AMENDMENT TO SEPARATION AGREEMENT


              THIS AMENDMENT TO SEPARATION  AGREEMENT  ("Amendment")  is entered
into as of August ___, 1998, by and between COYOTE NETWORK  SYSTEMS,  a Delaware
corporation (the "Company") and SYDNEY B. LILLY ("Lilly").

RECITAL

              The Company, through its predecessor,  The Diana Corporation,  and
Lilly are parties to that certain Separation  Agreement dated November 20, 1996.
Subsequent to that Separation Agreement,  Lilly provided substantial services to
the Company for which he has not already received  compensation.  Lilly has also
provided  long term  service to the Company as an officer and a director.  Lilly
has  informed  the  Company  that he has  decided  not to seek  reelection  as a
Director of the Company  when his term  expires at the earlier of the  Company's
1998 annual meeting or September 30, 1998.

              NOW,  THEREFORE,  the  Company  and  Lilly  agree  to  amend  that
Separation Agreement as follows:

1.       Compensation

              As  a  further  severance  settlement  to  that  provided  in  the
Separation  Agreement,  the Company shall pay to Lilly $50,000 per year in sixty
(60) monthly  installments of $4,166.67 on or before the first day of each month
beginning  October 1, 1998.  The  Company  also  hereby  extends the time period
during which it is required to pay all medical expenses for Lilly and his spouse
under the Separation Agreement for an additional ten years until March 31, 2010.

2.       Stock Registration

              The  Company  shall,  on  or  before  October  31,  1998,  file  a
registration statement on Form S-3, if eligible to do so, to register the shares
of Common Stock of Coyote Network Systems,  Inc. into which the Class A Units of
Sattel  Communications  LLC  (the  "Class  A  Units")  held  by  Mr.  Lilly  are
convertible (the "Conversion Shares"), and will keep that registration statement
or a  successor  registration  statement  in  effect  until  30 days  after  the
conversion  of the  Class A Units,  such  that  the  Conversion  Shares  will be
registered  and  freely   tradable  by  Mr.  Lilly.   In  connection  with  this
registration obligation,  the Company and Mr. Lilly acknowledge that the Company
is not presently  eligible to make a filing under Form S-3 and such  eligibility
will  depend on factors  beyond the  Company's  control,  such as listing of the
Company's  common  stock on an exchange.  In the event that the Company  remains
ineligible to make a Form S-3 filing on or before  October 31, 1998, the Company
agrees to use its best  efforts to  register  the  conversion  shares as soon as
possible.  If such  registration  has not occurred by March 31, 1999,  Mr. Lilly
shall  have the  right to  demand  registration  on any  form  available  to the
Company.  The  registration  of the  Conversion  Shares  will be effected at the
Company's expense.
<PAGE>

3.       Severability.

              If any provision of this Amendment is held by a court of competent
jurisdiction  to  be  invalid,   void  or   unenforceable  as  to  a  particular
application,  then such  provision  shall be deemed  modified  to  exclude  such
application,  and  such  provision  in all  other  applications,  and all  other
provisions of this  Amendment and  Separation  Agreement  shall continue in full
force and effect  without being  modified,  impaired or  invalidated in any way.
Both the  Company  and Lilly  intend  that  this  Amendment  and the  Separation
Agreement be given the maximum force,  effect and application  permissible under
applicable law.

4.       Assignability

              This Amendment and the Separation Agreement may not be assigned by
either the company or Lilly without the prior written consent of the other.

5.       Waiver of Default

              Any  waiver  by  either  the  Company  or Lilly of a breach of any
provision in this Agreement shall not operate or be construed as a waiver of any
subsequent breach of the same or any other provision of this Agreement.

6.       Applicable Law.

              This Amendment shall be construed under and enforced in accordance
with the laws of the State of California.

7.       Attorney's Fee

              In the event suit is  brought  by either the  Company or Lilly for
enforcement of this Amendment, the prevailing party shall recover, as additional
costs, reasonable attorneys' fees and costs as determined by the court.

8.       Miscellaneous.

              Except as modified of this  Amendment all of the terms,  covenants
and  conditions of the  Separation  Agreement  shall  continue in full force and
effect.  This  Amendment  is not  intended  to be, and shall not  constitute,  a
substitution  or novation of the  Separation  Agreement.  This  Amendment may be
signed  in  counterparts,  all of  which  shall be  taken  together  as a single
instrument.

<PAGE>

              IN WITNESS  WHEREOF,  the parties have caused this Amendment to be
duly executed as of the date first above written.

COYOTE NETWORK SYSTEMS                      SYDNEY B. LILLY


By:  /s/ James J. Fielder                   /s/ Sydney B. Lilly
     __________________________________     ___________________________________
     James J. Fiedler
     Chairman and Chief Executive Officer



By:  /s/ Daniel W. Latham
     __________________________________
     Daniel W. Latham
     President and Chief Operating Officer