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

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

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

                                    FORM 10-K

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

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

            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 - PARTS OF REGISTRANT'S PROXY
        STATEMENT FOR THE ANNUAL MEETING OF STOCKHOLDERS ARE INCORPORATED
                   BY REFERENCE INTO PART III OF THIS REPORT.
================================================================================

<PAGE>
================================================================================
                                     PART I
================================================================================

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

All statements other than historical statements contained in this Report on Form
10-K constitute  "forward-looking  statements" within the meaning of the Private
Securities  Litigation  Reform Act of 1995.  Without  limitation,  these forward
looking statements include statements regarding new products to be introduced by
us in the future,  statements about our business strategy and plans,  statements
about the adequacy of our working capital and other financial resources,  and in
general  statements herein that are not of a historical  nature.  Any Form 10-K,
Annual Report to Shareholders,  Form 10-Q, Form 8-K or press release of ours may
include  forward-looking   statements.   In  addition,  other  written  or  oral
statements which constitute  forward-looking statements have been made or may in
the  future  be made by us,  including  statements  regarding  future  operating
performance,  short and long-term  sales and earnings  estimates,  backlog,  the
status of litigation, the value of new contract signings,  industry growth rates
and our performance relative thereto. These forward-looking statements rely on a
number of assumptions  concerning future events,  and are subject to a number of
uncertainties and other factors,  many of which are outside of our control, that
could cause actual  results to differ  materially  from such  statements.  These
include,  but are not limited to: risks associated with recent operating losses,
no assurance of profitability,  the need to increase sales, liquidity deficiency
and the other risk  factors  set forth  herein (see Item 7 - Risk  Factors).  We
disclaim any  intention or  obligation  to update or revise any  forward-looking
statements whether as a result of new information, future events or otherwise.

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

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

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

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

New carrier  services,  evolving  technologies,  and the  Internet  mark today's
telecom   industry.   As  telecom   carriers   expand  into  new  markets   with
revenue-generating  services,  we believe they need to differentiate  themselves
with tailored voice, data, video and Internet  services.  We believe the ability
of carriers to provide  "bundled"  local,  long distance and Internet service is
critical to their success.

According  to  industry  analysts,  some of the  more  nimble  competitive  long
distance  carriers will grow sales and earnings as they gain market share at the
expense of larger  incumbent  carriers and weaker rivals,  and gradually  expand
into other services.  The industry  consolidation,  which is a result of today's
competitive pressures,  is expected to create a more benevolent,  i.e., rational


                                       1
<PAGE>

business environment for the survivors.  International  telephony is expected to
grow in the mid-teens  rate, in terms of minutes of use, over the next few years
and carriers that are ahead of the pack in expanding into other  services,  such
as prepaid calling cards,  800 number  services,  Internet  telephony,  and data
services could grow faster.

Additionally,   the  telecommunications   industry  is  in  a  period  of  rapid
technological  evolution,  marked by the introduction of competitive product and
service  offerings,  such as the  utilization of IP (Internet  Protocol) and ATM
(Asynchronous  Transfer  Mode)  networks,  and the  Internet  for voice and data
communications.

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

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 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. ("AT&T"), MCI Worldcom ("MCI") and
Sprint  Corporation  ("Sprint").  In  addition,  these  small  and  medium-sized
companies   generally  have  only  limited   capital   resources  to  invest  in
international  facilities.  New international carriers emerged to take advantage
of this demand for less expensive international bandwidth. These entrepreneurial
multinational carriers acted as aggregators of international traffic for smaller
carriers,  taking  advantage  of larger  volumes to obtain  volume  discounts on
international routes (resale traffic), or investing in facilities when volume on
particular routes justified such investments.  Over time, as these international
carriers  became  established and created high quality  networks,  they began to
carry  overflow  traffic from the larger long distance  providers  seeking lower
rates on certain routes.  Our wholesale  international long distance company and
Telecom  Alliance are designed,  among other things,  to obtain volume discounts
and other economies by aggregating a number of emerging carriers.

Deregulation and privatization  have also allowed new long distance providers to
emerge in foreign markets. By eroding the traditional  monopolies held by single
national providers, many of which are wholly or partially government owned, such
as Post  Telegraph & Telephone  operators  ("PTTs"),  deregulation  is providing
U.S.-based providers the opportunity to negotiate more favorable agreements with
PTTs and  emerging  foreign  providers.  In  addition,  deregulation  in certain
foreign countries is enabling U.S.-based  providers to establish local switching
and transmission facilities in order to terminate their own traffic and begin to
carry international long distance traffic originated in that country. We believe
that growth of traffic  originated in markets outside of the U.S. will be higher
than the growth in traffic originated within the U.S. due to recent deregulation
in many foreign markets, relative economic growth rates and increasing access to
telecommunications facilities in emerging markets.


                                       2
<PAGE>

International Switched Long Distance Services
--------------------------------------------------------------

International switched long distance services are provided through switching and
transmission  facilities that automatically route calls to circuits based upon a
predetermined set of routing criteria.  The call typically originates on a local
exchange  carrier's  network and is  transported  to the caller's  domestic long
distance  carrier.  The domestic long distance provider then carries the call to
an international  gateway switch such as the ones we sell. An international long
distance  provider  picks up the call at its  gateway  and sends it  directly or
through one or more other long  distance  providers to a  corresponding  gateway
switch  operated in the  country of  destination.  Once the traffic  reaches the
country of  destination,  it is then  routed  through  that  country's  domestic
telephone network to the party being called.

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

Operating Agreements
----------------------------------------------------------

Under traditional operating  agreements,  international long distance traffic is
exchanged  under  bilateral  agreements  between   international  long  distance
providers in two countries.  Operating agreements provide for the termination of
traffic in, and return traffic to, the  international  long distance  providers'
respective  countries at a standard  "accounting  rate" with that  international
provider.  Under a  traditional  operating  agreement,  the  international  long
distance  provider that  originates  more traffic  compensates the long distance
provider  in the other  country by paying a net amount  based on the  difference
between minutes sent and minutes received and the settlement rate.

A carrier  gains  ownership  rights in a digital fiber optic cable by purchasing
direct  ownership in a particular cable prior to the time the cable is placed in
service,  acquiring  an  "Indefeasible  Right of Use"  ("IRU")  in a  previously
installed cable, or by leasing or obtaining  capacity from another long distance
provider  that either has direct  ownership or IRUs in the cable.  In situations
where a long distance  provider has  sufficiently  high traffic volume,  routing
calls across directly owned or IRU cable is generally more  cost-effective  on a
per call basis than the use of short-term  variable  capacity  arrangements with
other long distance  providers or leased cable.  However,  direct  ownership and
acquisition  of IRUs  require a company  to make an  initial  investment  of its
capital based on anticipated usage. We do not currently own IRUs; however,  part
of our business plan is to acquire IRUs to carry our  international  traffic and
sell excess capacity to customers and resellers.

Transit Arrangements
----------------------------------------------------------

In addition to utilizing an operating  agreement to terminate  traffic delivered
from one country directly to another,  an international  long distance  provider
may enter into transit  arrangements  pursuant to which a long distance provider
in an intermediate country carries the traffic to a country of destination. Such
transit  arrangements involve agreement among the providers in all the countries
involved and are generally  used for overflow  traffic or where a direct circuit
is unavailable or not volume justified.


                                       3
<PAGE>

Resale Arrangements
----------------------------------------------------------

Resale  arrangements  typically  involve  the  wholesale  purchase  and  sale of
transmission and termination  services between two long distance  providers on a
variable, per minute basis. The resale of capacity, which was first permitted in
the U.S.  market in the 1980s  enabled the emergence of new  international  long
distance  providers  that  rely  at  least  in part on  capacity  acquired  on a
wholesale basis from other long distance providers.  International long distance
calls may be routed through a facilities-based  carrier with excess capacity, or
through multiple long distance  resellers  between the originating long distance
provider  and  the  facilities-based  carrier  that  ultimately  terminates  the
traffic.  Resale arrangements set per minute prices for different routes,  which
may be  guaranteed  for a set time  period or subject to  fluctuation  following
notice. The resale market for international  capacity is constantly changing, as
new long distance resellers emerge and existing providers respond to fluctuating
costs and competitive pressures. In order to be able to effectively manage costs
when utilizing resale  arrangements,  long distance providers need timely access
to  changing  market  data and must  quickly  react to changes in costs  through
pricing adjustments or routing decisions. We sell competitively priced wholesale
international  long  distance  services to  entrepreneurial  carriers  through a
network comprised of foreign termination  agreements,  gateway switches,  leased
facilities and resale arrangements with other carriers.

Alternative Termination Arrangements
----------------------------------------------------------

As the international  telecommunications market has become deregulated,  service
providers have developed  alternative  arrangements to reduce their  termination
costs by, for  example,  routing  traffic via third  countries  to obtain  lower
settlement  rates or using  international  private line facilities to bypass the
settlement rates applicable to traffic routed over the public switched telephone
network  ("PSTN").   These  arrangements  include  International  Simple  Resale
("ISR"),  traffic  refiling and the  acquisition of  transmission  and switching
facilities  in  foreign  countries.  Refiling  of  traffic  takes  advantage  of
disparities  in settlement  rates between  different  countries.  An originating
operator  typically  refiles traffic by sending it first to a third country that
enjoys  lower  settlement  rates with the  destination  country  whereupon it is
forwarded or refiled to the  destination  country  thereby  resulting in a lower
overall  termination cost. The difference  between transit and refiling is that,
with respect to transit, the operator in the destination country typically has a
direct  relationship  with  the  originating   operator  and  is  aware  of  the
arrangement,  while with  refiling,  the  operator  in the  destination  country
typically is not aware that it is  terminating  refiled  traffic  originated  in
another  country.  While the United States has taken no position with respect to
whether refiling comports with international regulation,  refiling is illegal in
many  countries.  With ISR, a long  distance  provider  completely  bypasses the
settlement  system by  connecting an  international  private line ("IPL") to the
PSTN on one or both ends.  While ISR  currently is only  sanctioned  by U.S. and
other regulatory authorities on some routes, ISR services are increasing and are
expected  to  expand   significantly   as  deregulation  of  the   international
telecommunications  market continues. In addition, new market access agreements,
such as the World Trade Organization ("WTO") Basic Telecommunications  Agreement
(the "WTO  Agreement"),  have made it possible  for many  international  service
providers  to establish  their own  transmission  and  switching  facilities  in
certain  foreign  countries,  enabling  them  to  self-correspond  and  directly
terminate  traffic.  In our capacity as a wholesaler  and retailer of traffic we
engage in ISR and traffic refiling. (See "Government Regulation").

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

                                       4
<PAGE>

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

Our  primary  equipment  products  include  telecommunications   switches  ("DSS
Switches")  and IP  gateways  ("Carrier  IP  Gateways ") designed to route voice
traffic over the PSTN,  Internet Protocol (IP) networks,  and the Internet.  Our
equipment business consists of designing, developing, engineering, and marketing
telecommunications   switches   and  IP  gateways.   The  DSS  Switch   provides
cost-effective  and  versatile  access  to the  PSTN.  Examples  of  DSS  Switch
applications include their use by entrepreneurial carriers that use DSS Switches
to provide domestic and international long distance  services,  debit and credit
card services and 800 number in-bound translation service.

The Carrier IP Gateway is a scalable  IP solution  designed to meet the needs of
domestic and international long distance  carriers,  CLECs and ISPs by improving
the  efficiency  of costly  dedicated  long  distance  T1 lines.  The Carrier IP
Gateway offers carriers a cost  effective,  efficient  Signaling  System 7 (SS7)
solution  that  provides  seamless  routing of phone calls  between the PSTN and
IP-based  networks.  The Carrier IP Gateway can handle voice as well as fax and,
when used with the DSS  Switch  can scale  from 1 T1 to 80 T1s.  The  Carrier IP
Gateway is standards based and communicates  with virtually any Class 4 or Class
5 switch using E&M signaling.

We are using our scalable DSS Switch to route  international long distance calls
for our wholesale and retail long distance operations. The DSS Switch enables us
to enter new  expanding  markets  and  capture  calls at a low per  minute,  per
customer  cost,  creating a  competitive  advantage  over  traditional  wireline
carriers.

We believe that the timely  development  of new products and the addition of new
long distance routes are essential for us to compete in the telecom  market.  We
expect to continue to devote  substantial  resources,  subject to our  financial
ability to do so, to  engineering  new  products  as well as to  obtaining  such
products through acquisitions, joint ventures and strategic alliances.

We also provide wholesale  international  long distance  services,  primarily to
entrepreneurial  carriers  through a network  comprised  of foreign  termination
agreements,  international gateway switches,  leased transmission facilities and
resale arrangements with other long distance service providers.

In  addition,  we  provide  a range of long  distance  services,  primarily  for
affinity groups such as French and Japanese speaking people in the U.S. Services
include  1-800/888  numbers,  calling  card and  prepaid  debit  card  services,
international callback, security codes and access codes.

We provide  entrepreneurial  carriers  with  network  integration  and  customer
support  services,   including  consulting  services,   network  design,  switch
provisioning,  outsourcing,  on-site technical support, remote monitoring,  7x24
customer support, billing administration and help desk support.

Business Strategy
--------------------------------------------------------------

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

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

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

                                       5
<PAGE>

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

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

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

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

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

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

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

3. Acquire IRUs to carry our  international  traffic and sell excess capacity to
resellers and customers.

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

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

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

-    We also plan to market our telecom  equipment,  international long distance
     and network services in Europe, where market liberalization is in its early
     stages.  To do so, for  example,  we may  increase  our equity  position in
     companies such as Systeam S.p.A., a Rome,  Italy-based telecom company, and
     seek  alliances  with  European  companies  to permit  them to  market  our
     products and services in Europe and  permitting us to market their products
     and services in the U.S.

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

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

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



                                       6
<PAGE>

STRATEGY IMPLEMENTATION
--------------------------------------------------------------------------------

General Framework
-----------------------------------------------------------

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

Consolidating and Expanding Our Technology Position
-----------------------------------------------------------

We plan to  continue  to  develop,  acquire,  take  equity  positions  in and/or
contract  with  companies  that have  leading-edge  technologies  and that serve
customers with cost-competitive  solutions,  including IP gateways,  alternative
transmission and packet- and revenue-generating  applications.  For example, our
Carrier IP Gateway  combines the high  bandwidth  efficiency  of an IP link with
compression  equipment,  thereby increasing bandwidth efficiency.  Besides being
more efficient, new networks, such as IP, ATM and the Internet, typically bypass
conventional long distance carriers, who must pay local access charges.

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

Acquiring and Integrating Switchless Affinity-Based Resellers
-------------------------------------------------------------

We are pursuing an  acquisition  strategy and will continue to target  companies
where  complementary  technologies,  international  long  distance  and  network
services can provide our customers  with  cost-competitive,  revenue  generating
solutions.

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

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

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

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

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

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

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

-    We can facilitate debt and/or lease financing.

-    We can provide billing and collection services.


                                       7
<PAGE>

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

-    We can provide space for their switching equipment.

-    We can increase the value of their company.

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

-    We enable them to provide new revenue generating services.

-    We can provide them with a strategy for growth.

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

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

Sales and Marketing
--------------------------------------------------------------

To meet the needs of our customers,  we market our products and services through
the  coordinated  efforts  of our direct  sales  force,  independent  agents and
systems integrators.

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

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


Customers and Customer Concentration
--------------------------------------------------------------

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

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

While  our  customer  base  continues  to  grow,   many  of  our  customers  are
entrepreneurial carriers with limited financial resources.  Their ability to pay
for our  equipment  and services is often  dependent  on  obtaining  third party
financing.  The timeliness of such  financings  will continue to be an important
ingredient in our results.  Our recent  agreements with RCC Finance and PrinVest


                                       8
<PAGE>

are aimed at providing this  necessary part of our program.  In certain of these
lease  transactions,  we issue warrants and other  financial  inducements to the
leasing company to facilitate  financing to our end-user customer.  We recognize
profit on these transactions as payments are received.

A component  of our  long-term  strategy  is our  expansion  into  international
markets as evidenced by our investment in Systeam,  S.p.A. and our OEM (original
equipment manufacturer) agreement with Tokyo-based Apollo KK. In order to effect
this  strategy,  we are seeking  strategic  alliances  with  companies that have
established  international  distribution  channels.  We also recently obtained a
Class II carrier  license  and a point of  presence  (POP) in Japan.  A Class II
license enables us to originate and terminate  traffic in that country and a POP
is the physical place where a long distance carrier connects to a local exchange
carrier's network.

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

Customer Service and Support
--------------------------------------------------

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

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

Research and Development, Manufacturing and Supply
--------------------------------------------------

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

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

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

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


                                       9
<PAGE>

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

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

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

Certain  software  and  hardware  for our  switch and IP  gateway  products  are
licensed or procured from other vendors under OEM arrangements, or are developed
jointly with other vendors pursuant to research and development  joint ventures,
partnerships or similar arrangements. Other hardware and/or software components,
such as subscriber  and data line cards and core switch  software were developed
by us or our contractors.

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

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

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

Proprietary Rights
-------------------------------------------------

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

Wholesale and Retail Facilities
--------------------------------------------------

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

Competition in the Telecommunications Industry
--------------------------------------------------------------

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


                                       10
<PAGE>

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

-    large, multinational corporations;

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

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

-    international joint ventures and alliances;

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

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

Many  of  these  competitors  have  considerably  greater  financial  and  other
resources and more extensive domestic and international  communications networks
than us. In addition,  consolidation  in the  telecommunications  industry could
create even larger  competitors with greater financial and other resources,  and
could also  affect us by  reducing  the number of  potential  customers  for our
services.

International  competition  also may  increase  as a result  of the  competitive
opportunities  created  by a Basic  Telecommunications  Agreement  concluded  by
members of the World Trade  Organization (WTO) in April 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  FCC.  Certain
telecommunication  services  offered  by the  Company  in the  U.S.  may also be
subject to the jurisdiction of state regulatory  authorities,  commonly known as
public utility commissions ("PUCs").  Our  telecommunications  service offerings
outside the U.S. are also generally subject to regulation by national regulatory
authorities. In addition, U.S. and foreign regulatory authorities may affect our
international  service  offerings  as a result  of the  termination  or  transit
arrangements  associated therewith.  U.S. or foreign regulatory  authorities may
take actions or adopt regulatory  requirements  which could adversely affect us.
Our business plan depends on a large degree on the  deregulation  of the telecom
market.

Environmental Regulation
--------------------------------------------------------------

Compliance with federal,  state and local regulations  relating to environmental
protection  have  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.


                                       11
<PAGE>
================================================================================
                                    Glossary
================================================================================

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

AGT - American  Gateway  Telecommunications  - An 80% owned subsidiary of Coyote
Network Systems,  Inc. AGT is  headquartered  in Houston and provides  wholesale
long distance services.

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 fully  compatible  with IP  technology.  ATM also is
compatible with fiber optic technology.  In ATM, info 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 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 switching platforms.

CAP -  Competitive  Access  Provider - An  alternative  carrier that  originally
competed with  incumbent  local  exchange  carriers for traffic to and from long
distance  providers.  Today, most CAPs compete across the board with other local
telephone companies over a wide range of services.

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.

CNS -  Coyote Network Systems, Inc.

CCS - Coyote Communications Services, LLC.

CTL - Coyote Technologies, LLC.

E&M Signaling - Ear and Mouth Signaling - The "E" or "ear" lead receives open or
ground signaling from the signaling equipment. The "M" or "mouth" lead transmits
a ground or battery conditions to the signaling equipment.

E1 - A digital  transmission link with the capacity of 2,048,000 bits per second
(bps). An E1 uses two pairs of normal twisted wires,  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  IDSN-PRI  and  advanced
services  including  Fame Relay,  IP and ATM.  E1 is the unit of base  telephone
trunking outside the United States. In the United States, T1 is the standard.


                                       12
<PAGE>

E3 - A service carrying 16 E1s with a data rate of 34,368,000 BPS.

FoN or FoIP - Fax messages sent over the Internet.

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.

ILD - International Long Distance Carrier.

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.

INET - INET Interactive Network System, Inc. - A 100% owned subsidiary of Coyote
Network  Systems,  Inc.  INET is based in Los Angeles and  provides  retail long
distance services, primarily to affinity groups.

IP -  Internet  Protocol  - Part of the TCP/IP  family of  protocols  describing
software that tracks the Internet address of nodes, route outgoing messages, and
recognizes incoming messages.  IP was originally  developed by the US 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. An IRU is to a submarine  cable what a lease is to a
building.

ISP - Internet Service Provider.

IXC - Inter-exchange Carrier - A long distance carrier.

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

LAN - Local Area Network.

LD - Long distance services.

OAM&P - Operations,  Administration,  Maintenance and Provisioning - Back office
activities.

OEM - Original Equipment Manufacturer.

PCM - Pulse Code Modulation - The most common method of encoding an analog voice
signal into a digital bit stream.

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.

                                       13
<PAGE>

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

PSTN - Public Switched Telephone Network - The public network used for telephone
communications.

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 and brawniest 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 the 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.

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 twisted 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 IDSN-PRI and advanced services including Fame Relay, IP and
ATM. T1 is the unit of base telephone  trunking in the United States.  Overseas,
E1 is the standard.

T3 - A service consisting of 28 T1s or 44,736,000 BPS.

TCP -  Transmission  Control  Protocol - TCP is the transport  layer in a TCP/IP
network. It provides for reliable,  sequenced and unduplicated delivery of bytes
to a remote or local user.
Trunk - A communication line between two switching systems.

VAR - Value Added Reseller.

VoATM - Voice-over-ATM (See ATM).

VoIP - Voice-over-IP (See IP).

WAN - Wide Area Network - Includes voice and data networks connecting  non-local
sites.  The PSTN, the Internet and networks  carrying data traffic are generally
included in the definition of the WAN.


                                       14
<PAGE>

--------------------------------------------------------------------------------
ITEM 2.  PROPERTIES
--------------------------------------------------------------------------------

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


--------------------------------------------------------------------------------
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.

                                       15
<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 in the  foreseeable  future.  The payment of
cash dividends is restricted by our subordinated debentures,  which provide that
our  consolidated  tangible  net worth  cannot be reduced to less than an amount
equal  to  the  aggregate  principal  amount  of  the  subordinated   debentures
($1,254,000 as of June 25, 1999).

Sales and Issuance of Unregistered Securities
---------------------------------------------------

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

In June 1999,  in  connection  with lease  financing  provided  to our  end-user
customers,  we issued three warrants to 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

                                       16
<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
                                                        -------------------------------------------------------------
<S>                                                       <C>        <C>          <C>           <C>         <C>
                                                           March 31,  March 31,    March 31,     March 30,   April 1,
                                                             1999       1998         1997          1996        1995
Net sales                                                 $ 43,318    $  5,387     $  7,154      $   264     $ ---
                                                          ========    ========     ========      =======     =======
Earnings (loss) from:
     Continuing operations (1)(2)                         $(13,843)   $(34,155)    $(12,335)     $(2,746)    $(2,140)
     Discontinued operations (3)                              (900)      ---         (8,175)        (619)      1,420
     Extraordinary items                                     ---         ---           (508)       ---         ---
                                                          --------    --------     ---------     -------     -------
       Net loss                                           $(14,743)   $(34,155)    $(21,018)     $(3,365)    $  (720)

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

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

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

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

(2)    Included in the fiscal 1998 loss are the  following:  a non-cash  expense
       charge of $5,522,000 for the conversion  into our common stock of certain
       Class  A and B  units  owned  by  our  directors  and  employees;  legal,
       accounting  and  other  professional  fees  of  $1,300,000;   charges  of
       $1,875,000 with respect to non-cash  accounting  charges  associated with
       the  issuance of our common  stock upon  conversion  of notes issued June
       1998; a charge of $2,200,000 in connection with failed acquisitions;  and
       a non-cash expense of $8,000,000  relating to the issuance of warrants as
       part of the settlement of the securities litigation.

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

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

                                       17

<PAGE>

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

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

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

In  April  1998,  our  subsidiary,   Coyote  Gateway,   LLC  ("CGL"),   acquired
substantially   all  of  the  assets  of   privately   held   American   Gateway
Telecommunications,  Inc. ("AGT"),  a provider of wholesale  international  long
distance services,  primarily to entrepreneurial  carriers.  In consideration of
the asset transfer,  AGT received a 20% ownership interest in CGL. CGL continues
to  operate  under  the  name of AGT.  Based in  Houston,  Texas,  AGT  provides
wholesale long distance  service to  international  countries  through a network
comprised of foreign  termination  agreements,  international  gateway switches,
leased transmission  facilities and resale arrangements with other long distance
providers.  AGT is leveraging  CTL's scalable DSS Switch to route  international
long distance calls. The DSS Switch enables AGT to enter new markets and capture
calls at a low per minute,  per customer cost  creating a competitive  advantage
over traditional wireline carriers.

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

In  November   1998,   we  announced   the   formation   of  a  joint   venture,
TelecomAlliance,  with Profitec, Inc. TelecomAlliance is designed to enhance the
growth and  liquidity  of  entrepreneurial  carriers.  TelecomAlliance  plans to
develop and manage a new telecom network,  combining voice and data transmission
services, as well as back office services,  e.g., billing,  customer service and
service provisioning. TelecomAlliance plans to provide its member companies with
wholesale  long distance and Internet  services at new price  points.  Profitec,
based in Wallingford,  CT, provides billing,  back office and financial services
to the telecom reseller market.

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

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


                                       18
<PAGE>
Segments
----------------------------------------

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

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

For the fiscal  year ended March 31,  1999,  we had  revenues of $43.3  million,
representing  a $37.9  million,  or 704%,  increase  over the prior fiscal year.
Revenue from the sales of DSS switches  and related OEM  equipment  increased to
$36.6  million  in  fiscal  1999  from  $5.4  million  in the  prior  year.  The
international  long distance  service  subsidiaries  that were  acquired  during
fiscal 1999 generated revenues of $6.7 million.

Revenues in fiscal 1999 included  shipments of switching  equipment to eight new
customers.  Most of these  contracts were sold and financed  through third party
lessors.  Total revenues of $35.3 million were financed in this manner in fiscal
1999.  Many of the  agreements  with third party lessors  required us to place a
refundable  security deposit with the third party lessors based on the equipment
component  and gross  value of the  transaction.  The  amount of these  security
deposits at March 31, 1999 is $2.2 million.  At the point that the terms of each
lease  transaction  are satisfied,  the security  deposits  associated with that
lease  will be  refunded  to us.  We have  reserved  the  full  amount  of these
deposits.  In certain of these  instances,  we have also issued  warrants to the
third party lessors as part of the transaction.

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

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

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

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

Selling,  general and  administrative  expenses for the current fiscal year were
$17.4 million versus $13.2 million for the same period last year.  This increase
is  primarily  related to the  additional  operating  expenses  incurred  by the
recently acquired long distance service provider  subsidiaries and the increased
sales  commissions  and expenses  associated  with the  significant  increase in
switching equipment sales.


                                       19
<PAGE>

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

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

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

Non-operating  income for fiscal  1999 is $0.4  million  versus the fiscal  1998
expense of $2.1  million.  The current year  includes an expense of $0.6 million
associated with issuing warrants as part of securing financing and other charges
of $0.2  million.  Offsetting  the  expense  charges  is a gain of $0.9  million
related to the sale of Concentric  Network  Corporation  ("CNC")  securities and
interest  income of $0.3  million.  Fiscal 1998  non-operating  expense was $2.1
million and  included  charges of $2.2  million  associated  with due  diligence
expenses,  financial  consulting fees, and costs of professional  services and a
$0.2  million  loss on the sale of  securities.  These  fiscal 1998 charges were
offset by other activities totaling $0.3 million.

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

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

CTL had revenues of $5.4 million in fiscal 1998,  primarily from the sale of DSS
Switches,  compared  to  revenues of $7.2  million in fiscal  1997.  Revenues in
fiscal  1998  included  shipments  to  nine  new  customers.  One of  the  sales
contracts, which accounted for approximately 40% of the total revenue for fiscal
1998, involved a company that was one of our potential  acquisition targets. The
sale,  which  involved a third party  lessor,  occurred  in March 1998.  We have
deferred  recognition  of  gross  profit  on  this  sale  as  if  the  potential
acquisition  was an  affiliate  at the time of the  sale.  As a  result  of this
deferral, the gross margin for fiscal 1998 was reduced to 38% compared to 56% in
the prior year.  During  fiscal 1997,  94% of revenues were from sales under one
specific  contract  with  Concentric  Network   Corporation  ("CNC")  which  was
fulfilled and completed in fiscal 1997.

Selling and administrative expenses included $1.3 million for professional audit
and legal costs, primarily related to acquisitions that were not consummated.

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

Operating  expenses  included a charge of $5.5  million.  This  non-cash  charge
pertained to the Class A and Class B units owned by certain of our directors and


                                       20
<PAGE>

employees which became  convertible  into our common stock on September 4, 1997,
when the Board of Directors eliminated the previous  measurement  requirement of
certain minimum pre-tax profits. (See also Note 12).

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

Non-operating expense in fiscal 1998 includes a provision charge of $2.2 million
with respect to losses in connection with failed  acquisitions,  including costs
advanced,  costs of due diligence expenses,  consulting fees, legal expenses and
other professional  services.  The components of non-operating  income (expense)
are shown in Note 10 to the Consolidated Financial Statements.

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

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

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

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

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.  The Company has also entered into an agreement to
sell its shares of iCompression, Inc. for $1.9 million.

In February  1999,  we entered into  definitive  agreements  for a loan to us of
$10.0 million.  This loan was intended to be for a five-year term, bear interest
at 8% per  year  and be  secured  by our  common  stock.  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.

                                       21
<PAGE>

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

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

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

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

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

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

Third Party Lease Financing
------------------------------------------------

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

Impact of Inflation
------------------------------------------------------------

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

Backlog
--------------------------------------------------------------

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

                                       22
<PAGE>

================================================================================
                                  RISK FACTORS
================================================================================

Limited Operating History; No Assurance of Profitability
-------------------------------------------------------------------------

We have a limited operating  history and have not yet achieved  consistent sales
of our products over any extended  period.  For the last four fiscal  years,  we
reported  losses  from  continuing  operations.  Our net sales  from  continuing
operations from 1996 to 1999 -- $264,000 in the 1996 fiscal year,  $7,154,000 in
the 1997 fiscal year,  $5,387,000 in the 1998 fiscal year and $43,318,000 in the
1999 fiscal year -- did not offset our operating  and other  expenses in each of
these  years.  To  achieve  profitability  we will need to  increase  the market
acceptance and sales of our products. However, we cannot assure you that we will
be successful in this effort or that we will become profitable.

Adverse Publicity and Related Suspension of Trading in Coyote Common Stock
--------------------------------------------------------------------------

On December 9, 1998, TheStreet.com, an Internet publication,  published articles
questioning  our  reported  equipment  sale through  Comdisco,  Inc. to Crescent
Communications. 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
our  common  stock  reached   approximately   2.2  million   shares,   a  number
significantly  in excess of our historical  trading level,  and our common stock
price  declined  more than 50%. As a result of the articles and the  significant
trading in our common stock, The Nasdaq National Market suspended trading in our
common stock on Thursday,  December 10, 1998. After we 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  referred to above,  The Nasdaq  National
Market  and the  Securities  and  Exchange  Commission  have asked us to provide
documents and other material about the Crescent  Communications  transaction and
other transactions.  We are 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, we do 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  Nasdaq
National  Market may cause  disruption in the trading of our 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 us. The Commission
and The Nasdaq  National  Market could impose a variety of sanctions,  including
fines, consent decrees and possibly de-listing. In addition, an investigation by
the  Commission  could   substantially   delay  or  postpone   indefinitely  the
effectiveness of any registration  statement registering the resale of shares of
our common stock.

Risks Associated with our Relationship with Crescent Communications
-----------------------------------------------------------------------

The  public   dialogue  and   investigations   focused   attention  on  Crescent
Communications  and Gene  Curcio,  its  president.  On September  24,  1998,  we
announced  that we had signed a three-year  equipment and service  contract with
Crescent  Communications  valued at more than $37  million.  As  reported in our
December 10, 1998 press release,  Comdisco  purchased the initial $12 million of
equipment  pursuant to Crescent's order and leased it to Crescent.  We were paid
in full for that purchase by Comdisco.


                                       23
<PAGE>

While we remain  committed  to  Crescent's  development  and to  delivering  the
approximately $16 million in equipment remaining under Crescent's network order,
plus $9 million in services once Crescent's  network is operational,  we wish to
further  caution you that  Crescent's  development is not within our control and
that such  future  sales  and  deliveries  may or may not  occur.  Crescent  has
experienced  delays in executing its business plan and to date has not generated
the  minimum  sales  required  under  the  services  agreement.  There can be no
assurance  that  Crescent will be successful or that we will receive any revenue
from the  services  portion of our  services  contract  with  Crescent.  Our due
diligence in 1998 indicated that Crescent had letters of intent for more than 30
million  minutes  per month to  international  locations.  Our  future  sales to
Crescent  will depend upon  Crescent's  ability to  successfully  implement  its
business plan,  including its ability to make its system operational,  to retain
such minutes and to obtain  additional  commitments  and translate those minutes
and commitments  into successful  operations and cash flows. As with the initial
delivery  to  Crescent,  we do not  intend  to  make  any  additional  equipment
deliveries without Crescent first obtaining third party financing, which has not
yet been  obtained.  Accordingly,  you  should  not rely on the  receipt  of any
additional revenues from Crescent.

In responding to the December  1998  articles and follow-up  questions  from The
Street.com,  and in an effort to defend Crescent's right as a private company to
refuse to discuss  its  business  with the press,  we made  positive  statements
regarding  Crescent  and  its  founder,  Mr.  Curcio,   relating  to  Crescent's
entrepreneurial  spirit and Mr.  Curcio's 17 years of experience  and beneficial
contacts in the telecommunications  business. When we entered into the equipment
sale and services agreements with Comdisco and Crescent,  we were aware that Mr.
Curcio was an entrepreneur  who had been involved with start-up  companies,  not
all of  which  were  ultimately  successful.  Our  due  diligence  investigation
regarding   Crescent  focused  on  Crescent's   ability  to  obtain  minutes  to
international  locations and was not conducted for the purpose of evaluating Mr.
Curcio's business history or individual creditworthiness.  We did not and cannot
warrant the  individual  business  history of Crescent or its founder or that of
any end user of its  products.  Because  we will be  providing  the  operational
support for Crescent  under a services  contract,  we did not and do not believe
that such information materially relates to the benefits we are seeking from our
relationship with Crescent.

Fluctuation in Quarterly Operations Results
--------------------------------------------------------------

Our quarterly operating results may fluctuate  significantly because of a number
of factors, including:

-   the budgeting and spending patterns of our customers and potential customers
    in the telecommunications industry;

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

-   the addition or loss of a major customer;

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

-   pricing pressure resulting from increased competition;

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

-   technical difficulties or failures with portions of our network;

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

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

Changes in or  difficulties  experienced  by our customers in  fulfilling  their
business plans,  economic  conditions and related  financing have caused some of


                                       24
<PAGE>

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

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
any of the  above  factors.  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 us.

Reductions in Size and Diversification
--------------------------------------------------------------

As a part of our  business  plan,  we have sold  certain  of our  businesses  to
concentrate on the telecommunications industry. As a result, although we believe
we are now more  focused,  we have in turn  developed  into a  smaller  and less
diversified  company with a lower fixed asset and revenue base than we had prior
to this restructuring.  Consequently, any decline in operating results after the
restructuring could more immediately and severely affect us.

Risks Inherent in Acquisition Strategy
--------------------------------------------------------------

As part of our business  strategy to grow and expand  through  acquisitions,  we
regularly  evaluate  future   acquisition   opportunities.   For  instance,   we
successfully  completed the acquisition of American  Gateway  Telecommunications
("AGT") in April 1998,  and we  successfully  completed the  acquisition of INET
Interactive Network System, Inc. ("INET") in September 1998.

Our  operations  and  earnings  will be affected by our ability to  successfully
integrate the acquisition of any business.  The process of integrating  acquired
operations presents a significant  challenge to our management and may result in
unanticipated  costs or a diversion of  management's  attention from  day-to-day
operations.  The acquisitions of AGT and INET have placed significant demands on
our financial  and  management  resources.  We cannot assure you that we will be
able to successfully  integrate AGT, INET or any other  operations or businesses
that we may acquire in the future into our operating  structure.  We also cannot
assure you that our current or future acquisitions will be profitable or that we
will recoup our acquisition costs.

In addition,  because the value of our common stock has not yet fully  recovered
from its December 9, 1998 decline,  we may encounter  delays in consummating any
acquisition involving the use of our common stock as consideration.  We recently
terminated a pending acquisition of Apollo Telecom, Inc. due to its inability to
satisfy all of the closing conditions. We currently have pending one acquisition
which may involve the issuance of shares of our common stock.

We cannot  assure you that the  conditions to closing such  acquisition  will be
met. The timing of  contemplated  acquisitions  may have a direct  impact on our
performance.



                                       25
<PAGE>

Risks Related to our Dependence on the Telecommunications Industry
-------------------------------------------------------------------

Because our customers are  concentrated in the  telecommunications  and Internet
service  industries,  our future success  depends upon such  customers'  capital
spending  patterns  and  their  demand  for  telecommunications  switches  ("DSS
Switches"),   Internet  Protocol  (IP)  Gateways  ("Carrier  IP  Gateways")  and
international long distance services.  We are initially targeting the market for
small to  medium-sized  telecom  switches and IP gateways in the United  States,
Mexico, South America and the Far East. Historically,  there has been little, if
any, demand for telecommunications  switches similar in functionality,  type and
size to the DSS Switch and the Carrier IP Gateway. Accordingly, we cannot assure
you that potential customers will purchase our switches.

It is also  possible  that  telecommunications  companies  and  other  potential
customers  will  adopt  alternative   architectures  or  technologies  that  are
incompatible  with the DSS Switch or the Carrier IP Gateway,  which could have a
material  adverse  effect on our business.  The demand for our technology may be
delayed or prevented by a variety of factors over which we have no control. Such
factors  include  costs,  regulatory  obstacles,   the  lack  of  the  requisite
compatible   infrastructure,   the  lack  of   consumer   demand  for   advanced
telecommunications services and alternative approaches to service delivery.

In  addition,  the   telecommunications   industry  is  in  a  period  of  rapid
technological  evolution,  marked by the introduction of competitive product and
service offerings,  such as the use of the Internet for international  voice and
data  communications.  We are  unable to  predict  the  effect of  technological
changes on our operations, and such changes could have a material adverse effect
on us.

Competition in the Telecommunications Industry
----------------------------------------------------------------

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

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

- multinational corporations;

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

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

- international 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  (the "FCC") to resell and
  terminate international telecommunications services.


                                       26
<PAGE>

Many  of  these  competitors  have  considerably  greater  financial  and  other
resources and more extensive domestic and international communications networks.
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
services.

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 (WTO) in April 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.

Regulatory Risks
-----------------------------------------------------------------

In general, the telecommunications  industry is highly regulated by federal laws
and regulations  issued and administered by various federal agencies,  including
the FCC, and by comparable laws, regulations and agencies overseas. In addition,
the U.S. Congress and the FCC may adopt new laws,  regulations and policies that
may directly or indirectly affect us in the future. We are unable to predict the
impact of regulations which may be adopted in the future.

Risks Associated with Dependence on a Concentrated Product Line
-----------------------------------------------------------------

In fiscal 1998 and fiscal  1999,  we derived  substantially  all of our revenues
from the DSS Switch. As a result, any decrease in the overall level of sales of,
or the prices for, the DSS Switch could have a material adverse effect on us.

Our success will depend, in part, upon our ability to enhance the technology for
the DSS Switch and to develop and  introduce,  on a timely basis,  new products,
such as the Carrier IP Gateway,  that keep pace with technological  developments
and emerging industry standards and address to changing customer requirements in
a  cost-effective   manner.  We  cannot  guarantee  that  we  will  be  able  to
successfully  develop,  introduce  and  market  new  products,  or that  our new
products  and product  enhancements  will  achieve  market  acceptance.  We have
experienced  delays in completing  development and  introduction of new products
and features,  and there can be no assurance  that such delays will not recur in
the  future.  It is also  possible  that  future  technological  advances in the
telecommunications  industry will diminish  market  acceptance for our products,
which could have a material adverse effect on us.

Furthermore,  the DSS Switch contains a significant  amount of complex  software
that may contain  undetected or unresolved  errors as products are introduced or
new versions are released.  We have in the past  discovered  software  errors in
certain DSS Switch  installations.  We cannot make any assurance  that,  despite
significant  testing,  software errors will not be found in new  enhancements of
the DSS Switch  and/or the Carrier IP Gateway.  Such errors may result in delays
in or loss of market  acceptance,  either of which could have a material adverse
effect on us.

Risks Associated with Dependence on Manufacturers and Other Key Suppliers
----------------------------------------------------------------------------

Our suppliers  have from time to time  experienced  delays in receipt of various
hardware  components.   Certain  components,   including  microprocessors,   are
available from either a single or a limited number of sources.  An  interruption
in our business with certain  manufacturers  and suppliers could have a material
adverse  effect on us. Some single  suppliers are  companies  which from time to
time allocate parts to telecommunications  equipment manufacturers due to market
demand for telecommunications  equipment.  Many of our potential competitors for
such parts are much larger and may be able to obtain priority  allocations  from


                                       27
<PAGE>

these  shared  suppliers,  thereby  limiting  our  supply  of these  components.
Although we have established  relationships with alternative  suppliers and have
assembled product ourselves, a failure by a supplier to deliver quality products
on a timely basis, or the inability to develop additional  alternative  sources,
could have a material adverse effect on us.

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

We rely on a  combination  of trade  secrets,  confidentiality  and  non-compete
agreements  to protect  the  products  and  features  that we believe  give us a
competitive advantage.  Nevertheless,  we cannot guarantee that such protections
will be  adequate  to prevent  misappropriation  of our  technology  or that our
competitors will not independently  develop  technologies that are substantially
equivalent or superior to ours. In addition,  the laws of many foreign countries
do not protect our  intellectual  property rights to the same extent as the laws
of the United States.  Our failure to protect our proprietary  information could
have a material adverse effect on us.

In  addition,  we may be subject to  litigation  that will  require us to defend
against claimed  infringements of the rights of others or to determine the scope
and validity of the proprietary  rights of others.  In this  connection,  we are
currently  involved in a litigation  alleging  that our use of the name "Coyote"
infringes on the rights of the plaintiff. There can be no assurance that we will
prevail in such  litigation.  Litigation  also may be  necessary  to enforce and
protect trade secrets and other  intellectual  property  rights that we own. Any
such litigation  could be costly or cause  diversion of management's  attention,
either of which  could have a material  adverse  effect on us.  Furthermore,  an
adverse  determination  in any  such  litigation  could  result  in the  loss of
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.

Risks Associated with Customer Concentration
---------------------------------------------------

For fiscal  1999,  we shipped  equipment  to sixteen  customers,  seven of which
accounted for  approximately  93% of our total equipment  revenues.  In the 1998
fiscal year, we shipped  equipment to 12 customers,  one of which  accounted for
approximately 40% of our total revenues.  Furthermore,  in the 1997 fiscal year,
we derived  approximately 94% of our revenues from sales to Concentric  Network.
We expect that our results of  operations  in any given period will  continue to
depend to a significant extent upon sales to a limited number of customers. As a
consequence,  the loss of one or more  major  customers  could  have a  material
adverse effect on us.

Difficulties in Managing Growth
---------------------------------------------------

We have  experienced  growth in the number of our employees and the scope of our
operations.  To manage potential future growth effectively,  we must improve our
operational,  financial  and  management  information  systems and hire,  train,
motivate and manage our  employees.  Our future  success also will depend on our
ability to attract and retain qualified  technical,  sales,  marketing,  network
operations and management  personnel,  for whom competition is intense.  In some
instances,   we  have  experienced  delays  in  filling  sales  and  engineering
positions.  We cannot predict that we will effectively achieve or manage growth,
and our failure to do so could delay  product  development  cycles or  otherwise
have a material adverse effect on us.

No Dividends
----------------------------------------------------

We have not paid cash dividends to stockholders in the last six years, and we do
not anticipate paying cash dividends to stockholders for the foreseeable future.



                                       28
<PAGE>

Risks Associated with International Operations
--------------------------------------------------------------

We plan to increase our expansion into international markets.  Accordingly,  our
business will be increasingly subject to certain risks inherent in international
operations.  For  example,  we may  encounter  problems in  obtaining  necessary
permits and operation licenses in foreign jurisdictions. Other risks include:

-    unexpected changes in regulatory environments;

-    changes in political and economic conditions;

-    fluctuations in exchange rates; and

-    difficulties in staffing and managing operations.

We have not experienced any material adverse effects with respect to our foreign
operations  arising from such factors.  However,  problems  associated with such
risks  could  arise in the  future.  Finally,  managing  operations  in multiple
jurisdictions  could place  further  strain on our ability to manage our overall
growth.

Need for Additional Capital to Finance Growth and Capital Requirements
----------------------------------------------------------------------

We anticipate  requiring  additional capital to carry out our immediate business
plans and to meet our anticipated short-term working capital needs and there can
be no guarantee  that we will obtain such capital on favorable  terms or at all.
Although we have  entered  into a  definitive  agreement  with  respect to a $10
million loan, such loan has not yet been received and is long overdue.  There is
no assurance that such  financing  will be consummated on a timely basis,  or at
all. We will need to raise  additional  capital  from the equity or debt capital
markets to carry out our business plan and such needs could be increased if:

-    we find one or more additional attractive acquisition opportunities;

-    our cash flow from operations does not meet our working capital and
     capital expenditure requirements; or

-    our growth exceeds current expectations.

We cannot  guarantee that we will succeed in obtaining such capital on favorable
terms,  or at  all.  If  additional  funds  are  raised  by our  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 additional  funds are raised by our issuing debt, we may be subject to
certain limitations on our operations,  including  limitations on the payment of
dividends.

If adequate funds are not available or not available on acceptable terms, we may
have to reduce the scope of our planned expansion of operations;  we also may 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 us. 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.  We cannot be  certain  that we will
maintain  sufficient  liquidity  over an extended  period of time to achieve our
operating goals or develop successful operations through acquisitions.


                                       29
<PAGE>
Dependence on Third Parties to Finance our Customers
---------------------------------------------------------------

Many of our  customers are  entrepreneurial  telecommunications  companies  with
limited financial resources. Their ability to pay for our equipment and services
is often  dependent  on their  ability  to obtain  financing.  Although  we have
arranged  such  financing  in the past for  certain  customers,  there can be no
assurance  that we will be able to arrange  such  financing  in the  future.  In
addition,  to induce such third parties to make lease financing available to our
customers,  in some cases we have issued  warrants  to buy our common  stock and
made other financial considerations to the third party leasing companies, and we
may need to provide such inducements in the future.


Volatility of Stock Price
--------------------------------------------------------------

 The market price of our common  stock has been  volatile and may be affected by
several factors,  including actual or anticipated  fluctuations in our operating
results or the announcement of potential acquisitions. Other factors include:

-    changes in federal and international regulations;

-    activities of the voice and data equipment vendors;

-    domestic and international service providers;

-    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.


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


Existing Stockholders May be Able to Exercise Significant Control Over Us
-------------------------------------------------------------------------

As of June 3, 1999, our officers and directors,  as a group,  beneficially owned
7.4% of our outstanding common stock. In addition,  according to filed Schedules
13D and 13G, as of the dates of such filings,  Comdisco  beneficially owned 5.6%
of our outstanding  common stock. Alan J. Andreini  beneficially  owned 9.1% and
the  Kiskiminetas  Springs School owned 8.1% of our common stock.  Additionally,
Richard  L.  Haydon  beneficially  owned  11.7% of our  common  stock and Ardent
Research Partners beneficially owned 4.6% 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.


                                       30
<PAGE>

Recently Issued Accounting Standards
--------------------------------------------------------------

In June  1998,  the  AICPA  issued  SFAS No.  133,  "Accounting  for  Derivative
Instruments  and Hedging  Activities."  The Company  will adopt the  standard in
January 2000 and does not expect the adoption to have any material impact on the
Company's financial position or results of operations.

Year 2000 Compliance
--------------------------------------------------------------

We have  completed a  comprehensive  assessment of our DSS Switch and Carrier IP
Gateway  operating systems and our internal computer systems and applications to
identify  those that might be  affected by  computer  programs  using two digits
rather than four to define the applicable year,  including the related leap year
concern (the "Year 2000 issue").  We have used primarily  internal  personnel to
identify  those  systems  and  applications  that are  affected by the Year 2000
issue.

Specifically,  we tested the current versions of the DSS Switch,  Administrative
and Maintenance  Terminal ("AMT") and Call Management System ("CMS"),  which are
the customer products most susceptible to the Year 2000 issue.  Those tests were
conducted by internal  personnel and outside  consultants  who are involved with
specific  product  development  and  maintenance.  Additionally,  we tested  our
internal  computer  systems and  applications  using internal  personnel.  Those
systems include corporate finance,  internal communications and production.  The
testing also  includes  working with key third party  vendors to insure that the
products they sell to us are Year 2000 compliant.

The  results of the testing  program to date,  including  key vendor  responses,
indicates  that the  customer  products  and  internal  systems  are  Year  2000
compliant.  Responses have been received from a majority of vendors, but not all
vendors  have  assured us that they will be Year 2000  compliant  in time.  As a
contingency,  we are creating an alternative list of third party vendors in case
a critical third party does not achieve compliance.

Our internal systems rely primarily on widely  recognized "mass market" software
and hardware that vendors have represented to be Year 2000 compliant.

Because  of the  fluid  nature  of this  issue,  Year  2000  due  diligence  and
compliance testing is ongoing and by necessity must include any new, adjunct, or
upgraded products implemented with the external or internal user.

To date, the costs associated with the Year 2000 have not been material to us.

Based upon the status of our Year 2000 compliance  assessment to date, we do not
have a formal  contingency  plan in the event that an area of our operation does
not  become  Year 2000  compliant.  A formal  plan will be adopted if it becomes
evident that there will be an area of  non-compliance in our systems or those of
a critical third party.

Although we expect to achieve Year 2000 compliance, there are potential risks if
we do not become or are late in becoming compliant. Such risks might include the
impairment of our ability to process and deliver  customer  orders,  manufacture
compliant  equipment and perform other  critical  business  functions that could
have a material  impact on  financial  performance.  Those risks  would  include
potential claims against us for the non-compliance of our products. The costs of
defending and settling such claims could have a material impact on our financial
statements.

The  information  presented is based on  management's  estimates  that were made
using  assumptions  of  future  events.   Uncontrollable  factors  such  as  the
compliance  of the systems of third  parties and the  availability  of resources
could  materially  increase  the  cost  or  delay  the  date  of our  Year  2000
compliance.


                                       31
<PAGE>
================================================================================
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
--------------------------------------------------------------------------------

                  COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES


Report of Arthur Andersen LLP, Independent Public Accountants............... 33

Report of PricewaterhouseCoopers LLP, Independent Accountants............... 34

Consolidated Balance Sheets................................................. 35

Consolidated Statements of Operations....................................... 36

Consolidated Statements of Changes in Shareholders' Equity.................. 37

Consolidated Statements of Cash Flows....................................... 38

Notes to Consolidated Financial Statements.................................. 39




                                       32
<PAGE>

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


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

We have audited the  accompanying  consolidated  balance sheet of Coyote Network
Systems,  Inc. (a Delaware corporation and formerly,  The Diana Corporation) and
subsidiaries  as of  March  31,  1999 and  1998,  and the  related  consolidated
statements of operations, shareholders' equity and cash flows for the years then
ended.  These  financial  statements  are the  responsibility  of the  Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audits.

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

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


ARTHUR ANDERSEN LLP
Los Angeles, California
July 13, 1999




                                       33
<PAGE>



                        REPORT OF INDEPENDENT ACCOUNTANTS


To the Board of Directors and Shareholders of
The Diana Corporation

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

         The accompanying  financial statements have been prepared assuming that
the  Company  will  continue as a going  concern.  As  discussed  in Note 2, the
Company  initiated a  restructuring  plan during  fiscal 1997 which  resulted in
Sattel  Communications  LLC  ("Sattel")  becoming  the  sole  operating  company
comprising the Company's continuing  operations.  Sattel has a limited operating
history  and  has  not yet  achieved  significant  sales  of its  products.  The
Company's other  operating  companies were sold or are held for sale as of March
31, 1997.  As discussed  in Note 15,  management  believes the Company will have
sufficient  cash  resources,  including  proceeds from those net assets held for
sale, to fund its operations for the fiscal year ending March 31, 1998. However,
any material delay during fiscal 1998 in the timing of disposal and the ultimate
receipt of cash  proceeds by the Company with respect to the net assets held for
sale could have a material  adverse  effect on the  Company.  In  addition,  the
Company's  viability is further  dependent on Sattel  achieving sales levels and
operating  results  sufficient to fund the  Company's  operations.  Finally,  as
discussed in Note 7, the Company is subject to  uncertainties  relating to class
action  litigation  asserted  against the Company and other potential  claims by
investors,  the ultimate effects of which on the Company's  financial  position,
results of operations and cash flows cannot presently be determined.



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




                                       34
<PAGE>

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

<TABLE>
<CAPTION>
                                     Assets                                     March 31, 1999         March 31, 1998
                                                                                --------------         --------------
Current assets:
<S>                                                                                <C>                   <C>
     Cash and cash equivalents                                                     $   1,225             $  3,746
     Marketable securities                                                               ---                   16
     Receivables, net of allowance of $402 and $480 at                                12,292                  715
         March 31, 1999 and 1998, respectively
     Inventories                                                                       2,130                2,122
     Notes receivable - current                                                        2,367                4,596
     Other current assets                                                              4,323                1,409
                                                                                   ---------             --------
                  Total current assets                                                22,337               12,604

Property and equipment, net                                                            8,192                2,391
Capitalized software development                                                       1,604                ---
Intangible assets, net                                                                 5,620                3,542
Net assets of discontinued operations                                                    234                  909
Notes receivable - non-current                                                           871                1,170
Investments                                                                            1,550                  750
Other assets                                                                             620                  609
                                                                                   ---------             --------
                                                                                   $  41,028             $ 21,975
                                                                                   =========             ========
                      Liabilities and Shareholders' Equity
Current liabilities:
     Lines of credit                                                               $   1,133             $  ---
     Accounts payable                                                                  8,161                1,920
     Deferred revenue and customer deposits                                            7,811                1,900
     Accrued loss reserve                                                              ---                  2,200
     Accrued professional fees and litigation costs                                      676                  805
     Other accrued liabilities                                                         3,900                1,130
     Current portion of long-term debt and capital lease obligations                   1,315                  141
                                                                                   ---------             --------
                  Total current liabilities                                           22,996                8,096

Notes payable                                                                          8,183                ---
Long-term debt                                                                         1,534                5,349
Capital lease obligations                                                              1,830                ---
Other liabilities                                                                        428                  470
Commitments and contingencies (Note 7)                                                ---                   ---
Shareholders' equity:
     Preferred stock - $.01 par value:  authorized 5,000,000 shares,
         700 issued, liquidation preference of $10,000 per share                       7,000                ---
     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                                                      109,649              102,360
     Accumulated deficit                                                            (116,002)             (97,695)
     Treasury stock at cost                                                           (5,757)              (5,757)
                                                                                   ----------            ---------

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

                                                                                   $  41,028             $ 21,975
                                                                                   =========             ========
</TABLE>

                 See notes to consolidated financial statements.


                                       35
<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                                                          $  43,318        $   5,387        $   7,154
Cost of goods sold                                                    28,748            3,363            3,132
                                                                   ---------        ----------         --------
Gross profit                                                          14,570            2,024            4,022
                                                                   ---------        ----------         --------

Selling and administrative expenses                                   17,404           13,214           12,112
Engineering, research and development                                  9,546            5,022            4,060
A & B unit conversion expense                                          ---              5,522             ---
                                                                   ---------        ----------         --------
         Total operating expenses                                     26,950           23,758           16,172
                                                                   ---------        ----------         --------
Operating loss                                                       (12,380)         (21,734)         (12,150)

Interest expense                                                      (1,893)          (2,334)             (52)
Non-operating income (expense)                                           430           (2,087)          (1,337)
Securities litigation warrant expense                                  ---             (8,000)            ---
Minority interest                                                      ---              ---                368
Income tax credit                                                      ---              ---                836
                                                                   ---------         ---------         -------

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

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

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

Weighted average number of common shares outstanding                   9,814            7,423            5,535
                                                                   ==========        =========         ========
     (basic & diluted)

</TABLE>

                 See notes to consolidated financial statements.



                                       36
<PAGE>


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


<TABLE>
<CAPTION>
                                                         COMMON STOCK
                                                       ---------------                       Unrealized   TREASURY STOCK     Total
                                            Preferred  Number           Additional  Accum-    Loss on     ---------------    Share-
                                              Stock      of       Par    Paid in    ulated   Marketable   Number of         holders'
                                             Amount    Shares    Value   Capital    Deficit  Securities    Shares    Cost    Equity
                                            --------- ---------  ------ ----------  -------  ----------- ---------  ------  --------

<S>                                         <C>       <C>        <C>      <C>     <C>         <C>         <C>      <C>      <C>
Balance at March 30, 1996                   $ ---    5,526,282   $5,526   $59,456 $ (34,776)  $  (876)    877,692  $(4,644) $24,686

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

 Net loss                                     ---       ---        ---      ---     (34,155)     ---        ---       ---   (34,155)
 Exercise of stock options                    ---      442,956      443     1,812     ---        ---        ---       ---     2,255
 Amendment of A & B units
    convertible to common stock               ---       ---        ---      5,522     ---        ---        ---       ---     5,522
 Issuance of common stock, net                ---    1,880,750    1,881     1,481     ---        ---        ---       ---     3,362
 Common stock issued on debt conversion       ---      821,039      821     2,734     ---        ---        ---       ---     3,555
 Non-cash expense                             ---       ---        ---     10,687     ---        ---        ---       ---    10,687
                                            ------   ---------   ------  --------  --------   -------    --------   ------  -------
Balance at March 31, 1998                      ---   9,151,920    9,152   102,360   (97,695)     ---      708,692   (5,757)   8,060

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




                 See notes to consolidated financial statements


                                       37
<PAGE>

                  COYOTE NETWORK SYSTEMS, INC AND SUBSIDIARIES
                      Consolidated Statements of Cash Flows
                                 (In Thousands)
                                Fiscal Year Ended
<TABLE>
<CAPTION>
                                                                                ---------------------------------------
                                                                                 March 31,       March 31,    March 31,
  Operating activities:                                                            1999            1998         1997
                                                                                ----------      ----------    ---------
<S>                                                                              <C>             <C>          <C>
  Loss before extraordinary items                                                $(14,743)       $(34,155)    $ (20,510)
  Adjustments to reconcile loss to net cash used In operating activities:
       Depreciation and amortization                                                1,880             787           478
       Loss (gain) on sales of marketable securities                                 (877)            155           736
       Gain on sale of land                                                           (20)
       Write-down of CNC preferred stock                                             ---            ---           1,060
       Minority interest                                                             ---            ---            (368)
       Expense related to amendments to A & B Units                                  ---            5,522          ---
       Provision for loss on discontinued operations                                  900           ---           7,550
       Net change in discontinued operations                                         (225)            145        (3,862)
       Changes in current assets and liabilities                                    6,207           8,489        (3,164)
       Other - non-cash financing and warrant expense                                 753          10,582           221
                                                                                 --------        --------     ---------

  Net cash used in operating activities                                            (6,125)         (8,475)      (17,859)
                                                                                 ---------       ---------    ----------

  Investing activities:
       Purchases of property and equipment                                         (3,217)         (1,021)        (1,914)
       Increase in other assets                                                    (1,604)          ---            ---
       Purchases of marketable securities                                            ---             (736)         ---
       Proceeds from sale of marketable securities                                    893           1,777          1,353
       Change in notes receivable                                                   1,050          (2,466)        (5,000)
       Proceeds from sale of CNC preferred stock                                      ---           ---            2,500
       Proceeds from sale of land                                                      67           ---            ---
       Cash payment on acquisition                                                 (1,333)          ---            ---
       Increase in investments in affiliate                                          (400)          ---            ---
       Net proceeds from the sale of APC and C&L assets                              ---            2,861            640
       Net change in discontinued operations                                         ---             (401)          (985)
       Other items                                                                   ---            ---              283
                                                                                 --------        --------       --------

  Net cash (used) provided by investing activities                                 (4,544)             14         (3,123)
                                                                                 ---------       --------       --------

  Financing activities:
       Increase in borrowings on line of credit                                     1,133           ---            ---
       Increase in notes payable                                                      262           ---            ---
       Repayments of long-term debt                                                  (142)           (141)         (141)
       Convertible preferred stock issued, net of expenses                          6,345           ---            ---
       Common stock issued                                                            758           5,366        13,918
       Convertible debt issued                                                       ---            6,474          ---
       Net change in discontinued operations                                         ---              275         3,314
       Other items                                                                   (208)            152          (508)
                                                                                 ---------       --------       -------

  Net cash provided by financing activities                                         8,148          12,126        16,583
                                                                                 --------        --------       -------
  Increase (decrease) in cash and cash equivalents                                 (2,521)          3,665        (4,399)

  Cash and cash equivalents:
       At beginning of year                                                         3,746              81         4,480
                                                                                 --------        --------       -------

       At end of year                                                            $  1,225        $  3,746       $    81
                                                                                 ========        ========       =======
</TABLE>

                 See notes to consolidated financial statements.


                                       38
<PAGE>
                  COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 March 31, 1999

--------------------------------------------------------------------------------
NOTE 1   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
--------------------------------------------------------------------------------

Basis of Presentation and Principles of Consolidation
-----------------------------------------------------------------------

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

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

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

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

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

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

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

                                       39
<PAGE>

Business Risk
-------------------------------------------------

As discussed in Note 2 below,  the Company has  substantially  completed a major
restructuring  that  resulted  in the  disposition  of several  operations.  The
Company's   primary   operations   are   now   the   production   and   sale  of
telecommunication   switches   and   Internet   Protocol   based   gateways   to
telecommunication service providers. The telecommunications equipment market, in
general,  is characterized by rapidly changing  technology,  evolving standards,
changes in end-user  requirements  and  frequent new product  introductions  and
enhancements.  In  addition,  the  purchasers  of  the  Company's  switches  are
primarily early stage entrepreneurial companies with limited operating histories
and financial  resources.  Thus, the Company's sales and profit  recognition are
heavily  dependent  on  the  availability  of  third  party  financing  for  its
customers.  The Company is also  engaged,  through AGT and INET (see Note 4), in
the wholesaling and retailing of international long distance service.

After the  restructuring,  the Company's  operations  are similar to those of an
early-stage  enterprise and are subject to all the risks  associated  therewith.
These risks include, among others,  uncertainty of markets,  ability to develop,
produce and sell profitably its products and services and the ability to finance
operations.  Management  believes that it has made  significant  progress on its
business plan in fiscal 1999 and to date in fiscal 2000.  Significant actions in
this progress include increasing sales in fiscal 1999,  commencing operations of
AGT and INET,  resolving  the class  action  lawsuit  (See Note 7) and  recently
raising additional equity investment (see Notes 8 and 16). However,  the Company
remains  constrained in its ability to access  outside  sources of capital until
such time as the Company is able to demonstrate  higher levels of sales and more
favorable  operating  results.  Management  believes  that  it  will  be able to
continue to make progress on its business plan and mitigate the risks associated
with its business, industry and current lack of working capital.

Financial Instruments
--------------------------------------------------

The  carrying  values  of cash  and  cash  equivalents,  marketable  securities,
receivables,  accounts  payable and  borrowings at March 31, 1999, and March 31,
1998, approximate fair value.

Marketable Securities
--------------------------------------------------

The Company  accounts for marketable  securities in accordance with Statement of
Financial  Accounting  Standards  ("SFAS")  No.  115,  "Accounting  for  Certain
Investments  in Debt and  Equity  Securities."  Under SFAS No.  115,  management
determines  the  appropriate  classification  of debt  securities at the time of
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.


                                       40
<PAGE>

Non-Marketable Securities
---------------------------------------------------

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

Inventories
--------------------------------------------------

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

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

Property and Equipment
--------------------------------------------------

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

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

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


Intangible Assets
--------------------------------------------------

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

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


                                       41
<PAGE>

The Company amortizes the intellectual property rights for the DSS Switch over a
20-year  period on a  straight-line  basis.  The Company  amortizes the goodwill
created through the acquisition of INET in October 1998 over a five-year  period
on a straight-line basis.  Accumulated amortization was $1.1 million and $0.5 at
March 31, 1999 and 1998, respectively.

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

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

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

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

Revenue  from product  sales is generally  recognized  upon  shipment.  Revenues
subject to significant  future  obligations,  restrictions or contingencies,  or
dependent on future events are deferred  until the  obligation,  restriction  or
contingency  is  resolved or the future  event has taken  place.  Gross  profits
related to transactions with customers without established credit-worthiness are
deferred and recognized  using the cost recovery  method or until a creditworthy
third party (usually a leasing company) assumes the obligation.  Revenue related
to long-distance services is recognized at the time of usage.

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

For the year  ended  March 31,  1999,  third  party  lessors  were  involved  in
approximately 82% of net sales. For the year ended March 31, 1998, a third party
lessor was involved in  approximately  40% of net sales and sales to Apollo Inc.
accounted  for  approximately  19% of net sales (see Note 4). For the year ended
March 31, 1997,  Concentric Network Corporation  accounted for approximately 94%
of net sales. At March 31, 1999 and 1998, two third-party  lessors accounted for
77% and 41% of gross  receivables,  respectively.  The Company performs periodic
credit evaluations of its customers'  financial condition and generally does not
require  collateral  other than,  in certain  instances,  a  perfected  security
interest in the related equipment.  In addition,  approximately 11% of inventory
purchased during fiscal 1998 was supplied by Sattel Technologies, Inc.
("STI").

Product Warranty
--------------------------------------------------

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


                                       42
<PAGE>
Research and Development Costs
--------------------------------------------------

Engineering,  research and  development  costs include all  engineering  charges
related to new products and product improvements,  and are charged to operations
when incurred.  Software  development  costs are capitalized once  technological
feasibility is established.

Income Taxes
---------------------------------------------------

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

Loss Per Common Share
---------------------------------------------------

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

Use of Estimates
---------------------------------------------------

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

Statement of Cash Flows
---------------------------------------------------

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


                                       43
<PAGE>

--------------------------------------------------------------------------------
NOTE 2   DISCONTINUED OPERATIONS
--------------------------------------------------------------------------------

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

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

On February 3, 1997, the Board of Directors of the Company  approved the sale of
a majority of the assets of APC to Colorado Boxed Beef Company ("Colorado"). The
sale closed on February 3, 1997. On November 20, 1997, the Company completed the
sale  of  its   telecommunications   equipment   distributor   subsidiary,   C&L
Communications,  Inc.  ("C&L"),  to the  management  of C&L. In March 1998,  the
Company  reached  agreement on the sale of its 80% owned wire  installation  and
service  subsidiary,   Valley  Communications  Inc.  ("Valley"),  to  Technology
Services Corporation ("TSC").

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



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

The 1997 estimated loss on disposal of discontinued  operations  consists of the
following (in thousands):

  Estimated  operating  losses for the disposal period and
     loss on disposal of C&L and Valley                             $ 2,054
  Operating  losses for the  disposal  period and loss on
     the disposal of APC                                              2,550
  Investment  banking  fees,  including  the fair  value
     of a warrant to purchase common stock                            1,100
  Professional fees incurred in connection with the spin-off            854
  Severance payments to Messrs. Fischer, Runge and Lilly
     (see Note 12)                                                      508
  Charge due to acceleration of deferred compensation
     payments to Messrs. Fisher and Runge (see Note 12)                 137
  Other                                                                 347
                                                                     ------
                                                                    $ 7,550

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


                                       44
<PAGE>


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

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

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



                                       45
<PAGE>
--------------------------------------------------------------------------------
NOTE 3   CAPITAL STRUCTURE OF CTL
--------------------------------------------------------------------------------

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

During fiscal 1997, CTL granted  subordinated  equity  participation  interests,
which  amount  to  approximately  a 20%  effective  ownership  interest  (before
consideration of the  subordination  provisions) in CTL, to certain employees of
the Company.  The Company's effective ownership of CTL is approximately 80% as a
result of these  transactions.  CTL is a California  Limited  Liability  Company
owned by members (the "Members") owning either of two classes of interests,  the
"Class A Units" and the "Class B Units" (collectively,  the "Units").  SCC holds
8,000 Class A Units.  Additional Class A Units are held by Charles  Chandler,  a
former  employee,  and Sydney Lilly, a former director and former Executive Vice
President  of the Company.  Mr.  Chandler and Mr. Lilly hold 350 and 100 Class A
Units, respectively. Aggregate capital contributed to CTL related to these Class
A  Units  totaled  $242,000.  Initially,  1,550  Class B Units  were  issued  to
employees of CTL in connection with their continued employment,  without capital
contribution therefor.

No  compensation  expense was recognized in fiscal 1997 upon the granting of the
Class B Units to the  employees.  The estimated  fair value of such units at the
date of grant was considered immaterial to the financial statements based on the
subordinated nature of the interests  resulting from the priority  distributions
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.


                                       46
<PAGE>

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

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

In fiscal 1999, certain Class B Unit holders converted a total of 138 Units into
shares  of  Company  common  stock in  accordance  with the  amended  terms  for
conversion. Certain current and former employees of CTL continue to collectively
own  1,369  Class B  Units,  representing  all of the  Class  B Units  currently
outstanding.  The following table reflects the current  ownership of the Class B
Units by the management of CTL and others as of June 15, 1999:

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


                                       47
<PAGE>
--------------------------------------------------------------------------------
NOTE 4   ACQUISITIONS
--------------------------------------------------------------------------------

NUKO
------------------------------------------

In December 1997, the Company entered into a letter of intent regarding a merger
with  NUKO  Information  Systems,  Inc.  ("NUKO").  NUKO  is a  manufacturer  of
compression and transmission technology for a variety of video applications. The
Company  subsequently was unable to reach agreement with NUKO on the transaction
and withdrew its offer in March 1998.  During  negotiations,  and in  accordance
with the terms of the letter of intent,  the Company  advanced  funds to support
NUKO's ongoing activity.  Including the interest,  the total funding advanced to
NUKO and now owed to the  Company of $1.9  million is secured by a pledge to the
Company of shares of stock owned by NUKO in iCompression,  Inc. (fka,  Internext
Compression, Inc.). In April 1998, NUKO filed a voluntary petition under Chapter
11 of the U.S.  Bankruptcy  Code. In May 1999, the Company  received an offer to
purchase  the  collateral  for a total  price of $1.9  million.  The Company has
accepted  this offer  subject to NUKO's  right of first  offer to  purchase  the
shares.   This  amount  is  included  in  notes  receivable  -  current  in  the
accompanying balance sheet.

Systeam
------------------------------------------

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

Coyote Gateway
--------------------------------------------

On April 16,  1998,  the Company  established  Coyote  Gateway,  LLC, a Colorado
limited  liability  company  ("CGL").  The Company  owns 80% of CGL and American
Gateway  Telecommunications,  Inc.,  a  Texas  corporation  ("AGT"),  and  other
minority investors own 20%. In consideration of its 20% ownership interest,  AGT
contributed assets to CGL, consisting of customer contracts for the transmission
of international  telephone  minutes and vendor and carrier contracts to service
those contracts.

INET
--------------------------------------------

On September 30, 1998, the Company completed the acquisition of INET Interactive
Network  System,  Inc.  ("INET")  through the merger of INET into a wholly owned
subsidiary of the Company. Under the terms of the merger agreement,  the Company
made total cash payments of $1.0 million and issued a total of 198,300 shares of
the Company's common stock as consideration  for the outstanding  shares of INET
capital stock,  the  cancellation of certain warrants to purchase shares of INET
common stock,  the transfer of certain  lines of credit and certain  contractual
releases.  The  Company  also  agreed to forgive  and  extinguish  all loans and
advances  in the  amount of  $433,000  which had been made to INET  prior to the
merger, of which $333,000 was advanced in fiscal 1999. As further consideration,
the Company  will issue  earnout  shares of the  Company's  common  stock to the
former INET shareholders in five installments based upon certain earning targets
for the  period  from  October 1, 1998 to March 31,  2001.  The  maximum  amount
payable under the earnout  agreement is $2.0 million  payable in Company  common
stock to be valued at certain  average trading prices at the time any earnout is


                                       48
<PAGE>

payable. Since the earnings targets have not yet been achieved, no earnout stock
has been provided as of March 31, 1999. In connection  with the  acquisition  of
INET, the Company  recorded  goodwill of $2.6 million.  (See Note 1 - Intangible
Assets).

Crescent
----------------------------------------------

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

Apollo
-----------------------------------------------

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


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

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


                                       49
<PAGE>

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

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

The subordinated  debentures  consist of principal of $1,254,000 and capitalized
interest of $421,000 at 11.25%.  These debentures,  which were issued in January
1992, are unsecured.  The payment of cash dividends by the Company is restricted
by the subordinated  debentures which provide that the consolidated tangible net
worth of the  Company  cannot be  reduced  to less  than an amount  equal to the
aggregate principal amount of the subordinated debentures, or $1,254,000.

Approximate annual amounts payable by the Company on debt and capital leases are
as follows (in thousands):
                                                        Capital
                                           Debt         Leases       Total
                                          -------      --------     -------
      2000                                $   577      $   857      $ 1,434
      2001                                    141          696          837
      2002                                  1,393          684        2,077
      2003                                   ---           668          668
      2004                                   ---           150          150
                                          -------      -------      -------
                                            2,111        3,055        5,166
    Less amount representing interest        ---          (487)        (487)
                                          -------      --------     --------
                                            2,111        2,568        4,679
    Less current portion                     (577)        (738)      (1,315)
                                          --------     --------     --------
                                          $ 1,534      $ 1,830      $ 3,364
                                          =======      =======      =======

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

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

                                       50
<PAGE>
--------------------------------------------------------------------------------
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

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


                                       51
<PAGE>

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
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.


                                       52
<PAGE>
--------------------------------------------------------------------------------
NOTE 8   SHAREHOLDERS' EQUITY
--------------------------------------------------------------------------------

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

The Company has plans under which  options to acquire up to 3,090,463  shares of
the Company's common stock may be granted to directors, officers, key employees,
consultants and non-employee  directors of the Company and its subsidiaries.  At
March 31, 1999,  options for  1,256,926  shares were  available  for grant under
these plans.  These plans are  administered by the Company's Board of Directors,
which is  authorized,  among other things,  to determine  which persons  receive
options  under  each  plan,  the  number  of shares  for which an option  may be
granted, and the exercise price and expiration date for each option. The term of
options  granted  shall not exceed 11 years from the date of grant of the option
or from the date of any extension of the option term.

The following table  summarizes the transactions for the option plans as well as
for warrants issued for the last three fiscal years:
<TABLE>
<CAPTION>
                                                 Option Price 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>


                                           Weighted Average             Weighted
                              Weighted        Remaining                  Average
 Option Price  Outstanding     Average       Contractual   Exercisable  Exercise
  Per share      Options    Exercise Price   Life (Years)   Options      Price
 -----------   -----------  --------------  -------------- -----------  --------
    $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
               =========                                    =======


                                       53
<PAGE>
                                                              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 the  disclosure-only  provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation."

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

                                              1999          1998        1997
                                              ----          ----        ----
    Net loss            -  as reported     $ (14,743)   $ (34,155)   $(21,018)
                        -  proforma          (15,461)     (34,439)    (21,500)
    Net loss per share  -  as reported         (1.50)       (4.60)      (3.80)
                        -  proforma            (1.58)       (4.64)      (3.88)

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

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

The  weighted  average  exercise  prices per share for options  outstanding  and
exercisable  at March 31, 1999 are $4.82 and $3.41,  respectively.  The weighted
average  exercise  prices per share for options  outstanding  and exercisable at
March 31, 1998,  are $5.00 and $6.06,  respectively.  The weighted  average fair
value of options granted during fiscal 1997, 1998 and 1999 is $17.65,  $3.95 and
$4.04 per share,  respectively.  The weighted average remaining contractual life
for  outstanding  options at March 31, 1998 and March 31, 1999 is 3.65 years and
4.69 years, respectively.

In February  1998,  the  Company's  Board of Directors  approved and adopted the
establishment  of a  Non-Employee  Director  Stock  Option  Plan and to date has
granted stock options to purchase 20,000 shares of the Company's common stock to
each of the three non-employee  directors.  These options have a five-year term,
are fully  vested and have  exercise  prices of $3.42 and $4.39 per share.  This
plan is included in the above transaction table of options.

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


                                       54
<PAGE>

the Black-Scholes  option-pricing model of $384,000. These costs were originally
capitalized  in other assets and amortized over the term of the debt as non-cash
interest  expense.  Upon  conversion,  the  unamortized  portion was credited to
additional paid in capital.

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

In fiscal  1998,  the Company  issued two warrants to an  investment  banker for
services  provided in connection with the  Restructuring  to purchase a total of
324,000  shares of the  Company's  common stock at $2.25 per share.  The Company
recorded  the fair value of the  warrants  of  $503,000  as an expense in fiscal
1998.  The fair  value of the  warrants  of  $503,000  was  estimated  using the
Black-Scholes option-pricing model.

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

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

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

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

As described in Note 7 above, an agreement has been reached to settle the claims
against the Company and its  subsidiaries  in The Diana  Securities  Litigation.
Under the terms of the  agreement,  the Company  anticipates  that it will issue
warrants for 2,225,000  shares of the Company common stock with an expected life
of three years from date of issuance.  Such warrants will have an exercise price
of $9.00 per share if exercised  during the first year from date of issue and an
exercise  price of $10.00 per share or $11.00 per share if exercised  during the
second year or third year, respectively.  The Company recorded the fair value of
the  warrants of  $8,000,000  as an expense in fiscal  1998.  The fair value was
estimated using the Black-Scholes  option-pricing  model. These warrants are not
included in the above table.

Convertible Preferred Stock and Warrants
----------------------------------------------------

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


                                       55
<PAGE>

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

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

Common Stock and Convertible Notes
--------------------------------------------------

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

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

In  December  1997,  the  Company  received  $4,635,000  upon  the  issuance  of
$5,000,000 in 8% convertible  notes. The initial  conversion price is the lessor
of $7.00 or 80% of the five-day  average  closing bid price on a conversion date
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 Discount
              Closing Transaction Price
        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


                                       56
<PAGE>

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.


--------------------------------------------------------------------------------
NOTE 9   INCOME TAXES
--------------------------------------------------------------------------------

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

<TABLE>
<CAPTION>
                                                              1999       1998       1997
                                                             -------   --------   -------
<S>                                                          <C>       <C>        <C>
 Credit at statutory rate                                    $(3,097)  $(11,613)  $(4,604)
 Settlements of liabilities of unconsolidated subsidiary          (1)       (10)       (5)
 Tax effect of net operating loss not benefited                3,076     11,600     4,500
 Refund of federal income taxes paid in a prior year            ---       ---        (836)
 Other, net                                                       22         23       109
                                                             -------   --------   -------
 Income tax credit                                           $  ---    $  ---     $  (836)
                                                             =======   ========   ========
</TABLE>

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

                                                       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
    Excess and obsolete inventory reserve                   337          560
    Capitalized interest in CNS debentures                  168          225
    General business credit                                 490          145
    All others                                              314          261
                                                       --------     --------
             Total deferred tax assets                   24,433       21,763
    Valuation allowance for deferred tax assets         (21,879)     (19,396)
                                                       ---------    ---------
    Net deferred tax assets                               2,554        2,367
    Intangible assets (net)                               1,407        1,407
    All others                                            1,147          960
                                                       --------     --------
             Total deferred tax liabilities               2,554        2,367
    Net deferred taxes                                 $  ---       $  ---
                                                       ========     ========

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


                                       57
<PAGE>

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.

--------------------------------------------------------------------------------
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):

                                                 1999      1998       1997
                                                ------    -------    -------
  Write-down of CNC preferred stock             $ ---     $  ---     $(1,060)
  Provision for losses                            ---      (2,200)      ---
  Net gains (losses) on sales of
     marketable securities                         877       (155)      (736)
  Interest income                                  278        141        427
  Warrant expense                                 (655)      ---        ---
  Other                                            (70)       127         32
                                                -------   -------    -------
                                                $  430    $(2,087)   $(1,337)
                                                ======    ========   ========

In June 1996,  Concentric Network Corporation ("CNC") executed a Promissory Note
for $5.0 million in favor of the Company for a bridge  loan.  CNC granted to the
Company a warrant to  purchase a split  adjusted  36,765  shares of CNC Series D
Preferred  Stock ("CNC Preferred  Stock") at a split adjusted  exercise price of
$20.40  per  share  (equal  to the par  value  of  such  shares)  as  additional
consideration  for the bridge loan to CNC. In August 1996, the  Promissory  Note
and accrued  interest  receivable  were converted  into 3,729,110  shares of CNC
Preferred Stock. In September 1996, the Company sold to StreamLogic  Corporation
1,838,234 shares, or 49% of its CNC Preferred Stock for $2.5 million. No gain or
loss was recognized in connection with this sale.

In August 1997, CNC completed its Initial  Public  Offering at an offering price
of  $12.00  per  share.  The  CNC  Preferred  Stock  owned  by the  Company  was
automatically  converted into CNC common stock  immediately prior to the closing
of the IPO. The value of the Company's  investment  in CNC  Preferred  Stock was
approximately  $1,512,000.  The Company deemed this value to be the maximum fair
market  value of its holding on an  if-converted  basis at March 31, 1997 and in
addition,  concluded  the value of that  investment  was  permanently  impaired.
Consequently,  the Company recorded a non-operating loss of $1,060,000 in fiscal
1997 related to the  impairment of its  investment.  The Company was  prohibited
from selling 75% of its CNC common stock for six months following CNC's IPO. The
Company  sold 25% of its CNC common stock in August 1997 at $12.00 per share and
received  $396,000 and sold the  remaining  75% in the fourth  quarter of fiscal
1998  receiving  $1,358,000  and  recorded a gain on these  sales of $242,000 in
fiscal 1998. In March 1999, in  connection  with a public  offering made by CNC,
the Company  exercised and sold the CNC common stock  represented by the warrant
and recorded a non-operating gain of $877,000.

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

Provisions were made for  non-operating  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.

                                       58
<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
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.


                                       59
<PAGE>

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

Certain of the Company's  non-employee  directors have provided  services to the
Company and/or its subsidiaries for which they were compensated. Amounts accrued
or paid to all directors for these  services  during fiscal 1999,  1998 and 1997
are $0, $50,000 and $4,000, respectively.

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

Mr.  Fiedler,  the Company's  Chairman and Chief Executive  Officer,  loaned the
Company $250,000 in June 1997. The principal amount of the loan was converted to
common stock in conjunction with Mr. Fiedler's  purchase of Company common stock
in a private  placement in July 1997.  Mr. Latham,  the Company's  President and
Chief  Operating  officer,  loaned the Company  $98,000  subsequent to March 31,
1997.  This loan was repaid in July 1997.  Mr.  Portner,  a director,  purchased
Company common stock pursuant to the Regulation D private placement. Mr. Fiedler
advanced the Company $220,000 in March 1999, which was repaid in March 1999.

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

In January 1998, the Board of Directors of the Company approved an interest-free
loan to Daniel W. Latham for a maximum  amount of $500,000 to be used solely for
the  purpose of  providing  partial  down  payment  monies on his  purchase of a
residence  in  California.  The  funding  is to be  secured  by the  residential
property and is for a five-year term unless  specifically  extended by the Board
of  Directors.  Earlier  repayment  of the loan will be demanded in the event of
either (1) sale or refinancing of the property;  (2) termination of Mr. Latham's
employment either voluntarily or for cause; or (3) sale by Mr. Latham of all, or
substantially all, of his stock in Coyote Network Systems,  Inc. As of March 31,
1999,  $421,000 was funded under this  agreement.  In October 1998,  the Company
amended the terms of the loan and in agreement  with Mr. Latham  established  an
annual  interest  rate of 6.5% to be  applied  to the loans and  payable  at the
completion of the term.

In September 1998, the Company sold approximately  $13.0 million of equipment to
Crescent  Communications,  Inc.  ("Crescent")  through  a  third  party  leasing
arrangement.  In  addition  to  the  cash  proceeds,  the  Company  received  an
approximately 20% ownership  interest in Crescent and the Company entered into a
maintenance  and service  agreement  with  Crescent.  The  Company has  deferred
recognition of gross profit of  approximately  $2.5 million on this sale related
to  its  equity  interest  in  the  buyer  and  amounts   reserved  for  service
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.

                                       60
<PAGE>

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.
PrinVest has also provided  lease  financing of the  Company's  equipment to the
Company's end-user customers.  In 1999, PrinVest provided lease financing in the
total amount of $15.0  million to four of the Company's  customers.  The Company
has  pledged  708,692  shares of  common  stock as  collateral  on the loans and
advances from PrinVest.

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

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

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

                                       61
<PAGE>

--------------------------------------------------------------------------------
NOTE 13  BUSINESS SEGMENT INFORMATION
--------------------------------------------------------------------------------

In addition to operating the telecom switching  equipment  business segment,  in
fiscal 1999, the Company acquired AGT (April 1998) and INET (September 1998) and
through these  subsidiaries  operated an  international  long distance  services
business segment.  The accounting policies of the segments are the same as those
described in significant  accounting  policies;  however,  the Company evaluates
performance   based  on  operating  profit.  In  fiscal  1999,  seven  customers
represented 93% of CTL's revenue.  Also, in fiscal 1999, two third-party leasing
companies,  Comdisco  and  PrinVest  Corporation,  provided  the  financing  for
substantially  all of the  customers  of CTL.  The telecom  switching  equipment
business  segment  consists solely of the operations of CTL. In fiscal 1998, CTL
had sales to two domestic  customers that comprised 66% of net sales.  In fiscal
1997,  CTL had sales to one domestic  customer that  comprised 94% of net sales.
Information by industry segment is as follows (in thousands):

<TABLE>
<CAPTION>
                                                    Fiscal Year Ended
                                        --------------------------------------
                                          March 31,     March 31,    March 31,
                                            1999          1998         1997
                                         ----------    ----------   ---------
   Net Sales:
<S>                                      <C>           <C>          <C>
            Switching equipment          $ 36,562      $  5,387     $  7,154
            Long distance services          6,756          ---          ---
                                          -------      --------      -------
                                         $ 43,318      $  5,387     $  7,154
                                         ========      ========     ========
   Operating Loss:
            Switching equipment          $ (3,868)     $(11,267)    $ (8,740)
            Long distance services         (5,950)         ---          ---
            Corporate                      (2,562)      (10,467)      (3,410)
                                          --------      -------      --------
                                         $(12,380)     $(21,734)    $(12,150)
                                         =========     ========     =========
   Depreciation and amortization:
            Switching equipment          $  1,134      $    787     $    467
            Long distance services            508          ---          ---
            Corporate                         238          ---            11
                                         --------       -------      -------
                                         $  1,880      $    787     $    478
                                         ========      ========     ========
   Capital expenditures:
            Switching equipment          $  2,085      $  1,021     $  1,902
            Long distance services          1,116          ---          ---
            Corporate                          16          ---            12
                                         --------      --------      -------
                                         $  3,217      $  1,021     $  1,914
                                         ========      ========     ========
   Identifiable assets:
            Switching equipment          $ 18,214      $ 11,528     $ 14,811
            Long distance services         12,902          ---          ---
            Discontinued operations           234           909        8,201
            Corporate                       9,678         9,538          232
                                         --------      --------     --------
                                         $ 41,028      $ 21,975     $ 23,244
                                         ========      ========     ========
</TABLE>


                                       62
<PAGE>
--------------------------------------------------------------------------------
NOTE 14  STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------

Supplemental  cash flow  information  relating to continuing  operations for the
last three fiscal years is as follows (in thousands):

<TABLE>
<CAPTION>
                                                              1999        1998     1997
                                                            --------    --------  -------
  Change in current assets and liabilities:
<S>                                                         <C>         <C>       <C>
     Trade receivables                                      $(10,486)   $ 3,879   $(4,540)
     Inventories                                                  (8)       815    (1,850)
     Other current assets                                      6,071       (735)      294
     Accounts payable                                          2,472       (640)    2,076
     Other current liabilities                                 8,158      5,170       856
                                                            --------    -------   -------
                                                            $  6,207    $ 8,489   $(3,164)
                                                            ========    =======   ========
  Non-cash transactions:
     Expense charge on conversion of A & B units            $   ---     $ 5,522   $  ---
     Convertible debt expense associated with conversion
         to common stock below market price                     (382)     1,875      ---
     Acquisitions purchased with common stock                  1,686       ---      1,818
     Conversion of promissory note and accrued interest
         into CNC preferred stock                               ---        ---      5,072
     Conversion of debt to common stock                        3,789       ---       ---
     Securities litigation warrant expense                      ---       8,000      ---
     Dividend paid in common stock                             3,359       ---      7,725
     Sales discount granted for investment in affiliate         (900)      ---       ---
     Amounts paid directly by lender                          (7,921)      ---       ---
</TABLE>

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

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

After the  restructuring,  the Company's  operations  are similar to those of an
early-stage  enterprise and are subject to all the risks  associated  therewith.
These risks include, among others,  uncertainty of markets,  ability to develop,
produce and sell profitably its products and services and the ability to finance
operations.  Management  believes that it has made  significant  progress on its
business plan in fiscal 1999 and to date in fiscal 2000.  Significant actions in
this progress include increasing sales in fiscal 1999,  commencing operations of
AGT and INET,  resolving  the class  action  lawsuit  (See Note 7) and  recently
raising additional equity investment (see Notes 8 and 16). However,  the Company
remains  constrained in its ability to access  outside  sources of capital until
such time as the Company is able to demonstrate  higher levels of sales and more
favorable  operating  results.  Management  believes  that  it  will  be able to
continue to make progress on its business plan and mitigate the risks associated
with its business, industry and current lack of working capital.

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


                                       63
<PAGE>

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

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

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

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

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

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

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

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

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

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

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

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.


                                       64
<PAGE>

Thereafter,  the Company's  operations  will need to be funded either with funds
generated through operations or with additional debt or equity financing. If the
Company's  operations do not provide funds sufficient to fund its operations and
the Company seeks outside financing,  there can be no assurance that the Company
will be able to obtain such  financing  when needed,  on acceptable  terms or at
all.

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


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

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

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

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

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


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

None.

                                       65
<PAGE>
================================================================================
                                    PART III.
================================================================================


Items 10, 11, 12 and 13.  Directors  and Executive  Officers of the  Registrant;
Executive Compensation;  Security Ownership of Certain Relationships and Related
Transactions.

The information required by these Items is omitted because the Company is filing
a definitive proxy statement  pursuant to Regulation 14A not later than 120 days
after the end of the fiscal year  covered by this Form 10-K which  includes  the
required information.  The required information contained in the Company's proxy
statement is incorporated herein by reference.





                                       66
<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        33

        Report of PricewaterhouseCoopers LLP, Independent Accountants        34

        Consolidated Balance Sheets - March 31, 1999 and March 31, 1998      35

        Consolidated Statements of Operations - Fiscal Years Ended
          March 31, 1999, March 31, 1998 and March 31, 1997                  36

        Consolidated Statements of Changes in Shareholders' Equity -
          Fiscal Years Ended March 31, 1999, March 31, 1998
          and March 31, 1997                                                 37

        Consolidated Statements of Cash Flows - Fiscal Years Ended
          March 31, 1999, March 31, 1998 and March 31, 1997                  38

        Notes to Consolidated Financial Statements                           39

    (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           73

        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.



                                       67
<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).

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).

                                       68
<PAGE>
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).

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).

                                       69
<PAGE>
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).

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).

                                       70
<PAGE>
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).

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).


                                       71
<PAGE>
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.



21    Subsidiaries of Registrant

23    Consent of Independent Accountants

27    Financial Data Schedule


                                       72
<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.


                                       73
<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.


                                       74
<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.





                                       75
<PAGE>
================================================================================
                                   SIGNATURES
================================================================================


Pursuant to the requirements of Section 13 or 15 (d) of the Securities  Exchange
Act of 1934,  the  Registrant  has duly  caused  this report to be signed on its
behalf by the  undersigned,  thereunto  duly  authorized  this 14th day of July,
1999.

                                        COYOTE NETWORK SYSTEMS, INC.

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

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

          Signature                          Title                      Date

 /s/ James J. Fiedler     Chairman of the Board and               July 14, 1999
 ----------------------   Chief Executive Officer
 James J. Fiedler         (Principal Executive Officer)


 /s/ Daniel W. Latham     President, Chief Operating Officer      July 14, 1999
 ----------------------   and Director
 Daniel W. Latham


 /s/ Brian A. Robson      Executive Vice President,               July 14, 1999
----------------------    Chief Financial Officer and Secretary
 Brian A. Robson          (Principal Financial and Accounting Officer)


 /s/ Jack E. Donnelly     Director
----------------------
Jack E. Donnelly                                                  July 14, 1999


 /s/ Stephen W. Portner   Director                                July 14, 1999
 ----------------------
 Stephen W. Portner


                                       76
<PAGE>