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

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

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

                                   FORM 10-K/A
                                 Amendment No. 3

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

[X]    Annual Report Pursuant to Section 13 or 15 (d) of the Securities Exchange
       Act of 1934.  For the fiscal year ended            March 31, 1999
                                                 ------------------------------

[ ]    Transition Report Pursuant to Section 13 or 15 (d) of the Securities
       Exchange Act of 1934.  For the transition period from ______ to ______

       Commission file number               1-5486
                              -------------------------------------------------

                          COYOTE NETWORK SYSTEMS, INC.
             (Exact name of Registrant as specified in its charter)

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

4360 Park Terrace Drive, Westlake Village, 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 filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the 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.                                                [_]

On July 12, 1999, the aggregate market value of the voting stock of the
Registrant held by stockholders who were not affiliates of the Registrant was
$58,353,000 based on the closing sale price of $5.00 of the Registrant's common
stock on The Nasdaq National Stock Market. At July 12, 1999, the Registrant had
issued and outstanding an aggregate of 12,702,350 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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                                     PART I
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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
us in the future, statements about our business strategy and plans, statements
about the adequacy of our 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 ours 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 us, 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 our 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 our 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 the other risk factors set forth herein (see Item 7 - Risk Factors). We
disclaim any intention or obligation to update or revise any forward-looking
statements whether as a result of new information, future events or otherwise.


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ITEM 1.  BUSINESS
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General
---------------------------------

Coyote Network Systems, Inc. is engaged in the telecommunications business.
Specifically, we sell telecommunications equipment, international long distance
services and network services, primarily to entrepreneurial carriers, e.g.,
domestic and international long distance providers, competitive local exchange
carriers and Internet service providers. In fiscal 1999, we derived 85% of our
total revenues from the sale of telecom switching and related equipment and 15%
from retail and wholesale long distance services. Our telecommunications
products are designed to route telephone calls in an efficient, cost-effective
manner. We also sell competitively priced wholesale international long distance
services, primarily to entrepreneurial carriers and we market retail
international long distance services, primarily to affinity groups, i.e., groups
that share a common characteristic such as language or culture. In addition, we
provide telecom network support services, i.e., network design and integration,
facilities management, switch provisioning, billing administration and customer
support services. Through our joint venture, TelecomAlliance, we plan to provide
carriers with wholesale long distance and Internet services at new price points,
and to provide them with telecom equipment, billing administration, customer
support services and a path to access voice over data networks.


We were incorporated in 1961, and in November 1996, we made a strategic decision
to dispose of all of our non-telecommunications equipment businesses. As a
result, in 1997, we divested the Atlanta Provision Company, a meat and seafood
provider, and C&L Communications, a distributor of telecom and datacom products.
In 1998, we completed the restructuring by divesting Valley Communications, a
network installation and service company. Accordingly, in 1997, we changed our
name to Coyote Network Systems, Inc.

                                       1
<PAGE>

In April 1998, we expanded the scope of our telecommunications equipment
business by acquiring substantially all of the assets of American Gateway
Telecommunications, a provider of wholesale international long distance
services. In September 1998, we completed the acquisition of INET Interactive
Network System, a provider of international long distance services primarily to
commercial and residential affinity groups. In November 1998, we formed
TelecomAlliance, which is designed to enhance the growth and liquidity of
entrepreneurial carriers by providing its member companies with wholesale long
distance and Internet services. In January 1999, we formed Coyote Communications
Services LLC, designed to provide network operations and support services to our
customers and other new, entrepreneurial carriers.


Our principal executive offices are located at 4360 Park Terrace Drive, Westlake
Village, California 91361 and our telephone number is (818) 735-7600.


Industry Overview
----------------------------------

In fiscal 1999, we derived 85% of our total revenues from the sale of switching
and related OEM equipment. We derived 9% of our revenues from retail domestic
and international long distance service and 6% of our revenues from wholesale
international long distance service. Over time, we expect revenues from the sale
of international long distance service will constitute an increasing percentage
of overall revenue.

Evolving technologies, pro-competitive legislation, privatization of
international telephone companies, the build-out of new networks in developing
countries, the Internet, new carrier services and changing customer demands mark
today's telecommunications industry. As communications carriers expand into new
markets with new revenue-generating services, we believe they need to
differentiate with solutions that include voice, data, video and Internet
services. We believe these developments have created a new paradigm, an
opportunity for new, emerging domestic and international carriers to compete
with incumbent carriers and for established carriers to expand beyond their
traditional markets.

We believe these carriers have a need for small-to-medium sized telecom switches
that can add revenue-generating services quickly and cost effectively. These
smaller telecom switches, such as our DSS Switch, can be cost-justified with
less than one million minutes of voice traffic per month, enabling carriers to
match their costs with their revenue streams.


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 (Asynchronous Transfer Mode) networks, and the
Internet for voice and data communications.

A survey of Fortune 1000 telecom and datacom managers by Killen & Associates
shows that respondents expect 18% of all voice traffic to be IP-based by 2002,
and to reach 33% by 2005. Probe Research expects the combined U.S. voice and fax
over IP services market to reach 36 billion minutes by 2002. Jupiter
Communications believes that established service providers should integrate IP
telephony into their suite of services to prevent market erosion by nimble
competitors. Voice compression is a benefit of IP telephony. Today's compression
standards enable a toll quality call to be completed using a fraction of the
bandwidth for an uncompressed call.

We are committed to delivering leading edge technologies, such as compressed
voice over IP.

                                       2
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From the standpoint of U.S.-based long distance providers, the industry can be
divided into two major segments: the U.S. international market, consisting of
all international calls billed in the U.S., and the overseas market, consisting
of all international calls billed in countries other than the U.S. The U.S.
international market has experienced substantial growth in recent years, with
gross revenues from international long distance services rising from
approximately $8.0 billion in 1990 to approximately $19.3 billion in 1997,
according to Federal Communications Commission ("FCC") data.


The 1984 deregulation of the U.S. telecommunications industry enabled the
emergence of a number of new long distance companies in the U.S. Currently,
there are more than 500 U.S. long distance companies, most of which are small or
medium-sized companies. To be successful, these small and medium-sized companies
need to offer their customers a full range of services, including international
long distance. However, most of these carriers do not have the critical mass to
receive volume discounts on international traffic from the larger
facilities-based carriers such as AT&T Corp., MCI Worldcom and Sprint
Corporation. In addition, these small and medium-sized companies generally have
only limited capital resources to invest. New international carriers emerged to
take advantage of this demand for less expensive international bandwidth. These
entrepreneurial carriers acted as aggregators of international traffic for
smaller carriers, taking advantage of larger volumes to obtain volume discounts
on international routes (resale traffic), or investing in facilities when volume
on particular routes justified such investments. Over time, as these
international carriers became established and created high quality networks,
they began to carry overflow traffic from the larger long distance providers
seeking lower rates on certain routes. Our wholesale international long distance
company and TelecomAlliance are designed, among other things, to obtain volume
discounts and other economies by aggregating a number of emerging carriers.


The highly competitive and rapidly changing international telecommunications
market has created a significant opportunity for carriers that can offer high
quality, low cost international long distance service. Deregulation,
privatization, the expansion of the resale market and other trends influencing
the international telecommunications market are driving decreased termination
costs, a proliferation of routing options and increased competition. Successful
companies among both the emerging and established international long distance
companies will need to aggregate enough traffic to lower costs of both
facilities-based or resale opportunities, maintain systems which enable analysis
of multiple routing options and provide a variety of services, invest in
facilities and switches and remain flexible enough to locate and route traffic
through the most advantageous routes. We are seeking to take advantage of these
market conditions both as a provider of necessary equipment targeted to emerging
entrepreneurial carriers and as a provider of retail and wholesale international
long distance services.

International long distance providers can generally be categorized by their
ownership and use of switches and transmission facilities. The largest U.S.
carriers primarily utilize owned transmission facilities and generally use other
long distance providers to carry their overflow traffic. Since only very large
carriers have transmission facilities that cover the more than 200 countries to
which major long distance providers generally offer service, a significantly
larger group of long distance providers own and operate their own switches but
either rely solely on resale agreements with other long distance carriers to
terminate their traffic or use a combination of resale agreements and owned
facilities in order to terminate their traffic. One other category, "switchless
resellers", rely entirely on third parties to switch and terminate their
traffic. Such switchless resellers generally attempt to purchase enough minutes
to obtain volume discounts and then resell the time at a mark-up. These
"switchless resellers" and emerging carriers are the principal market for our
DSS Switches and Carrier IP Gateways, which are designed specifically to require


                                       3
<PAGE>
less investment than the equipment used by large telecommunications companies
and, accordingly, to be cost effective for emerging telecom companies.


Principal Products and Services
-----------------------------------
We market telecommunications switching equipment and domestic and international
retail and wholesale long distance services. Our primary equipment products
include telecommunications switches ("DSS Switches") and Internet Protocol
gateways ("Carrier IP Gateways ") designed to route voice traffic over public
and private networks and the Internet. In fiscal 1999, we derived 85% of our
total revenues from the sale of switching and related OEM equipment. We derived
9% of our revenues from retail domestic and international long distance service
and 6% of our revenues from wholesale international long distance service. Over
time, we expect revenues from the sale of international long distance service
will constitute an increasing percentage of overall revenue.

DSS Switch
We design, develop, engineer and market flexible telecom switches that enable
telecommunications carriers to provide voice and data services to retail and
wholesale customers. DSS Switches enable telecom carriers to provide local, long
distance and Internet access as well as value-added services like debit and
credit card services, 800 number services, conferencing and operator services.

Our DSS Switch is an all-digital telephone switch used in central office, tandem
and international gateway solutions that enable telecom and Internet service
providers to enter new markets and generate new revenues. DSS Switches are
modular in design and can be expanded in size from 96 to 10,240 lines enabling
telecom carriers to start small and to cost effectively add telephone lines as
their customer base grows.

The DSS Switch converts different signaling systems from international countries
to be compatible with the signaling system used for domestic telephone calls,
providing reliable, efficient, affordable international voice and data
communications.

As an international gateway, the DSS Switch enables calls to be placed from the
U.S. to international countries. As a central office or end office Class 5
switch, the DSS connects customers to the public switched telephone network. As
a tandem Class 4 switch, the DSS connects to other switches in the public
telephone network to enable long distance calls to be completed. The DSS Switch
is flexible, modular and designed with an open architecture, enabling it to
operate as a stand-alone product or in conjunction with products provided by
other equipment manufacturers.

Carrier IP Gateway
The Carrier IP Gateway is a flexible Internet Protocol (IP) solution designed to
meet the needs of domestic and international long distance carriers, local
service providers and Internet access providers. Internet Protocol describes
software that is used on the Internet and data networks to track addresses, to
route outgoing messages and to recognize incoming messages. The Carrier IP
Gateway improves the efficiency of costly dedicated long distance telephone
lines by compressing and packetizing the traffic and routing it between the
public telephone network, private data networks and the Internet.

                                       4
<PAGE>
The Carrier IP Gateway serves as a connection between the public telephone
network, private voice and data networks and/or the Internet. The Carrier IP
Gateway enables voice and fax calls to be routed over networks that use IP. When
connected to our DSS Switch, the Carrier IP Gateway can be configured to use IP
or other packet technologies like frame-relay or Asynchronous Transfer Mode
(ATM). Frame relay is a popular type of packet technology generally used for
data transmission. ATM is a high-speed transmission technology that is generally
believed to be a preferred technology for high bandwidth networks and is
compatible with IP technology.

Data or IP networks are more efficient and cost effective for transmitting voice
traffic than the public telephone network resulting in lower operating cost,
better utilization of telephone lines and the ability to add new applications
that utilize both voice and data technologies. The Carrier IP Gateway is
standards-based and capable of communicating with virtually any Class 5 central
office or Class 4 tandem telecom switch.

Retail and Wholesale Domestic and International Long Distance Services
We also provide wholesale domestic and international long distance services,
primarily to emerging and entrepreneurial carriers through a flexible network
comprised of international gateway switches, leased transmission facilities and
resale arrangements, operating agreement and termination arrangements with other
long distance service providers, all of which enables us to complete telephone
calls to more than 200 countries in Europe, Africa, Asia, the Pacific Rim,
Australia, Canada, the Caribbean and Central and South America.

Our INET Interactive Network System subsidiary is a full service,
facilities-based telecommunications carrier that provides retail as well as
wholesale long distance services to commercial customers as well as affinity
groups, such as French and Japanese speaking people in the United States. As of
March 31, 1999, INET had approximately 9,900 customers who purchased
approximately 16,250,000 minutes of traffic for the three months ended March
1999.

INET's retail and wholesale services include call origination to and from
anywhere in the U.S. to more than 200 countries worldwide. INET also provides
back office services, such as billing administration and invoice reconciliation
services and switch partitioning which maximizes switch resources and generates
additional revenue by permitting the resale of excess switching capacity to
other carriers. INET also provides retail services such as 1-800/888 services,
calling card and pre-paid debit card services, billing services and
language-centric and culture-sensitive customer support.

Our American Gateway Telecommunications subsidiary is a full service,
facilities-based carrier offering wholesale services to telecom carriers and
switchless resellers. AGT provides international long distance services to Asia,
the Pacific Rim, Europe and the Americas. In fiscal 1999, AGT had nine wholesale
customers who purchased an aggregate of 4,300,000 minutes of traffic.

We also provide carriers with network integration and customer support services,
including consulting services, network design, switch provisioning, outsourcing,
on-site technical support, remote monitoring, 7x24 customer support, billing
administration and help desk support. These services enable our customers to
focus on growing their business while we operate and manage their network for a
fee.




                                       5
<PAGE>
Business Strategy
--------------------------------------
A fundamental component of our strategy is to provide a total solution to
entrepreneurial carriers. We provide telecom equipment, international long
distance and network services. We are targeting specific market segments:
telecom equipment, wholesale and retail international long distance and network
services. We plan to partner with and/or take minority positions in
entrepreneurial carriers. We also plan to complement our strategy through
acquisitions of entrepreneurial carriers with a goal to convert them to
switch-based and voice over IP. We plan to expand our market presence
internationally through acquisitions and plan to secure cable routes to
strategic international countries.

     -    Today, we design, develop and market telecom switches and IP gateways.

     -    We also provide international and affinity based long distance and
          network services, which include facilities management, billing and
          customer support services.

     -    Our technology enables small and medium-sized carriers and resellers
          to optimize their resources, improve their margins and offer
          value-added services at competitive prices.

     -    We are able to offer our customers a complete solution, including
          telecom equipment, international long distance and network services.

     -    We are seeking to leverage this complete solution primarily to
          entrepreneurial carriers, by either entering into a strategic
          partnership with them or by acquiring them.

     -    We plan to create a network of switched resellers, to generate
          synergies among these carriers, to increase the amount and the quality
          of services they can offer their customers, to cross-sell our
          equipment and services and to reduce costs at all levels.

We have a four-pronged approach to generate growth relative to this strategy:

1.   Expand our market for selling telecom equipment, international long
     distance and network services to entrepreneurial carriers.

2.   Create synergies by combining partly or wholly owned switched resellers
     into a network, optimizing interconnectivity among the participants, and
     reducing costs - thus further increasing the value and the market appeal of
     both the carrier and the network.

3.   Acquire IRUs (Indefeasible Right of Use) to carry our international traffic
     and sell excess capacity to resellers and customers. The owner of an IRU
     has the right to use that portion of the undersea cable for a specified
     period of time.

4.   Use these sources of revenues (switch and gateway sales, international long
     distance services, customer contracts, and minutes sold on IRUs) to develop
     a financial mechanism to warrant further acquisitions and to extend our
     technology position.

     -    The success of our strategy depends on our ability to provide a total
          solution of telecom equipment, international long distance and network
          services and on our capacity to find carriers that can be integrated
          into our network. Our success is also dependent on obtaining
          additional financing.

                                       6
<PAGE>

     -    We believe that our decision to focus on international and
          "affinity-based" entrepreneurial carriers should yield positive
          results in creating synergies and generating increased revenues.
          Affinity-based carriers typically have higher margins, primarily due
          to focused marketing efforts, requiring less marketing expense. Such
          groups also typically have a stronger customer allegiance since there
          are group-based.

     -    We also plan to market our telecom equipment, international long
          distance and network services in Europe, where market liberalization
          is in its early stages. To do so, for example, we may seek alliances
          with European companies to permit them to market our products and
          services in Europe and permitting us to market their products and
          services in the U.S.

     -    Our joint venture, TelecomAlliance, plans to provide entrepreneurial
          carriers with switching equipment, long distance as well as data and
          Internet services, network design and operations, access to financing,
          facilities management, billing administration, customer support
          services and access to a path to voice over data networks.
          TelecomAlliance plans to carry up to 550 million minutes of traffic
          per month for its members.

     -    TelecomAlliance is intended to be a stand-alone operation initially
          limited to up to 30 switchless resellers.

The fulfillment of our strategy is subject to a number of contingencies,
including our obtaining adequate financing to pursue our objectives.


STRATEGY IMPLEMENTATION
----------------------------------
General Framework
-----------------

We have identified initiatives to turn our strategic vision into reality.


Consolidating and Expanding Our Technology Position
---------------------------------------------------
We plan to continue to develop, acquire, take equity positions in and/or
contract with companies that have leading-edge technologies and that serve
customers with cost-competitive solutions, including IP gateways, alternative
transmission and packet- and revenue-generating applications. For example, our
Carrier IP Gateway combines the high bandwidth efficiency of an IP link with
compression equipment, improving the efficiency of costly dedicated long
distance lines. 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.

We plan to bundle local, long distance, data and video services in focused
markets to better serve our customers with value-added, cost-competitive
solutions. We also plan to add Internet services, international facilities and
IRUs.



                                       7
<PAGE>
Acquiring and Integrating Switchless Affinity-Based Resellers
-------------------------------------------------------------
We are pursuing an acquisition strategy and will continue to target companies
where complementary technologies, international long distance and network
services can provide our customers with cost-competitive, revenue generating
solutions.

-    Acquisition Criteria: We will continue to look for companies that are
     customer-oriented, currently profitable or that can be profitable within 12
     months, synergistic with our existing companies, have strong management and
     enhance long-term shareholder value.

-    Acquisition Targets: We will continue to look for international long
     distance companies that market to affinity groups. We plan to use packet
     technology and value-added applications to complement them.

-    Management Strategy: We will seek to motivate management to grow their
     company. Generally, we plan to only centralize treasury, finance and
     accounting functions, information systems (where appropriate), switching
     and carrier operational services, and staff functions, i.e., human
     resources.

-    Integration Strategy: We expect to realize synergies, revenue growth and
     cost savings by selling telecom equipment and digital technologies, and by
     interconnecting local carriers with domestic and international long
     distance providers. Our companies will be expected to "hand off" much of
     their traffic to our other companies which have "landing rights," thereby
     reducing or eliminating termination fees. In addition, we will provide our
     companies with telecom equipment, international long distance and network
     services to help improve their margins and profits.

We believe entrepreneurial carriers have several reasons to work with us:

-    We deliver cost-competitive, value-added solutions.

-    We provide telecom equipment, international long distance and network
     services.

-    We can facilitate debt and/or lease financing through our relationships
     with lessors and our willingness to offer inducements, such as warrants, to
     lenders and lessors to work with our customers.

-    We can provide billing and collection services.

-    We can integrate networks and provide the equipment and services to support
     them.

-    We can provide space for their switching equipment.

-    We can improve their margins due to economies of scale and synergies.

-    We enable them to provide new revenue generating services.

-    We can provide them with a strategy for growth.

-    We can provide them with a path to voice over data networks.

-    We offer them the potential of a logical exit strategy.

-    We can increase the value of their company by providing the above-mentioned
     items.

                                       8
<PAGE>
Sales and Marketing
----------------------------
To meet the needs of our customers, we market our products and services through
the coordinated efforts of our direct sales force, independent agents and
systems integrators.

Our equipment sales are targeted to entrepreneurial carriers, such as
competitive local exchange carriers, switchless resellers and international and
domestic long distance providers. Many of the equipment sales are coupled with
service contracts or contemplate additional equipment sales as the end-user
customer progresses with the implementation of their business plan. Our receipt
of the additional service or equipment revenues is subject to the ability of our
customers to implement their business plans. In many instances, we facilitate
sales by arranging for third party lease financing. In such instances, we often
provide warrants and other financial inducements to the lease company to
facilitate the financing.

We primarily market our wholesale long distance services directly to carriers
and through independent agents. We primarily market our retail long distance
services through our agents and focused sales and marketing activities, e.g.,
advertising in local ethnic newspapers.


Customers and Customer Concentration
-------------------------------------
Our equipment products are targeted at markets for small-to-medium sized telecom
switches and IP gateways. Potential customers for our telecommunications
equipment include, among others, entrepreneurial telecommunications carriers
such as competitive local exchange carriers, switchless resellers, incumbent
local exchange carriers, wholesale and retail international and domestic long
distance providers and Internet service providers. We market retail
international long distance services to affinity groups. Our equipment revenues
in fiscal 1999 were from shipments to 16 end-user customers, seven of which were
sold through third party lessors and which accounted for approximately 93% of
the total equipment revenues. In fiscal 1998, we shipped equipment to 12
customers, one of which accounted for approximately 40% of total equipment
revenues.

Among the companies that have taken delivery of our switches are Apollo Telecom,
BD Communications, Cellular XL, Concentric Network Corporation, Crescent
Communications, Dakota Carrier Services, DTA/I:COMM Networks, Lightcom
International, Inc., Mercury Telecom (USA), Mony Travel Inc., Rhinos
International, Telesys S.A., Vancouver Telephone Company, Wireless USA and
WorldWave Communications.

While our customer base continues to grow, many of our customers are
entrepreneurial carriers with limited financial resources. Their ability to pay
for our equipment and services is often dependent on obtaining third party
financing. The timeliness of such financings will continue to be an important
ingredient in our results. Our recent agreements with RCC Finance and PrinVest
are aimed at providing this necessary part of our program. In certain of these
lease transactions, we issue warrants and other financial inducements to the
leasing company to facilitate financing to our end-user customer. We recognize
profit on these transactions as payments are received.

A component of our long-term strategy is our expansion into international
markets as evidenced by our investment in Systeam, S.p.A. and our OEM (original
equipment manufacturer) agreement with Tokyo-based Apollo KK. In order to effect
this strategy, we are seeking strategic alliances with companies that have
established international distribution channels. We also recently obtained a
Class II carrier license and a point of presence in Japan. A Class II license


                                       9
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enables us to originate and terminate traffic in that country and a point of
presence is the physical place where a long distance carrier connects to a local
exchange carrier's network.

Our wholesale international long distance services are offered primarily to
U.S.-based entrepreneurial carriers.


Customer Service and Support
-----------------------------
We service and provide support for our products and services. We, or an
authorized third party, provide customer training in connection with the
installation of our products and services. We have entered into agreements with
third parties, including certain suppliers of equipment incorporated into our
products, to provide support for our products. Our products may be sold with a
service plan under which we provide ongoing technical assistance and
maintenance.

We provide network operations and support services to our customers. The
services include network operations and on-site facilities support, network
design and consulting services, switch provisioning, outsourcing, on-site
technical support, remote monitoring and billing administration.


Research and Development, Manufacturing and Supply
--------------------------------------------------
In fiscal 1999, we invested approximately $11.0 million in engineering, research
and development efforts with the goal of providing new and enhanced features to
the existing DSS Switch and developing the Carrier IP Gateway. The purpose of
these investments was to address the expanded customer and technical demands of
the existing carrier marketplace while preparing us to successfully participate
in the Internet Protocol based market.

Our Switch Server Architecture (SSA) is a scalable, open, standards-based
platform designed to meet the needs of entrepreneurial carriers. The SSA meets
those needs by reducing network costs and enabling revenue generation through
enhanced service applications. Carrier and service provider costs are reduced by
routing voice and fax traffic over inexpensive IP networks. The SSA allows
carrier and service providers to realize the cost reductions of next-generation
IP-telephony networks while maintaining interoperability with the public
telephone networks.

The SSA employs internally-developed and OEM hardware and software components
which enables us to quickly provide complete turnkey products and services to
our customers. The SSA provides an industry-standard and open call-processing
model which allows application developers to quickly develop and/or integrate
third-party revenue-generating enhanced services.

The research and development focus described above has been conducted in
accordance with detailed design specifications developed by us. We engage
contract engineers and independent laboratories to perform some of the research
and development work. These efforts typically involve expertise in the following
areas: automatic test systems, telecommunications and engineering processes,
UNIX software, operation administration maintenance and provisioning,
telecommunication signaling systems, telecommunications and data communications


                                       10
<PAGE>
software and Internet software. In virtually all of these instances, we own the
results of the research and development performed.

Where an application requires the customization of existing contractor
proprietary software, we typically enter into a license agreement with the
contractor.

We retain the responsibility of successfully integrating the contractor's work
product with our products.

Certain software and hardware for our switch and IP gateway products 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. Other hardware and/or software components,
such as subscriber and data line cards and core switch software were developed
by us or our contractors.

General purpose hardware components are also used in the switches and IP
gateways, which lowers costs and enables us, if we choose, to acquire such
components from more than one vendor.

We perform certain systems integration and test functions in house. In addition,
we outsource some of our manufacturing and procurement of raw materials used in
manufacturing to outsource vendors, including APW and I-PAC Manufacturing, Inc.
Our outsource vendors have facilities to provide a turnkey product which
includes the manufacturing or procurement of board, chassis, and system level
assemblies. We conduct final assembly and testing of our products at our
facilities and then ship the products directly to our end-user customer sites
via a third-party transportation company.

Certain software and hardware associated with adjunct and peripheral equipment
to provide certain functions and features are licensed or procured under OEM
arrangements from other vendors.


Proprietary Rights
-------------------------------
We use a combination of trade secrets, industry know-how, confidentiality,
non-compete agreements and tight control of our software to protect the products
and features that we believe give us competitive advantages. We are currently
engaged in litigation alleging that our use of the name Coyote infringes on the
rights of the plaintiff.


Wholesale and Retail Facilities
--------------------------------
We provide long distance service to international countries through a flexible
network comprised of various foreign termination relationships, international
gateway switches, leased facilities and resale arrangements with long distance
providers. We plan to grow our revenues by capitalizing on the deregulation of
international telecommunications markets.



                                       11
<PAGE>
Competition in the Telecommunications Industry
-----------------------------------------------
The telecommunications equipment markets are highly competitive. We compete with
telecommunications equipment providers, including Nortel, Cisco Systems, Lucent
Technologies, Newbridge Networks, and Digital Switch Corporation, which have the
resources and expertise to compete in the smaller-scale telecom switch and IP
gateway market. In addition, it is possible that large communication carriers
with financial resources significantly greater than ours may enter the telecom
equipment market. Some of these large carriers, such as AT&T, MCI Worldcom and
Sprint, could initiate and support prolonged price competition to gain market
share.

The international telecommunications long distance market is also intensely
competitive and subject to rapid change. Our competitors in the international
wholesale long distance market and the retail international long distance market
include:

-    large, multinational corporations;

-    smaller service providers in the U.S. and overseas that have emerged as a
     result of deregulation;

-    switchless and switch-based resellers of international long distance
     services;

-    international joint ventures and alliances;

-    dominant telecommunications operators that previously held various
     monopolies established by law over the telecommunications traffic in their
     countries; and

-    U.S. based and foreign long-distance providers that have the authority from
     the Federal Communications Commission (the "FCC") 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 us. In addition, consolidation in the telecommunications industry could
create even larger competitors with greater financial and other resources, and
could also affect us by reducing the number of potential customers for our
services.

International competition also may increase as a result of the competitive
opportunities created by a Basic Telecommunications Agreement concluded by
members of the World Trade Organization (WTO) in 1997. Under the terms of the
WTO agreement, starting February 1998, the United States and more than 65
countries have committed to open their telecommunications markets to competition
and foreign ownership and to adopt measures to protect against anti-competitive
behavior.


Government Regulation
---------------------------
Our U.S. interstate and international telecommunications service offerings
generally are subject to the regulatory jurisdiction of the Federal
Communications Commission (FCC). Our telecommunications service offerings
outside the U.S. are generally done under contract to third-party carriers who
deal with the international and in-country regulatory authorities.

                                       12
<PAGE>
In addition, U.S. and foreign regulatory authorities may affect our
international service offerings as a result of termination and/or transit
arrangements. U.S. or international regulatory authorities may take action or
adopt regulatory requirements that could adversely affect us. Our business plan
depends to a large degree on the deregulation of the telecommunications market
which has enabled the emergence of many new services.

United States Regulation
Overview. We provide international telecommunications service to, from and
through the United States and generally are subject to the terms of the
Communications Act of 1934, the Telecommunications Act of 1996 and to regulation
by the FCC. Section 214 of the Communications Act requires us to make
application to and receive authorization from the FCC prior to leasing
international capacity, acquiring international facilities, purchasing switched
minutes or providing international service to the public.

In this regard, we offer telecommunications service pursuant to FCC
authorization under Section 214. In addition, FCC rules require prior FCC
approval before transferring control of or assigning FCC licenses and impose
various reporting and filing requirements upon companies providing international
services under a FCC authorization. We must file reports and contracts with the
FCC and must pay regulatory fees that are subject to change.

Long distance telecommunication services we offer in the U.S. are also subject
to the jurisdiction of state regulatory authorities, commonly known as public
utility commissions (PUCs). Specifically, since we have facilities in
California, New York and Texas, we are subject to the regulations of the PUCs in
those states.

Regulatory action that may be taken in the future by the FCC may intensify
competition, impose additional operating costs, disrupt transmission
arrangements or otherwise require us to modify our operations. Although rule
changes may provide us with more flexibility to respond more rapidly to changes
in the global telecommunications market, they also will provide the same
flexibility to our competitors.

In addition, by its own actions or in response to a third-party's filing, the
FCC could determine that our services, termination agreements, agreements with
other carriers or reports do not or did not comply with FCC rules. If this were
to occur, the FCC could order us to terminate non-compliant arrangements, fine
us or revoke our FCC authorizations. We may also be indirectly adversely
affected by the FCC on other actions that could affect our customers, potential
customers, suppliers and the telecommunications industry in general.

International Traffic. Under the World Trade Organization Basic Telecom
Agreement, concluded in 1997, sixty-nine nations comprising 95% of the global
market for basic telecommunications services agreed to permit competition from
foreign carriers. In addition, fifty-nine of these countries have subscribed to
specific pro-competitive regulatory principles. The WTO Agreement became
effective in February 1998 and is expected to be implemented by the signatory
countries by 2002. We believe the WTO Agreement will increase opportunities for
us and for our competitors. However, the precise scope and timing of the
implementation of the WTO Agreement remain uncertain and there can be no
assurance that the WTO Agreement will result in beneficial regulatory
liberalization.

We have a "Special Type II Telecommunications Carrier" license that allows us to
originate and terminate traffic in Japan. As such, we must comply with the
provisions of the Japanese Telecommunications Business Law and the Japanese


                                       13
<PAGE>
Ministry of Post and Telecommunications (MPT) "Three Year program for the
Promotion of Deregulation" and related laws on the "Rationalization of
Regulatory Frameworks in the Telecommunications Field." A Special Type II
license provides us with certain privileges and responsibilities, e.g., we must
have two certified switch engineers in Japan and we must file periodic reports
with the MPT.


Environmental Regulation
----------------------------
Compliance with federal, state and local regulations relating to environmental
protection has not had a material effect upon our capital expenditures,
operating results or competitive position.


Employees
----------------------------
As of May 27, 1999, we had 154 employees. In addition, we retain from time to
time, on a contract basis, a number of people for specific projects. We believe
that our future growth and success will depend in large part upon our ability to
continue to attract and retain highly qualified people. We have no collective
bargaining agreement with our employees.





                                       14
<PAGE>
================================================================================
                                    Glossary
================================================================================

Affinity Group - People or organizations that share a common bond, including
language, religious or ethnic background, profession or occupation, college or
university.

ATM - Asynchronous Transfer Mode - Very high-speed transmission technology. ATM
is a high bandwidth, low-delay, packet-like switching and multiplexing
technique. It is generally believed to be the preferred technology for high
bandwidth networks and is compatible with IP technology. ATM also is compatible
with fiber optic technology. In ATM, information is segregated into 53-byte
fixed-size cells, consisting of header and information fields.

Bandwidth - In telecommunications, bandwidth is the width of a communications
channel. In analog communications, bandwidth is generally measured in Hertz -
cycles per second. In digital communications, bandwidth is typically measured in
bits per second. A voice conversation in analog format is typically 3,000 Hertz.
In digital communications, a voice conversation encoded in PCM (Pulse Code
Modulation) is 64,000 bits per second. The higher the bandwidth, the greater the
capacities of the communications channel.

Class 4 Switch - The fourth level in the traditional telephone switching
hierarchy - major switching center to which toll calls (long distance) from
Class 5 end office switching centers are sent.

Class 5 Switch - An end office in the traditional telephone switching hierarchy.
Residential and business customer's telephone service, including carrier
provided features, are provided from Class 5 switches.

CLEC - Competitive Local Exchange Carrier - New carriers which compete with the
incumbent local exchange carrier. CAPs, cable companies, long distance
companies, incumbent local exchange carriers operating out of their traditional
franchise territories, new entrants and wireless companies can be CLECs.

E1 - A digital transmission link with the capacity of 2,048,000 bits per second
(bps). An E1 uses two pairs of normal copper wire, the same wires utilized in
homes. An E1 can be channelized into 30 voice or data channels, each handling
64,000 BPS. Two additional channels of 64 Kbps each are used for signaling and
framing respectively. An E1 may also be utilized for ISDN-PRI and advanced
services including Fame Relay, IP and ATM. E1 is the unit of base telephone
trunking outside the United States. In the United States, T1 is the standard.

Frame Relay - A packet type network service generally used for data transmission
including LAN to LAN, LAN to Mainframe and Mainframe to Mainframe. In some
networks, generally enterprise networks, Voice-over-Frame Relay has been a
successful application.

Gateway - A gateway is an entrance and exit into a communications network.
Gateways are often located as access points into a network or connecting two
different networks.

ILEC - Incumbent Local Exchange Carrier - The telephone company that had an
exclusive franchise in a defined geographic area prior to telephone
deregulation. ILECs include the Regional Bell Operating Companies, GTE,
Cincinnati Bell, Southern New England Telephone, Rochester Telephone and other
independent telephone companies.

                                       15
<PAGE>

IP - Internet Protocol - Part of the TCP/IP family of protocols describing
software that tracks the Internet address of nodes, routes outgoing messages,
and recognizes incoming messages. IP was originally developed by the U.S.
Department of Defense to support interworking of dissimilar computers across a
network.

IP Telephony - Telephone service over an IP network. It may be a private IP
network or the public Internet.

IRU - Indefeasible right of use. A measure of currency in the underseas cable
business. The owner of the IRU has the right to use that portion of the cable
for the time provided for.

ISP - Internet Service Provider.

Landing Rights - The right to carry traffic into and out of a country. The
respective governments grant the carrier the right to bring traffic into or out
of a country.

LAN - Local Area Network.

OEM - Original Equipment Manufacturer.

Point of Presence - POP - Physical place where a long distance carrier connects
with a local exchange carrier's network.

Ports - An entrance to or exit from a device or an entire network.

PTT - Post Telephone & Telegraph - PTTs provide telephone and telecommunications
services in most foreign countries. Their governments have traditionally owned
them. In some countries, privatization and deregulation have mapped a future
with less government control for some PTTs.

PSTN - Public Switched Telephone Network - The public telephone network.

Public Internet - The Internet, a public network using IP. There are also
private or dedicated IP networks which are not part of the public Internet.

SSA - Switch Server Architecture - A network architecture strategy developed by
Coyote Technologies, LLC, which allows interworking of voice and data networks
and the applications operating on these networks.

Server - A shared computer on a network that can be as simple as a regular PC on
a local network set aside to handle print request to a single printer. Usually,
it is the fastest PC or workstation or largest computer around. It may be used
as a depository and a distributor of large amounts of data. It may also be the
gatekeeper controlling access to voice mail, electronic mail, facsimile services
and other applications. Today, servers can be found throughout local area
networks and across wide area networks, including the Internet. Generally, they
can be characterized as applications platforms. In some contextual uses of the
word server, the word refers only to software running on the application
platform. Generally, however, server refers to hardware, operating systems, and
applications software.

                                       16
<PAGE>

SS7 - Signaling System 7 - A signaling system that works with the telephone
network to improve call processing and allows for more advanced network
applications to work with the telephone network. In the United States, SS7-ANSI
is the prevailing standard. Outside the United States, SS7-ITU (or sometimes
referred to as C7) is the prevailing standard.

Switchless Reseller - A reseller of long distance (or local) services who does
not own a telephone switch. These carriers must arrange for leasing of switch
capacity from other carriers.

Switched Reseller - A reseller of long distance (or local) services who own at
least one telephone switch.

T1 - A digital transmission link with the capacity of 1,544,000 BPS. A T1 uses
two pairs of normal copper wires, the same wires utilized in homes. A T1 can be
channelized into 24 voice or data channels, each handling 64,000 BPS. A T1 may
also be utilized for ISDN-PRI and advanced services including Fame Relay, IP and
ATM. T1 is the unit of base telephone trunking in the United States. Overseas,
E1 is the standard.





                                       17
<PAGE>
--------------------------------------------------------------------------------
ITEM 2.  PROPERTIES
--------------------------------------------------------------------------------

Our executive offices are located in approximately 23,000 square feet of office
space in Westlake Village, California currently leased by us under a five-year
lease expiring February 2003. We also lease 21,000 square feet of office space
in Richardson, Texas to support our engineering requirements under a seven-year
lease expiring April 2005. We currently lease 3,000 square feet of space in
Houston, Texas under a five-year lease expiring in April 2003, however, we plan
to move to a 4,000 square foot office space in the Dallas area in the near
future. We also lease 8,000 square feet of office space in Los Angeles,
California under a five-year lease expiring March 2004. Additionally, we lease
5,100 square feet of office space in Norcross, Georgia under a five-year lease
expiring October 2003. We own a 91,000 square-foot building in Atlanta, Georgia,
which was formerly used by a discontinued company. This property was sold in
July 1999.



--------------------------------------------------------------------------------
ITEM 3.  LEGAL PROCEEDINGS
--------------------------------------------------------------------------------

Coyote Network Systems, Inc. (The Diana Corporation) Securities Litigation (Civ.
No. 97-3186) We were a defendant in a consolidated class action, In re The Diana
Corporation Securities Litigation, that was pending in the United States
District Court for the Central District of California. The consolidated
complaint asserted claims against us and others under Section 10(b) of the
Securities Exchange Act of 1934, alleging essentially that we were engaged,
together with others, in a scheme to inflate the price of our stock during the
class period, December 6, 1994 through May 2, 1997, through false and misleading
statements and manipulative transactions.

On or about February 25, 1999, the parties executed and submitted to the court a
formal Stipulation of Settlement, dated as of October 6, 1998. Under the terms
of the settlement, all claims asserted or that could have been asserted by the
class are to be dismissed and released in return for a cash payment of $8.0
million (of which $7.25 million was paid by our D&O insurance carrier on behalf
of the individual defendants and $750,000 was paid by Concentric Network
Corporation, an unrelated defendant) and the issuance of three-year warrants to
acquire 2,225,000 shares of our common stock at prices per share increasing each
year from $9 in the first year, to $10 in the second year and $11 in the third
year. The cash portion of the settlement was previously paid into an escrow fund
pending final court approval. Charges relating to the warrants were fully
reserved by us in fiscal 1998.

On June 9, 1999, the Court rendered its Final Judgment and Order approving the
settlement set forth in the Stipulation of Settlement. No objections to the
approval of the settlement were filed.

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


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

Not applicable.


                                       18
<PAGE>
                  ============================================
                                    PART II.
                  ============================================
--------------------------------------------------------------------------------
ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
         STOCKHOLDER MATTERS
--------------------------------------------------------------------------------

Our common stock was listed on The Nasdaq National Market under the symbol CYOE
on November 5, 1998. Prior to such date, our common stock was included for
quotation on the NASD OTC Bulletin Board under the symbol CYOE. The table below
sets forth by quarter, the high and low sales prices of our common stock on The
Nasdaq National Market, and the high and low bid prices per share for our common
stock obtained from trading reports of The Nasdaq National Market subsequent to
November 5, 1998. The sales prices have been adjusted to reflect the 5% stock
dividend paid on November 4, 1998. Prices set forth below from prior to our
November 5, 1998, listing on The Nasdaq National Market reflect inter-dealer
prices without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions.

              FISCAL 1999                         FISCAL 1998
    -----------------------------        ---------------------------
    Quarter     High        Low          Quarter     High       Low
    -------     ----        ---          -------     ----       ---
    First      $ 9.167     $3.720        First      $5.580    $1.235
    Second      10.119      4.533        Second      9.762     2.679
    Third       16.500      6.071        Third       8.274     4.539
    Fourth     $ 9.125     $4.125        Fourth     $6.429    $3.303


At June 11, 1999, we had 1,224 stockholders of record.

We have not declared any cash dividends during the last three fiscal years. We
have no plans to pay cash dividends on our common stock in the foreseeable
future. The payment of cash dividends on our common stock is restricted by our
subordinated debentures, which provide that our consolidated tangible net worth
cannot be reduced to less than an amount equal to the aggregate principal amount
of the subordinated debentures ($1,254,000 as of June 25, 1999).

Sales and Issuance of Unregistered Securities
---------------------------------------------
None except as described below and as previously disclosed in reports filed
pursuant to the Securities and Exchange Act of 1934.

In June 1999, in connection with lease financing provided to our end-user
customers, we issued three warrants to PrinVest Financial Corporation, a
third-party leasing company. Each of these warrants is to purchase 30,000 shares
of common stock and may be exercised for three years from the date of issuance
at $3.56, $5.56 and $7.56, per share, respectively.



                                       19
<PAGE>
--------------------------------------------------------------------------------
ITEM 6.  SELECTED FINANCIAL DATA
--------------------------------------------------------------------------------

                          COYOTE NETWORK SYSTEMS, INC.
                             SELECTED FINANCIAL DATA
                    (In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
                                                                           As of and for the Years Ended
                                                          --------------------------------------------------------------
                                                          March 31,    March 31,    March 31,     March 30,   April 1,
                                                            1999         1998         1997          1996        1995
                                                          ------------------------------------------------------------
<S>                                                       <C>          <C>          <C>           <C>         <C>
Net sales                                                 $ 43,318     $  5,387     $  7,154      $   264     $  ---
                                                          ========     ========     ========      ========     =======
Earnings (loss) from:
     Continuing operations (1)(2)                         $(13,843)    $(34,155)    $(12,335)     $(2,746)    $(2,140)
     Discontinued operations (3)                              (900)       ---         (8,175)        (619)      1,420
     Extraordinary items                                     ---          ---           (508)        ---         ---
                                                          --------     --------     ---------     -------     --------
       Net loss                                           $(14,743)    $(34,155)    $(21,018)     $(3,365)    $  (720)

Earnings (loss) per common share [basic and diluted]:
     Continuing operations                                $ (1.41)     $  (4.60)    $  (2.23)     $  (.59)    $  (.48)
     Discontinued operations                                 (.09)        ---          (1.48)        (.13)        .32
     Extraordinary items                                     ---          ---           (.09)        ---         ---
                                                          --------     --------     ---------      -------     -------
       Net earnings (loss) per common share               $ (1.50)     $  (4.60)    $  (3.80)     $  (.72)    $  (.16)

Cash dividends per common share                           $  ---       $  ---       $  ---        $  ---      $  ---
                                                          ========     ========     =========     ========    ========

Total assets                                              $ 41,028     $ 21,975     $ 23,244      $29,092     $24,205
Debt (4)                                                    13,995        5,490        1,958        2,099       2,240
Working capital (deficit)                                     (659)       4,508        6,161       13,282      15,489
Shareholders' equity                                         6,057        8,060       16,834       24,686      19,729

<FN>
(1)  Included in the fiscal 1999 loss is a charge of $2,500,000 in connection
     with provisions for losses on investments and on deposits made to long
     distance telecom carriers.

(2)  Included in the fiscal 1998 loss are the following: a non-cash expense
     charge of $5,522,000 for the conversion into our common stock of certain
     Class A and B units owned by our directors and employees; 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 our
     common stock upon conversion of notes issued June 1998; a charge of
     $2,200,000 in connection with failed acquisitions; and a non-cash expense
     of $8,000,000 relating to the issuance of warrants as part of the
     settlement of the securities litigation.

(3)  The increase in the loss from discontinued operations in fiscal 1997 is due
     to a provision of $7,550,000 recorded for restructuring costs, severance
     and the estimated loss on disposal of assets of certain discontinued
     operations and, in fiscal 1999, is due to a reduction in the estimated
     market value of land and buildings which were part of a discontinued
     operation.

(4)  Includes current portion of long term debt, capital leases, notes payable
     and line of credit.
</FN>
</TABLE>

                                       20
<PAGE>
--------------------------------------------------------------------------------
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS
         OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
--------------------------------------------------------------------------------

General
---------------------------
In November 1996, we made a strategic decision to dispose of all of our
non-telecommunications switch business segments (the "Restructuring").
Subsequently, on February 3, 1997, our Board of Directors approved the sale of
Atlanta Provision Company to Colorado Boxed Beef Company. On November 20, 1997,
we completed the sale of our telecommunications equipment and distributor
subsidiary, C&L Communications, Inc. to the management of C&L. In March 1998, we
reached an agreement for the sale of our 80% owned wire installation and service
subsidiary, Valley Communications, Inc., to Technology Services Corporation. As
part of the Restructuring, our Board of Directors approved plans changing our
name to Coyote Network Systems, Inc. and in November 1997, our shareholders
approved the name change. Subsequently, the name of our telecommunications
equipment subsidiary, Sattel Communications LLC, was changed to Coyote
Technologies, LLC ("CTL"). Based in Richardson, Texas, CTL has granted
subordinated equity participation interests, which amount to approximately a 20%
effective ownership interest in CTL, to certain of our employees. These
participation interests are convertible into shares of our common stock at the
option of the holder.

In April 1998, our subsidiary, Coyote Gateway, LLC ("CGL"), acquired
substantially all of the assets of privately held American Gateway
Telecommunications, Inc. ("AGT"), a provider of wholesale international long
distance services, primarily to entrepreneurial carriers. 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 Richardson, Texas, AGT provides
wholesale long distance service to international countries through a network
comprised of foreign termination agreements, international gateway switches,
leased transmission facilities and resale arrangements with other long distance
providers. AGT is leveraging CTL's scalable DSS Switch to route international
long distance calls. The DSS Switch enables AGT to enter new markets and capture
calls at a low per minute, per customer cost creating a competitive advantage
over traditional wireline carriers.

On September 30, 1998, we completed the acquisition of INET Interactive Network
System, Inc. ("INET"), through the merger of INET into one of our wholly owned
subsidiaries. INET provides international long distance services to commercial
and residential "affinity" groups. Headquartered in Los Angeles, California,
INET markets international long distance services, primarily to French and
Japanese speaking people in the U.S. INET provides a range of long distance
services including 1+ direct dialing. Other telephone services include 1-800/888
numbers, calling card and prepaid debit card services, international callback,
security codes, and access codes. For high volume customers, INET provides
tailored services including customized billing, telemanagement reports, and call
analysis.

In November 1998, we announced the formation of a joint venture,
TelecomAlliance, with Profitec, Inc. TelecomAlliance is designed to enhance the
growth and liquidity of entrepreneurial carriers. TelecomAlliance plans to
develop and manage a new telecom network, combining voice and data transmission
services, as well as back office services, e.g., billing, customer service and
service provisioning. TelecomAlliance plans to provide its member companies with
wholesale long distance and Internet services at new price points.
TelecomAlliance intends to build a facilities-based network with its own
switching equipment and co-location arrangements and intends to contract with


                                       21
<PAGE>
nationwide carriers for communications routes. While we have no financing
commitments to TelecomAlliance, we are committed to provide certain services and
to provide switching equipment at prevailing market prices. TelecomAlliance is
planned to be a self-funded operation. To date, TelecomAlliance has completed
market research, marketing communications and network design. Our long distance
service subsidiary, INET, has contracted to be a member of the alliance and is
currently the sole member. TelecomAlliance is not yet processing traffic.
Profitec, based in Wallingford, CT, provides billing, back office and financial
services to the telecom reseller market.

In January 1999, we formed Coyote Communications Services LLC ("CCS"), designed
to provide network operations and support services to our customers and other
new, entrepreneurial carriers. Based in Norcross, GA, CCS provides a range of
services, including network operations and on-site facilities support, network
design and consulting services, switch provisioning, outsourcing, on-site
technical support, remote monitoring and billing administration.

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


Segments
---------------------------
For the year ended March 31, 1999, our business is reported for two operating
segments: one operating segment is telecommunications equipment and the other
operating segment covers the provision of long distance services. (See Note 13
to the Consolidated Financial Statements).


Results of Operations - Fiscal Year Ended March 31, 1999 versus March 31, 1998
--------------------------------------------------------------------------------
For the fiscal year ended March 31, 1999, we had revenues of $43.3 million,
representing a $37.9 million, or 704%, increase over the prior fiscal year.
Revenue from the sales of DSS switches and related OEM equipment increased to
$36.6 million in fiscal 1999 from $5.4 million in the prior year. The
international long distance service subsidiaries that were acquired during
fiscal 1999 generated revenues of $6.7 million. The increase in revenues over
the prior fiscal year is primarily due to successfully completing six contracts
for the sale of DSS Switches and associated OEM equipment. The revenue from
these contracts was $35.4 million. The success in completing these contracts was
primarily related to our ability to identify and obtain funding for our
customers through third party lessors. These sales are generally non-recurring
and it is difficult to predict to what extent the increase will continue.
However, we are currently working on several equipment sale transactions which
are dependent upon lease financing.

Revenues in fiscal 1999 included shipments of switching equipment to eight new
customers. Most of these contracts were sold and financed through third party
lessors. Under these arrangements, the equipment is sold to a leasing company,
the leasing company pays us and leases the equipment to the end user. Total
revenues of $35.4 million were financed in this manner in fiscal 1999. To
provide the leasing company with some security in the event of default by the
end user, many of the agreements with third party lessors require us to place a
refundable security deposit with the third party lessors based on the equipment
component and gross value of the transaction. The amount of these security
deposits at March 31, 1999 is $2.2 million. At the point that the terms of each
lease transaction are satisfied, the security deposits associated with that
lease will be refunded to us. As refund of the security deposits is contingent
on the end user completing their payment obligation, we have reserved the full
amount of these deposits and have not recognized profits on that portion of our


                                       22
<PAGE>
contracts subject to deposits or other contingencies. In certain of these
instances, we have also issued warrants to the third party lessors as part of
the transaction.

One $7.2 million equipment sale to Wireless USA, an emerging domestic and
international long distance service provider, initially resulted in extended
payment terms being granted by us while the customer sought lease financing.
Wireless USA was successful in procuring lease financing and we are awaiting the
final one-third payment due in accordance with the lease agreement. We have
recognized profit on this transaction as payments were received. As of March 31,
1999, a profit deferral of approximately $1.5 million remains on this
transaction representing the final one-third payment due.

Additional profit deferrals of $1.6 million have been made in respect of
transactions that have been financed by third parties and, at March 31, 1999,
final payment to us is pending under the terms of the lease agreements.

The revenue generated from sales of switching equipment is $36.6 million in
fiscal 1999 with a gross margin of 37%. If the fiscal 1999 gross margin for the
switching equipment were not impacted by the security deposits and profit
deferral, the gross margin on revenue of $36.6 million would be $19.0 million,
or 52%. The international long distance service subsidiaries that were acquired
during fiscal 1999 generated a gross margin of $0.9 million, or 13% of long
distance service revenues.

The total gross margin for all lines of business for fiscal 1999 is $14.6
million, or 34% of total revenues, as compared with the fiscal 1998 gross margin
of $2.0 million, or 38% of total revenues. In fiscal 1998, all of the revenues
were derived from the sale of switching equipment systems.

Selling, general and administrative expenses for fiscal 1999 were $17.4 million
versus $15.4 million for the same period last year. This increase is primarily
related to the additional operating expenses incurred by the recently acquired
long distance service provider subsidiaries and the increased sales commissions
and expenses associated with the significant increase in switching equipment
sales.

Engineering, research and development expenses for fiscal 1999 are $9.5 million,
or 22% of sales, as compared with $5.0 million, or 92% of sales, for the prior
fiscal year. We have continued to enhance product offerings to meet current and
anticipated customer demand, including further refinement of our client/server
architecture on our switch and the development of voice over Internet Protocol.

The operating loss for fiscal 1999 is $12.4 million versus a fiscal 1998 loss of
$21.7 million. The improvement over the prior year is primarily the result of
the increase in gross profit generated by the increase in revenues and partially
offset by increased operating expenses, including engineering, research and
development activity.

Interest expense for fiscal 1999 is $1.9 million versus $2.3 million for the
prior year. The prior year included a $1.9 million charge related to the
discount from market value of the common stock issued upon conversion of the 8%
convertible notes issued in principal amounts of $2.5 million and $5.0 million
in July 1997 and December 1997, respectively. The 1999 fiscal year expense of
$1.9 million is comprised primarily of financing costs related to the operations
of the international long distance service subsidiaries.

                                       23
<PAGE>
Non-operating income for fiscal 1999 is $0.4 million versus the fiscal 1998
expense of $0.1 million. The current year includes an expense of $0.6 million
associated with issuing warrants as part of securing financing and other charges
of $0.2 million. Offsetting the expense charges is a gain of $0.9 million
related to the sale of Concentric Network Corporation securities and interest
income of $0.3 million. Fiscal 1998 non-operating expense of $0.1 million was
primarily due to a loss on the sale of securities.

The net loss for continuing operations for fiscal 1999 is $13.8 million versus
the prior period net loss of $34.2 million. The fiscal 1999 loss represents a
basic and fully diluted loss per common share of $1.41 versus a comparable loss
of $4.60 for the prior year. The loss from discontinued operations for fiscal
1999 is $0.9 million and increases the basic and fully diluted per share loss to
$1.50. The fiscal 1998 loss of $34.2 million included a non-cash expense of $5.5
million related to potential conversion of Class A and B units and a non-cash
expense of $8.0 million for warrants anticipated to be issued in connection with
securities litigation.


Results of Operations - Fiscal Year Ended March 31, 1998 versus March 31, 1997
--------------------------------------------------------------------------------
CTL had revenues of $5.4 million in fiscal 1998, primarily from the sale of DSS
Switches, compared to revenues of $7.2 million 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 INET, a company that was one of our potential acquisition targets
and which we subsequently acquired. The sale, which involved a third party
lessor, occurred in March 1998. We have deferred recognition of gross profit on
this sale as if the potential acquisition target was an affiliate at the time of
the sale (in effect, we eliminated profit on the sale as if it were an
inter-company transaction). 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 $1.3 million for professional audit
and legal costs, primarily related to acquisitions that were not consummated.
Selling and administrative expense in fiscal 1998 also includes a charge of $2.2
million 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.

Engineering, research and development expenses of $5.0 million in fiscal 1998
increased by almost 25% over the prior fiscal year as we continued to enhance
product offerings. An explanation of our accounting policy for these expenses is
included in Note 1 to the Consolidated Financial Statements.

Operating expenses included a charge of $5.5 million. This non-cash charge
pertained to the Class A and Class B units owned by certain of our directors and
employees which became convertible into our 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 12).

Interest expense of $2.3 million included a non-cash charge of $1.9 million
related to the discount from market value of our common stock issued upon
conversion of the 8% convertible notes, which were issued in principal amounts


                                       24
<PAGE>
of $2.5 million and $5.0 million in July 1997 and December 1997, respectively.
The details and terms of the notes are described in Note 8 to the Consolidated
Financial Statements.

Subsequent to 1998 fiscal year end, we reached an agreement in principle to
settle the claims against us which arose out of certain securities litigation
(See Item 3). We recorded a non-cash expense of $8.0 million for the fair market
value of warrants expected to be issued in such settlement in the financial
statements for the fiscal year ended March 31, 1998. Details and terms of the
warrants are described in Note 8 to the Consolidated Financial Statements.

The increase in loss from continuing operations in fiscal 1998 is primarily due
to (a) an increase in general and administrative expense of $1.1 million
primarily related to legal and other expenses incurred in market development and
due diligence examination of potential acquisitions; (b) an increase in
engineering, research and development expense of $0.9 million (c) an increase in
interest charges of $2.0 million including a non-cash charge of $1.9 million
with respect to the discount from market value of our common stock issued upon
conversion of the 8% convertible notes described above; (d) a non-cash expense
of $5.5 million related to the potential conversion of Class A and B Units; (e)
expenses incurred in connection with the failed acquisition previously
described; and (f) a non-cash expense of $8.0 million for warrants expected to
be issued in connection with securities litigation.


Liquidity and Capital Resources
---------------------------------
As of March 31, 1999, we had a negative working capital of $0.7 million. In May
1999, as part of our efforts to provide additional working capital, we received
$10.2 million in net proceeds from a private placement. The placement agent
received cash commissions of $352,000 and commissions in the form of common
stock aggregating 131,148 shares and five-year warrants to purchase 176,700
shares at $6.00 per share. From the net proceeds of this placement, we paid $4
million to redeem 100 shares of the 700 shares of 5% Series A Convertible
Preferred Stock which were issued and outstanding as at March 31, 1999. In
connection with the redemption, the conversion price of the remaining $6 million
of Convertible Preferred Stock was fixed at $6.00 per share and we issued the
holder of the Convertible Preferred Stock 18-month warrants to purchase 325,000
shares of common stock at $6.00 per share.

In July 1999, we received an offer for a commitment for a stand-by credit
facility from certain shareholders that would provide a funding commitment to us
of $3.5 million. This facility would be secured by the stock of INET, bear 12.5%
interest on the outstanding principal balance and be repayable on March 31,
2000. We intend to enter into a definitive agreement only if these funds are
needed to support the operation. The Company has also entered into an agreement
to sell its shares of iCompression, Inc. for $1.9 million. The agreement was
consummated and we received $1.9 million in July 1999.

In February 1999, we entered into definitive agreements with AMAC of Minnesota,
Inc. for a loan to us of $10.0 million. This loan was intended to be for a
five-year term, bear interest at 8% per year and be secured by our common stock.
Despite repeated assurances that the funding was forthcoming, AMAC has not
fulfilled its commitment, the loan has not been received, is long overdue and
there can be no assurance that it will be received. We are now considering what
course of action to take.



                                       25
<PAGE>
We used cash from operating activities of $6.1 million during fiscal 1999
compared to using $8.5 million during fiscal 1998. This improvement in operating
cash flow in fiscal 1999 is primarily due to the improvement in the operating
profit generated by the 704% increase in revenues over fiscal 1998.

We used cash for investing activities of $4.5 million during fiscal 1999
compared to $14,000 provided from investing activities in fiscal 1998. Capital
expenditures on equipment purchases and software of $4.8 million in fiscal 1999
represented an increase of $4.2 million above the prior fiscal year. Purchases
were primarily for additional computer and test equipment required to support
the switching equipment segment of the business and software for certain
internet protocol and compression capabilities.

Net cash used in investing activities in fiscal 1999 also included cash paid in
connection with increases in investment in affiliates and acquisitions of $1.7
million. We gained $0.9 million from the sale of investments in fiscal 1999. In
fiscal 1999, we received net cash proceeds of $6.3 million from the issuance of
700 shares of 5% Series A Convertible Preferred Stock and warrants, a portion of
which we redeemed for $4 million and warrants in fiscal 2000. (See Note 8 to the
Consolidated Financial Statements).

As of March 31, 1999, we have notes payable of $8.2 million. These notes are
secured by certain of our assets and by 708,692 shares of our common stock and
bear interest at the bank's prime rate (currently 7.75%) plus 1/2%. These notes
were due on demand. In July 1999, the payment date was extended to December
2001. In addition, we have capital lease obligations of $2.6 million at March
31, 1999, payable through 2004 and a note payable of $0.4 million due February
2000.

We also have a $2.2 million revolving line of credit secured against certain
trade receivables. As at March 31, 1999, $1.1 million has been drawn against the
line, which bears interest at the bank's prime rate plus 4%. The line of credit
expires on February 29, 2000. We have a long-term obligation in the amount of
$1.7 million in connection with principal and interest due on subordinated
debentures, which bear interest of 11.25% per year. The debentures mature in the
year 2002 and interest only is due until such time.

We do not have any specific capital expenditure commitments at this time. Our
specific plans and actions to fund debt obligations and ongoing operations
include:

     (a)  Sale of iCompression stock;

     (b)  Refinancing of notes to improve short-term liquidity;

     (c)  Collection of existing receivables through the completion of customer
          lease financing on recent sales;

     (d)  Completion of contracts and associated lease financing of identified
          new customers; and

     (e)  Exercise of options, warrants and the possible sale of other equity
          instruments.

We are currently exploring means of raising capital through debt and equity
financing to fund our immediate working capital needs. In addition, we will need
additional capital to fund our future operations and acquisition strategy. We
believe that we will be able to continue to fund our operations and acquisitions
by obtaining additional outside financing; however, there can be no assurance
that we will be able to obtain the needed financing when needed on acceptable
terms or at all or that we will be able to carry out the plans outlined above.

                                       26
<PAGE>
Third Party Lease Financing
-------------------------------
To facilitate the sale of our equipment, we often arrange lease financing for
the purchaser. Parties providing the third party lease financing include
Comdisco and PrinVest and, recently, RCC Financing Group, Ltd. agreed in
principle to provide lease financing to creditworthy customers, with a goal of
providing $50 million by March 31, 2000.


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.


Backlog
-------------------------------
We only include in our backlog written orders for products and related services
scheduled to be shipped within one year. We do not believe that the level of, or
changes in the levels of, our backlog is necessarily a meaningful indicator of
future results of operations.


Recently Issued Accounting Standards
-------------------------------------
In June 1998 and June 1999, the AICPA issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" and SFAS No. 137 which deferred
the effective date of SFAS No. 133. We will adopt the standard in April 2001
and do not expect the adoption to have any material impact on our financial
position or results of operations.





                                       27
<PAGE>
                   =========================================
                                  RISK FACTORS
                   =========================================

We have only recently entered the telecommunications industry and have a limited
operating history in such industry; therefore, we expect to encounter risks
frequently faced by new entrants into this rapidly evolving market, such as
difficulty obtaining acceptance and generating sales of our products.

     Although we were originally incorporated in 1961, we did not enter the
telecommunications industry until 1994. Accordingly, we have a limited operating
history in the telecommunications business upon which you can evaluate our
current business and we are subject to the risks typically encountered in a
relatively new business. In order to be successful, we must increase the level
of sales of our products and services, and increase their acceptance in the
marketplace. Some of the risks and uncertainties we face while we continue to
develop our experience in this market relate to our ability to:

     -    sell our products and services;

     -    generate significant revenues from our sale of long distance minutes;

     -    integrate acquired businesses, technologies and services; and

     -    respond to rapidly changing technologies and competitors' development
          of similar products.


     We may not be successful in accomplishing these objectives. Our inability
to increase market awareness and demand for our products could adversely affect
our sales and revenues and our ability to compete in the telecommunications
industry.

We have experienced and may continue to experience operating losses and negative
cash flow from operations, which could adversely affect our ability to carry out
our business plan and attain profitability.

     Our ability to achieve profitability and positive cash flow from operations
is uncertain. We have incurred substantial costs in growing our business and by
acquiring complementary businesses and technologies. For the last four fiscal
years, we incurred losses from our continuing operations. Our net sales during
the same period, $264,000 in the 1996 fiscal year, $7,154,000 in the 1997 fiscal
year, $5,387,000 in the 1998 fiscal year and $43,318,000 in the 1999 year, did
not offset our operating losses in each of these years. In addition, we
experienced negative cash flow from operations of $17,859,000, $8,475,000 and
$6,125,000, in fiscal years 1997, 1998 and 1999, respectively. To achieve
profitability and positive cash flow, we must increase the sales of our products
and services. If we are unable to increase our sales, we may not generate enough
revenues to carry out our business plan and achieve profitability. Even if we do
achieve profitability and positive cash flow, we may not sustain or increase
profitability and positive cash flow in the future.



                                       28
<PAGE>
We have negative working capital and if we are unable to obtain the required
substantial additional financing to carry out our business plan, we may be
unable to carry out our planned expansion of operations.

     As of March 31, and December 31, 1999, we had negative working capital of
$659,000 and $4,300,000, respectively. Although we anticipate that available
funds and cash flow from operations will enable us to meet our anticipated
working capital needs over the next 12 months our current business plan
contemplates growth through acquisitions, which would require substantial
additional financing and we cannot assure you that the required additional
financing will be available to us on favorable terms or at all. If we are unable
to obtain adequate funds at all or on acceptable terms, we may have to reduce
the scope of our planned expansion of operations; we may also be unable to take
advantage of acquisition opportunities, develop or enhance services or respond
to competitive or business pressures, all of which could have a material adverse
effect on our business, results of operations and financial condition.


     In addition, until we achieve higher sales and more favorable operating
results, our ability to obtain funding from outside sources of capital could be
restricted. Although our short-term liquidity has improved recently, we cannot
be certain that we will maintain sufficient liquidity for the length of time
required to achieve our operating goals or to successfully integrate the
operations of our acquired businesses into our own.

     Factors that could further increase our need for additional capital
include:

     -    our discovery of one or more additional attractive acquisition
          opportunities;

     -    the failure of our operating cash flow to meet our working capital and
          capital expenditure needs; and

     -    the growth of our company beyond our current expectations.

     If we raise additional funds by issuing equity securities, stockholders may
experience dilution of their ownership interest and such securities may have
rights senior to those of the holders of our common stock. If we raise
additional funds by issuing debt, we may be subject to certain limitations on
our operations, including limitations on our payment of dividends.

     In February 2000, we sold close to 20% of our outstanding common stock in a
private placement. Accordingly, under NASD rules, we may not be able to obtain
additional financing through another private placement in the near further
without shareholder approval or a waiver from the NASD.


We may continue to experience the consequences from adverse publicity which we
received in December 1998, including an inquiry from Nasdaq, decreases in the
price of our common stock or disruption in trading.

     In December 1998, we received publicity, which adversely affected our stock
price, from several articles published by TheStreet.com, an Internet
publication, which implied, among other things:

     -    that one of our end-user customers, Crescent Communications, Inc. did
          not exist; and

     -    that our sale of equipment to Crescent through a third party,
          Comdisco, Inc., was invalid.

                                       29
<PAGE>

     We believe that as a result of this publicity, The Nasdaq National Market
and the Securities and Exchange Commission have commenced inquiries regarding
our sale to Crescent Communications and other transactions. We were requested to
furnish, and have furnished, a number of documents and although we were advised
in November 1999 that the SEC had dropped its investigation, we do not know the
status of The Nasdaq National Market inquiry. The Nasdaq National Market inquiry
may continue to divert the attention of our management from day-to-day
operations which could have a material adverse effect on our business, results
of operations and financial condition.

     If the Nasdaq inquiry results in a negative outcome, The Nasdaq National
Market could impose a variety of sanctions against us, including possible
de-listing. These sanctions could adversely affect our financial condition or
the trading or registration of our common stock and/or its price.


We may not receive expected revenues because a customer may not fulfill its
obligation to purchase additional equipment and services from us and our failure
to receive these revenues could contribute to our operating losses or adversely
affect our cash flow.

     We typically sell equipment through a third party leasing company which
pays us for the equipment and then leases it to our customers. Crescent
Communications ordered equipment from us, which we sold to Comdisco, Inc.
Comdisco paid us the full $12 million for that equipment and then leased it to
Crescent under a separate contract between Comdisco and Crescent. Our agreement
with Crescent contemplated Crescent ordering an additional $16 million in
equipment and $9 million in services from us. However, Crescent Communications
has not been able to implement its business plan as scheduled and has not
purchased the additional equipment or generated the sales which would enable it
to purchase the $9 million in services from us. Our future sales to Crescent
will depend upon Crescent's ability to:

     -    implement its business plan;

     -    get its system operational;

     -    retain the 30 million minutes of communications traffic it had letters
          of intent for at the time of our agreement in September 1998;

     -    obtain additional commitments for minutes of communications traffic;
          and

     -    translate those minutes and commitments into successful operations and
          cash flows.

     We will not deliver any additional equipment to Crescent unless it first
obtains third party financing. We cannot control the development of Crescent or
its business and we may not receive any additional revenue from sales of our
equipment to Crescent through Comdisco or another third party, or from sales of
our services directly to Crescent. Crescent's inability to purchase additional
equipment could result in the loss of revenue we had planned on generating,
decreasing our anticipated cash flow and increasing our cash requirements.


Our operating results vary significantly, which could adversely affect our
ability to manage our expenses in any given period and could also affect our
stock price.

     Our quarterly operating results have fluctuated and may continue to
fluctuate significantly in the future due to a variety of factors, many of which


                                       30
<PAGE>
are outside of our control. As a result, we believe that period-to-period
comparisons of our operating results may not be meaningful, especially as
indicators of our future performance. In addition, it is difficult for us to
predict the occurrence of factors which may lead to such fluctuation. Because we
base our expense levels in part on expectations regarding future sales, we may
be unable to adjust spending in a timely manner to compensate for any unexpected
shortfall in sales. A significant shortfall in demand relative to our
expectations, or a material delay in customer orders, could have a material
adverse effect on our ability to meet our financial commitments. In recent
periods, slower than expected closings of lease transactions and financings have
adversely impacted our results and strained our liquidity. Some of the factors
which cause fluctuation include:


     -    fluctuations in the volume of calls, particularly in regions with
          relatively high per-minute rates;

     -    the addition or loss of a major customer;

     -    the loss of economically beneficial routing options for our traffic;

     -    pricing pressure resulting from increased competition;

     -    market acceptance of new or advanced versions of our products;

     -    technical difficulties or failures with portions of our network;

     -    fluctuations in the rates charged by carriers for our traffic and in
          other costs associated with obtaining rights to switching and other
          transmission facilities; and

     -    changes in the staffing levels of our sales, marketing and technical
          support and administrative personnel.

     Changes in or difficulties experienced by our customers in fulfilling their
business plans, economic conditions and related financing have caused some of
our customers to not meet previously announced estimated purchase requirements.
In addition, some of our contracts contemplate the purchase of additional
equipment or the provision by us of maintenance and other services, which are
dependent on our customers installing their equipment, placing it into service
and otherwise fulfilling their business plans, which may not occur on a timely
basis or at all.


We have sold our non-telecommunications businesses and are no longer
diversified. Any decline in our telecommunications business will materially
affect our financial condition.

     We have sold our non-telecommunications businesses in order to concentrate
on developing our telecommunications business. We are now focused solely on the
development and sales of our telecommunications products and services. Our
company has become smaller and less diverse than in the past, with fewer fixed
assets and a smaller revenue base. A decrease in the sales of our
telecommunications products and services will no longer be offset by revenues
from our businesses in other industries, and will therefore directly and
adversely affect our revenues and results of operations.

                                       31
<PAGE>
We plan to expand our business by acquiring complementary businesses and any
difficulties we encounter in acquiring such businesses or integrating those
businesses into our company may adversely affect our operations and our ability
to compete in the telecommunications industry.

     Our growth strategy is to expand through the acquisition of other
businesses which are complementary to our own. Since April 1998, we acquired two
such businesses, American Gateway Telecommunications ("American Gateway") and
INET Interactive Network System, Inc. (although we divested ourselves of
American Gateway in October 1999). Our management must devote a significant
amount of time and attention to integrating newly acquired businesses into our
company, which may divert their attention from our day-to-day operations. We
must also allocate some of our financial resources to the integration process
which, along with the diversion of management's attention, may adversely affect
our business, results of operations and financial condition. When we acquire a
company, we sometimes face difficulties in assimilating that company's personnel
and operations. In addition, key personnel of the acquired company might decide
not to work for us. If we are unable to successfully integrate our new
businesses into our existing operations, the new businesses may not operate at a
profitable level and we may not be able to recoup the cost of acquiring the new
businesses.

     Our common stock price has not fully recovered from its December decline
and we may encounter difficulties in acquiring other businesses using our common
stock as a form of payment. We also invest financial and management resources
into potential acquisitions of businesses that we do not ultimately acquire. We
terminated our pending acquisition of Apollo Telecom, Inc. due to its inability
to satisfy all of the closing conditions. In addition, our pending acquisition
of additional interests in Systeam, S.p.A.had been postponed indefinitely due to
our inability to timely raise the needed capital. We ultimately sold our
interest in Systeam in February 2000. If we are unable to acquire other
businesses that are complementary to our own and expand our range of products
and services, this may adversely affect our growth strategy and our ability to
compete in the telecommunications industry.

We have recently entered the application services market and any difficulties we
have in establishing our business in that area may adversely affect our
operations.

     As part of our strategy, we have recently entered the application services
market, in which we have only limited experience and which involves all of the
risks commonly associated with the established of new lines of business. The
likelihood of our success must be considered in light of the problems, expenses,
difficulties, complications and delays frequently encountered in connection with
the establishment of new lines of business. Any difficulties we encounter may
divert our financial resources and the attention of our management and adversely
affect our business and operations.


If  we  are  unable  to  successfully  introduce  our  products,   services  and
technologies into the telecommunications marketplace, our business and financial
condition may be materially adversely affected.

     While our products are targeted primarily to smaller carriers of telephone
and Internet communications who cannot afford larger switches and gateways, this
is an emerging market and there has been no historical demand for our products.
We are working to create a larger market for our products but if there is no
demand for them, our sales and revenues may decrease, which could have a
material adverse effect on our results of operations and financial condition. A
variety of factors, many of which are beyond our control, could affect the


                                       32
<PAGE>
demand for our products and technology. These factors include:


     -    the cost of the various components that we must purchase in order to
          market our DSS Switch and other products, which is reflected in our
          prices;

     -    the compatibility of our customers' systems and infrastructure with
          our products and services;

     -    consumer demand for advanced telecommunications services; and

     -    the emergence of alternative approaches to the delivery of
          telecommunications services.


If our products become obsolete or incompatible with emerging  technologies,  we
may be unable to sell our products which could have a material adverse effect on
our revenue and results of operations.

     Our potential customers, including other telecommunications companies, may
choose to buy other emerging products that use different technologies but serve
the same purposes as our products. Our products may also be technologically
incompatible with the systems of our potential customers. The telecommunications
industry and its technology are evolving rapidly, and new products and services
are constantly being introduced into the marketplace which may render our
products' technology obsolete. Products which involve the use of the Internet
for international voice and data communications are among the new products which
compete with ours, including our Carrier IP Gateway. If we are unable to conform
our operations, products and services to new technological developments and
compete with other sellers of telecommunications products, our product sales
could decrease or we may be unable to sell our products. Our inability to sell
our products or a decrease in our sales could result in a decrease in revenues
and results of operations.


The telecommunications industry is highly competitive and our inability to
compete successfully could decrease the demand for our products and adversely
affect our sales revenues.

     We sell our products, including our DSS Switch and our Carrier IP Gateway,
in competition with several other sellers of similar telecommunications
equipment. Some of our competitors include Nortel, Cisco Systems, Lucent
Technologies, Newbridge Networks and Digital Switch Corporation. Many of our
competitors have longer operating histories, greater name recognition, larger
customer bases and significantly greater financial, technical and marketing
resources than we do. In addition, it is possible that large telecommunications
companies with significantly greater financial resources than ours, including
AT&T Corporation, MCI Worldcom Communications and Sprint, could begin selling
products similar to our DSS Switch and Carrier IP Gateway. Such potential
competitors have the financial and other resources necessary to engage in
prolonged price competition to gain market share, which could force us to lower
our prices and reduce the profitability of sales. If we are unable to
successfully compete in the marketplace, our sales and revenues could decrease
and this could have a material adverse effect on our business, results of
operations and financial condition.



                                       33
<PAGE>
     The international telecommunications industry is also intensely competitive
and subject to rapid change. INET's competitors in the retail and wholesale
international long distance market include:


     -    multinational corporations;

     -    service providers in the U.S. and overseas that have emerged as a
          result of deregulation;

     -    switchless and switch-based resellers of international long distance
          services;

     -    joint ventures and alliances among such companies;

     -    dominant telecommunications operators that previously held various
          monopolies established by law over the telecommunications traffic in
          their countries; and

     -    U.S. based and foreign long-distance providers that have the authority
          from the Federal Communications Commission to resell and terminate
          international telecommunications services.


     In addition, consolidation in the telecommunications industry could not
only create even larger competitors with greater financial and other resources,
but could also affect us by reducing the number of potential customers for our
products and services. If we are unable to sell our products and services to the
remaining potential customers, this could further hamper our ability to attain a
profitable level of sales.

     International competition also may increase as a result of the competitive
opportunities created by a new Basic Telecommunications Agreement concluded by
members of the World Trade Organization in April 1997. Under the terms of such
agreement, starting February 1998, the United States and more than 65 countries
have committed to open their telecommunications markets to competition and
foreign ownership and to adopt measures to protect against anti-competitive
behavior.


The  telecommunications  industry is highly regulated and future regulations may
have an adverse effect on our business.

     The federal government, through the Federal Communications Commission and
other federal agencies, regulates and administers the telecommunications
industry by passing laws and regulations that control prices, competition and
the sale of long distance minutes. Foreign governments perform similar functions
overseas. The U.S. Congress, the FCC or foreign governments may adopt new laws,
regulations and policies that may directly or indirectly affect us in the
future. The adoption of new legislation or regulations which impact
telecommunications businesses could have a material adverse effect on our
business. We are unable to predict the impact of regulations which may be
adopted in the future.


We depend  primarily  on sales of one  product  for most of our  revenue and our
inability to achieve and maintain market  acceptance  could adversely impact our
ability to compete in the telecommunications industry.

     In fiscal years 1998 and 1999, most of our revenue came from the sale of
our principal product, our DSS Switch. Any reduction in such sales could have a
material adverse effect on our business, results of operations and financial
condition. To maintain the sales of our DSS Switch, we must continue to enhance


                                       34
<PAGE>
its technology to keep pace with industry standards and developments. We must
also maintain its compatibility with our customers' technology, equipment and
software.

     Our ability to achieve market acceptance of our DSS Switch depends on our
ability to maintain a low rate of undetected and unresolved errors in new
versions of its complex software. In the past, we have discovered software
errors in DSS switch installations, and although we test our equipment and
software rigorously, we may find similar errors in the future in new versions of
the DSS Switch and our Internet Protocol products. These errors could delay our
installation of DSS Switches and decrease market acceptance of our products,
which could have a material adverse effect on our ability to compete in the
telecommunications industry and our overall business, results of operations and
financial condition.


Our  inability to develop and market new  products  could  adversely  affect our
sales and revenue.

     In order to reduce the effect a decline in sales of our DSS Switch could
have on our revenues, we must also cost-effectively develop and introduce new
products on a timely basis, such as the Carrier IP Gateway. We cannot guarantee
that we will be able to successfully develop, introduce and market new products,
or that our new products and product enhancements will achieve market
acceptance. We have experienced delays in completing and developing new products
and features, and we cannot assure you that similar delays will not occur in the
future. In addition, future technological advances in the telecommunications
industry could decrease acceptance of our products. If we are unable to develop
new products and successfully market them, we may not be able to attain
profitability if sales of our DSS switch decline and this could have a material
adverse effect on our business, results of operations and financial condition.


We depend on relationships with a limited number of suppliers and any difficulty
in obtaining  products or components  from them could  materially  and adversely
affect our relationships with our customers.

     Our business could be adversely affected if we do not maintain our existing
relationships with key suppliers of the necessary components of our products.
Certain components used in our products are available from only a limited number
of suppliers and failure by a supplier to deliver quality products on a timely
basis, could have a material adverse effect on our ability to sell our own
products. In addition, due to market demand certain suppliers, from time to
time, allocate supplies among customers. We compete with many larger
telecommunications companies that may have a higher priority in receiving
components from this limited supply. If we are unable to obtain components for
our products and are unable to provide them to our customers on time or at all,
our relationships with them may be adversely affected and demand for our
products could decline, causing a material adverse effect on our sales and
revenues. To protect ourselves against such occurrences we have established
relationships with alternative suppliers.


If the protection of our intellectual  property rights is inadequate or if third
parties subject us to claims of infringement, our ability to manufacture, market
and sell our products may be adversely affected.

     We rely on a combination of trade secrets, confidentiality and non-compete
agreements to protect our products and their specific features. Despite our
efforts to protect our proprietary rights, unauthorized parties may attempt to
copy aspects of our products or to obtain and use information that we regard as


                                       35
<PAGE>
proprietary. Competitors may also independently develop technologies that are
substantially equivalent or superior to ours. Effective trademark, service mark,
copyright and trade secret protection may not be available in every country in
which we market our products and services. Our failure to protect our
intellectual property rights and proprietary information could enable others to
build products comparable or superior to ours which they could sell to our
potential and existing customers. If this occurs, our customer base could be
reduced and our sales and revenues could be adversely affected.

     We cannot assure you that the steps taken by us will prevent
misappropriation of our technology or that the agreements entered into for that
purpose will be enforceable. Litigation may be necessary to enforce or protect
our intellectual property rights or to defend against claims of infringement.
Litigation for these purposes could be costly and could divert the attention of
our management from day-to-day operations, which could have a material adverse
effect on our business, results of operations and financial condition. A
negative outcome in intellectual property litigation could cost us our
proprietary rights, subject us to significant liabilities, require us to seek
licenses from third parties (which they may not be willing to grant) or prevent
us from manufacturing or selling our products, all of which could have a
material adverse affect on our ability to compete in the telecommunications
industry and our overall business, results of operations and financial
condition. We are currently involved in litigation to defend a claim that our
use of the name "Coyote" infringes on the rights of the plaintiff. We cannot
assure you that we will prevail in this litigation.


We have  historically  made equipment sales to a limited number of customers and
the loss of one or more major  customers could  materially and adversely  affect
our sales revenues.

     We made shipments of our products to 16 customers in fiscal year 1999,
seven of which accounted for approximately 93% of our total equipment revenues.
Customers accounting for 10% or more of total equipment revenues were Crescent
Communications, Inc. (30%), Dakota Carrier Services (19%), Wireless USA, Inc.
(17%) and DTA/I:COMM Networks (11%). In fiscal year 1998, we made shipments to
12 customers. One customer, INET Interactive Network System, Inc., accounted for
approximately 40% of our total revenues and Apollo Telecom, Inc. accounted for
20% of total revenues. In fiscal year 1997, 94% of our revenues came from sales
to Concentric Network. We expect that our dependence on sales to a limited
number of customers will continue, and the loss of one or more of our major
customers could substantially decrease our sales revenues and adversely affect
our results of operations and financial condition.


Our  inability to  effectively  manage our growth and retain  skilled  personnel
could delay our  development  of new  products and the  enhancement  of existing
products.

     We have experienced growth in the number of our employees and the scope of
our operations. To manage potential future growth of our operations, we must
improve our operational, financial and management information systems. We will
also be required to expand, train, motivate and manage our employee base on a
timely basis. We face intense competition in the market for qualified technical,
sales, marketing, network operations and management personnel and our success
will depend on our ability to attract and retain them. We have in the past
experienced delays in filling sales and engineering positions. We may not be
able to achieve or manage growth, and our inability to do so could delay our
development of new products and our enhancement of existing products, which
could negatively impact our ability to compete in the telecommunications
industry or otherwise have a material adverse effect on our business, results of
operations and financial condition.


                                       36
<PAGE>
The loss of the  services  of our key  personnel  could have a material  adverse
effect on our growth, business and financial condition.

     In January 2000, James R. McCullough succeeded James J. Fiedler as Chief
Executive Officer. Our future success depends, in part, on the continued
services of our senior management, particularly James R. McCullough, our Chief
Executive Officer. We have entered into an employment agreement with Mr.
McCullough, which terminates on January 14, 2003. The loss of the services of
Mr. McCullough could adversely affect the expansion of our operations into the
applications services market, which could have a material adverse effect on our
growth, business and financial condition.


We may encounter  difficulties in expanding into  international  markets,  which
could affect our overall growth.

     We plan to increase our expansion into international markets, where we will
face risks inherent in international operations. Factors that may affect our
international operations include:

     -    our ability to obtain necessary permits and operating licenses in
          foreign countries;

     -    unexpected regulatory changes;

     -    fluctuations in international currency exchange rates;

     -    changes in political and economic conditions; and

     -    our ability to staff and manage international operations.


     If we encounter such difficulties in our international operations,
management's attention from other day-to-day operations could be diverted and
this could affect our results of operations. Managing operations in multiple
countries could also strain our ability to manage our overall growth and our
inability to do so could delay our development of new products and our
enhancement of existing products which could negatively impact our ability to
compete in the telecommunications industry or otherwise affect our business,
results of operations and financial condition.


We depend on third parties to finance our equipment customers and our inability
to arrange such financing in the future may materially and adversely affect our
business.

     Many of our customers are entrepreneurial telecommunications companies with
limited financial resources. They are often unable to pay for our equipment and
services without obtaining additional financing. Although we have arranged
financing for some of our customers in the past, through third parties, we
cannot assure you that we will be able to arrange similar financing in the
future. To arrange lease financing for our customers through third parties, we
have on occasion issued warrants to purchase our common stock and made other
financial considerations to the third party leasing companies, and we may need
to provide such inducements in the future. If our customers are unable to obtain
financing, they may decrease their purchases of our equipment and services,
which could decrease our sales revenues or otherwise adversely affect our
business, results of operations and financial condition.



                                       37
<PAGE>
Our common  stock price has been and may  continue to be  volatile,  which could
result in difficulty using our stock to make acquisitions and raising financing.

     The market price of our common stock has been volatile, in part due to the
negative publicity referred to above, and could be subject to further
fluctuations in response to factors such as:

     -    actual or anticipated fluctuations in our operating results;

     -    our announcement of potential acquisitions;

     -    industry consolidation;

     -    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; and

     -    general market conditions and other factors.

     These fluctuations may adversely affect the market price of our common
stock which could affect our ability to use such stock as consideration for
acquisitions and to raise financing.


Options, warrants,  convertible securities and other commitments to issue common
stock may dilute the value of the common stock.

     As of February 25, 2000, we had outstanding warrants and options to issue
up to 8,459,804 shares of common stock, of which up to 911,500 are subject to
shareholder approval and convertible securities convertible into up to 3,564,562
shares of common stock. If the common stock underlying such options, warrants,
convertible securities and commitments were issued, it could dilute the book
value per share, earnings per share and voting power of our outstanding capital
stock.


Existing stockholders may be able to exercise significant control over us.

     As of February 25, 2000, our officers and directors, as a group,
beneficially owned 11.5% of our outstanding common stock. In addition, according
to filed Schedules 13D and 13G, as of the dates of such filings, Alan J.
Andreini beneficially owned 8.7% and the Kiskiminetas Springs School owned 5.8%
of our common stock. Additionally, Richard L. Haydon beneficially owned 9.0%
of our common stock, JNC Opportunity Fund beneficially owned 4.999% of our
common stock and Ardent Research Partners beneficially owned 3.9% of our common
stock. Such stockholders may have significant influence on us, including
influence over the outcome of any matter submitted to a vote of the
stockholders, including the election of directors and the approval of
significant corporate transactions.



                                       38
<PAGE>
If our products,  software,  computer  technology and other systems are not Year
2000 compliant, our business will be materially and adversely affected.

     The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. In other words,
date-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in system failures or miscalculations
causing disruptions of operations, including, among others, a temporary
inability to process transactions, send invoices, or engage in similar normal
business activities.

     We have completed a comprehensive assessment of our principal products
operating systems and our internal systems to identify those that may be
affected by the Year 2000 issue. Based on our testing, we believe that our
customer products and our internal computer systems are Year 2000 compliant.
However, if we are not Year 2000 compliant, it could impair our ability to
process and deliver customer orders, manufacture compliant equipment and perform
other critical business functions, which could have a material adverse effect on
our business, results of operations and financial condition. We could also be
subjected to claims against us for the non-compliance of our products. The costs
of defending and settling such claims could have a material adverse affect on
our financial condition. Since January 1, 2000, we have not experienced any
adverse effects related to the Year 2000 issue.

     Because we believe that we are currently Year 2000 compliant, we do not
have a formal contingency plan in the event that an area of our operation does
not become Year 2000 compliant. We will adopt a formal plan if we believe that a
part of our internal systems or those of a critical third party will be
non-compliant. If we are wrong, our failure to prepare a contingency plan will
likely exacerbate the problem. Our Year 2000 due diligence and compliance
testing is ongoing and we will test any new, adjunct or upgraded products that
we integrate into our products or our internal computer systems. To date, our
costs associated with Year 2000 testing have not been material. Factors beyond
our control that could materially increase the cost or delay the date of our
Year 2000 compliance include the compliance of the systems of third parties.





                                       39
<PAGE>
--------------------------------------------------------------------------------
ITEM 7a. QUALITATIVE AND QUANTITATIVE MARKET RISK DISCLOSURES
--------------------------------------------------------------------------------

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


Interest Rate Sensitivity Model
--------------------------------

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

                                               Year Ending March 31
                                           (U.S. Dollars - Thousands)
                                      ------------------------------------
                                       1999      2000       2001     2002
                                       ----      ----       ----     ----
       Notes payables                 $8,180    $6,000    $3,000     $---
       Interest expense (A)              675       495       248      ---
       Interest expense (B)             ---        555       278      ---
       Interest expense (C)             ---        435       218      ---

       Line of credit borrowings       1,133     1,000       500      500
       Interest expense (A)              133       118        59       59
       Interest expense (B)             ---        128        64       64
       Interest expense (C)             ---        108        54       54

-    The borrowings bear interest at the bank's prime rate plus1/2% and 4% for
     the notes payable and line of credit, respectively.

-    The interest expense shown for line (A) is based upon the actual bank's
     prime rate at March 31, 1999 of 7.75%.

-    The interest expense shown for line (B) is based upon a hypothetical
     increase of one percentage point in the bank's prime rate to 8.75%.

-    The interest expense shown for line (C) is based upon a hypothetical
     decrease of one percentage point in the bank's prime rate to 6.75%.



                                       40
<PAGE>
--------------------------------------------------------------------------------
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
--------------------------------------------------------------------------------

                  COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES


Report of Arthur Andersen LLP, Independent Public Accountants............    42

Report of PricewaterhouseCoopers LLP, Independent Accountants............    43

Consolidated Balance Sheets..............................................    44

Consolidated Statements of Operations....................................    45

Consolidated Statements of Changes in Shareholders' Equity...............    46

Consolidated Statements of Cash Flows....................................    47

Notes to Consolidated Financial Statements...............................    48






                                       41
<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. (a Delaware corporation and formerly, The Diana Corporation) and
subsidiaries as of March 31, 1999 and 1998, and the related consolidated
statements of operations, shareholders' equity and cash flows for the years 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 audits.

We conducted our audits 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 audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Coyote Network
Systems, Inc. and its subsidiaries as of March 31, 1999 and 1998, and the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.


ARTHUR ANDERSEN LLP
Los Angeles, California
July 13, 1999




                                       42
<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 results of operations and cash flows of The Diana
Corporation and its subsidiaries (the "Company") for the year 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 audit. We conducted our audit 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 audit provides 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 15, 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 7, 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.



PRICEWATERHOUSECOOPERS LLP
Milwaukee, Wisconsin
September 22,  1997,  except as to the last  paragraph of Note 8,
     which is as of November 4, 1998




                                       43
<PAGE>
                  COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES
                           Consolidated Balance Sheets
                             (Dollars in Thousands)

<TABLE>
<CAPTION>
                                     Assets                             March 31, 1999      March 31, 1998
                                                                        --------------      --------------
Current assets:
<S>                                                                      <C>                   <C>
     Cash and cash equivalents                                           $   1,225             $  3,746
     Marketable securities                                                     ---                   16
     Receivables, net of allowance of $402 and $480 at                      12,292                  715
         March 31, 1999 and 1998, respectively

     Inventories                                                             2,130                2,122
     Notes receivable - current                                              2,367                2,796
     Other current assets                                                    4,323                1,409
                                                                         ---------             --------
                  Total current assets                                      22,337               10,804


Property and equipment, net                                                  8,192                2,391
Capitalized software development                                             1,604                ---
Intangible assets, net                                                       5,620                3,542
Net assets of discontinued operations                                          234                  909
Notes receivable - non-current                                                 871                1,170
Investments                                                                  1,550                  750
Other assets                                                                   620                  609
                                                                         ---------             --------

                                                                         $  41,028             $ 20,175
                                                                         =========             ========

                      Liabilities and Shareholders' Equity
Current liabilities:
     Lines of credit                                                     $   1,133             $  ---
     Accounts payable                                                        8,161                1,920
     Deferred revenue and customer deposits                                  7,811                1,900

     Accrued professional fees and litigation costs                            676                  805
     Other accrued liabilities                                               3,900                1,530
     Current portion of long-term debt and capital lease obligations         1,315                  141
                                                                          --------             --------
                  Total current liabilities                                 22,996                6,296

Notes payable                                                                8,183                ---
Long-term debt                                                               1,534                5,349
Capital lease obligations                                                    1,830                ---
Other liabilities                                                              428                  470
Commitments and contingencies (Note 7)
Shareholders' equity:
     Preferred stock - $.01 par value:  authorized 5,000,000 shares,

         700 issued, liquidation preference of $10,000 per share             7,255                ---
     Common stock - $1 par value:   authorized 30,000,000 shares,
         issued 11,167,456 and 9,151,920 shares                             11,167                9,152
     Additional paid-in capital                                            109,394              102,360
     Accumulated deficit                                                  (116,002)             (97,695)
     Treasury stock at cost                                                 (5,757)              (5,757)
                                                                         ---------             ---------

                  Total Shareholders' equity                                 6,057                8,060
                                                                         ---------             --------

                                                                         $  41,028             $ 20,175
                                                                         =========             ========

</TABLE>
                 See notes to consolidated financial statements.

                                       44
<PAGE>
                  COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES
                      Consolidated Statements of Operations
                    (In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
                                                                                              Fiscal Year Ended
                                                                               -----------------------------------------------
                                                                                March 31,           March 31,        March 31,
                                                                                  1999                1998             1997
                                                                               -----------         ------------      -------

<S>                                                                            <C>                 <C>                  <C>
  Net sales        -  product                                                  $  36,562           $   5,387            7,154
                   -  services                                                     6,756               ---              ---
                                                                               ---------           ---------          -------
                   Total                                                          43,318               5,387            7,154
                                                                               ---------           ---------          -------
  Cost of sales    -  product                                                     22,870               3,363            3,132
                   -  services                                                     5,878               ---              ---
                                                                               ---------           ---------          -------
                   Total                                                          28,748               3,363            3,132
                                                                               ---------           ---------          -------
  Gross profit     -  product                                                     13,692               2,024            4,022
                   -  services                                                       878               ---              ---
                                                                               ---------           ---------          -------
                   Total                                                          14,570               2,024            4,022
                                                                               ---------           ---------          -------

  Selling and administrative expenses                                             17,404              15,414           12,112
  Engineering, research and development                                            9,546               5,022            4,060
  A & B unit conversion expense                                                    ---                 5,522            ---
                                                                               ---------           ---------          -------
           Total operating expenses                                               26,950              25,958           16,172
                                                                               ---------           ---------          -------
  Operating loss                                                                 (12,380)            (23,934)         (12,150)

  Interest expense                                                                (1,893)             (2,334)             (52)
  Non-operating income (expense)                                                     430                 113           (1,337)
  Securities litigation warrant expense                                            ---                (8,000)            ---
  Minority interest                                                                ---                 ---                368
  Income tax credit                                                                ---                 ---                836
                                                                               ---------           ---------          -------

  Loss from continuing operations                                                (13,843)            (34,155)         (12,335)

  Loss from discontinued operations                                                 (900)              ---               (625)
  Estimated loss on disposal of discontinued operations                            ---                 ---             (7,550)
                                                                               ---------           ---------          --------

  Loss before extraordinary items                                                (14,743)            (34,155)         (20,510)
  Extraordinary items                                                              ---                 ---               (508)
                                                                               ---------           ---------          --------
  Net loss                                                                     $ (14,743)           $(34,155)        $(21,018)
                                                                               ==========           =========         ========
  Loss per common share (basic & diluted):
       Continuing operations                                                   $   (1.41)          $   (4.60)        $  (2.23)
       Discontinued operations                                                     (0.09)              ---              (1.48)
       Extraordinary items                                                         ---                 ---               (.09)
                                                                               -----------         ---------          --------
       Net loss per common share (basic & diluted)                             $   (1.50)          $   (4.60)        $  (3.80)
                                                                               ==========          ==========         ========

  Weighted average number of common shares outstanding (basic & diluted)           9,814               7,423             5,535
                                                                               =========            ========          ========
</TABLE>
                 See notes to consolidated financial statements.


                                       45
<PAGE>
                  COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES
           Consolidated Statements of Changes in Shareholders' Equity
                             (Dollars in Thousands)
<TABLE>
<CAPTION>
                                                      COMMON STOCK
                                                     ---------------                        Unrealized   TREASURY STOCK      Total
                                           Preferred  Number           Additional    Accum-   Loss on   ------------------   Share-
                                            Stock      of        Par     Paid in     ulated  Marketable Number of           holders'
                                            Amount    Shares    Value    Capital    Deficit  Securities  Shares     Cost     Equity
                                           -------  ---------   ------   -------    -------- ---------- --------  --------  --------
<S>                                        <C>      <C>         <C>      <C>        <C>        <C>      <C>      <C>       <C>
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     ---      821,039      821      2,734      ---      ---       ---       ---       3,555
  Non-cash expense                           ---       ---        ---      10,687      ---      ---       ---       ---      10,687
                                           ------  ----------  -------   --------    -------   -----    -------    ------   --------
Balance at March 31, 1998                    ---    9,151,920    9,152    102,360    (97,695)   ---     708,692   (5,757)     8,060

  Net loss                                   ---       ---        ---       ---      (14,743)   ---       ---       ---     (14,743)
  5% stock dividend                          ---      497,623      497      2,859     (3,359)   ---       ---       ---          (3)
  Exercise of stock options                  ---      105,713      106        352      ---      ---       ---       ---         458
  B Unit conversions                         ---       73,500       73        (73)     ---      ---       ---       ---         ---
  Common stock issued on debt conversion     ---    1,068,750    1,069      2,337      ---      ---       ---       ---       3,406
  Issuance of common stock, net              ---      269,950      270      1,716      ---      ---       ---       ---       1,986
  Issuance of 700 preference shares, net    7,000      ---        ---        (655)     ---      ---       ---       ---       6,345
  Preferred share dividend                   ---       ---        ---       ---         (205)   ---       ---       ---        (205)
  Non-cash warrant expense                   ---       ---        ---         753      ---      ---       ---       ---         753
                                           ------  ----------  -------   --------   --------   -----    -------    ------   --------
Balance at March 31, 1999                  $7,000  11,167,456  $11,167   $109,649  $(116,002)  $ ---    708,692  $(5,757)  $  6,057
                                           ======  ==========  =======   ========  ==========  =====    =======  ========  ========
</TABLE>
                 See notes to consolidated financial statements

                                       46
<PAGE>
                  COYOTE NETWORK SYSTEMS, INC AND SUBSIDIARIES
                      Consolidated Statements of Cash Flows
                                 (In Thousands)
<TABLE>
<CAPTION>
                                                                                             Fiscal Year Ended
                                                                                -----------------------------------------
                                                                                 March 31,       March 31,      March 31,
  Operating activities:                                                            1999            1998           1997
                                                                                ----------       ---------      ---------
<S>                                                                              <C>             <C>            <C>
  Loss before extraordinary items                                                $(14,743)       $(34,155)      $(20,510)
  Adjustments to reconcile loss to net cash used In operating activities:
       Depreciation and amortization                                                1,880             787            478
       Loss (gain) on sales of marketable securities                                 (877)            155            736
       Gain on sale of land                                                           (20)
       Write-down of CNC preferred stock                                             ---            ---            1,060
       Minority interest                                                             ---            ---             (368)
       Expense related to amendments to A & B Units                                  ---            5,522           ---
       Provision for loss on discontinued operations                                  900           ---            7,550
       Net change in discontinued operations                                         (225)            145         (3,862)
       Changes in current assets and liabilities                                    6,207           8,489         (3,164)
       Other - non-cash financing and warrant expense                                 753          10,582            221
                                                                                 --------        --------       --------
  Net cash used in operating activities                                            (6,125)         (8,475)       (17,859)
                                                                                 ---------       --------       --------
  Investing activities:
       Purchases of property and equipment                                         (3,217)         (1,021)         (1,914)
       Increase in other assets                                                    (1,604)          ---             ---
       Purchases of marketable securities                                            ---             (736)          ---
       Proceeds from sale of marketable securities                                    893           1,777           1,353
       Change in notes receivable                                                   1,050          (2,466)         (5,000)
       Proceeds from sale of CNC preferred stock                                      ---           ---             2,500
       Proceeds from sale of land                                                      67           ---             ---
       Cash payment on acquisition                                                 (1,333)          ---             ---
       Increase in investments in affiliate                                          (400)          ---             ---
       Net proceeds from the sale of APC and C&L assets                              ---            2,861             640
       Net change in discontinued operations                                         ---             (401)           (985)
       Other items                                                                   ---            ---               283
                                                                                 --------        --------        --------
  Net cash (used) provided by investing activities                                 (4,544)             14          (3,123)
                                                                                 ---------       --------        ---------
  Financing activities:
       Increase in borrowings on line of credit                                     1,133           ---             ---
       Increase in notes payable                                                      262           ---             ---
       Repayments of long-term debt                                                  (142)           (141)          (141)
       Convertible preferred stock issued, net of expenses                          6,345           ---             ---
       Common stock issued                                                            758           5,366         13,918
       Convertible debt issued                                                       ---            6,474           ---
       Net change in discontinued operations                                         ---              275          3,314
       Other items                                                                   (208)            152           (508)
                                                                                 ---------       --------       ---------
  Net cash provided by financing activities                                         8,148          12,126         16,583
                                                                                 --------        --------       --------
  Increase (decrease) in cash and cash equivalents                                 (2,521)          3,665         (4,399)

  Cash and cash equivalents:
       At beginning of year                                                         3,746              81          4,480
                                                                                 --------        --------       --------
       At end of year                                                            $  1,225        $  3,746       $     81
                                                                                 ========        ========       ========
</TABLE>

                 See notes to consolidated financial statements.

                                       47
<PAGE>
                  COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 March 31, 1999

--------------------------------------------------------------------------------
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 administrative and investing activities.

Coyote Technologies, LLC ("CTL"), formerly Sattel Communications, LLC
Since fiscal 1997, CNS has owned 100% of Coyote Technologies, Inc. ["CTI", fka,
Sattel Communications Corp. ("SCC")] (see Note 3). CTI, through its subsidiary
CTL, is a provider of telecommunication switches and IP gateways. CTI has an
ownership interest in CTL, a limited liability company, of approximately 80% and
certain additional preferential rights (see Note 3). Its activities consist
primarily of development, production and sale of scalable telecommunications
switches and Internet protocol based gateway systems to telecommunications
service providers.

Coyote Gateway, LLC ("CGL" dba American Gateway Telecommunications)
On April 16, 1998, the Company established Coyote Gateway, LLC, a Colorado
limited liability company. The Company owns 80% of CGL, and American Gateway
Telecom, Inc., a Texas corporation ("AGT") owns 20%. Its principal activities
consist of the wholesaling of long distance services.

INET Interactive Network System, Inc. ("INET")
On September 30, 1998, the "Company" completed the acquisition of INET
Interactive Network System, Inc. ("INET"), through the merger of INET into a
wholly owned subsidiary of the Company. INET is a provider of international long
distance services to commercial and residential "affinity" groups. INET markets
international long distance services to primarily French and Japanese affinity
groups.

Coyote Communications Services, LLC ("CCS")
Formed in January 1999, CCS provides customer support and consulting services
including network integration, network design, switch provisioning, outsourcing,
on-site technical support, remote monitoring, 7x24 customer support, billing
administration and help desk support.

TelecomAlliance
Formed in November 1998, TelecomAlliance is a joint venture between CNS and
Profitec. TelecomAlliance plans to offer its customers an alternative to
traditional capital-intensive private network provisioning, with a national
multi-service Internet-Protocol based platform that can be leased by a carrier


                                       48
<PAGE>
to extend or supplement their current network, or to build a new network from
scratch. As of March 31, 1999, TelecomAlliance was still in the organizational
phase and had not commenced operations.

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 the production and sale of
telecommunication switches and Internet Protocol based gateways 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. In addition, the purchasers of the Company's switches are
primarily early stage entrepreneurial companies with limited operating histories
and financial resources. Thus, the Company's sales and profit recognition are
heavily dependent on the availability of third party financing for its
customers. The Company is also engaged, through AGT and INET (see Note 4), in
the wholesaling and retailing of international long distance service.

After the restructuring, the Company's operations are similar to those of an
early-stage enterprise and are subject to all the risks associated therewith.
These risks include, among others, uncertainty of markets, ability to develop,
produce and sell profitably its products and services and the ability to finance
operations. Management believes that it has made significant progress on its
business plan in fiscal 1999 and to date in fiscal 2000. Significant actions in
this progress include increasing sales in fiscal 1999, commencing operations of
AGT and INET, resolving the class action lawsuit (See Note 7) and recently
raising additional equity investment (see Notes 8 and 16). However, the Company
remains 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, industry and current lack of working capital.


Financial Instruments
----------------------------
The carrying values of cash and cash equivalents, marketable securities,
receivables, accounts payable and borrowings at March 31, 1999, and March 31,
1998, 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


                                       49
<PAGE>
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.

Gains on sales of available-for-sale securities totaled $877,000, $242,000 and
$0 in fiscal 1999, 1998 and 1997, respectively; and losses totaled $0, $397,000
and $736,000 in fiscal 1999, 1998 and 1997, respectively.


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, 1999    March 31, 1998
                                                --------------    --------------
   Raw materials and work-in-progress               $2,645           $2,376
   Finished goods                                      253              152
   Consigned and with customers                      1,074              994
   Allowance for excess and obsolete inventory      (1,842)          (1,400)
                                                    -------          -------
                                                    $2,130           $2,122
                                                    ======           ======


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 eighteen 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.


                                       50
<PAGE>
Property and equipment consist of the following (in thousands):

                                          March 31, 1999       March 31, 1998
                                          --------------       --------------
      Land                                   $     0              $     50
      Fixtures and equipment                  10,249                 3,151
                                             -------              --------
                                              10,249                 3,201
      Less accumulated depreciation           (2,057)                 (810)
                                             -------              --------
                                             $ 8,192              $  2,391
                                             =======              ========


Intangible Assets
----------------------------
Intangible assets, net of amortization, consist of the following (in thousands):

                                          March 31, 1999     March 31, 1998
                                          --------------     --------------
      Intellectual property rights           $3,316              $3,519
      Goodwill                                2,167                ---
      Other                                     137                  23
                                             ------              ------
                                             $5,620              $3,542
                                             ======              ======

The Company amortizes the intellectual property rights for the DSS Switch over a
20-year period on a straight-line basis. The Company amortizes the goodwill
created through the acquisition of INET in October 1998 over a five-year period
on a straight-line basis. Accumulated amortization was $1.1 million and $0.5 at
March 31, 1999 and 1998, 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 the Company's 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 carrying value of the asset, a loss is
recognized for the difference between the fair value and carrying value of the
asset.



                                       51
<PAGE>
Revenue Recognition
----------------------------

End User Sales

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.


Sales Involving Third Party Leasing Companies
Beginning in fiscal 1998, third party leasing companies were involved in a
significant number of the Company's transactions. For these transactions where
the customer is in the process of obtaining third party financing, the entire
profit has been deferred and will be recognized using the cost recovery method
or until a credit-worthy third party (usually a leasing company) assumes the
obligation. In transactions involving third party leasing companies, the leasing
company will withhold a portion of the sales price, as a deposit, the collection
of which is contingent on the lessee completing their payment obligations. At
March 31, 1999, included in deferred revenue was approximately $2.2 million
related to the amounts due from leasing companies whose receipt was contingent
on performance under the lease by the equipment end user (lessee).

Long Distance and Other Services
Revenue related to long-distance services is recognized at the time of usage.
Revenue related to other customer services such as installation, maintenance and
training is recognized as and when these services are performed.


Credit and Other Concentrations
-------------------------------
For the year ended March 31, 1999, third party lessors were involved in
approximately 82% of net sales. For the year ended March 31, 1998, a third party
lessor was involved in approximately 40% of net sales and sales to Apollo Inc.
accounted for approximately 19% of net sales (see Note 4). For the year ended
March 31, 1997, Concentric Network Corporation accounted for approximately 94%
of net sales. At March 31, 1999 and 1998, two third-party lessors accounted for
77% and 41% of gross receivables, respectively. 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% of inventory
purchased during fiscal 1998 was supplied by Sattel Technologies, Inc.


Product Warranty
----------------------------
Estimated product warranty costs are charged to operations at the time of
shipment. Warranty costs to date have been insignificant.

                                       52
<PAGE>
Research and Development Costs
------------------------------
Engineering, research and development costs include all engineering charges
related to new products and product improvements, and are charged to operations
when incurred. Software development costs are capitalized once technological
feasibility is established.


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. Diluted loss
per common share is equal to the basic loss per share. Because of the net losses
in fiscal 1997, 1998 and 1999, the effect of options and warrants are not
included in the calculations of loss per common share. Loss per share amounts
for the years ended March 31, 1997 and 1998 have been restated to reflect the
effect of the Company's 5% stock dividend on November 4, 1998.


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.






                                       53
<PAGE>
--------------------------------------------------------------------------------
NOTE 2   DISCONTINUED OPERATIONS
--------------------------------------------------------------------------------

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

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

On February 3, 1997, the 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. 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. 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").

The components of net assets and liabilities of discontinued operations consist
only of the meat and seafood segment and are as follows (in thousands):

                                                            1999       1998
                                                            ----       ----
    Other current assets                                 $  ---       $    7
    Property and equipment, net                            2,572       2,572
    Long term debt                                          (688)       (740)
                                                         --------     -------
    Net non-current assets of discontinued operations    $ 1,884      $1,839
           Reserve for loss on disposal                   (1,650)       (930)
                                                         --------     -------
           Net assets of discontinued operations         $   234      $  909
                                                         =======      ======

The 1997 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. Fisher, Runge and Lilly (see Note 12)      508
 Charge due to acceleration of deferred compensation payments
      to Messrs. Fisher and Runge (see Note 12)                           137
 Other                                                                    347
                                                                       -------
                                                                       $7,550

The Company believes that the net assets of discontinued operations are recorded
at approximate net realizable value at March 31, 1999.


                                       54
<PAGE>
As of June 18, 1999, the Company had collected all cash related to the sale of
discontinued operations except $410,000 due under a note and the only asset of
discontinued operations was real estate related to the land and buildings of the
discontinued APC operation. The real estate is listed for sale. Based upon an
estimate of the current market value of the real estate, the Company took an
additional charge of $900,000 in the second quarter of fiscal 1999. The asset
book value as of March 31, 1999 was $234,000, net of mortgages and reserves
applicable to the property.

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

                                      Fiscal Year Ending March 31, 1997
                               -----------------------------------------------
                                           Telecomm-        Wire
                               Meat and    unications   Installation
                               Seafood     Equipment     and Service    Total
                               --------    ----------   ------------  --------
Net sales                      $188,853     $19,750       $11,540     $220,143
Earnings (loss) from           ========     =======       =======     ========
 discontinued operations       $   (584)    $   (51)      $    10     $   (625)
                               ========     =======       =======     ========


--------------------------------------------------------------------------------
NOTE 3   CAPITAL STRUCTURE OF CTL
--------------------------------------------------------------------------------

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.

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 former 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.

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


                                       55
<PAGE>
payable to holders of Class A Units. Compensation expense was to 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 would
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
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 was 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.



                                       56
<PAGE>
In fiscal 1999, certain Class B Unit holders converted a total of 138 Units into
shares of Company common stock in accordance with the amended terms for
conversion. Certain current and former employees of CTL continue to collectively
own 1,369 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 15, 1999:

                         Name                   Class B Units
                         ----                   -------------
                   James J. Fiedler                   350
                   Daniel W. Latham                   212
                   David Held                         250
                   Bruce Thomas                       250
                   Others                             307



--------------------------------------------------------------------------------
NOTE 4   ACQUISITIONS
--------------------------------------------------------------------------------

NUKO
----------------------------
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. Including the interest, the total funding advanced to
NUKO and now owed to the Company of $1.9 million is secured by a pledge to the
Company of shares of stock owned by NUKO in iCompression, Inc. (fka, Internext
Compression, Inc.). In April 1998, NUKO filed a voluntary petition under Chapter
11 of the U.S. Bankruptcy Code. In May 1999, the Company received an offer to
purchase the collateral for a total price of $1.9 million. The Company has
accepted this offer subject to NUKO's right of first offer to purchase the
shares. This amount is included in notes receivable - current in the
accompanying balance sheet.


Systeam
----------------------------
In fiscal 1998, the Company invested $750,000 in Systeam, S.p.A. Based in Rome,
Italy, Systeam develops voice, data, video and Internet solutions. This
investment represents an approximately 9% equity ownership of Systeam. In
February 1999, the Company announced that it signed a definitive agreement to
acquire controlling interest in Systeam by increasing its equity position to 60%
from 9%, for approximately $5.0 million in cash, including $1.5 million for
working capital and 880,000 unregistered shares of Company common stock. As part
of the Systeam acquisition, the Company also will acquire an indirect
controlling interest in Smartech, an information technology-consulting firm that
provides software solutions for telecom, financial service and utility
companies. Smartech is 51% owned by Systeam. In March 1999, the Company advanced
to Systeam an additional $550,000 toward the option to achieve the planned 60%
equity position. This amount is included in other assets in the accompanying
balance sheet. The investment in Systeam is accounted for using the cost method.


                                       57
<PAGE>
Coyote Gateway
----------------------------
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"), and other
minority investors own 20%. In consideration of its 20% ownership interest, AGT
contributed assets to CGL, consisting of customer contracts for the transmission
of international telephone minutes and vendor and carrier contracts to service
those contracts.


INET
----------------------------
On September 30, 1998, the Company completed the acquisition of INET Interactive
Network System, Inc. ("INET") through the merger of INET into a wholly owned
subsidiary of the Company. Under the terms of the merger agreement, the Company
made total cash payments of $1.0 million and issued a total of 198,300 shares of
the Company's common stock as consideration for the outstanding shares of INET
capital stock, the cancellation of certain warrants to purchase shares of INET
common stock, the transfer of certain lines of credit and certain contractual
releases. The Company also agreed to forgive and extinguish all loans and
advances in the amount of $433,000 which had been made to INET prior to the
merger, of which $333,000 was advanced in fiscal 1999. As further consideration,
the Company will issue earnout shares of the Company's common stock to the
former INET shareholders in five installments based upon certain earning targets
for the period from October 1, 1998 to March 31, 2001. As of March 31, 1999, the
maximum amount payable under the earnout agreement is $1.25 million payable in
Company common stock to be valued at certain average trading prices at the time
any earnout is payable. Since the earnings targets have not yet been achieved
and management considers the likelihood to be remote, no earnout stock has been
provided as of March 31, 1999. In connection with the acquisition of INET, the
Company recorded goodwill of $2.6 million. (See Note 1 - Intangible Assets).


Crescent
----------------------------
In September 1998, the Company acquired a 19.9% equity position in Crescent
Communications, Inc. ("Crescent"). Crescent is an early stage entity formed to
provide primarily wholesale telecommunication services to select international
markets. The Company acquired this minority interest for the sum of $1.3 million
represented by a cash payment of $0.4 to Crescent and $0.9 in the form of a
discount granted on switching equipment sold to Crescent (through a third-party
lessor) in September 1998, this investment is accounted for using the cost
method. As of March 31, 1999, Crescent was not yet running telecommunications
traffic through its switching equipment and the Company recorded a $0.5
realization reserve on this investment.


Apollo
----------------------------
In February 1999, the Company entered into an agreement, subject to certain
conditions, to acquire Apollo Telecom, Inc. ("Apollo"). Apollo subsequently was
unable to meet the stipulated conditions and the Company withdrew its offer in
April 1999. During the negotiations and in connection with the proposed
acquisition, the Company advanced funds to Apollo in part secured by a Class II
Telecommunications License to originate and terminate traffic in Tokyo, Japan.
The total funding advanced to Apollo as at March 31, 1999 was $1.1 million. In


                                       58
<PAGE>
April 1999, subsequent to the withdrawal of the Company's acquisition offer,
Apollo filed a voluntary petition under Chapter 11 of the U.S. Bankruptcy Code.
The Company subsequently obtained the Japanese license which has an estimated
market value of $220,000. The Company recorded an expense charge of $0.9 million
to fully provide for the loss in the fourth quarter of fiscal 1999.


Provisions were made for expenses of $2.2 million in fiscal 1998 for losses in
connection with failed acquisitions, including funds advanced, costs of
professional services, due diligence expenses, financial consulting fees and
losses. The Company has provided for this amount, by recording a $1.8 million
reserve against notes receivable and has accrued $400,000 in other accrued
liabilities for other costs in the accompanying Balance Sheet. In fiscal 1999,
the Company's similar expenses related to the Crescent investment ($0.5 million)
and the Apollo ($0.9 million) investment were offset by recoveries on prior year
provisions. These provisions and recoveries are included in selling and
administrative expenses in the accompanying financial statements.


--------------------------------------------------------------------------------
NOTE 5   OTHER CURRENT ASSETS
--------------------------------------------------------------------------------

At March 31, 1999, the Company had deposits with long distance carriers of $5.2
million. In the fourth quarter of fiscal 1999, the Company recorded a reserve of
$2.0 million related to various deposits made with long distance carriers. The
financial viability of some of the carriers has raised concern regarding the
ultimate realization of the deposits. This provision is included in general and
administrative expenses in the accompanying financial statements.


--------------------------------------------------------------------------------
NOTE 6   DEBT
--------------------------------------------------------------------------------

Debt consists of the following (in thousands):
                                                       March 31,   March 31,
                                                         1999        1998
                                                       ---------   ---------
    Subordinated debentures due January 2002            $ 1,675     $1,817
         and capitalized interest
    8% Convertible loan due December 2000                 ---        3,673
    Note payable bearing interest at 10% payable in
         monthly installments through February 2000         436       ---
    Capital lease obligations                             2,568       ---
                                                        -------     ------
                                                          4,679      5,490
    Less current portion                                 (1,315)      (141)
                                                        -------     ------
                                                        $ 3,364     $5,349
                                                         =======     ======

The subordinated debentures consist of principal of $1,254,000 and capitalized
interest of $421,000 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.



                                       59
<PAGE>
Approximate annual amounts payable by the Company on debt and capital leases are
as follows (in thousands):

                                                         Capital
                                              Debt       Leases       Total
                                             ------      -------     -------
      2000                                   $  577      $  857      $ 1,434
      2001                                      141         696          837
      2002                                    1,393         684        2,077
      2003                                     ---          668          668
      2004                                     ---          150          150
                                             ------      ------      -------
                                              2,111       3,055        5,166
      Less amount representing interest        ---         (487)        (487)
                                             ------      ------      -------
                                              2,111       2,568        4,679
      Less current portion                     (577)       (738)      (1,315)
                                             ------      ------      -------
                                             $1,534      $1,830      $ 3,364
                                             ======      ======      =======

As of March 31, 1999, the Company has notes payable with PrinVest of $8.2
million secured by certain assets and by 708,692 shares of the Company's common
stock and bearing interest at the bank's prime rate (7.75% at March 31, 1999)
plus 1/2%. The notes were repayable on demand. (See Notes 12 and 15). In July
1999, the payment date was extended to December 2001.

The Company also has a $2.2 million revolving line of credit secured against
certain trade receivables, bearing interest at the bank's prime rate plus 4%. As
of March 31, 1999, $1.1 million has been drawn against this line of credit. This
line of credit is renewable annually on March 1st.



--------------------------------------------------------------------------------
NOTE 7   COMMITMENTS AND CONTINGENCIES
--------------------------------------------------------------------------------

The Company leases its 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 1999, 1998 and 1997 was $931,000, $310,000, $279,000,
respectively.

Future minimum payments under non-cancelable operating leases with initial terms
of one year or more for fiscal years subsequent to March 31, 1999 are as follows
(in thousands):

            2000..............................   $1,169
            2001..............................    1,097
            2002..............................    1,110
            2003..............................    1,053
            2004..............................      441
                                                 ------
                                                 $4,870


                                       60
<PAGE>
Coyote Network Systems, Inc. (The Diana Corporation) Securities Litigation (Civ.
No. 97-3186) The Company was a defendant in a consolidated class action, In re
The Diana Corporation Securities Litigation, that was pending in the United
States District Court for the Central District of California. The Consolidated
Complaint asserted claims against the Company and others under Section 10(b) of
the Securities Exchange Act of 1934, alleging essentially that the Company was
engaged, together with others, in a scheme to inflate the price of the Company's
stock during the class period, December 6, 1994 through May 2, 1997, through
false and misleading statements and manipulative transactions.

On or about February 25, 1999, the parties executed and submitted to the court a
formal Stipulation of Settlement, dated as of October 6, 1998. Under the terms
of the settlement, all claims asserted or that could have been asserted by the
class are to be dismissed and released in return for a cash payment of $8.0
million (of which $7.25 million was paid by the Company's D&O insurance carrier
on behalf of the individual defendants and $750,000 was paid by Concentric
Network Corporation, an unrelated defendant) and the issuance of three-year
warrants to acquire 2,225,000 shares of the Company's common stock at per share
prices increasing from $9 in the first year, $10 in the second year and $11 in
the third year. The cash portion of the settlement was previously paid into an
escrow fund pending final court approval. The warrants were fully reserved by
the Company in fiscal 1998.

On June 9, 1999, the Court rendered its Final Judgment and Order approving the
settlement set forth in the Stipulation of Settlement. No objections to the
approval of the settlement were filed.

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.


Nasdaq and Securities Exchange Commission
-----------------------------------------
On December 9, 1998, TheStreet.com, an Internet publication, published articles
questioning the Company's reported equipment sale through Comdisco, Inc. to
Crescent Communications (see Notes 4 and 12). The articles implied that Crescent
Communications, Inc. did not exist, leading to the conclusion that the sale was
not valid. The article also discussed a Form S-3 Registration Statement,
indicating that numerous insiders were "poised to sell huge chunks" of their
holdings. Immediately following the publication of these articles, the trading
volume in the Company's common stock reached approximately 2.2 million shares, a
number significantly in excess of historical trading level, and the common stock
price declined more than 50%. As a result of the articles and the significant
trading in the Company's common stock, The Nasdaq National Market suspended
trading in the Company's common stock on Thursday, December 10, 1998. After the
Company issued two press releases responding to the articles and further
clarifying the transaction with Crescent Communications, The Nasdaq National
Market resumed trading in the stock on Friday, December 11, 1998.

Since the publication of the articles, The Nasdaq National Market and the
Securities and Exchange Commission have asked the Company to provide documents
and other material about the Crescent Communications transaction and other
transactions. The Company is cooperating with both The Nasdaq National Market
and the Commission in connection with these requests. However, because of the
Commission's practice of keeping its investigations confidential, the Company
does not know whether the Commission is in fact investigating the matter and, if


                                       61
<PAGE>
so, the status of such matter. Investigations by the Commission and/or The
Nasdaq National Market may cause disruption in the trading of the common stock
and/or divert the attention of management. In addition, an adverse determination
in any such investigation could have a material adverse effect on the Company.
The Commission and The Nasdaq National Market could impose a variety of
sanctions, including fines, consent decrees and possibly de-listing.





                                       62
<PAGE>
--------------------------------------------------------------------------------
NOTE 8   SHAREHOLDERS' EQUITY
--------------------------------------------------------------------------------

Options and Warrants
-----------------------------
The Company has plans under which options to acquire up to 3,090,463 shares of
the Company's common stock may be granted to directors, officers, key employees,
consultants and non-employee directors of the Company and its subsidiaries. At
March 31, 1999, options for 1,256,926 shares were available for grant under
these plans. These 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 the option plans as well as
for warrants issued for the last three fiscal years:

<TABLE>
<CAPTION>
                                                     Option Price                        Warrant Price
                                      Options          Per Share          Warrants         Per Share
                                      -------        --------------       --------       -------------
<S>                                    <C>           <C>                  <C>             <C>
Outstanding at March 30, 1996          971,158       $ 1.95 - 19.05          ---               ---
         5% stock dividend              53,119            ---                ---               ---
         Granted                       135,024        5.00 - 27.00           ---               ---
         Cancelled                    (320,941)          19.05               ---               ---
                                      ---------                           ----------

Outstanding at March 31, 1997          838,360       $ 1.95 - 27.00          ---               ---
         Revalued - cancelled          (81,838)       19.05 - 27.00          ---               ---
         Revalued - granted             81,838            3.00               ---               ---
         Granted                       284,250         3.00 -  7.72        2,329,198      $2.14 - 6.86
         Exercised                    (442,956)        1.95 -  5.55          ---               ---
         Cancelled                    (175,680)        5.53 - 27.00          ---               ---
                                      ---------                           ----------

Outstanding at March 31, 1998          503,974       $ 1.95 - 19.05        2,329,198       2.14 - 6.86
         5% stock dividend              62,238            ---                149,045           ---
         Granted                     1,054,994         3.42 - 16.00          651,667       2.86 - 8.33
         Exercised                    (105,713)        2.86 -  9.00           ---               ---
         Cancelled                    (205,625)        2.86 - 19.05           ---               ---
                                    -----------                          -----------
Outstanding at March 31, 1999        1,309,868        $1.95 - 16.00        3,129,910      $2.14 - 6.86

Exercisable at March 31, 1999          305,997                             3,129,910
</TABLE>

<TABLE>
<CAPTION>
                                                      Weighted Average
Option Price      Outstanding   Weighted Average    Remaining Contractual    Exercisable        Weighted Average
  Per share         Options      Exercise Price          Life (Years)           Options          Exercise Price
------------      -----------   ----------------    ---------------------    -----------        ----------------
<S> <C>            <C>              <C>                    <C>                 <C>                   <C>
    $1.86             25,526        $1.86                  2.76                 25,526               $1.86
 2.86 - 3.93         637,268         3.49                  5.07                206,091                3.06
 3.99 - 6.01         268,790         5.00                  4.27                 60,551                4.63
 6.13 - 7.38         291,182         6.66                  4.43                 13,829                6.18
7.56 - 16.00          87,102         8.71                  4.60                   ---                  ---
                   ---------                                                   -------
                   1,309,868        $4.82                  4.69                305,997               $3.41
                   =========                                                   =======
</TABLE>


                                       63
<PAGE>
<TABLE>
<CAPTION>
                                                            Weighted Average
   Warrant Price    Outstanding      Weighted Average    Remaining Contractual
     Per share        Warrants        Exercise Price          Life (Years)
   -------------    -----------      ----------------    ---------------------
<S><C>               <C>                <C>                   <C>
   $2.14 - 3.81       2,460,728          $2.78                 3.28
    3.99 - 6.86         142,431           5.68                 2.26
    8.01 - 8.33         526,751           8.08                 3.92
                      ---------
                      3,129,910          $3.80                 3.34
                      =========
</TABLE>
The Company accounts for 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 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 thousand, except per
share amounts):
                                             1999          1998        1997
                                             ----          ----        ----
 Net loss             -  as reported       $(14,743)    $(34,155)    $(21,018)
                      -  proforma           (15,461)     (34,439)     (21,500)
 Net loss per share   -  as reported          (1.50)       (4.60)       (3.80)
                      -  proforma             (1.58)       (4.64)       (3.88)

The fair value of each grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions for grants in fiscal 1997, 1998 and 1999:

                                         1999             1998           1997
                                         ----             ----           ----
 Expected stock price volatility      90% - 114.3%       130.90%         93.3%
 Risk free interest rate                 5.95%             5.95%          6.2%
 Expected life                      2.0 - 5.0 years     5.0 years      4.8 years

The weighted average exercise prices per share for options outstanding and
exercisable at March 31, 1999 are $4.82 and $3.41, respectively. 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 fair
value of options granted during fiscal 1997, 1998 and 1999 is $17.65, $3.95 and
$4.04 per share, respectively. The weighted average remaining contractual life
for outstanding options at March 31, 1998 and March 31, 1999 is 3.65 years and
4.69 years, respectively.

In February 1998, the Company's Board of Directors approved and adopted the
establishment of a Non-Employee Director Stock Option Plan and to date has
granted stock options to purchase 20,000 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 exercise prices of $3.42 and $4.39 per share. This
plan is included in the above transaction table of options.

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


                                       64
<PAGE>
previously issued stock options.

In connection with the issuance of the convertible notes in July and December
1997, the Company issued 85,648 warrants at fair market value estimated using
the Black-Scholes option-pricing model 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 was credited to
additional paid in capital.

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.

In 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 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.

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 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.

In fiscal 1999, the Company issued two five-year term warrants to a leasing
company for services provided in connection with customer financing to purchase
75,000 shares and 70,000 shares of the Company common stock at $8.75 per share
and $8.50 per share, respectively. The Company recorded a fair value of the
warrants of $485,000 as an expense in fiscal 1999. The fair value was estimated
using the Black-Scholes option-pricing model.

Through June 19, 1999, none of the above warrants have been exercised.

At March 31, 1999, the Company had 3,940,285 shares of common stock reserved and
available for warrants and for the conversion of Class A and B Units as
described in Note 12 - Related Party Transactions.

As described in Note 7 above, an agreement has been reached to settle the claims
against the Company and its subsidiaries in The Diana Securities Litigation.
Under the terms of the agreement, the Company anticipates that it will issue
warrants for 2,225,000 shares of the Company common stock with an expected life
of three 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
the warrants of $8,000,000 as an expense in fiscal 1998. The fair value was
estimated using the Black-Scholes option-pricing model. These warrants are not
included in the above table.




                                       65
<PAGE>
Convertible Preferred Stock and Warrants
----------------------------------------
In September 1998, the Company entered into a private placement agreement and
issued 700 shares of 5% Series A Convertible Preferred Stock, par value $.01,
with a liquidation value of $10,000 per share. The total cash received by the
Company was $6,345,000 after payment of $655,000 for fees and expenses
associated with the issue. The preferred stock has no voting rights and is
convertible, subject to certain limitations and restrictions, into shares of
common stock, after a minimum holding period of 120 days, based upon a per share
common stock price that will be the lesser of the initial conversion price as
defined in the contract or 87% of the average of the three lowest per share
market values during the ten trading day period prior to an applicable
conversion date. The holders of Preferred Stock are entitled to receive 5%
cumulative dividends per annum. No dividends can be paid or declared on any
Common Stock unless full cash dividends, including past dividends declared, have
been paid on the Preferred Stock. During fiscal 1999, the Company declared and
paid cash dividends of $205,000 on the Preferred Stock.

In conjunction with this agreement, the Company issued warrant rights to the
investment participant to purchase 225,000 shares of common stock at a warrant
exercise price of $8.43 per share. The term of the warrants is three years.

In May 1999, in connection with a private placement, a partial redemption of the
5% Series A Convertible Preferred Stock was consummated and the terms for future
conversion of the remaining balance into Company common stock were revised. (See
Note 16 Subsequent Events).


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. 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.
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.

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. 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 initial conversion price is the lessor
of $7.00 or 80% of the five-day average closing bid price on a conversion date


                                       66
<PAGE>
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. Common stock totaling
1,404,825 shares was issued in connection with conversions of $5,133,000 of
convertible notes and accrued interest.

In October 1998, the Board of Directors approved the declaration of a 5% common
stock dividend. Based upon an established record date of October 21, 1998, the
Company issued 497,623 shares of common stock on November 4, 1998. Certain
contractual anti-dilution provisions reduced conversion and warrant exercise
prices by a minor amount.



                                       67
<PAGE>
--------------------------------------------------------------------------------
NOTE 9   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>
                                                                 1999         1998          1997
                                                                 ----         ----          ----
<S>                                                            <C>          <C>           <C>
  Credit at statutory rate                                     $(3,097)     $(11,613)     $(4,604)
  Settlements of liabilities of unconsolidated subsidiary           (1)          (10)          (5)
  Tax effect of net operating loss not benefited                 3,076        11,600        4,500
  Refund of federal income taxes paid in a prior year             ---          ---           (836)
  Other, net                                                        22            23          109
                                                               -------      --------      -------
  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,
                                                        1999            1998
                                                      --------        --------
<S>                                                   <C>             <C>
   Federal net operating loss carryforwards           $ 16,818        $ 17,814
   State net operating loss carryforwards                  729           1,367
   Reserve for loss on discontinued operations             819             745
   Federal capital loss carryforward                     4,758             646
   Excess and obsolete inventory reserve                   337             560
   Capitalized interest in CNS debentures                  168             225
   General business credit                                 490             145
   All others                                              314             261
                                                      --------        --------
            Total deferred tax assets                   24,433          21,763
   Valuation allowance for deferred tax assets         (21,879)        (19,396)
                                                      ---------       ---------
   Net deferred tax assets                               2,554           2,367
   Intangible assets (net)                               1,407           1,407
   All others                                            1,147             960
                                                      --------        --------
            Total deferred tax liabilities               2,554           2,367
   Net deferred taxes                                 $  ---          $ ---
                                                      ========        ========
</TABLE>
The Company has approximately $50,000,000 in both federal and state net
operating loss carryforwards. These carryforwards expire at various dates
through fiscal 2014. 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, 1999, 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.





                                       68
<PAGE>
--------------------------------------------------------------------------------
NOTE 10  NON-OPERATING INCOME (EXPENSE) AND UNUSUAL ITEMS
--------------------------------------------------------------------------------

Non-operating income (expense) consists of the following for the last three
fiscal years (in thousands):
<TABLE>
<CAPTION>
                                                            1999      1998      1997
                                                            ----      ----      ----
<S>                                                        <C>       <C>      <C>
  Write-down of CNC preferred stock                        $ ---     $ ---    $(1,060)

  Net gains (losses) on sales of marketable securities       877      (155)      (736)
  Interest income                                            278       141        427
  Warrant expense                                           (655)     ---        ---
  Other                                                      (70)      127         32
                                                           ------    -----    -------
                                                           $ 430     $ 113    $(1,337)
                                                           =====     =====    ========
</TABLE>
In June 1996, Concentric Network Corporation ("CNC") executed a Promissory Note
for $5.0 million in favor of the Company for a bridge loan. CNC granted to the
Company 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. In August 1996, the Promissory Note
and accrued interest receivable were converted into 3,729,110 shares of CNC
Preferred Stock. In September 1996, the Company 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 the Company was
automatically converted into CNC common stock immediately prior to the closing
of the IPO. The value of the Company's investment in CNC Preferred Stock was
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. The
Company 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. In March 1999, in connection with a public offering made by CNC,
the Company exercised and sold the CNC common stock represented by the warrant
and recorded a non-operating gain of $877,000.

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.


                                       69
<PAGE>
--------------------------------------------------------------------------------
NOTE 11  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.

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.



--------------------------------------------------------------------------------
NOTE 12  RELATED PARTY TRANSACTIONS
--------------------------------------------------------------------------------

On November 11, 1996, the Company loaned $300,000 each to 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 were
forgiven at September 4, 1997 and, if their respective employments are renewed,
will be forgiven 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


                                       70
<PAGE>
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 provided 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.
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 1999, 1998 and 1997
are $0, $50,000 and $4,000, 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
in a 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. Mr. Fiedler
advanced the Company $220,000 in March 1999, which was repaid in March 1999.

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,
1999, $421,000 was funded under this agreement. In October 1998, the Company
amended the terms of the loan and in agreement with Mr. Latham established an
annual interest rate of 6.5% to be applied to the loans and payable at the
completion of the term.

In September 1998, the Company sold approximately $13.0 million of equipment to
Crescent Communications, Inc. ("Crescent") through a third party leasing


                                       71
<PAGE>
arrangement. In addition to the cash proceeds, the Company received an
approximately 20% ownership interest represented by 1,990 shares of common stock
in Crescent and the Company entered into a maintenance and service agreement
with Crescent. The Company has deferred recognition of gross profit of
approximately $2.5 million on this sale related to its equity interest in the
buyer and amounts reserved for payment contingencies. The entire cash proceeds
related to the sale were collected prior to September 30, 1998.

On September 30, 1998, the Board of Directors of the Company accepted the
tendered resignation of Mr. Lilly as a director of the Company and approved Mr.
Lilly's Amended Separation Agreement ("Amendment"). The Amendment provides for
payments to Mr. Lilly of $50,000 per year for five years to be paid in sixty
monthly installments commencing on October 1, 1999. As of March 31, 1999, Mr.
Lilly had been paid $25,000. The Amendment also extended the time period during
which the Company is required to pay all medical expenses for Mr. Lilly and his
spouse under the Separation Agreement for an additional ten years until March
31, 2010.

Comdisco, Inc., a technology services and finance company, is the beneficial
owner of approximately 6% of the Company's common stock including 515,400 shares
purchased by Comdisco on the open market and 192,990 warrants issued in
connection with lease financing provided by Comdisco to the Company's end-user
customers. During fiscal 1998 and fiscal 1999, Comdisco has provided financing
in a total amount of $24.0 million to four of the Company's customers.

In fiscal 1999, the Company sold 71,650 shares of common stock for $300,000 to
Systeam. (See Note 4).

PrinVest Corporation, a financing and leasing corporation, has a minority
interest of approximately 4% of the Company's subsidiary Coyote Gateway, LLC
(dba AGT). During fiscal 1999, PrinVest has provided financing to AGT ($8.2
million at March 31, 1999) in connection with deposits required to be made by
AGT to other long distance telecommunications carriers and for working capital.
The Company has pledged 708,692 shares of common stock as collateral on the
notes payable to PrinVest. PrinVest has also provided lease financing of the
Company's equipment to the Company's end-user customers. In 1999, PrinVest
provided lease financing in the total amount of $15.0 million to four of the
Company's customers.

In November 1997, the Company completed the sale of C&L Communications, Inc.
("C&L") to the management of C&L (See Note 2). During the years ended March 31,
1998 and 1999, the Company had the following transactions with C&L.

                                                    1999             1998
                                                    ----             ----
     Purchases from C&L                           $9,498,000       $      0
     Sales to C&L                                 $        0       $304,000
     Redemption of Preferred Stock by C&L         $1,500,000       $      0

The purchases from C&L consist primarily of compression equipment manufactured
by Newbridge Networks. C&L is a Newbridge dealer and the Company is not.



                                       72
<PAGE>
--------------------------------------------------------------------------------
NOTE 13  BUSINESS SEGMENT INFORMATION
--------------------------------------------------------------------------------

In addition to operating the telecom switching equipment business segment, in
fiscal 1999, the Company acquired AGT (April 1998) and INET (September 1998) and
through these subsidiaries operated an international long distance services
business segment. The accounting policies of the segments are the same as those
described in significant accounting policies; however, the Company evaluates
performance based on operating profit. In fiscal 1999, seven customers
represented 93% of CTL's revenue. Also, in fiscal 1999, two third-party leasing
companies, Comdisco and PrinVest Corporation, provided the financing for
substantially all of the customers of CTL. The telecom switching equipment
business 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.
Information by industry segment is as follows (in thousands):
<TABLE>
<CAPTION>
                                                   Fiscal Year Ended
                                         ---------------------------------------
                                         March 31,      March 31,      March 31,
                                            1999          1998           1997
                                         ---------      ---------      --------
 Net Sales:
<S>                                      <C>            <C>            <C>
          Switching equipment            $ 36,562       $   5,387      $  7,154
          Long distance services            6,756            ---           ---
                                          -------        --------       ------
                                         $ 43,318       $   5,387      $  7,154
                                         ========       =========      ========
 Operating Loss:

          Switching equipment            $ (3,868)      $( 13,467)     $ (8,740)
          Long distance services           (5,950)           ---           ---
          Corporate                        (2,562)        (10,467)       (3,410)
                                          --------       --------       --------
                                         $(12,380)      $( 23,934)     $(12,150)
                                          ========      =========      =========

 Depreciation and amortization:
          Switching equipment            $  1,134       $     787      $    467
          Long distance services              508            ---           ---
          Corporate                           238            ---             11
                                         --------        --------       -------
                                         $  1,880       $     787      $    478
                                         ========       =========      ========
 Capital expenditures:
          Switching equipment            $  2,085       $   1,021      $  1,902
          Long distance services            1,116            ---           ---
          Corporate                            16            ---             12
                                         --------       ---------       -------
                                         $  3,217       $   1,021      $  1,914
                                         ========       =========      ========
 Identifiable assets:
          Switching equipment            $ 18,214       $  11,528      $ 14,811
          Long distance services           12,902            ---           ---
          Discontinued operations             234             909         8,201
          Corporate                         9,678           9,538           232
                                         --------       ---------      --------
                                         $ 41,028       $  21,975      $ 23,244
                                         ========       =========      ========
</TABLE>


                                       73
<PAGE>
--------------------------------------------------------------------------------
NOTE 14  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>
                                                                 1999         1998          1997
                                                                 ----         ----          ----
Change in current assets and liabilities:
<S>                                                           <C>            <C>           <C>
  Trade receivables                                           $(10,486)      $3,879        $(4,540)
  Inventories                                                       (8)         815         (1,850)
  Other current assets                                           6,071         (735)           294
  Accounts payable                                               2,472         (640)         2,076
  Other current liabilities                                      8,158        5,170            856
                                                              --------       ------        -------
                                                              $  6,207       $8,489        $(3,164)
                                                              ========       ======        ========
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                          (382)       1,875           ---
  Acquisitions purchased with common stock                       1,686         ---           1,818
  Conversion of promissory note and accrued interest
      into CNC preferred stock                                    ---          ---           5,072
  Conversion of debt to common stock                             3,789         ---            ---
  Securities litigation warrant expense                           ---         8,000           ---
  Dividend paid in common stock                                  3,359         ---           7,725
  Sales discount granted for investment in affiliate              (900)        ---            ---
  Amounts paid directly by lender                               (7,921)        ---            ---
</TABLE>


--------------------------------------------------------------------------------
NOTE 15  LIQUIDITY AND CAPITAL RESOURCES
--------------------------------------------------------------------------------

Fiscal 1999  -  Year Ended March 31, 1999
-----------------------------------------

After the restructuring, the Company's operations are similar to those of an
early-stage enterprise and are subject to all the risks associated therewith.
These risks include, among others, uncertainty of markets, ability to develop,
produce and sell profitably its products and services and the ability to finance
operations. Management believes that it has made significant progress on its
business plan in fiscal 1999 and to date in fiscal 2000. Significant actions in
this progress include increasing sales in fiscal 1999, commencing operations of
AGT and INET, resolving the class action lawsuit (See Note 7) and recently
raising additional equity investment (see Notes 8 and 16). However, the Company
remains 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, industry and current lack of working capital.

In fiscal 1999, the Company raised $6.3 million, net of fees, from the issuance
of 700 shares of 5% Series A Convertible Preferred Stock (see Note 8). These
funds, together with operating cash on hand at the end of the prior fiscal year


                                       74
<PAGE>
and increases in short-term borrowings, were sufficient to finance the Company's
growth in operating activities experienced during fiscal 1999. However, the
increases in short-term debt and other current liabilities required to support
the operations resulted in a deficiency in current working capital as at March
31, 1999 of $0.7 million.

Subsequent to year-end, the Company continues to be constrained in its ability
to access outside capital, however, management has taken certain actions that
they believe will allow the Company to continue to fund operations at least
until March 2000. These actions include:

     -    Received $10.2 million proceeds from a private placement in May 1999
          (See Note 16);

     -    Received an offer for a commitment for a stand-by credit facility of
          $3.5 million (See Note 16);

     -    In July 1999, the Company entered into an agreement to sell its shares
          of iCompression, Inc. (See Note 4) for $1.9 million; and

     -    Extended the maturity date of the $8.2 million note payable with
          PrinVest to December 2001 (See Note 12).

In order to fund the current and future operating and investment activities, the
Company will need to continue to generate cash from its present operations and,
in addition, will require and is seeking further outside investment.


Fiscal 1998  -  Year Ended March 31, 1998
-----------------------------------------

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.


                                       75
<PAGE>
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.


--------------------------------------------------------------------------------
NOTE 16  SUBSEQUENT EVENTS
--------------------------------------------------------------------------------

On May 27, 1999, the Company sold, pursuant to Rule 506 under Regulation D,
1,767,000 shares of common stock at $6.00 per share in a private placement with
new and existing domestic and international institutional investors. The
placement agent received cash commissions of $352,000 and commissions in the
form of common stock aggregating 131,148 shares and five-year warrants to
purchase 176,700 shares at $6.00 per share. The net proceeds of approximately
$10.2 million are to be used for working capital and to redeem $4 million of the
outstanding Convertible Preferred Stock. In connection with this redemption, the
conversion price of the remaining $6 million of Convertible Preferred Stock was
fixed at $6.00 per share and the Company issued the holder of the Convertible
Preferred Stock 18-month warrants to purchase 325,000 shares of common stock at
$6.00 per share. These warrants may be exercised at any time until December 30,
2000.

The Company has agreed to use its best efforts to file a registration statement
as to the common stock issued in the private placement and underlying the
warrants and Convertible Preferred Stock referred to above.

In July 1999, the Company received an offer for a commitment for a stand-by
credit facility from certain shareholders that would provide a funding
commitment to the Company of $3.5 million. This facility would be secured by the
stock of INET, bear 12.5% interest on the outstanding principal balance and be
repayable on March 31, 2000.

                                       76
<PAGE>
In July 1999, the Company entered into an agreement to sell its shares of
iCompression, Inc. (See Note 4) for $1.9 million.



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

(a)  Previous independent accountants

(i)  On October 15, 1997, after completion of the March 31, 1997 fiscal year
     audit, Price Waterhouse LLP, our former independent accountants, in a
     letter addressed to our Chairman and CEO with a copy to the Chief
     Accountant at the SEC, confirmed that the client - auditor relationship
     between Coyote Network Systems, Inc. (formerly The Diana Corporation) and
     Price Waterhouse LLP had ceased upon the resignation of Price Waterhouse
     LLP. During the third quarter of fiscal 1997, ending on January 4, 1997, we
     announced a restructuring plan to concentrate our resources on one line of
     business (communication switching) via our holdings in Coyote Technologies,
     LLC (formerly Sattel Communications LLC), and to discontinue, from an
     accounting standpoint, and to divest our other holdings. Our largest
     subsidiary, Atlanta Provision Company, Inc., was sold in February 1997. We
     subsequently moved our headquarters to Calabasas, California from
     Milwaukee, Wisconsin. The change in both scope and size of annual revenues
     (from over $200,000,000 to approximately $10,000,000) going forward as well
     as the change in management and locations (now the former Sattel management
     in California) led to the cessation of our client - auditor relationship
     with Price Waterhouse LLP.

(ii) The reports of Price Waterhouse LLP on the financial statements for the
     prior two fiscal years contained no adverse opinion or disclaimer of
     opinion and were not qualified or modified as to uncertainty, audit scope
     or accounting principle, except as to the uncertainties noted in the Report
     of Independent Accountants filed with our Form 10-K dated September 22,
     1997. The uncertainties noted relate to our liquidity and viability, and
     class action litigation and other potential claims by investors.

(iii) The Company's audit committee was not involved by Price Waterhouse LLP
     regarding its decision to end our client - auditor relationship.

(iv) Except as mentioned below, in connection with its audits for the two most
     recent fiscal years and through October 15, 1997, there have been no
     disagreements with Price Waterhouse LLP on any matter of accounting
     principles or practices, financial statement disclosure, or auditing scope
     or procedure which disagreements if not resolved to the satisfaction of
     Price Waterhouse LLP would have caused them to make reference thereto in
     their report on the financial statements for such years.

     During the audit of the fiscal 1997 financial statements a difference of
     opinion arose relating to the audit procedures necessary with respect to
     certain customer sales, including Concentric Network Corporation. The
     difference of opinion was with respect to the timing and manner of further
     Price Waterhouse LLP direct contact in addition to written receivable


                                       77
<PAGE>
     confirmation requests with our customers and management's concern regarding
     both pending legal proceedings with customers and/or potential adverse
     effect on our customer relationships. After further discussion, the manner
     of the customer contact was mutually agreed upon and the initial
     disagreement thus promptly (within 1 day) resolved. No disagreements in
     accounting related to these sales arose. The Audit Committee discussed the
     subject matter of this disagreement with Price Waterhouse LLP. We have
     authorized Price Waterhouse LLP to respond fully to the inquiries of its
     successor auditors concerning the subject matter of this disagreement.

(v)  During the two most recent fiscal years and through October 15, 1997, our
     management believes that there have been no reportable events (as defined
     in Regulations S-K Item 304 (a)(1)(v) ) except as follows:

     (1)  During the year-end audit of the accounts for fiscal 1997, the
          following weaknesses in internal control were identified:

          (1.1) Errors, including instances of failure to properly consider,
               with respect to our policy, the effect of non-standard contract
               provisions on revenue recognition.

          (1.2) Need for a more structured approach by which to thoroughly
               complete and document a review of relevant terms and conditions
               for all contracts consistent with our revenue recognition
               policy/procedure and required revenue recognition criteria.

     Upon further review by us it was determined that certain sales transactions
     at our Sattel Communications ("Sattel") operation were not consistent with
     the Sattel policy and procedure and the criteria required to support
     revenue recognition in accordance with generally accepted accounting
     principles. These errors resulted in revisions to previously reported
     unaudited financial information with respect to the second and third
     quarters of fiscal 1997. These revisions, which were included and reported
     in Note 16 Quarterly Results of Operations (Unaudited) of Form 10-K filed
     in respect of the fiscal year 1997, were as follows:

                                 -----------------------------------------------
                                       FISCAL YEAR ENDED MARCH 31, 1997
                                    (In Thousands, Except Per Share Amounts)
                                 -----------------------------------------------
                                                12 Weeks Ended
                                 -----------------------------------------------
                                 ---------------------    ----------------------
                                   October 12, 1996          January 4, 1997
                                 ---------------------    ----------------------
                                 Originally               Originally
                                  Reported    Revised      Reported    Revised
                                 ----------   -------     ----------   -------
     Net Sales                    $ 4,046     $ 3,666      $ 4,337     $ 2,552
     Gross profit (loss)            3,034       2,775        3,057       1,842
     Net loss                     $(4,598)    $(4,737)     $(4,001)    $(5,936)
     Net loss per common share    $  (.87)    $  (.90)     $  (.76)    $ (1.12)

          The per share amounts presented above do not reflect our November 4,
          1998 stock dividend.

     (2)  In addition to the matter reported in (v)(1) above, it was also noted
          that internal control weaknesses existed, which did not result in
          revisions to previously reported financial information, relative to
          insufficient identification and control surrounding Sattel's


                                       78
<PAGE>
          maintenance of detailed historical cost and accumulated depreciation
          information by individual asset, and that the timeliness and quality
          of account reconciliations and supporting analysis requires
          improvement in order to ensure that procedures are in place to support
          expected increases in transaction volumes anticipated by us.

     The following actions are being taken by our management to correct the
     identified weaknesses:

     -    Strengthening of our financial organization to increase the number of
          personnel qualified to address revenue recognition issues and to
          improve the timeliness and quality of account reconciliations and
          analysis.

     -    Implementation of a more timely and diligent review and resolution by
          management of all non-standard contract terms and conditions.

     -    Development and implementation of a comprehensive system to identify
          and properly address relevant revenue recognition considerations.

     -    Implementation of an enhanced fixed assets accounting and control
          system.

(b)  New independent accountants

     We engaged Arthur Andersen LLP as our new independent accountants as of
     December 9, 1997. During the two most recent fiscal years prior to fiscal
     1998 and through December 9, 1997 we (or someone on our behalf) did not
     consult with Arthur Andersen LLP regarding (1) the application of
     accounting principles to a specified transaction, either completed or
     proposed, or the type of audit opinion that might be rendered on our
     financial statements or (2) any matter that was either the subject matter
     of a disagreement or a reportable event.




                                       79
<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
three classes of two members each or six members in the aggregate. 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. Currently,
the Board of Directors has one vacant position. The Board of Directors consists
of the following members:

                      Directors with Terms Expiring in 1999
                      -------------------------------------
Jack E. Donnelly, age 64, 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 51, 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 of Coyote Technologies, LLC ("CTL") since September
1995. Prior to his association with CTL, Mr. Latham was the President of
Frontier Communications Long Distance Company.

                      Directors with Terms Expiring in 2000
                      -------------------------------------
James J. Fiedler, age 53, 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 Corporation, 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 47, has been a director of the Company since August
1997. He has been the Managing Director of European Projects for JMJ Associates,
a global management consulting company, and has served in various capacities at
JMJ Associates from January 1994 to the present. From December 1991 to January
1994, Mr. Portner held positions in plant and project management and was
Director of Quality at Air Products Incorporated, an industrial chemicals
company.

                       Director with Term Expiring in 2001
                       -----------------------------------
J. Thomas Markley, age 66, has served as an advisor to the Company's Board of
Directors and was appointed as director in September 1999. Mr. Markley is
President of JTM, Inc., a consulting firm specializing in senior management
consulting for telecommunications, data communications and electric utilities.
Previously, Mr. Markley was President of Raytheon Worldwide, a leading
diversified technology company, as well as Corporate Vice President and
President of Raytheon Data Systems. Prior to Raytheon, Mr. Markley was Deputy
Program Manager of NASA's Apollo Program. Mr. Markley has served on the
President's Science Advisory Council, as a member of the Space Defense


                                       80
<PAGE>
Initiative Committee and as an examiner for the Malcolm Baldridge National
Quality Award. Mr. Markley also was Senior Vice President Telecommunication
Operation and Planning for Salient3 Communications, Inc., a telecom equipment
company.


Identification of Executive Officers
------------------------------------
The following individuals are the executive officers of the Company:

          Name             Age              Position
          ----             ---              --------
    James J. Fiedler       53      Chief Executive Officer
    Daniel W. Latham       51      President and Chief Operating Officer
    Brian A. Robson        62      Executive Vice President,
                                     Chief Financial Officer and Secretary

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

Mr. Robson has been the Executive Vice President, Chief Financial Officer and
Secretary since December 15, 1998. Mr. Robson was Vice President of Finance and
Chief Financial Officer of Ascom Timeplex, a telecommunications company from
1989-1996.


Section 16(a) Beneficial Ownership Reporting Compliance
-------------------------------------------------------

Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), requires the Company's directors and executive officers, and persons who
beneficially own more than ten percent of a registered class of the Company's
equity securities, to file with the Securities and Exchange Commission (the
"Commission") initial reports of ownership and reports of changes in ownership
of Common Stock and the other equity securities of the Company. Officers,
directors, and persons who beneficially own more than ten percent of a
registered class of the Company's equities are required by the regulations of
the Commission to furnish the Company with copies of all Section 16(a) forms
they file. To the Company's knowledge, based solely on review of the copies of
such reports furnished to the Company, during the fiscal year ended March 31,
1999, all Section 16(a) filing requirements applicable to its officers,
directors, and greater than ten percent beneficial owners were complied with,
except that transactions that should have been reported on Forms 5 for the
fiscal years ended March 31, 1997 and/or March 31, 1998 were reported on Forms 5
for the fiscal year ended March 31, 1999 for each of Stephen W. Portner, Sydney
B. Lilly, Jack E. Donnelly, Brian A. Robson and James J. Fiedler, and
transactions that should have been reported on Forms 3 and 4 during the fiscal
years ended March 31, 1997 and March 31, 1998 for Alan J. Andreini were reported
on Form 5 for the fiscal year ended March 31, 1999. In addition, the Form 3 that
should have been filed by Alan J. Andreini during the fiscal year ended March
31, 1997 was filed on April 5, 1999.



                                       81
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
-------------------------------
All shares and per share numbers included herein have been retroactively
adjusted to give effect to a 5% stock dividend which was paid on November 4,
1998 to holders of record as of October 21, 1998.

The following table sets forth, for the three fiscal years ended March 31, 1999,
the total annual compensation paid to, or accrued by the Company for the account
of, James J. Fiedler, Daniel W. Latham and Brian A. Robson (the "Named
Executives") serving as such at March 31, 1999 and one former executive officer:
<TABLE>
<CAPTION>
                                                            SUMMARY COMPENSATION TABLE
--------------------------------------------------------------------------------------------------------------------------------
                                           Annual Compensation                           Long-Term Compensation
                                   ----------------------------------   -----------------------------------------
                                                           Other        Restricted  Securities   Long-term             All
        Name and                                           Annual         Stock     Underlying   Incentive Plan       Other
  Principal Position        Year    Salary    Bonus    Compensation(5)   Award(s)    Options      Layouts          Compensation
  ------------------        ----   --------   ------   ---------------   --------   -----------  --------------    ------------
<S>                         <C>    <C>        <C>        <C>               <C>        <C>             <C>          <C>
James J. Fiedler (1)        1999   $300,000   $ 9,335    $20,000           ---        94,500 (6)      ---          $  7,200 (8)

   Chairman, CEO            1998   $200,000   $19,746    $15,000           ---          ---           ---          $  7,200 (8)
   and Director             1997   $200,000      ---     $ 3,750           ---          ---           ---             ---

Daniel W. Latham (2)        1999   $300,000   $ 9,335    $20,000           ---        94,500 (6)      ---          $  7,200 (8)
   President, COO           1998   $175,000   $19,746    $15,000           ---          ---           ---          $  7,200 (8)
   and Director             1997   $175,000      ---     $ 3,750           ---          ---           ---          $170,197 (9)

Brian A. Robson (3)         1999   $152,487   $12,875      ---             ---        98,125 (7)      ---             ---
  Executive Vice President  1998   $139,907      ---       ---             ---         2,100          ---          $ 21,921 (10)

   CFO and Secretary        1997   $ 56,250      ---       ---             ---        11,025          ---          $ 13,041 (10)

Edward Beeman (4)           1999   $ 79,526      ---       ---             ---          ---           ---          $ 53,548 (11)
<FN>
(1)  On November 29, 1996, Mr. Fiedler was appointed Chairman and Chief
     Executive Officer of the Company. Mr. Fiedler also remained as Chairman and
     Chief Executive Officer of CTL (see Employment Agreements).

(2)  On November 29, 1996, Mr. Latham was appointed President and Chief
     Operating Officer of the Company. Mr. Latham also remained as President of
     CTL (see Employment Agreements).

(3)  On October 31, 1996, Mr. Robson was appointed Vice President and Controller
     of the Company. On December 15, 1998, Mr. Robson was appointed Executive
     Vice President, Chief Financial Officer and Secretary of the Company.


                                       82
<PAGE>
(4)  On June 1, 1998, Mr. Beeman was appointed Executive Vice President, Chief
     Financial Officer and Secretary of the Company. In November 1998, Mr.
     Beeman's employment with the Company was terminated.

(5)  Director's fees paid to officers.

(6)  Pursuant to their employment agreements, on April 1, 1998, Messrs. Fiedler
     and Latham are entitled to receive ten year stock options to purchase a
     total of 450,000 shares of the Company's common stock over a period of five
     years, to be granted in increments of 90,000 shares annually, at various
     exercise prices for each 90,000 share increment. As adjusted for the stock
     dividend, each 90,000 share increment has been adjusted to a 94,500 share
     increment, and the exercise price of each of the five 94,500 share
     increments is $3.81, $7.62, $11.43, $15.24 and $19.05, respectively.

(7)  Stock options to purchase 13,125 shares of common stock were granted on
     June 1, 1997 at $2.86 per share; 8,750 of these options are exercisable as
     of June 1, 1999. Stock options to purchase 13,125 shares of common stock
     were granted on June 1, 1998 at $3.90 per share; 4,375 of these options are
     exercisable as of June 1, 1999. Stock options to purchase 85,000 shares of
     common stock were granted on December 11, 1998 at $6.56 per share; these
     options are not currently exercisable.

(8)  Represents automobile allowance.

(9)  Represents relocation assistance and $98,000 paid to Mr. Latham to cover
     his loss on a personal residence and related real estate commissions and
     selling expenses.

(10) Represents relocation assistance paid by the Company.

(11) Represents automobile allowance and relocation assistance paid by the
     Company.
</FN>
</TABLE>


                                       83
<PAGE>
The table below provides information regarding stock options granted during the
fiscal year ended March 31, 1999 to the Named Executives:

<TABLE>
<CAPTION>
                       OPTIONS GRANTED IN LAST FISCAL YEAR

                                                       Individual Grants
                    --------------------------------------------------------------------------------------
                       Number of         % of Total                             Potential Realizable Value
                        Shares         Options Granted                          at Assumed Annual Rate of
                      Underlying        to Employees     Exercise  Expiration   Stock Price Appreciation
                    Options Granted    in Fiscal Year     Price      Date           for Option Term(3)
                    ---------------    --------------    --------  ----------   --------------------------
                                                                                    5%           10%
                                                                                    --           ---
<S>                    <C>                 <C>           <C>        <C>           <C>         <C>
James J. Fiedler       94,500              9.3%          $ 3.81     04/01/08      $226,430    $573,819
Daniel W. Latham       94,500              9.3%          $ 3.81     04/01/08      $226,430    $573,819
Brian A. Robson        13,125 (1)          1.3%          $ 3.90     06/01/03      $ 14,142    $ 31,250
                       85,000 (2)          8.3%          $ 6.56     12/11/03      $154,055    $340,420
<FN>
(1)  These options vest annually in one-third increments commencing June 1,
     1999.

(2)  These options vest annually in one-third increments commencing December 11,
     1999.

(3)  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.
</FN>
</TABLE>

Aggregated option exercises during the fiscal year
ended March 31, 1999 and fiscal year end option values
------------------------------------------------------
The table below provides information regarding the value of the in-the-money
stock options held by the Named Executives at March 31, 1999. The Named
Executives did not exercise any stock options during the fiscal year.

                    Number of Unexercised      Value of Unexercised In-the-Money
                  Options at March 31, 1999        Options at March 31, 1999(1)
                  ---------------------------   --------------------------------
                  Exercisable   Unexercisable     Exercisable     Unexercisable
James J. Fiedler      ---          94,500             ---            $195,615
Daniel W. Latham      ---          94,500             ---            $195,615
Brian A. Robson       4,375       106,875           $13,212          $ 52,412

(1)  Value based on the closing price of $5.88 of the common stock on The Nasdaq
     National Market on March 31, 1999, less the option exercise price. Does not
     include, as to Messrs. Fiedler and Latham, an aggregate of 378,000 options
     each, which they are entitled to be granted over the next four years
     pursuant to their respective employment agreements. If such options were
     added, the value of unexercisable in-the-money options would not increase,
     as the exercise prices of such grants will range from $7.62 to $19.05.


                                       84
<PAGE>
Stock Option Plans
---------------------------
On December 11, 1986, the Board of Directors adopted the Company's 1986
Non-Qualified Stock Option Plan (the "1986 Plan"). The 1986 Plan, as amended,
provides for the grant of options to purchase up to 832,963 shares of Common
Stock to executive officers, key officers, employees, directors and consultants
of the Company and its subsidiaries. In February 1998, the Board of Directors
adopted the Company's Non-Employee Director Stock Option Plan (the "Director
Plan"). The Director Plan provides for the grant of options to purchase up to
157,500 shares of Common Stock to non-employee directors of the Company. In
March 1996, the Board of Directors adopted the Employees Non-Qualified Stock
Option Plan of CTL (the "CTL Plan"). The CTL Plan provides for the grant of
options to purchase up to 2,100,000 shares of Common Stock to executive
officers, key employees, directors, consultants and advisors of the Company, its
affiliates and subsidiaries.

As of March 31, 1999, options to purchase 592,463, 63,000 and 1,178,074 shares
of Common Stock have been granted under the 1986 Plan, the Director Plan and the
CTL Plan, respectively. As of March 31, 1999, 442,956, 0 and 105,713 shares of
Common Stock have been issued pursuant to the exercise of options under the 1986
Plan, the Director Plan and the CTL Plan, respectively. Any unexercised options
that expire or terminate upon a director's resignation or an employee's ceasing
to be employed by the Company, its affiliates or subsidiaries become available
again for issuance under the 1986 Plan, the Director Plan or the CTL Plan, as
the case may be.

In April 1998, stock options to purchase 10,500 shares of the Company's common
stock were granted to each of the non-employee members of the Board of Directors
pursuant to the Director Plan. These options have an exercise price of $3.42 per
share.


Employment Agreements
---------------------------
On April 1, 1998, the Company entered into employment agreements, expiring on
March 31, 2003, with Mr. Fiedler and Mr. Latham. Pursuant to each of their
employment agreements, Messrs. Fiedler and Latham (the "Executive") will receive
a guaranteed minimum annual salary of $300,000 or an amount based on a
percentage of the Company's pre-tax income, whichever is greater; however, the
Executive's annual salary shall not exceed $4.5 million. The Executive shall
also receive deferred compensation for five years following his five-year
employment term (the "Employment Term") based on a percentage of the Company's
pre-tax income during each year of the Employment Term; however, deferred
compensation shall not exceed $600,000 per year. The employment agreements also
provide that the Executive will not compete with the Company for one year
following the termination of his employment.


Compensation of Directors
------------------------------
Directors receive an annual fee of $15,000, paid on a monthly basis. Directors
are also reimbursed for travel expenses. In addition, directors receive up to
$1,250 per day for each meeting attended (board or committee). Non-employee
directors (including retired directors as determined by the Board) receive
supplemental medical reimbursement to pay all medical expenses for them and
their immediate families (spouses and unemancipated children) up to a limit of
$25,000 per year.

                                       85
<PAGE>
Report on Repricing of Options
------------------------------
The Company did not adjust or amend the exercise price of stock options
previously awarded to the Named Executives during the fiscal year ended March
31, 1999, except to reflect the 5% stock dividend issued on November 4, 1998 to
stockholders of record as of October 21, 1998.


Compensation Committee Interlocks and Insider Participation
-----------------------------------------------------------
The Board of Directors does not have a compensation committee because executive
compensation decisions are made by the full Board. Recommendations on executive
compensation with regard to Messrs. Fiedler and Latham are made by the outside
non-employee directors when requested to do so 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 1999 compensation and employment contracts were previously
described above.




                                       86
<PAGE>
--------------------------------------------------------------------------------
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------------------------

The following table sets forth certain information as of August 31, 1999
regarding the beneficial ownership of the Company's Common Stock by (a) each
person known by the Company to own beneficially more than 5% of the Company's
Common Stock, (b) each director and officer of the Company, including Messrs.
Fiedler, Latham and Robson, and (c) all directors and executive officers of the
Company as a group. Except as otherwise indicated and subject to community
property laws where applicable, the persons named in the table below have sole
voting and dispositive power with respect to the shares of Common Stock shown as
beneficially owned by them. Information as to Alan J. Andreini and Kiskiminetas
Springs School was derived from the Schedules 13D and 13G filed by each such
stockholder. Information as to Richard L. Haydon was derived from the Schedule
13D filed by Mr. Haydon on July 28, 1997, as well as information provided to the
Company by Mr. Haydon. Information as to JNC Opportunity Fund was derived from
information provided to the Company by JNC. Except for the percentage of
ownership, the information set forth below reflects the information contained in
the Schedule 13G and/or 13D as of the date such Schedule 13G or 13D was filed.
<TABLE>
<CAPTION>
                Name and Address                   Number of Shares         Percent of
              of Beneficial Owner                 Beneficially Owned     Outstanding Shares
              -------------------                 ------------------     ------------------
<S>                                                <C>                          <C>
 Jack E. Donnelly (1)................................ 42,245 (2)                  *
 James J. Fiedler (1)................................642,288 (3)                 5.0%
 Daniel W. Latham (1)................................232,312 (4)                 1.8 %
 J. Thomas Markley (1)  ..............................21,000 (5)                  *
 Stephen W. Portner (1)...............................47,250 (6)                  *
 Brian A. Robson (1)..................................13,125 (7)                  *
 Alan J. Andreini (8)..............................1,134,335 (9)                 9.0%
 JNC Opportunity Fund (10)...........................663,142 (11)                4.999%
 Richard L. Haydon (12)............................1,528,400 (13)               11.5%
 Kiskiminetas Springs School (14)..................1,010,210 (15)                8.0%
 All directors and executive officers of the
 Company as a group (5 persons)......................998,220 (2)(3)              7.5%
                                                             (4)(5)(6)(16)
<FN>
*    Less than 1%

(1)  The address of the stockholder is: c/o Coyote Network Systems, Inc., 4360
     Park Terrace Drive, Westlake Village, CA 91361.

(2)  Includes 33,763 shares of Common Stock issuable upon exercise of stock
     options which are currently exercisable.

(3)  Includes 94,500 shares of Common Stock issuable upon exercise of stock
     options and 183,750 shares of Common Stock issuable upon exercise of
     warrants which are currently exercisable. Includes 192,938 shares of Common
     Stock received by the stockholder upon conversion of Class B Units of


                                       87
<PAGE>
     Coyote Technologies, LLC ("CTL") on June 24, 1999. Does not include 94,500
     shares of Common Stock issuable upon exercise of stock options not
     currently exercisable.

(4)  Includes 94,500 shares of Common Stock issuable upon exercise of stock
     options which are currently exercisable. Includes 21,000 shares of Common
     Stock received by the stockholder upon conversion of Class B Units of CTL
     on July 7, 1999. Includes 95,812 shares of Common Stock issuable upon
     conversion of additional Class B Units of CTL. Does not include 94,500
     shares of Common Stock issuable upon exercise of stock options not
     currently exercisable.

(5)  Represents 21,000 shares of Common Stock issuable upon exercise of stock
     options which are currently exercisable.

(6)  Includes 26,250 shares of Common Stock issuable upon exercise of stock
     options and 10,500 shares of Common Stock issuable upon exercise of
     warrants which are currently exercisable.

(7)  Includes 13,125 shares of Common Stock issuable upon exercise of stock
     options which are currently exercisable. Does not include 98,125 shares
     issuable upon exercise of stock options not currently exercisable.

(8)  The address of Alan J. Andreini is: 395 Hudson Street, New York, NY 10014.

(9)  Includes 877,710 shares of Common Stock held by Mr. Andreini for his own
     account. Includes 145,700 shares held in the account of Kiskiminetas
     Springs School (the "School"), 24,150 shares held in the account of John D.
     Andreini and Blanche M. Andreini (the "Parents"), 84,150 shares held in the
     account of The Andreini Foundation (the "Foundation") and 2,625 shares held
     for the benefit of Alan J. Andreini, Jr. (the "Son"), of which Mr. Andreini
     may be deemed to be the beneficial owner. Mr. Andreini disclaims beneficial
     ownership of all shares of Common Stock except those shares held by him for
     his own account. Mr. Andreini has sole voting and dispositive power over
     964,485 shares of Common Stock (includes 877,710 shares held by Mr.
     Andreini for his own account, 84,150 shares held in the account of the
     Foundation and 2,625 shares held in the account of the Son). Mr. Andreini
     has shared voting and dispositive power over 169,850 shares of Common Stock
     (includes 145,700 shares held in the account of the School and 24,150
     shares held in the account of the Parents).

(10) The address of JNC Opportunity Fund is c/o Olympia Capital (Cayman) Ltd.,
     Williams House, 20 Reid Street, Hamilton HM11, Bermuda.

(11) Includes 4.999% of the Company common stock outstanding as of August 31,
     1999. This represents the maximum beneficial ownership of the Company
     common stock permitted under the terms of the conversion into common stock
     of the Convertible Preferred Stock held by JNC. The Certificate of
     Designation governing the preferred stock prohibits JNC from converting
     shares of the preferred stock to the extent that such conversion would
     result in JNC beneficially owning in excess of 4.999% of the outstanding
     shares of common stock following such conversion. Such restriction may be
     waived by JNC upon not less than 75 days notice to the Company.

(12) The address of Richard L. Haydon is: 1114 Avenue of the Americas, New York,
     NY 10036.

(13) Includes 872,150 shares of Common Stock held in various managed
     discretionary accounts of which Mr. Haydon may be deemed to be the
     beneficial owner. Includes 656,250 shares of Common Stock issuable upon
     exercise of warrants which are currently exercisable, held by various


                                       88
<PAGE>
     discretionary accounts, of which Mr. Haydon may be deemed to be the
     beneficial owner. Based upon information supplied by this stockholder (in
     addition to the information derived from Mr. Haydon's Schedule 13D, filed
     on July 28, 1997), Mr. Haydon has sole voting and dispositive power over
     1,528,400 shares of Common Stock.

(14) The address of Kiskiminetas Springs School is: 1888 Brett Lane, Saltsburg,
     PA 15681.

(15) According to the Schedule 13D filed on May 14, 1999, by Alan J. Andreini,
     the School beneficially owns 1,010,210 shares of Common Stock.

(16) Includes 262,138 shares of Common Stock issuable upon exercise of stock
     options and 194,250 shares of Common Stock issuable upon exercise of
     warrants which are currently exercisable. Does not include 287,125 shares
     of Common Stock issuable upon exercise of stock options not currently
     exercisable.
</FN>
</TABLE>



                                       89
<PAGE>
--------------------------------------------------------------------------------
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
--------------------------------------------------------------------------------

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 payments 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 by the
Company either voluntarily or for cause; or (3) sale by Mr. Latham of all, or
substantially all, of his stock in the Company. As of March 31, 1999, $421,000
was funded to Mr. Latham under this agreement. In October 1998, the Company
amended the terms of the loan, and in agreement with Mr. Latham established an
annual interest rate of 6.5% to be applied to the loan and which is payable at
the completion of the term.

Comdisco, Inc., a technology services and finance company, was the beneficial
owner of approximately 6% of our common stock including 515,400 shares purchased
by Comdisco on the open market and 192,990 warrants issued in connection with
lease financing provided by Comdisco to our end-user customers. During fiscal
1998 and fiscal 1999, Comdisco has provided lease financing in a total amount of
$24.0 million to four of the Company's customers. In August 1999, Comdisco filed
a Schedule 13G disclosing that its beneficial ownership as of August 23, 1999
consisted solely of the 192,990 warrants and that Comdisco had ceased to be a
beneficial owner of more than 5% of our common stock.





                                       90
<PAGE>
                      ===================================
                                    PART IV.
                      ===================================

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

    (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         42

        Report of PricewaterhouseCoopers LLP, Independent Accountants         43

        Consolidated Balance Sheets - March 31, 1999 and March 31, 1998       44

        Consolidated Statements of Operations - Fiscal Years Ended March 31,
        1999, March 31, 1998 and March 31, 1997                               45

        Consolidated Statements of Changes in Shareholders' Equity - Fiscal
        Years Ended March 31, 1999, March 31, 1998 and March 31, 1997         46

        Consolidated Statements of Cash Flows - Fiscal Years Ended March 31,
        1999, March 31, 1998 and March 31, 1997                               47

        Notes to Consolidated Financial Statements                            48

    (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            98

        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:

        The Company did not file any reports on Form 8-K during the fourth
        quarter of fiscal 1999.


                                       91
<PAGE>
(c) Exhibits

Exhibit
Number    Description
-------   -----------
2.1       Stock Acquisition by Merger Agreement, dated as of September 30, 1998,
          among Coyote Network Systems, Inc., INET Acquisition, Inc., INET
          Interactive Network System, Inc., Claude Buchert, Helene Legendre and
          First Rock Trustees, Limited, a Gibraltar corporation, trustee of the
          Guimauve Trust, a Gibraltar trust dated September 1, 1994
          (incorporated herein by reference to Exhibit 2.1 of Registrant's Form
          8-K filed on October 15, 1998).

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

3.2       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 6 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).

                                       92
<PAGE>
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.

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.

4.16      Form of Subscription Agreement (incorporated herein by reference to
          Exhibit 4.1 of Registrant's Form 8-K filed on June 3, 1999).

4.17      Warrant Agreement (incorporated herein by reference to Exhibit 4.2 of
          Registrant's Form 8-K/A filed on June 22, 1999).

4.18      Cross Receipt and Agreement (incorporated herein by reference to
          Exhibit 4.3 of Registrant's Form 8-K filed on June 3, 1999).

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 The Diana Corporation 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).



                                       93
<PAGE>
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).

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).

                                       94
<PAGE>
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).

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 of Registrant's Form 10-K filed September
          23, 1997).


                                       95
<PAGE>
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 10.30 of 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
          (incorporated herein by reference to Exhibit 10.34 of Registrant's
          Form 10-K filed July 14, 1998).

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).

10.37     Employment Agreement effectively dated April 1, 1998, by and between
          Coyote Network Systems, Inc. and James J. Fiedler (incorporated herein
          by reference to Exhibit 10.1 of Registrant's Form 10-Q filed August
          14, 1998).

10.38     Employment Agreement effectively dated April 1, 1998, by and between
          Coyote Network Systems, Inc. and Daniel W. Latham (incorporated herein
          by reference to Exhibit 10.2 of Registrant's Form 10-Q filed August
          14, 1998).

10.39     Non-Compete Agreement between C&L Acquisitions, Inc. and Technology
          Services Corporation, dated March 31, 1998 (incorporated herein by
          reference to Exhibit 99.2 of Registrant's Form 8-K filed June 19,
          1998).

10.40     Convertible Preferred Stock Purchase Agreement between the Company and
          JNC Opportunity Fund, dated August 31, 1998 (incorporated herein by
          reference to Exhibit 10.3 of Registrant's Form 10-Q filed November 16,
          1998).

10.41     Amendment to Separation Agreement between the Company and Sydney B.
          Lilly effective September 30, 1998.



                                       96
<PAGE>
16.1      Letter dated November 5, 1997 from Price Waterhouse LLP, (incorporated
          herein by reference to Form 8-K/A (Amendment No. 2) filed on November
          5, 1997). The disclosures included in Item 9(a) of this Annual Report
          on Form 10-K/A (Amendment No. 2) were derived from Item 4(a) of the
          Company's October 15, 1997 Form 8-K/A (Amendment No. 2) as referenced
          in the letter dated November 5, 1997 from Price Waterhouse LLP.

21        Subsidiaries of Registrant

23        Consent of Independent Accountants

27        Financial Data Schedule







                                       97
<PAGE>
                  COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES
           Schedule I - Condensed Financial Information of Registrant
                            Statements of Operations
                    (In Thousands, Except Per Share Amounts)

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

     Interest expense                                                 (52)

     Non-operating expense                                           (326)

     Income tax credit                                                836

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

     Loss from continuing operations                              (12,335)

     Loss from discontinued operations                             (8,175)

     Loss before extraordinary items                              (20,510)

     Extraordinary items                                             (508)

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

     Loss per common share (basic & diluted):
           Continuing operations                                 $  (2.23)
           Discontinued operations                                  (1.48)
           Extraordinary items                                       (.09)
                                                                 ---------

           Net loss per common share                             $  (3.80)
                                                                 =========

     Weighted average number of common shares outstanding           5,535
                                                                 ========
</TABLE>

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

                                       98
<PAGE>
                  COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES
     Schedule I - Condensed Financial Information of Registrant (Continued)
                            Statements of Cash Flows
                                 (In Thousands)

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

Net cash used by operating activities                            (2,316)
                                                                 -------

Investing activities:
     Proceeds from sales of marketable securities                 1,353
     Changes in investments in and advances to
       unconsolidated subsidiaries                              (15,945)
     Other                                                          100

Net cash used by investing activities                           (14,492)
                                                                --------

Financing activities:
     Repayments of long-term debt                                  (141)
     Common stock funding                                        13,918
     Extraordinary items                                           (508)
                                                                --------
Net cash provided by financing activities                        13,269
                                                                -------
Decrease in cash                                                 (3,539)
Cash at the beginning of the year                                 3,567
                                                                -------

Cash at the end of the year                                     $    28
                                                                =======

Non-cash transactions:
     Purchase of minority interest with common stock              1,818
</TABLE>

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

                                       99
<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 includes the accounts of the parent company.

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





                                      100
<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 16th day of March
2000.



                                        COYOTE NETWORK SYSTEMS, INC.


                                        By:   /s/ James R. McCullough
                                              ----------------------------
                                              James R. McCullough
                                              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 R. McCullough    Chief Executive Officer and Director   March 16, 2000
-----------------------    (Principal Executive Officer)
James R. McCullough


/s/ Daniel W. Latham       President, Chief Operating Officer     March 16, 2000
-----------------------    and Director

Daniel W. Latham



/s/ Brian A. Robson        Executive Vice President,              March 16, 2000
-----------------------    Chief Financial Officer and Secretary
Brian A. Robson            (Principal Financial and Accounting Officer)




/s/ John M. Eger           Director                               March 16, 2000
-----------------------
John M. Eger


/s/ J. Thomas Markley      Director                               March 16, 2000
-----------------------

J. Thomas Markley