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

                       ----------------------------------
                                   FORM 10-K/A

                                 Amendment No. 4

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

|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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<PAGE>
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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 do
not undertake any 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 businessof selling international
long distance services. We 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.


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.

<PAGE>

In April 1998, we expanded the scope of our telecommunications 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 May 2000, we made a strategic
decision to discontinue the switch segment of our business. See "Subsequent
Events".


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 $6.8 million of revenues from retail domestic and
international long distance service. The revenues from long distance
services constitute our only continuing segment.

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. We 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.


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
use of 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.

<PAGE>
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


                                       2
<PAGE>
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 is 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 as a provider of retail and wholesale international long
distance services.


Principal Products and Services
--------------------------------------------------------------------------

Retail and Wholesale Domestic and International Long Distance Services

We 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, American Gateway had
nine wholesale customers who purchased an aggregate of 4,300,000 minutes of
traffic. In September 1999, we sold our interest in American Gateway by
transferring all the assets and liabilities to PrinVest Corp., reporting a gain
of $6.2 million.

In 1999, we marketed 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


                                       3
<PAGE>
public and private networks and the Internet. In fiscal 1999, we generated
revenues of approximately $35 million from the sale of switching and related OEM
equipment. As discussed above, we made the strategic decision to dispose of this
segment in May 2000. Our revenues from the sale of international long distance
service will constitute our main source of revenue. See "Subsequent Events".

Our Discontinued Segment

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

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.

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.

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.


Our equipment sales are targeted to entrepreneurial carriers, such as
competitive local exchange carriers, switchless resellers and international and
domestic long distance providers.


<PAGE>
Business Strategy
--------------------------------------------------------------------------

We will continue to develop and grow our carrier business through internal
growth and acquisition. We also plan to provide telecommunications services that


                                       4
<PAGE>
will allow users of our service to easily make retail purchases and bill payment
using the Internet and provide other information services.

The fulfillment of our strategy is subject to a number of contingencies,
including obtaining adequate financing to pursue our objectives. In May 2000, we
changed part of our strategy and formulated a plan to discontinue the switch
segment of our business.

We believe we can create a sustainable competitive advantage and increased
valuation by providing our end-users customers with a low cost, high
functionality communications package that includes easy-to-use Internet-based
applications, local and long distance service and Internet access, all from a
simple screen-based, smart telephone. The key is simplicity. We believe
consumers are looking for tailored services on an easy-to-use platform. The
result is a truly scalable e-commerce platform driven off a simple
telephone-like Internet appliance, not a PC.

Using a "push-pull" marketing strategy, we intend to leverage the spending power
of each customer across multiple vertical applications. We are developing
partnerships with companies in vertical markets such as utilities, grocery
chains, credit cards and banks that would purchase the smart phone for
distribution to their respective customers. We plan to provide significant
economic incentive and value to our partners while leveraging our core asset:
loyal customers. We plan to receive revenues from e-commerce transactions,
advertising and voice services as well as Internet access services. All services
will feed the others and drive a simple, yet comprehensive offering to our
customers.

By partnering with companies in vertical markets, we add additional value to our
end-user customers by enabling horizontal applications such as local, long
distance and Internet access services while improving efficiencies and expanding
market opportunities for our vertical marketing partners.

By providing Internet applications over screen-based Internet appliance, we
believe our marketing partners will benefit by increasing their addressable
market, reducing their customer churn and lowering their operating costs. For
example, the appliances should enable our partners to leverage the power of the
Internet for sales, marketing, distribution, and collections. Also, by
delivering these applications directly to the counter top, we believe these
"anchor" vertical applications will provide our partners significantly greater
interaction with our customers.

We also plan to "incubate" new telecom carriers, Internet service providers as
well as application service providers to expand our own network and as part of
our strategic plan to acquire technologies, applications and customers. We plan
to own or acquire core technologies and partner for others. We also plan to
expand our IP-based network, both domestically and internationally and to
penetrate global markets for the sale of value-added applications.

Target Markets
We are targeting specific vertical market segments such as utilities, grocery
chains, credit cards and banks, as well as affinity groups. We plan to continue
to acquire companies and form joint ventures to complement our network carrier
strategy and implementation of IP-based networks, both domestically and
internationally, as well as acquiring cable rights to strategic countries. We
are a licensed carrier in Japan and are pursuing carrier status in other
countries.


                                       5
<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 and independent agents.


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.

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


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.


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.


Competition in the Telecommunications Industry
------------------------------------------------
The telecommunications markets are highly competitive. We compete with
large communication carriers with financial resources significantly greater than
ours. 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 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.



                                       6
<PAGE>
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.

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.


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<PAGE>
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
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. We believe that our relationships with
our employees are good.


Subsequent Event

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

In May 2000 we made the strategic decision to discontinue the switch segment of
our business. Our long distance services segment is now our only segment. Our
consolidated financial statements, Selected Financial Data and Management's
Discussion and Analysis of Financial Condition and Results of Operations have
been restated and revised to reflect the switch segment as discontinued
operations.


                                       8
<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 Frame 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.

                                       9
<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.


                                       10
<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 Frame Relay, IP
and ATM. T1 is the unit of base telephone trunking in the United States.
Overseas, E1 is the standard.




                                       11
<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 also lease 15,000 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 plan to sublet the space
referenced above in Westlake and move the Headquarters to the Los Angeles,
California location. In addition, we plan to reduce our Richardson obligation by
60% as soon as possible.



================================================================================
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.


                                       12
<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. Further, 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
----------------------------------------------

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.


                                       13
<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                                                 $  6,756       $  ---       $  ---        $ ---       $ ---
                                                          ========       =========    ========      =======     =======
Earnings (loss) from:
     Continuing operations (1)(2)                         $ (9,590)      $(15,389)    $ (3,638)     $(1,912)    $(2,140)
     Discontinued operations (3) (4)                        (5,153)       (18,766)     (16,872)      (1,453)      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                                $  (1.11)      $  (2.07)    $  (0.66)     $ (0.41)    $  (.48)
     Discontinued operations                                 (0.52)         (2.53)       (3.05)       (0.31)        .32
     Extraordinary items                                      ---           ---           (.09)        ---        ---
                                                          ---------       -------     ---------      -------     ------
     Net earnings (loss) per common share                 $  (1.63)      $  (4.60)    $  (3.80)     $  (.72)    $  (.16)
Cash dividends per common share                           $   ---        $   ---      $  ---        $ ---       $ ---
                                                          =========       =======     =========     ========    =======
Total assets                                              $ 28,807       $ 16,935     $ 19,837      $28,591     $24,205
Debt (5)                                                    13,827          5,490        1,958        2,099       2,240
Working capital (deficit)                                     (659)         4,509        6,161       13,282      15,489
Shareholders' equity                                         6,057          8,060       16,834       24,686      19,729

</TABLE>

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

(2)  Included in the fiscal 1998 loss are the following: 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)  Included in the loss from discontinued operations in fiscal 1997 is 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 a provision of $900,000 for a reduction in the
     estimated market value of land and buildings which were part of a
     discontinued operation.

(4)  Included in the loss from discontinued operations in fiscal 1998 is 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
     of our switch business segment.

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

                                       14
<PAGE>
================================================================================
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS
         OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
--------------------------------------------------------------------------------

General
----------------------------------

Discontinuance of Switch Segment
In May 2000,  we  decided to  discontinue  and  dispose  of our switch  business
including the manufacture,  development, sale and service of DSS Switches and IP
Gateway equipment.  Prior to the May 2000 decision, this segment was our largest
segment in terms of revenues.

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


Discontinuance of Atlanta Provision Company, C&L Communications, Inc. and Valley
Communications, Inc.

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.


Our Long Distance Services Segment
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. In September 1999, we sold our interest in
AGT to PrinVest Corp.


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


                                       15
<PAGE>
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.

Segments

Following our decision in May 2000 to discontinue the operations of the
telecommunications switching business, our business is reported for as one
continuing operating segment, that is the provider of long distance services.



Results of Operations - Fiscal Year Ended March 31, 1999 versus March 31, 1998
-------------------------------------------------------------------------------

Fiscal year 1999 and the comparative historical results of operations have been
restated to reflect the operations of our DSS Switch business segment separately
as discontinued operations. The following discussion relates to the continuing
operations of the long distance services and our corporate administration
offices. The long distance services business was comprised of two subsidiaries:
AGT, which was acquired in April 1998 and INET, which was acquired in September
1998. For the fiscal year ended March 31, 1999, the continuing operations of the
two international long distance service subsidiaries that were acquired during
fiscal 1999 generated revenues of $6.8 million. Our long distance services
business had no revenues in fiscal 1998.

The gross margin on the continuing long distance services for fiscal 1999 is
$0.9 million, or 13% of revenues. As and if revenues increase, we believe that
our gross margin percentage will increase due to better absorption of fixed
costs.

Selling, general and administrative expenses of the continuing operations for
fiscal 1999 were $9.6 million versus $5.1 million for the same period last year.
This increase is primarily related to the additional operating expenses incurred
by the two recently acquired long distance services subsidiaries and expansion
of our corporate staff and related expenses. In fiscal 1999 the general and
administrative expenses include a charge of $2.0 million in connection with
provisions for losses on deposits made to long distance telecom carriers.
Selling, general and administrative expense in fiscal 1998 includes a charge of
$2.2 million related to losses in connection with failed acquisitions, including
costs advanced, costs of due diligence expenses, consulting fees, legal expenses
and other professional services.

The operating loss for fiscal 1999 is $8.7 million versus a fiscal 1998 loss of
$5.1 million. The increase is primarily due to selling, general and
administrative expenses increasing faster than revenue increased.

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 (beneficial conversion feature) 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.

Non-operating income for fiscal 1999 is $1.0 million versus the fiscal 1998
income of $0.1 million. The current year gain of $0.9 million related to the
sale of Concentric Network Corporation securities and interest income of $0.2
million. Fiscal 1998 non-operating income of $0.1 million was primarily interest
income.

                                       16
<PAGE>
The loss from discontinued operations in fiscal 1999 was $5.2 million, comprised
of an operating loss of $4.3 million related to the switching business segment
and a loss of $0.9 million related to the sale of land and buildings of the APC
operation which was discontinued in fiscal 1997.

The comparable loss from discontinued operations in fiscal 1998 of $18.8 million
included a non-cash expense of $5.5 million related to the conversion of Class A
and B units of ownership in the switching business. The decrease in the loss was
primarily due to sales increases of approximately $30 million in the switch
business. (See Note 2 of Notes to the Consolidated Financial Statements.)

The loss for continuing operations for fiscal 1999 is $9.6 million versus the
prior period loss of $15.4 million. The fiscal 1998 net loss of $34.2 million
included 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
-------------------------------------------------------------------------------

Selling, general and administrative expenses attributed to the corporate
headquarters costs of our continuing operations for fiscal 1998 were $5.1
million compared to $3.6 million for the prior fiscal year. Selling, general and
administrative expense in fiscal 1998 includes a charge of $2.2 million related
to losses in connection with failed acquisitions, including costs advanced,
costs of due diligence expenses, consulting fees, legal expenses and other
professional services.


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
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 loss from discontinued operations in fiscal 1998 was $18.8 million compared
to $9.3 million in the prior fiscal year. The increase is primarily due to the
increase in operating losses of the switching business resulting from a $2.0
million reduction in gross profit and increases in engineering, selling, general
and administration expenses of $2.5 million. The loss from discontinued
operations in fiscal 1998 also included a non-cash expense of $5.5 million
related to the conversation of Class A and B units of ownership in the switching
business.



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


                                       17
<PAGE>
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. The shareholders offering this facility were Strategic
Restructuring Partnership, Mr. Alan J. Andreini, Junction Investors, Ardent
Research Partners and Mr. Fred Stein. This facility would be secured by the
stock of INET, bear 12.5% interest on the outstanding principal balance and be
repayable on March 31, 2000. We intend to enter into a definitive agreement only
if these funds are needed to support the operation.

As collateral for $1.9 million funds advanced to NUKO Information Systems, Inc.,
we received shares of stock owned by NUKO in iCompression, Inc. The shares of
iCompression had no published market value. We entered into an agreement to sell
the 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 $10.0 million five-year loan, bearing interest at 8% per year and
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.



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 reduction in losses of the
discontinued operations.

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 of $1.5 million in fiscal 1999. Purchases
were primarily for additional computer and test equipment required to support
the long distance services business.


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 (7.75% at March 31, 1999) plus 1/2%.
These notes were due on demand. In July 1999, the payment date was extended to
December 2001. Subsequently, we sold one of our subsidiaries (AGT) which
included in the assumption of these notes. See Note 17 of the notes to
consolidated financial statements for additional information. In addition, we
have capital lease obligations of $2.4 million at March 31, 1999, payable
through 2004 and a note payable of $0.4 million due February 2000.

                                       18
<PAGE>
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 related to the discontinued switching
     operations;

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

Subsequently, we raised $13.9 million of additional capital. See Note 17 of
Notes to Consolidated Financial Statements for additional information.



<PAGE>
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 do not maintain a backlog related to the long distance services business
operations. We do not believe that such data is 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.




                                       19
<PAGE>
================================================================================
                                  RISK FACTORS
================================================================================

We have only recently entered the long distance services segment of
telecommunications industry and have a limited operating history in such
segment; 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 services.

     Although we were originally incorporated in 1961, we did not enter the long
distance services segment of the telecommunications industry until 1998.
Accordingly, we have a limited operating history in the long distance services
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 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 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 and/or services.

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


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 developing and acquiring our
businesses. For the last four fiscal years, we incurred losses from our
operations. 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 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.



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


                                       20
<PAGE>
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 due to
additional equity financing, see Liquidity (page 62), 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 new shares equal to approximately 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 future 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.

     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


                                       21
<PAGE>
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.

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
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 have had a negative effect on our cash flow
and 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;

     -    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.

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 and are disposing of our
switch equipment segment in order to concentrate on developing our services
segment. 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
services will no longer be offset by revenues from our businesses in other
segments, and will therefore directly and adversely affect our revenues and
results of operations.


                                       22
<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 long  distance  services  segment  of 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 terminated due to our
inability to timely raise the needed capital. We sold all of 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 long
distance services segment of 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 establishment 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.


The telecommunications industry is highly competitive and our inability to
compete successfully could adversely affect our sales revenues.

     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;

                                       23
<PAGE>
     -    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 impact 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.

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
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.

                                       24
<PAGE>
     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.


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.


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.


                                       25
<PAGE>
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.


<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.

                                       26
<PAGE>
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 11.9.0%
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.


<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.


                                       27
<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                 $8,183     $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%.





                                       28
<PAGE>
================================================================================
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
--------------------------------------------------------------------------------

                  COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES

Report of Arthur Andersen LLP, Independent Public Accountants...............30

Consolidated Balance Sheets.................................................31

Consolidated Statements of Operations.......................................32

Consolidated Statements of Changes in Shareholders' Equity..................33

Consolidated Statements of Cash Flows.......................................34

Notes to Consolidated Financial Statements..................................35




                                       29
<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 auditing standards generally accepted
in the United States. 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 accounting principles generally accepted in the United States.


ARTHUR ANDERSEN LLP

Los Angeles,  California
July 13, 1999, accept as to Notes 2 and 17,
Which are as of May 16, 2000



                                       30
<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 $186 and $0 at                                      2,502                    150
         March 31, 1999 and 1998, respectively
     Notes receivable - current                                                           2,367                  2,796
     Deposits and other current assets                                                    4,035                    857
                                                                                       --------              ---------
                  Total current assets                                                   10,129                  7,565

Property and equipment, net                                                               4,807                     57
Intangible assets, net                                                                    5,619                  3,542
Net long-term assets of discontinued operations                                           5,312                  3,242
Notes receivable - non-current                                                              771                  1,170
Investments                                                                               1,550                    750
Other assets                                                                                619                    609
                                                                                      ---------              ---------
                                                                                      $  28,807              $  16,935
                                                                                      =========              =========
                   Liabilities and Shareholders' Equity
Current liabilities:
     Lines of credit                                                                  $   1,133              $    ---
     Accounts payable                                                                     2,885                    539
     Accrued professional fees and litigation costs                                         676                    805
     Other accrued liabilities                                                              384                    365
     Current portion of long-term debt and capital lease obligations                      1,160                    141
     Net current liabilities of discontinued operations                                   4,550                  1,206
                                                                                       --------              ---------
                  Total current liabilities                                              10,788                  3,056
Notes payable                                                                             8,183                   ---
Long-term debt                                                                            1,534                  5,349
Capital lease obligations                                                                 1,817                   ---
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                          7,395                   ---
     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                                                         109,254                102,360
     Accumulated deficit                                                               (116,002)               (97,695)
     Treasury stock at cost                                                              (5,757)                (5,757)
                                                                                       --------             -----------
                  Total Shareholders' equity                                              6,057                  8,060
                                                                                       --------             ----------
                                                                                      $  28,807             $   16,935
                                                                                       ========             ==========

</TABLE>
                 See notes to consolidated financial statements.


                                       31
<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                                                                  $  6,756            $  ---          $   ---

  Cost of sales                                                                 5,878               ---              ---
                                                                             --------            --------        ---------
  Gross profit                                                                    878               ---              ---
                                                                             --------            --------        ---------
  Selling, general and administrative expenses                                  9,590              5,145            3,610
                                                                             --------            --------        ---------
  Operating loss                                                               (8,712)            (5,145)          (3,610)
  Interest expense                                                             (1,885)            (2,334)             (12)
  Non-operating income (expense)                                                1,007                 90           (1,220)
  Securities litigation warrant expense                                        ---                (8,000)            ---
  Minority interest                                                            ---                  ---               368
  Income tax credit                                                            ---                  ---               836
                                                                             --------           ---------         --------
  Loss from continuing operations                                              (9,590)           (15,389)          (3,638)
  Loss from discontinued operations                                            (4,253)           (18,766)          (9,322)
  Estimated loss on disposal of discontinued operations                          (900)               ---           (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                                                 $  (1.11)          $  (2.07)        $  (0.66)
       Discontinued operations                                                  (0.52)             (2.53)           (3.05)
       Extraordinary items                                                      ---                 ---              (.09)
                                                                             ---------          ---------        ---------
       Net loss per common share (basic & diluted)                           $  (1.63)          $  (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.

                                       32
<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              holders'
                                           Amount   Shares     Value    Capital    Deficit  Securities of 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    6,345     ---        ---      ---        ---      ---         ---        ---      6,345

  Beneficial conversion feature -           1,050     ---        ---     (1,050)     ---      ---         ---        ---        ---
    preference shares

  Preferred share dividend                    ---     ---        ---      ---         (205)   ---         ---        ---       (205)
  Non-cash warrant expense                    ---     ---        ---        753      ---      ---         ---        ---        753
                                           ------ ----------  -------  --------  ---------  ------     --------   -------  --------

Balance at March 31, 1999                  $7,395 11,167,456  $11,167  $109,254  $(116,002) $ ---       708,692   $(5,757) $  6,057
                                           ====== ==========  =======  ========  ========== ======     ========   ======== ========

</TABLE>
                 See notes to consolidated financial statements


                                       33
<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                                    676           203             213
       Loss (gain) on sales of marketable securities                   (877)          155             736
       Gain on sale of land                                             (20)         ---             ---
       Bad debt expense                                                 186          ---             ---
       Provision for loss on discontinued operations                    900          ---            7,550
       Non-cash financing and warrant expense                            98        10,582             221
       Net change in discontinued operations                          4,935        13,477          (7,907)
       (Increase) decrease in:
           Receivables                                               (1,447)         (150)           ---
           Deposits and other current assets                          5,707        (1,794)          1,546
       Increase (decrease) in:
           Accounts payable                                          (1,423)          255             105
           Other current liabilities                                   (117)        2,952             187
                                                                   ---------      --------         --------
  Net cash used in operating activities                              (6,125)       (8,475)        (17,859)
                                                                  ----------     ---------        --------
  Investing activities:
       Purchases of property and equipment                           (1,490)         ---              (12)
       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                         (3,331)       (1,422)         (2,887)
       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                           (118)          275           3,314
       Other items                                                      (90)          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.

                                       34
<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 year (all significant intercompany
balances and transactions have been eliminated):

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 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. This entity was disposed
of in fiscal 2000. (See Note 17)


INET Interactive Network System, Inc. ("INET")

On September 30, 1998, the Company completed the acquisition of INET Interactive
Network System, Inc. 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. INET is the
principle operating subsidiary of the Company.

In May 2000, the Company made the strategic decision and adopted a formal plan
to discontinue the following entities (see Note 17):

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 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.




                                       35
<PAGE>
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
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 and has
decided to discontinue its business units that are involved in the production
and sale of telecommunication switches and Internet Protocol based gateways to
telecommunication service providers (see Note 17). The Company's primary
business will be the wholesaling and retailing of international long distance
service.

After the discontinuance and 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 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 commencing operations of INET, resolving the class
action lawsuit (See Note 7) and raising additional equity investment (see Notes
8, 16 and 17). 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.



                                       36
<PAGE>
Marketable Securities
---------------------------------------
The Company accounts for marketable securities in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Under SFAS No. 115, management
determines the appropriate classification of debt securities at the time of
purchase and re-evaluates such designation as of each balance sheet date. Debt
securities are classified as held-to-maturity when the Company has the positive
intent and ability to hold the securities to maturity. Held-to-maturity
securities are stated at amortized cost, adjusted for amortization of premiums
and accretion of discounts to maturity. Such amortization is included in
non-operating income (expense). Marketable equity securities and debt securities
not classified as held-to-maturity are classified as available-for-sale.
Available-for-sale securities are carried at fair value (based on published
market values), with the unrealized gains and losses reported in a separate
component of shareholders' equity. The amortized cost of debt securities is
adjusted for amortization of premiums and accretion of discounts to maturity.
Such amortization is included in non-operating income (expense). Realized gains
and losses, interest income and dividends are included in non-operating income
(expense). For purposes of determining the gain or loss on a sale, the cost of
securities sold is determined using the average cost of all shares of each such
security held at the dates of sale.

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.

Property and Equipment
---------------------------------------
Property and equipment are stated at cost. Depreciation expense is 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.

                                                   March 31,    March 31,
        Property and equipment consist of the         1999        1998
          following (in thousands):                ---------    ---------

               Land                                 $  ---        $  50
               Fixtures and equipment                5,030           13
                                                    ------        -----
                                                     5,030           63
               Less accumulated depreciation          (223)          (6)
                                                    -------       ------
                                                    $4,807        $  57
                                                    ======        =====


                                       37
<PAGE>
Intangible Assets
-------------------------------------
Intangible assets, net of amortization, consist of the following (in thousands):


                                                  March 31,    March 31,
                                                    1999         1998
                                                  ---------    ---------
          Intellectual property rights              $3,316       $3,519
          Goodwill                                   2,167         ---
          Other                                        136           23
                                                    ------       ------
                                                    $5,619       $3,542
                                                    ======       ======

The Company amortizes the goodwill created through the acquisition of INET in
September 1998 over a five-year period on a straight-line basis. Accumulated
amortization was $0.3 million at March 31, 1999.


Included in intangible assets are the intellectual property rights for the
DSS Switch. The Company amortizes the intellectual property rights over a
20-year period on a straight-line basis. Accumulated amortization was $0.7
million and $0.5 million 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.


Revenue Recognition
------------------------------------

Long Distance Services
Revenue related to long-distance services is recognized at the time of usage.

Switch Sales (Discontinued)
As described in Note 17, the Company decided to discontinue our switch business
in May 2000. All revenue and expenses related to the switch business are
summarized in the line item "loss on discontinued operations" in the
accompanying financial statements. Revenue and profits related to shipments of
switching equipment have generally been recognized upon shipment to a
credit-worthy customer, based on a fixed price. The Company also sells
maintenance and other services to its customers. Revenue related to these
services is recognized on a straight-line basis over the life of the contract.

Since 1998, the Company has also been involved in transactions in which the
end-user of the switch equipment does not have established credit and will


                                       38
<PAGE>
obtain a third party leasing company to purchase the equipment or assume the end
users' purchase obligation.  At March 31, 1999, there were no unpaid
transactions that had not been assumed by a credit worthy leasing company.

In transactions involving leasing companies, the leasing companies may withhold
a portion of the sales price, as additional security, the payment 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, the payment of which was contingent on the
lessees completing their payment obligations under the lease. In addition as of
March 31, 1999, the Company deferred $3.1 million of profit recognition related
to three leases with a leasing company that the Company had not done business
with in past. This leasing company was withholding payment until the lessee and
lessor acknowledged that the equipment was operational.


Credit and Other Concentrations
-------------------------------------

For the year ended March 31, 1999, third party lessors were involved in
approximately 97% of net sales of our discontinued switching business (see Note
2). For the year ended March 31, 1998, a third party lessor was involved in
approximately 40% of the revenue for the switch segment and revenue from Apollo
Inc. accounted for approximately 19% of revenue of the switch segment (see Note
4). For the year ended March 31, 1997, Concentric Network Corporation accounted
for almost all revenue of the switch segment. At March 31, 1999 and 1998, two
third-party lessors accounted for 77% and 41%, respectively, of gross
receivables included in assets of discontinued operations, 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.


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. These costs are included in loss from discontinued operations in
the accompanying consolidated statements of operations. Software development
costs are capitalized once technological feasibility is established and are
included in the net long-term assets of discontinued operations in the
accompanying consolidated balance sheets.


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


                                       39
<PAGE>
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.

    The beneficial conversion feature ($1,050,000) discussed in Note 8 has been
accounted for as a dividend to Series A Convertible Preferred shareholders. In
computed net loss per share applicable to common stock shareholders for the year
ended March 31, 1999, all dividends on preferred stock have been added to the
net loss to arrive at the net loss applicable to common shares.


Use of Estimates
-------------------------------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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.





                                       40
<PAGE>
--------------------------------------------------------------------------------
NOTE 2   DISCONTINUED OPERATIONS
--------------------------------------------------------------------------------

Discontinuance of Switch Business

In May 2000, the Board of Directors of the Company approved a restructuring plan
that provides for the discontinuance and sale of the DSS Switch segment of the
business. As a result, the Company has reported the operations of the DSS Switch
business for 1999, 1998 and 1997 separately as discontinued operations in the
accompanying consolidated statement of operations. Also the assets and
liabilities of this segment are presented separately and summarized in the
accompanying 1999 and 1998 consolidated balance sheets as follows:

                                                            1999          1998
                                                            ----          ----
                                                          (Dollars in Thousands)
     Current assets:
          Accounts receivable                               $ 9,790      $  564
          Inventory                                           2,130       2,122
          Prepaids and other current assets                     286         554
                                                            -------      ------
                                                            $12,206      $3,240
                                                            -------      ------

     Current liabilities:
          Accounts payable                                  $ 5,275      $1,380
          Other accrued liabilities                           3,515       3,066
          Deferred revenue and customer deposits              7,810        ---
          Current portion capital leases                        156        ---
                                                            -------      -----
                                                            $16,756      $4,446
                                                            -------      ------

     Net current liabilities of discontinued operations     $ 4,550      $1,206
                                                            =======      ======

     Non-current assets:
          Property and equipment, net                       $ 3,374      $2,333
          Capitalized software development                    1,604        ---
          Notes receivable                                      100        ---
                                                            -------      -----
     Net long-term assets of discontinued operations        $ 5,078      $2,333
                                                            =======      ======

Expected operating results relating to the discontinued operations from April 1,
2000 until the expected disposal date will be included in the estimated loss on
disposal and will be recorded as a charge in the consolidated financial
statements in fiscal 2000. The Company expects to record a charge for estimated
loss on disposal of the switch business of approximately $10.0 million in fiscal
2000, which includes estimated $3.0 million of expected losses of the segment
for the first two quarters of fiscal 2001. The Company expects to dispose of the
segment by the end of the second quarter of fiscal 2001.

The operating results relating to the above discontinued segment are as follows:

                                                Fiscal Year Ending March 31
                                                  (Dollars in Thousands)

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

                                              1999         1998          1997
                                              ----         ----          ----
Net sales                                   $35,907      $  5,264      $ 7,154
                                            =======      ========      =======
Loss from discontinued operations           $(4,253)     $(18,766)     $(8,697)
                                            ========     ========      ========


                                       41
<PAGE>

1996 - 1997 Restructuring

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

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

On February 3, 1997, the 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 include
certain items from the discontinued meat and seafood segment as follows (in
thousands):

                                                            1999         1998
                                                            ----         ----
   Other 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 related to
C&L, Valley and Entree/APC are recorded at approximate net realizable value at
March 31, 1999.


                                       42
<PAGE>

As of June 18, 1999, the Company had collected all cash related to the sale of
discontinued operations of the meat and seafood segment except $410,000 due
under a note and the 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 following
discontinued operations for fiscal year 1997 through the measurement date of
November 20, 1996 are as follows (in thousands):


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


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


                                       43
<PAGE>
subordinated nature of the interests resulting from the priority distributions
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.

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.


                                       44
<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 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
                                               -----
                                               1,369


--------------------------------------------------------------------------------
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.). At the time this security was accepted by the Company, the
iCompression stock had no published market value nor was there any reliable
financial information available. 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


                                       45
<PAGE>
balance sheet. The investment in Systeam is accounted for using the cost method.
Subsequent to March 31, 1999, the Company sold all of its interests in Systeam,
S.p.A., see Note 17.


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. Subsequent to March 31, 1999, the Company sold all of its
interest in CGL, see Note 17.


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 million to Crescent and $0.9 million 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 million realization reserve on this investment.



                                       46
<PAGE>
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
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 incurred 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,
general and administrative expenses in the accompanying financial statements.

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

NOTE 5   DEPOSITS AND 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 selling,
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                              2,400       ---
                                                          -------      ------
                                                            4,511       5,490
     Less current portion                                  (1,160)       (141)
                                                          -------      ------
                                                          $ 3,351      $5,349
                                                          =======      ======



                                       47
<PAGE>
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.

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

                                                          Capital
                                                 Debt      Leases       Total
                                               ------     -------      -------

        2000                                    $  577     $  689      $ 1,266
        2001                                       141        686          827
        2002                                     1,393        678        2,071
        2003                                      ---         668          668
        2004                                      ---         150          150
                                                ------     ------      -------
                                                 2,111      2,871        4,982
      Less amount representing interest           ---        (471)        (471)
                                                ------     ------      --------
                                                 2,111      2,400        4,511
      Less current portion                        (577)      (583)      (1,160)
                                                -------    -------     --------
                                                $1,534     $1,817      $ 3,351
                                                ======     ======      =======

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, 15 and 17). 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 the first of March.

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


                                       48
<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
so, the status of such matter. Investigations by the Commission and/or The


                                       49
<PAGE>
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.


--------------------------------------------------------------------------------
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 Per                       Warrant Price
                                            Options            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>


                                       50
<PAGE>
<TABLE>
<CAPTION>
                                               Weighted Average
                                  Weighted        Remaining                       Weighted
Option Price    Outstanding        Average        Contractual    Exercisable       Average
  Per share       Options      Exercise Price     Life (Years)    Options       Exercise Price
------------    -----------    --------------   ---------------  -----------    --------------
<S>              <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>


                                                            Weighted Average
   Warrant Price     Outstanding     Weighted Average     Remaining Contractual
    Per share          Warrants       Exercise Price          Life (Years)
   -------------     -----------     ----------------     ---------------------
   $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
                      =========

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         (1.63)      (4.60)       (3.80)
                         -   proforma            (1.70)      (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 1999, 1998 and 1997:


                                           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


                                       51
<PAGE>
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
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 a reduction in net sales in the fourth quarter ended March 31,
1998 of $123,000 using the Black-Scholes option-pricing model, this amount is
included in loss on discontinued operations in the accompanying consolidated
statement of operations.

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 $655,000 as a reduction in net sales in fiscal 1999, this amount is
included in loss on discontinued operations in the accompanying consolidated
statement of operations. The fair value was estimated using the Black-Scholes
option-pricing model.

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

                                       52
<PAGE>
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.


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. This beneficial conversion feature has been valued at
$1,050,000 and accounted for as a dividend to the preferred shareholders. 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,


                                       53
<PAGE>
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
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.


                                       54
<PAGE>
--------------------------------------------------------------------------------
NOTE 9   INCOME TAXES
--------------------------------------------------------------------------------

A reconciliation of the provision (benefit) for income taxes 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>
  Federal income tax at statutory rate                       $(3,261)    $(5,232)   $(1,646)
  State income tax, net of federal benefit                      (575)       (923)      (291)
  Settlements of liabilities of unconsolidated subsidiary         (1)        (10)        (5)
  Tax effect of net operating loss not benefited               3,815       6,142      1,833
  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):

                                                       March 31,     March 31,
                                                         1999          1998
                                                       --------      --------

     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
     Reserves                                               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                                $ ---         $  ---
                                                       ========      ========

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.

                                       55
<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                                               200        118          544
    Other                                                         (70)       127           32
                                                               -------     -----      --------
                                                               $1,007      $  90      $(1,220)
                                                               ======      =====      ========

</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 and is included in the loss from discontinued
operations in the accompanying consolidated financial statements. 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.


                                       56
<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


                                       57
<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 switch
equipment to Crescent Communications, Inc. ("Crescent") through a third party


                                       58
<PAGE>
leasing 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 did not recognize approximately $2.5 million of gross
profit 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. In 1999, PrinVest was the purchaser/lessor on
approximately $15.0 million of equipment that it is leasing to end-users.


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 (1)                        $9,498,000        $  ---
       Sales to C&L (1)                              $   ---           $304,000
       Redemption of Preferred Stock by C&L          $1,500,000        $  ---

       (1)  Included in discontinued operations

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.




                                       59
<PAGE>
--------------------------------------------------------------------------------
NOTE 13  BUSINESS SEGMENT INFORMATION
--------------------------------------------------------------------------------

After the decision to discontinue the switch business, the Company will be
operating in only one segment, long distance services.



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

Non-cash transactions/continuing operations:

     Convertible debt expense associated with conversion
<S>                                                              <C>       <C>         <C>
         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


     Amounts paid directly by lender                           (7,921)      ---         ---
Non-cash transactions, discontinued operations:
     Expense charge on conversion of A & B units              $  ---      $5,522      $ ---
     Sales discount granted for investment in affiliate          (900)      ---         ---

</TABLE>


                                       60
<PAGE>
--------------------------------------------------------------------------------
NOTE 15  LIQUIDITY AND CAPITAL RESOURCES
--------------------------------------------------------------------------------

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

After the restructuring and discontinuance, 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 commencing operations of
INET, resolving the class action lawsuit (See Note 7) and recently raising
additional equity investment (see Notes 8, 16 and 17). 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
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.


                                       61
<PAGE>
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 8). With completion of the equity and debt financing and the
collection of $4,400,000 of previously delinquent customer receivables and the
receipt of $2,254,000 from the exercise of Company Employee Stock Options, the
Company had more than sufficient funds to finance its operating activities in
fiscal 1998 and ended the fiscal year with an operating cash balance of
$3,700,000.

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

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

Fiscal 1997 - Year Ended March 31, 1997
----------------------------------------------
The Company encountered a liquidity deficiency in fiscal 1997 and subsequently,
primarily because (i) certain customers of CTL were past due on receivables,
(ii) CTL has granted certain customers extended payment terms, (iii) CTL's
revenue growth has been lower than expected and (iv) the Company made payments
of $2,349,000 in connection with the Restructuring.

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

The Company is seeking buyers for C&L and Valley. It is anticipated that the
proceeds of the sales of these businesses and assets will be used to fund a
portion of the Company's capital and operating requirements in fiscal 1998.
Restrictions in the revolving lines of credit of C&L and Valley prevent the


                                       62
<PAGE>
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.

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

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

NOTE 17  POST JULY 13, 1999 EVENTS

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

Since July 13, 1999, several significant events have occurred. The are
summarized as follows:

     1.   In September 1999, the Company sold its interest in American Gateway
          Telecommunications ("AGT") by transferring all assets and liabilities
          to PrinVest Corp. (the holder of $8.2 million of Notes from AGT)
          reporting a gain of $6.2 million.

     2.   In February 2000, the Company sold its interest in Systeam, S.p.A. for
          $1.2 million.

     3.   In January and February 2000, the Company raised additional equity of
          $13.9 million (net of expenses) by the sale of approximately 3.2
          million shares of 6% Series B Convertible Preferred Stock.

     4.   In January 2000, the Company restructured its management team and
          business strategy. In connection therewith, the Company issued
          2,000,000 shares of common stock to a consulting firm and issued
          options to purchase 750,000 shares of common stock at $5.00 per share.
          The options are subject to shareholder approval.

                                       63
<PAGE>
     5.   In May 2000, the Company approved a plan that included the
          discontinuance of the Company's switch business. The financial
          statements have been restated to present the operations of the switch
          business as discontinued operations (see Note 2).

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

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
     confirmation requests with our customers and management's concern regarding
     both pending legal proceedings with customers and/or potential adverse


                                       64
<PAGE>
     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:
<TABLE>
<CAPTION>
                                     ----------------------------------------------------
                                              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
                                     ----------    -------       ----------       -------
<S>                                  <C>           <C>            <C>             <C>
  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)
</TABLE>

     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 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


                                       65
<PAGE>
     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.




                                       66
<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. The Board
of Directors currently 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
Initiative Committee and as an examiner for the Malcolm Baldridge National
Quality Award. Mr. Markley also was Senior Vice President Telecommunication


                                       67
<PAGE>

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.



                                       68
<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)
</TABLE>

[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.


                                       69
<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>


                                       70
<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
                       --------------------------------------------------------------------------------------
                                                                                         Potential Realizable
                          Number of        % of Total                                      Value at Assumed
                           Shares        Options Granted                                 Annual Rate of Stock
                         Underlying       to Employees       Exercise     Expiration      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
</TABLE>
[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>

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.

<TABLE>
<CAPTION>
                         Number of Unexercised           Value of Unexercised In-the-Money
                       Options at March 31, 1999             Options at March 31, 1999(1)
                       ---------------------------       ---------------------------------
                       Exercisable   Unexercisable       Exercisable        Unexercisable

<S>                                     <C>                                   <C>
  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
</TABLE>

(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.

                                       71
<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.

                                       72
<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.






                                       73
<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>
                                                                                  Percent of
                  Name and Address                       Number of Shares         Outstanding
                of Beneficial Owner                     Beneficially Owned           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)
</TABLE>
[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


                                       74
<PAGE>
     Stock received by the stockholder upon conversion of Class B Units of
     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


                                       75
<PAGE>
     exercise of warrants which are currently exercisable, held by various
     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>

================================================================================
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.



                                       76
<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         30

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

        Consolidated Statements of Operations - Fiscal Years Ended March 31,
        1999, March 31, 1998 and March 31, 1997                               32

        Consolidated Statements of Changes in Shareholders' Equity - Fiscal
        Years Ended March 31, 1999, March 31, 1998 and March 31, 1997         33

        Consolidated Statements of Cash Flows - Fiscal Years Ended March 31,
        1999, March 31, 1998 and March 31, 1997                               34

        Notes to Consolidated Financial Statements                            35

    (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            84

        Schedule II - Valuation and Qualifying Accounts                       88

        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.


                                       77
<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).

                                       78
<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).

                                      79
<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).

                                       80
<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).

                                       81
<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.


                                       82
<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     Consents of Independent Accountants*


27     Financial Data Schedule

-------------
*   To be filed by amendment.





                                       83
<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.

                                       84
<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.

                                       85
<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.



                                       86
<PAGE>


                    Report of Independent Public Accountants


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

We have audited in accordance with auditing standards  generally accepted in the
United States the consolidated  financial  statements of Coyote Network Systems,
Inc.  included in this Form 10-K,  and have issued our report thereon dated July
13, 1999,  except as to Notes 2 and 17,  which is as of May 16, 2000.  Our audit
was made for the  purpose of forming an opinion on those  statements  taken as a
whole. The Schedule of Valuation and Qualifying  Accounts is the  responsibility
of the Company's  management and is presented for purposes of complying with the
Securities and Exchange Commissions rules and is not part of the basic financial
statements.  This schedule has been subjected to the auditing procedures applied
in the audit of the basic financial statements and, in our opinion, fairly state
in all material  respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.


ARTHUR ANDERSEN LLP
Los Angeles, California
May 16, 2000






                                       87
<PAGE>

                  COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES

                 Schedule II - Valuation and Qualifying Accounts

                                 (In Thousands)
<TABLE>
<CAPTION>
                                                             Fiscal Year Ended
                                                     ----------------------------------
                                                      March 31,    March 31,   March 31,
                                                         1999        1998       1997
                                                     -----------   ----------  --------
Allowance for net unrealized losses on
   current marketable securities:

<S>                                                     <C>         <C>        <C>
Balance at beginning of year                            $ ---       $ ---      $ 876

  Charge (credit) against shareholders' equity            ---         ---       (876)
                                                        ------      ------     ------

Balance at end of year                                  $ ---       $ ---      $ ---
                                                        ======      ======     ======


Allowance for doubtful accounts on receivables:

  Balance at beginning of year                          $ ---       $ ---      $ ---

  Bad debt expense                                        186         ---        ---

  Write-offs/recoveries                                   ---         ---        ---
                                                        ------      ------     ------

Balance at end of year                                  $ 186       $ ---      $ ---
                                                        ======      ======     ======

</TABLE>


                                       88
<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 May 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      May 16, 2000
----------------------    (Principal Executive Officer)
James R. McCullough


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


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


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

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



                                       89
<PAGE>