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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                           -------------------------

                                  FORM 10-K/A
                                AMENDMENT NO. 5
                           -------------------------

     [X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
        SECURITIES EXCHANGE ACT OF 1934

                        FOR THE FISCAL YEAR ENDED MARCH 31, 1999

     [ ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
           EXCHANGE ACT OF 1934


         FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .


                         COMMISSION FILE NUMBER 1-5486

                          COYOTE NETWORK SYSTEMS, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)


<TABLE>
<S>                                              <C>
                   DELAWARE                                        36-2448698
        (STATE OR OTHER JURISDICTION OF                         (I.R.S. EMPLOYER
        INCORPORATION OR ORGANIZATION)                         IDENTIFICATION NO.)
   1640 SOUTH SEPULVEDA BOULEVARD, SUITE 320
            LOS ANGELES, CALIFORNIA                                   90025
   (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                        (ZIP CODE)
</TABLE>



<TABLE>
<S>                                                           <C>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:           (800) 935-8506
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
</TABLE>



     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 June 15, 2000, the aggregate market value of the voting stock of the
Registrant held by stockholders who were not affiliates of the Registrant was
$97,753,000 based on the closing sale price of $6.00 of the Registrant's common
stock on The Nasdaq National Stock Market. At June 15, 2000, the Registrant had
issued and outstanding an aggregate of 17,430,451 shares of its common stock.
For purposes of this Report, the number of shares held by non-affiliates was
determined by aggregating the number of shares held by Officers and Directors of
Registrant, and by others who, to Registrant's knowledge, own more than 10% of
Registrant's common stock, and subtracting those shares from the total number of
shares outstanding.

                  DOCUMENTS INCORPORATED BY REFERENCE -- NONE.
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                                     PART I

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). Except as required by law, including the federal
securities laws, we do not undertake any obligation to update or revise any
forward-looking statements whether as a result of new information, future events
or otherwise.


ITEM 1. BUSINESS

GENERAL


     Coyote Network Systems, Inc. is engaged in the business of selling
international long distance services. We sell competitively priced wholesale
international long distance services, primarily to entrepreneurial carriers and
we market retail international long distance services, primarily to affinity
groups, i.e., groups that share a common characteristic such as language or
culture.


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


     In April 1998, we expanded the scope of our telecommunications business by
acquiring substantially all of the assets of American Gateway
Telecommunications, a provider of wholesale international long distance
services. In September 1998, we completed the acquisition of INET Interactive
Network System, a provider of international long distance services primarily to
commercial and residential affinity groups. In November 1998, we formed
TelecomAlliance, which was designed to enhance the growth and liquidity of
entrepreneurial carriers by providing its member companies with wholesale long
distance and Internet services. In January 1999, we formed Coyote Communications
Services LLC, designed to provide network operations and support services to our
customers and other new, entrepreneurial carriers. In September 1999 we sold
substantially all of the assets of American Gateway. In May 2000, we made a
strategic decision to discontinue the switch segment of our business, including
the businesses of TelecomAlliance and Coyote Communications Services LLC. See
"Our Discontinued Segments" and "Subsequent Events". In fiscal 1999 and 2000, we
derived $6.8 million and $11.8 million, respectively, of revenue from the retail
and wholesale international long distance service, our only continuing segment.



     In March 2000, we agreed to acquire Group Long Distance, Inc., or GLDI, a
non-facilities-based reseller of long distance services to more than 15,000
small and medium-sized businesses and residential customers. On May 10, 2000, we
entered into an Agreement and Plan of Merger, subsequently amended on May 26,
2000, under which we agreed to acquire Primary Knowledge, Inc., a California
corporation in the process of changing its name to HomeAccess MicroWeb, Inc.
HomeAccess is a developer of local community on-line


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exchange services that are expected to enable customers to select, order and pay
for products and services on-line from local merchants using personal computers
or less expensive screen phones. The consummation of the transactions
contemplated by the merger agreement are subject to certain contingencies,
including approval of our stockholders. In May 2000, we agreed to acquire two
additional telecommunications carriers, Ariana Telecommunications and Poly Link
Development Ltd., which provide service in a variety of locations in the Middle
East and eastern Asia, respectively. The acquisitions of GLDI, Ariana and Poly
Link are subject to certain closing conditions which we expect will be satisfied
later this year.



     Our principal executive offices are located at 1640 South Sepulveda
Boulevard, Suite 320, Los Angeles, California 90025, and our telephone number is
(800) 935-8506.


INDUSTRY OVERVIEW


     Evolving technologies, pro-competitive legislation, deregulation and
privatization of international telephone companies, the build-out of new
networks in developing countries, the Internet, new carrier services and
changing customer demands mark today's telecommunications industry. We believe
these developments have created a new paradigm, an opportunity for new, emerging
domestic and international carriers to compete with incumbent carriers and for
established carriers to expand beyond their traditional markets.



  International Long Distance Market.



     The international long distance market is a large and growing segment of
the telecommunications market. According to TeleGeography, a market research
firm, the total market for international long distance services in 1997 was
approximately $65.9 billion. International Data Corporation expects
international long distance traffic to grow from 94.9 billion minutes in 1998 to
187.1 billion minutes in 2002. We believe that this growth will accelerate as
countries around the world continue to deregulate their telecommunication
markets.



     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 data.



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


     The highly competitive and rapidly changing international
telecommunications market has created a significant opportunity for carriers
that can offer high quality, low cost international long distance service.
Deregulation, privatization, the expansion of the resale market and other trends
influencing the international telecommunications market are driving decreased
termination costs, a proliferation of routing options and increased competition.
Successful companies among both the emerging and established international long
distance companies will need to aggregate enough traffic to lower costs of both
facilities-based or resale
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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 seek to take advantage of these market conditions as a provider of
retail and wholesale international long distance services.



OUR RETAIL AND WHOLESALE DOMESTIC AND INTERNATIONAL LONG DISTANCE SERVICES


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


     Our INET Interactive Network System subsidiary is a full service,
facilities-based telecommunications carrier that provides retail as well as
wholesale long distance services to commercial customers as well as affinity
groups, such as French and Japanese speaking people in the United States. As of
March 31, 1999, INET had approximately 9,900 customers who purchased
approximately 16.3 million minutes of traffic for the three months ended March
31, 1999. As of March 31, 2000, INET had approximately 23,600 customers who
purchased approximately 23.4 million minutes of traffic for the three months
ended March 31, 2000.



     INET's retail and wholesale services include call origination to and from
anywhere in the U.S. to more than 200 countries worldwide. INET also provides
back office services, such as billing administration and invoice reconciliation
services and switch partitioning which maximizes switch resources and generates
additional revenue by permitting the resale of excess switching capacity to
other carriers. INET also provides retail services such as 1-800/888 services,
calling card and pre-paid debit card services, billing services and
language-centric and culture-sensitive customer support. Our former American
Gateway Telecommunications subsidiary was a full service, facilities-based
carrier offering wholesale services to telecom carriers and switchless
resellers. AGT provided international long distance services to Asia, the
Pacific Rim, Europe and the Americas. In fiscal 1999, American Gateway had nine
wholesale customers who purchased an aggregate of 4.3 million minutes of
traffic. In September 1999, we sold our interest in American Gateway by
transferring all the assets and liabilities to PrinVest Corp., reporting a gain
of $6.2 million.



OUR DISCONTINUED SEGMENTS



     Our primary equipment products include telecommunications switches ("DSS
Switches") and Internet Protocol gateways, or entrances and exits to a
communications network ("Carrier IP Gateways"), designed to route voice traffic
over public and private networks and the Internet. In fiscal 1999 and 2000, we
generated revenues of approximately $32 million and $13 million, respectively,
from the sale of switching and related original equipment manufacturer, or OEM,
equipment. In May, 2000, we made the strategic decision to discontinue and
dispose of this segment, including our DSS Switches and Carrier IP Gateways, and
have substantially exited these business segments. Revenue from the sale of
international long distance service constitutes our primary source of revenue.
See "Subsequent Events".



  DSS Switch.



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



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


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  Carrier IP Gateway.



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


     The Carrier IP Gateway serves as a connection between the public telephone
network, private voice and data networks and/or the Internet. The Carrier IP
Gateway enables voice and fax calls to be routed over networks that use IP.


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


BUSINESS STRATEGY


     In addition to continuing to develop and grow our long distance carrier
business through internal growth and acquisition, we plan to provide telephone
communications services that will allow users to easily make retail purchases
and bill payments using the Internet and provide other information services.



     In our view, the personal computer remains too complex and expensive to
encourage high volumes of e-commerce transactions by the majority of the
population. We believe that the market will move toward a much simpler
electronic interaction between customer and seller, regardless of age,
technological background, or location. We intend to build the "Model A" of
Internet transaction-platforms based not on the computer with all its
complexities but on the telephone with all its familiarities. We believe we can
create a sustainable competitive advantage and increased valuation by providing
our end-users customers with a low cost, high functionality communications
package that includes easy-to-use Internet-based applications, local and long
distance service and Internet access, all from a Web-enabled screen telephone.



     In most cases, we intend to sign agreements which call for vertical market
partners, such as grocery chains, credit card issuers and utility companies, to
purchase the requisite Web-enabled screen telephones for distribution in the
partner's channels. Through these strategic relationships, we intend to generate
transactional, e-commerce-based revenues through the tying together of a number
of important consumer applications including long distance/local dial tone,
Internet service, secure on-line shopping, bill payment and presentation, and
smart card capability. In each case, a screen based telephone with a simple
command and entry structure will be the primary interface, not the personal
computer. We plan to receive revenues from e-commerce transactions, advertising
and voice services as well as Internet access services. Each service and
strategic partnership is intended to feed the others and drive a simple, yet
comprehensive offering to our customers.



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



  Target Markets.



     We plan to continue to acquire companies and form joint ventures to
complement our carrier strategy and implementation of IP-based networks, both
domestically and internationally, as well as acquiring cable rights to strategic
countries. We are a licensed carrier in Japan and are pursuing carrier status in
other countries.



  Sales and Marketing.



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



     We primarily market our wholesale long distance services directly to U.S.
based and foreign based international telecommunication carriers through our
direct sales force. We primarily market our retail long

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distance services through our agents and focused sales and marketing activities,
e.g., advertising in local ethnic newspapers.



  Research and Development, Manufacturing and Supply.



     In fiscal 1999, we invested approximately $11.0 million in engineering,
research and development efforts with the goal of providing new and enhanced
features to our then existing DSS Switch and developing the Carrier IP Gateway,
each of which are now discontinued segments of our business. See "Our
Discontinued Segments" and "Subsequent Events". 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, or SSA, is a scalable, open,
standards-based platform that allows interworking of voice and data networks and
the applications operating on these networks and is designed to meet the needs
of entrepreneurial carriers. The SSA meets those needs by reducing network costs
and enabling revenue generation through enhanced service applications. Carrier
and service provider costs are reduced by routing voice and fax traffic over
inexpensive IP networks. The SSA allows carrier and service providers to realize
the cost reductions of next-generation IP-telephony networks while maintaining
interoperability with the public telephone networks.



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



     The research and development focus described above was conducted in
accordance with detailed design specifications developed by us. We engaged
contract engineers and independent laboratories to perform some of the research
and development work. These efforts typically involved expertise in the
following areas: automatic test systems, telecommunications and engineering
processes, UNIX software, operation administration maintenance and provisioning,
telecommunication signaling systems, telecommunications and data communications
software and Internet software. In virtually all of these instances, we owned
the results of the research and development performed.



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



     Certain software and hardware for our DSS Switch and IP Gateway products
were licensed or procured from other vendors under OEM arrangements, or were
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 date line cards and core switch software,
were developed by us or our contractors.



     General purpose hardware components were also used in the switches and IP
gateways, which lowered costs and enabled us, if we chose, to acquire such
components from more than one vendor.



     We performed certain system integration and test functions in house. In
addition, we outsourced some of our manufacturing and procurement of raw
materials used in manufacturing to outsourced 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 conducted final assembly and testing of our products
at our facility and then shipped 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 were licensed or procured
under OEM arrangements from other vendors.


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  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 services
and features that we believe give us competitive advantages.



  Wholesale and Retail Facilities.



     We provide long distance service to and from international countries
through a flexible network comprised of various foreign and domestic 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.



     Telecommunications markets are highly competitive. We compete with large
communication carriers with financial resources significantly greater than ours.
Some of these large carriers, such as AT&T, MCI Worldcom and Sprint, could
initiate and support prolonged price competition to gain market share. The
international telecommunications long distance market is intensely competitive
and subject to rapid change. Our competitors in the international wholesale long
distance market and the retail international long distance market include:



     - large, multinational corporations such as AT&T, MCI Worldcom and Sprint;



     - smaller service providers in the U.S. and overseas that have emerged as a
       result of deregulation, including providers such as Startec Global
       Communications Corp. and Primus Telecommunications Group, Inc., each of
       which focuses partly on affinity groups;


     - 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, or 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, or WTO, in 1997. Under the terms of the
WTO agreement, starting February 1998, the United States and more than 65
countries have committed to open their telecommunications markets to competition
and foreign ownership and to adopt measures to protect against anti-competitive
behavior.



GOVERNMENT REGULATION.



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


     In addition, U.S. and foreign regulatory authorities may affect our
international service offerings as a result of termination and/or transit
arrangements. U.S. or international regulatory authorities may take action

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or adopt regulatory requirements that could adversely affect us. Our business
plan depends to a large degree on the deregulation of the telecommunications
market which has enabled the emergence of many new services.

  United States Regulation


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


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


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


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

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

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


     We have a "Special Type II Telecommunications Carrier" license that allows
us to originate and terminate traffic in Japan. As such, we must comply with the
provisions of the Japanese Telecommunications Business Law and the Japanese
Ministry of Post and Telecommunications, or MPT, "Three Year program for the
Promotion of Deregulation" and related laws on the "Rationalization of
Regulatory Frameworks in the Telecommunications Field." A Special Type II
license provides us with certain privileges and responsibilities, e.g., we must
have two certified switch engineers in Japan and we must file periodic reports
with the MPT.



  Environmental Regulation.


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

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EMPLOYEES.



     As of June 19, 2000, we had 74 employees. In addition, we retain from time
to time, on a contract basis, a number of people for specific projects. We
believe that our future growth and success will depend in large part upon our
ability to continue to attract and retain highly qualified people. We have no
collective bargaining agreement with our employees. We believe that our
relationships with our employees are good.



  Subsequent Event.



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



                                  RISK FACTORS



     In addition to the other information included in this report, the following
factors should be considered in evaluating our business and future prospects.



OUR LIMITED OPERATING HISTORY IN OUR CURRENT BUSINESS SEGMENT MAKES IT DIFFICULT
TO EVALUATE OUR BUSINESS AND FUTURE PROSPECTS.



     In May 2000 we decided to discontinue and dispose of our switch business,
which represented approximately 56% of our net sales for the year ended March
31, 2000. We did not enter the long distance services segment, which is
currently our only business segment, until 1998. Accordingly, in our current
business segment we have a limited operating history upon which you can evaluate
our business and future prospects. In addition, we have recently entered into an
agreement to acquire HomeAccess Microweb, Inc., a developer of local community
on-line exchange services, a new business for us if this acquisition is
consummated. You should consider the risks and uncertainties that companies in a
relatively new business, like ours, may experience. Some of the risks and
uncertainties we face as we continue to develop our experience in this market
relate to our ability to:



     - sell our services;



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



     - integrate acquired businesses, technologies and services; and



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



     If we are unable to address successfully some or all of these
uncertainties, we may not be able to expand our business, compete effectively or
achieve profitability.



WE HAVE EXPERIENCED AND MAY CONTINUE TO EXPERIENCE OPERATING LOSSES AND NEGATIVE
CASH FLOW FROM OPERATIONS, AND WE MAY BE UNABLE TO ACHIEVE PROFITABILITY.



     We have incurred substantial costs in developing and acquiring our
businesses and technologies. For the last four fiscal years, we incurred losses
from our operations. In addition, we experienced negative cash flow from
operations of $17,859,000, $8,475,000, $6,125,000 and $15,673,000, in fiscal
years 1997, 1998, 1999 and 2000, respectively. We may not be able to achieve
profitability and positive cash flow from operations in the foreseeable future.
To achieve profitability and positive cash flow, we must increase the sales of
our services. If we are unable to increase our sales, we may not generate enough
revenues to carry out our business plan and achieve profitability. Even if we do
achieve profitability and positive cash flow, we may not be able to sustain or
increase profitability and positive cash flow in the future.


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IF WE ARE UNABLE TO OBTAIN SUBSTANTIAL ADDITIONAL FINANCING, WE MAY BE UNABLE TO
SUPPORT OUR GROWTH, EXECUTE OUR BUSINESS STRATEGY OR RESPOND TO COMPETITIVE
PRESSURES.



     As of March 31, 1999, we had negative working capital of $0.7 million and
as of March 31, 2000, we had positive working capital of $2.5 million. Our
current business plan contemplates growth through acquisitions, which would
require substantial additional financing. The required additional financing may
not be available to us on favorable terms or at all. Without additional
financing on acceptable terms, we may have to reduce the scope of our planned
expansion of operations. In particular, if we are unable to obtain adequate
funds on acceptable terms or at all, we may be unable to:



     - take advantage of acquisition opportunities;



     - successfully integrate operations of acquired businesses into our own;



     - develop or enhance services; or



     - respond to competitive or business pressures.



     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.



THE MARKET PRICE OF OUR COMMON STOCK PRICE HAS BEEN AND MAY CONTINUE TO BE
VOLATILE, AND OUR INVESTORS MAY EXPERIENCE INVESTMENT LOSSES.



     The market price of our common stock has been and may continue to be
volatile. As a result, investors may buy our stock at high prices only to see
the price drop substantially a short time later. Our stock price may decline or
fluctuate in response to a variety of factors, including:



     - actual or anticipated fluctuations in our operating results;



     - our announcement of potential acquisitions;



     - industry consolidation;



     - conditions and trends in the international telecommunications market;



     - adoption of new accounting standards affecting the telecommunications
       industry;



     - changes in estimates of our performance or recommendations by financial
       analysts; and



     - market conditions in the telecommunications industry and the market as a
       whole.



     The volatility of the market price of our stock could also result in
securities class action litigation. Any litigation would result in substantial
costs and divert our management's attention and resources.



ANY FUTURE ACQUISITIONS OF COMPANIES MAY RESULT IN DISTRACTION OF OUR MANAGEMENT
AND DISRUPTIONS TO OUR BUSINESS, AND WE MAY INCUR A VARIETY OF EXPENSES WITHOUT
REALIZING THE ANTICIPATED BENEFITS.



     Our growth strategy is to expand through the acquisition of or investment
in complementary businesses, technologies, services or products if appropriate
opportunities arise. We may not be able to identify suitable acquisition or
investment candidates in the future, or if we do identify suitable candidates,
we may not be able to make such acquisitions or investments on commercially
acceptable terms or at all. Our inability to make such acquisitions or
investments and expand our range of services and products may have a negative
impact on our growth strategy and our ability to compete in the long distance
services segment of the telecommunications industry. If we acquire or invest in
another company, we could have difficulty assimilating that company's personnel,
operations, technology or products and service offerings. We may also experience
risks associated with entering markets in which we have limited or no
experience. In addition, the key personnel of the acquired company may decide
not to work for us. These difficulties could disrupt our ongoing business,
distract our management and employees, increase our expenses and adversely
affect our results of operations. If we are unable to successfully integrate a
newly acquired business into our existing operations, we may not be


                                        9
<PAGE>   11


able to recoup the cost of the acquisition. Furthermore, the accounting
treatment for any acquisition transaction may result in significant goodwill,
which, when amortized, will negatively affect our net income.



     Since April 1998, we have acquired two business, American Gateway
Telecommunications and INET Interactive Network System, Inc., and we have
entered into definitive agreements to acquire HomeAccess Microweb, Inc., Ariana
Telecommunications and Poly Link Development Ltd. We disposed of our interests
in American Gateway in October 1999 and we terminated a pending acquisition of
Apollo Telecom, Inc. in April 1999 due to its inability to satisfy all of the
closing conditions. In fiscal 2000 we also terminated a pending acquisition of
additional interests in Systeam, S.p.A. because of our inability to timely raise
the needed capital. We sold all of our interests in Systeam in February 2000.



BECAUSE OUR BUSINESS IS NOT CURRENTLY DIVERSIFIED, A DECLINE IN OUR
TELECOMMUNICATIONS BUSINESS WILL HARM OUR FINANCIAL PERFORMANCE AND MAY CAUSE
THE PRICE OF OUR STOCK TO DECLINE.



     We have sold our non-telecommunications businesses and are discontinuing
and disposing of our switch equipment segment to concentrate on developing our
long distance services segment. For the year ended March 31, 2000, our switch
segment represented approximately 56% of our total net sales. As a result of our
decision to dispose of these segments of our business, we have become smaller
and less diverse than in the past, with fewer fixed assets and a smaller revenue
base. To reduce the effect of these business changes, we will have to develop
and introduce new products or services on a timely basis. We may not be able to
successfully develop, introduce and market new products and services, and any
new products or services may not achieve market acceptance. If we are unable to
develop new products or services and successfully market them, we may not be
able to attain profitability. Any decrease in the sales of our services will no
longer be offset by sales from our business segments that we discontinued and
will therefore directly and adversely affect our financial condition, which may
in turn cause the price of our stock to decline.



OUR OPERATING RESULTS FLUCTUATE SIGNIFICANTLY FROM QUARTER TO QUARTER, WHICH
COULD CAUSE OUR STOCK PRICE TO DECLINE AND MAKE IT DIFFICULT FOR US TO MANAGE
OUR EXPENSES.



     Our operating results have fluctuated and may continue to fluctuate
significantly from quarter to quarter due to a number of factors. In future
quarters, our operating results may be below the expectations of public market
analysts or investors, and the price of our common stock may decline. Some of
the factors which cause fluctuations include:



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



     - the addition or loss of a major customer;



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



     - pricing pressure resulting from increased competition;



     - technical difficulties or failures with portions of our network;



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



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



     - market acceptance of new products.



     It is difficult for us to predict the occurrence of factors which may cause
fluctuations. 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 shortfalls in sales. A significant shortfall in
demand for our services relative to our expectations, or a material delay in
customer orders, may cause us to be unable to meet our financial commitments. In
recent periods, slower than expected closings of lease transactions and
financings have adversely impacted our results and have had a negative effect on
our cash flow and liquidity.


                                       10
<PAGE>   12


IF WE LOSE OUR KEY PERSONNEL OR ARE UNABLE TO ATTRACT AND RETAIN KEY PERSONNEL,
WE MAY BE UNABLE TO PURSUE BUSINESS OPPORTUNITIES AND OUR REVENUES COULD
DECLINE.



     We believe that our future success depends in large part upon our continued
ability to recruit, hire, retain and motivate highly skilled technical, sales,
marketing, network operations and managerial personnel. Competition for these
employees is intense and may result in significant increases in our costs to
hire and retain them, which could reduce our margins and profitability. We may
not be successful in retaining key personnel, and the loss of any of our
executive officers or other key employees, or the failure of any recently hired
executive officers to integrate into our operations, could adversely affect our
ability to execute our business strategy and compete in the telecommunications
industry. If we are unable to attract additional qualified personnel in a timely
manner and on reasonable terms, our revenues and profitability could decline.



A PENDING NASDAQ INVESTIGATION MAY CAUSE THE PRICE OF OUR COMMON STOCK TO
DECLINE, DISRUPT TRADING AND DISTRACT MANAGEMENT.



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



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



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



     Following the publication of these articles, Nasdaq and the Securities and
Exchange Commission commenced inquiries regarding our sale to Crescent
Communications and other transactions. The SEC advised us in November 1999 that
it had dropped its investigation. We do not know the status of the Nasdaq
inquiry and Nasdaq has not contacted us regarding the matter since May 1999. If
the Nasdaq inquiry continues it may divert the attention of our management from
day-to-day operations which could have a material adverse effect on our
business. If the Nasdaq inquiry results in a negative outcome, Nasdaq could
impose a variety of sanctions against us, including possible de-listing. These
sanctions could adversely affect the trading or registration of our common stock
and cause the stock price to decline.



IF WE DO NOT EFFECTIVELY MANAGE OUR GROWTH, OUR INFRASTRUCTURE MAY NOT BE ABLE
TO SUPPORT IT AND WE MAY NOT BE ABLE TO MANAGE OUR BUSINESS.



     We have experienced growth in the number of our employees and the scope of
our operations. This growth may strain our managerial and operational resources.
To support our growth, our organizational infrastructure must grow accordingly.
To manage potential future growth of our operations and personnel, we must
improve our operational, financial and management information systems. If we
fail to address these issues, our operational infrastructure may be insufficient
to support our levels of business activity. In this event, we could experience
disruptions in our business, delays in the development of new products and
services or the enhancement of existing services, and declining revenues or
profitability.



ADDITIONAL FUNDING MAY BE DILUTIVE TO EXISTING STOCKHOLDERS OR MAY IMPOSE
OPERATIONAL RESTRICTIONS.



     Any additional equity financing may be dilutive to our stockholders. Debt
financing, if available, may involve restrictive covenants, which may limit our
operating flexibility with respect to certain business matters, including
limitations on our payment of dividends. If we raise additional funds by issuing
equity securities, stockholders may experience dilution in net book value per
share and any additional equity securities may have rights, preferences and
privileges senior to those of the holders of our common stock.



     In February 2000, we sold shares equal to approximately 20% of our
outstanding common stock in a private placement. Under NASD rules, we may not be
able to obtain additional financing through another private placement in the
near future without stockholder approval or a waiver from the NASD.


                                       11
<PAGE>   13


THE TELECOMMUNICATIONS INDUSTRY IS HIGHLY COMPETITIVE AND OUR INABILITY TO
COMPETE SUCCESSFULLY COULD DECREASE THE DEMAND FOR OUR SERVICES AND ADVERSELY
AFFECT OUR SALES AND REVENUES.



     Our competitors or potential competitors may have longer operating
histories, greater name recognition, larger customer bases and greater
financial, technical and marketing resources that we do. If we are unable to
successfully compete in the marketplace, our revenues may decline. In addition,
consolidation in the telecommunications industry could not only create even
larger competitors with greater financial and other resources, but could also
reduce the number of potential customers for our services. If we are unable to
sell our services to the remaining potential customers, this could further
impact our ability to attain a profitable level of sales.



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



     - multinational corporations;



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



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



     - joint ventures and alliances among such companies;



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



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



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



OUR INABILITY TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS COULD HARM OUR
COMPETITIVE POSITION AND OUR ABILITY TO MARKET AND SELL OUR SERVICES.



     We rely on a combination of trade secrets, confidentiality and non-compete
agreements to protect our services and their specific features. Despite our
efforts to protect our proprietary rights, unauthorized parties may attempt to
copy aspects of our services or to obtain and use information that we regard as
proprietary. Competitors may also independently develop technologies that are
substantially equivalent or superior to ours. Effective trademark, service mark,
copyright and trade secret protection may not be available in every country in
which we may market our services or products. Our failure to protect our
intellectual property rights and proprietary information could enable others to
offer services or products comparable or superior to ours which they could sell
to our potential and existing customers. If this occurs, our customer base could
be reduced and our sales could decline.



     Litigation may be necessary to enforce or protect our intellectual property
rights or to defend against claims of infringement. Litigation for these
purposes could be costly and could divert the attention of our management from
day-to-day operations. An adverse outcome in intellectual property litigation
could cost us our proprietary rights, subject us to significant liabilities,
require us to seek licenses from third parties (which they may not be willing to
grant) or prevent us from selling our services, all of which could have a
material adverse affect on our ability to compete in the telecommunications
industry and our overall business. We recently settled litigation involving a
claim that our use of the name "Coyote" infringed on the rights of the plaintiff
and agreed to change our name.


                                       12
<PAGE>   14


OUR PLANS FOR INTERNATIONAL EXPANSION MAY NOT SUCCEED, WHICH COULD HARM OUR
REVENUES, PROFITABILITY AND OVERALL GROWTH.



     We plan to increase our expansion into international markets. Our expansion
into international markets may not succeed for a number of reasons, including:



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



     - unexpected regulatory changes;



     - legal uncertainties inherent in transnational operations;



     - fluctuations in international currency exchange rates or imposition of
       currency exchange controls;



     - potentially adverse tax consequences;



     - changes in political and economic conditions; and



     - difficulties in staffing and managing international operations.



     Difficulties we may encounter in our international operations could divert
management's attention from other day-to-day operations and negatively affect
our financial performance. Managing operations in multiple countries could also
strain our ability to manage our overall growth. Our inability to manage growth
could delay our development of new products and services and our enhancement of
existing services, which could negatively impact our ability to compete in the
telecommunications industry and our business in general.



OPTIONS, WARRANTS, CONVERTIBLE SECURITIES AND OTHER COMMITMENTS TO ISSUE COMMON
STOCK MAY DILUTE THE VALUE OF THE COMMON STOCK.



     As of June 19, 2000, we had outstanding warrants and options to issue up to
10,330,540 shares of common stock, and convertible securities convertible into
up to 3,364,561 shares of common stock. If the common stock underlying such
options, warrants, convertible securities and commitments were issued, it would
dilute the book value per share, earnings per share and voting power of our
outstanding capital stock.



THE TELECOMMUNICATIONS INDUSTRY IS HIGHLY REGULATED AND FUTURE REGULATIONS MAY
ADVERSELY AFFECT OUR BUSINESS AND OPERATIONS.



     The federal government, through the FCC and other federal agencies,
regulates and administers the telecommunications industry by passing laws and
regulations that control prices, competition and the sale of long distance
minutes. Foreign governments and agencies perform similar functions. The U.S.
Congress, the FCC or foreign governments or agencies may adopt new laws,
regulations and policies that may directly or indirectly affect us in the
future. The adoption of new legislation or regulations which impact
telecommunications businesses could adversely affect our business and
operations.


ITEM 2. PROPERTIES


     Our executive offices are located in approximately 15,000 square feet of
office space in Los Angeles, California currently leased by us under a five-year
lease expiring March 2004. We also lease 21,000 square feet of office space in
Richardson, Texas to support our engineering requirements under a seven-year
lease expiring April 2005. We also lease 5,100 square feet of office space in
Norcross, Georgia under a five-year lease expiring October 2003. Additionally,
we lease 23,000 square feet of office space in Westlake Village, California, the
former location of our executive offices, under a five-year lease expiring
February 2003. We are currently subletting the Westlake Village space and plan
to reduce our Richardson obligation by 60% in the near future.


                                       13
<PAGE>   15


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.

                                       14
<PAGE>   16

                                    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.


<TABLE>
<CAPTION>
              FISCAL 1999                                     FISCAL 1998
----------------------------------------        ---------------------------------------
       QUARTER          HIGH       LOW                 QUARTER          HIGH      LOW
       -------         -------    ------               -------         ------    ------
<S>                    <C>        <C>           <C>                    <C>       <C>
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
</TABLE>



     At June 16, 2000, we had 1,180 stockholders of record.



     We have not declared any cash dividends during the last three fiscal years.
We have no plans to pay cash dividends on our common stock in the foreseeable
future. Further, pursuant to our subordinated debentures, we cannot pay cash
dividends on our common stock if our consolidated tangible net worth ($5,488,000
at March 31, 2000) would be less than the aggregate principal amount of the
subordinated debentures ($1,254,000).


SALES AND ISSUANCE OF UNREGISTERED SECURITIES


     In June 1999, in connection with lease financing provided to our end-user
customers, we issued three year warrants to PrinVest Financial Corporation, a
third-party leasing company, pursuant to the exemption provided by Section 4(2)
of the Securities Act of 1933, as amended. 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.


                                       15
<PAGE>   17

ITEM 6. SELECTED FINANCIAL DATA

                          COYOTE NETWORK SYSTEMS, INC.

                            SELECTED FINANCIAL DATA
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


<TABLE>
<CAPTION>
                                                             AS OF AND FOR THE YEARS ENDED
                                                --------------------------------------------------------
                                                MARCH 31,   MARCH 31,   MARCH 31,   MARCH 30,   APRIL 1,
                                                  1999        1998        1997        1996        1995
                                                ---------   ---------   ---------   ---------   --------
<S>                                             <C>         <C>         <C>         <C>         <C>
Net sales.....................................  $  6,756    $     --    $     --     $    --    $    --
                                                ========    ========    ========     =======    =======
Earnings (loss) from:
  Continuing operations(1)(2).................  $ (9,628)   $(17,278)   $ (4,081)    $(1,912)   $(2,140)
  Discontinued operations(3)(4)...............    (5,115)    (16,877)    (16,429)     (1,453)     1,420
  Extraordinary items.........................        --          --        (508)         --         --
                                                --------    --------    --------     -------    -------
     Net loss.................................  $(14,743)   $(34,155)   $(21,018)    $(3,365)   $  (720)
                                                ========    ========    ========     =======    =======
Earnings (loss) per common share (basic and
  diluted):
  Continuing operations.......................  $  (1.11)   $  (2.33)   $  (0.74)    $ (0.41)   $  (.48)
  Discontinued operations.....................     (0.52)      (2.27)      (2.97)      (0.31)       .32
  Extraordinary items.........................        --          --        (.09)         --         --
                                                --------    --------    --------     -------    -------
  Net earnings (loss) per common share........  $  (1.63)   $  (4.60)   $  (3.80)    $  (.72)   $  (.16)
                                                ========    ========    ========     =======    =======
Cash dividends per common share...............  $     --    $     --    $     --     $    --    $    --
Total assets..................................    34,151      19,860      20,120      28,591     24,205
Debt(5).......................................    13,983       5,490       1,958       2,099      2,240
Working capital (deficit).....................      (659)      4,509       6,161      13,282     15,489
Shareholders' equity..........................     6,057       8,060      16,834      24,686     19,729
</TABLE>


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

(1) Included in the fiscal 1999 loss is a charge of $2,000,000 in connection
    with provisions for losses on deposits made to two long distance telecom
    carriers to secure capacity on their networks. These provisions were made
    due to concerns related to the financial viability of these carriers and
    doubt regarding the ultimate realization of the deposits.


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

(3) Included in the loss from discontinued operations in fiscal 1997 is a
    provision of $7,550,000 recorded for restructuring costs, severance and the
    estimated loss on disposal of assets of certain discontinued operations and,
    in fiscal 1999, is a provision of $900,000 for a reduction in the estimated
    market value of land and buildings which were part of a discontinued
    operation.


(4) Included in the loss from discontinued operations in fiscal 1998 is a
    non-cash expense charge of $5,522,000 for the conversion into our common
    stock of certain Class A and B units owned by our directors and employees of
    our switch business segment. See Note 3 of Notes to Consolidated Financial
    Statements.


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

                                       16
<PAGE>   18

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

GENERAL

DISCONTINUANCE OF SWITCH SEGMENT


     In May 2000, we decided to discontinue and dispose of our switch business
including the manufacture, development, sale and service of DSS Switches and IP
Gateway equipment. Prior to the May 2000 decision, this segment was our largest
segment in terms of revenues. The discontinuance of our switch segment includes
the operations of TelecomAlliance, our joint venture with Profitec, and Coyote
Communications Services, LLC, or Coyote Communications.



     Expected operating results relating to the discontinued operations from
April 1, 2000 until the expected disposal date are included in the estimated
loss on disposal and was recorded as a charge in the consolidated financial
statements in the fourth quarter of fiscal 2000. The Company recorded a charge
for estimated loss on disposal of the switch business of approximately $11.0
million in fiscal 2000, which includes an estimated $2.5 million of expected
losses of the segment for the first two quarters of fiscal 2001. The Company
expects to dispose of the segment near the end of the second quarter of fiscal
2001.


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

DISCONTINUANCE OF ATLANTA PROVISION COMPANY, C&L COMMUNICATIONS, INC. AND VALLEY
COMMUNICATIONS, INC.

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

OUR LONG DISTANCE SERVICES SEGMENT


     In April 1998, our subsidiary, Coyote Gateway, LLC ("CGL"), acquired
substantially all of the assets of privately held American Gateway
Telecommunications, Inc. ("AGT"), a provider of wholesale international long
distance services, primarily to entrepreneurial carriers. In consideration of
the asset transfer, AGT received a 20% ownership interest in CGL. CGL continues
to operate under the name of AGT. Effective September 1999, we sold our interest
in AGT to PrinVest Corp, reporting a gain of $6.2 million.



     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 is a full service, facilities-based telecommunications
carrier that provides retail as well as wholesale long distance services to
commercial customers and residential affinity groups, such as French and
Japanese speaking people in the U.S.



SEGMENTS


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

                                       17
<PAGE>   19


     Fiscal year 1999 and the comparative historical results of operations have
been restated to reflect the operations of our DSS Switch business segment
separately as discontinued operations. The following discussion relates to the
continuing operations of the long distance services and our corporate
administration offices. The long distance services business was comprised of two
subsidiaries: AGT, which was acquired in April 1998 and sold effective September
1999, and INET, which was acquired in September 1998.


RESULTS OF OPERATIONS -- FISCAL YEAR ENDED MARCH 31, 1999 VERSUS MARCH 31, 1998


     Our continuing operations in fiscal 1999 consisted of the business of our
two international long distance service subsidiaries that were acquired during
fiscal 1999, INET and AGT. AGT was sold effective September 1999. Because these
operations were acquired during fiscal 1999, they did not generate any sales,
cost of sales or gross profit in fiscal 1998. The following table reflects
selected results of operations data for each subsidiary and our total continuing
operations in fiscal 1999:



<TABLE>
<CAPTION>
                                                                 FISCAL 1999
                                                   ----------------------------------------
                                                   COYOTE       AGT       INET      TOTAL
                                                   ------     -------    ------    --------
<S>                                                <C>        <C>        <C>       <C>
Net sales........................................  $   --     $ 2,779    $3,977    $  6,756
Cost of sales....................................      --       3,031     2,847       5,878
                                                   -------    -------    ------    --------
Gross profit (loss)..............................      --        (252)    1,130         878
                                                   -------    -------    ------    --------
Selling, general and administrative expenses.....   5,139       2,880     1,679       9,698
                                                   -------    -------    ------    --------
Operating loss...................................  $(5,139)   $(3,132)   $ (549)   $ (8,820)
                                                   =======    =======    ======    ========
</TABLE>



     In fiscal 1999, gross profit (loss) for AGT and INET as a percent of net
sales was (9.1%) and 28.4%, respectively.



     Selling, general and administrative expenses of the continuing operations
for fiscal 1999 were $9.7 million, compared to $7.1 million for fiscal 1998, an
increase of $2.6 million, or 37.4%. This increase is primarily related to the
selling, general and administrative expenses incurred by INET and AGT, which
were acquired during fiscal 1999, and expansion of our corporate staff and
related expenses. In fiscal 1999 these expenses also included a charge of $2.0
million in connection with provisions for losses on deposits made by AGT to two
long distance telecom carriers to secure capacity on their networks. These
provisions were made due to concerns related to the financial viability of these
carriers and doubt regarding the ultimate realization of the deposits. We do not
anticipate additional similar charges of this magnitude in the future. In fiscal
1998 selling, general and administrative expenses included a charge of $2.2
million related to losses in connection with failed acquisitions, including
costs advanced, costs of due diligence expenses, consulting fees, legal expenses
and other professional services.



     The operating loss for fiscal 1999 was $8.8 million, compared to $7.1
million for fiscal 1998, an increase of $1.7 million, or 25.0%. The increase is
primarily due to the lack of net sales from our continuing operations in fiscal
1998, the higher selling, general and administrative expenses associated with
INET and AGT and expansion of our operations in fiscal 1999.



     Non-operating expense for fiscal 1999 was $0.8 million, compared to $2.2
million for fiscal 1998, a decrease of $1.4 million, or 63.6%. The decrease is
due to a $1.0 million increase in gains on sale of marketable securities and a
$0.4 million decrease in interest expense. The 18.9% decrease in interest
expense results primarily from a $1.9 million charge in fiscal 1998 related to
the discount from market value (beneficial conversion feature) of the common
stock issued upon conversion of our 8% convertible notes issued in an aggregate
principal amount of $7.5 million in fiscal 1998. This decrease in interest
expense was partially offset by increases in interest expense due to an increase
of $8.2 million in notes payable for financing costs relating to INET and AGT,
offset by decreases due to a decrease in long-term debt of $3.7 million as a
result of the conversion of our 8% convertible notes into shares of common
stock.



     The loss from continuing operations for fiscal 1999 was $9.6 million,
compared to $17.3 million in fiscal 1998, a decrease of $7.7 million, or 44.3%,
due primarily to securities litigation warrant expense of $8.0 million in fiscal
1998 resulting from our agreement to issue three-year warrants to acquire
2,225,000 shares of our


                                       18
<PAGE>   20


common stock in connection with our settlement of the securities class action
lawsuit described in "Legal Proceedings," and the other reasons discussed above.



     The loss from discontinued operations in fiscal 1999 was $5.1 million,
compared to a fiscal 1998 loss from discontinued operations of $16.9 million, a
decrease of $11.8 million, or 69.7%. The decrease in the loss from fiscal 1998
to fiscal 1999 was primarily due to sales increases of $26.4 million in the
switch business. The fiscal 1999 loss consisted of an operating loss of $4.2
million related to the switching business segment and a loss of $0.9 million
related to the sale of land and buildings of the Atlanta Provisions Company
operation which was discontinued in fiscal 1997. The loss from discontinued
operations in fiscal 1998 included a non-cash expense of $5.5 million related to
the conversion of Class A and B units of ownership in the switching business.



     Net loss in fiscal 1999 was $14.7 million, compared to $34.2 million in
fiscal 1998, a decrease of $19.5 million, or 56.8%. The decrease in net loss
resulted primarily from the $8.0 million expense in fiscal 1998 for warrants to
be issued in connection with our settlement of class action securities
litigation and the decrease in losses from operations, offset by a $0.9 million
charge in fiscal 1999 for the estimated loss on disposal of discontinued
operations.


RESULTS OF OPERATIONS -- FISCAL YEAR ENDED MARCH 31, 1998 VERSUS MARCH 31, 1997


     We acquired our long distance services business, which comprise our
continuing operations, in fiscal 1999. These operations did not generate any
sales, cost of sales or gross profit in fiscal 1998 or 1997.



     Selling, general and administrative expenses for fiscal 1998 were $7.1
million, compared to $3.4 million for fiscal 1997, an increase of $3.7 million,
or 107.0%. This increase is primarily related to a charge of $2.2 million in
fiscal 1998 related to losses in connection with failed acquisitions, including
costs advanced, costs of due diligence expenses, consulting fees, legal expenses
and other professional services.



     The operating loss for fiscal 1998 was $7.1 million, compared to $3.4
million for fiscal 1997, an increase of $3.7 million, or 107.0%. The increase is
primarily due to the higher selling, general and administrative expenses in
fiscal 1998.



     Non-operating expense for fiscal 1998 was $2.2 million, compared to $1.5
million for fiscal 1997, an increase of $0.7 million or 47.3%. The increase in
non-operating expense is primarily due to a $2.3 million increase in interest
expense that results primarily from a $1.9 million charge in fiscal 1998 related
to the discount from market value (beneficial conversion feature) of the common
stock issued upon conversion of our 8% convertible notes issued in an aggregate
principal amount of $7.5 million in fiscal 1998, and net gains on sale of
marketable securities of $0.2 million in fiscal 1998 compared to net losses on
such sales of $0.7 million in fiscal 1997. In addition, in fiscal 1997, we had
non-operating expense of $1.1 million due to our write-down of our preferred
stock in Concentric Network.



     The loss from continuing operations for fiscal 1998 was $17.3 million,
compared to $4.1 million in fiscal 1997, an increase of $13.2 million, or
323.4%, due primarily to securities litigation warrant expense of $8.0 million
in fiscal 1998 resulting from our agreement to issue three-year warrants to
acquire 2,225,000 shares of our common stock in connection with our settlement
of the securities class action lawsuit described in "Legal Proceedings," an
income tax credit in fiscal 1997 of $0.8 million, and the other reasons
discussed above.



     The loss from discontinued operations in fiscal 1998 was $16.9 million,
compared to a fiscal 1997 loss of $8.9 million, an increase of $8.0 million, or
90.1%. The increase in the loss from fiscal 1997 to fiscal 1998 was primarily
due to a non-cash expense of $5.5 million in fiscal 1998 related to the
conversion of Class A and B units of ownership in the switching business and
decreases in net sales of $222.0 million.



     Net loss in fiscal 1998 was $34.2 million, compared to a net loss of $21.0
million in fiscal 1997, an increase of $13.2 million, or 62.5%. The increase in
net loss resulted primarily from the $8.0 million expense in fiscal 1998 for
warrants to be issued in connection with our settlement of class action
securities litigation and the $3.7 million increase in operating loss, offset by
a charge of $7.6 million in fiscal 1997 for the estimated loss on disposal of
discontinued operations consisting of Atlantic Provision Company, C&L
Communications


                                       19
<PAGE>   21


and Valley Communications and an extraordinary charge of $0.5 million in fiscal
1997 relating to expenses incurred in connection with Atlantic Provision
Company's refinancing its line of credit in October 1996 and repayment of the
line of credit in February 1997.


LIQUIDITY AND CAPITAL RESOURCES


     As of March 31, 1998, we had positive working capital of $4.5 million, and
as of March 31, 1999, we had negative working capital of $0.7 million.



     We used cash from operating activities of $6.1 million during fiscal 1999
compared to using $8.5 million during fiscal 1998. This improvement in operating
cash flow in fiscal 1999 is primarily due to the reduction in losses of the
discontinued switch business. Our receivables increased from $0.2 million as of
March 31, 1998 to $2.5 million at March 31, 1999, representing approximately
four months of net sales due to poor collection follow-up. Through improved
procedures and collection efforts, accounts receivable at March 31, 2000 were
$3.6 million, representing approximately two months of net sales.



     We used cash for investing activities of $4.5 million during fiscal 1999
compared to $14,000 provided from investing activities in fiscal 1998. The
increase in cash used for investing activities primarily results from capital
expenditures for discontinued operations and acquisition investments. Capital
expenditures on equipment purchases increased from $0.3 million in fiscal 1998
to $1.6 million in fiscal 1999. Equipment purchases primarily consisted of
additional switching equipment required to support the international long
distance services business. We received net proceeds of $2.9 million in fiscal
1998 from the sale of Atlantic Provision Company and C&L Communications and
spent $1.3 million in fiscal 1999 in connection with our acquisitions of INET
and our 19.9% interest in Crescent Communications, Inc. Proceeds from sales of
marketable securities decreased from $1.8 million in fiscal 1998 to $0.9 million
in fiscal 1999, and we purchased $0.7 million of marketable securities in fiscal
1998 and $0 in fiscal 1999. Investments in affiliates increased from $0 million
in fiscal 1998 to $0.4 million in fiscal 1999. Capital expenditures for
discontinued operations, comprising equipment and software, also increased, from
$1.2 million in fiscal 1998 to $3.3 million in fiscal 1999.



     Financing activities provided net cash of $8.1 million in fiscal 1999,
compared to $12.1 million in fiscal 1998. In fiscal 1999, net cash provided by
financing activities included 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 $4.0 million and warrants in fiscal 2000, and
increases in borrowings under our line of credit and in notes payable. Net cash
provided by financing activities in fiscal 1998 included $3.4 million of net
proceeds from a private placement of 1,880,750 shares of common stock in July
1997, $2.2 million of proceeds from the exercise of stock options, $2.2 million
of net proceeds from a private placement of $2.5 million aggregate principal
amount of 8% convertible notes in July 1997 and $4.6 million of net proceeds
from a private placement of $5.0 million aggregate principal amount of 8%
convertible notes in December 1997.



     In the third quarter of fiscal 2000, we completed and received funding
under two demand loans. The first loan for a total amount of $600,000 was
provided by Mr. James Fiedler, our former Chairman and Chief Executive Officer,
in the amount of $175,000, by Mr. Daniel W. Latham, our President, Chief
Operating Officer and director, in the amount of $75,000 and by Mr. Alan J.
Andreini, a shareholder, in the amount of $350,000 in September and October
1999. This loan bore interest at bank's prime rate plus 1% per year (9.25% at
December 31, 1999), was repayable on demand and was secured against our
investment in Systeam, S.p.A.



     The second loan for a total amount of $1,225,000 was provided by Mr.
Richard L. Haydon, a shareholder, in the amount of $500,000, by Mr. Andreini in
the amount of $225,000 and by three other shareholders in a combined total
amount of $500,000, in November 1999. This loan bore interest at the rate of
17.5% per year and was repayable, on demand by the lenders, no earlier than
March 31, 2000. The maximum term of the loan was three years to November 2002.
This loan was secured by shares of the common stock of INET. Under the terms of
this loan, the lenders were granted, pro-rata, a combined total of 73,500
three-year warrants to purchase shares of our common stock at an exercise price
of $4.50 per share. The warrants resulted in a non-cash interest expense charge
of $0.3 million taken in the fourth quarter of fiscal 2000.

                                       20
<PAGE>   22


     We repaid these loans and the accrued interest in February and April 2000.



     In January and February 2000, we completed a private placement with
accredited investors and sold 3,157,895 shares of our 6% Series B Preferred
Stock at $4.75 per share. The total cash we received was $13.9 million, net of
fees and expenses associated with the placement.



     In February 2000, we completed the sale of our investment in Systeam,
S.p.A. and received a cash payment of $1.2 million. A gain on the sale of this
investment of approximately $0.4 million will be recorded in the fourth quarter
of fiscal 2000.



     In March 2000, four of our customers completed third party lease contracts
in respect of $14.2 million of switching equipment previously shipped under
extended payment terms. In March and April 2000, we received payments of $10.0
million and $1.5 million, respectively. We expect to receive the remaining
balance of $2.7 million when the lessees complete their payment obligations to
the lessor.



     As of March 31, 1999, we had notes payable of $8.2 million. These notes
were secured by certain of our assets and by 708,692 shares of our common stock
and bore interest at the bank's prime rate plus  1/2% (8.25% at March 31, 1999).
These notes were due on December 2001. Effective September 1999, these notes
were assumed by the buyer of AGT.



     As of March 31, 1999 and 2000, we had capital lease obligations of $2.6
million and $2.8 million, respectively.



     Our cash and cash equivalents as of March 31, 1999 and 2000 were $1.2
million and $16.3 million, respectively.



     We also have a $2.2 million revolving line of credit secured against
certain trade receivables. As of March 31, 1999 and 2000, $1.1 million and $1.7
million, respectively, had been drawn against the line, which bore interest at
the bank's prime rate plus 3% (11% at March 31, 1999 and 12% at March 31, 2000).
The line of credit expires on June 30, 2000.



     We have subordinated debentures in the aggregate principal amount of $1.3
million outstanding as of March 31, 2000. The debentures bear interest of 11.25%
per year, payable semi-annually, and mature on January 1, 2002.


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


          - Refinancing of notes to improve short-term liquidity;



          - Collection of existing receivables related to the discontinued
     switching operations; and



          - Exercises of options and warrants and the possible sale of other
     equity instruments.



     We believe that our cash on hand on March 31, 2000 will fund our debt
obligations and ongoing operations through the end of fiscal 2001. We believe
that we will be able to continue to fund our operations and acquisitions by
obtaining additional outside financing; however, we cannot assure you that we
will be able to obtain the necessary financing when needed on acceptable terms
or at all.



THIRD PARTY LEASE FINANCING



     To facilitate the sale of our equipment in our discontinued switch segment,
we often have third party lessors provide lease financing for the purchaser.
Parties that provided the third party lease financing included Comdisco,
PrinVest and First Venture Leasing.


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.

                                       21
<PAGE>   23

BACKLOG

     We do not maintain a backlog related to the long distance services business
operations. We do not believe that such data is a meaningful indicator of future
results of operations.

RECENTLY ISSUED ACCOUNTING STANDARDS

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


ITEM 7A. QUALITATIVE AND QUANTITATIVE MARKET RISK DISCLOSURES


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

INTEREST RATE SENSITIVITY MODEL

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


<TABLE>
<CAPTION>
                                                                    YEAR ENDING MARCH 31,
                                                              ---------------------------------
                                                               1999     2000     2001     2002
                                                              ------   ------   ------   ------
                                                                 (U.S. DOLLARS -- THOUSANDS)
<S>                                                           <C>      <C>      <C>      <C>
Notes payable...............................................  $8,183   $  814   $   --   $   --
Interest expense (A)........................................     675       67       --       --
Interest expense (B)........................................      --       75       --       --
Interest expense (C)........................................      --       59       --       --
Line of credit borrowings...................................   1,133    1,705    4,000    6,000
Interest expense (A)........................................     133      140      330      495
Interest expense (B)........................................      --      157      370      555
Interest expense (C)........................................      --      123      290      435
</TABLE>



- The borrowings bear interest at the bank's prime rate plus  1/2% and 4% for
  the notes payable and line of credit, respectively.


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

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

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

                                       22
<PAGE>   24

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                 COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES


<TABLE>
<S>                                                           <C>
Report of Arthur Andersen LLP, Independent Public
  Accountants...............................................   24
Report of PricewaterhouseCoopers LLP, Independent
  Accountants...............................................   25
Consolidated Balance Sheets.................................   26
Consolidated Statements of Operations.......................   27
Consolidated Statements of Changes in Shareholders'
  Equity....................................................   28
Consolidated Statements of Cash Flows.......................   29
Notes to Consolidated Financial Statements..................   30
</TABLE>


                                       23
<PAGE>   25

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

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


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


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


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


ARTHUR ANDERSEN LLP
Los Angeles, California

July 13, 1999, except as to Notes 1, 2 and 17,


which are as of June 29, 2000


                                       24
<PAGE>   26


                       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.


/s/ PRICEWATERHOUSECOOPERS LLP


PRICEWATERHOUSECOOPERS LLP



Milwaukee, Wisconsin


September 22, 1997, except as to the last paragraph of Note 8,


  which is as of November 4, 1998 and the "Discontinuance


  of Switch Business" section of Note 2, which


  is as of May 8, 2000.


                                       25
<PAGE>   27

                 COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS
                             (DOLLARS IN THOUSANDS)


                                     ASSETS



<TABLE>
<CAPTION>
                                                              MARCH 31,   MARCH 31,
                                                                1999        1998
                                                              ---------   ---------
<S>                                                           <C>         <C>
Current assets:
  Cash and cash equivalents.................................  $   1,225   $  3,746
  Marketable securities.....................................         --         16
  Receivables, net of allowance of $377 and $0 at March 31,
     1999 and 1998, respectively............................      2,502        150
  Notes receivable -- current...............................      2,367      2,796
  Deposits and other current assets.........................      4,321      1,411
  Net current assets of discontinued operations.............      5,046      2,371
                                                              ---------   --------
          Total current assets..............................     15,461     10,490
Property and equipment, net.................................      5,430        616
Intangible assets, net......................................      2,303         --
Net long-term assets of discontinued operations.............      7,917      6,225
Notes receivable -- non-current.............................        871      1,170
Investments.................................................      1,550        750
Other assets................................................        619        609
                                                              ---------   --------
                                                              $  34,151   $ 19,860
                                                              =========   ========
                       LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Lines of credit...........................................  $   1,133   $     --
  Accounts payable..........................................      8,160      1,919
  Accrued professional fees and litigation costs............        676        805
  Other accrued liabilities.................................      3,425      3,116
  Deferred revenue and customer deposits....................      1,410         --
  Current portion of long-term debt and capital lease
     obligations............................................      1,316        141
                                                              ---------   --------
          Total current liabilities.........................     16,120      5,981
Notes payable...............................................      8,183         --
Long-term debt..............................................      1,534      5,349
Capital lease obligations...................................      1,817         --
Other liabilities...........................................        440        470
Commitments and contingencies (Note 7)
Shareholders' equity:
  Preferred stock -- $.01 par value: authorized 5,000,000
     shares, 700 issued, liquidation preference of $10,000
     per share..............................................      7,395         --
  Common stock -- $1 par value: authorized 30,000,000
     shares, issued 11,167,456 and 9,151,920 shares.........     11,167      9,152
  Additional paid-in capital................................    109,254    102,360
  Accumulated deficit.......................................   (116,002)   (97,695)
  Treasury stock at cost....................................     (5,757)    (5,757)
                                                              ---------   --------
          Total shareholders' equity........................      6,057      8,060
                                                              ---------   --------
                                                              $  34,151   $ 19,860
                                                              =========   ========
</TABLE>


                See notes to consolidated financial statements.
                                       26
<PAGE>   28

                 COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


<TABLE>
<CAPTION>
                                                                      FISCAL YEAR ENDED
                                                             -----------------------------------
                                                             MARCH 31,    MARCH 31,    MARCH 31,
                                                               1999         1998         1997
                                                             ---------    ---------    ---------
<S>                                                          <C>          <C>          <C>
Net sales..................................................  $  6,756     $     --     $     --
Cost of sales..............................................     5,878           --           --
                                                             --------     --------     --------
Gross profit...............................................       878           --           --
                                                             --------     --------     --------
Selling, general and administrative expenses...............     9,698        7,058        3,410
                                                             --------     --------     --------
Operating loss.............................................    (8,820)      (7,058)      (3,410)
Securities litigation warrant expense......................        --       (8,000)          --
Other non-operating income (expense):
  Interest expense.........................................    (1,893)      (2,334)         (52)
  Net gains (losses) on sale of marketable securities......       877         (155)        (736)
  Write down of CNC preferred stock........................        --           --       (1,060)
  Interest and other income................................       208          269          341
                                                             --------     --------     --------
                                                                 (808)      (2,220)      (1,507)
Income tax credit..........................................        --           --          836
                                                             --------     --------     --------
Loss from continuing operations............................    (9,628)     (17,278)      (4,081)
Loss from discontinued operations..........................    (4,215)     (16,877)      (8,879)
Estimated loss on disposal of discontinued operations......      (900)          --       (7,550)
                                                             --------     --------     --------
Loss before extraordinary items............................   (14,743)     (34,155)     (20,510)
Extraordinary items........................................        --           --         (508)
                                                             --------     --------     --------
Net loss...................................................   (14,743)     (34,155)     (21,018)
                                                             ========     ========     ========
Preferred stock dividends..................................    (1,255)          --           --
Net loss...................................................   (14,743)     (34,155)     (21,018)
                                                             --------     --------     --------
Loss applicable to common shareholders.....................  $(15,998)    $(34,155)    $(21,018)
                                                             ========     ========     ========
Loss per common share (basic & diluted):
  Continuing operations....................................  $  (1.11)    $  (2.33)    $  (0.74)
  Discontinued operations..................................     (0.52)       (2.27)       (2.97)
  Extraordinary items......................................        --           --         (.09)
                                                             --------     --------     --------
  Net loss per common share (basic & diluted)..............  $  (1.63)    $  (4.60)    $  (3.80)
                                                             ========     ========     ========
Weighted average number of common shares outstanding (basic
  & diluted)...............................................     9,814        7,423        5,535
                                                             ========     ========     ========
</TABLE>


                See notes to consolidated financial statements.
                                       27
<PAGE>   29

                 COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES


                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                            COMMON STOCK                                  UNREALIZED     TREASURY STOCK
                            PREFERRED   --------------------   ADDITIONAL                  LOSS ON     -------------------
                              STOCK     NUMBER OF      PAR      PAID-IN     ACCUMULATED   MARKETABLE   NUMBER OF
                             AMOUNT       SHARES      VALUE     CAPITAL       DEFICIT     SECURITIES    SHARES      COST
                            ---------   ----------   -------   ----------   -----------   ----------   ---------   -------
<S>                         <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)
  Net loss................       --             --        --          --       (21,018)        --            --         --
  5% stock dividend.......       --        250,893       251       7,474        (7,746)        --            --         --
  Realized loss on
    securities............       --             --        --          --            --        876            --         --
  Acquisition of Coyote
    Technologies, Inc.
    minority interest,
    net...................       --             --        --         385            --         --        35,000     (2,203)
  Issuance of common
    stock.................       --        230,000       230      12,630            --         --      (200,000)     1,058
  Other...................       --             --        --         179            --         --        (4,000)        32
                             ------     ----------   -------    --------     ---------      -----      --------    -------
BALANCE AT MARCH 31,
  1997....................       --      6,007,175     6,007      80,124       (63,540)        --       708,692     (5,757)
  Net loss................       --             --        --          --       (34,155)        --            --         --
  Exercise of stock
    options...............       --        442,956       443       1,812            --         --            --         --
  Amendment of A & B units
    Convertible to common
    stock.................       --             --        --       5,522            --         --            --         --
  Issuance of common
    stock, net............       --      1,880,750     1,881       1,481            --         --            --         --
  Common stock issued on
    debt conversion.......       --        821,039       821       2,734            --         --            --         --
  Non-cash expense........       --             --        --      10,687            --         --            --         --
                             ------     ----------   -------    --------     ---------      -----      --------    -------
BALANCE AT MARCH 31,
  1998....................       --      9,151,920     9,152     102,360       (97,695)        --       708,692     (5,757)
  Net loss................       --             --        --          --       (14,743)        --            --         --
  5% stock dividend.......       --        497,623       497       2,859        (3,359)        --            --         --
  Exercise of stock
    options...............       --        105,713       106         352            --         --            --         --
  B Unit conversions......       --         73,500        73         (73)           --         --            --         --
  Common stock issued on
    debt conversion.......       --      1,068,750     1,069       2,337            --         --            --         --
  Issuance of common
    stock, net............       --        269,950       270       1,716            --         --            --         --
  Issuance of 700
    preference shares,
    net...................    6,345             --        --          --            --         --            --         --
  Beneficial conversion
    feature -- preference
    shares................    1,050             --        --      (1,050)           --         --            --         --
  Preferred stock cash
    dividend..............       --             --        --          --          (205)        --            --         --
  Non-cash warrant
    expense...............       --             --        --         753            --         --            --         --
                             ------     ----------   -------    --------     ---------      -----      --------    -------
BALANCE AT MARCH 31,
  1999....................   $7,395     11,167,456   $11,167    $109,254     $(116,002)     $  --       708,692    $(5,757)
                             ======     ==========   =======    ========     =========      =====      ========    =======

<CAPTION>

                                TOTAL
                            SHAREHOLDERS'
                               EQUITY
                            -------------
<S>                         <C>
BALANCE AT MARCH 30,
  1996....................    $ 24,686
  Net loss................     (21,018)
  5% stock dividend.......         (21)
  Realized loss on
    securities............         876
  Acquisition of Coyote
    Technologies, Inc.
    minority interest,
    net...................      (1,818)
  Issuance of common
    stock.................      13,918
  Other...................         211
                              --------
BALANCE AT MARCH 31,
  1997....................      16,834
  Net loss................     (34,155)
  Exercise of stock
    options...............       2,255
  Amendment of A & B units
    Convertible to common
    stock.................       5,522
  Issuance of common
    stock, net............       3,362
  Common stock issued on
    debt conversion.......       3,555
  Non-cash expense........      10,687
                              --------
BALANCE AT MARCH 31,
  1998....................       8,060
  Net loss................     (14,743)
  5% stock dividend.......          (3)
  Exercise of stock
    options...............         458
  B Unit conversions......          --
  Common stock issued on
    debt conversion.......       3,406
  Issuance of common
    stock, net............       1,986
  Issuance of 700
    preference shares,
    net...................       6,345
  Beneficial conversion
    feature -- preference
    shares................          --
  Preferred stock cash
    dividend..............        (205)
  Non-cash warrant
    expense...............         753
                              --------
BALANCE AT MARCH 31,
  1999....................    $  6,057
                              ========
</TABLE>


                 See notes to consolidated financial statements
                                       28
<PAGE>   30

                  COYOTE NETWORK SYSTEMS, INC AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                       FISCAL YEAR ENDED
                                                              -----------------------------------
                                                              MARCH 31,    MARCH 31,    MARCH 31,
                                                                1999         1998         1997
                                                              ---------    ---------    ---------
<S>                                                           <C>          <C>          <C>
OPERATING ACTIVITIES:
Loss before extraordinary items.............................  $(14,743)    $(34,155)    $(20,510)
Adjustments to reconcile loss to net cash used in operating
  activities:
  Depreciation and amortization.............................       982          294           11
  Loss (gain) on sales of marketable securities.............      (877)         155          736
  Gain on sale of land......................................       (20)          --           --
  Write down of CNC Preferred Stock.........................        --           --        1,060
  Bad debt expense..........................................       377           --           --
  Provision for loss on discontinued operations.............       900           --        7,550
  Non-cash financing and warrant expense....................        98       10,582          221
  Net change in discontinued operations.....................      (310)       7,040       (7,315)
  (Increase) decrease in:
     Receivables............................................    (4,874)       3,879           --
     Deposits and other current assets......................     6,071         (735)          96
  Increase (decrease) in:
     Accounts payable.......................................     2,472         (640)         105
     Other current liabilities..............................     3,799        5,105          187
                                                              --------     --------     --------
Net cash used in operating activities.......................    (6,125)      (8,475)     (17,859)
                                                              --------     --------     --------
INVESTING ACTIVITIES:
  Purchases of property and equipment.......................    (1,556)        (254)         (12)
  Purchases of marketable securities........................        --         (736)          --
  Proceeds from sale of marketable securities...............       893        1,777        1,353
  Change in notes receivable................................     1,050       (2,466)      (5,000)
  Proceeds from sale of CNC preferred stock.................        --           --        2,500
  Proceeds from sale of land................................        67           --          112
  Cash payment on acquisition...............................    (1,333)          --           --
  Increase in investments in affiliate......................      (400)          --           --
  Net proceeds from the sale of Atlantic Provision and C&L
     assets.................................................        --        2,861          640
  Net change in discontinued operations.....................    (3,265)      (1,168)      (2,716)
                                                              --------     --------     --------
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        5,617       13,918
  Convertible debt issued...................................        --        6,870           --
  Net change in discontinued operations.....................        --          275        3,314
  Other items...............................................      (208)        (495)        (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.
                                       29
<PAGE>   31

                 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


     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.



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



COYOTE NETWORK SYSTEMS, INC. ("Coyote"), formerly The Diana Corporation



     Coyote and its wholly owned non-operating subsidiaries are included in the
consolidated group for all three fiscal years. Coyote's activities historically
consisted primarily of corporate administrative and investing activities.



COYOTE GATEWAY, LLC dba American Gateway Telecommunications ("American Gateway")



     On April 16, 1998, the Company established American Gateway, a Colorado
limited liability company. The Company owns 80% of American Gateway, and
American Gateway Telecom, Inc., a Texas corporation ("AGT") owns 16%. PrinVest
Financial Corporation owns the remaining 4%. Its principal activities consist of
the wholesaling of long distance services. This entity was disposed of in fiscal
2000. (See Note 17 -- Post July 13, 1999 Events)


INET INTERACTIVE NETWORK SYSTEM, INC. ("INET")


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



     In May 2000, the Company made the strategic decision and adopted a formal
plan to discontinue the following entities (see Note 17 -- Post July 13, 1999
Events):



COYOTE TECHNOLOGIES, LLC ("Coyote Technologies, LLC"), formerly Sattel
Communications, LLC



     Since fiscal 1997, Coyote has owned 100% of Coyote Technologies, Inc. (fka,
Sattel Communications Corp.) (see Note 3). Coyote Technologies, Inc., through
its subsidiary Coyote Technologies, LLC is a provider of telecommunication
switches and IP gateways. Coyote Technologies, Inc. has an ownership interest in
Coyote Technologies, LLC, a limited liability company, of approximately 97% and
certain additional preferential rights (see Note 3). Its activities consist
primarily of development, production and sale of scalable telecommunications
switches and Internet protocol based gateway systems to telecommunications
service providers.



COYOTE COMMUNICATIONS SERVICES, LLC ("Coyote Communications")



     Formed in January 1999, Coyote Communications provides customer support and
consulting services including network integration, network design, switch
provisioning, outsourcing, on-site technical support, remote monitoring, 7 x 24
customer support, billing administration and help desk support.


                                       30
<PAGE>   32
                 COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 1999

TELECOMALLIANCE


     Formed in November 1998, TelecomAlliance is a joint venture between Coyote
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.



  Business Risk



     As discussed in Note 2 below, the Company has substantially completed a
major restructuring that resulted in the disposition of several operations and
in May 2000 decided to discontinue its business units that are involved in the
production and sale of telecommunication switches and Internet Protocol based
gateways to telecommunication service providers (see Note 17 -- Post July 13,
1999 Events). The Company's primary business is now the wholesaling and
retailing of international long distance service.



     After the discontinuance and restructuring, the Company's operations are
similar to those of an early-stage enterprise and are subject to all the risks
associated therewith. These risks include, among others, uncertainty of markets,
ability to develop, produce and sell profitably its 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 fiscal 2000.
Significant actions in this progress include commencing operations of INET,
resolving the class action lawsuit (See Note 7) and raising additional equity
(see Notes 8, 16 and 17 -- Subsequent Events). 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.

                                       31
<PAGE>   33
                 COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 1999

  Non-Marketable Securities

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

  Property and Equipment

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


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



<TABLE>
<CAPTION>
                                                  MARCH 31, 1999    MARCH 31, 1998
                                                  --------------    --------------
<S>                                               <C>               <C>
Land............................................      $   --            $   50
Fixtures and equipment..........................       6,421               983
                                                      ------            ------
                                                       6,421             1,033
                                                      ------            ------
Less accumulated depreciation...................        (991)             (417)
                                                      ------            ------
                                                      $5,430            $  616
                                                      ======            ======
</TABLE>


  Intangible Assets

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


<TABLE>
<CAPTION>
                                                 MARCH 31, 1999
                                                 --------------
<S>                                              <C>
Goodwill.......................................      $2,167
Other..........................................         136
                                                     ------
                                                     $2,303
                                                     ======
</TABLE>



     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 $0.3 million at March 31, 1999.


     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.

                                       32
<PAGE>   34
                 COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 1999

  Revenue Recognition

LONG DISTANCE SERVICES

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

SWITCH SALES (DISCONTINUED)


     As described in Note 17 -- Post July 13, 1999 Events, the Company decided
to discontinue its switch business in May 2000. All revenue and expenses related
to the switch business are summarized in the line item "loss on discontinued
operations" in the accompanying financial statements. Revenue from switching
equipment sales based on a firm agreement and a fixed price, were recognized
upon shipment to a credit-worthy customer. The Company also sells maintenance
and other services to its customers. Revenue related to these services is
recognized on a straight-line basis over the life of the contract.



     Since 1998, the Company has also been involved in transactions in which the
end user of the switch equipment does not have established credit and will
obtain a third party leasing company to purchase the equipment or assume the end
user's payment obligation. At March 31, 1999, there were no unpaid transactions
that had not been assumed by a credit-worthy leasing company.



     Generally, the Company recognizes revenue based on the type of sales
transactions as follows:



          a) Shipments to credit-worthy customers with no portion of the
     collection dependent on any future event. Revenues are recorded at the time
     of shipment.



          b) Shipments to a customer without established credit. These
     transactions are primarily shipments to customers who are in the process of
     obtaining lease financing and to whom the Company has granted extended
     payment terms (generally three year notes requiring monthly payments and
     secured by the equipment sold). Revenues are deferred (not recognized) and
     no receivable is recorded until a credit-worthy leasing company has
     purchased the equipment from the end user and has assumed the payment
     obligation. Upon assumption by a leasing company, we receive a significant
     portion of the sales price in cash, and give up our security interest in
     the equipment in return for the forgiveness of the note from the end user.



          c) Shipments where a portion of the revenue is dependent upon some
     future event. These consist primarily of transactions involving third party
     leasing companies. Under these agreements, a portion of the sales price is
     contingent on the lessees completing their payment obligations to the
     lessor. Amounts related to this contingency ($4.2 million at March 31,
     1999) are not recognized as revenue until the contingency is removed or
     payment is received. Also on certain transactions a portion of the payments
     are contingent on installation. At March 31, 1999, the Company had
     approximately $3.1 million subject to this contingency and therefore not
     recognized as revenue.



  Credit and Other Concentrations



     For the year ended March 31, 1999, third party lessors were involved in
approximately 97% of net sales of our discontinued switching business (see Note
2). For the year ended March 31, 1998, a third party lessor was involved in
approximately 40% of the revenue for the switch segment and revenue from Apollo
Inc. accounted for approximately 19% of revenue of the switch segment (see Note
4). For the year ended March 31, 1997, Concentric Network Corporation accounted
for almost all revenue of the switch segment. At March 31, 1999 and 1998,
third-party lessors accounted for approximately 99% and 47%, respectively, of
gross receivables of the discontinued segment. 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


                                       33
<PAGE>   35
                 COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 1999

in the related equipment. In addition, approximately 11% of inventory purchased
during fiscal 1998 was supplied by Sattel Technologies, Inc.

  Research and Development Costs

     Engineering, research and development costs include all engineering charges
related to new products and product improvements, and are charged to operations
when incurred. These costs are included in loss from discontinued operations in
the accompanying consolidated statements of operations. Software development
costs are capitalized once technological feasibility is established and are
included in the net long-term assets of discontinued operations in the
accompanying consolidated balance sheets.

  Income Taxes

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

  Loss Per Common Share


     The basic loss per common share is determined by using the weighted average
number of shares of common stock outstanding during each period. Diluted loss
per common share is equal to the basic loss per share. Because of the net losses
in fiscal 1997, 1998 and 1999, the effect of options and warrants are
antidilutive, and therefore are excluded from the calculations of diluted loss
per common share. Loss per share amounts for the years ended March 31, 1997 and
1998 have been restated to reflect the effect of the Company's 5% stock dividend
on November 4, 1998.



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



     At March 31, 1997, 1998 and 1999 the following convertible securities,
outstanding options and warrants to purchase common stock were not included in
the computation of diluted loss per common share as the effect would be
antidilutive due to the net loss.



<TABLE>
<CAPTION>
                                                              1999         1998         1997
                                                            ---------    ---------    ---------
<S>                                                         <C>          <C>          <C>
Options...................................................  1,315,118      503,974      838,360
Warrants and units........................................  4,109,571    3,345,373    1,016,175
Warrants to be issued related to securities litigation
  settlement..............................................  2,225,000           --           --
Convertible debt..........................................         --      920,000           --
Convertible preferred stock...............................  1,500,000           --           --
                                                            ---------    ---------    ---------
          Total -- common stock...........................  9,149,689    4,769,347    1,854,535
                                                            =========    =========    =========
</TABLE>


  Use of Estimates

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

                                       34
<PAGE>   36
                 COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 1999

  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.


NOTE 2 -- DISCONTINUED OPERATIONS


  Discontinuance of Switch Business

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


<TABLE>
<CAPTION>
                                                                1999          1998
                                                              --------      --------
                                                              (DOLLARS IN THOUSANDS)
<S>                                                           <C>           <C>
Current assets and liabilities:
  Accounts receivable, net of reserves......................   $3,390        $  564
  Inventory.................................................    2,130         2,122
  Accrued liabilities.......................................     (474)         (315)
                                                               ------        ------
Net current assets of discontinued operations...............   $5,046        $2,371
                                                               ======        ======
Non-current assets:
  Property and equipment, net...............................   $2,763        $1,774
  Capitalized software development and intellectual property
     rights.................................................    4,920         3,519
  Other.....................................................       --            23
                                                               ------        ------
Net long-term assets of discontinued operations.............   $7,683        $5,316
                                                               ======        ======
</TABLE>



     Expected operating results relating to the discontinued operations from
April 1, 2000 until the expected disposal date will be included in the estimated
loss on disposal and will be recorded as a charge in the consolidated financial
statements in fiscal 2000. The Company expects to record a charge for estimated
loss on disposal of the switch business of approximately $11.0 million in fiscal
2000, which includes an estimated $2.5 million of expected losses of the segment
for the first two quarters of fiscal 2001. The Company expects to dispose of the
segment near the end of the second quarter of fiscal 2001.



     A summary of the operations of the segment is as follows:



<TABLE>
<CAPTION>
                                                               FISCAL YEAR ENDING MARCH 31,
                                                              ------------------------------
                                                               1999        1998       1997
                                                              -------    --------    -------
                                                                  (DOLLARS IN THOUSANDS)
<S>                                                           <C>        <C>         <C>
Net sales...................................................  $28,607    $  5,264    $ 7,154
                                                              =======    ========    =======
Loss from discontinued operations...........................  $(4,215)   $(16,877)   $(8,254)
                                                              =======    ========    =======
</TABLE>



     Certain reclassifications have been made to the fiscal 1999 net sales shown
above to reflect $7.3 million of deferred revenue (related to contingencies
discussed in revenue recognition in Note 1), as reductions of sales rather than
additions to cost of sales as previously presented. These reclassifications did
not affect net income.


                                       35
<PAGE>   37
                 COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 1999


  1996 - 1997 Restructuring



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



<TABLE>
<CAPTION>
                 SEGMENT                                  COMPANY
                 -------                                  -------
<S>                                          <C>
Telecommunications equipment
  distribution...........................    C&L
Wire installation and service............    Valley
Wholesale distribution of meat and
  seafood................................    Entree/Atlantic Provision Company
</TABLE>



     On February 3, 1997, the Board of Directors of Coyote approved the sale of
a majority of the assets of Atlantic Provision Company to Colorado Boxed Beef
Company. 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., 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., to Technology Services Corporation.



     The components of net long-term assets of discontinued operations include
certain items from the discontinued meat and seafood segment as follows (in
thousands):


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


     The Company believes that the net assets of discontinued operations related
to C&L, Valley and Entree/ Atlantic Provision are recorded at approximate net
realizable value at March 31, 1999.


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


<TABLE>
<S>                                                           <C>
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 Atlantic Provision............................   2,550
Investment banking fees, including the fair value of a
  warrant to purchase common stock..........................   1,100
Professional fees incurred in connection with the
  spin-off..................................................     854
Severance payments to Messrs. Fisher, Runge and Lilly (see
  Note 12)..................................................     508
Charge due to acceleration of deferred compensation payments
  to Messrs. Fisher and Runge (see Note 12).................     137
Other.......................................................     347
                                                              ------
                                                              $7,550
                                                              ======
</TABLE>



     As of June 18, 1999, the Company had collected all cash related to the sale
of discontinued operations of the meat and seafood segment except $410,000 due
under a note and the only asset of discontinued operations was real estate
related to the land and buildings of the discontinued Atlantic Provision
operation. The real estate is listed for sale. Based upon an estimate of the
current market value of the real estate, the Company


                                       36
<PAGE>   38
                 COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 1999

took an additional charge of $900,000 in the second quarter of fiscal 1999. The
asset book value as of March 31, 1999 was $234,000, net of mortgages and
reserves applicable to the property.

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


<TABLE>
<CAPTION>
                                                         FISCAL YEAR ENDING MARCH 31, 1997
                                        --------------------------------------------------------------------
                                                           TELECOMMUNICATIONS   WIRE INSTALLATION
                                        MEAT AND SEAFOOD       EQUIPMENT           AND SERVICE       TOTAL
                                        ----------------   ------------------   -----------------   --------
<S>                                     <C>                <C>                  <C>                 <C>
Net sales.............................      $188,853            $19,750              $11,540        $220,143
                                            ========            =======              =======        ========
Earnings (loss) from discontinued
  operations..........................      $   (584)           $   (51)             $    10        $   (625)
                                            ========            =======              =======        ========
</TABLE>



NOTE 3 -- CAPITAL STRUCTURE OF COYOTE TECHNOLOGIES



     On May 3, 1996, the Company and Sattel Technologies, Inc. ("STI") entered
into a Supplemental Agreement by which the Company acquired an additional 15%
ownership interest in Coyote Technologies, Inc. The acquisition occurred as part
of a transaction in which the Company contributed an additional $10 million in
cash to Coyote Technologies, Inc. In lieu of contributing its proportionate
share of the additional funding to Coyote Technologies, Inc., and in exchange
for a release from its obligation related to certain product development
efforts, STI agreed to convey to the Company 15% of Coyote Technologies, Inc.,
together with 50,000 shares of the Coyote 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 Coyote Technologies, Inc. for 15,000 shares of the Company's common
stock. At this time Coyote Technologies, Inc. became a wholly-owned subsidiary
of the Company.



     During fiscal 1997, Coyote Technologies, LLC granted subordinated equity
participation interests, which amount to approximately a 20% effective ownership
interest (before consideration of the subordination provisions) in Coyote
Technologies, LLC to certain employees of the Company. The Company's effective
ownership of Coyote Technologies, LLC is approximately 80% as a result of these
transactions. Coyote Technologies, LLC 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"). Coyote
Technologies, Inc. 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 Coyote
Technologies, LLC related to these Class A Units totaled $242,000. Initially,
1,550 Class B Units were issued to employees of Coyote Technologies, LLC 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
Coyote Technologies, LLC 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


                                       37
<PAGE>   39
                 COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 1999


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 Coyote
Technologies, LLC 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 Coyote Technologies, LLC 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 Coyote Technologies, Inc.
also have the right, but not the obligation, to require the Company to purchase
all, but not less than all, of such holder's Class A Units at a price equal to
the agreed-upon or appraised fair market value at any time after April 1, 1999.



     The Conversion Rights discussed above provided the Class B Unit holders
with an approximately comparable ownership interest in the Company as they have
in Coyote Technologies, LLC.



     In September 1997, the Board of Directors authorized an amendment to
certain Class B Units owned by directors and employees of Coyote and Coyote
Technologies, LLC 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 Coyote
Technologies, Inc., 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 Coyote Technologies, LLC
continue to collectively own 1,369 Class B Units, representing all of the Class
B Units currently outstanding. The following table reflects the ownership of the
Class B Units by the management of Coyote Technologies, LLC and others as of
June 15, 1999:


<TABLE>
<CAPTION>
                      NAME                        CLASS B UNITS
                      ----                        -------------
<S>                                               <C>
James J. Fiedler................................        350
Daniel W. Latham................................        212
David Held......................................        250
Bruce Thomas....................................        250
Others..........................................        307
                                                      -----
                                                      1,369
                                                      =====
</TABLE>

                                       38
<PAGE>   40
                 COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 1999


NOTE 4 -- ACQUISITIONS



  NUKO



     In December 1997, the Company entered into a letter of intent regarding a
merger with NUKO Information Systems, Inc. ("NUKO"). NUKO is a manufacturer of
compression and transmission technology for a variety of video applications. The
Company subsequently was unable to reach agreement with NUKO on the transaction
and withdrew its offer in March 1998. During negotiations, and in accordance
with the terms of the letter of intent, the Company advanced funds to support
NUKO's ongoing activity. Including the interest, the total funding advanced to
NUKO and now owed to the Company of $1.9 million is secured by a pledge to the
Company of shares of stock owned by NUKO in iCompression, Inc. (fka, Internext
Compression, Inc.). At the time this security was accepted by the Company, the
iCompression stock had no published market value nor was there any reliable
financial information available. In April 1998, NUKO filed a voluntary petition
under Chapter 11 of the U.S. Bankruptcy Code. In May 1999, the Company received
an offer to purchase the collateral for a total price of $1.9 million. The
Company has accepted this offer subject to NUKO's right of first offer to
purchase the shares. This amount is included in notes receivable -- current in
the accompanying balance sheet. (See Note 16 -- Subsequent Events regarding sale
of iCompression stock).


  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.
Subsequent to March 31, 1999, the Company sold all of its interests in Systeam,
S.p.A., see Note 17 -- Post July 13, 1999 Events.


  Coyote Gateway


     On April 16, 1998, the Company established American Gateway (f/k/a Coyote
Gateway, LLC), a Colorado limited liability company. The Company owns 80% of
American Gateway, and AGT and PrinVest Financial Corporation own 20%. In
consideration of its 20% ownership interest, AGT contributed assets to American
Gateway, consisting of customer contracts for the transmission of international
telephone minutes and vendor and carrier contracts to service those contracts.
Subsequent to March 31, 1999, the Company sold all of its interest in American
Gateway, see Note 17 -- Post July 13, 1999 Events.


  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

                                       39
<PAGE>   41
                 COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 1999

$333,000 was advanced in fiscal 1999. As further consideration, the Company will
issue earnout shares of the Company's common stock to the former INET
shareholders in five installments based upon certain earning targets for the
period from October 1, 1998 to March 31, 2001. As of March 31, 1999, the maximum
amount payable under the earnout agreement is $1.25 million payable in Company
common stock to be valued at certain average trading prices at the time any
earnout is payable. Since the earnings targets have not yet been achieved and
management considers the likelihood to be remote, no earnout stock has been
provided as of March 31, 1999. In connection with the acquisition of INET, the
Company recorded goodwill of $2.6 million. (See Note 1 -- Intangible Assets).

  Crescent

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

  Apollo

     In February 1999, the Company entered into an agreement, subject to certain
conditions, to acquire Apollo Telecom, Inc. ("Apollo"). Apollo subsequently was
unable to meet the stipulated conditions and the Company withdrew its offer in
April 1999. During the negotiations and in connection with the proposed
acquisition, the Company advanced funds to Apollo in part secured by a Class II
Telecommunications License to originate and terminate traffic in Tokyo, Japan.
The total funding advanced to Apollo as at March 31, 1999 was $1.1 million. In
April 1999, subsequent to the withdrawal of the Company's acquisition offer,
Apollo filed a voluntary petition under Chapter 11 of the U.S. Bankruptcy Code.
The Company subsequently obtained the Japanese license which has an estimated
market value of $220,000. The Company recorded an expense charge of $0.9 million
to fully provide for the loss in the fourth quarter of fiscal 1999.


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



NOTE 5 -- DEPOSITS AND OTHER CURRENT ASSETS



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


                                       40
<PAGE>   42
                 COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 1999


NOTE 6 -- DEBT


     Debt consists of the following (in thousands):


<TABLE>
<CAPTION>
                                                              MARCH 31, 1999   MARCH 31, 1998
                                                              --------------   --------------
<S>                                                           <C>              <C>
Subordinated debentures due January 2002 and capitalized
  interest..................................................     $ 1,675           $1,817
8% Convertible loan due December 2000.......................          --            3,673
Note payable bearing interest at 10% payable in monthly
  installments through August 2000..........................         436               --
Capital lease obligations...................................       2,556               --
                                                                 -------           ------
                                                                   4,667            5,490
Less current portion........................................      (1,316)            (141)
                                                                 -------           ------
                                                                 $ 3,351           $5,349
                                                                 =======           ======
</TABLE>


     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):


<TABLE>
<CAPTION>
                                                                       CAPITAL
                                                               DEBT    LEASES     TOTAL
                                                              ------   -------   -------
<S>                                                           <C>      <C>       <C>
2000........................................................  $  577   $  845    $ 1,422
2001........................................................     141      696        837
2002........................................................   1,393      684      2,077
2003........................................................      --      668        668
2004........................................................      --      150        150
                                                              ------   ------    -------
                                                               2,111    3,043      5,154
Less amount representing interest...........................      --     (487)      (487)
                                                              ------   ------    -------
                                                               2,111    2,556      4,667
Less current portion........................................    (577)    (739)    (1,316)
                                                              ------   ------    -------
                                                              $1,534   $1,817    $ 3,351
                                                              ======   ======    =======
</TABLE>



     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. (See Note 17 -- Post July
13, 1999 Events).


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


NOTE 7 -- COMMITMENTS AND CONTINGENCIES


     The Company leases its facilities and various equipment under
non-cancelable lease arrangements for varying periods. Leases that expire
generally are expected to be renewed or replaced by other leases. Total

                                       41
<PAGE>   43
                 COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 1999

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):


<TABLE>
<S>                                                   <C>
2000................................................  $1,169
2001................................................   1,097
2002................................................   1,110
2003................................................   1,053
2004................................................     441
                                                      ------
                                                      $4,870
                                                      ======
</TABLE>


  Coyote Network Systems, Inc. (The Diana Corporation) Securities Litigation
(Civ. No. 97-3186)

     The Company was a defendant in a consolidated class action, In re The Diana
Corporation Securities Litigation, that was pending in the United States
District Court for the Central District of California. The Consolidated
Complaint asserted claims against the Company and others under Section 10(b) of
the Securities Exchange Act of 1934, alleging essentially that the Company was
engaged, together with others, in a scheme to inflate the price of the Company's
stock during the class period, December 6, 1994 through May 2, 1997, through
false and misleading statements and manipulative transactions.

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

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

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

  Nasdaq and Securities Exchange Commission

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

                                       42
<PAGE>   44
                 COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 1999

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. See Note
17 -- Post July 13, 1999 Events regarding the Commission's notifying the Company
in November 1999 that the Commission had dropped its investigation.


                                       43
<PAGE>   45
                 COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 1999


NOTE 8 -- SHAREHOLDERS' EQUITY


  Options and Warrants

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

     The following table summarizes the transactions for the option plans as
well as for warrants issued for the last three fiscal years:


<TABLE>
<CAPTION>
                                                        OPTION PRICE                  WARRANT PRICE
                                           OPTIONS       PER SHARE       WARRANTS       PER SHARE
                                          ---------    --------------    ---------    -------------
<S>                                       <C>          <C>               <C>          <C>
OUTSTANDING AT MARCH 30, 1996...........    971,158    $ 1.86 - 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    $ 1.86 - 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    $ 1.86 - 19.05    2,329,198     2.14 - 6.86
  5% stock dividend.....................     62,238          --            149,045         --
  Granted...............................  1,060,244      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...........  1,315,118    $ 1.86 - 16.00    3,129,910    $2.14 - 8.33
                                          =========                      =========
EXERCISABLE AT MARCH 31, 1999...........    305,997                      3,129,910
                                          =========                      =========
</TABLE>



<TABLE>
<CAPTION>
                                        WEIGHTED
                                         AVERAGE
                            WEIGHTED    REMAINING                  WEIGHTED
   OPTION                   AVERAGE    CONTRACTUAL                 AVERAGE
   PRICE      OUTSTANDING   EXERCISE      LIFE       EXERCISABLE   EXERCISE
 PER SHARE      OPTIONS      PRICE       (YEARS)       OPTIONS      PRICE
------------  -----------   --------   -----------   -----------   --------
<S>           <C>           <C>        <C>           <C>           <C>
   $1.86          25,526     $1.86        2.76          25,526      $1.86
2.86 -  3.93     637,268      3.49        5.07         206,091       3.06
3.99 -  6.01     274,040      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              --         --
               ---------                               -------
               1,315,118     $4.82        4.69         305,997      $3.41
               =========                               =======
</TABLE>


                                       44
<PAGE>   46
                 COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 1999


<TABLE>
<CAPTION>
                                        WEIGHTED
                                         AVERAGE
                            WEIGHTED    REMAINING
  WARRANT                   AVERAGE    CONTRACTUAL
   PRICE      OUTSTANDING   EXERCISE      LIFE
 PER SHARE     WARRANTS      PRICE       (YEARS)
 ---------    -----------   --------   -----------
<S>           <C>           <C>        <C>
$2.14 - 3.81   2,460,728     $2.78        3.28
 3.99 - 6.86     142,431      5.68        2.26
 8.01 - 8.33     526,751      8.08        3.92
               ---------
               3,129,910     $3.80        3.34
               =========
</TABLE>


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

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


<TABLE>
<CAPTION>
                                                               1999        1998        1997
                                                             --------    --------    --------
<S>                                                          <C>         <C>         <C>
Net loss -- as reported....................................  $(15,998)   $(34,155)   $(21,018)
         -- pro forma......................................   (16,716)    (34,439)    (21,500)
Net loss per share -- as reported..........................     (1.63)      (4.60)      (3.80)
                    -- pro forma...........................     (1.70)      (4.64)      (3.88)
</TABLE>


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


<TABLE>
<CAPTION>
                                                        1999             1998           1997
                                                    -------------    -------------    ---------
<S>                                                 <C>              <C>              <C>
Expected stock price volatility...................  90% - 114.3%        130.90%         93.3%
Risk free interest rate...........................  5.95% - 6.25%    5.95% - 6.25%      6.2%
                                                      2.0 - 5.0
Expected life.....................................      years          5.0 years      4.8 years
</TABLE>


     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
(before adjustment for 5% stock dividend) at fair market value estimated using
the Black-Scholes option-pricing

                                       45
<PAGE>   47
                 COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 1999

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 (before
adjustment for 5% stock dividend). 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 (before adjustment for
5% stock dividend). The Company recorded a fair value of the warrants as a
reduction in net sales in the fourth quarter ended March 31, 1998 of $123,000
using the Black-Scholes option-pricing model, this amount is included in loss on
discontinued operations in the accompanying consolidated statement of
operations.



     In fiscal 1999, the Company issued warrants to leasing companies for
services provided in connection with customer financing to purchase 242,250
shares of the Company's common stock at prices ranging from $3.56 to $8.33 per
share. The Company recorded a fair value of the warrants of $753,000 as a
reduction in net sales in fiscal 1999, this amount is included in loss on
discontinued operations in the accompanying consolidated statement of
operations. The fair value was estimated using the Black-Scholes option-pricing
model.


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

     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.


     See Note 17 -- Post July 13, 1999 Events.


  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
                                       46
<PAGE>   48
                 COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 1999

upon a per share common stock price that will be the lesser of the initial
conversion price as defined in the contract or 87% of the average of the three
lowest per share market values during the ten trading day period prior to an
applicable conversion date. This beneficial conversion feature has been valued
at $1,050,000 and accounted for as a dividend to the preferred shareholders. The
holders of Preferred Stock are entitled to receive 5% cumulative dividends per
annum. No dividends can be paid or declared on any Common Stock unless full cash
dividends, including past dividends declared, have been paid on the Preferred
Stock. During fiscal 1999, the Company declared and paid cash dividends of
$205,000 on the Preferred Stock.

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

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

  Common Stock and Convertible Notes


     In July 1997, the Company issued 1,880,750 shares of its common stock at
$2.00 per share in a private placement. The Company received $3,362,000 from the
private placement, net of fees of $400,000. In addition, the Company issued
warrants to purchase 1,880,750 shares of the Company's common stock at $3.00 per
share (before adjustment for 5% stock dividend). 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

                                       47
<PAGE>   49
                 COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 1999

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:


<TABLE>
<CAPTION>
                         15 DAY AVERAGE                           APPLICABLE
                   CLOSING TRANSACTION PRICE                       DISCOUNT
                   -------------------------                      ----------
<S>               <C>                                             <C>
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%
</TABLE>


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

     As of June 9, 1998, the full value of notes and accrued interest to the
date of conversion had been converted into Company common stock. Common stock
totaling 1,404,825 shares was issued in connection with conversions of
$5,133,000 of convertible notes and accrued interest.

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


NOTE 9 -- INCOME TAXES


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


<TABLE>
<CAPTION>
                                                               1999       1998       1997
                                                              -------    -------    -------
<S>                                                           <C>        <C>        <C>
Federal income tax at statutory rate........................  $(3,277)   $(5,875)   $(1,388)
State income tax, net of federal benefit....................     (578)    (1,036)      (245)
Tax effect of net operating loss not benefited..............    3,834      6,898      1,529
Refund of federal income taxes paid in a prior year.........       --         --       (836)
Other, net..................................................       21         13        104
                                                              -------    -------    -------
Income tax credit...........................................  $    --    $    --    $  (836)
                                                              =======    =======    =======
</TABLE>


                                       48
<PAGE>   50
                 COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 1999

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


<TABLE>
<CAPTION>
                                                              MARCH 31, 1999    MARCH 31, 1998
                                                              --------------    --------------
<S>                                                           <C>               <C>
Federal net operating loss carryforwards....................     $ 21,576          $ 18,460
State net operating loss carryforwards......................          729             1,367
Reserve for loss on discontinued operations.................          819               745
Reserves....................................................          337               560
Capitalized interest in Coyote debentures...................          168               225
General business credits....................................          490               145
All others..................................................          314               261
                                                                 --------          --------
          Total deferred tax assets.........................       24,433            21,763
Valuation allowance for deferred tax assets.................      (21,879)          (19,396)
                                                                 --------          --------
Net deferred tax assets.....................................        2,554             2,367
Intangible assets (net).....................................        1,407             1,407
All others..................................................        1,147               960
                                                                 --------          --------
          Total deferred tax liabilities....................        2,554             2,367
                                                                 --------          --------
Net deferred taxes..........................................     $     --          $     --
                                                                 ========          ========
</TABLE>



     The Company has approximately $50,000,000 in both federal and state net
operating loss carryforwards. These carryforwards expire at various dates
through fiscal 2019. The Tax Reform Act of 1986 imposed substantial restrictions
on the utilization of net operating losses in the event of an "ownership change"
as defined in Section 382 of the Internal Revenue Code of 1986. Subsequent to
March 31, 1999, due to the Company's continuing financing efforts, there may be
ownership changes which would significantly limit the Company's ability to
immediately utilize its net operation loss carryforwards.



NOTE 10 -- NON-OPERATING INCOME (EXPENSE) AND UNUSUAL ITEMS



     In June 1996, Concentric Network Corporation executed a Promissory Note for
$5.0 million in favor of the Company for a bridge loan. Concentric Network
granted to the Company a warrant to purchase a split adjusted 36,765 shares of
Concentric Network 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 Concentric Network.
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, Concentric Network 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 Concentric Network 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 Concentric
Network common stock for six months following Concentric Network's IPO. The
Company sold 25% of its Concentric Network 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

                                       49
<PAGE>   51
                 COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 1999


public offering made by Concentric Network, the Company exercised and sold the
Concentric Network common stock represented by the warrant and recorded a
non-operating gain of $877,000.



     In September 1997, the Board of Directors authorized an amendment to
certain Class B Units owned by directors and employees of the Company at June
30, 1997, to provide for the elimination of the minimum pre-tax profits measure
requirement and the conversion into Company common stock at the option of the
holder. An accrued expense charge of approximately $5,522,000 was recorded in
the second quarter of fiscal 1998 and is included in the loss from discontinued
operations in the accompanying consolidated financial statements, since all of
these related to Coyote Technologies, LLC the provider of the discontinued
switches. 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.



NOTE 11 -- EXTRAORDINARY ITEMS



     On October 4, 1996, Atlantic Provision refinanced its revolving line of
credit with a new lender. In connection with the refinancing, Atlantic Provision
incurred expenses of $227,000, which are reflected in the fiscal 1997
Consolidated Statement of Operations as an extraordinary item.



     In February 1997, Atlantic Provision sold a majority of its assets and used
part of the proceeds to repay its revolving line of credit (see Note 2).
Atlantic Provision 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 Coyote Technologies, LLC (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 employment terms 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 Coyote Technologies, LLC from Mark Jacques,
a former officer of Coyote Technologies, LLC for an aggregate purchase price of
$600,000. On November 12, 1996, Coyote Technologies, LLC 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 Coyote
Technologies, LLC and (ii) retained his remaining 250 Class B Units of Coyote
Technologies, LLC. 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


                                       50
<PAGE>   52
                 COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 1999

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.
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, Atlantic Provision conveyed its 50% ownership interest in
Fieldstone Meats of Alabama, Inc. to a former officer and director of Atlantic
Provision in consideration for past services as a director and officer of
Atlantic Provision for his assistance in the sale of the Atlantic Provision
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 Coyote and Coyote
Technologies, LLC, 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

                                       51
<PAGE>   53
                 COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 1999

established an annual interest rate of 6.5% to be applied to the loans and
payable at the completion of the term.


     In September 1998, the Company sold approximately $13.0 million of switch
equipment to Crescent Communications, Inc. ("Crescent") through a third party
leasing arrangement. In addition to the cash proceeds, the Company received an
approximately 20% ownership interest represented by 1,990 shares of common stock
in Crescent and the Company entered into a maintenance and service agreement
with Crescent. The Company did not recognize approximately $2.5 million of
revenue on this sale related to its equity interest in the buyer and amounts
reserved for payment contingencies. The entire cash proceeds related to the sale
were collected prior to September 30, 1998.


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

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

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


     PrinVest Financial Corporation, a financing and leasing corporation, owns a
minority interest of approximately 4% of the Company's subsidiary Coyote
Gateway, LLC (dba AGT), and 90,000 warrants to purchase shares of the Company's
common stock. During fiscal 1999, PrinVest has provided financing to AGT ($8.2
million at March 31, 1999) in connection with deposits required to be made by
AGT to other long distance telecommunications carriers and for working capital.
The Company has pledged 708,692 shares of common stock as collateral on the
notes payable to PrinVest. As of March 31, 1999, PrinVest was the
purchaser/lessor on approximately $15.0 million of equipment that it is leasing
to end-users. See Note 17 -- Post July 13, 1999 Events.



     In November 1997, the Company completed the sale of C&L Communications,
Inc. 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:


<TABLE>
<CAPTION>
                                                                 1999         1998
                                                              ----------    --------
<S>                                                           <C>           <C>
Purchases from C&L (1)......................................  $9,498,000    $     --
Sales to C&L (1)............................................  $       --    $304,000
Redemption of Preferred Stock by C&L........................  $1,500,000    $     --
</TABLE>

---------------
(1) Included in discontinued operations

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


     See Note 17 -- Subsequent Events.


                                       52
<PAGE>   54
                 COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 1999


NOTE 13 -- BUSINESS SEGMENT INFORMATION


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


NOTE 14 -- STATEMENTS OF CASH FLOWS


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


<TABLE>
<CAPTION>
                                                               1999       1998      1997
                                                              -------    ------    ------
<S>                                                           <C>        <C>       <C>
Cash paid for interest......................................    1,808       444        42
Cash paid for taxes.........................................        6         6         5
Non-cash transactions, continuing operations:
  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
  Beneficial conversion feature on preferred shares.........    1,050        --        --
  Amounts paid directly by lender...........................   (7,921)       --        --
Non-cash transactions, discontinued operations:
  Expense charge on conversion of A & B units...............  $    --    $5,522    $   --
  Sales discount granted for investment in affiliate........     (900)       --        --
</TABLE>



NOTE 15 -- LIQUIDITY AND CAPITAL RESOURCES


  Fiscal 1999 -- Year Ended March 31, 1999

     After the restructuring and discontinuance, the Company's operations are
similar to those of an early-stage enterprise and are subject to all the risks
associated therewith. These risks include, among others, uncertainty of markets,
ability to develop, produce and sell profitably its products and services and
the ability to finance operations. Management believes that it has made
significant progress on its business plan in fiscal 1999 and to date in fiscal
2000. Significant actions in this progress include commencing operations of
INET, resolving the class action lawsuit (See Note 7) and recently raising
additional equity investment (see Notes 8, 16 and 17). However, the Company
remains constrained in its ability to access outside sources of capital until
such time as the Company is able to demonstrate higher levels of sales and more
favorable operating results. Management believes that it will be able to
continue to make progress on its business plan and mitigate the risks associated
with its business, industry and current lack of working capital.

     In fiscal 1999, the Company raised $6.3 million, net of fees, from the
issuance of 700 shares of 5% Series A Convertible Preferred Stock (see Note 8).
These funds, together with operating cash on hand at the end of the prior fiscal
year and increases in short-term borrowings, were sufficient to finance the
Company's growth in operating activities experienced during fiscal 1999.
However, the increases in short-term debt and other current liabilities required
to support the operations resulted in a deficiency in current working capital as
at March 31, 1999 of $0.7 million.

                                       53
<PAGE>   55
                 COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 1999

     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 -- Subsequent Events);



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



     - In July 1999, the Company entered into an agreement to sell its shares of
       iCompression, Inc. (See Note 4) for $1.9 million (See Note 17 -- Post
       July 13, 1999 Events); and



     - Extended the maturity date of the $8.2 million note payable with PrinVest
       to December 2001 (See Notes 12 and 17 -- Subsequent Events).


     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 Coyote Technologies were past due on receivables, (ii) Coyote
Technologies granted certain customers extended payments terms, (iii) Coyote
Technologies' revenue growth has been lower than expected and (iv) the Company
made payments of $2,349,000 in connection with the Restructuring.


     As a result of the liquidity deficiency, the Company had become delinquent
on certain of its working capital obligations. In July and December 1997, the
Company raised $5,597,000 and $4,635,000 respectively, through equity and debt
financing (see Note 8). With completion of the equity and debt financing and the
collection of $4,400,000 of previously delinquent customer receivables and the
receipt of $2,254,000 from the exercise of Company Employee Stock Options, the
Company had more than sufficient funds to finance its operating activities in
fiscal 1998 and ended the fiscal year with an operating cash balance of
$3,700,000.


     The Company has now divested the majority of its discontinued operations
(Atlantic Provision, C&L, Valley) and is actively seeking buyers for the
remaining land and building which were formerly part of the Atlantic Provision
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 Coyote Technologies,
LLC were past due on receivables, (ii) Coyote Technologies, LLC has granted
certain customers extended payment terms, (iii) Coyote Technologies', LLC
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
                                       54
<PAGE>   56
                 COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 1999


the equity and debt financings, collection of $4.4 million from Concentric
Network, pursuant to the final court agreement secured by Coyote Technologies,
LLC against this customer, and the anticipated sales of C&L, Valley and Atlantic
Provision's real estate discussed further below, management believes that it
will have sufficient resources to provide adequate liquidity to meet the
Company's planned capital and operating requirements through March 31, 1998.
Thereafter, the Company's operations will need to be funded either with funds
generated through operations or with additional debt or equity financing. If the
Company's operations do not provide funds sufficient to fund its operations and
the Company seeks outside financing, there can be no assurance that the Company
will be able to obtain such financing when needed, on acceptable terms or at
all.


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


NOTE 16 -- SUBSEQUENT EVENTS


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

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

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


     In July 1999, the Company sold its shares of iCompression, Inc. (See Note
4) for $1.9 million.



NOTE 17 -- POST JULY 13, 1999 EVENTS



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



     1. In September 1999, the Company sold its interest in American Gateway by
        transferring all assets and liabilities to PrinVest Corp., reporting a
        gain of $6.2 million. In connection with this sale, PrinVest cancelled
        the $8.2 million outstanding principal amount of Notes of American
        Gateway owed to PrinVest.



     2. In November 1999, the Commission advised the Company that it had dropped
        its investigation regarding its sales to Crescent Communications,
        described in Note 7. The Company does not know


                                       55
<PAGE>   57
                 COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 1999


        the status of the Nasdaq inquiry and Nasdaq has not contacted the
        Company regarding the matter since May 1999.



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



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



     5. In January 2000, the Company restructured its management team and
        business strategy. In connection therewith, the Company issued 2,000,000
        shares of common stock to a consulting firm and issued options to
        purchase 750,000 shares of common stock at $5.00 per share to James R.
        McCullough, the Company's new Chief Executive Officer.



     6. In March 2000, four of our customers completed third party lease
        contracts in respect of $14.2 million of switching equipment previously
        shipped under extended payment terms. We received payments of $10.0
        million and $1.5 million in March 2000 and April 2000, respectively.



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


                                       56
<PAGE>   58


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


     (a) Previous independent accountants

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

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

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

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

     During the audit of the fiscal 1997 financial statements a difference of
opinion arose relating to the audit procedures necessary with respect to certain
customer sales, including Concentric Network Corporation. The difference of
opinion was with respect to the timing and manner of further Price Waterhouse
LLP direct contact in addition to written receivable confirmation requests with
our customers and management's concern regarding both pending legal proceedings
with customers and/or potential adverse effect on our customer relationships.
After further discussion, the manner of the customer contact was mutually agreed
upon and the initial disagreement thus promptly (within 1 day) resolved. No
disagreements in accounting related to these sales arose. The Audit Committee
discussed the subject matter of this disagreement with Price Waterhouse LLP. We
have authorized Price Waterhouse LLP to respond fully to the inquiries of its
successor auditors concerning the subject matter of this disagreement.

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

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

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

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

                                       57
<PAGE>   59

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

                        FISCAL YEAR ENDED MARCH 31, 1997
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


<TABLE>
<CAPTION>
                                                                     12 WEEKS ENDED
                                                     ----------------------------------------------
                                                       OCTOBER 12, 1996          JANUARY 4, 1997
                                                     ---------------------    ---------------------
                                                     ORIGINALLY               ORIGINALLY
                                                      REPORTED     REVISED     REPORTED     REVISED
                                                     ----------    -------    ----------    -------
<S>                                                  <C>           <C>        <C>           <C>
Net sales..........................................   $ 4,046      $ 3,666     $ 4,337      $ 2,552
Gross profit (loss)................................     3,034        2,775       3,057        1,842
Net loss...........................................   $(4,598)     $(4,737)    $(4,001)     $(5,936)
Net loss per common share..........................   $  (.87)     $  (.90)    $  (.76)     $ (1.12)
</TABLE>


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

          (2) In addition to the matter reported in (v)(1) above, it was also
     noted that internal control weaknesses existed, which did not result in
     revisions to previously reported financial information, relative to
     insufficient identification and control surrounding Sattel's maintenance of
     detailed historical cost and accumulated depreciation information by
     individual asset, and that the timeliness and quality of account
     reconciliations and supporting analysis requires improvement in order to
     ensure that procedures are in place to support expected increases in
     transaction volumes anticipated by us.

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

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

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

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

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

     (b) New independent accountants

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

                                       58
<PAGE>   60


                                    PART III


ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

  Identification of Directors


     Our board of directors is divided into three classes of directors,
consisting of one class of two members and two classes of one member each, or
four members in the aggregate. The term of each class is three years. The board
of directors currently consists of four members, James R. McCullough, Daniel W.
Latham, John M. Eger and J. Thomas Markley.



     The following table sets forth certain information with respect to each
person who is currently a director of us, and the individual nominated and
recommended to be elected to our board of directors and is based on our records
and information furnished to us by such persons. Reference is made to "Security
Ownership of Certain Beneficial Owners and Management" for information
pertaining to stock ownership by each of our directors and executive officers.



<TABLE>
<CAPTION>
                   NAME                      AGE                    POSITION
                   ----                      ---                    --------
<S>                                          <C>   <C>
John M. Eger...............................  60    Director
Daniel W. Latham...........................  51    President, Chief Operating Officer and
                                                   Director
J. Thomas Markley..........................  67    Director
James R. McCullough........................  32    Chief Executive Officer and Director
</TABLE>



                       NOMINEE FOR ELECTION AS A DIRECTOR


                           WITH TERM EXPIRING IN 2002



     DANIEL W. LATHAM, age 51, has served as our director since November 1996.
He has served as our President and Chief Operating Officer since November 1996
and President of Coyote Technologies, LLC ("CTL") since September 1995. Prior to
his association with CTL, Mr. Latham was the President of Frontier
Communications Long Distance Company.



                     DIRECTORS WITH TERMS EXPIRING IN 2001



     J. THOMAS MARKLEY, age 67, has served as our director since September 1999,
and previously served as an advisor to our board of directors. Mr. Markley has
served as President of JTM, Inc., a consulting firm specializing in senior
management consulting for telecommunications, data communications and electric
utilities, since July 1989. Previously, Mr. Markley was Senior Vice President,
Telecommunications Operations and Planning for SALIENT(3) Communications, Inc.,
a telecommunications company that designs, manufactures and markets equipment
for communications network operators worldwide. Mr. Markley also held senior
management positions with Raytheon, a leading diversified technology company, as
Corporate Vice President, President of Raytheon Data Systems and President of
Raytheon Worldwide. Prior to Raytheon, Mr. Markley was Deputy Program Manager of
NASA's Apollo Program. Mr. Markley has served on the President's Science
Advisory Council, as a member of the Space Defense Initiative Committee and as
an examiner for the Malcolm Baldridge National Quality Award.



     JAMES R. MCCULLOUGH, age 32, has served as our director and as our Chief
Executive Officer since February 2000. Mr. McCullough's principal occupation
prior to joining us was as a Co-President of Renwick Corporate Finance, Inc., a
consulting company, from 1996 to the present. From 1994 to 1997, Mr. McCullough
was the general partner of an investment fund focusing on early stage technology
companies.



                      DIRECTOR WITH TERM EXPIRING IN 2000



     JOHN M. EGER, age 60, has served as our director since February 2000. As a
telecommunications lawyer, Mr. Eger is a professor at San Diego State University
where he serves as the Lionel Van Deerlin Endowed Chair of Communications and
Public Policy and Executive Director of the University's International Center

                                       59
<PAGE>   61


for Communications. Earlier, Mr. Eger established CBS Broadcast International
and was Senior Vice President of the CBS Broadcast group. From 1971 - 1973, he
was legal assistant to the chairman of the Federal Communications Commission,
and from 1974 - 1976, served as Telecommunications Advisor to Presidents Nixon
and Ford and Head of the White House Office of Telecommunications Policy. Mr.
Eger also serves as a director of GTC Telecom Corp.



  Identification of Executive Officers



     Information is set forth below regarding each of our executive officers who
do not also serve as directors, including their age, principal occupation during
the last five years and the date each first became an executive officer.



<TABLE>
<CAPTION>
                   NAME                     AGE                     POSITION
                   ----                     ---                     --------
<S>                                         <C>    <C>
Timothy G. Atkinson.......................  43     Vice President of Business Development and
                                                   General Counsel and Secretary
Cheryl Johnson............................  40     Controller and Principal Finance and
                                                   Accounting Officer
</TABLE>



     TIMOTHY G. ATKINSON, age 43, has served as our Vice President of Business
Development and General Counsel since April 2000 and as our Secretary since May
2000. Prior to joining us, Mr. Atkinson was in private practice as a shareholder
and Managing Partner of the Denver office of Reinhart, Boerner, Van Deuren,
Norris & Rieselbach from April 1991 to May 2000.



     CHERYL JOHNSON, age 40, has served as our Controller and Principal Finance
and Accounting Officer since June 2000 and has served as the Chief Financial
Officer of our wholly owned subsidiary, INET Interactive Network Systems, Inc.
since March 2000. From January 1998 to January 2000, Ms. Johnson served as the
Chief Financial Officer of G&H Technology, Inc. Before joining G&H Technology,
Inc., Ms. Johnson was a Senior Manager with Ernst & Young, LLP from March 1995
to January 1998. Ms. Johnson is a certified public accountant with 16 years of
accounting, financial and business management experience working with public and
privately held companies.


  Section 16(a) Beneficial Ownership Reporting Compliance


     Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
our directors and executive officers, and persons who beneficially own more than
ten percent of a registered class of our equity securities, to file with the
Securities and Exchange Commission (the "Commission") initial reports of
ownership and reports of changes in ownership of our common stock and our other
equity securities. Officers, directors, and persons who beneficially own more
than ten percent of a registered class of our equity securities are required by
the regulations of the Commission to furnish us with copies of all Section 16(a)
forms they file. To our knowledge, based solely on review of the copies of such
reports furnished to us, during the fiscal years ended March 31, 1999 and 2000,
all Section 16(a) filing requirements applicable to our officers, directors, and
greater than ten percent beneficial owners were complied with, except that
transactions that should have been reported on Forms 5 for the fiscal years
ended March 31, 1997 and/or March 31, 1998 were reported on Forms 5 for the
fiscal year ended March 31, 1999 for each of Stephen W. Portner, Sydney B.
Lilly, Jack E. Donnelly, Brian A. Robson and James J. Fiedler, and transactions
that should have been reported on Forms 3 and 4 during the fiscal years ended
March 31, 1997 and March 31, 1998 for Alan J. Andreini were reported on Form 5
for the fiscal year ended March 31, 1999. In addition, the Form 3 that should
have been filed by Alan J. Andreini during the fiscal year ended March 31, 1997
was filed on April 5, 1999.


                                       60
<PAGE>   62

ITEM 11. EXECUTIVE COMPENSATION

     All shares and per share numbers included herein have been retroactively
adjusted to give effect to a 5% stock dividend which was paid on November 4,
1998 to holders of record as of October 21, 1998.


     The following table sets forth, for the three fiscal years ended March 31,
1999, the total annual compensation paid to, or accrued by us for the account
of, James J. Fiedler, Daniel W. Latham and Brian A. Robson (the "Named
Executives") serving as such at March 31, 1999 and one former executive officer:



                           SUMMARY COMPENSATION TABLE



<TABLE>
<CAPTION>
                                                                                 LONG-TERM
                                              ANNUAL COMPENSATION               COMPENSATION
                                      ------------------------------------   ------------------
          NAME AND                                          OTHER ANNUAL         SECURITIES        ALL OTHER
    PRINCIPAL POSITION(1)      YEAR    SALARY     BONUS    COMPENSATION(6)   UNDERLYING OPTIONS   COMPENSATION
    ---------------------      ----   --------   -------   ---------------   ------------------   ------------
<S>                            <C>    <C>        <C>       <C>               <C>                  <C>
James J. Fiedler(2)..........  1999   $300,000   $ 9,335       $20,000             94,500(7)        $  7,200(9)
  Former Chairman, CEO         1998   $200,000   $19,746       $15,000                 --           $  7,200(9)
  and Director                 1997   $200,000        --       $ 3,720                 --                 --
Daniel W. Latham(3)..........  1999   $300,000   $ 9,335       $20,000             94,500(7)        $  7,200(9)
  President, COO and Director  1998   $175,000   $19,746       $15,000                 --           $  7,200(9)
                               1997   $175,000        --       $ 3,750                 --           $170,197(10)
Brian A. Robson(4)...........  1999   $152,487   $12,875            --             98,125(8)              --
  Former Executive Vice        1998   $139,907        --            --             13,125           $ 21,921(11)
  President, CFO and
    Secretary                  1997   $ 56,250        --            --                              $ 13,041(11)
Edward Beeman(5).............  1999   $ 79,526        --            --                 --           $ 53,548(12)
  Former Executive Vice        1998         --        --            --                 --                 --
  President, CFO and
    Secretary                  1997         --        --            --                 --                 --
</TABLE>


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

 (1) As a result of the changes in our management in January 2000, there will be
     significant differences in the executive compensation for our fiscal year
     ending March 31, 2000. As described in our Current Report on Form 8-K,
     dated as of January 25, 2000, Mr. Fiedler was succeeded as Chief Executive
     Officer by Mr. James R. McCullough.



 (2) On November 29, 1996, Mr. Fiedler was appointed as our Chairman and Chief
     Executive Officer. Mr. Fiedler also remained as Chairman and Chief
     Executive Officer of CTL. Effective as of January 26, 2000, Mr. Fielder
     resigned as Chief Executive Officer and effective as of February 29, 2000
     he resigned as Chairman of the Board and as a director. (See "Employment
     Agreements").



 (3) On November 29, 1996, Mr. Latham was appointed as our President and Chief
     Operating Officer. Mr. Latham also remained as President of CTL (See
     "Employment Agreements").



 (4) On October 31, 1996, Mr. Robson was appointed as our Vice President and
     Controller. On December 15, 1998, Mr. Robson was appointed as our Executive
     Vice President, Chief Financial Officer and Secretary. On June 15, 2000,
     Mr. Robson resigned as our Executive Vice President, Chief Financial
     Officer and Secretary.



 (5) On June 1, 1998, Mr. Beeman was appointed as our Executive Vice President,
     Chief Financial Officer and Secretary. In November 1998, Mr. Beeman's
     employment with us was terminated.



 (6) Compensation for serving on the board of directors.



 (7) Pursuant to their respective employment agreements, Messrs. Fiedler and
     Latham are entitled to receive ten year stock options to purchase a total
     of 450,000 shares of our common stock over a period of five years, to be
     granted in increments of 90,000 shares annually, at various exercise prices
     for each 90,000 share increment. As adjusted for the stock dividend, each
     90,000 share increment has been adjusted to a 94,500 share increment, and
     the exercise price of each of the five 94,500 share increments is $3.81,
     $7.62, $11.43, $15.24 and $19.05, respectively. Effective as of January 24,
     2000, by action of our board of directors, the terms of Messrs. Fiedler's
     and Latham's employment agreements were modified to provide for immediate
     acceleration of the award of 378,000 options and repricing of 94,500
     options which were awarded on April 1, 1999 at an exercise price of $7.62
     per share. All of such options are currently exercisable at an exercise
     price of $5.00 per share.


                                       61
<PAGE>   63


 (8) Stock options to purchase 13,125 shares of common stock were granted on
     June 1, 1997 at $2.86 per share. Stock options to purchase 13,125 shares of
     common stock were granted on June 1, 1998 at $3.90 per share. Stock options
     to purchase 85,000 shares of common stock were granted on December 11, 1998
     at $6.56 per share.



 (9) Represents automobile allowance.



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



(11) Represents relocation assistance paid by us.



(12) Represents automobile allowance and relocation assistance paid by us.


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


                     OPTIONS GRANTED IN LAST FISCAL YEAR(1)



<TABLE>
<CAPTION>
                                                            INDIVIDUAL GRANTS
                          -------------------------------------------------------------------------------------
                                                                                        POTENTIAL REALIZABLE
                                                                                          VALUE AT ASSUMED
                                                  % OF                                     ANNUAL RATE OF
                                              TOTAL OPTIONS                           STOCK PRICE APPRECIATION
                              NUMBER OF        GRANTED TO                                FOR OPTION TERM(2)
                          SHARES UNDERLYING   EMPLOYEES IN    EXERCISE   EXPIRATION   -------------------------
                           OPTIONS GRANTED     FISCAL YEAR     PRICE        DATE          5%            10%
                          -----------------   -------------   --------   ----------   -----------   -----------
<S>                       <C>                 <C>             <C>        <C>          <C>           <C>
James J. Fiedler........       94,500(3)           9.3%        $3.81      04/01/08      $226,430      $573,819
Daniel W. Latham........       94,500(3)           9.3%        $3.81      04/01/08      $226,430      $573,819
Brian A. Robson.........       13,125(4)           1.3%        $3.90      06/01/03      $ 14,142      $ 31,250
                               85,000(5)           8.3%        $6.56      12/11/03      $154,055      $340,420
</TABLE>


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

(1) As a result of the changes in our management in January 2000, there will be
    significant differences in the options granted for our fiscal year ending
    March 31, 2000. As described in our Current Report on Form 8-K, dated as of
    January 25, 2000, Mr. Fiedler was succeeded as Chief Executive Officer by
    Mr. James R. McCullough. In addition, Mr. Robson resigned as our Executive
    Vice President, Chief Financial Officer and Secretary effective June 15,
    2000.



(2) The dollar amounts under these columns are the results of calculations at
    the 5% and 10% rates set by the Securities and Exchange Commission. The
    potential realizable values are not intended to forecast possible future
    appreciation, if any, in the market price of the common stock.



(3) Effective as of January 24, 2000, by action of our Board of Directors, the
    terms of Messrs. Fiedler's and Latham's employment agreements were both
    modified to provide for immediate acceleration of the award of 378,000
    options, including the repricing of 94,500 options which were originally
    awarded on April 1, 1999 at an exercise price of $7.62 per share. All of
    these options are currently exercisable at an exercise price of $5.00 per
    share. Assuming the $5.00 per share exercise price, the Potential Realizable
    Value at Assumed Annual Rate of Stock Price Appreciation for Option Term
    would be $1,188,610 and $3,012,173 for 5% and 10%, respectively.



(4) These options vest annually in one-third increments commencing June 1, 1999.



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



    AGGREGATED OPTION EXERCISES DURING THE FISCAL YEAR ENDED MARCH 31, 1999
                       AND FISCAL YEAR END OPTION VALUES



     The table below provides information regarding the value of the
in-the-money stock options held by the Named Executives at March 31, 1999. The
Named Executives did not exercise any stock options during the fiscal year. As a
result of the changes in our management in January 2000, there will be
significant differences in the options granted for our fiscal year ending March
31, 2000. As described in our Current Report on Form 8-K, dated as of January
25, 2000, Mr. Fiedler was succeeded as Chief Executive Officer by Mr. James


                                       62
<PAGE>   64


R. McCullough. In addition, Mr. Robson resigned as our Executive Vice President,
Chief Financial Officer and Secretary on June 15, 2000.


<TABLE>
<CAPTION>
                                                                                 VALUE OF UNEXERCISED
                                                NUMBER OF UNEXERCISED            IN-THE-MONEY OPTIONS
                                              OPTIONS AT MARCH 31, 1999          AT MARCH 31, 1999(1)
                                             ----------------------------    ----------------------------
                                             EXERCISABLE    UNEXERCISABLE    EXERCISABLE    UNEXERCISABLE
                                             -----------    -------------    -----------    -------------
<S>                                          <C>            <C>              <C>            <C>
James J. Fiedler...........................        --           94,500              --        $195,615
Daniel W. Latham...........................        --           94,500              --        $195,615
Brian A. Robson............................     4,375          106,875         $13,212        $ 52,412
</TABLE>

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

(1) Value based on the closing price of $5.88 of the common stock on The Nasdaq
    National Market on March 31, 1999, less the option exercise price. Does not
    include, as to Messrs. Fiedler and Latham, an aggregate of 378,000 options
    each, which vested in January 2000 pursuant to a modification of their
    respective employment agreements. If such options were added, the value of
    such unexercisable in-the-money options for Messrs. Fiedler and Latham would
    increase to $582,255 for each, as the exercise prices of such grants were
    repriced at $5.00 per share.


  Stock Option Plans


     On December 11, 1986, the board of directors adopted our 1986 Non-Qualified
Stock Option Plan (the "1986 Plan"). The 1986 Plan, as amended, provides for the
grant of options to purchase up to 832,963 shares of common stock to our
executive officers, key officers, employees, directors and consultants and those
of our subsidiaries. In February 1998, the board of directors adopted our
Non-Employee Director Stock Option Plan (the "Director Plan"). The Director Plan
provides for the grant of options to purchase up to 157,500 shares of common
stock to our non-employee directors. In March 1996, the board of directors
adopted the Employees Non-Qualified Stock Option Plan of CTL (the "CTL Plan").
The CTL Plan provides for the grant of options to purchase up to 2,100,000
shares of common stock to our executive officers, key employees, directors,
consultants and advisors, those of our affiliates and subsidiaries. On March 8,
2000, the board of directors adopted, and at the annual meeting of stockholders,
the stockholders will be asked to approve, our 2000 Equity Incentive Plan (the
"Equity Plan"). The Equity Plan provides for the grant of options to purchase up
to 4,000,000 shares of common stock to our directors, officers, key employees
and consultants and those of our subsidiaries.



     As of June 19, 2000, options to purchase 592,463, 157,500 and 2,100,000
shares of common stock have been granted under the 1986 Plan, the Director Plan
and the CTL Plan, respectively. As of June 19, 2000, 442,956, 0 and 1,291,160
shares of common stock have been issued pursuant to the exercise of options
under the 1986 Plan, the Director Plan and the CTL Plan, respectively. As of
June 13, 2000, subject to stockholder approval, options to purchase 911,500
shares of common stock have been granted under the Equity Plan. No shares have
been issued pursuant to the exercise of options under the Equity Plan. Any
unexercised options that expire in accordance with their terms or terminate upon
a director's resignation or an employee's ceasing to be employed by us, our
affiliates or subsidiaries become available again for issuance under the 1986
Plan, the Director Plan, the CTL Plan or the Equity Plan, as the case may be.



     In April 1998, stock options to purchase 10,500 shares of our common stock
were granted to each of the non-employee members of the board of directors
pursuant to the Director Plan. These options have an exercise price of $3.42 per
share. In September 1999, stock options to purchase 21,000 shares of our common
stock were granted to J. Thomas Markley pursuant to the CTL Plan. These options
have an exercise price of $4.40 per share.



     In January 2000, stock options to purchase 750,000 shares of our common
stock were granted to James R. McCullough. Of such options, 300,000 vested
immediately and the balance vest in three installments of 100,000, 150,000 and
200,000 on January 14, 2001, 2002 and 2003, respectively. These options have an
exercise price of $5.00 per share.


                                       63
<PAGE>   65


     In January 2000, stock options to purchase 50,000 shares of our common
stock were granted, subject to stockholder approval, to one of our independent
directors, J. Thomas Markley, and to former directors Stephen W. Portner and
Jack E. Donnelly, pursuant to the Equity Plan and the Director Plan. These
options are fully vested and have an exercise price of $5.00 per share. In
February 2000, stock options to purchase 50,000 shares of our common stock were
granted, subject to stockholder approval, to one of our independent directors,
John M. Eger, pursuant to the Equity Plan. Such options are fully vested and
have an exercise price of $5.50 per share.


  Employment Agreements


     On April 1, 1998, we entered into employment agreements, expiring on March
31, 2003, with Mr. Fiedler and Mr. Latham (the "Executives"). Pursuant to their
employment agreements, the Executives will receive a guaranteed minimum annual
salary of $300,000 or an amount based on a percentage of our pre-tax income,
whichever is greater, with a maximum salary of $4.5 million. The Executives
shall also receive deferred compensation for five years following each
Executive's five-year employment term (the "Employment Term") based on a
percentage of our pre-tax income during each year of the Employment Term;
however, deferred compensation shall not exceed $600,000 per year. The
employment agreements also provide that the Executives will not compete with us
for one year following the termination of their respective employment. By action
of our board of directors on January 24, 2000, certain terms of the employment
agreements were modified to provide for the following: (i) 94,500 unvested
options previously awarded to each of the Executives pursuant to the employment
agreements were repriced at an exercise price of $5.00 per share and became
immediately exercisable, (ii) immediate award of their remaining entitlement of
283,500 options as currently exercisable at $5.00 per share; (iii) medical
benefits were extended to June 30, 2006, and (iv) payment of a cash incentive of
$150,000 to each Executive if they remain with us through July 24, 2000, or if
they are terminated.



     Mr. Fiedler relinquished his duties as our Chief Executive Officer and
retired from our board of directors, effective as of January 26, 2000 and
February 29, 2000, respectively. In accordance with the terms of Mr. Fiedler's
employment agreement and the separation agreement entered into between us and
Mr. Fiedler on February 16, 2000, we will pay Mr. Fiedler severance payments
through March 31, 2003 at his present salary. In addition, in lieu of the
$150,000 incentive payment referenced above, we will grant to Mr. Fiedler
200,000 immediately vested options to purchase common stock at an exercise price
of $5.00 per share.



     On January 26, 2000, we appointed James R. McCullough as our Chief
Executive Officer to succeed Mr. Fiedler. Also on January 26, 2000, we entered
into an employment agreement with Mr. McCullough pursuant to which he will
receive a salary of $160,000 per annum and options to purchase up to 750,000
shares of common stock at $5.00 per share. Of such options, 300,000 vested
immediately and the balance vest in three installments of 100,000, 150,000 and
200,000 on January 14, 2001, 2002 and 2003, respectively. The options will
immediately vest upon a change in control and the vesting will be accelerated if
certain common stock price targets are met and sustained. If Mr. McCullough is
terminated by us without cause or Mr. McCullough terminates the agreement for
good cause, he is entitled to receive his base salary for a period of six months
and the vesting schedule for the options will remain in effect. If Mr.
McCullough voluntarily terminates the agreement or is terminated by us for
cause, he is not entitled to any additional compensation after the termination
date and all unvested options will terminate. The agreement also provides that
Mr. McCullough will meet with the Audit Committee no later than six months after
the execution of the agreement to discuss adjusting Mr. McCullough's
compensation. In June 2000, Mr. McCullough met with the Audit Committee and the
Board of Directors approved the Audit Committee's recommendation to award Mr.
McCullough additional compensation based on Mr. McCullough's performance over
the preceding five months. Specifically, Mr. McCullough was granted an option to
purchase 750,000 shares of Common Stock at an exercise price of $7.00 per share.
The option was in three equal blocks of 250,000 each when the closing bid price
of the Common Stock for 20 consecutive trading days exceeds $12.00, $16.00 and
$20.00 per share, respectively. In addition, the vesting provisions will be
accelerated if Mr. McCullough is terminated without cause or there is a change
in control of the Company.


                                       64
<PAGE>   66


     On April 15, 2000, we entered into an employment agreement with Mr.
Atkinson pursuant to which he will receive a salary of $180,000 per annum and
options to purchase 150,000 shares of common stock at $9.00 per share and
options to purchase 100,000 shares of common stock at $7.00 per share. These
options vest and become exercisable in three equal installments on October 15,
2000, April 15, 2001 and October 15, 2001. The options will immediately vest
upon a change in control. If Mr. Atkinson is terminated by us without cause or
Mr. Atkinson terminates the agreement for good cause, he is entitled to receive
his base salary for a period of six months and the vesting schedule for the
options will remain in effect. If Mr. Atkinson voluntarily terminates the
agreement or is terminated by us for cause, he is not entitled to any additional
compensation after the termination date and all unvested options will terminate.
Mr. Atkinson also received, as a signing bonus, $50,000 and 25,000 shares of
common stock.



     Effective June 15, 2000, we entered into a separation agreement with Mr.
Robson. Under the agreement, Mr. Robson resigned as our Executive Vice
President, Chief Financial Officer and Secretary effective June 15, 2000. Under
the terms of the agreement, Mr. Robson is entitled to receive $15,000 per month
through October 31, 2000 and medical, dental and life insurance benefits through
August 31, 2001. In addition, all unvested options became fully vested and Mr.
Robson received a fully-vested option to purchase 50,000 shares of common stock
at an exercise price of $5.00 per share. Mr. Robson has also agreed to provide
us with consulting services with respect to the preparation of our Securities
and Exchange Commission filings.


  Compensation of Directors


     Directors receive an annual fee of $15,000, paid on a monthly basis.
Directors are also reimbursed for travel expenses. In addition, directors
receive up to $1,250 per day for each meeting attended (board or committee).
Non-employee directors (including retired directors as determined by the board
of directors) receive supplemental medical reimbursement to pay all medical
expenses for them and their immediate families (spouses and unemancipated
children) up to a limit of $25,000 per year. In addition, effective as of
February 2, 2000 and subject to stockholder approval, we have granted
immediately exercisable options to purchase 50,000 shares of the common stock to
each of our non-employee directors at an exercise price of $5.00 per share.


  Compensation Committee Interlocks and Insider Participation


     The board of directors does not have a compensation committee because
executive compensation decisions are made by the full board. Recommendations on
executive compensation with regard to Messrs. Fiedler and Latham are made by the
outside non-employee directors when requested to do so by the full board. All
directors participate in the deliberations.



     From November 1996 until January 26, 2000, when he was succeeded by Mr.
McCullough, Mr. Fiedler served as our Chairman and Chief Executive Officer. Mr.
Latham is the Company's President and Chief Operating Officer. Messrs. Fiedler's
and Latham's fiscal 1999 compensation and employment contracts are described
above.


                                       65
<PAGE>   67

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT


     The following table sets forth certain information as of June 19, 2000
regarding the beneficial ownership of our common stock by (a) each person known
by us to own beneficially more than 5% of our common stock, (b) each of our
directors and the Named Executives, and (c) all our directors and executive
officers as a group. Except as otherwise indicated and subject to community
property laws where applicable, the persons named in the table below have sole
voting and dispositive power with respect to the shares of common stock shown as
beneficially owned by them. Information as to Alan J. Andreini and Kiskiminetas
Springs School was derived from the Schedules 13D and 13G filed by each such
stockholder. Information as to Richard L. Haydon was derived from the Schedule
13D filed by Mr. Haydon on March 20, 2000, as well as information provided to us
by Mr. Haydon. Except for the percentage of ownership, the information set forth
below reflects the information contained in the Schedule 13G and/or 13D as of
the date such Schedule 13G or 13D was filed, where applicable.



<TABLE>
<CAPTION>
                                                                                        PERCENT OF
                   NAME AND ADDRESS                      NUMBER OF SHARES               OUTSTANDING
                 OF BENEFICIAL OWNER                    BENEFICIALLY OWNED                SHARES
                 -------------------                    ------------------              -----------
<S>                                                     <C>                             <C>
James R. McCullough(1)................................        578,278(2)                    3.3%
James J. Fiedler(1)...................................      1,020,288(3)                    5.7%
Daniel W. Latham(1)...................................        610,313(4)                    3.4%
J. Thomas Markley(1)..................................         60,000(5)                      *
John M. Eger(1).......................................         50,000(6)                      *
Brian A. Robson(1)....................................        161,251(7)                      *
Alan J. Andreini(8)...................................      1,467,645(9)                    8.4%
Richard L. Haydon(10).................................      1,517,230(11)                   8.4%
Kiskiminetas Springs School(12).......................        969,710(13)                   5.6%
Omega Capital Advisers(14)............................      2,052,632(15)                  11.8%
All directors and executive officers of the Company as
  a group (6 persons).................................      1,423,591(2)(4)(5)(6)(16)       7.7%
</TABLE>


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

  *  Less than 1%.



 (1) The address of the stockholder is: c/o Coyote Network Systems, Inc., 1640
     S. Sepulveda Blvd., Suite 320, Los Angeles, CA 90025.



 (2) Includes 300,000 shares of common stock issuable upon the exercise of stock
     options which are currently exercisable at $5.00 per share. Does not
     include 450,000 share of common stock issuable at $5.00 per share upon the
     exercise of options which vest over a period of three years, subject to
     acceleration if certain common stock price targets are met and sustained.
     In addition, includes 277,778 of the 833,344 shares of common stock held by
     KRJ, LLC, an entity in which Mr. McCullough owns a one-third equity
     interest. Mr. McCullough disclaims any beneficial ownership interest in the
     shares of common stock held by KRJ, LLC.



 (3) Includes 472,500 shares of common stock issuable upon exercise of stock
     options which are currently exercisable, subject to, in the case of options
     to purchase 378,000 shares, stockholder approval. Also includes 108,675
     shares of common stock issuable upon exercise of warrants which are
     currently exercisable. Includes 192,938 shares of common stock received by
     the stockholder upon conversion of Class B Units of Coyote Technologies,
     LLC ("CTL") on June 24, 1999 and 75,075 shares received by the stockholder
     upon exercise of warrants on September 8, 1999.



 (4) Includes 472,500 shares of common stock issuable upon exercise of stock
     options which are currently exercisable, subject to, in the case of options
     to purchase 378,000 shares, stockholder approval. Includes 137,813 shares
     of common stock received by the stockholder upon conversion of Class B
     Units of CTL on July 7, 1999 and September 2, 1999.



 (5) Includes 60,000 shares of common stock issuable upon exercise of stock
     options which are currently exercisable, subject to, in the case of options
     to purchase 50,000 shares, stockholder approval.


                                       66
<PAGE>   68


 (6) Includes 50,000 shares of common stock issuable upon exercise of stock
     options which are currently exercisable, subject to, in the case of all
     such options, stockholder approval.



 (7) Includes 161,251 shares of common stock issuable upon exercise of stock
     options which are currently exercisable, subject to, in the case of options
     to purchase 50,000 shares, stockholder approval.


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


 (9) Includes 1,101,010 shares of common stock held by Mr. Andreini for his own
     account. Includes 145,700 shares held in the account of Kiskiminetas
     Springs School (the "School"), 24,950 shares held in the account of John D.
     Andreini (who is deceased) and Blanche M. Andreini (the "Parents"), 95,650
     shares held in the account of The Andreini Foundation (the "Foundation")
     and 2,625 shares held for the benefit of Alan J. Andreini, Jr. (the "Son"),
     of which Mr. Andreini may be deemed to be the beneficial owner. Mr.
     Andreini disclaims beneficial ownership of all shares of common stock
     except those shares held by him for his own account and for the benefit of
     the Son. Mr. Andreini has sole voting and dispositive power over 1,199,285
     shares of common stock (includes 1,101,010 shares held by Mr. Andreini for
     his own account, 95,650 shares held in the account of the Foundation and
     2,625 shares held in the account of the Son). Mr. Andreini has shared
     voting and dispositive power over 170,650 shares of common stock (includes
     145,700 shares held in the account of the School and 24,950 shares held in
     the account of the Parents).



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



(11) Includes 830,980 shares of common stock held in various managed
     discretionary accounts of which Mr. Haydon may be deemed to be the
     beneficial owner. Includes 686,250 shares of common stock issuable upon
     exercise of warrants which are currently exercisable, held by various
     discretionary accounts, of which Mr. Haydon may be deemed to be the
     beneficial owner. Based upon information supplied by this stockholder (in
     addition to the information derived from Mr. Haydon's Schedule 13D, filed
     on March 20, 2000), Mr. Haydon has sole voting and dispositive power over
     1,517,230 shares of common stock.



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



(13) According to the Schedule 13D filed on February 10, 2000, by Kiskiminetas
     Spring School, the School beneficially owns 969,710 shares of common stock.



(14) The address of Omega Capital Advisers is 88 Pine Street, 31st Floor, New
     York, New York 10005.



(15) Includes 1,052,632 shares of common stock purchased by the Stockholder in a
     private placement in January 2000.



(16) Includes 1,007,500 shares of common stock issuable upon exercise of stock
     options and shares of common stock granted but not outstanding as of June
     19, 2000. Of such shares, 478,000 are subject to stockholder approval. Does
     not include 800,000 shares of common stock issuable upon exercise of stock
     options not currently exercisable. Of such shares, none are subject to
     stockholder approval. Does not include shares of common stock or options
     held by Messrs. Fielder and Robson, who are no longer executive officers of
     us, but includes shares of common stock and options to purchase common
     stock held by Mr. Atkinson and Ms. Johnson.


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS


     In January 1998, our Board of Directors approved an interest-free loan to
Daniel W. Latham, our President and Chief Operating Officer and director, for a
maximum amount of $500,000 to be used solely for the purpose of providing
partial down payments on his purchase of a residence in California. The funding
is to be secured by the residential property and is for a five-year term unless
specifically extended by the Board of Directors. Earlier repayment of the loan
will be demanded in the event of either (1) sale or refinancing of the property;
(2) termination of Mr. Latham's employment by us either voluntarily or for
cause; or (3) sale by Mr. Latham of all, or substantially all, of his shares of
our common stock. As of March 31, 1999 and 2000, $421,000 was funded to Mr.
Latham under this agreement. In October 1998, we amended the terms of the loan,
and in agreement with Mr. Latham established an annual interest rate of 6.5% to
be applied to the loan and which is payable at the completion of the term.

                                       67
<PAGE>   69


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



     In the third quarter of fiscal 1999, we completed and received funding
under two demand loans. The first loan for a total amount of $600,000 was
provided by Mr. James Fiedler, our former Chairman and Chief Executive Officer,
in the amount of $175,000, by Mr. Latham in the amount of $75,000 and by Mr.
Alan J. Andreini, a stockholder who was deemed to beneficially own approximately
8.4% of our outstanding common stock as of June 19, 2000, in the amount of
$350,000, in September and October 1999. This loan bore interest at the bank's
prime rate plus 1% per year, was repayable on demand and was secured against our
investment in Systeam, S.p.A.



     The second loan for a total amount of $1,225,000 was provided by Mr.
Richard L. Haydon, a stockholder who was deemed to beneficially own
approximately 8.4% of our outstanding common stock as of June 19, 2000, in the
amount of $500,000, by Mr. Andreini in the amount of $225,000 and by three other
stockholders in a combined total amount of $500,000, in November 1999. This loan
bore interest at the rate of 17.5% per year and was repayable, on demand by the
lenders, no earlier than March 31, 2000. The maximum term of the loan was three
years to November 2002. This loan was secured by shares of the common stock of
INET. Under the terms of this loan, the lenders were granted, pro-rata, a
combined total of 73,500 three-year warrants to purchase shares of our common
stock at an exercise price of $4.50 per share. The warrants will result in a
non-cash interest expense charge of $0.3 million taken in the fourth quarter of
fiscal 2000.



     We repaid these loans and the accrued interest in February and April 2000.



     On January 26, 2000, we entered into a Consulting Agreement with KRJ, LLC
("KRJ"), pursuant to which KRJ will provide assistance in identifying strategic
partners and business opportunities, making introductions to IP Telephony
customers, introducing new management, restructuring vendor finance programs,
investor relations, and identifying credit facilities. Mr. McCullough has an
approximately one-third interest in KRJ and the balance of KRJ is owned by
affiliates of First Venture Leasing, LLC ("First Venture"). As compensation for
KRJ's services, we issued KRJ 2,000,000 shares of common stock. Of such shares,
1,250,000 were placed in escrow to be released to KRJ in three equal annual
installments, subject to acceleration if certain Common Stock price targets are
met and sustained. In March 2000, 416,000 shares held in escrow were released to
KRJ as certain Common Stock price targets were met. The agreement also provides
that KRJ will meet with the Audit Committee no later than six months after the
execution of the agreement to discuss providing additional compensation to KRJ
based upon the services it has provided as of the date of the meeting. The terms
of the Consulting Agreement were the result of an arms' length negotiation in
which Mr. McCullough did not participate.



     In June 2000 in consideration of additional services provided under the
consulting agreement with KRJ, our Board of Directors resolved to present for
shareholder approval the issuance of 2,500,000 shares of common stock and the
grant of warrants to purchase 2,400,000 shares of common stock at an exercise
price per share of $7.00. The vesting of the shares and the exercisability of
the warrants would be dependent on the average bid price of our common stock
exceeding certain amounts that range from $12 to $30 per share.



     On March 31, 2000, we entered into a Financial Services Agreement with
First Venture, pursuant to which a limited liability company, Coyote Leasing,
LLC ("Coyote Leasing") was formed by First Venture to offer certain leasing and
credit packages to our customers. First Venture is an entity in which Mr.
McCullough, our Chief Executive Officer, had a 25% equity interest, which he
relinquished effective upon his election to our Board of Directors on February
2, 2000. As partial consideration for Coyote Leasing's commitment to fund at
least $50,000,000 in leases for our customers during the 2000 calendar year and
the purchase of $14.27 million of accounts receivable of CTL, we granted to
First Venture warrants to purchase 620,000 and 261,600 shares of our common
stock, at an exercise price of $5.00 and $7.35 per share,

                                       68
<PAGE>   70


respectively. Each warrant is exercisable for a period of three years. First
Venture initially paid us $11.5 million for the receivables with the remaining
balance of $2.77 million due and payable based upon the performance of the
leases to which the receivables relate. The terms of the agreement with First
Venture were the result of an arms' length negotiation in which Mr. McCullough
did not participate.



     Also on March 31, 2000, we entered into a Remarketing Agreement and two
separate License Agreements with Coyote Leasing, pursuant to which Coyote
Leasing will act as our agent in remarketing equipment leased to third parties
upon the termination of such leases and shall have the right to use certain
trademarks, service marks, trade names and other designations in connection with
the services to be provided by Coyote Leasing.


                                    PART IV


ITEM 14.EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K



<TABLE>
<CAPTION>
                                                                         FORM 10-K
                                                                        PAGE NUMBER
                                                                        -----------
<S>  <C>  <C>                                                           <C>
(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.................................................      24
          Report of PricewaterhouseCoopers LLP, Independent
          Accountants.................................................      25
          Consolidated Balance Sheets -- March 31, 1999 and March 31,
          1998........................................................      27
          Consolidated Statements of Operations -- Fiscal Years Ended
          March 31, 1999, March 31, 1998 and March 31, 1997...........      28
          Consolidated Statements of Shareholders' Equity -- Fiscal
          Years Ended March 31, 1999, March 31, 1998 and March 31,
          1997........................................................      29
          Consolidated Statements of Cash Flows -- Fiscal Years Ended
          March 31, 1999, March 31, 1998 and March 31, 1997...........      30
          Notes to Consolidated Financial Statements..................      31
     (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..................................................      75
          Schedule II -- Valuation and Qualifying Accounts............      80
          All other schedules are omitted because the required
          information is not applicable 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.
</TABLE>


                                       69
<PAGE>   71


(C) EXHIBITS



<TABLE>
<CAPTION>
    EXHIBIT
    NUMBER                            DESCRIPTION
    -------                           -----------
    <C>       <S>
      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 dated September 30, 1998 filed on
              October 15, 1998).
      3.1     Restated Certificate of Incorporation (incorporated herein
              by reference to Exhibit 3.01 of Registrant's Form 10-Q for
              the quarter ended September 30, 1998 filed on November 16,
              1998).
      3.2     By-Laws of Registrant, as amended March 7, 1997
              (incorporated herein by reference to Exhibit 3.2 of
              Registrant's Form 10-K for the fiscal year ended March 31,
              1997).
      3.3     Certificate of Designations, Preferences and Rights of
              Series B Preferred Stock (incorporated herein by reference
              to Exhibit 4.2 of Registrant's Form 8-K dated January 31,
              2000 filed on February 14, 2000).
      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
              (incorporated herein by reference to Exhibit 4.5 of
              Registrant's Form 10-K for the fiscal year ended March 31,
              1997 filed on September 23, 1977).
      4.6     First Amendment to Loan and Security Agreement by and
              between Valley Communications, Inc. and Sanwa Business
              Credit Corporation dated May 29, 1997 (incorporated herein
              by reference to Exhibit 4.6 of Registrant's Form 10-K for
              the fiscal year ended March 31, 1997 filed on September 23,
              1977).
      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 relating to common
              stock issuable upon conversion of 8% Convertible Notes
              (incorporated herein by reference to Exhibit 4.3 of
              Registrant's Form 8-K dated December 22, 1997 filed on
              January 5, 1998).
     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).
</TABLE>


                                       70
<PAGE>   72


<TABLE>
<CAPTION>
    EXHIBIT
    NUMBER                            DESCRIPTION
    -------                           -----------
    <C>       <S>
     4.11     Waiver of Events of Default for Sanwa Business Credit
              Corporation to C&L Communications, Inc. dated September 1,
              1997 (incorporated herein by reference to Exhibit 4.11 of
              Registrant's Form 10-K for the fiscal year ended March 31,
              1997 filed on September 23, 1977).
     4.12     Second Amendment to Loan and Security Agreement by and
              between Valley Communications, Inc. and Sanwa Business
              Credit Corporation dated September 16, 1997 (incorporated
              herein by reference to Exhibit 4.12 of Registrant's Form
              10-K for the fiscal year ended March 31, 1997 filed on
              September 23, 1977).
     4.13     Stock and Warrant Purchase Agreement dated June 6, 1997 by
              and between Coyote Network Systems, Inc. and James J.
              Fiedler (incorporated herein by reference to Exhibit 4.13 of
              Registrant's Form 10-K for the fiscal year ended March 31,
              1997 filed on September 23, 1977).
     4.14     Warrant issued to James J. Fiedler dated June 6, 1997 to
              purchase shares of common stock of Coyote Network Systems,
              Inc. (incorporated herein by reference to Exhibit 4.14 of
              Registrant's Form 10-K for the fiscal year ended March 31,
              1997 filed on September 23, 1977).
     4.15     Registration Rights Agreement dated June 6, 1997 by and
              among The Diana Corporation and James J. Fiedler
              (incorporated herein by reference to Exhibit 4.15 of
              Registrant's Form 10-K for the fiscal year ended March 31,
              1997 filed on September 23, 1977).
     4.16     Form of Subscription Agreement for shares of common stock
              (incorporated herein by reference to Exhibit 4.1 of
              Registrant's Form 8-K dated May 27, 1999 filed on June 3,
              1999).
     4.17     Share Purchase Warrant Agreement to purchase 325,000 shares
              of common stock issued to JNC Opportunity Fund, Ltd.
              (incorporated herein by reference to Exhibit 4.2 of
              Registrant's Form 8-K/A dated May 27, 1999 filed on June 22,
              1999).
     4.18     Cross Receipt and Agreement between Coyote Network Systems,
              Inc. and JNC Opportunity Fund, Ltd. (incorporated herein by
              reference to Exhibit 4.3 of Registrant's Form 8-K dated May
              27, 1999 filed on June 3, 1999).
     4.19     Registration Rights Agreement dated as of August 31, 1998
              between Coyote Network Systems, Inc. and JNC Opportunity
              Fund Ltd. (incorporated herein by reference to Exhibit B of
              Exhibit 10.03 of Registrant's Form 10-Q for the quarter
              ended September 30, 1998 filed November 16, 1998).
     4.20     Warrant dated August 31, 1998 to purchase 225,000 shares of
              common stock issued to JNC Opportunity Fund Ltd.
              (incorporated herein by reference to Exhibit D of Exhibit
              10.03 of Registrant's Form 10-Q for the quarter ended
              September 30, 1998 filed November 16, 1998).
     10.1     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).
     10.2     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).
     10.3     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).
     10.4     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).
</TABLE>


                                       71
<PAGE>   73


<TABLE>
<CAPTION>
    EXHIBIT
    NUMBER                            DESCRIPTION
    -------                           -----------
    <C>       <S>
     10.5     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).
     10.6     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).
     10.7     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).
     10.8     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).
     10.9     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).
    10.10     Separation Agreement dated November 20, 1996 by and between
              The Diana Corporation and Richard Y. Fisher (incorporated
              herein by reference to Exhibit 10.6 of Registrant's Form 8-K
              filed March 3, 1997).
    10.11     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).
    10.12     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).
    10.13     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).
    10.14     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).
    10.15     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).
    10.16     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).
    10.17     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).
    10.18     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).
    10.19     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).
</TABLE>


                                       72
<PAGE>   74


<TABLE>
<CAPTION>
    EXHIBIT
    NUMBER                            DESCRIPTION
    -------                           -----------
    <C>       <S>
    10.20     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).
    10.21     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).
    10.22     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).
    10.23     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 dated April 16, 1998 filed June 19,
              1998).
    10.24     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).
    10.25     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).
    10.26     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 dated April 16, 1998 filed June 19,
              1998).
    10.27     Convertible Preferred Stock Purchase Agreement between
              Coyote Network Systems, Inc. and JNC Opportunity Fund Ltd.,
              dated August 31, 1998 and Registration Rights Agreement
              dated as of August 31, 1998 between Coyote Network Systems,
              Inc. and JNC Opportunity Fund Ltd. (incorporated herein by
              reference to Exhibit 10.3 of Registrant's Form 10-Q filed
              November 16, 1998).
    10.28     Amendment to Separation Agreement between the Company and
              Sydney B. Lilly effective September 30, 1998 (incorporated
              herein by reference to Exhibit 10.41 of Registrant's Form
              10-K for the fiscal year ended March 31, 1999 filed July 14,
              1999).
     16.1     Letter dated November 5, 1997 from Price Waterhouse LLP,
              (incorporated herein by reference to Form 8-K/A (Amendment
              No. 2) filed on November 5, 1997). The disclosures included
              in Item 9(a) of this Annual Report on Form 10-K/A (Amendment
              No. 2) were derived from Item 4(a) of the Company's October
              15, 1997 Form 8-K/A (Amendment No. 2) as referenced in the
              letter dated November 5, 1997 from Price Waterhouse LLP.
       21     Subsidiaries of Registrant
     23.1     Consent of Arthur Andersen LLP
     23.2     Consent of PricewaterhouseCoopers LLP
       27     Financial Data Schedule
</TABLE>


                                       73
<PAGE>   75

                 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.......................................        (1,386)
Income tax credit...........................................           836
                                                                  --------
Loss from continuing operations.............................        (4,012)
Loss from discontinued operations...........................       (16,498)
                                                                  --------
Loss before extraordinary items.............................       (20,510)
Extraordinary items.........................................          (508)
                                                                  --------
Net loss....................................................      $(21,018)
                                                                  ========
Loss per common share (basic & diluted):
  Continuing operations.....................................      $   (.72)
  Discontinued operations...................................         (2.99)
  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.
                                       74
<PAGE>   76

                 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
                                                              -----------------
<S>                                                           <C>
Operating activities:
  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.
                                       75
<PAGE>   77

                 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.

                                       76
<PAGE>   78

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

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

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

ARTHUR ANDERSEN LLP
Los Angeles, California

July 13, 1999


                                       77
<PAGE>   79

                 COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES

                SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
                                 (IN THOUSANDS)




<TABLE>
<CAPTION>
                                        BALANCE AT                                              BALANCE AT
                                       BEGINNING OF                                               END OF
                                          PERIOD       ACQUISITION    PROVISION    WRITE-OFF      PERIOD
                                       ------------    -----------    ---------    ---------    ----------
<S>                                    <C>             <C>            <C>          <C>          <C>
Allowance for doubtful accounts:
  Year ended March 31, 1997..........      $ --           $ --          $ --         $ --          $ --
  Year ended March 31, 1998..........      $ --           $ --          $ --         $ --          $ --
  Year ended March 31, 1999..........      $ --           $ --          $377         $ --          $377
</TABLE>


                                       78
<PAGE>   80

                                   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 29th day of June,
2000.


                                          COYOTE NETWORK SYSTEMS, INC.


                                          By:    /s/ JAMES R. MCCULLOUGH

                                            ------------------------------------
                                                    James R. McCullough
                                                  Chief Executive Officer

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


<TABLE>
<CAPTION>
                      SIGNATURE                                      TITLE                    DATE
                      ---------                                      -----                    ----
<C>                                                    <S>                                <C>

               /s/ JAMES R. MCCULLOUGH                 Chief Executive Officer and        June 29, 2000
-----------------------------------------------------  Director (Principal Executive
                 James R. McCullough                   Officer)

                /s/ DANIEL W. LATHAM                   President, Chief Operating         June 29, 2000
-----------------------------------------------------  Officer and Director
                  Daniel W. Latham

                 /s/ CHERYL JOHNSON                    Controller (Principal Financial    June 29, 2000
-----------------------------------------------------  and Accounting Officer)
                   Cheryl Johnson

                  /s/ JOHN M. EGER                     Director                           June 29, 2000
-----------------------------------------------------
                    John M. Eger

                /s/ J. THOMAS MARKLEY                  Director                           June 29, 2000
-----------------------------------------------------
                  J. Thomas Markley
</TABLE>


                                       79