The  Company's  vision  is  to be a  customer  intimate  organization  with
multiple core  technologies,  equipment,  and network services that supports its
goal:  To build a core set of  communication  companies  that  provide  both the
equipment  and the  networks  to  enable  and  deliver  voice,  data,  and video
solutions.  The Company's  business  model is focused on  leveraging  its switch
technology and  interconnecting  emerging  international  long distance carriers
with  CLECs in gateway  cities to  significantly  reduce the costs of  providing
telephone services.  The Company plans to build, partner and/or acquire CLECs in
gateway cities.

     The   Company   is   targeting    specific   market   segments    including
telecommunications  switches,  IP gateway systems,  international long distance,
and CLEC  services  in gateway  cities.  The  Company  will  continue to develop
relationships,   make  investments,   and  contract  with  companies  that  have
complementary  technologies,  network facilities and services, support services,
value-added   services,   and   established   distribution   channels  that  are
strategically aligned with the Company's goal to enable and deliver voice, data,
and video solutions.

     The Company's growth strategy has five phases that it expects will fuel its
growth to reach critical mass.

1.   Technology  Expansion:  The Company plans to continue to develop,  acquire,
     and/or contract with companies that have leading-edge technologies to serve
     customers  with  total  solutions.  They  include IP  gateway  systems  and
     alternative  transmission,  and packet and revenue generating applications.
     For example,  industry  analysts  believe  that between 1998 and 2001,  the
     Internet  Telephony  market could be as much as $8 billion.  Besides  being
     more efficient,  new networks, such as IP, ATM and the Internet,  typically
     bypass  conventional  long  distance  carriers,  who must pay local  access
     charges  and taxes.  Such fees make up  approximately  40% of typical  long
     distance  charges.  Today,  industry analysts say the average long distance
     call in the U.S.  costs  about 13  cents  per  minute,  while  the  average
     international  price is 89 cents per minute.  The gap has little to do with
     the extra cost of an  international  call,  which is marginal.  Rather,  it
     reflects  the power of a small  group of  service  providers.  
2.   Increase Market Share by Providing End-to-End Solutions:  The Company plans
     to bundle local,  long  distance,  and data services in focused  markets to
     better serve its  customers.  
3.   Acquisitions:  The  Company is pursuing an  acquisition  strategy  and will
     continue  to target  companies  with  complementary  technologies,  network
     services, products, and value-added applications.

     Acquisition Criteria:  The Company will continue to look for companies that
     are customer-oriented; currently profitable or profitable within 12 months;
     and  synergistic  with  existing  Coyote  Network  Systems,   Inc.  ("CNS")
     companies.

     Acquisition  Targets:  The Company will continue to look for companies that
     market to affinity  groups,  international  gateway  companies  and/or data
     network  companies.  The  Company  plans to acquire  and/or  build CLECs in
     gateway  cities.  The  Company  also  plans  to  target  packet  technology
     companies and value-added application providers.

     Planned Acquisitions: Near-term acquisition targets for the Company include
     international long distance companies,  and CLECs. 

                                       4
<PAGE>

4.   Increase  and  Leverage  Relationships:   The  Company  plans  to  leverage
     relationships  that will increase market penetration and complete the total
     system solution for the Company's customers.  
5.   Develop  Brand  Recognition:  The Company  plans to deploy  technology  and
     leverage   contracts  to  raise   visibility,   add  value,   and  increase
     profitability of core companies.

     The Company's goals also include applying for and acceptance for listing on
the Nasdaq National Market System, and enhancing long-term shareholder value.

Sales and Marketing

     To meet the needs of its  customers,  the Company  sells its  products  and
network  services  through the  coordinated  efforts of its direct  sales force,
independent agents, systems integrators, OEMs, resellers, and distributors.

     CTL's  direct  sales  force is  principally  focused on selling to domestic
carriers,  e.g.,  ILECs,  CLECs,  switchless  resellers,  international  gateway
providers  and long  distance  providers.  CTL also uses  indirect  distribution
channels such as systems integrators,  VARs, OEMs and distributors to market its
products and services internationally.

     AGT primarily  markets its network  services  directly to carriers  through
independent agents.

     The Company will continue to develop  relationships  with, make investments
and/or acquire companies with complementary technologies, network facilities and
services,  support services,  value added services, and established distribution
channels that are  strategically  aligned with the Company's  goal to enable and
deliver voice, data and video solutions to carriers.

Customer Service and Support

     The Company  services and provides  technical  support for its products and
services. The Company or an authorized third party provides customer training in
connection with the  installation of its products and services.  The Company has
entered into  agreements  with third  parties,  including  certain  suppliers of
equipment incorporated into its products, to provide support for CTL's products.
CTL services and provides  technical support for its products.  DSS Switches and
SSA/IP  Gateway  Systems may be sold with a service  plan  pursuant to which CTL
provides ongoing technical assistance and maintenance.

New Products

     The SSA/IP  Gateway  System is a scalable,  open  standards-based  Internet
Protocol  solution  designed  to meet  the  needs of  local  exchange  carriers,
domestic and international long distance carriers,  ISPs, and Internet Telephony
Service Providers  (ITSPs),  by improving the efficiency of long distance trunks
up to 75%. The SSA/IP  Gateway  system  routes voice and fax traffic over IP and
ATM networks, the Internet, and the PSTN. The SSA/IP Gateway System routes voice
and fax traffic from costly  dedicated T1 links and combines the high  bandwidth
utilization of an IP link with voice  compression  (8:1) and  packetization  for
reducing bandwidth requirements.

     In March 1998,  CTL announced a cooperative  sales and marketing  agreement
with Info Directions Inc. (IDI). The agreement also calls for the development of
an interface to allow single provisioning and rating from CTL's DSS Switch using
IDI's CostGuard(TM) customer care and billing system.

                                       5
<PAGE>

     The rapid growth in IP and ATM-based networks has opened  opportunities for
CTL to integrate voice communications with data and video services. In May 1997,
CTL and Yurie Systems,  Inc. ("Yurie") announced a Hybrid CO/ATM switch designed
to  consolidate  and  concurrently  switch  "any-to-any"  voice,  data and video
traffic  across public and private ATM  networks.  The CO/ATM switch pairs CTL's
DSS Switch  with  Yurie's LDR ATM access  equipment.  The Hybrid  CO/ATM  switch
illustrates  the benefits of  flattening  the  traditional  PSTN,  revealing new
opportunities for competitive  telcos,  ISPs, private network  operators,  cable
companies and new entrants to the increasingly  competitive telecom industry. To
date there are no CTL customers using Yurie's ATM switch,  however,  the Company
recently  announced  that  Rhinos  International  is using CTL's DSS Switch with
another vendor's ATM equipment to gain the efficiencies of combining voice, data
and video over ATM and IP networks.

     AGT plans to leverage Coyote Technologies' scalable DSS Switches to process
international traffic using least cost routing, in some cases over the Internet.
The  switching  capacity  will  enable AGT to enter new  expanding  markets  and
capture  calls  at a low per  port,  per  minute  cost  creating  a  competitive
advantage  over  traditional  wireline  carriers.  International  simple resale,
refile  services,  voice  over  frame  relay and  voice  over the  Internet  all
represent  opportunities for AGT to participate in telecom arbitrage.  AGT plans
to build out carrier grade termination services via the Internet,  intranets and
virtual private networks in Latin America and Southeast Asia.

     There can be no assurance that the  development of saleable  products which
will be  beneficial  to the future  growth of the Company or that  products  and
services will be developed in a cost effective  manner and be available for sale
within the time frame required to take advantage of the market opportunities.

     The  Company  believes  that the timely  development  of new  products  and
network  services are essential  for it to compete in the telecom  equipment and
network services markets.  The Company expects to continue to devote substantial
resources subject to its available liquidity (see Item 7 - Liquidity and Capital
Resources and Risk Factors) to research and  development as well as to strategic
alliances in fiscal 1999.

Raw Materials

     CTL designs, develops, manufactures, engineers, markets and distributes the
DSS Switch and the SSA/IP Gateway System, parts of which are subject to a patent
and patent pending.  Certain software and hardware are licensed or procured from
other  vendors  under OEM  arrangements,  or are  developed  jointly  with other
vendors pursuant to research and development  joint ventures,  partnerships,  or
similar arrangements.

     CTL utilizes  certain general purpose  hardware  components in its switches
and IP gateway  systems,  which  lowers  costs and retains for CTL the option of
acquiring  such  components  from more than one vendor.  Other  hardware  and/or
software  components  such as  subscriber  and data line  cards and core  switch
software were developed by CTL or its contractors.

     CTL performs  certain  systems  integration and test functions in house. In
addition,  CTL  outsources  some of its  manufacturing  and  procurement  of raw
materials  used  in  manufacturing  to  outsource  vendors,   including  Sanmina
Corporation ("Sanmina") and I-PAC Manufacturing, Inc. ("I-PAC"). CTL's outsource
vendors  have  facilities  to  provide  a turnkey  product  which  includes  the
manufacturing or procurement of board,  chassis, and system level assemblies for
CTL.

     CTL's outsource manufacturers have from time-to-time  experienced delays in
receipt  of certain  hardware  components.  A failure  by a supplier  to deliver
quality  products on a timely  basis,  or the  inability  to develop  additional
alternative  sources if and as  required,  could  result in delays  which  could
materially  and adversely  affect CTL. (See Item 7 Risk Factors  -Dependence  on
Outsource Manufacturers and Other Key Suppliers).  Certain software and hardware
associated with adjunct and peripheral  equipment used by CTL to provide certain
functions  and features are licensed or procured  under OEM  arrangements,  from
other vendors.

                                       6
<PAGE>

Proprietary Rights

     CTL uses a  combination  of  patents,  trade  secrets,  industry  know-how,
confidentiality,  non-compete  agreements  and tight  control of its software to
protect  the  products  and  features  that  it  believes  give  it  competitive
advantages.  (See  Item  7 -  Risk  Factors-Limited  Protection  of  Proprietary
Technology; Risk of Third-Party Claims of Infringement).

Customers and Customer Concentration

     The Company  believes  that  potential  customers  include,  among  others,
telecommunications  carriers  such as CLECs,  international  gateway  providers,
switchless resellers, ILECs, international and domestic long distance providers,
wireless  telephone  companies,  cable TV  companies,  virtual  private  network
providers,  ISPs,  and  affinity  groups.  The Company  markets its products and
services to targeted  customer  segments  directly  with its own sales force and
indirectly  markets  to other  customers  through  independent  agents,  systems
integrators,  OEMs,  VARs and  distributors.  Revenues  in fiscal 1998 were from
shipments to twelve  customers,  one of which accounted for approximately 40% of
the total  revenues.  Approximately  94% of CTL's  revenues for fiscal 1997 were
derived from sales to Concentric Network Corporation ("CNC").

     CTL's  products are targeted at markets for  small-to-medium  sized telecom
switches  and for IP gateway  systems.  CTL's  direct  sales  force  principally
focuses on smaller carriers, e.g., CLECs, ILECs, international gateway providers
and switchless  resellers.  CTL also uses indirect distribution channels such as
systems  integrators,  VARs,  OEMs and  distributors  to market its  products to
CLECs, IXCs, international telephone companies and smaller ISPs.

     Among the companies that have taken  delivery of the Company's  switches to
date are Apollo Telecom,  Cellular XL, Concentric  Network  Corporation,  Dakota
Carrier  Services,  Lightcom  International,  Inc.,  Mony  Travel  Inc.,  Rhinos
International,   Telesys  S.A.,   Vancouver  Telephone  Company,  and  WorldWave
Communications, Inc.

     Another component of the Company's long-term strategy is its expansion into
international  markets. In order to effect this strategy, the Company is seeking
out strategic  alliances  with  companies  that have  established  international
distribution channels. In February 1998, CTL announced a three-year, $20 million
OEM agreement for DSS Switches with Tokyo-based  Apollo KK, a company focused on
telecommunication infrastructures and real estate. Under terms of the agreement,
Apollo KK has  exclusive  rights to  distribute  DSS  Switches  in Japan and has
agreed to an annual  minimum  commitment  of $4  million,  $6  million,  and $10
million  respectively  for the three  years.  Apollo  KK  agreed  to place  firm
purchase orders at the beginning of each year for not less than 25% of the total
annual  commitment.  Apollo  KK also has  non-exclusive  rights  to  resell  DSS
Switches in other parts of the world. Apollo Telecom, a U.S.-based subsidiary of
Apollo KK, and CTL will provide installation and support services.

     AGT is an emerging  international  carrier (EIC)  focused  primarily on the
international  long  distance  market.  AGT  offers  highly  reliable,  low-cost
switched  voice  services on a wholesale  basis,  primarily to  U.S.-based  long
distance  carriers.   AGT  provides   international  long  distance  service  to
approximately  11 foreign  countries  through a flexible  network  comprised  of
various  foreign  termination  relationships,  international  gateway  switches,
leased facilities and resale arrangements with long distance  providers.  AGT is
rapidly   growing  its  revenues  by   capitalizing   on  the   deregulation  of
international  telecommunications  markets,  combining sophisticated information
systems with flexible routing and leveraging management's industry expertise.

     The Company  anticipates that its results of operations in any given period
will continue to fluctuate  and depend to a  significant  extent upon sales to a
small  number  of  customers.  There  can be no  assurance  that  the  Company's
principal  customers  will  continue  to  purchase  product  from the Company at
current  levels,  if at all.  The Company is working  diligently  to broaden its
end-user  customer base and to develop  relationships  with indirect channels of
distribution.

                                       7
<PAGE>

Backlog

     The Company only  includes in its backlog  written  orders for products and
related  services  scheduled to be shipped within one year. The Company does not
believe  that the level  of, or  changes  in the  levels  of,  its  backlog  are
necessarily a meaningful indicator of future results of operations.

Competition

     The  telecommunications  switch and IP gateway  systems  markets are highly
competitive.  CTL produces  small-to-medium sized scalable telecom switches that
currently  compete with few, if any,  directly  comparable  products.  CTL faces
potential competition in the data communications market segment from a number of
data communications  equipment providers,  such as Bay Networks,  Cisco Systems,
Lucent Technologies, Newbridge Networks, and 3Com.

     In addition,  the manufacturers of large scale central office switches such
as Lucent Technologies,  Northern Telecom,  Digital Switch Corporation,  Siemens
AG, Alcatel,  LM Ericsson and others have the resources and expertise to compete
in the smaller-scale  telecom switching  equipment segment.  It is also possible
that large communication carriers such as AT&T Corporation,  MCI Communications,
Sprint and, when and if legally  permitted to, the RBOCs, may enter the small to
mid-sized  telecom  switching  equipment  business.  Many of  these  competitors
possess  financial  resources  significantly  greater  than  those  of  CTL  and
accordingly  could  initiate and support  prolonged  price  competition  to gain
market share.

     Additionally,  the  telecommunications  industry  is in a  period  of rapid
technological  evolution,  marked by the introduction of competitive product and
service  offerings,  such as the  utilization  of IP and ATM  networks,  and the
Internet  for voice and data  communications.  The  Company is unable to predict
which technological  development will challenge its competitive  position or the
amount of  expenditures  that will be required to respond to a rapidly  changing
technological environment.

     The international  telecommunications industry is intensely competitive and
subject to rapid change.  AGT's competitors in the international  wholesale long
distance market include large,  facilities-based  multinational corporations and
smaller facilities-based providers in the U.S. and overseas that have emerged as
a result of deregulation,  switch-based resellers of international long distance
services and  international  joint ventures and alliances  among such companies.
AGT also competes  internationally with a number of dominant  telecommunications
operators that  previously held various  monopolies  established by law over the
telecommunications  traffic in their countries.  International wholesale service
providers compete on the basis of price, customer service, transmission quality,
breadth of service offerings and value-added services.

     Further, the number of the Company's competitors is likely to increase as a
result   of   the   competitive   opportunities   created   by   a   new   Basic
Telecommunications   Agreement   concluded   by  members  of  the  World   Trade
Organization (WTO) in April 1997. Under the terms of the WTO Agreement, starting
February 5, 1998, the United States and more than 65 countries have committed to
open their  telecommunications  markets to  competition,  foreign  ownership and
adopt measures to protect against  anti-competitive  behavior.  As a result, AGT
believes that competition will continue to increase,  placing downward  pressure
on prices.  Such pressure could  adversely  affect AGT's gross margins if AGT is
not able to reduce its costs commensurate with such price reductions.

     A majority  of the  U.S.-based  international  telecommunications  services
revenue is currently generated by AT&T Corp. ("AT&T"),  MCI Communications Corp.
("MCI") and Sprint Corporation ("Sprint"). AGT also competes with companies such
as WorldCom, Inc., Star Telecommunications, Inc., Pacific Gateway Exchange, Inc.
and other U.S.-based and foreign long distance  providers,  including the RBOCs,
which  presently  have FCC  authority  to  resell  and  terminate  international
telecommunications services. Many of these competitors have considerably greater
financial and other  resources  and more  extensive  domestic and  international
communications  networks than AGT. AGT's business would be materially  adversely
affected  to the extent that a  significant  number of such  customers  limit or
cease doing business with AGT for competitive or other reasons. Consolidation in
the  telecommunications  industry could not only create even larger  competitors


                                       8
<PAGE>
with greater financial and other resources,  but could also adversely affect the
Company  by  reducing  the  number  of  potential  customers  for the  Company's
services.

Research and Development

     In  fiscal  1998,   the  Company  made  a  strategic   decision  to  invest
approximately $5 million in engineering, research and development to provide new
and  enhanced  features  to the DSS  Switch and to  develop  the SSA/IP  Gateway
System.

     In  virtually  all  cases,  CTL  owns  the  results  of  the  research  and
development  performed by contract  engineers and independent  laboratories.  In
some instances,  however,  the development  activity requested by CTL involves a
specific  customization of a contractor's  proprietary  software for integration
into CTL's products.  In those instances,  CTL establishes a licensing agreement
with the contractor.

     When CTL subcontracts  development  work, the contractor  designs and tests
the technology needed to fulfill the contract. CTL retains the responsibility to
integrate the contractor's work product with CTL's products.

     The individual contract engineers assist with specific  technological needs
of CTL. Each of the outside laboratories utilized by CTL has been selected based
on a specific  organizational  capability  and expertise in one of the following
areas:  automatic test systems,  telecommunications  and engineering  processes,
UNIX software,  operation  administration  maintenance & provisioning ("OAM&P"),
telecommunications signaling systems, telecommunications and data communications
software products and Internet software.

Employees

     As of June 2, 1998,  the Company had 78 employees.  In addition the Company
retained,  on a contract basis,  additional  people for specific  projects.  The
Company  believes  that its future  growth and success will depend in large part
upon its ability to continue to attract and retain highly qualified people.  The
Company has no collective bargaining agreement with its employees.

Environmental Regulation

     Compliance  with  federal,   state  and  local   regulations   relating  to
environmental   protection   have  not  had  a  material   effect  upon  capital
expenditures, operating results or the competitive position of the Company.

                                       9
<PAGE>

                                    Glossary

Advanced  Call  Processing - Features  include  Operator  Services for busy line
verification and busy line interrupt,  exchange  service  capability for service
provider Number Portability and Enhanced 911.

Affinity Groups - People or organizations that share a common bond.

ANI - Automatic  number  identification  (the phone number of the phone  calling
you).

Busy hour call  attempts - number of call  attempts  during  the busy  hour,  an
important concept in traffic engineering,  i.e., figuring how much switching and
transmission capacities are needed.

C++ language - An object-oriented programming language.

Call  Management  System - a DSS Switch  adjunct  processor  that  handles  call
authorizations, time-of-day routing decisions, and call record storage.

Class 4 office - The major  switching  center to which  toll  calls from Class 5
central office switches are sent.

Class 5 office - An end  office.  Connects  subscribers  to the public  switched
telephone network (PSTN).

CAP - Competitive access provider.  Alternative carrier: a company that competes
with  telephone  companies in carrying  voice and data  traffic.  Usually  these
companies  construct a fiber ring in an urban area to attract  businesses to use
their services in addition to or in place of the services of the local telephone
company.

CLEC - Competitive  local exchange  carrier.  Competes with incumbent  telephone
carriers for local, long distance and Internet access services.

DNIS - Dialed number identification service.

Enhanced 911 - Emergency call routing with calling number identification (ANI).

EIC - Emerging  international  carrier. New carriers that typically compete with
traditional  carriers  such as  AT&T,  MCI and  Sprint  for  international  long
distance services.

FoN - Fax over the Internet.

ILD - International long distance.

ILEC -  Incumbent  local  exchange  carrier.  Typically  a local Bell  telephone
company.

IP - Internet Protocol.

ISDN - Integrated  services digital  network.  There are two interfaces in ISDN:
PRI - Primary rate interface: The ISDN equivalent of a T1 or E1 circuit, and BRI
- Basic rate interface:  Consists of two bearer  B-channels at 64 kilobits and a
data channel at 16 kilobits per second.

LD - Long distance services.

Number  Portability - Allows  telephone  numbers to move with a customer between
carriers.


                                       10
<PAGE>

OAM&P - Operation, administration, maintenance and provisioning.

Operator Services - A variety of services provided by an operator, i.e., collect
calls, third-party billed calls and person-to-person calls.

Ports - an entrance to or exit from a network.

Rack - an open metal structure onto which equipment is mounted.

Shelf unit - a unit that mounts in a rack and holds cards.

Switch  Adjunct  Server (SAS) - Enables  customers  to better  manage DSS Switch
resources and increase  processor  usability in the switch.  SAS leaves more CPU
power in the switch by moving  translations  to the SAS. The SAS has a graphical
user interface for  point-and-click  switch  maintenance and it enables users to
monitor alarm messages from the switch.

SSA - Coyote Technologies' Switch Server Architecture.

Servers - Typically a computer that sits on a local area network that is used as
a repository or distributor of data.

Signaling  System 7 ("SS7") - An  international  intelligent  network  signaling
system that  significantly  improves  call  processing.  SS7 networks  typically
process  calls  faster  than  other  signaling  systems  since the call  arrives
independently  from the  voice  traffic.  SS7  reduces  network  congestion  and
deployment  costs  through  greater port  utilization  and  alternative  routing
capabilities.  SS7 also enables value-added services to be efficiently deployed.
Examples of these value-added services include credit and debit card validation,
and wireless applications.

T1/E1 circuits - A T1 circuit is a digital  transmission link with a capacity of
1.544 megabits per second (North American standard).  An E1 circuit is a digital
transmission  link  with a  capacity  of 2.048  megabits  per  second  (European
standard).

Time-space-time   switching  -  A  fully   electronic   switch   matrix   design
architecture.

Trunks - A communication line between two switching systems.

Unix - A multi-tasking,  multi-user  operating system for running  computers and
telephone  systems that allow  multiple  programs to be run  simultaneously  and
multiple users to use a single computer.

VoN - Voice over the Internet.

Workstations  - High-speed  personal  computers  that are used for  high-powered
processing tasks, i.e., CAD/CAM, engineering.
 
ITEM 2.  PROPERTIES

     CTL's and the  Company's  executive  offices are  located in  approximately
23,000 square feet of office and warehouse space in Westlake Village, California
currently  leased by the  Company.  The  Company  also  leases  office  space in
Richardson,   Texas  to  support   its   Research  &   Development   Engineering
requirements. The Company owns a vacant parcel of land in Eldridge, Iowa that is
for sale.  The Company owns a 91,000  square-foot  building in Atlanta,  Georgia
which was formerly used by APC. The Company has listed this property for sale.

                                     11
<PAGE>
ITEM 3.  LEGAL PROCEEDINGS

     Coyote Network Systems, Inc. (The Diana Corporation)  Securities Litigation
(Civ.  No.  97-3186).  This is a  consolidation  of what  were  originally  nine
separate  actions  brought in the United States  District  Court for the Central
District of California  on behalf of  purchasers  of the Company's  common stock
during a class period that  extended  from December 6, 1994 through May 2, 1997.
On July 23, 1997, the Court entered a stipulation  and order  consolidating  the
nine  actions  for all  purposes.  On  September  9,  1997,  plaintiffs  filed a
consolidated amended complaint (the "Consolidated  Complaint")  asserting claims
against the Company,  certain of its present and former  directors and officers,
and others under  Section  10(b) of the  Securities  Exchange  Act of 1934.  The
Consolidated Complaint alleges essentially that the Company and other defendants
were  engaged in a scheme to inflate  the price of the  Company's  common  stock
during the class period through false and misleading statements and manipulative
transactions.   The  Consolidated   Complaint  seeks  unspecified  damages,  but
identifies  the  significant  movement in the  Company's  stock price during the
putative  class  period (a swing of more than $115 per  share) to imply that the
damages that will be claimed will exceed the Company's assets.

     On  December  15,  1997,  the Court  denied a motion by the Company and the
other defendants to dismiss the consolidated amended complaint. Since that time,
the parties have begun the early stages of  discovery  and have had  preliminary
discussions  concerning  settlement.  On April 20, 1998, the Plaintiffs  filed a
motion to have the action certified as a class action.  That motion is currently
scheduled to be heard by the Court on September 21, 1998. The Company intends to
defend the action  vigorously,  but is continuing  discussions  with  Plaintiffs
concerning potential settlement.

     On July 9, 1998,  the  respective  counsel for the  Plaintiffs  and for the
Company executed a letter agreeing in principle,  subject to various  conditions
and contingencies, to settle the claims against the Company and its subsidiaries
in The Diana Securities Litigation. If consummated,  the settlement will require
the  Company to issue  warrants  to acquire  2,500,000  shares of the  Company's
common stock.  The warrants will be exercisable for three years from the date of
issuance and will have an exercise  price of $9 per share in the first year, $10
per share in the  second  year and $11 per share in the third  year,  subject to
adjustment in certain  events.  If the Company lists its common stock on Nasdaq,
it will also use its best  efforts to arrange  for a listing of the  warrants on
Nasdaq.  Among the conditions to the  settlement  are that the  Plaintiffs  also
reach a settlement  with the  individual  defendants in the litigation and their
D&O insurance  carriers and that,  ultimately,  the  settlement  receives  court
approval.  The Company  regards this agreement in principle as a step toward the
resolution of this litigation,  but cautions that, in view of the conditions and
contingencies  associated with this preliminary agreement, the Company is unable
to predict with certainty the nature or timing of an actual settlement. See also
Note 6 to the Consolidated Financial Statements.

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

     A special meeting of the Shareholders was held on March 20, 1998 to approve
an amendment to the Company's Restated  Certificate of Incorporation to increase
the  number of  authorized  common  stock from  15,000,000  to  30,000,000.  The
proposal was approved with the following ballot results:

             Votes for                            7,310,012
             Votes Against                          199,109
             Abstentions                              8,236
                                               ------------
                          Total Votes Cast        7,517,357

     Ninety-one  percent (91%) of the shares outstanding were represented at the
meeting.

                                       12
<PAGE>
                                     PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     The  Company's  common  stock is included  for  quotations  on the NASD OTC
Bulletin  Board under the symbol CYOE.  Prior to March 10, 1997,  the  Company's
common stock was traded on the New York Stock Exchange under the symbol DNA. The
table below sets forth by quarter the high and low sales prices of the Company's
common stock on the New York Stock  Exchange  Composite  Tape prior to March 10,
1997,  and the high and low bid prices per share for the Company's  common stock
obtained from trading reports of the National  Association of Securities Dealers
OTC  Bulletin  Board  subsequent  to March 7, 1997.  The sales  prices have been
adjusted to reflect the 5% stock  dividend  paid on October 2, 1996.  Prices set
forth below from the NASD OTC Bulletin Board reflect inter-dealer prices without
retail mark-up, mark-down or commission and may not necessarily represent actual
transactions.

             FISCAL 1998                             FISCAL 1997
  Quarter       High        Low            Quarter        High        Low

  First      $  5.859     $1.297           First        $114.286    $23.810
  Second       10.250      2.813           Second         46.190     19.524
  Third         8.688      4.766           Third          41.750     25.875
  Fourth     $  6.750     $3.500           Fourth       $ 26.875    $ 4.250

     At June 19, 1998 the Company had 1,232 shareholders of record.

     The Company has not declared any cash dividends  during the last two fiscal
years. The Company has no plans to pay cash dividends in the foreseeable future.
The payment of cash  dividends  by the Company is  restricted  by the  Company's
subordinated  debentures which provide that the consolidated  tangible net worth
of the Company  cannot be reduced to less than an amount equal to the  aggregate
principal amount of the subordinated debentures, or $1,254,000.

Sales and Issuance of Unregistered Securities

     In December  1997,  the Company  received  $4,635,000  upon the issuance of
$5,000,000 in 8% convertible  notes. Fees and expenses amounted to $365,000.  As
of June 9, 1998,  the full value of notes and  accrued  interest  to the date of
conversion  had been  converted  into  Company  common  stock,  which was issued
pursuant to the exemption provisions of Section 3(a)(9) of the Securities Act of
1933.  Common stock  totaling  1,404,825  shares was issued in  connection  with
conversions of $5,133,000 of convertible  notes and accrued  interest.  Of those
conversion shares,  336,075 were issued as of March 31, 1998, in connection with
conversions of $1,344,000 of convertible notes and accrued interest.

                                       13
<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA
                          COYOTE NETWORK SYSTEMS, INC.
                             SELECTED FINANCIAL DATA
                    (In Thousands, Except Per Share Amounts)

<TABLE>
                                               As of and for the Years Ended

                                         ----------------------------------------------------------------
<CAPTION>
                                         March 31,      March 31,     March 30,      April 1,    April 2,
                                            1998          1997          1996          1995       1994 (4)
                                         ---------     ----------     ---------     ----------   --------   
<S>       <C>                            <C>           <C>            <C>           <C>          <C>  
Net sales (1)                            $  5,387      $  7,154       $    264      $ ---        $ ---
                                         ========      ========       ========      ========     =======
Earnings (loss) from:
     Continuing operations (1) (5)       $(34,155)     $(12,335)      $ (2,746)     $ (2,140)    $ 1,364
     Discontinued operations (2)            ---          (8,175)          (619)        1,420         2,093
     Extraordinary items                    ---            (508)         ---          ---             (266)
     Accounting change                      ---          ---             ---          ---              262
                                         ---------     ---------      --------      --------     ----------
         Net earnings (loss)             $(34,155)     $(21,018)      $ (3,365)     $   (720)    $   3,453

Earnings (loss) per common share:
Basic
     Continuing operations               $ (4.83)      $(2.34)        $(.62)        $  (.51)     $     .33
     Discontinued operations                ---         (1.55)         (.14)            .34             .51
     Extraordinary items                    ---          (.10)           ---          ---             (.06)
     Accounting change                      ---          ---             ---          ---              .06
                                         --------      ----------     --------       -------     ---------
         Net earnings (loss) per
           common share                  $ (4.83)      $(3.99)        $(.76)        $  (.17)      $    .84
                                         ========      =======        ========      =======      =========

Diluted
     Continuing operations               $ (4.83)      $(2.34)        $(.62)        $  (.51)      $    .32
     Discontinued operations                ---         (1.55)         (.14)            .34            .49
     Extraordinary items                    ---          (.10)           ---          ---             (.06)
     Accounting change                      ---          ---             ---          ---              .06
                                         --------      ----------     --------      --------     ---------
         Net earnings (loss) per
            common share.                $ (4.83)      $(3.99)        $(.76)        $  (.17)      $    .81
                                         ========      =======        ========      ========      ========
Cash dividends per
     common share                        $  ---        $   ---           ---        $ ---         $  ---
                                         ========      ==========     ========      ========      ========

Total assets                             $ 21,975      $   23,244     $ 29,092      $ 24,205      $ 28,522
Long-term debt (3)                          5,490           1,958        2,099         2,240         2,501
Working capital                             4,508           6,161       13,282        15,489        19,007
Shareholders' equity                        8,060          16,834       24,686        19,729        18,852

<FN>
(1)  Earnings (loss) from continuing  operations  includes the operating results
     of CTL and the corporate office. CTL commenced operations in November 1994.
     (See Item 1 Business).  Included in the fiscal 1998 loss are the following:
     a non-cash  expense  charges of $5,522,000 for the conversion  into Company
     common stock of certain  Class A & B units owned by Directors and Employees
     of  the  Company;   legal,   accounting  and  other  professional  fees  of
     $1,300,000;  charges of  $1,875,000  with  respect to  non-cash  accounting
     charges   associated  with  the  issuance  of  Company  common  stock  upon
     conversion  of notes  issued  under  Regulation  S; an  accrued  charge  of
     $1,600,000 to defer  recognition of profit on equipment  sales to a leasing
     company,  pending future  disposition and ownership of the equipment by the
     end-user  lessee  ; a  charge  of  $2,200,000  in  connection  with  failed
     acquisitions;  and a non-cash  warrant  expense of $8,000,000 in connection
     with securities litigation.
(2)  The increase in the loss from discontinued operations in fiscal 1997 is due
     to a provision of $7,550,000 recorded for restructure costs,  severance and
     the  estimated  loss on disposal of APC, C&L and Valley.  See Note 2 to the
     Consolidated Financial Statements.
(3)  Includes  current portion of long-term debt.
(4)  The data in this column is unaudited. 
(5)  Earnings from continuing operations in fiscal 1994 included interest income
     and gains on sales of marketable securities of $2,567,000.
</FN>
</TABLE>

                                       14
<PAGE>

ITEM 7.

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of Operations - Fiscal Year Ended March 31, 1998 versus March 31, 1997

     CTL had revenues of $5,387,000 in fiscal 1998,  primarily  from the sale of
DSS Switches,  compared to revenues of  $7,154,000  in fiscal 1997.  Revenues in
fiscal  1998  included  shipments  to  nine  new  customers.  One of  the  sales
contracts, which accounted for approximately 40% of the total revenue for fiscal
1998,  involved a company that is a potential  acquisition  of the Company.  The
sale,  which involved a third party lessor,  occurred in March 1998. The Company
has  deferred  recognition  of gross  profit  on this  sale as if the  potential
acquisition  was an  affiliate  at the time of the  sale.  As a  result  of this
deferral, the gross margin for fiscal 1998 was reduced to 38% compared to 56% in
the prior year.  During  fiscal 1997,  94% of revenues were from sales under one
specific contract with Concentric Network  Corporation (CNC) which was fulfilled
and completed in fiscal 1997.

     Selling and  administrative  expenses included  $1,300,000 for professional
audit and legal costs.

     Engineering, research and development expenses of $5,022,000 in fiscal 1998
increased by almost 25% over the prior  fiscal year as the Company  continued to
enhance product offerings. An explanation of the Company's accounting policy for
these expenses is included in Note 1 to the Consolidated Financial Statements.

     Operating  expenses  includes a charge of $5,522,000.  This non-cash charge
pertains to the convertibility  into Company common stock of the Class A & Class
B units owned by certain  Directors  and  Employees of the Company  which became
convertible  into Company  common stock on September 4, 1997,  when the Board of
Directors  eliminated the previous  measurement  requirement of certain  minimum
pre-tax profits. (See also Note 11)

     Interest  expense of  $2,334,000  included a non-cash  charge of $1,875,000
related to the discount from market value of the  Company's  common stock issued
upon  conversion of the 8% convertible  notes,  which were issued with principal
amounts  of  $2,500,000   and   $5,000,000  in  July  1997  and  December  1997,
respectively.  The details and terms of the notes are described in Note 7 to the
Consolidated Financial Statements.

     Non-operating  expense  in  fiscal  1998  includes  a  provision  charge of
$2,200,000  with  respect  to  losses in  connection  with  failed  acquisitions
including  costs advanced,  costs of due diligence  expenses,  consulting  fees,
legal expenses and other professional  services. The components of non-operating
income (expense) are shown in Note 9 to the Consolidated Financial Statements.

     Subsequent to 1998 fiscal year end, negotiations  concerning the securities
litigation  (see Item 3), the Company has reached an  agreement  in principle to
settle the claims against the Company and its subsidiaries. Upon consummation of
the  agreement,  the Company  anticipates  issuing  warrants for  plaintiffs  to
purchase  2.5  million  shares of the  Company  common  stock.  The  Company has
recorded  a  non-cash  expense  for the fair  market  value of the  warrants  of
$8,000,000 in the financial statements for the fiscal year ended March 31, 1998.
Details and terms of the  warrants are  described in Note 7 to the  Consolidated
Financial Statements.

     The increase in loss from continuing operations in fiscal 1998 is primarily
due to (i) an  increase  in general  and  administrative  expense of  $1,102,000
primarily related to legal and other expenses incurred in market development and
due  diligence  examination  of  potential  acquisitions;  (ii) an  increase  in
engineering,  research & development  expense of $962,000;  (iii) an increase in
interest  charges of $2,000,000  including a non-cash  charge of $1,875,000 with
respect to the discount from market value of the  Company's  common stock issued
upon  conversion of the 8% convertible  notes described  above;  (iv) a non-cash
expense  of  $5,522,000  related  to the Class A & B Units  convertibility;  (v)
expenses  incurred  in  connection  with  the  failed   acquisition   previously
described; and (vi) a non-cash expense of $8,000,000 for warrants anticipated to
be issued in connection with securities litigation.

                                       15
<PAGE>
Results of Operations - Fiscal Year Ended March 31, 1997 versus March 30, 1996

     The  following  discussion  encompasses  the results of  operations  of CTL
(formerly  Sattel   Communications  LLC)  and  the  Company's  former  Milwaukee
headquarters.  CTL's  operations  were conducted  through Sattel  Communications
Corp.  ("SCC") prior to CTL's formation in April 1996. SCC commenced  operations
in  November  1994 as a 50/50  joint  venture  between  the  Company  and Sattel
Technologies, Inc. In January 1996, the Company increased its ownership interest
in SCC from 50% to 80% and SCC acquired the intellectual property and technology
rights  of the  DSS  Switch.  SCC is  included  in  the  consolidated  financial
statements  since  the  beginning  of  fiscal  1996  (see  Notes  1 and 3 to the
Consolidated Financial Statements.)

     CTL's revenues and expenses  increased in fiscal 1997 as compared to fiscal
1996,  primarily  because  CTL's  operations  in fiscal  1996  consisted  of the
start-up and development of its business.

     CTL had sales of  $7,154,000  in fiscal 1997,  primarily  from sales of DSS
Switches  compared  to  sales of  $264,000  in  fiscal  1996.  CTL had  sales of
$6,712,000,  or 94% of fiscal 1997 sales,  to CNC. In fiscal  1997,  CTL's gross
profit  was  reduced  by  charges  of  $1,400,000  as  allowance  for  inventory
obsolescence.

     In  fiscal  1997,  selling  and  administrative   expenses  of  $12,112,000
increased  $8,463,000  over fiscal  1996.  Selling and  administrative  expenses
increased in fiscal 1997 primarily  because of the further  development of CTL's
business,  the settlement  expense of $600,000 with a former employee,  and to a
lesser extent due to increased corporate  headquarters  expenses.  During fiscal
1996, CTL incurred  significantly  less selling and  administrative  expenses as
compared to fiscal 1997  because  CTL was in the early stage of  developing  its
business and staff.

     Engineering,  research and development expenses of $4,060,000 were incurred
by CTL during  fiscal  1997.  An  explanation  of the  increase in  engineering,
research and development  expenses and the Company's accounting policy for these
expenses is in Note 1 to the Consolidated Financial Statements.

     The components of non-operating income (expense) are shown in Note 9 to the
Consolidated Financial Statements.

     Minority interest in fiscal 1997 represents the minority partners' share of
CTL's loss.  In fiscal 1996,  the Company has included the results of SCC in its
statement of operations  as though it had acquired its majority  interest at the
beginning  of fiscal 1996 and added back the minority  partner's  share of SCC's
loss as part of  minority  interest  (see Note 1 to the  Consolidated  Financial
Statements).

     In December  1996, the Company filed a federal income tax refund claim with
the Internal  Revenue  Service  ("IRS")  resulting from the carryback of certain
prior year  deductions to fiscal 1985. In January 1997,  the Company  received a
payment  from the IRS for the  claim  and  recorded  an  income  tax  credit  of
$836,000.

     The loss from  continuing  operations  in fiscal 1997 is  primarily  due to
losses   incurred  by  CTL  and  costs  related  to  the   Company's   corporate
headquarters. The increase in the loss from continuing operations in fiscal 1997
as  compared  to  fiscal  1996 is  primarily  due to (i) an  increase  in  CTL's
operating  loss  of  $6,857,000  (see  Note  12 to  the  Consolidated  Financial
Statements), (ii) a settlement expense of $600,000 with a former employee, (iii)
a  non-operating  loss of $1,060,000  incurred by CTL for the  write-down of its
investment in CNC preferred stock,  (iv) an increase in the Company's  corporate
headquarters  operating  expenses of $1,001,000  primarily due to an increase in
professional fees and directors and officers liability insurance expense and (v)
a loss  of  $736,000  incurred  by the  Company  on the  sale  of its  remaining
marketable  securities.  These expenses and losses were  partially  offset by an
income tax credit of $836,000.

                                       16
<PAGE>
     The summarized operating results of discontinued operations for fiscal 1997
and fiscal 1996, respectively, are shown in Note 2 to the Consolidated Financial
Statements.  The operating  results from  discontinued  operations  reflected in
fiscal 1997 are through the  measurement  date of November 20,  1996.  Operating
losses from  discontinued  operations  subsequent  to the  measurement  date are
reflected  within the estimated  loss on disposal.  The  operating  results from
discontinued operations reflected in fiscal 1996 are for the entire fiscal year.

     The estimated loss on disposal of  discontinued  operations is discussed in
Note 2 to the Consolidated Financial Statements.

     The  extraordinary  items  are  discussed  in Note  10 to the  Consolidated
Financial Statements.

Liquidity and Capital Resources

     As previously disclosed in the Company's Annual Report on Form 10-K for the
fiscal year ended March 31, 1997, the Company encountered a liquidity deficiency
during the end of fiscal 1997 and in early  fiscal 1998,  primarily  because (i)
certain customers of CTL were past due on receivables,  (ii) CTL granted certain
customers  extended  payments  terms,  (iii) CTL's revenue growth has been lower
than  expected and (iv) the Company made  payments of  $2,349,000  in connection
with the  Restructuring,  as discussed in Note 2 to the  Consolidated  Financial
Statements.

     As a result of the liquidity deficiency,  the Company had become delinquent
on certain of its working capital  obligations.  In July 1997 and December 1997,
the Company raised  $5,597,000 and $4,635,000  respectively,  through equity and
debt  financing  (see  Note  7 to  the  Consolidated  Financial  Statements  for
additional  information).  With  completion of the equity and debt financing and
the collection of $4,400,000 of previously  delinquent customer  receivables and
the receipt of $2,255,000  from the exercise of Company  Employee Stock Options,
the Company had more than sufficient  funds to finance its operating  activities
in fiscal  1998 and ended the  fiscal  year with an  operating  cash  balance of
$3,700,000.

     In fiscal 1999, the Company's operations will need to be funded either with
funds generated through  operations or with additional debt or equity financing.
If the  Company's  operations  do not  provide  funds  sufficient  to  fund  its
operations  and the Company seeks outside  financing,  there can be no assurance
that  the  Company  will  be able to  obtain  such  financing  when  needed,  on
acceptable  terms  or at all.  In  addition,  any  future  equity  financing  or
convertible  debt  financing  would cause the  Company's  shareholders  to incur
dilution in common  stock  holdings  as a  percentage  of the total  outstanding
shares.

     The Company used cash in operating  activities of $8,475,000  during fiscal
1998 compared to using  $17,859,000 for fiscal 1997. The change is primarily due
to lower inventory and the improvement in collection of trade  receivables.  CTL
trade  receivables at March 31, 1998,  were $715,000  compared to $4,594,000 for
the prior year.

     Capital  expenditures  were  $1,021,000  in fiscal  1998,  a decrease  from
$1,914,000  in  fiscal  1997.  Purchases  were  primarily  for  additional  test
equipment and development hardware.

     The Company  liquidated  its investment in CNC common stock in fiscal 1998.
Twenty-five  percent of its holdings  were sold in August 1997 and the remaining
75% was sold in February 1998. Total proceeds on the sales were $1,777,000.  The
Company  continues  to own a warrant to purchase  36,765  shares of CNC Series D
Preferred  Stock at an  exercise  price of $19.60  per  share.  The  warrant  is
exercisable immediately and expires on June 6, 1999.

     In fiscal 1998, net cash proceeds of $2,861,000 were received in connection
with the sale of discontinued operations,  (see Note 2 to Consolidated Financial
Statements),  as the Company  collected the balance due from the sale of APC and
in November 1997, completed the sale of C&L.

     In March 1998,  the Company  completed an agreement  for the sale of Valley
and in June 1998,  received  full payment of the cash  proceeds in the amount of
$2,300,000. (See Note 2 to Consolidated Financial Statements).

                                       17
<PAGE>

     The  following  are  included  in  investing  activities  (See  Note  3  to
Consolidated Financial Statements): (i) during fiscal 1998, the company advanced
funds to NUKO Information Systems,  Inc., a potential acquisition  candidate.  A
total  of  $1,800,000  was  advanced  under  a  secured   promissory  note.  The
acquisition  effort was  terminated  and  subsequently,  NUKO filed a  voluntary
petition under Chapter 11 of the U.S.  Bankruptcy  Code; (ii) in March 1998, the
Company  advanced  $100,000 under a secured  promissory note to INET Interactive
Systems,  Inc.  under an agreed  intent to acquire  INET.  This  acquisition  is
expected to be  completed  during the second  quarter of fiscal  1999;  (iii) in
February and March 1998, the Company  advanced a total of $190,000 in connection
with the  acquisition  of American  Gateway  Telecommunications,  Inc. which was
completed in April 1998; and (iv) in January 1998, the Company advanced $450,000
to Systeam, S.p.A. in connection with an investment in convertible notes in that
company. The notes will be issued after completion of Italian legal process.

                                  RISK FACTORS

     The Company has been  restructured  to consist of the operations of CTL and
certain acquisitions in the related  telecommunications network services market.
Stockholders  of the  Company  should be aware that the  Restructuring  involves
risks which could  adversely  affect the value of their Company common stock. In
addition,  certain characteristics and dynamics of the Company's business and of
financial markets generally create risks to the Company's  long-term success and
to predictable  quarterly  results.  No representation as to the future value of
Company common stock is made hereby, nor is any person authorized by the Company
to make any such  representation.  The Company is aware of the following  risks,
each of which should be considered carefully:

Recent Operating Losses; No Assurance of Profitability

     The Company has reported  losses from  continuing  operations  for the last
four fiscal  years.  There can be no  assurance  that the Company will return to
profitability.

Need to Increase Sales

     CTL has a limited  operating  history and has not yet  achieved  consistent
sales of its  products  over an  extended  period.  Net sales of the  continuing
operations of the Company were  $264,000 in the 1996 fiscal year,  $7,154,000 in
the 1997 fiscal year and  $5,387,000  in the 1998 fiscal year.  These sales were
not  sufficient  to offset the  operating  and other  expenses  incurred  by the
Company.  If the Company is to achieve  profitability,  it will need to increase
the market acceptance and sales of its products to levels  commensurate with the
expense levels of the Company.  No assurances can be given that the Company will
be successful in this effort.

Liquidity Deficiency

     Recent events have improved the Company's short-term liquidity. The Company
nevertheless considers that its capital situation, over the longer term, will be
dependent on its operating results and its ability to obtain additional  capital
required to acquire and develop  successful  operations with  acquisitions.  The
Company could remain  relatively  constrained  and its ability to access outside
sources of capital could be restricted until such time as the Company is able to
demonstrate  higher levels of sales and more  favorable  operating  results.  No
assurances  can be given that the Company will be able to maintain its liquidity
over an  extended  period of time as  required  for the  Company to achieve  its
operating goals. See Management's Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity and Capital Resources.

Fluctuations in Quarterly Operating Results

     The Company's  quarterly  operating  results are difficult to forecast with
any degree of  accuracy  because a number of factors  subject  these  results to
significant   fluctuations.   As   a   result,   the   Company   believes   that
period-to-period  comparisons  of its  operating  results  are  not  necessarily
meaningful and should not be relied upon as indications of future performance.

                                       18
<PAGE>

     The Company's sales are subject to quarterly and annual fluctuations due to
a number of factors.  The Company  expects to experience  fluctuations  in sales
from  quarter-to-quarter due in large part to the capital budgeting and spending
patterns  of  potential  customers  in  the  telecommunications   industry.  The
Company's  ability to affect and judge the timing of individual  customer orders
is, by its nature,  limited.  The Company's sales for a given quarter may depend
to a significant  degree upon a limited  number of  customers,  often related to
specific customer orders.

     The Company's revenues, costs and expenses have fluctuated significantly in
the past and may continue to fluctuate  significantly  in the future as a result
of numerous factors.  The Company's revenues in any given period can vary due to
factors  such  as  call  volume  fluctuations,   particularly  in  regions  with
relatively  high  per-minute  rates;  the  addition or loss of major  customers,
whether through  competition,  merger,  consolidation or otherwise;  the loss of
economically  beneficial  routing  options for the  termination of the Company's
traffic;  financial difficulties of major customers;  pricing pressure resulting
from  increased  competition;  and  technical  difficulties  with or failures of
portions of the Company's  network that impact the Company's  ability to provide
service or to bill its customers.

     The Company's  cost of services and operating  expenses in any given period
can vary due to factors  such as  fluctuations  in rates  charged by carriers to
terminate the Company's traffic; increases in bad debt expense and reserves; the
timing of capital  expenditures,  and other costs  associated  with acquiring or
obtaining other rights to switching and other transmission  facilities;  changes
in the Company's sales  incentive  plans;  and costs  associated with changes in
staffing  levels of  sales,  marketing,  technical  support  and  administrative
personnel.

     Delays or lost sales can be caused by other  factors  beyond the  Company's
control,   including  changes  in  implementation  priorities  and  slower  than
anticipated  growth in demand for  products  and  services.  Delayed  sales have
occurred in the past and may occur in the future. In addition,  the Company has,
on occasion,  experienced  delays as a result of the need to modify its products
to comply with unique customer specifications.  These and similar delays or lost
sales could have a material adverse effect on its business.

     Operating  results may also  fluctuate due to factors such as the timing of
new product  enhancements and introductions by the Company,  its major customers
or its existing or potential  competitors,  delays in new product introductions,
market  acceptance  of new or enhanced  versions of the  Company's  products and
services,  changes in the product or customer mix of sales, changes in the level
of  operating  expenses,  competitive  pricing  pressures,  the  gain or loss of
significant  customers,   increased  research  and  development  and  sales  and
marketing expenses  associated with new product  enhancements and introductions,
and general economic conditions.  All of the above factors are difficult for the
Company to forecast,  and these or other factors  could have a material  adverse
effect on the  Company's  business for one quarter or a series of quarters.  The
Company's expense levels are based in part on its expectations  regarding future
sales and are fixed in the short term to a large extent.  Therefore, the Company
may be unable to  adjust  spending  in a timely  manner  to  compensate  for any
unexpected shortfall in sales. Any significant decline in demand relative to the
Company's  expectations  or any material  delay of customer  orders could have a
material  adverse effect on the Company's  business.  It is possible that in the
future,  the Company's  operating  results may experience  such problems,  which
could have a material adverse effect on the price of the Company's common stock.

Reductions in Size and Diversification

     While now  considered  more  focused,  the  Company  is a smaller  and less
diversified  company and has a lower fixed asset and revenue  base than prior to
the Restructuring.  Consequently, the effect of any decline in operating results
after the Restructuring could more immediately and severely affect the Company's
business.

Risks Inherent in Acquisition Strategy

     An  important  component  to the  Company's  strategy is to grow and expand
through  acquisitions.  This  growth  strategy  is  dependent  on the  continued
availability  of suitable  acquisition  candidates and subjects the Company to a
number of risks. In April 1998, the Company completed one acquisition, AGT. This
acquisition  has placed  significant  demands  on the  Company's  financial  and
management  resources,  as  the  process  for  integrating  acquired  operations


                                       19
<PAGE>

presents a  significant  challenge to the Company's  management  and may lead to
unanticipated  costs or a diversion of  management's  attention from  day-to-day
operations.  There  can be no  assurance  that  the  Company  will  be  able  to
successfully  integrate this acquisition or any other  acquisitions  made by the
Company in the future into  Company  operations.  Integrating  acquisitions  may
require  integration  of financial and  information  systems,  network and other
physical  facilities and personnel.  Difficulties in integrating these and other
acquisitions can cause system degradation,  added costs and loss of personnel or
customers.  Additionally,  the Company  may incur  unknown  liabilities  despite
management's efforts to investigate the operations of the acquired business. The
impact of these  risks,  and other  risks  arising as a result of the  Company's
acquisition strategy, could adversely affect the Company's business.

Dependence on  Telecommunications  Industry;  Telecom Switch Market,  IP Gateway
System Market, and the International Long Distance Service Market

     After the  Restructuring,  the Company's  customers are concentrated in the
telecommunications and Internet service industries.  Accordingly,  the Company's
future success depends upon the capital spending  patterns of such customers and
the demand by such customers for the DSS Switch, IP Gateway System and wholesale
international long distance services.  CTL is initially targeting the market for
small- to  medium-sized  telecom  switches and IP gateway  systems in the United
States,  Mexico, South America, and the Far East.  Historically,  there has been
little, if any, demand for telecommunications switches similar in functionality,
type and size to the DSS Switch and, accordingly, there can be no assurance that
potential  customers  will  consider  the  near  term  value  of the DSS  Switch
sufficient  to  influence  their  purchasing  decisions or that they will pursue
strategic  business  alternatives  that  would  benefit  from a  less  expensive
small-to-medium sized telecommunications  switch.  Furthermore,  there can be no
assurance that  telecommunications  companies and other potential customers will
not adopt  alternative  architectures or technologies that are incompatible with
the DSS Switch,  which  could have a material  adverse  effect on the  Company's
business.   Infrastructure  improvements  requiring  the  Company's  or  similar
technology may be delayed or prevented by a variety of factors,  including cost,
regulatory    obstacles,    the   lack   of   consumer   demand   for   advanced
telecommunications services and alternative approaches to service delivery.

     The   telecommunications   switch  and  IP  gateway   markets   are  highly
competitive.  CTL produces  small-to-medium sized scalable telecom switches that
currently  compete with few, if any,  directly  comparable  products.  CTL faces
potential competition in the data communications market segment from a number of
data communications  equipment providers,  such as Bay Networks,  Cisco Systems,
Lucent Technologies, Newbridge Networks, and 3Com.

     In addition,  the manufacturers of large scale central office switches such
as Lucent Technologies,  Northern Telecom,  Digital Switch Corporation,  Siemens
AG, Alcatel,  LM Ericsson and others have the resources and expertise to compete
in the  smaller-scale  central  office  switching  equipment  segment It is also
possible  that  large  communication  carriers  such  as AT&T  Corporation,  MCI
Communications,  Sprint and, when and if legally  permitted  to, the RBOCs,  may
enter the small to mid-sized central office switching equipment  business.  Many
of these competitors  possess  financial  resources  significantly  greater than
those  of CTL  and  accordingly  could  initiate  and  support  prolonged  price
competition to gain market share.

     Additionally,  the  telecommunications  industry  is in a  period  of rapid
technological  evolution,  marked by the introduction of competitive product and
service  offerings,  such as the  utilization of the Internet for  international
voice  and  data  communications.   The  Company  is  unable  to  predict  which
technological  development will challenge its competitive position or the amount
of  expenditures  that  will  be  required  to  respond  to a  rapidly  changing
technological environment.

     AGT is  expected  to generate a  substantial  majority  of its  revenues by
providing  international  telecommunications  services  to  its  customers  on a
wholesale basis. The international  nature of the Company's  operations involves
certain risks,  such as changes in U.S. and foreign  government  regulations and
telecommunications standards, dependence on foreign partners, tariffs, taxes and
other trade barriers,  the potential for  nationalization and economic downturns
and  political  instability  in foreign  countries.  In addition,  the Company's


                                       20
<PAGE>

business  could be adversely  affected by a reversal in the current trend toward
deregulation of  telecommunications  carriers.  The Company will be increasingly
subject to these risks to the extent that the Company  proceeds with the planned
expansion of its international operations.

     The international  telecommunications industry is intensely competitive and
subject to rapid change.  AGT's competitors in the international  wholesale long
distance market includes large, facilities-based  multinational corporations and
smaller facilities-based providers in the U.S. and overseas that have emerged as
a result of deregulation,  switch-based resellers of international long distance
services and  international  joint ventures and alliances  among such companies.
AGT also competes abroad with a number of dominant telecommunications  operators
that   previously   held  various   monopolies   established  by  law  over  the
telecommunications  traffic in their countries.  International service providers
compete on the basis of price, customer service,  transmission quality,  breadth
of service offerings and value-added services.

     Further, the number of AGT competitors is likely to increase as a result of
the  competitive   opportunities  created  by  a  new  Basic  Telecommunications
Agreement  concluded by members of the World Trade  Organization  (WTO) in April
1997.  Under the terms of the WTO  Agreement,  starting  February  5, 1998,  the
United   States   and  over  65   countries   have   committed   to  open  their
telecommunications markets to competition,  foreign ownership and adopt measures
to protect against  anti-competitive  behavior.  As a result,  AGT believes that
competition will continue to increase, placing downward pressure on prices. Such
pressure could adversely  affect AGT's gross margin if AGT is not able to reduce
its costs commensurate with such price reductions.

     A majority  of the  U.S.-based  international  telecommunications  services
revenue is currently generated by AT&T Corp. ("AT&T"),  MCI Communications Corp.
("MCI") and Sprint Corporation ("Sprint"). AGT also competes with companies such
as WorldCom, Inc., Star Telecommunications, Inc., Pacific Gateway Exchange, Inc.
and other U.S.-based and foreign long distance  providers,  including the RBOCs,
which  presently  have FCC  authority  to  resell  and  terminate  international
telecommunication  services. Many of these competitors have considerably greater
financial and other  resources  and more  extensive  domestic and  international
communications  networks than the Company.  AGT's  business  would be materially
adversely  affected to the extent that a  significant  number of such  customers
limit  or  cease  doing  business  with AGT for  competitive  or other  reasons.
Consolidation  in the  telecommunications  industry  could not only  create even
larger  competitors with greater  financial and other resources,  but could also
adversely  affect AGT by  reducing  the number of  potential  customers  for the
Company's services.

Concentrated Product Line; New Product Delays

     In fiscal 1998, CTL derived  substantially all of its revenues from the DSS
Switch.  As a result,  any  decrease  in the  overall  level of sales of, or the
prices for, the DSS Switch due to product  issues or any other reason could have
a material  adverse effect on the Company's  business.  The Company may consider
the  acquisition of other similar  companies or  technologies  provided they are
complementary to its core business.

     The  telecommunications  equipment market, in general,  is characterized by
rapidly changing  technology,  evolving industry standards,  changes in end-user
requirements,  and  frequent new product  introductions  and  enhancements.  The
introduction  of products  embodying  new  technologies  or the emergence of new
industry standards will be a continuing factor in the market. CTL's success will
depend,  in part,  upon its ability to enhance the technology for the DSS Switch
and to develop and  introduce,  on a timely  basis,  new  products,  such as the
SSA/IP  Gateway  System,  that  keep pace with  technological  developments  and
emerging  industry  standards and address  changing  customer  requirements in a
cost-effective  manner. There can be no assurance that CTL will be successful in
identifying,  developing,  manufacturing,  and marketing product enhancements or
new  products  that  respond  to  technological   change  or  evolving  industry
standards.  There  also  can  be no  assurance  that  CTL  will  not  experience
difficulties   that  could   delay  or  prevent  the   successful   development,
introduction  and  marketing  of these  products,  or that its new  products and
product  enhancements  will adequately meet the  requirements of the marketplace
and achieve market acceptance.

                                       21
<PAGE>
     Furthermore,  from time to time,  CTL or its  competitors  may announce new
products  or  product  enhancements,  services  or  technologies  that  have the
potential  to replace or shorten the life cycle of the CTL's  products  and that
may cause  customers to defer  purchases.  There can be no assurance that future
technological advances in the telecommunications  industry will not diminish any
market  acceptance  of the CTL's  products  which could have a material  adverse
effect on the Company's business, financial condition and results of operations.

     CTL has experienced  delays in completing  development and  introduction of
new products and features,  and there can be no assurance  that such delays will
not recur in the  future.  Furthermore,  the DSS Switch  contains a  significant
amount of complex software that may contain  undetected or unresolved  errors as
products are  introduced  or as new versions are  released.  CTL has in the past
discovered software errors in certain DSS Switch installations.  There can be no
assurance that, despite  significant  testing by CTL software errors will not be
found in new  enhancements  of the DSS Switch after  commencement  of shipments,
resulting in delays in or loss of market acceptance,  either of which could have
a material  adverse effect on the Company's  business,  financial  condition and
results of operations.

Dependence on Outsource Manufacturers and Other Key Suppliers

     CTL's outsource  manufacturers have from time to time experienced delays in
receipt of certain hardware components.  Certain components,  including crystals
and  microprocessors,  are  presently  single-sourced  or are  available  from a
limited  number of sources.  An  interruption  in  business  between CTL and its
outsource manufacturers could have a material adverse effect on the Company. CTL
has established relationships with alternate suppliers such as Sanmina and I-PAC
and has assembled product itself. Some sole-source suppliers are companies which
from time to time allocate parts to telecommunications  equipment  manufacturers
due to market demand for telecommunications  equipment.  Many of CTL's potential
competitors  for such parts are much  larger and may be able to obtain  priority
allocations from these shared  suppliers,  thereby limiting or making unreliable
the  sources  of supply for these  components.  There can be no  assurance  that
shortages in component  parts will not occur in the future or will not result in
CTL having to pay a higher  price for  components.  A failure  by a supplier  to
deliver  quality  products  on a  timely  basis,  or the  inability  to  develop
additional alternative sources if and as required,  could result in delays which
could have a material adverse effect on the Company's business.

Limited Protection of Proprietary Technology; Risk of Third-Party Claims of 
Infringement

     CTL uses a  combination  of patents,  trade  secrets,  confidentiality  and
non-compete agreements and tight control of its software to protect the products
and features that it believes give it competitive advantages. In particular, CTL
relies on  contractual  restrictions  to establish and protect its rights to the
technology developed by outside contractors used to assist in the development of
CTL's  products.  CTL's success and ability to compete is dependent in part upon
its technology.

     There can be no  assurance  that the steps taken by CTL will be adequate to
prevent  misappropriation  of its technology or that CTL's  competitors will not
independently develop technologies that are substantially equivalent or superior
to CTL's  technology.  In addition,  the laws of many  foreign  countries do not
protect CTL's intellectual property rights to the same extent as the laws of the
United States.  The failure of CTL to protect its proprietary  information could
have a material adverse effect on the Company's  business,  financial  condition
and results of operations.

     The increased dependence of the telecommunications  industry on proprietary
technology  has  resulted in frequent  litigation  based on  allegations  of the
infringement  of patents  and other  intellectual  property.  The Company may be
subject to litigation to defend against claimed  infringements  of the rights of
others or to  determine  the scope and  validity  of the  proprietary  rights of
others.  Litigation  also may be necessary to enforce and protect  trade secrets
and other intellectual property rights owned by the Company. Any such litigation
could be costly and cause diversion of management's  attention,  either of which
could  have a  material  adverse  effect  on  the  Company's  business.  Adverse
determinations  in such  litigation  could  result in the loss of the  Company's
proprietary rights, subject the Company to significant liabilities,  require the
Company  to seek  licenses  from third  parties,  or prevent  the  Company  from
manufacturing  or selling its  products,  any one of which could have a material
adverse  effect on the Company's  business,  financial  condition and results of


                                       22
<PAGE>

operations.  Furthermore,  there can be no assurance that any necessary licenses
will be available on reasonable terms.

Customer Concentration

     Revenues in fiscal 1998 were from  shipments  to twelve  customers,  one of
which accounted for approximately  40% of the total revenues.  Approximately 94%
of CTL's  revenues  for fiscal 1997 were  derived from sales to CNC. The Company
anticipates  that its results of operations in any given period will continue to
depend to a  significant  extent  upon sales to a limited  number of  customers.
There can be no assurance that the Company's  principal  customers will continue
to purchase  product from the Company at current levels,  if at all. The loss of
one or more major customers in any segment could have a material  adverse effect
on the Company's business, financial condition and results of operations.

Difficulties in Managing Growth

     The Company has  experienced  growth in the number of its employees and the
scope of its operations.  To manage  potential  future growth  effectively,  the
Company must  improve its  operational,  financial  and  management  information
systems and must hire,  train,  motivate  and manage its  employees.  The future
success of the Company  also will depend on its ability to increase its customer
support capability and to attract and retain qualified technical, sales, network
operations, marketing and management personnel, for whom competition is intense.
The Company is currently hiring a number of sales and engineering personnel and,
in some instances,  has experienced delays in filling such positions.  There can
be no assurance that the Company will be able to  effectively  achieve or manage
such  growth,  and failure to do so could delay  product  development  cycles or
otherwise have a material  adverse effect on the Company's  business,  financial
condition and results of operations.

Introduction of Switch Server Architecture into the Telecommunications Market

     In January 1997,  CTL announced the new Switch Server  Architecture  (SSA).
SSA  encompasses  a  client/server  approach  to  low,  medium  and  high  speed
communications.  There can be no assurance of its  successful  acceptance by the
telecommunications market in general.

Competition to DSS Switch and SSA/IP Gateway System Market

     The   telecommunications   market  and  Internet   markets  are   extremely
competitive.  CTL uses a combination of patents, trade secrets,  confidentiality
agreements and  non-compete  agreements to protect the product and features that
it believes give it competitive advantages. There can be no assurance,  however,
that other  competitors,  some of whom have much greater access to resources and
funding,  cannot  functionally  replicate CTL's critical  products and features.
Likewise,  there is no guarantee that competitors  cannot develop features which
equal or exceed CTL's offerings.

Outsourced Manufacturing; Capacity Constraints

     CTL performs  certain  manufacturing  functions in house. In addition,  CTL
outsources some of its manufacturing to Sanmina,  I-PAC and other non-affiliated
contract manufacturers and expects to continue to outsource some, or all, of its
manufacturing. The Company's ability to increase capacity may be constrained and
it may have less control over  manufacturing  than it would if it performed  all
the manufacturing functions in house. There can be no assurance, in the event of
substantial  increases in demand, that CTL can successfully deliver its products
in a timely fashion and/or  without  additional  expense which would result in a
deterioration of product margins.

International Risks

     The  Company's   business   strategy   includes   greater   expansion  into
international  markets.  There can be no assurance  that the Company will obtain
the permits and operating licenses required for it to operate, to hire and train
employees  or to market,  sell and deliver  high  quality  products and services


                                       23
<PAGE>

internationally.  In addition to the uncertainty as to the Company's  ability to
expand its  international  presence,  there are certain risks  inherent to doing
business on an  international  level,  such as unexpected  changes in regulatory
requirements,  trade  barriers,  difficulties  in staffing and managing  foreign
operations,  longer payment cycles,  problems in collecting accounts receivable,
political   instability,   fluctuations  in  current  exchange  rates,  seasonal
reductions in business activity, and potentially adverse tax consequences, which
could adversely impact the success of the Company's international operations. In
many  countries,  the  Company  may need to enter into a joint  venture or other
strategic  relationship  with one or more third parties in order to successfully
market its products and services and to conduct its operations.  There can be no
assurance  that such  factors  will not have a  material  adverse  effect on the
Company's future international  operations and,  consequently,  on the Company's
business, financial condition and results of operations.

No Dividends

     The Company has not paid cash dividends to its stockholders in the last six
years. The Company does not anticipate paying cash dividends to stockholders for
the foreseeable future.

Need For Additional Capital To Finance Growth And Capital Requirements

     The  Company  believes  that it must  continue  to  enhance  and expand its
products and services.  The Company's  ability to grow depends,  in part, on its
ability to expand its product and service offerings,  which requires significant
capital expenditures,  that are often incurred prior to the Company's receipt of
the related revenue.

     If the Company's  growth exceeds  current  expectations,  or if the Company
obtains one or more attractive  opportunities to purchase the business or assets
of another company,  or if the Company's cash flow from operations after the end
of such  period  is  insufficient  to  meet  its  working  capital  and  capital
expenditure requirements, the Company will need to raise additional capital from
equity or debt sources.  There can be no assurance that the Company will be able
to raise such capital on favorable  terms or at all. If the Company is unable to
obtain such additional capital,  the Company may be required to reduce the scope
of its anticipated expansion,  which could have a material adverse effect on the
Company's business, financial condition and results of operations.

Volatility of Stock Price

     The  market  price of the  shares of the  Company's  Common  Stock has been
volatile  and  may  be  affected  by  factors  such  as  actual  or  anticipated
fluctuations in the Company's  operating results,  the announcement of potential
acquisitions by the Company,  changes in federal and international  regulations,
activities  of the  larger  voice and data  equipment  providers,  domestic  and
international service providers,  industry consolidation and mergers, conditions
and  trends in the  international  telecommunications  market,  adoption  of new
accounting  standards  affecting  the  telecommunications  industry,  changes in
recommendations and estimates by securities analysts,  general market conditions
and  other  factors.  Other  factors  affecting  the  share  price  include  the
increasing  number of shares  of the  Company's  common  stock  outstanding,  or
committed  for  issuance  pursuant  to options or  warrants,  as the Company has
consummated  a  number  of  financings  in  recent  periods,   as  well  as  the
availability  of stock  for  sale,  or actual  sales of  stock,  by  substantial
shareholders in the Company. These factors have affected the share price for the
Company's common stock in the past and may be expected to continue to affect the
share price in the future.

     In addition, the stock market has from time to time experienced significant
price and volume fluctuations that have particularly  affected the market prices
for the shares of emerging growth companies like the Company. These broad market
fluctuations  may  adversely  affect the market  price of the  Company's  Common
Stock.

                                       24
<PAGE>
Accounting Pronouncement

     In July  1997,  the FASB  issued  SFAS No.  130,  "Reporting  Comprehensive
Income" and SFAS No. 131,  "Disclosure  About Segments on Enterprise and Related
Information."  SFAS No. 130  establishes  standards for reporting and display of
comprehensive  income. SFAS No. 131 requires disclosure for each segment that is
similar to those  required  under  current  standards and  additional  quarterly
disclosure requirements. Both standards will be adopted on April 1, 1998.

Impact of Inflation

     Inflation  has not had a  significant  impact  on net  sales  or loss  from
continuing operations for the three most recent fiscal years.

Year 2000 Compliance

     The Company believes that its CTL switching  product  operating systems and
its internal  computer  systems are Year 2000  compliant and does not anticipate
that it will incur  significant  expenditures  to ensure that such  systems will
function properly with respect to dates in the Year 2000 and beyond. The Company
is in the early stages of conducting a review of its  significant  suppliers and
other  third  parties to ensure that those  parties  have  appropriate  plans to
remedy Year 2000 issues where their systems interface with the Company's systems
or otherwise impact its operations.  There can be no assurance that a failure of
the CTL switching product operating systems or that the systems of third parties
on which the Company's  systems and  operations  rely to be Year 2000  compliant
will not have a material  adverse  affect on the Company's  business,  financial
condition or operating results.

                                       25
<PAGE>

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


                  COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES


                                                                           PAGE

Report of Arthur Andersen LLP, Independent Public Accountants............... 27

Report of Price Waterhouse LLP, Independent Accountants..................... 28

Consolidated Balance Sheets................................................. 29

Consolidated Statements of Operations....................................... 30

Consolidated Statements of Changes in Shareholders' Equity.................. 31

Consolidated Statements of Cash Flows....................................... 32

Notes to Consolidated Financial Statements.................................. 33


                                       26
<PAGE>

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To the Board of Directors and Shareholders
of Coyote Network Systems, Inc.

We have audited the  accompanying  consolidated  balance sheet of Coyote Network
Systems, Inc. (formerly, The Diana Corporation) and subsidiaries as of March 31,
1998,  and the related  consolidated  statements  of  operations,  shareholders'
equity and cash flows for the year then ended.  These  financial  statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards  require that we plan and perform the audit to obtain reasonable
assurance   about  whether  the  financial   statements  are  free  of  material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

As  discussed  in  Notes  1 and 2 of the  notes  to the  consolidated  financial
statements, the Company has substantially completed its major restructuring plan
which has resulted in Coyote  Technologies,  LLC becoming the primary  operating
company. As further discussed in Note 6, the Company is the defendant in various
lawsuits asserting claims under Section 10(b) of the Securities  Exchange Act of
1934. On July 9, 1998,  the  respective  counsel for the  plaintiffs and for the
Company executed a letter agreeing in principle,  subject to various  conditions
and contingencies, to settle the claims against the Company to issue warrants to
acquire  2,500,000  shares of the Company's common stock. The estimated value of
the warrants  ($8,000,000) has been provided for in the financial  statements as
of March 31, 1998.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the financial  position of Coyote Network Systems,  inc.
and  subsidiaries as of March 31, 1998, and the results of their  operations and
their cash flows for the year then ended in conformity  with generally  accepted
accounting principles.





ARTHUR ANDERSEN LLP
Los Angeles, California
July 13, 1998


                                       27
<PAGE>

                        REPORT OF INDEPENDENT ACCOUNTANTS


To the Board of Directors and Shareholders
of The Diana Corporation

     In our opinion,  the consolidated  financial statements listed in the index
appearing  under Item  14(a)(1) and (2) of this report  present  fairly,  in all
material  respects,  the  financial  position of The Diana  Corporation  and its
subsidiaries  (the  "Company")  at March  31,  1997,  and the  results  of their
operations  and their cash  flows for each of the two years in the period  ended
March 31, 1997, in conformity  with generally  accepted  accounting  principles.
These financial  statements are the responsibility of the Company's  management;
our responsibility is to express an opinion on these financial  statements based
on our audits.  We conducted our audits of these  statements in accordance  with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable  assurance about whether the financial statements are
free of material  misstatement.  An audit includes  examining,  on a test basis,
evidence  supporting the amounts and  disclosures  in the financial  statements,
assessing the  accounting  principles  used and  significant  estimates  made by
management,  and evaluating the overall  financial  statement  presentation.  We
believe  that our audits  provide a reasonable  basis for the opinion  expressed
above.

     The accompanying  financial statements have been prepared assuming that the
Company will  continue as a going  concern.  As discussed in Note 2, the Company
initiated  a  restructuring  plan during  fiscal  1997 which  resulted in Sattel
Communications LLC ("Sattel") becoming the sole operating company comprising the
Company's continuing operations.  Sattel has a limited operating history and has
not  yet  achieved  significant  sales  of its  products.  The  Company's  other
operating  companies  were  sold or are held for sale as of March 31,  1997.  As
discussed in Note 14, management  believes the Company will have sufficient cash
resources,  including  proceeds from those net assets held for sale, to fund its
operations  for the fiscal year ending  March 31,  1998.  However,  any material
delay during  fiscal 1998 in the timing of disposal and the ultimate  receipt of
cash  proceeds by the Company with respect to the net assets held for sale could
have a material  adverse  effect on the  Company.  In  addition,  the  Company's
viability is further  dependent on Sattel  achieving  sales levels and operating
results sufficient to fund the Company's  operations.  Finally,  as discussed in
Note 6, the  Company  is  subject  to  uncertainties  relating  to class  action
litigation asserted against the Company and other potential claims by investors,
the ultimate effects of which on the Company's  financial  position,  results of
operations and cash flows cannot presently be determined.




PRICE WATERHOUSE LLP
Milwaukee, Wisconsin
September 22, 1997


                                       28
<PAGE>

<PAGE>

                  COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES
                           Consolidated Balance Sheets
                             (Dollars In Thousands)

<TABLE>
                                                            March 31,   March 31,
                                                               1998       1997
                                                            ---------   --------
<CAPTION>
                               Assets
Current assets:
<S>                                                        <C>         <C>     
     Cash and cash equivalents                             $  3,746    $     81
     Marketable securities                                       16       ---
     Receivables                                                715       4,594
     Inventories                                              2,122       2,937
     Notes receivable - current                               4,596       ---
     Net assets of discontinued operations                    ---           893
     Other current assets                                     1,409       1,716
                                                           --------    ---------
         Total current assets                                12,604      10,221

Property and equipment, net                                   2,391       1,944
Intangible assets, net                                        3,542       3,755
Net assets of discontinued operations                           909       7,308
Notes receivable - non-current                                1,170       ---
Other assets                                                  1,359          16
                                                            -------    ---------
                                                           $ 21,975    $ 23,244
                                                           ========    =========

               Liabilities and Shareholders' Equity
Current liabilities:
     Accounts payable                                      $  1,920    $  2,559
     Deferred revenue and customer deposits                   1,900         362
     Accrued loss reserve (Note 9)                            2,200       ---
     Accrued professional fees and litigation costs             805         319
     Other accrued liabilities                                1,130         679
     Current portion of long-term debt                          141         141
                                                           --------    ---------
         Total current liabilities                            8,096       4,060

Long-term debt                                                5,349       1,817
Other liabilities                                               470         533
Commitments and contingencies (Note 6)

Shareholders' equity:
     Preferred stock - $.01 par value.
     Authorized 5,000,000 shares; none issued                 ---         ---
     Common stock - $1 par value.  Authorized 30,000,000
         shares; issued 9,151,920 and 6,007,175 shares        9,152       6,007
     Additional paid-in capital                             102,360      80,124
     Accumulated deficit                                    (97,695)    (63,540)
     Treasury stock at cost                                  (5,757)     (5,757)
                                                           ---------   ---------
         Total shareholders' equity                            8,060     16,834
                                                           ---------   ---------
                                                           $  21,975   $ 23,244
                                                           =========   =========
</TABLE>
                 See notes to consolidated financial statements.


                                       29
<PAGE>

                  COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES
                      Consolidated Statements of Operations
                    (In Thousands, Except Per Share Amounts)


<TABLE>
                                                                  Fiscal Year Ended

                                                         -----------------------------------
<CAPTION>
                                                         March 31,    March 31,    March 30,
                                                           1998         1997         1996
                                                         --------     ---------    --------
<S>                                                      <C>          <C>          <C>     
Net sales                                                $  5,387     $  7,154     $    264
Cost of goods sold                                          3,363        3,132          129
                                                          -------     --------     --------
Gross profit                                                2,024        4,022          135
                                                          -------     --------     --------

Selling and administrative expenses                        13,214       12,112        3,649
Engineering, research and development                       5,022        4,060          178
A & B unit conversion expense                               5,522        ---          ---
                                                          -------     --------     --------
     Total operating expenses                              23,758       16,172        3,827
                                                          -------     --------     --------
Operating loss                                            (21,734)     (12,150)      (3,692)

Interest expense                                           (2,334)         (52)        (106)
Non-operating income (expense)                             (2,087)      (1,337)         465
Securities litigation warrant expense                      (8,000)       ---          ---
Minority interest                                           ---            368          587
Income tax credit                                           ---            836        ---
                                                          -------     --------     --------

Loss from continuing operations                           (34,155)     (12,335)      (2,746)

Loss from discontinued operations                           ---           (625)        (619)
Estimated loss on disposal of discontinued operations       ---         (7,550)       ---
                                                          -------     --------     --------

Loss before extraordinary items                           (34,155)     (20,510)      (3,365)
Extraordinary items                                         ---           (508)       ---
                                                          -------     --------     --------
Net loss                                                 $(34,155)    $(21,018)    $ (3,365)
                                                          ========    =========    =========
Loss per common share (basic & diluted):
     Continuing operations                               $  (4.83)       (2.34)    $   (.62)
     Discontinued operations                                ---          (1.55)        (.14)
     Extraordinary items                                    ---           (.10)       ---
                                                          -------    ----------    ---------
     Net loss per common share (basic & diluted)         $  (4.83)   $   (3.99)    $   (.76)
                                                         =========   ==========    =========

Weighted average number of common shares
     outstanding (basic & diluted)                          7,070        5,271        4,401
                                                          =======      =======     ========
</TABLE>


                 See notes to consolidated financial statements.


                                       30
<PAGE>
                                                
                  COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES
           Consolidated Statements of Changes in Shareholders' Equity
                             (Dollars in Thousands)

<TABLE>
<CAPTION>
                                               COMMON STOCK                                            TREASURY STOCK
                                           ------------------                                         ---------------
                                                                Additional             Unrealized Loss                      Total
                                           Number of    Par       Paid in  Accumulated  on Marketable  Number of       Shareholders'
                                             Shares    Value      Capital    Deficit     Securities    Shares     Cost     Equity
                                           ----------  ------   ---------- ----------- --------------- --------   ----- ----------
<S>              <C>                        <C>        <C>      <C>         <C>             <C>        <C>       <C>       <C>    
Balance at April 1, 1995                    4,810,353  $4,810   $48,548     $(28,178)       $(713)     895,516   $(4,738)  $19,729
Net loss                                       ---       ---       ---        (3,365)         ---         ---               (3,365)
5% stock dividend                             195,929     196     3,022       (3,233)         ---         ---        ---       (15)
Exercise of stock options                      ---       ---        (39)        ---           ---       12,300)       65        26
Change in unrealized loss on securities        ---       ---       ---          ---          (163)        ---        ---      (163)
Acquisition of SCC minority interest          350,000     350     4,594         ---           ---         ---        ---     4,944
Issuance of common stock                      170,000     170     3,315         ---           ---         ---        ---     3,485
Other                                          ---       ---         16         ---           ---       (5,524)       29        45
                                           ----------  ------   -------     --------        ------     -------    ------  --------
Balance at March 30, 1996                   5,526,282   5,526    59,456      (34,776)        (876)     877,692    (4,644)   24,686

Net loss                                       ---       ---       ---       (21,018)         ---         ---        ---   (21,018)
5% stock dividend                             250,893     251     7,474       (7,746)         ---         ---        ---       (21)
Realized loss on securities                    ---       ---       ---          ---           876         ---        ---       876
Acquisition of SCC minority interest, net      ---       ---        385         ---           ---       35,000    (2,203)   (1,818)
Issuance of common stock                      230,000     230    12,630         ---           ---     (200,000)    1,058    13,918
Other                                          ---       ---        179         ---           ---       (4,000)       32       211
                                           ----------  ------   -------     --------        ------     -------   -------  --------
Balance at March 31, 1997                   6,007,175   6,007    80,124      (63,540)         ---      708,692    (5,757)   16,834

Net loss                                       ---       ---       ---       (34,155)         ---         ---        ---   (34,155)
Exercise of stock options                     442,956     443     1,812         ---           ---         ---        ---     2,255
Amendment of A & B units convertible
  to common stock                              ---       ---      5,522         ---           ---         ---        ---     5,522
Issuance of common stock, net               1,880,750   1,881     1,481         ---           ---         ---        ---     3,362
Common stock issued on debt
  conversion (7/97)                           484,964     485     1,815         ---           ---         ---        ---     2,300
Common stock issued on debt
  conversion (12/97)                          336,075     336       919         ---           ---         ---        ---     1,255
Non-cash expense                               ---       ---        626         ---           ---         ---        ---       626
Non-cash warrant expense                       ---       ---     10,061         ---           ---         ---        ---    10,061
                                           ----------  ------  --------     --------        ------     -------   -------   -------
Balance at March 31, 1998                   9,151,920  $9,152  $102,360     $(97,695)       $ ---      708,692   $(5,757)  $ 8,060
                                            =========  ======  ========     =========       ======     =======   ========  =======
</TABLE>

                 See notes to consolidated financial statements.


                                       31
<PAGE>
                  COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES
                      Consolidated Statements of Cash Flows
                                 (In Thousands)


<TABLE>
                                                                                            Fiscal Year Ended
                                                                              ---------------------------------------------
<CAPTION>
                                                                                March 31,        March 31,       March 30,
                                                                                   1998             1997            1996
                                                                              --------------    ------------     ---------
<S>                                                                            <C>               <C>             <C>
Operating activities:
Loss before extraordinary items                                                $  (34,155)       $  (20,510)     $ (3,365)
Adjustments to reconcile loss to net cash
  Provided (used) by operating activities:
     Depreciation and amortization                                                    787               478           121
     Loss (gain) on sales of  marketable securities                                  (155)              736           (26)
     Write-down of CNC preferred stock                                               ---              1,060          ---
     Minority interest                                                               ---               (368)         (587)
     Expense related to amendments to A & B units                                   5,522              ---           ---
     Estimated loss on disposal of
       discontinued operations                                                       ---              7,550          ---
     Net change in discontinued operations                                            145            (3,862)        5,583
     Changes in current assets and liabilities                                      8,489            (3,164)         (371)
     Other - Non-cash financing and warrant expense (in 1998)                      10,582               221           354
                                                                                 --------           -------      --------

Net cash provided (used) by operating activities                                   (8,475)          (17,859)        1,709
                                                                                 ---------          --------     --------

Investing activities:
     Purchases of property and equipment                                           (1,021)           (1,914)         (161)
     Purchases of marketable securities                                              (736)             ---           (475)
     Proceeds from sales of marketable securities                                   1,777             1,353         5,380
     Change in notes receivable                                                    (2,466)           (5,000)          138
     Proceeds from sale of CNC preferred stock                                       ---              2,500          ---
     Affiliate advances and acquisitions,  net of cash acquired                      ---               ---         (1,495)
     Net proceeds from the sale of APC and C&L assets                               2,861               640          ---
     Net change in discontinued operations                                           (401)             (985)       (3,444)
     Other items                                                                     ---                283            47
                                                                                 --------           -------      --------

Net cash provided (used) by investing activities                                       14            (3,123)          (10)
                                                                                 --------           --------     ---------

Financing activities:
     Repayments of long-term debt                                                    (141)             (141)         (141)
     Common stock issued                                                            5,366            13,918         3,485
     Convertible debt issued                                                        6,474              ---           ---
     Net change in discontinued operations                                            275             3,314          (888)
     Other items                                                                      152              (508)         ---
                                                                                 --------           --------     -------

Net cash provided by financing activities                                          12,126            16,583         2,456
                                                                                 --------           -------      --------

Increase (decrease) in cash and cash equivalents                                    3,665            (4,399)        4,155

Cash and cash equivalents:
     At beginning of year                                                              81             4,480           325
                                                                                 --------           -------      --------

     At end of year                                                              $  3,746           $    81     $   4,480
                                                                                 ========           =======     =========
</TABLE>

                 See notes to consolidated financial statements.


                                       32
<PAGE>
                  COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 March 31, 1998

NOTE 1   Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

     The consolidated  group (hereafter  referred to as the "Company")  included
the following companies during the past three years:

     Coyote Network Systems, Inc. ("CNS"),  formerly The Diana Corporation - CNS
and its wholly-owned non-operating subsidiaries are included in the consolidated
group  for all three  fiscal  years.  CNS's  activities  historically  consisted
primarily of corporate administration and investing activities.

     Coyote Technologies,  LLC ("CTL"), formerly Sattel Communications LLC - CNS
had  a 50%  ownership  interest  in  Sattel  Communications  Company  which  was
subsequently  converted into Sattel  Communications Corp. ("SCC"). CNS accounted
for this investment  using the equity method of accounting from November 1994 to
December 1995. In January 1996, CNS increased its ownership interest in SCC from
50% to 80% and at the same  time SCC also  acquired  the  intellectual  property
rights and  technology  rights to the DSS switch.  In fiscal  1997,  the Company
increased  its  ownership  interest  in SCC from 80% to 100% (see  Note 3).  The
Company  included the results of SCC in its statement of  operations  for fiscal
1996 as though it had acquired its majority  interest at the beginning of fiscal
1996  and  added  back the  minority  partner's  share of SCC's  loss as part of
minority   interest.   SCC,  through  its  subsidiary  CTL,  is  a  provider  of
telecommunication   switches  and  IP  gateway  systems.   In  April  1996,  SCC
transferred its assets and liabilities to CTL, a newly-formed  limited liability
company.  SCC has an ownership  interest in CTL of approximately 80% and certain
additional preferential rights (see Note 3).

     Discontinued  Operations  - The  operations  of  C&L  Communications,  Inc.
("C&L"), Valley Communications, Inc. ("Valley"), Atlanta Provision Company, Inc.
("APC")  and Entree  Corporation  ("Entree")  were  classified  as  discontinued
operations  in fiscal 1997.  C&L was a  wholly-owned  subsidiary of CNS. C&L was
sold in November 1997 (see Note 2).  Valley was an 80%-owned  subsidiary of CNS.
Valley was sold in March 1998 (see Note 2). Entree is an 81.25%-owned subsidiary
of CNS. APC is a wholly-owned subsidiary of Entree. The majority of APC's assets
were sold in February 1997 (see Note 2).

     Investments  in 20%-50%  owned  subsidiaries  in which  management  has the
ability to exercise  significant  influence  are  accounted for using the equity
method  of  accounting.   Accounts  and  transactions  between  members  of  the
consolidated group are eliminated in the consolidated financial statements.

     Certain prior year balances have been  reclassified  in order to conform to
current year presentation.

Business Risk

     As discussed  in Note 2 below,  the Company has  substantially  completed a
major restructuring that resulted in the disposition of several operations.  The
Company's  primary  operations  are now involved in the  production  of scalable
telecommunication  switches  and  Internet  Protocol  based  gateway  systems to
telecommunication service providers. The telecommunications equipment market, in
general,  is characterized by rapidly changing  technology,  evolving standards,
changes in end-user  requirements  and  frequent new product  introductions  and
enhancements.   The  Company  is  also   engaged,   through   American   Gateway
Telecommunications (see Note 3) in the wholesaling of long distance service.

     After the restructuring,  the Company operations are similar to those of an
early-stage enterprise and is subject to all the risks associated therewith.

                                       33
<PAGE>
These risks include, among others,  uncertainty of markets,  ability to develop,
produce and sell profitably its products and the ability to finance  operations.
Management  believes that it has made significant  progress on its business plan
in fiscal 1998 and to date in fiscal 1999.  Significant actions in this progress
include  substantially  completing  the  sale  of its  discontinued  operations,
increasing  sales in the  first  quarter  of 1999,  acquiring  American  Gateway
Telecommunications,  reaching an  agreement  in  principle  (see Note 6) towards
resolving the class action lawsuit and currently  discussing  additional  equity
investments  with  various  parties.  As  discussed  above,  recent  events have
improved the Company's short-term  liquidity.  However, the Company could remain
constrained in its ability to access outside  sources of capital until such time
as the Company is able to demonstrate  higher levels of sales and more favorable
operating results.  Management believes that it will be able to continue to make
progress  on its  business  plan and  mitigate  the  risks  associated  with its
business and industry.

Financial Instruments

     The carrying values of cash and cash  equivalents,  marketable  securities,
receivables,  accounts  payable and  borrowings  at March 31, 1998 and March 31,
1997 approximate fair value.

Marketable Securities

     The Company accounts for marketable securities in accordance with Statement
of Financial  Accounting  Standards  ("SFAS") No. 115,  "Accounting  for Certain
Investments  in Debt and  Equity  Securities."  Under SFAS No.  115,  management
determines  the  appropriate  classification  of debt  securities at the time of
purchase and  re-evaluates  such designation as of each balance sheet date. Debt
securities are classified as held-to-maturity  when the Company has the positive
intent  and  ability  to  hold  the  securities  to  maturity.  Held-to-maturity
securities are stated at amortized cost,  adjusted for  amortization of premiums
and  accretion  of  discounts  to  maturity.  Such  amortization  is included in
non-operating income (expense). Marketable equity securities and debt securities
not  classified  as  held-to-maturity  are  classified  as   available-for-sale.
Available-for-sale  securities  are  carried at fair value  (based on  published
market  values),  with the  unrealized  gains and losses  reported in a separate
component of  shareholders'  equity.  The amortized  cost of debt  securities is
adjusted for  amortization  of premiums and  accretion of discounts to maturity.
Such amortization is included in non-operating income (expense).  Realized gains
and losses,  interest income and dividends are included in non-operating  income
(expense).  For purposes of determining  the gain or loss on a sale, the cost of
securities sold is determined  using the average cost of all shares of each such
security held at the dates of sale.

Non-Marketable Securities

     Non-marketable  securities  are  accounted for on a lower of cost or market
basis.  A  write-down  to  market  is  recognized  on the  determination  that a
permanent impairment of value has occurred.

Inventories

     Inventories  are stated at the lower of cost or market with cost determined
using the first-in,  first-out method.  Inventories consist of the following (in
thousands):

                                                March 31, 1998    March 31, 1997
  Raw materials and work-in-process                $2,376           $2,728
  Finished goods                                      152              323
  Consigned and with customers                        994            1,286
  Allowance for excess and obsolete inventory      (1,400)          (1,400)
                                                   -------          -------
                                                   $2,122           $2,937
                                                   ======           ======

                                       34
<PAGE>
Property and Equipment

     Property and equipment are stated at cost.  Provisions for depreciation are
computed on the straight-line  method for financial  reporting purposes over the
estimated  useful  lives of the assets  which  range  from three to five  years.
Depreciation  for income tax purposes is computed on  accelerated  cost recovery
methods.  Expenditures which substantially  increase value or extend asset lives
are capitalized. Expenditures for maintenance and repairs are charged to expense
as incurred.

     Property and equipment consist of the following (in thousands):

                                             March 31, 1998    March 31, 1997
                                             --------------    --------------
     Land                                        $    50          $    50
     Fixtures and equipment                        3,151            2,204
                                                  ------           ------
                                                   3,201            2,254
     Less accumulated depreciation                  (810)            (310)
                                                  -------          ------
                                                  $2,391           $1,944
                                                  ======           ======

Intangible Assets

     Intangible assets consist of the following (in thousands):

                                             March 31, 1998    March 31, 1997
                                             --------------    --------------
     Intellectual property rights                 $3,519           $3,721
     Other                                            23               34
                                                  ------           ------
                                                  $3,542           $3,755
                                                  ======           ======

     The Company  amortizes the intellectual  property rights for the DSS Switch
over a 20 year period on a straight  line basis.  Accumulated  amortization  was
$472,000 and $354,000 at March 31, 1998 and March 31, 1997, respectively.

     In fiscal  1997,  the  Company  adopted  the  provisions  of SFAS No.  121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be  Disposed  Of."  This  statement  establishes  accounting  standards  for the
impairment of long-lived assets,  certain identifiable  intangibles and goodwill
related  to those  assets  to be held and used  and for  long-lived  assets  and
certain  identifiable  intangibles  to be  disposed  of.  The  adoption  of this
standard  did  not  have a  material  effect  on  its  consolidated  results  of
operations or financial position.

     Pursuant  to SFAS No.  121,  long-lived  assets and  intangible  assets are
reviewed for impairment  whenever events or circumstances  provide evidence that
suggest that the carrying amount of the asset may not be recoverable. Impairment
is generally  determined  by using  estimated  undiscounted  cash flows over the
remaining  amortization  period.  If the estimates of future  undiscounted  cash
flows do not support  recoverability  of the carrying value of the asset, a loss
is recognized  for the  difference  between the fair value and carrying value of
the asset.

     The  Company   obtained  an   independent   appraisal  in  support  of  the
recoverability  of the net book  value of  property  and  equipment  and the DSS
Switch intellectual property rights at March 31, 1997.

Revenue Recognition

     Revenue from product sales is recognized  upon shipment to a  credit-worthy
customer,  based on a firm agreement  whereby all risks and rewards of ownership
have been transferred,  in exchange for cash or a receivable which is liquid and
collectible.  The transaction must be complete in all significant  aspects as of
the date of revenue  recognition and free from any significant  uncertainties or
future obligations and restrictions.

                                       35
<PAGE>
Credit and Other Concentration

     For the year ended March 31,  1998,  a third party  lessor was  involved in
approximately  40% of net sales and Apollo Inc.  accounted for approximately 19%
of net sales (see Note 3). For the year ended March 31, 1997, Concentric Network
Corporation   accounted  for  approximately  94%  of  net  sales  and  92  %  of
receivables.  The Company performs periodic credit evaluations of its customers'
financial  condition and generally  does not require  collateral  other than, in
certain instances,  a perfected  security interest in the related equipment.  In
addition,  approximately  11% and 86% of inventories  purchased during the years
ended March 31, 1998 and March 31, 1997,  were supplied by Sattel  Technologies,
Inc. ("STI").  However, the Company has established relationships with alternate
suppliers  such as Sanmina  Corporation  and I-PAC  Manufacturing,  Inc. and has
assembled product itself in order to significantly reduce its dependency on STI.

Product Warranty

     Product  warranty costs are charged to operations  based upon the estimated
warranty cost per unit sold. Warranty costs to date have been insignificant.

Research and Development Costs

     Engineering, research and development costs include all engineering charges
related to new products and the DSS Switch,  and are charged to operations  when
incurred.  Software  development  costs incurred in the development of switching
products  are  required to be  capitalized  once  technological  feasibility  is
established  in  accordance  with  SFAS No.  86.  Technological  feasibility  is
established upon the successful  testing of a prototype or beta-test model based
upon CTL's product  development  process.  Software  development  costs incurred
during the period between  completion of a fully-tested model and general market
release have not been significant, and, accordingly, have not been capitalized.

Income Taxes

     The  Company  accounts  for  income  taxes  using the  liability  method in
accordance with SFAS No. 109, "Accounting for Income Taxes".

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.  On a diluted
basis, the loss per common share is anti-dilutive and therefore not applicable.

Use of Estimates

     The  preparation  of financial  statements  in  conformity  with  generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that  affect the  reported  amounts of assets and  liabilities  and
disclosures  of contingent  assets and  liabilities at the date of the financial
statements,  and the  reported  amounts  of  revenues  and  expenses  during the
reporting period. Actual results could differ from those estimates.

Statement of Cash Flows

     For purposes of the  statement  of cash flows,  the Company  considers  all
highly  liquid debt  instruments  with a maturity of three months or less at the
date of purchase to be cash equivalents.


                                       36
<PAGE>
NOTE 2   DISCONTINUED OPERATIONS

     On November  20, 1996,  the Board of  Directors  of 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

     The  Restructuring  provided  for a  spin-off  of the  non-CTL  businesses,
through a special  dividend to the  Company's  shareholders.  Consequently,  the
Company reported the results of operations of the  telecommunications  equipment
distribution  segment,  the voice and data network wire installation and service
segment and the wholesale distribution of meat and seafood segment separately as
discontinued operations. Subsequently, the Company received a purchase offer for
a majority of the assets of APC. On February 3, 1997,  the Board of Directors of
the  Company  approved  the sale of a majority  of the assets of APC to Colorado
Boxed Beef Company ("Colorado"). The sale closed on February 3, 1997.

     Colorado   purchased  the  following  assets  of  APC  for  $13.5  million:
receivables,  inventories,  machinery and equipment, furniture and fixtures, and
certain  other  current  assets.  Colorado  made a cash  payment  to APC of $6.9
million of which  $712,000  was  restricted  pursuant  to the terms of the Asset
Purchase  Agreement.  The  amount  of  $100,000  was held in  escrow;  which was
released  and  paid in full  to APC in  February  1998.  Colorado  also  assumed
accounts payable and accrued liabilities of APC of $6.6 million. APC repaid $5.8
million to its lender to extinguish all obligations  under its revolving line of
credit.

     APC's only remaining asset consists of real estate with a net book value of
$2.6 million.  The real estate is collateral  for two mortgage notes that amount
to $740,000.  APC entered into a lease with Colorado that  terminated on January
15, 1998. The real estate is listed for sale.

     As a result of the sale of APC's assets,  the Company's  Board of Directors
terminated  the  original  Restructuring  plan  for a  spin-off  of the  non-CTL
businesses.  The Company  adopted a revised  Restructuring  plan to sell C&L and
Valley. The revised Restructuring plan was approved by the Board of Directors in
February  1997.  On November 20,  1997,  the Company  completed  the sale of its
telecommunications  equipment distributor subsidiary,  C&L Communications,  Inc.
("C&L"),  to the management of C&L. Prior to the sale, $645,000 of non-operating
assets  were  dividended  by C&L to the  Company,  and  under  the  terms of the
agreement,  the  Company  received  $2,750,000  in cash,  a  $1,000,000  secured
promissory note due in monthly  installments and maturing on January 1, 2001 and
non-voting,  subordinated  preferred  stock  with a  liquidation  preference  of
$2,000,000. The note receivable was recorded at face value of $1,000,000 and the
preferred stock was recorded at a value of $800,000.

     In March 1998, the Company  reached  agreement on the sale of its 80% owned
wire installation and service subsidiary,  Valley Communications Inc. ("Valley")
to Technology Services  Corporation  ("TSC").  Under the terms of the agreement,
the  Company  received  $2,300,000,  which  was paid in cash in June  1998,  and
$811,000 paid by the assumption by TSC of the Company's  entire  liability under
certain  promissory  notes to and among the  Company and other  shareholders  of
Valley dated August 1995.

                                       37
<PAGE>

     The components of net assets and liabilities of discontinued operations are
as follows (in thousands):
<TABLE>
                                                                             March 31, 1998
                                                       -------------------------------------------------
<CAPTION>
                                                                     Telecommu-    Wire
                                                       Meat and      nications  Installation
                                                       Seafood       Equipment  and Service      Total
<S>                                                    <C>            <C>         <C>           <C>    
Other current assets                                   $     7        $  ---      $ ---         $     7
Property and equipment, net                              2,572           ---        ---           2,572
Long term debt                                            (740)          ---        ---            (740)
                                                       --------       -------     ------        -------
Net non-current assets of discontinued operations      $ 1,839        $  ---      $ ---         $ 1,839
                                                       =======        =======     ======
Reserve for loss on disposal                                                                       (930)
                                                                                                -------
Net assets of discontinued operations                                                           $   909
                                                                                                =======

                                                                             March 31, 1997
                                                       -------------------------------------------------
                                                                    Telecommu-     Wire
                                                       Meat and     nications   Installation
                                                       Seafood      Equipment   and Service       Total
Receivables                                            $  ---         $ 4,720     $ 3,387       $ 8,107
Inventories                                               ---           5,429         176         5,605
Other current assets                                      939             452         348         1,739
Accounts payable                                          (98)         (3,584)     (1,280)       (4,962)
Revolving lines of credit                                 ---          (4,164)     (1,100)       (5,264)
Other current liabilities                                (112)           (179)     (1,014)       (1,305)
                                                       -------        -------     -------       -------
                                                       $  729         $ 2,674     $   517       $ 3,920
                                                       ======         =======     =======

Reserve for loss on disposal                                                                     (3,027)
                                                                                                -------
Net current assets of discontinued operations                                                   $   893
                                                                                                =======

Property and equipment, net                            $ 2,572        $   280     $   571       $ 3,423
Intangible assets, net                                    ---           2,317       2,892         5,209
Other assets                                              ---             312          88           400
Long term debt                                            (781)          ---         (667)       (1,448)
Other liabilities                                         ---            ---         (276)         (276)
                                                       --------       -------     -------       -------
Net non-current assets of
  discontinued operations                              $ 1,791        $ 2,909     $ 2,608       $ 7,308
                                                       =======        =======     =======       =======
</TABLE>

     The estimated loss on disposal of discontinued  operations  consists of the
following (in thousands):

     Estimated  operating  losses for the  disposal  period
          and loss on  disposal of C&L and Valley                       $ 2,054
          
     Operating losses for the disposal period and loss on 
          the disposal of APC                                             2,550
     Investment  banking  fees,  including  the fair value 
          of a warrant to  purchase common stock                          1,100
     Professional fees incurred in connection with the spin-off             854
     Severance payments to Messrs. Fischer, Runge 
          and Lilly (see Note 11)                                           508
     Charge due to acceleration of deferred  compensation  
          payments (see Note 11) to Messrs. Fischer and Runge               137
     Other                                                                  347
                                                                        -------
                                                                        $ 7,550
                                                                        =======

                                       38
<PAGE>
     The company  believes that the net assets of  discontinued  operations  are
recorded at approximate net realizable value at March 31, 1998.

     Operating results,  net of minority interest,  relating to the discontinued
operations for fiscal year 1996 and for fiscal year 1997 through the measurement
date of November 20, 1996 are as follows (in thousands):

<TABLE>
                                                               Fiscal Year Ending March 31, 1997
                                                     ----------------------------------------------------
<CAPTION>
                                                                  Telecom-          Wire
                                                     Meat and     munications   Installation
                                                      Seafood     Equipment      and Service      Total
<S>                                                  <C>          <C>             <C>           <C>      
Net sales                                            $ 188,853    $ 19,750        $ 11,540      $ 220,143
                                                     =========    ========        ========      =========

Earnings (loss) from discontinued operations         $    (584)   $    (51)       $     10      $    (625)
                                                     ==========   =========       ========      =========

                        Fiscal Year Ending March 30, 1996
                                                                   Telecom-         Wire
                                                     Meat and     munications   Installation
                                                      Seafood     Equipment      and Service       Total
Net sale                                             $ 236,108    $ 25,350        $  6,144      $ 267,602
                                                     =========    ========        ========      =========

Earnings (loss) from discontinued operations         $  (1,067)   $     55        $    393      $    (619)
                                                     ==========   ========        ========      =========
</TABLE>

     In  fiscal  1996,   state  income  taxes  of  $83,000  were   allocated  to
discontinued  operations.  No income taxes have been  allocated to  discontinued
operations for fiscal 1997.

     In  reclassifying  the Company's  financial  statements for presentation of
discontinued  operations,  the Company  reflected all of APC's interest  expense
that  was  paid to the  Company  under  an  intercompany  loan  to  discontinued
operations.  Interest  expense paid by APC to the Company was $0 and $159,000 in
fiscal 1997 and 1996,  respectively.  The Company  reflected  the  corresponding
interest  income in  non-operating  income  (expense)  (see  Note 9).  All other
intercompany  interest has been eliminated in consolidation.  There was no other
allocation of interest to discontinued operations.

     As of July 9, 1998,  the Company had collected all cash related to the sale
of discontinued  operations  except $760,000 due under a note and the only asset
of  discontinued  operations  was real  estate  with a net asset  book  value of
$909,000. The real estate is listed for sale.

NOTE 3   Acquisitions

     In November  1994,  the Company and STI entered into a general  partnership
agreement to establish  Sattel  Communications  Company,  which was subsequently
converted  into SCC.  The  Company and STI each  received a 50%  interest in the
venture.

     Profits and losses were allocated equally among the two partners. Under the
terms of this agreement,  initial contributions to the partnership to be made by
the Company were  operating  capital and the cost of a marketing  study which in
the aggregate  would not exceed  $200,000.  In addition,  the Company  agreed to
prepare a business  plan and a  marketing  plan for SCC.  STI agreed to develop,
design and test a  telecommunications  switch,  manufacture three units, provide
administrative  services  and  provide  the use of its  facilities  to SCC until
permanent facilities were determined.  In addition, STI agreed to license SCC to
use its proprietary telecommunications switch (the "DSS Switch"). On January 16,
1996,  the  Company  and STI entered  into an  Exchange  Agreement  by which the
Company acquired an additional 30% ownership  interest in SCC, which brought its
total  ownership  interest in SCC to 80%. The acquisition was accounted for as a
purchase  of  a  minority  interest.  The  acquisition  occurred  as  part  of a
transaction in which the Company contributed additional cash, bringing its total
cash contributions to $2.5 million, and $1.425 million in loans to SCC to

                                       39
<PAGE>
further develop the DSS Switch. In lieu of contributing its proportionate  share
of the  additional  funding to SCC,  STI  assigned  all of its right,  title and
interest in the DSS Switch and related  technologies  to SCC. In connection with
this  transaction,  the Company issued  350,000 shares of its common stock,  par
value $1.00 per share,  (the "CNS  Shares") to STI.  The  Company's  Shares were
valued at $4,944,000,  or $14.125 per share, based on the average closing market
price of the  Company's  common stock from January 12, 1996 through  January 18,
1996.

     On May 3, 1996, the Company and STI entered into a  Supplemental  Agreement
by which the Company  acquired an additional 15% ownership  interest in SCC. The
acquisition  occurred as part of a transaction in which the Company  contributed
an  additional  $10  million  in  cash  to SCC.  In  lieu  of  contributing  its
proportionate  share of the  additional  funding to SCC,  and in exchange  for a
release from its obligation related to certain product development  efforts, STI
agreed to convey to the Company 15% of SCC,  together  with 50,000 shares of the
CNS Shares it had acquired pursuant to the Exchange Agreement.  This transaction
resulted in a net reduction of  approximately  $1,825,000  of intangible  assets
recorded at March 30, 1996. On October 14, 1996,  the Company  acquired from STI
its  remaining 5% ownership  interest in SCC for 15,000  shares of the Company's
common stock. At this time SCC became a wholly-owned subsidiary of the Company.

     In April 1996, SCC transferred its assets and liabilities to a newly-formed
limited liability company, Coyote Technologies, LLC ("CTL"). In addition, during
fiscal 1997 CTL  granted  subordinated  equity  participation  interests,  which
amount to approximately a 20% effective ownership interest (before consideration
of the  subordination  provisions) in CTL, to certain  employees of the Company.
The Company's  effective  ownership of CTL is  approximately  80% as a result of
these  transactions.  CTL is a California  Limited  Liability  Company  owned by
members (the "Members") owning either of two classes of interests,  the "Class A
Units" and the "Class B Units"  (collectively,  the  "Units").  SCC holds  8,000
Class A Units.  Additional Class A Units are held by Charles Chandler,  a former
employee,  and  Sydney  Lilly,  a current  director  and former  Executive  Vice
President  of the Company.  Mr.  Chandler and Mr. Lilly hold 350 and 100 Class A
Units, respectively. Aggregate capital contributed to CTL related to these Class
A  Units  totaled  $242,000.  Initially,  1,550  Class B Units  were  issued  to
employees of CTL in connection with their continued employment,  without capital
contribution  therefor.  Certain current and former employees of CTL continue to
collectively  own  1,507  Class B Units,  representing  all of the Class B Units
currently outstanding.

     The following table reflects the current  ownership of the Class B Units by
the  management of CTL and others as of June 30, 1998:  

               Name                Class B Units 
          James J. Fiedler              350 
          Daniel W. Latham              250
          David Held                    250
          Bruce Thomas                  250
          Others                        407
                                      -----  
                                      1,507
                                      =====

     No compensation  expense was recognized in fiscal 1997 upon the granting of
the Class B Units to the  employees.  The estimated  fair value of such units at
the date of grant was considered immaterial to the financial statements based on
the   subordinated   nature  of  the  interests   resulting  from  the  priority
distributions payable to holders of Class A Units.  Compensation expense will be
recognized  prospectively  when it becomes  probable  that a conversion or other
defined  triggering  event will occur.  If the Company  exercises  its option to
repurchase equity interests previously granted to employees,  total compensation
cost will be equal to the cash paid upon the repurchase.

     Prior  to  an  amendment  in  September  1997,  described  in a  succeeding
paragraph of this note, the terms of a conversion were that if in the future CTL
achieves  cumulative  pre-tax profits of at least $15 million over the four most
recent  quarters,  the members holding Class B Units not subject to the Board of
Directors'  authorization  discussed  below would have the right and  obligation
(the  "Conversion  Rights") to convert  their Class B Units into Company  common
stock on the basis of 500 shares of Company  common stock for each Class B Unit,
subject to adjustment for stock dividends,  stock splits, merger,  consolidation
or stock  exchange.  The  Conversion  Rights are  included in Class B Agreements


                                       40
<PAGE>
amended in November 1996 in lieu of  provisions  of the April 1, 1996  agreement
that  provided  members  holding  Class B Units might  require CTL to conduct an
initial public  offering,  upon the achievement of the same  cumulative  pre-tax
profit  measure  discussed  above,  in which the Class B holders  would have the
right to convert Class B Units into securities being offered, and would have the
right to have those securities  registered under the Securities Act of 1933 (the
"Registration  Rights").  If a  majority  of the Class B Units are  redeemed  or
purchased  by CTL or an  affiliate,  or if a  triggering  event  (including  the
conversion of a majority of the Class B Units) occurs,  the  individual  Class A
holders are entitled to have their Units  redeemed,  purchased or to participate
on the same  terms as the Class B Units,  except  with an upward  adjustment  in
price to reflect the priority of distribution associated with the Class A Units.
Pursuant to  agreements  regarding  Class A Units,  the holders of Class A Units
other  than SCC also have the right,  but not the  obligation,  to  require  the
Company to purchase all, but not less than all, of such  holder's  Class A Units
at a price equal to the  agreed-upon  or appraised fair market value at any time
after April 1, 1999.

     As a result of the Company's  Restructuring,  its continuing operations are
only those of CTL. The Conversion  Rights  discussed  above provided the Class B
Unit holders with an approximately  comparable ownership interest in the Company
as they have in CTL.

     In  September  1997,  the Board of  Directors  authorized  an  amendment to
certain  Class B Units owned by directors  and  employees of CNS and CTL at June
30, 1997, to provide for the  elimination of the minimum pre-tax profits measure
requirement  discussed above and the conversion into Company common stock at the
option of the holder. Consequently, there is a compensation charge of $4,016,000
recorded in the second quarter of fiscal 1998. This charge is based on the value
at  September  4, 1997 of 630,000  shares of Company  common stock at $6.375 per
share  that will be  issuable  to Class B Unit  Holders.  Assuming  that Class A
Units,  other  than those held by SCC,  are  convertible  on the same basis as a
result of the Board of Directors'  authorization  discussed above, an additional
charge of $1,506,000 is also recorded in the second quarter of fiscal 1998 based
on 236,250 shares of Company common stock and a per share price of $6.375.

     On April 16, 1998, the Company established Coyote Gateway,  LLC, a Colorado
limited  liability  company  ("CGL").  The Company  owns 80% of CGL and American
Gateway  Telecommunications,  Inc.,  a Texas  corporation  ("AGT") owns 20%. The
Company  founded CGL with a capital  contribution  of $240,000 and has agreed to
make certain additional working capital contributions through April 15, 1999. In
consideration  of its 20% ownership  interest,  AGT  contributed  assets to CGL,
consisting  of  customer  contracts  for the  transmission  of up to 31  million
minutes of  international  traffic  monthly to 11 countries when fully deployed,
and vendor and carrier  contracts  to service  those  minutes.  CGL has employed
AGT's operating and management  personnel,  and they are  participating in stock
option and bonus plans tied to the success of the venture.

     In April 1998, the Company  announced that it intends to acquire  privately
held  INET  Interactive   Network  Systems,   Inc.   ("INET"),   a  provider  of
international  long  distance  services.  The  acquisition  is  expected  to  be
completed  in the second  quarter of fiscal  1999.  In March  1998,  the Company
entered into a transaction  involving  INET and a third party leasing firm.  The
transaction  involved  the  sale of DSS  Switches  for use in  INET's  business.
Because of the impending acquisition of INET, the Company has deferred the gross
profit  on the  transaction  of  $1,600,000  as if  INET  was an  affiliate.  In
connection  with this  transaction,  the Company has issued a $702,000  stand-by
letter of credit in favor of the leasing company.

     In December 1997, the Company  entered into a letter of intent  regarding a
merger with NUKO Information Systems,  Inc. ("NUKO").  NUKO is a manufacturer of
compression and transmission technology for a variety of video applications. The
Company  subsequently was unable to reach agreement with NUKO on the transaction
and withdrew its offer in March 1998. During negotiations and in accordance with
the terms of the letter of intent,  the Company advanced funds to support NUKO's
ongoing activity. The total funding advanced to NUKO and now owed to the Company
of  $1,800,000  which is secured  by a pledge to the  Company of shares of stock
owned by NUKO in  Internext  Compression,  Inc.  In  April  1998,  NUKO  filed a
voluntary petition under Chapter 11 of the U.S. Bankruptcy Code. See also Note 9
- Non-Operating Expense - in connection with provisions recorded.


                                       41
<PAGE>
NOTE 4   Marketable Securities

     Marketable  securities  at March 31,  1998  consist  of the  following  (in
thousands):

                            Available-for-Sale Marketable Securities
                                         March 31, 1998
                            ----------------------------------------
                                              Gross        Estimated
                                            Realized          Fair
                              Cost            Losses         Value
    Equity securities         $210            $194            $16


     Gains on sales of available-for-sale  securities totaled $242,000,  $0, and
$31,000  in  fiscal  1998,  1997 and  1996,  respectively,  and  losses  totaled
$397,000, $736,000, and $5,000 in fiscal 1998, 1997 and 1996, respectively.

NOTE 5   LONG-TERM DEBT

     Long-term debt consists of the following (in thousands):

                                                March 31,         March 31,
                                                  1998               1997
                                                ---------         ---------
     Subordinated debentures due January
       2002 and capitalized interest               $1,817           $1,958
     8% Convertible loan due December 2000          3,673             ---
     Less current maturities                         (141)            (141)
                                                   ------           ------
                                                   $5,349           $1,817
                                                   ======           ======

     The  subordinated   debentures  consist  of  principal  of  $1,254,000  and
capitalized interest of $562,000 at 11.25%. These debentures,  which were issued
in January 1992, are unsecured.  The payment of cash dividends by the Company is
restricted by the  subordinated  debentures  which provide that the consolidated
tangible net worth of the Company cannot be reduced to less than an amount equal
to the aggregate principal amount of the subordinated debentures, or $1,254,000.

     Approximate  annual amounts payable by the Company on long-term debt are as
follows (in thousands):

        1999.............................        $  141
        2000.............................           141
        2001.............................           141
        2002.............................         1,394
                                                  -----
                                                 $1,817
                                                 ====== 

     The 8%  convertible  loan is  represented  by notes  which  were  issued in
December 1997 and is  convertible  into common stock of the Company.  Details of
the terms of the conversion are described in Note 7 - Shareholders'  Equity.  As
of June 9, 1998, the full value of notes and accrued interest had been converted
into the  Company's  common  stock which was issued  pursuant  to the  exemption
provisions of Regulation S of the Securities Act of 1933 (see Note 7).


                                       42
<PAGE>
NOTE 6   COMMITMENTS AND CONTINGENCIES

     The Company  and CTL lease their  facilities  and various  equipment  under
non-cancelable  lease  arrangements  for  varying  periods.  Leases  that expire
generally are expected to be renewed or replaced by other  leases.  Total rental
expense  under  operating  leases in fiscal  1998,  1997 and 1996 was  $310,000,
$279,000 and $63,000, respectively.

     Future minimum payments under non-cancelable  operating leases with initial
terms of one year or more for fiscal years  subsequent  to March 31, 1998 are as
follows (in thousands):

        1999.............................      $   735
        2000.............................          717
        2001.............................          719
        2002.............................          748
        2003.............................          704
                                                ------
                                               $ 3,623
                                               =======

     Coyote Network Systems, Inc. (The Diana Corporation)  Securities Litigation
(Civ.  No.  97-3186).  This is a  consolidation  of what  were  originally  nine
separate  actions  brought in the United States  District  Court for the Central
District of California  on behalf of  purchasers  of the Company's  common stock
during a class period that  extended  from December 6, 1994 through May 2, 1997.
On July 23, 1997, the Court entered a stipulation  and order  consolidating  the
nine  actions  for all  purposes.  On  September  9,  1997,  plaintiffs  filed a
consolidated amended complaint (the "Consolidated  Complaint")  asserting claims
against the Company,  certain of its present and former  directors and officers,
and others under  Section  10(b) of the  Securities  Exchange  Act of 1934.  The
Consolidated Complaint alleges essentially that the Company and other defendants
were  engaged in a scheme to inflate  the price of the  Company's  common  stock
during the class period through false and misleading statements and manipulative
transactions.   The  Consolidated   Complaint  seeks  unspecified  damages,  but
identifies  the  significant  movement in the  Company's  stock price during the
putative  class  period (a swing of more than $115 per  share) to imply that the
damages that will be claimed will exceed the Company's assets.

     On  December  15,  1997,  the Court  denied a motion by the Company and the
other defendants to dismiss the consolidated amended complaint. Since that time,
the parties have begun the early stages of  discovery  and have had  preliminary
discussions  concerning  settlement.  On April 20, 1998, the Plaintiffs  filed a
motion to have the action certified as a class action.  That motion is currently
scheduled to be heard by the Court on September 21, 1998. The Company intends to
defend the action  vigorously,  but is continuing  discussions  with  Plaintiffs
concerning potential settlement.

     On July 9, 1998,  the  respective  counsel for the  Plaintiffs  and for the
Company executed a letter agreeing in principle,  subject to various  conditions
and contingencies, to settle the claims against the Company and its subsidiaries
in The Diana Securities Litigation. If consummated,  the settlement will require
the  Company to issue  warrants  to acquire  2,500,000  shares of the  Company's
common stock.  The warrants will be exercisable for three years from the date of
issuance and will have an exercise  price of $9 per share in the first year, $10
per share in the  second  year and $11 per share in the third  year,  subject to
adjustment in certain  events.  If the Company lists its common stock on Nasdaq,
it will also use its best  efforts to arrange  for a listing of the  warrants on
Nasdaq.  Among the conditions to the  settlement  are that the  Plaintiffs  also
reach a settlement  with the  individual  defendants in the litigation and their
D&O insurance  carriers and that,  ultimately,  the  settlement  receives  court
approval.  The Company  regards this agreement in principle as a step toward the
resolution of this litigation,  but cautions that, in view of the conditions and
contingencies  associated with this preliminary agreement, the Company is unable
to predict  with  certainty  the nature or timing of an actual  settlement.  The
Company  recorded  the fair market value of the  warrants of  $8,000,000  in the
financial statements for fiscal 1998 (see also Note 7).

                                       43
<PAGE>

     The Company is also involved with other  proceedings or threatened  actions
incident to the operation of its  businesses.  It is  management's  opinion that
none of these  matters  will have a  material  adverse  effect on the  Company's
financial position, results of operations or cash flows.

NOTE 7   SHAREHOLDERS' EQUITY

Options

     The Company has two  non-qualified  employee stock option plans under which
options to acquire up to 1,339,389  shares of the Company's  common stock may be
granted to  directors,  officers  and certain  employees  of the Company and its
subsidiaries.  At March 31, 1998,  options for 422,459 shares were available for
grant under both plans.  Both plans are  administered  by the Company's Board of
Directors,  which is authorized,  among other things, to determine which persons
receive options under each plan, the number of shares for which an option may be
granted, and the exercise price and expiration date for each option. The term of
options  granted  shall not exceed 11 years from the date of grant of the option
or from the date of any extension of the option term.

     The following table summarizes the transactions for both stock option plans
for the last three fiscal years:

                                                              Option Price
                                                Options         Per Share
                                                -------     ----------------  
         Outstanding at April 1, 1995           566,976     $ 1.95  -  5.55
              5% stock dividend                  31,482            ---
              Options granted                   385,000       5.90  - 19.05
              Options exercised                 (12,300)           2.15
                                                --------

         Outstanding at March 30, 1996          971,158     $ 1.95  - 19.05
              5% stock dividend                  53,119            ---
              Options granted                   135,024       5.00  - 27.00
              Options canceled                 (320,941)          19.05
                                               ---------

         Outstanding at March 31, 1997          838,360     $ 1.95  - 27.00
              Options revalued - canceled       (81,838)     19.05  - 27.00
              Options revalued - granted         81,838            3.00
              Options granted                   254,250       3.00  -  7.72
              Option exercised                 (442,956)      1.95  -  5.55
              Options canceled                 (175,680)      5.53  - 27.00
                                               ---------

         Outstanding at March 31, 1998          473,974     $ 1.95  - 19.05
                                                =======

         Exercisable at March 31, 1998          152,886     $ 1.95  - 19.05
                                                =======


                                             Weighted
                               Weighted      Average                   Weighted
                               Average      Remaining                  Average
 Option Price    Outstanding   Exercise    Contractual    Exercisable  Exercise
  Per Share        Options      Price      Life (Years)     Options     Price
--------------   -----------   ---------   ------------   -----------  --------
$     1.95          24,310     $ 1.95          2.75           24,310     $ 1.95
 3.00 -   7.72     439,164       4.83          3.84          118,076       5.75
     19.05          10,500      19.05          1.94           10,500      19.05
                  --------                                  --------
                   473,974     $ 5.00          3.65          152,886     $ 6.06
                   =======                                   =======

                                       44
<PAGE>

     In February 1998, the Company's Board of Directors approved and adopted the
establishment  of  Non-Employee  Director  Stock  Option Plan and granted  stock
options to purchase  10,000 shares of the Company's  common stock to each of the
three  non-employee  directors.  These options have a five-year  term, are fully
vested and have an exercise price of $4.625 per share.

     The Company  accounts for these plans under APB Opinion No. 25, under which
the total compensation expense recognized is equal to the difference between the
option  exercise  price  and the  underlying  market  price of the  stock at the
measurement date. The Company has adopted the disclosure-only provisions of SFAS
No. 123, "Accounting for Stock-Based Compensation."

     The following pro forma net loss and net loss per common share  information
assumes that  compensation  cost was  recognized  for the vested  portion of the
awards  granted in those years,  based on the estimated  fair value at the grant
date  consistent  with the provisions of SFAS No. 123 (in thousands,  except per
share amounts):

                                             1998        1997         1996
                                             ----        ----         ----

     Net loss   - as reported             $(26,155)   $(21,018)    $ (3,365)
                - proforma                 (26,439)    (21,500)      (3,592)
     Net loss per share  - as reported    $  (3.70)   $  (3.99)    $   (.76)
                         - proforma          (3.74)      (4.08)        (.82)

     The fair value of each  option  granted is  estimated  on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions for grants in fiscal 1996, 1997 and 1998:

                                           1998         1997        1996
                                           ----         ----        ----

     Expected stock price volatility      130.90%       93.3%       72.9%
     Risk free interest rate                5.95%        6.2%        6.8%
     Expected life of options             5.0 years   4.8  years   4.9 years

     The weighted average exercise prices per share for options outstanding
and  exercisable  at March  31,  1998 are  $5.00 and  $6.06,  respectively.  The
weighted  average  exercise  prices  per  share  for  options   outstanding  and
exercisable  at March 31, 1997 are $7.79 and $5.72,  respectively.  The weighted
average  fair value of options  granted  during  fiscal  1996,  1997 and 1998 is
$3.65, $17.65 and $3.95 per share, respectively.

     In fiscal 1997, the Company recognized  compensation expense of $125,000 in
connection  with the issuance of  restricted  stock and the amendment of certain
previously issued stock options.

Common Stock and Convertible Notes

     In July 1997,  the Company issued  1,880,750  shares of its common stock at
$2.00 per share in a private  placement under Regulation D of the Securities Act
of 1933. The Company received $3,362,000 from the private placement, net of fees
of $400,000. In addition, warrants to purchase 1,880,750 shares of the Company's
common stock at $3.00 per share were issued to the  Regulation  D  participants.
The warrants are  exercisable  immediately  and expire five years from issuance.
Mr. Fiedler, the Company's Chairman and Chief Executive Officer, participated in
the private  placement and purchased 175,000 shares of common stock and received
warrants to purchase  175,000 shares of the Company's common stock. In addition,
Mr. Stephen W. Portner, a Director,  and his daughter collectively  participated
in the  private  placement  and  purchased  11,250  shares of  common  stock and
received  warrants to purchase 11,250 shares of the Company's  common stock. The
common  stock and common  stock  warrants  issued in the private  placement  are
subject to registration rights.

                                       45
<PAGE>
     In July  1997,  the  Company  received  $2,235,000  upon  the  issuance  of
$2,500,000 in 8% convertible  notes.  As of December 31, 1997, the full value of
notes and accrued interest to the date of conversion had been converted into the
Company's common stock which was issued pursuant to the exemption  provisions on
Regulation S of the Securities Act of 1933. Common stock totaling 484,964 shares
was issued in connection with conversions of $2,545,000 of convertible notes and
accrued interest at a weighted average conversion price of $5.25 per share which
represented  a conversion  price of 80% of the average  closing bid price on the
conversion  date in accordance  with the terms of the notes. A finance charge of
$625,000  was  recorded in the fourth  quarter of fiscal 1998 in respect of this
discount value.

     In December  1997,  the Company  received  $4,635,000  upon the issuance of
$5,000,000 in 8% convertible notes. The notes are convertible into the Company's
common  stock  which will be issued  pursuant  to the  exemption  provisions  of
Regulation S of the Securities Act of 1933. The initial  conversion price is the
lessor of $7.00 or 80% of the five-day average closing bid price on a conversion
date with a conversion floor price (the  "Conversion  Floor Price") of $4.00 per
share,  provided  that if the average  closing bid price for any 20  consecutive
trading  days  prior to a  conversion  date is less than  $4.00 per  share,  the
Conversion  Floor Price will be  adjusted to 80% of such 20 day average  closing
bid price.

     Effective  April 7, 1998, in agreement  with note holders,  the  conversion
terms were modified so that the conversion  price discount factors be determined
with reference to the closing  transaction  price of the common stock for the 15
consecutive  days prior to a conversion date and the applicable  discount factor
be applied to the average  closing  transaction  price of the stock for the five
consecutive  trading days prior to the conversion date in order to determine the
conversion price. The applicable discount factors were agreed as follows:

           15 Day Average                     Applicable
      Closing Transaction Price                Discount
       Below       $3.00                           0%
       Between     $3.00 - $3.75                  10%
                   $3.75 - $4.25                  15%
                   $4.25 - $4.85                  20%
                   $4.85 - $6.00                  25%
      Amounts in excess of $6.00                  20%

     A finance  charge of $1,250,000  was recorded in the fourth fiscal  quarter
ended March 31, 1998, in respect of the maximum  beneficial  value  available to
the investors based upon the estimated potential discount from market value upon
conversion.  The note can be  converted  equally  beginning  45, 75 and 105 days
following December 22, 1997. Interest is payable semi-annually in arrears in the
form of Company common stock based on the above-described conversion price.

     As of June 9, 1998,  the full value of notes and  accrued  interest  to the
date of conversion  had been  converted  into Company  common  stock,  which was
issued  pursuant to the exemption  provisions of Regulation S of the  Securities
Exchange  Act of 1933.  Common  stock  totaling  1,404,825  shares was issued in
connection  with  conversions  of  $5,133,000 of  convertible  notes and accrued
interest. Of those conversion shares,  336,075 were issued as of March 31, 1998,
in connection  with  conversions of $1,344,000 of convertible  notes and accrued
interest.

Warrants

     In  connection  with  the  issuance  of the  convertible  notes in July and
December  1997, the Company paid fees and expenses of $630,000 and issued 85,648
warrants  at an  estimated  fair  market  value of  $384,000.  These  costs were
originally  capitalized  in other assets and amortized over the term of the debt
as non-cash  interest  expense.  Upon  conversion,  the  unamortized  portion is
credited to  additional  paid in  capital.  At March 31,  1998,  the Company had
$401,000 in other current assets related to these items.

                                       46
<PAGE>
     The fair  market  value of the  above  warrants  was  estimated  using  the
Black-Scholes Option Pricing Model applying the following criteria:

     Expiration Date                July 17, 2000       December 31, 2002
     Expected Life                     3 years               5 years
     Exercise Price                    $6.75                  $7.20
     Total Options                     37,037                48,611
     Expected Price Volatility        151.88%                141.79%
     Risk Free Interest Rate            6.15%                  5.95%

     During fiscal 1998, the Company issued two warrants to an investment banker
for services  provided in connection with the  Restructuring to purchase a total
of 324,000 shares of the Company's common stock at $2.25 per share. The warrants
can be exercised at any time through May 2002, in respect of 273,000  shares and
November 2002, in respect of 51,000 shares.  The Company recorded the fair value
of the warrants of $503,000 as an expense in fiscal 1998.  The fair value of the
warrants of $503,000 was estimated using the Black-Scholes  option-pricing model
with the following weighted-average assumptions:

      Expected price volatility           127.38%
      Risk free interest rate               6.36%
      Expected life of options              5 years

     In March  1998,  the  Company  issued a warrant  to a leasing  company  for
services  provided in  connection  with  customer  financing to purchase  38,800
shares of the  Company's  common  stock at $4.00 per share.  The warrants can be
exercised any time through March 2003. The Company  recorded a fair value of the
warrants as an expense in the fourth  quarter  ended March 31, 1998, of $123,000
using the Black-Scholes option-pricing model with the following weighted average
assumptions:

     Expected price volatility            130.87%
     Risk free interest rate                5.95%
     Expected life of options               5 years

     During fiscal 1997,  the Company made a commitment to issue a warrant to an
investment  banker for services provided in connection with the Restructuring to
purchase  100,000 shares of the Company's  common stock at $22.63 per share (see
Note 2). The warrant can be  exercised at any time through  February  2000.  The
Company  recorded the fair value of the warrant within  discontinued  operations
(see Note 2). The fair value of the warrant of $800,000 was estimated  using the
Black-Scholes   option-pricing   model  with  the   following   weighted-average
assumptions:

     Expected stock price volatility      135.91%
     Risk free interest rate                5.89%
     Expected life of options               3 years

     Through June 19, 1998, none of the above warrants have been exercised.

     At March 31,  1998,  the  Company  had  3,195,448  shares  of common  stock
reserved and  available  for warrants  and for the  conversion  of Class A and B
Units as described in Note 11 - Related Party Transactions.

     As described in Note 6 above,  an agreement in principle  has been reached,
subject to various  conditions and  contingencies,  to settle the claims against
the Company and its subsidiaries in The Diana Securities  Litigation.  Under the
proposed  terms of the  agreement,  the Company  anticipates  that it will issue
warrants for 2,500,000  shares of the Company common stock with an expected life
of 3 years from date of issuance.  Such warrants will have an exercise  price of
$9.00 per share if  exercised  during  the first  year from date of issue and an
exercise  price of $10.00 per share or $11.00 per share if exercised  during the
second year or third year, respectively.  The Company recorded the fair value of


                                       47
<PAGE>
the  warrants  of  $8,000,000  as an expense in fiscal  1998.  The fair value of
$8,000,000 was estimated using the Black-Scholes option pricing model.

NOTE 8   INCOME TAXES

     A  reconciliation  of the income tax  credit  and the  amount  computed  by
applying the  statutory  federal  income tax rate (34%) to loss from  continuing
operations before extraordinary  items,  minority interest and income tax credit
for the last three fiscal years is as follows (in thousands):

<TABLE>
<CAPTION>
                                                            1998        1997        1996
                                                            ----        ----        ----
<S>                                                       <C>        <C>         <C>     
Credit at statutory rate                                  $(11,613)  $ (4,604)   $(1,108)
Settlements of liabilities of unconsolidated subsidiary        (10)        (5)      (156)
Tax effect of net operating loss not benefited              11,600      4,500      1,276
Refund of federal income taxes paid in a prior  year         ---         (836)      ---
Other, net                                                      23        109        (12)
                                                          --------   --------    -------
Income tax credit                                         $  ---     $   (836)   $  ---
                                                          ========   ========    =======
</TABLE>

     Deferred income taxes reflect the net tax effects of temporary  differences
between the carrying  amounts of assets and liabilities for financial  reporting
purposes and income tax purposes.  The components of the Company's  deferred tax
assets and liabilities of continuing operations are as follows (in thousands):

<TABLE>
<CAPTION>
                                                        March 31,    March 31,
                                                          1998         1997
                                                        ---------    --------
<S>                                                       <C>        <C>    
     Federal net operating loss carryforwards             $17,814    $11,950
     State net operating loss carryforwards                 1,367       1,835
     Reserve for loss on discontinued operations              745         953
     Federal capital loss carryforward                        646         659
     Excess and obsolete inventory reserve                    560         560
     Capitalized interest on CNS debentures                   225         281
     General business credit carryforwards                    145         145
     Deferred compensation                                  ---          ---
     All others                                               261         686
                                                          -------    --------
              Total deferred tax assets                    21,763      17,069
     Valuation allowance for deferred tax assets          (19,396)    (15,234)
                                                          -------    --------
     Net deferred tax assets                                2,367       1,835
     Intangible assets (net)                                1,407       1,489
     All others                                               960         346
                                                          -------    --------
              Total deferred tax liabilities                2,367       1,835
     Net deferred taxes                                   $   ---    $  ---
                                                          =======    ========
</TABLE>
     The Company has  approximately  $52,000,000  in both  federal and state net
operating  loss  carryforwards.  These  carryforwards  expire at  various  dates
through fiscal 2013. The Tax Reform Act of 1986 imposed substantial restrictions
on the utilization of net operating losses in the event of an "ownership change"
as defined in Section 382 of the Internal  Revenue Code of 1986.  Subsequent  to
March 31, 1998, due to the Company's continuing financing efforts,  there may be
ownership  changes  which would  significantly  limit the  Company's  ability to
immediately utilize its net operation loss carryforwards.

                                       48
<PAGE>
NOTE 9   NON-OPERATING INCOME (EXPENSE)

     Non-operating income (expense) consists of the following for the last three
fiscal years (in thousands):

                                           1998        1997       1996
                                           ----        ----       ----
  Write-down of CNC preferred stock      $ ---       $(1,060)    $ ---
  Provision for losses                    (2,200)      ---         ---
  Net gains (losses) on sales of 
     marketable securities                  (155)       (736)        26
  Interest income                            141         427        457
  Gain on settlements of lawsuits             77       ---         ---
  Other                                       50          32        (18)
                                         -------     -------     ------
                                         $(2,087)    $(1,337)    $  465
                                         =======     =======     ======

     In June 1996,  Concentric Network Corporation ("CNC") executed a Promissory
Note for  $5,000,000  in favor of CTL for a bridge  loan.  CNC  granted to CTL a
warrant to  purchase a split  adjusted  36,765  shares of CNC Series D Preferred
Stock ("CNC Preferred  Stock") at a split adjusted  exercise price of $20.40 per
share (equal to the par value of such shares) as  additional  consideration  for
the bridge loan to CNC. The warrant is  exercisable  immediately  and expires on
June 6,  1999.  In  August  1996,  the  Promissory  Note  and  accrued  interest
receivable  were  converted  into 3,729,110  shares of CNC Preferred  Stock.  In
September 1996, CTL sold to StreamLogic  Corporation 1,838,234 shares, or 49% of
its CNC  Preferred  Stock for $2.5  million.  No gain or loss was  recognized in
connection with this sale.

     In August 1997,  CNC completed its Initial  Public  Offering at an offering
price  of  $12.00  per  share.   The  CNC  Preferred  Stock  owned  by  CTL  was
automatically  converted into CNC common stock  immediately prior to the closing
of the IPO. The value of CTL's investment in CNC Preferred  Stock,  after giving
effect  to a  reverse  1 for 15 stock  split  and  based on a $12.00  per  share
offering price, is approximately $1,512,000. The Company deemed this value to be
the maximum fair market value of its holding on an  if-converted  basis at March
31, 1997 and in addition, concluded the value of that investment was permanently
impaired.  Consequently, the Company recorded a non-operating loss of $1,060,000
in fiscal 1997  related to the  impairment  of its  investment.  The Company was
prohibited  from  selling 75% of its CNC common  stock for six months  following
CNC's  IPO.  CTL sold 25% of its CNC common  stock in August  1997 at $12.00 per
share and received  $396,000 and sold the remaining 75% in the fourth quarter of
fiscal 1998 receiving  $1,358,000 and recorded a gain on these sales of $242,000
in fiscal 1998. (See Note 4). The Company  continues to own the warrant from CNC
which is now for CNC common stock as a result of the conversion discussed above.

     In  September  1997,  the Board of  Directors  authorized  an  amendment to
certain  Class B Units owned by directors  and  employees of the Company at June
30, 1997, to provide for the  elimination of the minimum pre-tax profits measure
requirement  and the  conversion  into Company common stock at the option of the
holder.  An accrued expense charge of  approximately  $5,522,000 was recorded in
the  second  quarter  of  fiscal  1998.  This  charge  is based on the  value at
September 4, 1997 of 866,250  shares of Company common stock at $6.375 per share
that will be issuable to the Class A and Class B Unit Holders.

     Provisions of $2,200,000 were accrued as a non-operating  expense in fiscal
1998 for losses in connection with failed acquisitions including funds advanced,
costs of professional  services, due diligence expenses and financial consulting
fees.

                                       49
<PAGE>
NOTE 10  EXTRAORDINARY ITEMS

     On October 4, 1996,  APC refinanced its revolving line of credit with a new
lender.  In connection with the refinancing,  APC incurred  expenses of $227,000
which are reflected in the fiscal 1997  Consolidated  Statement of Operations as
an extraordinary item pursuant to SFAS No. 4.

     In  February  1997,  APC sold a majority of its assets and used part of the
proceeds  to repay its  revolving  line of credit  (see  Note 2).  APC  incurred
expenses of $281,000 in connection  with the early repayment which are reflected
in the fiscal 1997 Consolidated Statement of Operations as an extraordinary item
pursuant to SFAS No. 4.

NOTE 11  RELATED PARTY TRANSACTIONS

     On  November  11,  1996 the  Company  loaned  $300,000  to each of James J.
Fiedler and Daniel W. Latham.  Mr.  Fiedler is the Company's  Chairman and Chief
Executive Officer and Mr. Latham is the Company's  President and Chief Operating
Officer. Messrs. Fiedler and Latham both executed unsecured Promissory Notes due
November 1, 1999 which  provide  interest at 6.07% per annum  compounded  on the
anniversary  date and  payable on  November 1, 1999.  In  addition,  each person
agreed to  surrender  previously  awarded  options  they  each held to  purchase
150,000 shares of the Company's common stock.

     The Promissory  Notes provide for full repayment  prior to November 1, 1999
in the event of the  following:  (a) upon any  transfer of Messrs.  Fiedler's or
Latham's Class B Units in CTL (other than to a Permitted Transferee,  as defined
in the Agreement Regarding Award of Class B Units (the "Award  Agreement")),  or
by any such Permitted Transferee (including without limitation certain transfers
contemplated  by the Award  Agreement) or (b) upon any exchange or conversion of
Class B Units for or into securities  registered  under the Securities  Exchange
Act of 1934, as amended,  in accordance with the Award Agreement.  In connection
with the employment  agreements with Messrs.  Fiedler and Latham entered into on
September 4, 1997, the Company's Board of Directors agreed to forgive the notes.
Under the  employment  agreements,  equal one  third  portions  of the notes was
forgiven at September 4, 1997 and, if their respective  employments are renewed,
at each of the next two anniversaries of the date of the employment  agreements,
provided that each individual remains as an employee of the Company at each such
forgiveness date.

     Messrs.  Fiedler and Latham used the proceeds of the loan to each  purchase
100 non-forfeitable  Class B Units of CTL from Mark Jacques, a former officer of
CTL, for an aggregate  purchase  price of  $600,000.  On November 12, 1996,  CTL
entered into a settlement  agreement  with Mr.  Jacques  whereby Mr. Jacques (i)
agreed to the assignment to the Company of the employment  agreement between him
and CTL and (ii) retained his  remaining  250 Class B Units of CTL. Mr.  Jacques
was  terminated as an employee of the Company in January  1997.  The Company has
accounted  for the loans to Messrs.  Fiedler  and Latham and their  purchase  of
Class B Units from Mr. Jacques as a settlement  with Mr. Jacques and recorded an
expense of $600,000 during the third quarter of fiscal 1997.

     The Company  entered into  Separation  Agreements,  dated November 20, 1996
(the "Separation  Agreements"),  with each of Richard Y. Fisher, Sydney B. Lilly
and Donald E. Runge (the  "Departing  Officers") that provide for termination of
employment and resignation from all offices and directorships in the Company and
its subsidiaries by the Departing Officers,  except for Mr. Lilly's directorship
of the Company. The Separation Agreements provide for payment by the Company, as
of November 29, 1996, of $186,000 and $749,000,  respectively,  to Mr. Runge and
Mr.  Fisher,  in  settlement  of  deferred  compensation  previously  earned and
payments  of $343,000  to Mr.  Fisher and  $83,000 to each of Mr.  Runge and Mr.
Lilly as  severance  settlements  resulting in total  payments to the  Departing
Officers  of  $1,444,000.  In  accordance  with  provisions  of the  Amended and
Restated  Employment  Agreements  entered  into by the  Company  and each of the
Departing Officers on April 2, 1995, each Departing Officer shall be entitled to
have all medical, dental, hospital, optometrical, nursing, nursing home and drug
expenses for  themselves  and their  spouses paid by the Company for life, or in
the case of Mr. Lilly,  until March 31, 2000. The  Separation  Agreement for Mr.
Fisher  provides  that he shall repay in full a promissory  note dated April 11,
1988, in the amount of $42,469.  The Separation  Agreements further provide that
all stock  options of the  Departing  Officers  shall remain  exercisable  until
December 31, 1997 (April 2, 2000 with respect to 82,688  options  granted to Mr.
Lilly on April 2, 1995) and amends existing Stock Option Agreements with Messrs.


                                       50
<PAGE>
Fisher,  Lilly and Runge to provide  for,  among  other  things,  the Company to
maintain the effectiveness of the Form S-8 Registration  Statement  currently in
effect  covering  the  exercise of the stock  options.  The Company has made all
required payments under the Separation Agreements.

     Certain of the Company's  non-employee  directors have provided services to
the Company and/or its  subsidiaries  for which they were  compensated.  Amounts
accrued or paid to all directors for these services during fiscal 1998, 1997 and
1996 are $50,000, $4,000 and $13,000, respectively.

     In February  1997,  APC conveyed its 50%  ownership  interest in Fieldstone
Meats of Alabama,  Inc. to a former officer and director of APC in consideration
for past  services as a director  and officer of APC for his  assistance  in the
sale of the APC business.

     Mr. Fiedler, the Company's Chairman and Chief Executive Officer, loaned the
Company $250,000 in June 1997. The principal amount of the loan was converted to
common stock in conjunction with Mr. Fiedler's  purchase of Company common stock
pursuant to the Regulation D private  placement in July 1997.  Mr.  Latham,  the
Company's  President and Chief  Operating  officer,  loaned the Company  $98,000
subsequent to March 31, 1997. This loan was repaid in July 1997. Mr. Portner,  a
Director,  purchased  Company  common stock pursuant to the Regulation D private
placement.

     On September 4, 1997,  the Board of  Directors  authorized  an amendment to
certain  Class B Units owned by directors  and  employees of CNS and CTL at June
30, 1997. (See Note 3).

     In  January  1998,  the  Board of  Directors  of the  Company  approved  an
interest-free  loan to Daniel W.  Latham for a maximum  amount of $500,000 to be
used solely for the purpose of  providing  partial  down  payment  monies on his
purchase  of a  residence  in  California.  The  funding is to be secured by the
residential property and is for a five-year term unless specifically extended by
the Board of  Directors.  Earlier  repayment of the loan will be demanded in the
event of either (1) sale or refinancing of the property;  (2) termination of Mr.
Latham's  employment either  voluntarily or for cause; or (3) sale by Mr. Latham
of all, or substantially all, of his stock in Coyote Network Systems, Inc. As of
March 31, 1998, $150,000 was funded under this agreement and a further amount of
$271,000 was funded in April 1998.


                                       51
<PAGE>
NOTE 12  BUSINESS SEGMENT INFORMATION

     In fiscal 1998,  the Company  operated  worldwide in the telecom  switching
equipment  business  segment.  This segment consists solely of the operations of
CTL. In fiscal 1998, CTL had sales to two domestic  customers that comprised 66%
of net  sales.  In fiscal  1997,  CTL had sales to one  domestic  customer  that
comprised 94% of net sales.  In fiscal 1996, CTL had sales to two customers that
comprised  68% and 32% of net  sales.  Information  by  industry  segment  is as
follows (in thousands):

<TABLE>
                                         Fiscal Year Ended
<CAPTION>
                               -------------------------------------
                               March 31,     March 31,     March 30,
                                  1998        1997           1996
                               ---------    ----------     ---------
<S>                             <C>          <C>           <C> 
Net Sales:
    Switching equipment         $  5,387     $  7,154      $    264
                                ========     ========      ========

Operating loss:
    Switching equipment          (11,267)      (8,740)       (1,883)
    Corporate                    (10,467)      (3,410)       (1,809)
                                ---------    --------      ---------
                                 (21,734)     (12,150)       (3,692)
                                =========    ========      =========
Depreciation and amortization:
    Switching equipment              787          467           111
    Corporate                     ---              11            10
                                --------     --------      --------
                                     787          478           121
                                ========     ========      ========
Capital expenditures:
    Switching equipment.           1,021        1,902           136
    Corporate                     ---              12            25
                                --------     --------      --------
                                   1,021        1,914           161
                                ========     ========      ========
Identifiable assets:
    Switching equipment           11,528       14,811         8,359
    Discontinued operations          909        8,201        15,569
    Corporate                      9,538          232         5,164
                                --------     --------      --------
                                $ 21,975     $ 23,244      $ 29,092
                                ========     ========      ========
</TABLE>

NOTE 13  STATEMENTS OF CASH FLOWS

     Supplemental  cash flow information  relating to continuing  operations for
the last three fiscal years is as follows (in thousands):
<TABLE>
<CAPTION>
                                                                1998       1997        1996
                                                                ----       ----        ----
<S>                                                          <C>         <C>         <C>      
Change in current assets and liabilities:
 Trade receivables                                           $ 3,879     $(4,540)    $   173
 Inventories                                                     815      (1,850)     (1,005)
 Other current assets                                           (735)        294         108
 Accounts payable                                               (640)      2,076         338
 Other current liabilities                                     5,170         856          15
                                                             -------     -------     -------
                                                             $ 8,489     $(3,164)    $  (371)
                                                             =======     =======     =======
Non-cash transactions:
 Expense charge on conversion of A & B units                 $ 5,522     $ ---       $  ---
 Convertible debt expense associated with conversion
   to common stock below market price                          1,875       ---          ---
 Purchase of minority interest with common stock                ---       1,818       4,944
 Conversion of promissory note and
   accrued interest into CNC preferred stock                    ---       5,072         ---
 Reduction of net liabilities of unconsolidated subsidiary      ---        ---          219
 Securities litigation warrant expense                         8,000       ---          ---

</TABLE>
                                       52
<PAGE>
NOTE 14  LIQUIDITY AND CAPITAL RESOURCES

     As discussed below, the Company  encountered a liquidity  deficiency during
the end of fiscal 1997 and in early fiscal 1998,  primarily  because (i) certain
customers  of CTL  were  past  due on  receivables,  (ii)  CTL  granted  certain
customers  extended  payments  terms,  (iii) CTL's revenue growth has been lower
than  expected and (iv) the Company made  payments of  $2,349,000  in connection
with the Restructuring.

     As a result of the liquidity deficiency,  the Company had become delinquent
on certain of its working  capital  obligations.  In July and December 1997, the
Company raised $5,597,000 and $4,635,000  respectively,  through equity and debt
financing (see Note 7). With completion of the equity and debt financing and the
collection of $4,400,000 of previously  delinquent customer  receivables and the
receipt of $2,254,000 from the exercise of Company  Employee Stock Options,  the
Company had more than  sufficient  funds to finance its operating  activities in
fiscal  1998 and ended  the  fiscal  year  with an  operating  cash  balance  of
$3,700,000.

     The Company has now divested the  majority of its  discontinued  operations
(APC,  C&L,  Valley) and is actively  seeking  buyers for the remaining land and
building which were formerly part of the APC operations in Atlanta.

     In  order  to fund  the  current  and  future  operating,  acquisition  and
investment  activities,  the Company will need to generate cash from its present
and recently acquired operations and, in addition, will require and is currently
seeking  further  outside  investment.  As of July 1, 1998,  the  Company had an
operating cash balance of approximately $5,000,000.

Fiscal 1997 - Year Ended March 31, 1997

     The  Company  encountered  a  liquidity   deficiency  in  fiscal  1997  and
subsequently,  primarily  because (i) certain  customers of CTL were past due on
receivables,  (ii) CTL has granted  certain  customers  extended  payment terms,
(iii) CTL's  revenue  growth has been lower than  expected  and (iv) the Company
made payments of $2,349,000 in connection with the Restructuring.

     As a result of the liquidity deficiency,  the Company had become delinquent
on certain of its working capital obligations.  In July 1997, the Company raised
$5,597,000  through  equity and debt.  After  completion  of the equity and debt
financings,  collection  of $4.4 million  from CNC,  pursuant to the final court
agreement  secured by CTL against this customer,  and the  anticipated  sales of
C&L, Valley and APC's real estate discussed further below,  management  believes
that it will have sufficient resources to provide adequate liquidity to meet the
Company's  planned  capital and operating  requirements  through March 31, 1998.
Thereafter,  the Company's  operations  will need to be funded either with funds
generated through operations or with additional debt or equity financing. If the
Company's  operations do not provide funds sufficient to fund its operations and
the Company seeks outside financing,  there can be no assurance that the Company
will be able to obtain such  financing  when needed,  on acceptable  terms or at
all.

     The Company is seeking buyers for C&L and Valley.  It is  anticipated  that
the proceeds of the sales of these  businesses and assets will be used to fund a
portion of the  Company's  capital and  operating  requirements  in fiscal 1998.
Restrictions  in the  revolving  lines of credit of C&L and Valley  prevent  the
Company  from  presently   accessing   funds  from  these   subsidiaries.   Such
restrictions  in C&L's  revolving  line of credit may also  initially  limit the
Company's  access  to the  total  proceeds  from a sale of  Valley  prior to any
ultimate sale of C&L given the existing ownership structure of Valley.

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND 
         FINANCIAL DISCLOSURE

     None

                                       53
<PAGE>
                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

Identification of Directors

     The  Board  of  Directors  is  divided  into  three  classes  of  directors
consisting of two classes of two members and one class of three members or seven
members  in the  aggregate.  However,  the Board  currently  includes  only five
members.  The  election of  directors  is staggered so that the term of only one
class of directors expires each year. Generally, the term of each class is three
years. Presently,  the Board of Directors has two vacant positions. The Board of
Directors consists of the following members:

                       Director With Term Expiring in 1998

     Sydney B. Lilly,  age 69, has been a director of the Company since 1988. He
was Executive Vice President of the Company from April 1995 to November 1996 and
a consultant  from 1984 to 1995.  He was a director of Entree  Corporation  from
1991 to 1996.

                      Directors With Term Expiring in 1999

     Jack E. Donnelly, age 63, has been a director of the Company since November
1991. Since 1986, he has been a principal of Bailey & Donnelly Associates, Inc.,
an investment company.

     Daniel W. Latham, age 49, has been a director of the Company since November
1996.  He has been  President and Chief  Operating  Officer of the Company since
November 1996 and President and Chief  Operating  Officer of CTL since September
1995.  Prior to his  association  with CTL,  Mr.  Latham  was the  President  of
Frontier Long Distance,  a U.S. long distance company. Mr. Latham also served as
a Senior Vice President at Racal Datacom where he was responsible for world-wide
sales. Prior to Racal, Mr. Latham held executive  positions at Digital Equipment
Corporation,  the  Bell  System  and  IBM.  He has  been a  director  of  Entree
Corporation since November 1996.

                      Directors With Terms Expiring in 2000

     James J.  Fiedler,  age 51, has been a director of the Company since August
1996.  He has been  Chairman and Chief  Executive  Officer of the Company  since
November 1996 and Chairman and Chief  Executive  Officer of CTL, since September
1995. Previously,  Mr. Fiedler was a principal in the consulting firm of Johnson
& Fiedler.  From November 1992 to September 1994, Mr. Fiedler was Vice President
of Sales and  Marketing and  subsequently  President and director of Summa Four,
Inc., a telecom switching company.  From June 1989 to July 1992, Mr. Fiedler was
Executive Vice President and Chief Operating  Officer of Timeplex,  a subsidiary
of Unisys engaged in the business of manufacturing  data and  telecommunications
equipment.  Prior to June 1989, Mr. Fiedler held executive positions with Unisys
Corporation   and   Sperry   Corporation   (subsequently   acquired   by  Unisys
Corporation). He has been a director of Entree Corporation since November 1996.

     Stephen W.  Portner,  age 46, was  appointed  a director  of the Company on
August  29,  1997.  He is  the  Managing  Director  of  North  America  for  JMJ
Associates,  a global management  consulting company,  and has served in various
capacities from January 1994 to May 1997 at JMJ  Associates.  From December 1991
to January 1994, Mr.  Portner held positions in plant and project  management as
well as Director of Quality for Air Products Incorporated.

     Directors  receive  an annual  fee of  $15,000,  paid on a  monthly  basis.
Directors  are also  reimbursed  for travel  expenses.  In  addition,  Directors
receive  $1,250 per meeting for service on the Audit  Committee  of the Board of
Directors.



                                       54
<PAGE>
     In February  1998,  stock options to purchase 5,000 shares of the Company's
common  stock were  granted to Mr.  Portner,  an outside  member of the Board of
Directors,  who joined the Board in fiscal 1998.  These options have an exercise
price of $4.625 per share.

     In  February  1998,  the  Board  of  Directors  approved  and  adopted  the
Non-Employee  Director Stock Option Plan and reserved  150,000 shares for grants
of the common stock of the Company under the plan.

     In February 1998,  stock options to purchase 10,000 shares of the Company's
common  stock were granted to each of the  non-employee  members of the board of
directors. These options have an exercise price of $4.625 per share.

Identification of Executive Officers

     The following individuals are the Executive Officers of the Company:

   Name                  Age                    Position
   James J. Fiedler       51     Chief Executive Officer
   Daniel W. Latham       49     President and Chief Operating Officer
   Edward A. Beeman       48     Executive Vice President, 
                                   Chief Financial Officer and Secretary
   Brian A. Robson        61     Vice President and Controller

     The  following  information  is furnished  with  respect to each  executive
officer who is not also a Director of the Company:

     Mr. Beeman was Chief  Financial  Officer of Western Water Company from 1996
to 1997  and  Vice  President  and  Chief  Financial  Officer  of  Bird  Medical
Technologies, Inc. from 1994 to 1996.

     Mr.  Robson was Vice  President of Finance and Chief  Financial  Officer of
Ascom Timeplex from 1989-1996.

                                       55
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION

     The  following  table  sets  forth the total  annual  compensation  paid or
accrued by the Company for the account of the executive  officers of the Company
serving as such at March 31, 1998 and for one former executive officer:

<TABLE>
                           SUMMARY COMPENSATION TABLE

                                            Annual Compensation                                  Long-Term Compensation
                             -------------------------------------------------  ----------------------------------------------
<CAPTION>
                                                              Other Annual      Restricted     Securities  
            Name and                                          Compensation        Stock        Underlying        All Other
       Principal Position    Year    Salary ($)   Bonus ($)      ($) (7)          Awards       Options (#)    Compensation ($)
                             ----    ----------   ---------   ------------      ----------     -----------    ----------------
<S>                          <C>      <C>           <C>           <C>           <C>            <C>               <C>
James J. Fiedler (1)         1998     200,000       19,746        15,000             0               0             7,200 (12)
Chairman, CEO and            1997     200,000            0         3,750             0               0                 0
  Director                   1996     111,538 (4)        0             0           2.5% (8)    150,000 (10)       19,612 (11)

Daniel W. Latham (2)         1998     175,000       19,746        15,000             0               0             7,200 (12)
  President, COO and         1997     175,000            0         3,750             0               0           170,197 (11)
    Director                 1996      90,865 (5)        0             0           1.5% (9)    150,000 (10)       26,416 (11)

Brian A. Robson              1998     139,907            0             0             0           2,000            21,921 (11)
  Vice President and         1997      56,250 (6)        0             0             0          10,500            13,041 (11)
   Controller

R. Scott Miswald (3)         1998     148,733            0             0             0               0                 0
  Vice President and         1997     125,000            0             0        52,500               0                 0
    Treasurer                1996     110,000       11,614             0             0          10,000                 0
</TABLE>

                                       56
<PAGE>
(1)  On November  29, 1996 Mr.  Fiedler was  appointed  Chairman  and CEO of the
     Company.  Mr.  Fiedler  also  remained  as  Chairman  and  CEO of CTL  (see
     Employment and Severance Agreements).
(2)  On November  29, 1996 Mr.  Latham was  appointed  President  and COO of the
     Company.  Mr.  Latham  also  remained  as  President  and  COO of CTL  (see
     Employment and Severance Agreements).
(3)  Mr. Miswald resigned from the Company as an executive  officer and director
     on September 30, 1997.
(4)  Represents part-year compensation from start of employment as CEO of CTL on
     September  11, 1995 to end of fiscal year,  based on  annualized  salary of
     $200,000.
(5)  Represents part-year compensation from start of employment as President and
     COO of CTL on September 25, 1995 to end of fiscal year, based on annualized
     salary of $175,000.
(6)  Started   employment  on  October  31,  1996.  Current  annualized  salary:
     $147,150.
(7)  Director's fees paid to officers.
(8)  Mr.  Fiedler  was granted  250 Class B Units in CTL  (equivalent  to a 2.5%
     ownership  interest).  
(9)  Mr.  Latham  was  granted  150 Class B Units in CTL  (equivalent  to a 1.5%
     ownership interest. 
(10) Performance-based  options  for the  indicated  number of shares of Company
     common stock surrendered on November 11, 1996 in connection with loans (see
     Certain Relationships and Related Transactions). 
(11) Represents  relocation  assistance  paid by the  Company  on  behalf of the
     various individuals.  Also includes $98,000 paid to Mr. Latham to cover his
     loss on a personal  residence and the related real estate  commissions  and
     selling expenses. 
(12) Represents automobile allowance.

     The table below provides information regarding stock options granted during
fiscal 1998 to the persons named in the Summary Compensation Tables:

                        OPTION GRANTS IN LAST FISCAL YEAR

                                             INDIVIDUAL GRANTS
                          ------------------------------------------------------
                          Number of      % of Total 
                           Shares        Options
                          Underlying     Granted to
                           Options       Employee in    Exercise     Expiration
                          Granted (1)    Fiscal Year      Price         Date
                          -----------    -----------    -----------  ----------
    James J. Fiedler            0            ---         $  ---       $   ---
    Daniel W. Latham            0            ---            ---           ---
    Brian A. Robson         2,000 (2)        0.7%          3.005       8/20/02
    R. Scott Miswald            0            ---            ---           ---

                            Potential Realizable Value at Assumed Annual Rate
                             of Stock Price Appreciation For Option Term (3)
                          -----------------------------------------------------
                                      5%                    10%
                                  ---------               ------
    James J. Fiedler              $ ---                   $ ---
    Daniel W. Latham                ---                     ---
    Brian A. Robson                1,660                   3,669
    R. Scott Miswald                ---                     ---

(1)  The options granted under the CTL 1996 Stock Option Plan are  non-qualified
     stock  options.  The  exercise  price per share is 100% of the fair  market
     value of a share of common  stock on the date of the  grant.  In June 1997,
     current employees owning stock options,  including Mr. Robson, were granted
     the right to exchange  existing  stock options for new options that have an
     exercise  price of $3.00 per share.  The new options  vest  equally  over a
     three year period commencing June 1, 1997.
(2)  The options vest as follows:  June 1, 1998 - 666;  June 1, 1999 - 666; June
     1, 2000 - 667.
(3)  The option term is five years.  The dollar  amounts under these columns are
     the results of  calculations  at the 5% and 10% rates set by the Securities
     and Exchange  Commission.  The potential realizable values are not intended
     to forecast  possible future  appreciation,  if any, in the market price of
     the common stock.

                                       57
<PAGE>
     The table below provides  information  regarding the value of  in-the-money
stock  options  held by named  executive  officers  at  March  31,  1997.  Named
executive officers did not exercise any stock options during the fiscal year.

                        UNEXERCISED COMPANY STOCK OPTIONS

                              Number of               Value of Unexercised
                         Unexercised Options          In-the-Money Options
                           at March 31, 1998           at March 31, 1998 (1)
                      --------------------------   -----------------------------
       Name           Exercisable  Unexercisable   Exercisable   Unexercisable
       ----           -----------  -------------   -----------   -------------
James J. Fiedler            0             0        $      0       $      0
Daniel W. Latham            0             0               0              0
Brian A. Robson             0        12,500               0         38,875
R. Scott Miswald       10,000             0           8,343              0

(1)  Value based on the closing  price of $6.11 of the common  stock on the NASD
     OTC Bulletin Board on March 31, 1998, less the option exercise price.

Employment and Severance Agreements

     The Company has employment agreements with certain executive officers.

     Messrs.  Fiedler and Latham were  employed by CTL until  December  31, 1996
pursuant  to  contracts  that  provided  for salary of  $200,000  and  $175,000,
respectively,  per year with a year-end bonus equal to 10% and 5%, respectively,
of CTL's pre-tax  earnings for the calendar year, up to the salary for the year,
and such fringe  benefits as CTL's  executive  committee  should make available.
From January 1, 1997 to September 3, 1997, Messrs.  Fiedler and Latham continued
their employment at the same salary without a contract.

     On  September  4,  1997,  Messrs.  Fiedler  and  Latham  entered  into  new
employment  agreements  with  the  Company  covering  the 1998  fiscal  year and
providing for salaries of $200,000 and $175,000,  respectively,  per year.  Such
employment  agreements  provide for customary fringe  benefits,  including a car
allowance  for each  Executive  of $600 per  month.  The  Executives  may become
entitled to bonuses based on the Company's pre-tax profits for each half year in
the fiscal  year  covered  by the  employment  agreements,  equal to 10% of such
pre-tax profits in the case of Mr. Fiedler and 5% in the case of Mr. Latham, but
not to exceed 100% of the  Executive's  annual salary in the case of Mr. Fiedler
and 75% in the case of Mr. Latham. Additionally,  the Executives are entitled to
an incentive  bonus equal to one-half  percent of the sales  revenues of CTL for
each month during the term of the agreement, subject to certain limitations, and
in any event not to exceed 100% of the Executive's  annual salary.  As disclosed
elsewhere  herein,  each of the  Executives  has a $300,000  note payable to the
Company. Under the employment agreements, equal one third portions of such notes
will be  forgiven  at the  date  of the  employment  agreement,  and,  if  their
respective employments are renewed, at each of the next two anniversaries of the
date of the employment  agreements,  provided that such Executive  remains as an
employee  of the  Company  at  each  such  forgiveness  date.  These  employment
agreements also contemplate that the Class A and Class B units of CTL, including
the units held by the  Executives,  will become  convertible  into the Company's
common stock,  at the rate of 500 shares of the Company's  common stock for each
such unit,  immediately and without the requirements that CTL achieve cumulative
pre-tax  profits of at least $15 million  over four  consecutive  quarters.  The
Company has also granted certain  registration rights with respect to the shares
of  common  stock  issuable  upon  such  conversion.  Copies  of the  employment
agreements  are filed as exhibits to this Annual  Report on Form 10-K,  and this
description  is qualified by  reference to such  exhibits.  Since April 1, 1998,
Messrs.  Fiedler and Latham have continued  their  employment at the same salary
level without a contract.


                                       58
<PAGE>
Compensation Committee Interlocks and Insider Participation

     As noted  above,  the  Board  of  Directors  does  not have a  compensation
committee,  because executive compensation decisions are made by the full Board.
Recommendations  on  executive  compensation  in respect of Messrs.  Fiedler and
Latham are prepared by the outside non-employee  directors when requested by the
full board. All directors participate in the deliberations.

     Mr.  Fiedler is the Company's  Chairman and Chief  Executive  Officer.  Mr.
Latham is the Company's President and Chief Operating Officer. Messrs. Fiedler's
and Latham's fiscal 1997  compensation and employment  contracts were previously
described above.

     In December 1991, Mr. Donnelly entered into a consulting agreement with the
Company to serve as chairman and consultant to C&L Communications, Inc. ("C&L"),
one of  the  Company's  subsidiaries.  The  agreement,  which  was  subsequently
amended,  terminated  on March 31,  1998.  In  addition,  Mr.  Donnelly was paid
$50,000 per year in accordance with the agreement.


                                       59
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following table sets forth certain information as of June 10, 1998 with
respect to the common stock  ownership  of each  director,  the Chief  Executive
Officer,  the other  executive  officers of the Company  and  identified  in the
Summary  Compensation Table (collectively with the Chief Executive Officer,  the
"named executive officers"), all directors and executive officers as a group and
each person or group of persons  known by the Company to own  beneficially  more
than 5% of the common stock of the Company.

<TABLE>
                Amount and Nature of Beneficial Ownership (1)(2)
      ---------------------------------------------------------- -------------------------- ---------------------
<CAPTION>
                                                                    Shares Issuable Upon
                                                                        Exercise of
                                                                 -------------------------- 
                                                                                            Shares Issuable Upon
                                        Number of     Percent       Stock        Warrants   Conversion of Class A
      Name of Beneficial Owner           Shares       of Class     Options(3)      (3)          or B Units (4)
      ------------------------------ --------------- ----------- -------------  ----------- ---------------------
<S>                                    <C>              <C>       <C>           <C>                   <C>
      Jack E. Donnelly                    30,234         *         22,155              0                    0

      ------------------------------ --------------- ----------- -------------  ----------- ---------------------
      James J. Fiedler                   535,000         5.4            0        175,000              175,000

      ------------------------------ --------------- ----------- -------------  ----------- ---------------------
      Daniel W. Latham                   125,000         1.3            0              0              125,000

      ------------------------------ --------------- ----------- -------------  ----------- ---------------------
      Sydney B. Lilly                    203,995 (5)     2.1      135,231              0               50,000

      ------------------------------ --------------- ----------- -------------  ----------- ---------------------
      R. Scott Miswald                    10,500         *         10,500              0                    0

      ------------------------------ --------------- ----------- -------------  ----------- ---------------------
      Brian A. Robson                      4,166         *          4,166              0                    0
      
      ------------------------------ --------------- ----------- -------------  ----------- ---------------------
      Stephen W. Portner                  37,500         *         15,000         11,250                    0
     
      ------------------------------ --------------- ----------- -------------  ----------- ---------------------
      All Directors and
      Executives as a Group              946,395         9.2      157,386        186,250              350,000
      (6 individuals)
      ------------------------------ --------------- ----------- -------------  ----------- ---------------------
      Richard L. Haydon
      1114 Avenue of the Americas      1,263,000 (6)    12.4            0        625,000                    0
      New York, NY  10036
      ------------------------------ --------------- ----------- -------------  ----------- ---------------------
      Ardent Research Partners           540,000 (7)     5.5            0        225,000                    0
      200 Park Avenue, 39th Floor
      New York, NY 10166
      ------------------------------ --------------- ----------- -------------  ----------- ---------------------

      * The  amount  shown is less than 1% of the  outstanding  shares of common
stock.

<FN>
(1)  Except as  otherwise  noted,  all persons  have sole voting and  investment
     power over the shares listed.
(2)  Includes shares of common stock issuable upon the exercise of stock options
     and warrants  exercisable  within 60 days of the May 31,  1998;  and shares
     issuable  upon the  conversion  of  Coyote  Technologies,  LLC Class A or B
     Units.
(3)  Only includes stock options or warrants  exercisable  within 60 days of May
     31, 1998.
(4)  Mr.  Fiedler  and  Mr.  Latham  own 350 and  250  Class B Units  of  Coyote
     Technologies, LLC ("Technologies"), respectively. Mr. Lily owns 100 Class A
     Units of  Technologies.  Mr.  Fiedler's and Mr.  Latham's Class B Units are
     convertible into 175,000 and 125,000 shares,  respectively,  of the Company
     common stock.  Mr. Lilly's Class A Units are convertible into 50,000 shares
     of the Company common stock.


                                       60
<PAGE>
(5)  Mr.  Lily also owns  30,000  shares  (less than 1%) of the common  stock of
     Entree Corporation  ("Entree"),  an 81.25%-owned subsidiary of the Company.
     All  directors and executive  officers as a group  beneficially  own 30,000
     shares (less than 1%) of Entree common stock.
(6)  Based on his Schedule 13D filed July 28, 1997,  Mr.  Haydon has sole voting
     and dispositive power over 1,263,000 shares.
(7)  Based upon Schedule 13D filed August 19, 1997, and information  supplied by
     this investor,  Ardent  Research  Partners has sole voting and  dispositive
     power over 540,000 shares.
</FN>
</TABLE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Mr. Lieberman,  a former director of the Company,  was paid an aggregate of
$4,000 during fiscal 1997 for consulting services.

     Mr. Fiedler, the Company's Chairman and Chief Executive Officer, loaned the
Company $250,000 in June 1997. The principal amount of the loan was converted to
common stock in conjunction with Mr. Fiedler's  purchase of Company common stock
pursuant to the Regulation D private  placement in July 1997.  Mr.  Latham,  the
Company's  President and Chief  Operating  officer,  loaned the Company  $98,000
subsequent to March 31, 1997. This loan was repaid in July 1997. Mr. Portner,  a
Director,  purchased  Company  common stock pursuant to the Regulation D private
placement.

     On November 11, 1996 the Company loaned $300,000 to each of Messrs. Fiedler
and Latham.  Messrs. Fiedler and Latham both executed unsecured Promissory Notes
due November 1, 1999 which provide interest at 6.07% per annum compounded on the
anniversary  date and  payable on  November 1, 1999.  In  addition,  each person
agreed to  surrender  previously  awarded  options  they  each held to  purchase
150,000 shares of the Company's common stock. The largest amount  outstanding to
the Company  under each  promissory  note during the fiscal year ended March 31,
1997 was $300,000.

     The Promissory  Notes provide for full repayment  prior to November 1, 1999
in the event of the  following:  (a) upon any  transfer of Messrs.  Fiedler's or
Latham's Class B Units in CTL (other than to a Permitted Transferee,  as defined
in the Agreement Regarding Award of Class B Units [the "Award  Agreement"]),  or
by any such Permitted Transferee (including without limitation certain transfers
contemplated  by the Award  Agreement) or (b) upon any exchange or conversion of
Class B Units for or into securities  registered  under the Securities  Exchange
Act of 1934, as amended,  in accordance with the Award Agreement.  In connection
with the employment  agreements with Messrs.  Fiedler and Latham entered into on
September 4, 1997, the Company's Board of Directors agreed to forgive the notes.
Under the  employment  agreements,  equal one  third  portions  of the notes was
forgiven at September 4, 1997 and, if their respective  employments are renewed,
at each of the next two anniversaries of the date of the employment  agreements,
provided that each individual remains as an employee of the Company at each such
forgiveness date.

                                       61
<PAGE>
                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
                                                                      Form 10-K
(a)  Financial Statements and Financial Statement Schedules          Page Number

     (1)  The following  consolidated  financial  statements  of 
          Coyote  Network Systems,  Inc.(formerly The Diana 
          Corporation)and its subsidiaries are included in Item 8:

          Report of Arthur Andersen LLP, Independent Public Accountants      27

          Report of Price Waterhouse LLP, Independent Accountants            28

          Consolidated Balance Sheets - March 31, 1998                       29 
          and March 31, 1997

          Consolidated Statements of Operations - Fiscal                     30
          Years Ended March 31, 1998, March 31, 1997 and
          March 30, 1996

          Consolidated Statements of Changes in Shareholders'                31
          Equity - Fiscal Years Ended March 31, 1998,
          March 31, 1997 and March 30, 1996

          Consolidated Statements of Cash Flows -                            32
          Fiscal Years Ended March 31, 1998,
          March 31, 1997 and March 30, 1996

          Notes to Consolidated Financial Statements                         33

     (2)  The  following  consolidated  financial  statement 
          schedule  of Coyote Network Systems, Inc is included 
          in Item 14(d):

          Schedule I - Condensed Financial Information of Registrant         68

          All other  schedules are omitted  because the required  information is
          not  present  or is not  present  in  amounts  sufficient  to  require
          submission  of the  schedules or because the  information  required is
          included  in  the  consolidated  financial  statements  or  the  notes
          thereto.

(b) Reports on Form 8-K:

          A Form 8-K was filed by the Company on January 5, 1998 which covered:

          Item 7,  "Financial  Statements  and  Exhibits"  and Item 9 "Sales  of
          Equity  Securities  Pursuant to Regulations  S". On December 22, 1998,
          the Company sold  $5,000,000 in 8% Convertible  Notes due December 22,
          2000.

                                       62
<PAGE>
(c)  Exhibits

Exhibit
Number    Description

3.1    Restated  Certificate  of  Incorporation,  as amended  September  1, 1992
       (incorporated  herein by  reference to Exhibit 3.1 of  Registrant's  Form
       10-K for the year ended April 3, 1993).

3.2    By-Laws of Registrant, as amended March 7, 1997.

4.1    Loan and Security  Agreement between C&L  Communications,  Inc. and Sanwa
       Business Credit dated January 2, 1996  (incorporated  herein by reference
       to Exhibit 10.1 of Registrant's  Registration  Statement on Form S-3 Reg.
       No. 333-1055).

4.2    First  Amendment  to Loan and  Security  Agreement  and Waiver  Agreement
       between C&L  Communications,  Inc. and Sanwa Business Credit  Corporation
       dated June 27, 1996  (incorporated  herein by reference to Exhibit 4.2 of
       Registrant's Form 10-K/A for the year ended March 30, 1996).

4.3    Loan and Security  Agreement by and between Valley  Communications,  Inc.
       and Sanwa Business Credit  Corporation dated March 14, 1996 (incorporated
       herein by  reference  to Exhibit  4.1 of  Registrant's  Form 10-Q for the
       period ended July 20, 1996).

4.4    Certain  other  long-term  debt  as  described  in  Note  5 of  Notes  to
       Consolidated  Financial  Statements  which  do  not  exceed  10%  of  the
       Registrant's total assets on a consolidated  basis. The Registrant agrees
       to furnish to the  Commission,  upon request,  copies of any  instruments
       defining the rights of holders of any such long-term debt.

4.5    Second  Amendment to Loan and  Security  Agreement  and Waiver  Agreement
       between C&L  Communications,  Inc. and Sanwa Business Credit  Corporation
       dated July 10, 1997.

4.6    First  Amendment  to Loan and Security  Agreement  by and between  Valley
       Communications,  Inc. and Sanwa Business Credit Corporation dated May 29,
       1997.

4.7    Form of  Subscription  Agreement  (incorporated  herein by  reference  to
       Exhibit 4.1 of Registrant's Form 8-K filed on July 31, 1997).

4.8    Form  of  Note  (incorporated  herein  by  reference  to  Exhibit  4.2 of
       Registrant's Form 8-K filed on July 31, 1997).

4.9    Form of Registration Rights Agreement  (incorporated  herein by reference
       to Exhibit 4.3 of Registrant's Form 8-K filed on July 31, 1997).

4.10   Form of Offshore Warrant Subscription  Agreement  (incorporated herein by
       reference  to  Exhibit  4.4 of  Registrant's  Form 8-K  filed on July 31,
       1997).

4.11   Waiver of Events of Default for Sanwa Business Credit  Corporation to C&L
       Communications, Inc. dated September 1, 1997.

                                       63
<PAGE>
Exhibit
Number  Description

4.12   Second  Amendment  to Loan and Security  Agreement by and between  Valley
       Communications,   Inc.  and  Sanwa  Business  Credit   Corporation  dated
       September 16, 1997.

4.13   Stock and Warrant  Purchase  Agreement  dated June 6, 1997 by and between
       Coyote Network Systems, Inc. and James J. Fiedler.

4.14   Warrant issued to James J. Fiedler dated June 6, 1997 to purchase  shares
       of common stock of Coyote Network Systems, Inc..

4.15   Registration  Rights  Agreement dated June 6, 1997 by and among The Diana
       Corporation and James J. Fiedler.

10.1   Consulting Agreement dated December 23, 1991 and ending December 23, 1996
       between C&L Acquisition  Corporation  and Jack E. Donnelly  (incorporated
       herein by reference to Exhibit  10.11 of  Registrant's  Form 10-K for the
       year ended April 3, 1993).

10.2   Amendment to Consulting Agreement between C&L Acquisition Corporation and
       Jack E. Donnelly dated March 7, 1995 (incorporated herein by reference to
       Exhibit 10.7 of Registrant's Form 10-K for the year ended April 1, 1995).

10.3   1986 Nonqualified Stock Option Plan of as amended (incorporated herein by
       reference to Exhibit 10.13 of  Registrant's  Form 10-K for the year ended
       April 3, 1993).

10.4   1993 Nonqualified Stock Option Plan of Entree  Corporation  (incorporated
       herein by reference to Exhibit  10.12 of  Registrant's  Form 10-K for the
       year ended April 2, 1994).

10.5   Purchase  Agreement  dated August 14, 1995 by and between C&L Acquisition
       Corporation  and Henry Mutz,  Chris O'Connor and Ken Hurst  (incorporated
       herein by  reference  to Exhibit  2.1 of  Registrant's  Form 8-K/A  filed
       February 1, 1996).

10.6   First  Amendment  to Purchase  Agreement  dated  November 20, 1995 by and
       between C&L Acquisition  Corporation  and Henry Mutz,  Chris O'Connor and
       Ken  Hurst   (incorporated   herein  by   reference  to  Exhibit  2.2  of
       Registrant's Form 8-K/A filed February 1, 1996).

10.7   Exchange  Agreement  dated  January  16,  1996  by and  among  The  Diana
       Corporation and CTL Technologies,  Inc. (incorporated herein by reference
       to Exhibit 10.2 of Registrant's  Registration  Statement on Form S-3 Reg.
       No. 333-1055).

10.8   1996 Sattel  Communications LLC Employees  Nonqualified Stock Option Plan
       (incorporated  herein by reference to Exhibit 10.13 of Registrant's  Form
       10-K for the year ended March 30, 1996).

10.9   Memorandum of Understanding between Coyote Network Systems,  Inc., Sattel
       Communications  Corp.  and Sattel  Technologies,  Inc.  dated May 3, 1996
       (incorporated  herein by reference to Exhibit 10.15 of Registrant's  Form
       10-K for the year ended March 30, 1996).

                                       64
<PAGE>
Exhibit
Number     Description

10.10  Second  Supplemental  Agreement  Relating to Joint  Venture and  Exchange
       Agreement  Reformation  between  Coyote  Network  Systems,  Inc.,  Sattel
       Technologies,  Inc.  and D.O.N.  Communications  Corp.  dated May 3, 1996
       (incorporated  herein by reference to Exhibit 10.16 of Registrant's  Form
       10-K for the year ended March 30, 1996).

10.11  Third Supplemental  Agreement Relating to Joint Venture between The Diana
       Corporation  and  Sattel  Technologies,   Inc.  dated  October  14,  1996
       (incorporated  herein  by  reference  to  Exhibit  10.3  of  Registrant's
       Amendment  No. 2 to Form S-3 filed  October 21,  1996).  

10.12  Operating Agreement of Sattel Communications, LLC (incorporated herein by
       reference to Exhibit 10.17 of Registrant's Form 10-K/A for the year ended
       March 30, 1996). 

10.13  Amendment  to  the  Operating  Agreement  of  Sattel  Communications  LLC
       (incorporated  herein by reference to Exhibit 10.18 of Registrant's  Form
       10-K/A for the year ended March 30, 1996).

10.14  Second Amendment to the Operating Agreement of Sattel  Communications LLC
       (incorporated  herein by reference to Exhibit 10.19 of Registrant's  Form
       10-K/A for the year ended March 30, 1996).

10.15  Asset  Purchase  Agreement  dated  January 31, 1997 by and among  Atlanta
       Provision  Company,  Inc. and Colorado  Boxed Beef Company  (incorporated
       herein by reference to Exhibit 10.1 of Registrant's  Form 8-K filed March
       3, 1997).

10.16  Agreement  Regarding  Class A Units dated  October 2, 1996 by and between
       Sydney B. Lilly and Sattel  Communications  LLC  (incorporated  herein by
       reference to Exhibit 10.2 of Registrant's Form 8-K filed March 3, 1997).

10.17  Amended and  Restated  Agreement  Regarding  Award of Class B Units dated
       November 11, 1996 by and between James J. Fiedler and CTL  Communications
       LLC  (incorporated  herein by reference  to Exhibit 10.3 of  Registrant's
       Form 8-K filed  March 3, 1997).  

10.18  Amended and  Restated  Agreement  Regarding  Award of Class B Units dated
       November   11,  1996  by  and   between   Daniel  W.  Latham  and  Sattel
       Communications  LLC (incorporated  herein by reference to Exhibit 10.4 of
       Registrant's Form 8-K filed March 3, 1997).

10.19  Amendment  to Stock  Option  Agreements  dated  November  20, 1996 by and
       between Coyote Network Systems,  Inc. and Richard Y. Fisher (incorporated
       herein by reference to Exhibit 10.5 of Registrant's  Form 8-K filed March
       3, 1997).

10.20  Separation  Agreement  dated  November  20, 1996 by and between The Diana
       Corporation  and Richard Y. Fisher  (incorporated  herein by reference to
       Exhibit 10.6 of Registrant's Form 8-K filed March 3, 1997).

10.21  Amendment  to Stock  Option  Agreements  dated  November  20, 1996 by and
       between Coyote Network  Systems,  Inc. and Sydney B. Lilly  (incorporated
       herein by reference to Exhibit 10.7 of Registrant's  Form 8-K filed March
       3, 1997).

                                       65
<PAGE>
Exhibit
Number      Description

10.22  Separation  Agreement  dated  November  20, 1996 by and between The Diana
       Corporation  and Sydney B. Lilly  (incorporated  herein by  reference  to
       Exhibit 10.8 of Registrant's Form 8-K filed March 3, 1997).

10.23  Amendment  to Stock  Option  Agreements  dated  November  20, 1996 by and
       between Coyote Network  Systems,  Inc. and Donald E. Runge  (incorporated
       herein by reference to Exhibit 10.9 of Registrant's  Form 8-K filed March
       3, 1997).

10.24  Separation  Agreement  dated  November  20, 1996 by and between The Diana
       Corporation  and Donald E. Runge  (incorporated  herein by  reference  to
       Exhibit 10.10 of Registrant's Form 8-K filed March 3, 1997).

10.25  Employment  Agreement  dated  November  27, 1996 by and between The Diana
       Corporation  and R. Scott  Miswald  (incorporated  herein by reference to
       Exhibit 10.11 of Registrant's Form 8-K filed March 3, 1997).

10.26  Form of Indemnification Agreement dated November 26, 1996 or November 27,
       1996 between Coyote  Network  Systems,  Inc. and (i) Bruce C.  Borchardt,
       (ii) Jack E. Donnelly,  (iii) James J. Fiedler, (iv) Jay M. Lieberman and
       (v) R. Scott Miswald  (incorporated  herein by reference to Exhibit 10.12
       of Registrant's Form 8-K filed March 3, 1997).

10.27  Loan Agreement and Promissory Note dated November 11, 1996 by and between
       Coyote Network Systems, Inc. and James J. Fiedler (incorporated herein by
       reference to Exhibit 10.13 of Registrant's Form 8-K filed March 3, 1997).

10.28  Loan Agreement and Promissory Note dated November 11, 1996 by and between
       Coyote Network Systems, Inc. and Daniel W. Latham (incorporated herein by
       reference to Exhibit 10.14 of Registrant's Form 8-K filed March 3, 1997).

10.29  Employment  Agreement  dated  September  4,  1997 by and  between  Coyote
       Network  Systems,  Inc.  and  James J.  Fiedler.(incorporated  herein  by
       reference to Exhibit 10.29 to Registrant's  Form 10-K filed September 23,
       1997).

10.30  Employment  Agreement  dated  September  4,  1997 by and  between  Coyote
       Network  Systems,  Inc.  and  Daniel  W.  Latham.(incorporated  herein by
       reference to Exhibit 10.29 to Registrant's  Form 10-K filed September 23,
       1997).

10.31  Agreement dated November 17, 1995 between Valley Communications, Inc. and
       Communications  Workers of America  Local  9412  (incorporated  herein by
       reference to Exhibit 10.1 of Registrant's  Form 10-Q for the period ended
       July 20, 1996).

10.32  Limited Liability Company Agreement of SatLogic LLC dated as of September
       12,  1996   (incorporated   herein  by   reference  to  Exhibit  10.3  of
       Registrant's Form 10-Q/A for the period ended July 20, 1996).

10.33  Stockholder  Protection  Rights  Agreement dated as of September 10, 1996
       between  Coyote  Network  Systems,   Inc.  and  ChaseMellon   Shareholder
       Services,  L.L.C.  as Rights Agent  (incorporated  herein by reference to
       Exhibit 1 of Registrant's Form 8-A filed September 11, 1996).

10.34  1998 Non-Employee Director Stock Option Plan dated February 19, 1998.


                                       66
<PAGE>
Exhibit
Number   Description

10.35  Merger  Agreement  dated  November 19, 1997, by and among Coyote  Network
       Systems, Inc.; Soncainol, Inc.; and Michael N. Sonaco, James G. Olson and
       William H. Cain  (incorporated  herein by  reference  to Exhibit  10.1 of
       Registrant's Form 8-K filed December 5, 1997).

10.36  Stock Purchase  Agreement dated March 31, 1998, between C&L Acquisitions,
       Inc.  and  Technology  Services   Corporation   (incorporated  herein  by
       reference to Exhibit 99.1 of Registrant's Form 8-K filed June 19, 1998).

21     Subsidiaries of Registrant

23     Consent of Independent Accountants

27     Financial Data Schedule

                                       67
<PAGE>
                  COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES
           Schedule I - Condensed Financial Information of Registrant
                             Condensed Balance Sheet
                                 (In Thousands)

<TABLE>
<CAPTION>
                                                                      March 31,
                                                                        1997
                                                                     ---------- 
                               Assets
<S>                                                                  <C>
Current assets:
     Cash and cash equivalents.                                      $     28
     Marketable securities                                             ---
     Other current assets                                                 106
                                                                     --------

                  Total current assets                                    134

Land and equipment (net)                                                   83
Investments in and advances to unconsolidated subsidiaries             19,904

                                                                     $ 20,121

                    Liabilities and Shareholders' Equity
Current liabilities:
     Accounts payable                                                $    283
     Accrued liabilities                                                  513
     Current portion of long-term debt                                    141
                                                                      -------

                  Total current liabilities                               937

Long-term debt                                                          1,817
Other liabilities                                                         533

Shareholders' equity:
     Common stock.                                                      6,007
     Additional paid-in capital.                                       80,124
     Accumulated deficit                                              (63,540)
     Treasury stock                                                    (5,757)
                                                                      -------

                  Total shareholders' equity                           16,834
                                                                      -------
                                                                     $ 20,121
                                                                     ======== 
</TABLE>

                See notes to condensed financial information and
                  notes to consolidated financial statements.

                                       68
<PAGE>
                  COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES
     Schedule I - Condensed Financial Information of Registrant (Continued)
                            Statements of Operations
                    (In Thousands, Except Per Share Amounts)


<TABLE>
                                                          Fiscal Year Ended
                                                       -------------------------
<CAPTION>
                                                       March 31,      March 30,
                                                         1997           1996
                                                       ----------    ----------
<S>                                                    <C>           <C>      
Administrative expenses                                $  (3,410)    $ (1,809)

Interest expense                                             (52)        (106)

Non-operating income (expense)                              (326)         474

Income tax credit                                            836        ---

Equity in loss of unconsolidated subsidiaries             (9,383)      (1,305)
                                                       ----------    ---------

Loss from continuing operations                          (12,335)      (2,746)

Earnings (loss) from discontinued operations              (8,175)        (619)
                                                       ----------    ---------

Loss before extraordinary items                          (20,510)      (3,365)

Extraordinary items                                         (508)       ---
                                                       ----------    ---------

Net loss                                               $ (21,018)    $ (3,365)
                                                       ==========    =========

Loss per common share (basic & diluted):
     Continuing operations                             $   (2.34)    $  (.62)
     Discontinued operations                               (1.55)       (.14)
     Extraordinary items                                    (.10)       ---
                                                       ----------    --------

     Net loss per common share                         $   (3.99)    $  (.76)
                                                       ==========    ========

Weighted average number of common shares outstanding       5,271        4,401
                                                       =========     ========
</TABLE>
                See notes to condensed financial information and
                  notes to consolidated financial statements.

                                       69
<PAGE>
                  COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES
     Schedule I - Condensed Financial Information of Registrant (Continued)
                            Statements of Cash Flows
                                 (In Thousands)


<TABLE>
                                                                         Fiscal Year Ended
                                                                     ------------------------
<CAPTION>
                                                                     March 31,      March 30,
                                                                       1997           1996
                                                                     ---------      ---------
<S>                                                                  <C>            <C>
Operating activities:
     Loss before extraordinary items                                 $(20,510)      $(3,365)
     Adjustments to reconcile loss to
       net cash used by operating activities:
     Equity in (earnings) loss of unconsolidated subsidiaries          17,558         1,924
     Other                                                               (595)         (427)
     Changes in current assets and liabilities                          1,231           115
                                                                     --------       -------

Net cash used by operating activities                                  (2,316)       (1,753)

Investing activities:
     Purchases of marketable securities                                  ---           (475)
     Proceeds from sales of marketable securities                       1,353         5,380
     Changes in investments in and advances to
       unconsolidated subsidiaries                                    (15,945)       (3,229)
     Other                                                                100           (25)
                                                                     --------       --------

Net cash provided (used) by investing activities                      (14,492)        1,651

Financing activities:
     Repayments of long-term debt                                        (141)         (141)
     Common stock and convertible debt funding                         13,918         3,485
     Extraordinary items                                                 (508)        ---
                                                                     ---------      -------
Net cash provided by financing activities                              13,269         3,344
                                                                     --------       -------
Increase (decrease) in cash                                            (3,539)        3,242
Increase in cash resulting from merger with subsidiary                   ---            325
Cash at the beginning of the year                                       3,567         ---
                                                                     --------       -------

Cash at the end of the year                                          $     28       $ 3,567
                                                                     ========       =======

Non-cash transactions:
     Purchase of minority interest with common stock                    1,818         4,944
     Reduction of net liabilities of unconsolidated subsidiary           ---            219
</TABLE>

                See notes to condensed financial information and
                  notes to consolidated financial statements.

                                       70
<PAGE>
                  COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES
     Schedule I - Condensed Financial Information of Registrant (Continued)
                    Notes to Condensed Financial Information


NOTE 1   BASIS OF PRESENTATION

       The condensed  financial  information of the includes the accounts of the
parent company. In fiscal 1996, the parent's  wholly-owned  subsidiary,  D.O.N.,
Incorporated was merged into the parent.

       Substantially   all   investments  in  and  advances  to   unconsolidated
subsidiaries are eliminated in the consolidated financial statements.  In fiscal
1997 and 1996,  other income  includes  interest income of $69,000 and $193,000,
respectively,  that is  eliminated  in the  consolidated  financial  statements.
Intercompany  profits  between related parties are eliminated in these financial
statements.

NOTE 2   LONG-TERM OBLIGATIONS

       Annual amounts due on long-term obligations (debentures issued in January
1992) for the five years subsequent to March 31, 1997 are (in thousands):

           1998.............................     $     141
           1999.............................           141
           2000.............................           141
           2001.............................           141
           2002.............................         1,394
                                                 ---------
                                                 $   1,958
                                                 ========= 


                                       71
<PAGE>
                                   SIGNATURES


       Pursuant to the  requirements  of Section 13 or 15 (d) 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 this 14th day of July,
1998.

                                COYOTE NETWORK SYSTEMS, INC.



                                By       /s/ James J. Fiedler
                                         -------------------------------------
                                         James J. Fiedler, Chairman of
                                         the Board and Chief Executive Officer

       Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed  below by the  following  persons on behalf of and the in
the capacities and on the dates indicated.

    Signature                         Title                           Date

/s/ James J. Fiedler         Chairman of the Board and            July 14, 1998
-------------------------    Chief Executive Officer
James J. Fiedler             (Principal Executive Officer)
                             

/s/ Edward A. Beeman         Executive Vice President,            July 14, 1998
-------------------------    Chief Financial Officer
Edward A. Beeman             and Secretary  
                             (Principal Financial and Accounting Officer)   
                             

/s/ Jack E. Donnelly         Director                             July 14, 1998
-------------------------
Jack E. Donnelly

/s/ Daniel W. Latham         Director, President and              July 14, 1998
-------------------------    Chief Operating Officer
Daniel W. Latham             

/s/ Sydney B. Lilly          Director                             July 14, 1998
-------------------------
Sydney B. Lilly

/s/ Stephen W. Portner       Director                             July 14, 1998
-------------------------
Stephen W. Portner

                                       72
<PAGE>