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

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

                                   FORM 10-K
                            ------------------------

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

                    FOR THE FISCAL YEAR ENDED MARCH 31, 2000

     [ ]   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.)
</TABLE>

<TABLE>
<S>                                            <C>
  1640 SOUTH SEPULVEDA BOULEVARD, SUITE 320,
           LOS ANGELES, CALIFORNIA                                 90025
   (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                      (ZIP CODE)
</TABLE>

       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

     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.  YES  [X]  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. Upon consummation of the merger, the
Company has agreed to issue 1,384,178 shares of Series C Preferred Stock and
between 3,229,747 and 4,556,250 shares of Common Stock (dependent upon the price
of the Common Stock on the closing date) to the stockholders of HomeAccess. The
shares of Series C Preferred Stock are convertible into between 1,952,679 and
1,384,178 shares of Common Stock, dependent upon the price of the Common Stock
on the closing date. For a period of four years after consummation of the
merger, the Company has agreed to issue to the shareholders of HomeAccess,
collectively, two shares of Common Stock for each new customer acquired by
HomeAccess; provided the customer has been preapproved by the Company and has
met certain performance criteria. In no event will the maximum number of shares
issued under this program exceed 13% of the total number of shares of Common
Stock outstanding, on a fully diluted basis, on the closing date. The Company
has also agreed to issue a warrant to purchase up to 3,600,000 shares of Common
Stock at an exercise price of $20 per share if certain performance criteria are
met. Accordingly, the Company's stockholders will have an opportunity to vote on
this transaction at a meeting of stockholders to be held after the Annual
Meeting. 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

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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 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

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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.

  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.

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  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 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.

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     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.

  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.

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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 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, Georgia, New York and Texas, we are subject to the regulations of
the PUCs in those states.

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

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

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

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

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  Environmental Regulation

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

EMPLOYEES

     As of 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.

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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.


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.

                                       10
<PAGE>   11

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 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;

                                       11
<PAGE>   12

     - 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.

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.
                                       12
<PAGE>   13

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.

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.

                                       13
<PAGE>   14

     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.

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
                                       14
<PAGE>   15

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.

ITEM 3. LEGAL PROCEEDINGS

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

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

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

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

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

     Not applicable.

                                       15
<PAGE>   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 2000                                  FISCAL 1999
     APRIL 1, 1999 TO MARCH 31, 2000              APRIL 1, 1998 TO MARCH 31, 1999
------------------------------------------   ------------------------------------------
        QUARTER            HIGH      LOW             QUARTER            HIGH      LOW
        -------           -------   ------           -------           -------   ------
<S>                       <C>       <C>      <C>                       <C>       <C>
First..................   $ 8.750   $4.500   First..................   $ 9.167   $3.720
Second.................     8.500    4.375   Second.................    10.119    4.533
Third..................     7.250    3.594   Third..................    16.500    6.071
Fourth.................   $14.500   $4.875   Fourth.................   $ 9.125   $4.125
</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

     On January 14, 2000, we issued to our Chief Executive Offer and director,
James McCullough, options to purchase 750,000 shares of common stock at an
exercise price of $5.00 per share in connection with our employment of Mr.
McCullough. The vesting of such options is as follows:

<TABLE>
<S>                       <C>
300,000.................  January 14, 2000
100,000.................  Earlier of January 14, 2001 or closing price of common stock
                          is $8 for 20 consecutive trading days.
150,000.................  Earlier of January 14, 2001 or closing price of common stock
                          is $12 for 20 consecutive trading days.
200,000.................  Earlier of January 14, 2001 or closing price of common stock
                          is $16 for 20 consecutive trading days.
</TABLE>


     All options vest upon a change in control. These options were granted
pursuant to Section 4(2) of the Securities Act of 1933.



     On January 12, 2000, we issued to Sunrise Technology Marketing Corporation
warrants to purchase 30,000 shares of common stock at an exercise price of $8.00
per share. The warrants have a five-year term and were exercisable on the date
of issue. The warrants were issued in connection with marketing consulting
services provided to us and pursuant to the exemption provided by Section 4(2)
of the Securities Act.


     On January 26, 2000, we issued to KRJ, LLC 2,000,000 shares of common stock
as consideration for consulting services KRJ provided to us. 1,250,000 of the
shares are being held in escrow to be released to KRJ in three equal annual
installments, except that one-third of the shares will automatically be released
from escrow if the closing price of our common stock is equal to or greater than
$8, $12 and $16, respectively, per share for 20 consecutive trading days. These
shares were issued in a private placement directly to KRJ pursuant to the
exemption provided by Section 4(2) of the Securities Act.

                                       16
<PAGE>   17


     On January 31, 2000, we sold, for $5 million cash, and on February 4, 2000,
for $10 million cash, pursuant to Rule 506 under Regulation D of the Securities
Act, an aggregate of 3,157,895 shares of our 6% Series B Preferred Stock at
$4.75 per share in a private placement with accredited investors. Each share of
6% Convertible Preferred Stock is convertible at any time at the holder's option
into one share of common stock, subject to adjustment pursuant to the terms of
the Preferred Stock. On February 4, 2000, we issued 75,000 shares of common
stock to Sunrise Securities Corp., the placement agent, as a portion of their
total commission equal to 7.0% of the gross proceeds of the sale of the Series B
Preferred Stock. These shares were issued pursuant to the exemption provided by
Section 4(2) of the Securities Act.



     On February 8, 2000, we granted to J. Thomas Markley, one of our
independent directors, and to Stephen W. Portner and Jack E. Donnelly, former
directors, options to purchase 50,000 shares of common stock at an exercise
price of $5.00 per share. These options were granted under our 2000 Equity
Incentive Plan and vested upon grant. These options were granted pursuant to the
exemption provided by Section 4(2) of the Securities Act.



     On March 8, 2000, we granted to John M. Eger, one of our independent
directors, options to purchase 50,000 shares of common stock at an exercise
price of $5.50 per share. These options were granted under our 2000 Equity
Incentive Plan and vested upon grant. These options were granted pursuant to the
exemption provided by Section 4(2) of the Securities Act.



     On March 6, 2000, we issued to Gallagher Harnett & Lagalante LLP warrants
to purchase 10,000 shares of common stock at an exercise price of $8.75 per
share. The warrants have a one-year term and were exercisable on the date of
issue. The warrants were issued in connection with legal services provided to us
and pursuant to the exemption provided by Section 4(2) of the Securities Act.


                                       17
<PAGE>   18

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 31,   MARCH 30,
                                                 2000        1999        1998        1997        1996
                                               ---------   ---------   ---------   ---------   ---------
<S>                                            <C>         <C>         <C>         <C>         <C>
Net sales....................................  $ 11,784    $  6,756    $     --    $     --     $    --
                                               ========    ========    ========    ========     =======
Earnings (loss) from:
  Continuing operations(1)(2)(3).............  $(25,298)   $ (9,628)   $(17,278)   $ (4,081)    $(1,912)
  Discontinued operations(4)(5)(6)...........   (23,977)     (5,115)    (16,877)    (16,429)     (1,453)
  Extraordinary items........................        --          --          --        (508)         --
                                               --------    --------    --------    --------     -------
     Net loss(6).............................  $(49,275)   $(14,743)   $(34,155)   $(21,018)    $(3,365)
                                               ========    ========    ========    ========     =======
Earnings (loss) per common share (basic and
  diluted):
  Continuing operations......................  $  (2.95)   $  (1.11)   $  (2.33)   $  (0.74)    $ (0.41)
  Discontinued operations....................     (1.81)      (0.52)      (2.27)      (2.97)      (0.31)
  Extraordinary items........................                    --          --        (.09)         --
                                               --------    --------    --------    --------     -------
  Net earnings (loss) per common share.......  $  (4.76)   $  (1.63)   $  (4.60)   $  (3.80)    $  (.72)
                                               ========    ========    ========    ========     =======
Cash dividends per common share..............  $     --    $     --    $     --    $     --     $    --
Total assets.................................  $ 29,968    $ 34,151    $ 19,860    $ 20,120     $28,591
Debt(7)......................................     6,464      13,983       5,490       1,958       2,099
Working capital (deficit)....................     2,466        (659)      4,509       6,161      13,282
Shareholders' equity.........................     7,558       6,057       8,060      16,834      24,686
</TABLE>


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

(1) Included in the fiscal 2000 loss are non-cash charges of $12,600,000 in
    connection with stock compensation for consulting services and of $1,665,000
    in connection with public relations services.



(2) 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.



(3) 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.



(4) Included in the loss from discontinued operations in fiscal 2000 is a
    provision of $11,000,000 in connection with estimated losses on disposal of
    the discontinued switching business. The loss from discontinued operations
    also includes a non-cash charge of $6,673,000 in connection with warrants to
    third party lessors which provided lease financing to our switching business
    customers.



(5) 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.



(6) 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.



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


                                       18
<PAGE>   19

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.
                                       19
<PAGE>   20

     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, 2000 VERSUS MARCH 31, 1999


     Our continuing operations in fiscal 2000 consisted of the business of our
two international long distance service subsidiaries that were acquired during
fiscal 1999: INET was acquired in September 1998 and AGT was acquired in April
1998 and sold effective September 1999. The following table reflects selected
results of operations data for each subsidiary and our total continuing
operations in fiscal 2000:


<TABLE>
<CAPTION>
                                                                   FISCAL 2000
                                                    ------------------------------------------
                                                     COYOTE       AGT       INET       TOTAL
                                                    --------    -------    -------    --------
<S>                                                 <C>         <C>        <C>        <C>
Net sales.........................................  $     --    $   424    $11,360    $ 11,784
Cost of sales.....................................        --        740      8,573       9,313
                                                    --------    -------    -------    --------
Gross profit (loss)...............................        --       (316)     2,787       2,471
Selling, general and administrative expenses......   (25,103)      (686)    (7,104)    (32,893)
                                                    --------    -------    -------    --------
Operating loss....................................  $(25,103)   $(1,002)   $(4,317)   $(30,422)
</TABLE>


     Net sales for fiscal 2000 were $11.8 million, compared to $6.8 million in
fiscal 1999, an increase of $5.0 million, or 74%. This increase is primarily
related to INET sales for the fiscal year 1999 of $4.0 million which represented
only six months of operations (INET was acquired on September 30, 1998) compared
to fiscal year 2000 sales of $11.4 million. Additionally, INET sales during
fiscal year 2000 reflect a growth in its international long distance services to
Asia. These increases were partially offset by the decrease in revenues of AGT
which were $2.8 million in fiscal 1999, compared to $0.4 million in fiscal year
2000, prior to our sale of AGT in September 1999.



     Cost of sales for fiscal 2000 were $9.3 million, compared to $5.9 million
in fiscal 1999, an increase of $3.4 million, or 58%. This increase was primarily
related to the increase in sales from fiscal 1999 to fiscal 2000. The increase
is, in part, offset by the decrease in cost of sales as a percent of sales
between years. During fiscal 1999, cost of sales of INET and AGT combined was
87% of sales compared to 79% for fiscal 2000. This decrease in cost of sales
percentage was primarily related to INET sales being a much larger portion of
the combined sales. INET cost of goods sold percentages were 71% and 75% in
fiscal 1999 and 2000, respectively. Conversely, AGT's cost of sales was 109% and
175% during fiscal 1999 and 2000, respectively.



     Gross profit for fiscal 2000 was $2.5 million, compared to $0.9 million in
fiscal 1999, an increase of $1.6 million, or 178%. This increase resulted from
the factors described above related to cost of sales. INET gross profit as a
percentage of sales was 28% in fiscal year 1999 compared to 25% in fiscal year
2000. The decrease in INET gross profit percentage is primarily due to the
smaller margins associated with services provided to Asia, which represented a
larger portion of INET's sales during fiscal 2000. In fiscal 2000, gross profit
(loss) for AGT and INET combined as a percent of net sales was (74%) and 25%,
respectively.



     Selling, general and administrative expenses for fiscal 2000 were $32.9
million, compared to $9.7 million for fiscal 1999, an increase of $23.2 million,
or 239%. This increase is primarily related to the increase in Coyote expenses
of $20 million. The majority of this increase related to non-cash transactions,
including charges of $12.6 million from stock compensation to consultants and
$4.2 million of warrants and options issued to non-employees for past services.
Additionally, Coyote expenses included approximately $1.2 million in charges in
connection with provisions for losses on investments and $0.8 million related to
development efforts for Internet protocol technology. In addition, INET expenses
increased from $1.7 million to $7.1 million from fiscal 1999. This increase of
$5.4 million relates primarily to six months of operations of INET during fiscal
year 1999 compared to twelve months in fiscal 2000. INET expenses also increased
relative to the additional efforts to support the increase in sales. In fiscal
1999 these expenses included a charge of $2.0 million in connection with
provisions for losses on deposits made by AGT to two long distance


                                       20
<PAGE>   21

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.


     The operating loss for fiscal 1999 was $30.4 million, compared to $8.8
million for fiscal 1999, an increase of $21.6 million, or 245%. The increase is
primarily due to the reasons stated above related to increase in gross profit of
$1.6 million offset by an increase in selling, general and administrative
expenses of $23.2 million.


     Non-operating income for fiscal 2000 was $5.1 million, compared to
non-operating expense of $0.8 million for fiscal 1999, an increase in income of
$5.9 million. The increase was primarily due to a $6.2 million gain on the sale
of AGT effective September 1999, offset by a decrease in interest expense of
$0.4 million and the lack of a gain on sale of marketable securities in fiscal
2000 compared to a gain of $0.9 million in fiscal 1999.


     The loss from continuing operations for fiscal 2000 was $25.3 million,
compared to $9.6 million in fiscal 1999, an increase of $15.7 million, or 163%,
due to the reasons discussed above.



     The loss from discontinued operations in fiscal 2000 was $13.0 million,
compared to a fiscal 1999 loss of $4.2 million, an increase of $8.8 million, or
210%. The increase in the loss from fiscal 1999 to fiscal 2000 was primarily due
to expenses of the switching business related to $1.7 million of severance costs
and $6.7 million of warrants granted in conjunction with financing arrangements
with a leasing company. The fiscal 2000 loss consisted of losses from the
switching business segment of $12.7 million and $0.3 million from the sale of
land and buildings of the Atlanta Provisions Company operation which was
discontinued in fiscal 1997. The fiscal 1999 loss consisted of an operating loss
of $4.3 million related to the switching business segment and a loss of $0.9
million related to Atlanta Provisions Company.



     Net loss in fiscal 2000 was $49.3 million, compared to $14.7 million in
fiscal 1999, an increase of $34.6 million, or 235%. The increase in net loss
resulted from the reasons set forth above and an $11.0 million charge in fiscal
2000 for estimated loss on disposal of discontinued operations, compared to a
$0.9 million charge in fiscal 1999 for estimated loss on disposal of
discontinued operations.


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,


                                       21
<PAGE>   22

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 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.


LIQUIDITY AND CAPITAL RESOURCES


     As of March 31, 2000, we had positive working capital of $2.5 million, an
increase from negative working capital of $0.7 million at March 31, 1999.



     We used cash from operating activities of $15.7 million during fiscal 2000
compared to using $6.1 million during fiscal 1999. This decline in operating
cash flow is primarily due to the increases in the losses incurred in the
continuing long distance services business and in the discontinued switch
business as well as increases in working capital required to support the
discontinued switch business operations. Our receivables were $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, at
March 31, 2000, our receivables were $3.6 million, representing less than two
months of net sales.



     We used cash for investing activities of $0.3 million during fiscal 2000
compared to using $4.5 million in fiscal 1999. The decrease in cash used for
investing activities primarily results from fewer capital expenditures related
to discontinued operations, which were $0.2 million in fiscal 2000 and $3.3
million in fiscal 1999. Capital expenditures on equipment purchases decreased
from $1.6 million in fiscal 1999 to $1.4 million in fiscal 2000. Equipment
purchases primarily consisted of additional switching equipment required to
support

                                       22
<PAGE>   23


the expansion of the international long distance services business. There were
no investments in affiliates for fiscal 2000 compared to $0.4 million in fiscal
1999. We received cash from the sale of our 9% interest in Systeam, S.p.A. of
$1.2 million in February 2000 and $1.9 million from the sale of shares of stock
in iCompression, Inc. in July 1999. We had acquired the shares of iCompression,
Inc. as collateral for $1.9 million we had advanced to NUKO Information Systems,
Inc. in March 1998.



     Financing activities provided net cash of $30.5 million in fiscal 2000,
compared to $8.1 million in fiscal 1999. In fiscal 2000, net cash provided by
financing activities included $13.9 million of net proceeds from private
placements in January and February 2000 of 3,157,895 shares of our 6% Series B
Preferred Stock at $4.75 per share, $10.2 million of net proceeds from a private
placement in May 1999 of common stock and increases of $7.0 million in notes
payable, offset by cash used for redemption of 5% Series A Convertible Preferred
Stock of $4.0 million. Net cash provided by financing activities in fiscal 1999
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.



     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.

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


     In March 2000, four of our switching equipment 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 once the lessees complete their
payment obligations to the lessor.



     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, 2000, $1.7 million had been drawn
against the line, which bore interest at the bank's prime rate plus 3% (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.


                                       23
<PAGE>   24

     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 at 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.

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.

                                       24
<PAGE>   25

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,
                                                              --------------------------------
                                                              2000     2001     2002     2003
                                                              -----    -----    -----    -----
                                                                (U.S. DOLLARS -- THOUSANDS)
<S>                                                           <C>      <C>      <C>      <C>
Notes payable                                                   814       --       --       --
Interest expense (A)........................................     81       --       --       --
Interest expense (B)........................................     90       --       --       --
Interest expense (C)........................................     73       --       --       --
Line of credit borrowings...................................  1,705    4,000    6,000    6,000
Interest expense (A)........................................    205      480      720      720
Interest expense (B)........................................    222      520      780      780
Interest expense (C)........................................    188      440      660      660
</TABLE>



     - The borrowings bear interest at the bank's prime rate plus 1% and 3% 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, 2000 of 9%.



     - The interest expense shown for line (B) is based upon a hypothetical
       increase of one percentage point in the bank's prime rate to 10%.



     - The interest expense shown for line (C) is based upon a hypothetical
       decrease of one percentage point in the bank's prime rate to 8%.


                                       25
<PAGE>   26

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                 COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES


<TABLE>
<S>                                                           <C>
Report of Arthur Andersen LLP, Independent Public
  Accountants...............................................   27
Consolidated Balance Sheets.................................   28
Consolidated Statements of Operations.......................   29
Consolidated Statements of Shareholders' Equity.............   30
Consolidated Statements of Cash Flows.......................   31
Notes to Consolidated Financial Statements..................   32
</TABLE>


                                       26
<PAGE>   27

                    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, 2000 and 1999, and the related
consolidated statements of operations, shareholders' equity and cash flows for
the three years ended March 31, 2000. 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, 2000 and 1999, and
the results of their operations and their cash flows for the three years ended
March 31, 2000 in conformity with accounting principles generally accepted in
the United States.


ARTHUR ANDERSEN LLP
Los Angeles, California

June 29, 2000


                                       27
<PAGE>   28


                 COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES


                          CONSOLIDATED BALANCE SHEETS
                             (DOLLARS IN THOUSANDS)

                                     ASSETS


<TABLE>
<CAPTION>
                                                              MARCH 31,    MARCH 31,
                                                                2000         1999
                                                              ---------    ---------
<S>                                                           <C>          <C>
Current assets:
  Cash and cash equivalents.................................  $  16,278    $   1,225
  Receivables, net of allowance of $593 and $377 at March
     31, 2000 and 1999, respectively........................      3,628        2,502
  Notes receivable -- current...............................        284        2,367
  Deposits and other current assets.........................      1,558        4,321
  Net current assets of discontinued operations.............         --        5,046
                                                              ---------    ---------
          Total current assets..............................     21,748       15,461
Property and equipment, net.................................      4,668        5,430
Intangible assets, net......................................      2,070        2,303
Net long-term assets of discontinued operations.............         --        7,917
Notes receivable -- non-current.............................        632          871
Investments and other assets................................        850        2,169
                                                              ---------    ---------
                                                              $  29,968    $  34,151
                                                              =========    =========
                        LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Lines of credit...........................................  $   1,705    $   1,133
  Accounts payable..........................................      6,665        8,160
  Other accrued liabilities.................................      5,657        4,101
  Deferred revenue and customer deposits....................        761        1,410
  Current portion of long-term debt and capital lease
     obligations............................................      1,572        1,316
  Notes payable -- current..................................      2,130           --
  Discontinued operations -- reserve for loss on disposal...        792           --
                                                              ---------    ---------
          Total current liabilities.........................     19,282       16,120
Notes payable...............................................         --        8,183
Long-term debt..............................................      1,393        1,534
Capital lease obligations...................................      1,369        1,817
Other liabilities...........................................        366          440
Commitments and contingencies (Note 7)
Shareholders' equity:
  Preferred stock -- authorized 5,000,000 shares,
     Series A $.01 par value, 124 shares and 700 shares
      issued in 2000 and 1999, respectively, liquidation
      preference of $10,000 per share.......................      1,570        7,395
     Series B $1 par value, 3,157,895 issued in 1999,
      liquidation preference of $4.75 per share.............     27,338           --
  Common stock -- $1 par value: authorized 30,000,000
     shares, issued 18,106,593 and 11,167,456 shares, in
     2000 and 1999, respectively............................     18,107       11,167
  Additional paid-in capital................................    132,075      109,254
  Deferred compensation.....................................       (278)          --
  Accumulated deficit.......................................   (165,497)    (116,002)
  Treasury stock at cost....................................     (5,757)      (5,757)
                                                              ---------    ---------
          Total shareholders' equity........................      7,558        6,057
                                                              ---------    ---------
                                                              $  29,968    $  34,151
                                                              =========    =========
</TABLE>



                See notes to consolidated financial statements.

                                       28
<PAGE>   29

                 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,
                                                               2000         1999         1998
                                                             ---------    ---------    ---------
<S>                                                          <C>          <C>          <C>
Net sales..................................................  $ 11,784     $  6,756     $     --
Cost of sales..............................................     9,313        5,878           --
                                                             --------     --------     --------
Gross profit...............................................     2,471          878           --
                                                             --------     --------     --------
Selling, general and administrative expenses...............    32,893        9,698        7,058
                                                             --------     --------     --------
Operating loss.............................................   (30,422)      (8,820)      (7,058)
Securities litigation warrant expense......................        --           --       (8,000)
Other non-operating income (expense):
  Interest expense.........................................    (1,473)      (1,893)      (2,334)
  Net gains (losses) on sale of marketable securities......        --          877         (155)
  Gain on sale of Coyote Gateway...........................     6,209           --           --
  Interest and other income................................       388          208          269
                                                             --------     --------     --------
                                                                5,124         (808)      (2,220)
                                                             --------     --------     --------
Loss from continuing operations............................   (25,298)      (9,628)     (17,278)
Loss from discontinued operations..........................   (12,977)      (4,215)     (16,877)
Estimated loss on disposal of discontinued operations......   (11,000)        (900)          --
                                                             --------     --------     --------
Net loss...................................................  $(49,275)    $(14,743)    $(34,155)
                                                             ========     ========     ========

Preferred stock dividends..................................  $(13,808)    $ (1,255)    $     --
Net loss...................................................   (49,275)     (14,743)     (34,155)
                                                             --------     --------     --------
Loss applicable to common shareholders.....................  $(63,083)    $(15,998)    $(34,155)
                                                             ========     ========     ========
Loss per common share (basic and diluted):
  Continuing operations....................................  $  (2.95)    $  (1.11)    $  (2.33)
  Discontinued operations..................................     (1.81)       (0.52)       (2.27)
                                                             --------     --------     --------
  Net loss per common share (basic and diluted)............  $  (4.76)    $  (1.63)    $  (4.60)
                                                             ========     ========     ========
Weighted average number of common shares outstanding (basic
  and diluted).............................................    13,247        9,814        7,423
                                                             ========     ========     ========
</TABLE>


                See notes to consolidated financial statements.
                                       29
<PAGE>   30

                 COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES


                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                       PREFERRED STOCK
                           ----------------------------------------       COMMON STOCK
                               SERIES A              SERIES B         --------------------   ADDITIONAL
                           -----------------   --------------------                  PAR      PAID-IN     DEFERRED   ACCUMULATED
                           SHARES    AMOUNT      SHARES     AMOUNT      SHARES      VALUE     CAPITAL       COMP       DEFICIT
                           -------   -------   ----------   -------   ----------   -------   ----------   --------   -----------
<S>                        <C>       <C>       <C>          <C>       <C>          <C>       <C>          <C>        <C>
BALANCE AT MARCH 31,
 1997....................       --   $    --           --   $    --    6,007,175   $ 6,007    $ 80,124     $  --      $ (63,540)
 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)
 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...................      700     6,345           --        --           --        --          --        --             --
 Beneficial conversion
   feature -- preference
   shares................       --     1,050           --        --           --        --      (1,050)       --             --
 Preferred share cash
   dividend..............       --        --           --        --           --        --          --        --           (205)
 Non-cash warrant
   expense...............       --        --           --        --           --        --         753        --             --
                           -------   -------   ----------   -------   ----------   -------    --------     -----      ---------
BALANCE AT MARCH 31,
 1999....................      700     7,395           --        --   11,167,456    11,167     109,254        --       (116,002)
 Net loss................       --        --           --        --           --        --          --        --        (49,275)
 Exercise of stock
   options and
   Warrants..............       --        --           --        --    1,326,922     1,327       4,215        --             --
 A and B Units
   conversions...........       --        --           --        --      810,375       812        (812)       --             --
 Redemption of preferred
   stock.................     (100)      200           --        --           --        --      (4,200)       --             --
 Issuance of common
   stock, net............       --        --           --        --    1,898,148     1,898       8,238        --             --
 Issuance of common stock
   for services..........       --        --           --        --    2,000,000     2,000      10,600        --             --
 Conversion of preferred
   stock.................     (476)   (6,025)          --        --      793,334       793       5,232        --             --
 Issuance of preferred
   stock.................       --        --    3,157,895    13,950       75,000        75         257        --             --
 Beneficial conversion
   feature -- preference
   shares................       --        --           --    13,388           --        --     (13,388)       --             --
 Preferred share
   dividend..............       --        --           --        --           --        --          --        --           (220)
 Non-cash option and
   warrant expense.......       --        --           --        --           --        --      12,502      (446)            --
 Issuance of common stock
   for dividend..........       --        --           --        --       35,358        35         177        --             --
 Compensation expense
   related to stock
   options...............       --        --           --        --           --        --          --       168             --
                           -------   -------   ----------   -------   ----------   -------    --------     -----      ---------
BALANCE AT MARCH 31,
 2000....................      124   $ 1,570    3,157,895   $27,338   18,106,593   $18,107    $132,075     $(278)     $(165,497)
                           =======   =======   ==========   =======   ==========   =======    ========     =====      =========

<CAPTION>
                           TREASURY
                             STOCK
                           ---------                 TOTAL
                           NUMBER OF             SHAREHOLDERS'
                            SHARES      COST        EQUITY
                           ---------   -------   -------------
<S>                        <C>         <C>       <C>
BALANCE AT MARCH 31,
 1997....................   708,692    $(5,757)    $ 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....................   708,692     (5,757)       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 share cash
   dividend..............        --         --         (205)
 Non-cash warrant
   expense...............        --         --          753
                            -------    -------     --------
BALANCE AT MARCH 31,
 1999....................   708,692     (5,757)       6,057
 Net loss................        --         --      (49,275)
 Exercise of stock
   options and
   Warrants..............        --         --        5,542
 A and B Units
   conversions...........        --         --           --
 Redemption of preferred
   stock.................        --         --        4,000
 Issuance of common
   stock, net............        --         --       10,136
 Issuance of common stock
   for services..........        --         --       12,600
 Conversion of preferred
   stock.................        --         --           --
 Issuance of preferred
   stock.................        --         --       14,282
 Beneficial conversion
   feature -- preference
   shares................        --         --           --
 Preferred share
   dividend..............        --         --         (220)
 Non-cash option and
   warrant expense.......        --         --       12,056
 Issuance of common stock
   for dividend..........        --         --          212
 Compensation expense
   related to stock
   options...............        --         --          168
                            -------    -------     --------
BALANCE AT MARCH 31,
 2000....................   708,692    $(5,757)    $  7,558
                            =======    =======     ========
</TABLE>


                See notes to consolidated financial statements.
                                       30
<PAGE>   31

                  COYOTE NETWORK SYSTEMS, INC AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                      FISCAL YEAR ENDED
                                                              ---------------------------------
                                                              MARCH 31,   MARCH 31,   MARCH 31,
                                                                2000        1999        1998
                                                              ---------   ---------   ---------
<S>                                                           <C>         <C>         <C>
OPERATING ACTIVITIES:
  Net Loss..................................................  $(49,275)   $(14,743)   $(34,155)
  Adjustments to reconcile net loss to net cash used in
    operating activities:
    Depreciation and amortization...........................     1,431         982         294
    Loss (gain) on sales of marketable securities...........        --        (877)        155
    Gain on sale of land....................................        --         (20)         --
    Gain on sale of Coyote Gateway..........................    (6,209)         --          --
    Bad debt expense........................................       216         377          --
    Provision for loss on discontinued operations...........    11,000         900          --
    Compensation expense relating to issuance of common
     stock..................................................    12,600          --          --
    Compensation expense relating to stock options and
     warrants...............................................    12,502          98      10,582
    Net change in discontinued operations...................     2,934        (310)      7,040
    (Increase) decrease in:
      Receivables...........................................    (1,731)      4,874       3,879
      Deposits and other assets.............................      (120)      6,071        (735)
    Increase (decrease) in:
      Accounts payable......................................        92       2,472        (640)
      Other liabilities.....................................       887       3,799       5,105
                                                              --------    --------    --------
Net cash used in operating activities.......................   (15,673)     (6,125)     (8,475)
                                                              --------    --------    --------
INVESTING ACTIVITIES:
  Purchases of property and equipment.......................    (1,444)     (1,556)       (254)
  Purchases of marketable securities........................        --          --        (736)
  Proceeds from sale of marketable securities...............        --         893       1,777
  Change in notes receivable................................     1,229       1,050      (2,466)
  Proceeds from sale of land................................        --          67          --
  Cash payment on acquisition...............................        --      (1,333)         --
  Change in investments in affiliates.......................       651        (400)         --
  Net proceeds from the sale of Atlantic Provision and C&L
    assets..................................................        --          --       2,861
  Net change in discontinued operations.....................      (179)     (3,265)     (1,168)
                                                              --------    --------    --------
Net cash (used) provided by investing activities............       257      (4,544)         14
                                                              --------    --------    --------
FINANCING ACTIVITIES:
  Net increase in borrowings on line of credit..............       572       1,133          --
  Increase in notes payable.................................     4,145         262          --
  Repayments of long-term debt and capital leases...........      (208)       (142)       (141)
  Convertible preferred stock issued, net of expenses.......    14,282       6,345          --
  Common stock issued.......................................    15,678         758       5,617
  Redemption of preferred stock.............................    (4,000)         --          --
  Convertible debt issued...................................        --          --       6,870
  Net change in discontinued operations.....................        --          --         275
  Other items...............................................        --        (208)       (495)
                                                              --------    --------    --------
Net cash provided by financing activities...................    30,469       8,148      12,126
                                                              --------    --------    --------
Increase (decrease) in cash and cash equivalents............    15,053      (2,521)      3,665
CASH AND CASH EQUIVALENTS:
  At beginning of year......................................     1,225       3,746          81
                                                              --------    --------    --------
  At end of year............................................  $ 16,278    $  1,225    $  3,746
                                                              ========    ========    ========
</TABLE>


                See notes to consolidated financial statements.
                                       31
<PAGE>   32

                 COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 2000

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 Coyote Gateway, LLC, 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 4)


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

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

     In May 2000, the Company made the strategic decision and adopted a formal
plan to discontinue the following entities (see Note 2):


COYOTE TECHNOLOGIES, LLC, formerly Sattel Communications, LLC ("CTL")



     Since fiscal 1997, Coyote has owned 100% of Coyote Technologies, Inc. (fka,
Sattel Communications Corp. ("SCC")) (see Note 3). CTI, through its subsidiary
CTL, is a provider of telecommunication switches and IP gateways. CTI has an
ownership interest in CTL, a limited liability company, of approximately 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, 7x24
customer support, billing administration and help desk support.


                                       32
<PAGE>   33
                 COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 2000

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.



  Business Risk and Non Cash Charges



     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. The Company's primary business
will be the wholesaling and retailing of international long distance service.



     After the discontinuance and restructuring, 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 2000 and to date in fiscal
2001. Significant actions in this progress include operations of INET and
raising additional equity (see Note 8). 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.



     To obtain financing and other assistance the Company has given various
equity incentives to lenders, third-party lessors, consultants and others. Also
in connection with the discontinuance of the switch business the Company
recorded several charges to earnings. As a result the Company has incurred
significant amounts of non-cash charges.



     Some of the more significant non-cash charges in fiscal 2000 are summarized
as follows (see also Note 13):



<TABLE>
<S>                                                           <C>
Reserve for loss on disposition of discontinued segment
  (Note 2)..................................................  $11,000,000
Stock compensation to consultants (Note 8)..................   12,600,000
Warrants given to --
  Leasing company (Note 8)..................................    6,673,000
  Public relations firm.....................................    1,665,000
  Others....................................................    3,718,000
                                                              -----------
                                                              $35,656,000
                                                              ===========
</TABLE>


  Financial Instruments

     The carrying values of cash and cash equivalents, marketable securities,
receivables, accounts payable and borrowings at March 31, 2000, and March 31,
1999, approximate fair value.

  Marketable Securities


     Realized gains and losses related to marketable securities 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.


                                       33
<PAGE>   34
                 COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 2000


     Gains on sales of securities totaled $877,000 and $242,000 in fiscal 1999
and 1998, respectively; and losses totaled $397,000 in fiscal 1998.


  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, 2000    MARCH 31, 1999
                                                          --------------    --------------
<S>                                                       <C>               <C>
Fixtures and equipment..................................     $ 6,613            $6,421
Less accumulated depreciation...........................      (1,945)             (991)
                                                             -------            ------
                                                             $ 4,668            $5,430
                                                             =======            ======
</TABLE>


  Intangible Assets

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


<TABLE>
<CAPTION>
                                                          MARCH 31, 2000    MARCH 31, 1999
                                                          --------------    --------------
<S>                                                       <C>               <C>
Goodwill................................................      $1,810             2,167
Other...................................................         260               136
                                                              ------            ------
                                                              $2,070            $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 $0.7 million at March 31, 2000.

     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.

                                       34
<PAGE>   35
                 COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 2000

  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 2, 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
users' payment obligation.



     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 ($7.0 million and $4.2 million
     at March 31, 2000 and 1999 respectively) are not recognized as revenue.
     Also on certain transactions a portion of the payments are contingent on
     installation. At March 31, 2000, and 1999, the Company had approximately
     $1.5 million and $3.1, respectively, subject to this contingency and
     therefore not recognized as revenue.



  Credit and Other Concentrations



     For the year ended March 31, 2000 and 1999, third party lessors were
involved in substantially all of the 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 the revenue of the
switch 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 in the related
equipment. In addition, approximately 11% of inventory purchased during fiscal
1998 was supplied by Sattel Technologies, Inc. (STI).


                                       35
<PAGE>   36
                 COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 2000

  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 2000, 1999 and 1998, the effect of options and warrants are
antidilutive and therefore are excluded from the calculations of diluted loss
per common share.



     The beneficial conversion feature $1,050,000 in 1999 and $13,388,000 in
2000 discussed in Note 8 has been accounted for as a dividend in computing loss
per common share. In computing net loss per share applicable to common
shareholders for the years ended March 31, 1999 and 2000, 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, 2000, 1999 and 1998 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>
                                                     2000          1999         1998
                                                  -----------    ---------    ---------
<S>                                               <C>            <C>          <C>
Options.........................................    4,956,967    1,315,118      503,974
Warrants and units..............................    5,010,135    4,109,571    3,345,373
Warrants to be issued related to securities
  litigation settlement.........................    2,225,000    2,225,000           --
Convertible debt................................           --           --      920,000
Convertible preferred stock.....................    3,364,561    1,500,000           --
                                                  -----------    ---------    ---------
                                                   15,556,663    9,149,689    4,769,347
                                                  ===========    =========    =========
</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.

  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.

                                       36
<PAGE>   37
                 COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 2000

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 2000, 1999 and 1998 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 2000 and 1999 consolidated balance sheets as follows (in
thousands):



<TABLE>
<CAPTION>
                                                               2000      1999
                                                              ------    ------
<S>                                                           <C>       <C>
Current assets:
  Accounts receivable, net of reserves......................  $1,642    $3,390
  Inventory.................................................   3,716     2,130
  Accrued liabilities.......................................  (2,189)     (474)
                                                              ------    ------
                                                               3,169     5,046
  Less -- reserve for loss on disposition...................  (3,169)       --
                                                              ------    ------
Net current assets of discontinued operations...............  $   --    $5,046
                                                              ======    ======
Non-current assets:
  Property and equipment, net...............................  $2,118    $2,763
  Capitalized software development and intellectual
     rights.................................................   4,921     4,920
                                                              ------    ------
                                                               7,039     7,683
  Less -- reserve for loss on disposition...................  (7,039)       --
                                                              ------    ------
Net long-term assets of discontinued operations.............  $   --    $7,683
                                                              ======    ======
</TABLE>


     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 recorded as a charge in the consolidated financial statements in
fiscal 2000. The estimated loss on disposal consists of the following:

<TABLE>
<S>                                                           <C>
Estimated operating losses for the disposal period..........  $ 2,850,000
Estimated fees and other costs..............................      400,000
Estimated loss on disposal..................................    7,750,000
                                                              -----------
                                                              $11,000,000
                                                              ===========
</TABLE>

     The estimated loss on disposal has been classified as follows:


<TABLE>
<S>                                                           <C>
Reserve against net current assets of discontinued
  operations................................................  $ 3,169,000
Reserve against net long term assets of discontinued
  operations................................................    7,039,000
Included in current liabilities.............................      792,000
                                                              -----------
                                                              $11,000,000
                                                              ===========
</TABLE>



     The Company expects to dispose of the segment near the end of the second
quarter of fiscal 2001.


                                       37
<PAGE>   38
                 COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 2000

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


<TABLE>
<CAPTION>
                                                FISCAL YEAR ENDING MARCH 31
                                              -------------------------------
                                                2000       1999        1998
                                              --------    -------    --------
                                                  (DOLLARS IN THOUSANDS)
<S>                                           <C>         <C>        <C>
Net sales...................................  $ 10,107    $28,607    $  5,264
                                              ========    =======    ========
Loss from discontinued operations...........  $(12,663)   $(4,215)   $(16,877)
                                              ========    =======    ========
</TABLE>



     We have reflected certain reclassifications in the fiscal 1999 net sales
amount 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. Warrants given as incentives to
third party leasing companies are presented as reductions of revenues. In the
fourth quarter of fiscal 2000 the value of the warrants given were $6,673,000
(see Note 8).


  1996 - 1997 Restructuring

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

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

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


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


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

     Based upon an estimate of the market value of certain real estate (the only
remaining asset of the discontinued APC operation), the Company took an
additional charge of $900,000 in the second quarter of fiscal 1999. This charge
is included in the loss from discontinued operations in the condensed
consolidated statement of operations for the fiscal year ended March 31, 1999.

     Prior to the sale of the real estate in fiscal 2000, additional expenses of
$314,000 were incurred related to property taxes. These costs are included in
the loss from discontinued operations in the condensed consolidated statement of
operations for the fiscal year ended March 31, 2000.

                                       38
<PAGE>   39
                 COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 2000

NOTE 3 -- CAPITAL STRUCTURE OF CTL


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


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

     No compensation expense was recognized in fiscal 1997 upon the granting of
the Class B Units to the employees. The estimated fair value of such units at
the date of grant was considered immaterial to the financial statements based on
the subordinated nature of the interests resulting from the priority
distributions payable to holders of Class A Units. Compensation expense was to
be recognized prospectively when it becomes probable that a conversion or other
defined triggering event will occur. If the Company exercises its option to
repurchase equity interests previously granted to employees, total compensation
cost would be equal to the cash paid upon the repurchase.

     Prior to an amendment in September 1997, described in a succeeding
paragraph of this note, the terms of a conversion were that if in the future CTL
achieves cumulative pre-tax profits of at least $15 million over the four most
recent quarters, the members holding Class B Units not subject to the Board of
Directors' authorization discussed below would have the right and obligation
(the "Conversion Rights") to convert their Class B Units into Company common
stock on the basis of 500 shares of Company common stock for each Class B Unit,
subject to adjustment for stock dividends, stock splits, merger, consolidation
or stock exchange. The Conversion Rights are included in Class B Agreements
amended in November 1996 in lieu of provisions of the April 1, 1996 agreement
that provided members holding Class B Units might require CTL to conduct an
initial public offering, upon the achievement of the same cumulative pre-tax
profit measure discussed above, in which the Class B holders would have the
right to convert Class B Units into securities being offered, and would have the
right to have those securities registered under the Securities Act of 1933 (the
"Registration Rights"). If a majority of the Class B Units are redeemed or
purchased by CTL or an affiliate, or if a triggering event (including the
conversion of a majority of the Class B Units) occurs, the individual Class A
holders are entitled to have their Units redeemed, purchased or to participate
on the same terms as the Class B Units, except with an upward adjustment in
price to reflect the priority of distribution associated with the Class A Units.
Pursuant to agreements regarding Class A Units, the holders of Class A Units
other than SCC also have the right, but not the obligation, to require the
Company to purchase all, but not less than

                                       39
<PAGE>   40
                 COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 2000

all, of such holder's Class A Units at a price equal to the agreed-upon or
appraised fair market value at any time after April 1, 1999.

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


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


     In fiscal 1999 and fiscal 2000, certain Class B Unit holders converted a
total of 138 and 1,062 Units, respectively, into shares of Company common stock
in accordance with the amended terms for conversion. Certain former employees of
CTL continue to collectively own 307 Class B Units, representing all of the
Class B Units currently outstanding. In fiscal 2000, Mr. Chandler and Mr. Lilly
converted their holdings of 350 and 100 Class A Units, respectively, into shares
of the Company's common stock in accordance with the terms of conversion
available to the Class A Unit holders.

NOTE 4 -- ACQUISITIONS AND DISPOSITION OF ASSETS

  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 owed to the Company of $1.9 million was 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 accepted this offer and in July 1999 received $1.9 million which
provided full recovery of the principal and interest owed on the loans.


  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.

                                       40
<PAGE>   41
                 COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 2000

The Company was unable to complete and consummate the acquisition of a
controlling interest in Systeam and in February 2000 sold all of its interests
in Systeam in return for a cash payment of $1.2 million.

  Coyote Gateway


     Effective September 30, 1999, pursuant to a Purchase Agreement, dated
October 27, 1999, among the Company, American Gateway Telecommunications, Inc.
("AGTI"), Coyote Gateway, LLC d/b/a American Gateway Telecommunications,
("AGT"), Prinvest Corp. ("PVC"), Prinvest Financial Corp. ("PFC"; together with
PVC, "Prinvest") and Arnold A. Salinas ("Salinas"), the Company sold its
approximately 80% membership interest in AGT to AGT's remaining member, AGTI,
which previously held an approximately 20% membership interest in AGT (the
"Sale").



     In consideration for the Sale, the Company will receive, for 18 months from
October 1, 1999, a monthly margin participation payment from AGT equal to
$0.0025 per minute of telecommunications traffic switched or routed by AGT
through AGT's telecommunications network, which the Company estimates will be
less than $50,000 and will record any such revenue upon receipt. The Company did
not receive any immediate cash payments as a result of the Sale.



     In addition, for the 18 months from October 1, 1999, the Company shall be
the exclusive supplier of telecommunications switches to AGT; AGT shall receive
a fifty percent discount on all Company-manufactured switches it purchases from
the Company during this time period. As of June 29, 2000, the Company has not
received any switch purchase orders from AGT and does not anticipate any. Coyote
Communications Services, LLC, an affiliate of the Company which is included in
the discontinued operations, shall continue to provide maintenance and technical
support services to AGT on a month-to-month renewable basis, pursuant to the
parties' existing maintenance and servicing agreement.


     For the fiscal year ended March 31, 2000, sales, operating losses,
depreciation and capital expenditures of $425,000, $1,602,000, $59,000 and
$346,000, respectively, of Coyote Gateway are included in the Company's long
distance services business.


     The acquirer of the AGT business was PrinVest (see Note 12). During fiscal
2000 and 1999, PrinVest provided financing to AGT in connection with deposits
required to be made by AGT to other long distance telecommunications carriers.
The Company had pledged 708,692 shares of common stock as collateral on its
guaranty of AGT's notes. In connection with the sale PrinVest assumed the notes,
terminated the Company's guaranty and pledge of shares and returned the stock
certificates representing the shares. At September 30, 1999, AGT had a negative
net worth of $6.2 million; thus a gain of $6.2 million was recorded in
connection with the sale.


  INET

     On September 30, 1998, the Company completed the acquisition of INET
Interactive Network System, Inc. ("INET") through the merger of INET into a
wholly owned subsidiary of the Company. Under the terms of the merger agreement,
the Company made total cash payments of $1.0 million and issued a total of
198,300 shares of the Company's common stock as consideration for the
outstanding shares of INET capital stock, the cancellation of certain warrants
to purchase shares of INET common stock, the transfer of certain lines of credit
and certain contractual releases. The Company also agreed to forgive and
extinguish all loans and advances in the amount of $433,000 which had been made
to INET prior to the merger, of which $333,000 was advanced in fiscal 1999. As
further consideration, the Company will issue earnout shares of the Company's
common stock to the former INET shareholders in five installments based upon
certain earning targets for the period from October 1, 1998 to March 31, 2001.
As of March 31, 2000, the maximum amount payable under the earnout agreement is
$350,000 payable in Company common stock to be valued at certain

                                       41
<PAGE>   42
                 COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 2000

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, 2000. 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, 2000, Crescent was not yet running
telecommunications traffic through its switching equipment and the Company
recorded a realization reserve on the total value of this investment of $1.3
million.


  Group Long Distance



     In March 2000, the Company signed a letter of intent to acquire Group Long
Distance, Inc., a non-facilities based reseller of long distance services to
more than 15,000 small and medium-sized businesses and residential customers.
The consideration will be the issuance of 700,000 shares of common stock and
contingent consideration of up to 210,000 shares based on certain performance
criteria.


NOTE 5 -- DEPOSITS AND OTHER CURRENT ASSETS


     At March 31, 2000 and 1999, the Company had deposits with long distance
carriers of $37,500 and $5.2 million, respectively. In 1999 the Company recorded
a reserve of $2.0 million related to various deposits made with long distance
carriers. The financial viability of some of the carriers raised concern
regarding the ultimate realization of the deposits. This provision is included
in selling, general and administrative expenses in the accompanying financial
statements.


NOTE 6 -- DEBT

     Debt consists of the following (in thousands):


<TABLE>
<CAPTION>
                                                              MARCH 31, 2000    MARCH 31, 1999
                                                              --------------    --------------
<S>                                                           <C>               <C>
Subordinated debentures due January 2002 and capitalized
  interest..................................................     $ 1,534           $ 1,675
Notes payable on demand bearing interest at 17.5%...........       1,225                --
Note payable bearing interest at 10% payable in monthly
  installments through August 2000..........................         814               436
Capital lease obligations...................................       2,891             2,556
                                                                 -------           -------
                                                                   6,464             4,667
Less current portion........................................      (3,702)           (1,316)
                                                                 -------           -------
                                                                 $ 2,762           $ 3,351
                                                                 =======           =======
</TABLE>


     The subordinated debentures consist of principal of $1,254,000 and
capitalized interest of $280,000 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.

                                       42
<PAGE>   43
                 COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 2000

     The demand loan of $1,225,000 together with accrued interest was fully
repaid in April 2000. Approximate annual amounts payable by the Company on debt
and capital leases are as follows (in thousands):


<TABLE>
<CAPTION>
                                                              DEBT      CAPITAL LEASES     TOTAL
                                                              ----      --------------    -------
<S>                                                          <C>        <C>               <C>
  2001.....................................................  $ 2,271       $ 1,668        $ 3,939
  2002.....................................................    1,393           725          2,118
  2003.....................................................       --           687            687
  2004.....................................................       --           140            140
  2005.....................................................       --             2              2
                                                             -------       -------        -------
                                                               3,664         3,222          6,886
Less amount representing interest..........................      (91)         (331)          (422)
                                                             -------       -------        -------
                                                               3,573         2,891          6,464
Less current portion.......................................   (2,180)       (1,522)        (3,702)
                                                             -------       -------        -------
                                                             $ 1,393       $ 1,369        $ 2,762
                                                             =======       =======        =======
</TABLE>


     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 (9%
at March 31, 2000) plus 3%. As of March 31, 2000, $1.7 million has been drawn
against this line of credit representing the maximum available at that time.
This line of credit expires on June 30, 2000.

NOTE 7 -- COMMITMENTS AND CONTINGENCIES

     The Company leases its facilities and various equipment under
non-cancelable lease arrangements for varying periods. Leases that expire
generally are expected to be renewed or replaced by other leases. Total rental
expense under operating leases in fiscal 2000, 1999 and 1998 was $1,247,000,
$931,000 and $310,000, respectively.


     Future minimum payments, net of sublease revenue, under non-cancelable
operating leases with initial terms of one year or more for fiscal years
subsequent to March 31, 2000 are as follows (in thousands):



<TABLE>
<CAPTION>
                                                              TOTAL
                                                              ------
<S>                                                           <C>
2001........................................................  $  865
2002........................................................     745
2003........................................................     759
2004........................................................     674
2005........................................................     252
                                                              ------
                                                              $3,295
                                                              ======
</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
                                       43
<PAGE>   44
                 COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 2000

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

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

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

  Nasdaq and Securities Exchange Commission

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

     Since the publication of the articles, The Nasdaq National Market and the
Securities and Exchange Commission have asked the Company to provide documents
and other material about the Crescent Communications transaction and other
transactions. The Company cooperated with both The Nasdaq National Market and
the Commission in connection with these requests. In November 1999, the
Commission advised the Company that it had dropped its investigation regarding
this matter. The Company does not know the status of the Nasdaq inquiry and
Nasdaq has not contacted the Company regarding the matter since May 1999.
Investigations by 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 Nasdaq National Market could impose a variety of
sanctions, including fines, consent decrees and possibly de-listing.


  Employment Agreements



     The Company has entered into various employment agreements with certain
officers and directors. The agreements generally provide for minimum annual
salaries, deferred compensation (based on pre-tax income during employment
term), the grant of stock options and severance payments in the event of
termination without cause.


                                       44
<PAGE>   45
                 COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 2000

NOTE 8 -- SHAREHOLDERS' EQUITY

  Options and Warrants

     On December 11, 1986, the Board of Directors adopted the Company's 1986
Non-Qualified Stock Option (the "1986 Plan"). The 1986 Plan, as amended,
provides for the grant of options to purchase up to 832,963 shares of Common
Stock to executive officers, key officers, employees, directors and consultants
of the Company and it subsidiaries. In February 1998, the Board of Directors
adopted the Company's Non-Employee Director Stock Option Plan (the "Director
Plan"). The Director Plan provides for the grant of options to purchase up to
157,500 shares of Common Stock to non-employee directors of the Company. In
March 1996, the Board of Directors adopted the Employees Non-Qualified Stock
Option Plan of CTL (the "CTL Plan"). The CTL Plan provides for the grant of
options to purchase up to 2,100,000 shares of Common Stock to executive
officers, key employees, directors, consultants and advisors of the Company, its
affiliates and subsidiaries. On March 8, 2000, the Board of Directors of the
Company adopted, subject to the approval of the stockholders, the Company's 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
directors, officers, key employees and consultants of the Company and its
subsidiaries.


     At March 31, 2000, options for 3,088,500 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 options and 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 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 - 6.86
  Granted...................................   5,453,809    4.00 - 11.50    2,016,800    4.50 - 8.75
  Exercised.................................  (1,190,347)   2.86 -  7.88     (136,575)
  Cancelled.................................    (621,613)   2.86 - 15.94           --
                                              ----------                    ---------
OUTSTANDING AT MARCH 31, 2000...............   4,956,967   $1.86 - 16.00    5,010,135   $2.14 - 8.75
                                              ==========                    =========
EXERCISABLE AT MARCH 31, 2000...............   2,828,481                    5,010,135
                                              ==========                    =========
</TABLE>


                                       45
<PAGE>   46
                 COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 2000

<TABLE>
<CAPTION>
                                            WEIGHTED
                               WEIGHTED      AVERAGE                    WEIGHTED
                               AVERAGE      REMAINING                   AVERAGE
 OPTION PRICE    OUTSTANDING   EXERCISE    CONTRACTUAL    EXERCISABLE   EXERCISE
  PER SHARE        OPTIONS      PRICE     LIFE (YEARS)      OPTIONS      PRICE
--------------   -----------   --------   -------------   -----------   --------
<S>              <C>           <C>        <C>             <C>           <C>
$1.86                25,526     $1.86         0.75            25,526     $1.86
  2.86 -  4.00      721,199      3.62         4.18           565,216      3.59
  4.02 -  4.50      500,100      4.47         4.01           291,850      4.45
  4.88 -  5.00    1,668,000      5.00         7.57         1,206,000      5.00
  5.12 -  5.50      487,000      5.44         4.81           203,500      5.41
  5.60 -  6.44      574,339      6.18         3.09           299,318      6.21
  6.49 -  8.56      703,431      8.08         4.47           225,057      8.07
  8.59 -  9.44      226,000      8.98         4.76            11,000      8.61
 11.50 - 16.00       51,372     11.59         4.94             1,014     14.26
                  ---------     -----         ----         ---------     -----
                  4,956,967     $5.60         5.28         2,828,481     $5.07
                  =========                                =========
</TABLE>


<TABLE>
<CAPTION>
                                          WEIGHTED
                                           AVERAGE
                              WEIGHTED    REMAINING                  WEIGHTED
                              AVERAGE    CONTRACTUAL                 AVERAGE
WARRANT PRICE   OUTSTANDING   EXERCISE      LIFE       EXERCISABLE   EXERCISE
  PER SHARE      WARRANTS      PRICE       (YEARS)      WARRANTS      PRICE
-------------   -----------   --------   -----------   -----------   --------
<S>             <C>           <C>        <C>           <C>           <C>
$2.44              340,200     $2.20        2.14          340,200     $2.14
 2.86            1,973,213      2.31        2.86        1,973,213      2.86
 3.81 - 4.50       166,740      2.95        4.17          166,740      4.17
 5.00              620,000      3.17        5.00          620,000      5.00
 5.56               30,000      2.20        5.56           30,000      5.56
 6.00              501,700      1.95        6.00          501,700      6.00
 6.43 - 7.00       519,931      4.10        6.91          119,931      6.61
 7.35 - 8.02       591,976      3.26        7.70          591,976      7.70
 8.03 - 8.33       256,375      3.39        8.14          256,375      8.14
 8.75               10,000      0.93        8.75           10,000      8.75
                 ---------     -----        ----        ---------     -----
                 5,010,135     $2.74        4.72        4,610,135     $4.53
                 =========     =====                    =========     =====
</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>
                                                               2000        1999        1998
                                                             --------    --------    --------
<S>                                                          <C>         <C>         <C>
Loss applicable to common shareholders -- as reported......  $(63,083)   $(15,998)   $(34,155)
                                           -- pro forma....   (66,104)    (16,716)    (34,439)
Loss per common share -- as reported.......................     (4.76)      (1.63)      (4.60)
                    -- pro forma...........................     (4.99)      (1.70)      (4.64)
</TABLE>


                                       46
<PAGE>   47
                 COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 2000

     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 2000, 1999, and 1998:

<TABLE>
<CAPTION>
                                                2000               1999              1998
                                           ---------------    ---------------    ------------
<S>                                        <C>                <C>                <C>
Expected stock price volatility..........  91% - 115%          90% - 114.3%        130.90%
Risk free interest rate..................  5.65% - 6.25%       5.95% - 6.25%     5.95% - 6.25%
Expected life............................  5 - 10 years         2 - 5 years        5 years
</TABLE>

     The weighted average exercise prices per share for options outstanding and
exercisable at March 31, 2000 are $5.60 and $5.07, respectively. 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 fair
value of options granted during fiscal 1998, 1999 and 2000 is $3.95, $4.04 and
$5.80 per share, respectively. The weighted average remaining contractual life
for outstanding options at March 31, 1999 and March 31, 2000 is 4.69 years and
5.28 years, respectively.


     As of March 31, 2000, subject to stockholder approval, options to purchase
911,500 shares of common stock have been granted (and are included in the above
table). No shares have been issued pursuant to the exercise of options under the
Director Plan or 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 the Company, its 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 January 2000, stock options to purchase 750,000 shares of the Company's
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. This
vesting is subject to acceleration if certain common stock price targets are met
and sustained. These options have a six-year term and an exercise price of $5.00
per share. The closing price of the Company's common stock on the date of grant
was $5.50. Compensation of $446,000 will be charged to earnings over the term of
the agreement in connection with the below market exercise price.



     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 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.



     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 fiscal 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.


                                       47
<PAGE>   48
                 COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 2000

     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 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.


     In March 2000, in connection with lease financing provided to switching
equipment end users customers, the Company issued to First Venture Leasing, LLC,
a third party leasing company, warrants to purchase 620,000 shares of common
stock at an exercise price of $5.00 per share and to purchase 261,600 shares of
common stock at an exercise price of $7.35 per share. These warrants may be
exercised for three years from the date of issuance. The Company recorded a fair
value of the warrants of $6,673,000 using the Black-Scholes option pricing
model. This amount is recorded as a reduction in net sales in the fourth quarter
and included in loss on discontinued operations in the accompanying consolidated
statement of operations.


     In fiscal 2000, in connection with public relations consulting services
provided to the Company, the Company issued warrants to Sunrise Financial Group,
Inc. to purchase 400,000 shares of common stock. These warrants were fully
earned in fiscal 2000 and may be exercised for four years beginning one year
from the date of issuance at an exercise price of $7.00 per share. The Company
recorded a fair value of $1,665,000 as administrative expense in fiscal 2000 for
these warrants using the Black-Scholes option pricing model.

     In fiscal 2000, in connection with marketing consulting services provided
to the Company, the Company issued a warrant to Sunrise Technology Marketing
Corporation to purchase 30,000 shares of common stock at an exercise price of
$8.00 per share. These warrants were fully earned in fiscal 2000 and may be
exercised for five years from the date of issuance. A fair value of $125,000 was
recorded in fiscal 2000 as administrative expense for this warrant using the
Black-Scholes option pricing model.

     In fiscal 2000, in connection with legal services provided to the Company,
the Company issued a warrant to Gallagher Harnett & Lagalante LLP to purchase
10,000 shares of common stock at an exercise price of $8.75 per share. These
warrants were fully earned in fiscal 2000 may be exercised for one year from the
date of issuance. The Company recorded a fair value of the warrant as
administrative expense in fiscal 2000 of $31,000. The fair value was determined
using the Black-Scholes option pricing model.

     In fiscal 2000, in connection with loans for a total amount of $1,225,000
provided to the Company, the Company issued to the lenders pro-rata to their
loan amounts, warrants to purchase a combined total of 73,500 shares of common
stock at an exercise price of $4.50 per share. These warrants may be exercised
for three years from the date of issuance. The Company recorded, as an interest
expense charge, a fair value of these warrants of $295,000. The fair value was
determined using the Black-Scholes option pricing model.

     Through June 21, 2000, except for the exercise and purchase of 30,000
shares by PrinVest none of the above warrants have been exercised.

     In fiscal 2000, the following holders of Class A and Class B Units
converted their holdings into shares of common stock in accordance with the
terms of conversion available to such holders.

<TABLE>
<CAPTION>
                    UNIT HOLDER                       UNIT CONVERTED    COMMON STOCK ISSUED
                    -----------                       --------------    -------------------
<S>                                                   <C>               <C>
James J. Fiedler, former Chairman and CEO...........   350 B Units            192,938
Daniel W. Latham, President and CEO.................   212 B Units            116,813
David Held, employee................................   250 B Units            137,812
Bruce Thomas, employee..............................   250 B Units            137,812
Charles Chandler, former executive..................   350 A Units            175,000
Sydney B. Lilly, former executive...................   100 A Units             50,000
</TABLE>

                                       48
<PAGE>   49
                 COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 2000

     In fiscal 2000, Mr. James J. Fiedler, the Company's former Chairman and
Chief Executive Officer, exercised warrants to acquire 75,075 shares of common
stock at an exercise price of $2.86 per share and a warrant holder who
participated in the private placement which was completed in July 1997 exercised
warrants to acquire 31,500 shares of common stock at an exercise price of $2.86
per share.

     At March 31, 2000, the Company had 5,010,135 shares of common stock
reserved and available for warrants.

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

  Convertible Preferred Stock and Warrants

     In September 1998, the Company entered into a private placement agreement
and issued 700 shares of 5% Series A Convertible Preferred Stock, par value
$.01, with a liquidation value of $10,000 per share. The total cash received by
the Company was $6,345,000 after payment of $655,000 for fees and expenses
associated with the issue. The preferred stock has no voting rights and is
convertible, subject to certain limitations and restrictions, into shares of
common stock, after a minimum holding period of 120 days, based upon a per share
common stock price that will be the lesser of the initial conversion price as
defined in the contract or 87% of the average of the three lowest per share
market values during the ten trading day period prior to an applicable
conversion date. This beneficial conversion feature has been valued at
$1,050,000 and accounted for as a dividend to the preferred shareholders. The
holders of Preferred Stock are entitled to receive 5% cumulative dividends per
annum. No dividends can be paid or declared on any Common Stock unless full cash
dividends, including past dividends declared, have been paid on the Preferred
Stock. During fiscal 1999, the Company declared and paid cash dividends of
$205,000 on the Preferred Stock.

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


     In May 1999, in connection with a private placement, the Company induced
the conversion of 700 shares of the 5% Series A Convertible Preferred Stock. To
convert the 700 shares, the holders received a cash payment of $4.0 million, 18
month warrants to purchase 325,000 shares of common stock at an exercise price
of $6.00 per share with a Black-Scholes value of $1.3 million and 600 shares of
Preferred Stock that are convertible into one million shares of common stock.
The excess of the amount given over the fair value of the shares immediately
prior to the inducement was $200,000. The excess has been added to Preferred
Stock.


     In December 1999, January and March 2000, the holder of the Series A
Convertible Preferred Stock converted a total of 476 shares of Preferred Stock
and the Company issued 793,334 shares of common stock to the holder in
accordance with the terms of conversion.

     In December 1999, January and March 2000, the Company issued 35,358 shares
of common stock to the preferred stockholder in connection with dividends due on
the above conversions and paid to the holder in common stock at the fixed
conversion rate of $6.00 per share.

                                       49
<PAGE>   50
                 COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 2000


     In January and February 2000, the Company entered into a private placement
agreement and sold 3,157,895 shares of 6% Series B Preferred Stock, par value
$1.00, with a liquidation value of $4.75 per share. Total cash received by the
Company was $14,142,000 after payment of $858,000 in fees and expenses
associated with the sale. Sunrise Securities Corp., the placement agent,
received a commission equal to 7% of the gross proceeds of the sale, consisting
of $718,500 cash and 75,000 shares of common stock, plus reimbursement for
expenses. The Preferred Stock has no voting rights. At their option, and at any
time, the holders may convert any shares of Series B Preferred Stock into shares
of common stock at a conversion price of $4.75 per share. As a result of this
discount from market of approximately $4.24 per share the Company recorded a
beneficial conversion feature of $13,388,000 which has been accounted for as a
dividend to preferred shareholders. The holders are entitled to receive 6%
cumulative dividends per year commencing 90 days from the date of the original
issue. However, such dividends shall not be paid until all amounts then due to
the holders of Series A Preferred Stock have been paid. 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. At any time after the
trading price of the Common Stock equals or exceeds $10 for twenty consecutive
trading days, the Company may, at its option, redeem all or any portion of the
shares of Series B Preferred Stock then outstanding at $4.75 per share, plus any
declared and unpaid dividends. Dividends shall cease to accrue on the shares of
Series B Preferred Stock once such shares have been redeemed. If the Company
exercises its option to redeem shares of Series B Preferred Stock, the rights of
the Holders to convert such shares will terminate at the close of business on
the business day preceding the Redemption Date.


  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
former 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 at the time, 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

                                       50
<PAGE>   51
                 COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 2000

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>
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.

     In May 1999, the Company sold 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 were used for working capital and to
redeem $4.0 million of the outstanding Series A Convertible Preferred Stock as
described above.


     In January 2000, in connection with a consulting services contract, the
Company issued 2,000,000 shares of common stock to KRJ, LLC and recorded a
non-cash charge to earnings of $12.6 million in the fourth quarter of fiscal
2000. See also Note 11 Related Party Transactions.


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>
                                                               2000       1999       1998
                                                              -------    -------    -------
<S>                                                           <C>        <C>        <C>
Federal income tax at statutory rate........................  $(8,601)   $(3,277)   $(5,875)
State income tax, net of federal benefit....................   (1,517)      (578)    (1,036)
Tax effect of net operating loss not benefited..............   10,118      3,834      6,898
Other, net..................................................       --         21         13
                                                              -------    -------    -------
Income tax credit...........................................  $    --    $    --    $    --
                                                              =======    =======    =======
</TABLE>


                                       51
<PAGE>   52
                 COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 2000

     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, 2000    MARCH 31, 1999
                                                              --------------    --------------
<S>                                                           <C>               <C>
Federal net operating loss carryforwards....................     $ 22,731          $ 16,818
State net operating loss carryforwards......................          705               729
Reserve for loss on discontinued operations.................        4,400               819
Federal capital loss carryforward...........................        5,765             4,758
Reserves and other..........................................        1,503             1,309
                                                                 --------          --------
          Total deferred tax assets.........................       35,104            24,433
Valuation allowance for deferred tax assets.................      (33,859)          (21,879)
                                                                 --------          --------
Net deferred tax assets.....................................                          2,554
Intangible assets (net).....................................        1,245             1,407
All others..................................................           --             1,147
                                                                 --------          --------
          Total deferred tax liabilities....................        1,245             2,554
                                                                 --------          --------
Net deferred taxes..........................................     $     --          $     --
                                                                 ========          ========
</TABLE>



     The Company has approximately $65 million and $10 million of federal and
state net operating loss carryforwards respectively. These carryforwards expire
at various dates through fiscal 2020. 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, 2000, 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 ("CNC") executed a Promissory
Note for $5.0 million in favor of the Company for a bridge loan. CNC granted to
the Company a warrant to purchase a split adjusted 36,765 shares of CNC Series D
Preferred Stock ("CNC Preferred Stock") at a split adjusted exercise price of
$20.40 per share (equal to the par value of such shares) as additional
consideration for the bridge loan to CNC. In August 1996, the Promissory Note
and accrued interest receivable were converted into 3,729,110 shares of CNC
Preferred Stock. In September 1996, the Company sold to StreamLogic Corporation
1,838,234 shares, or 49% of its CNC Preferred Stock for $2.5 million. No gain or
loss was recognized in connection with this sale.

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

                                       52
<PAGE>   53
                 COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 2000

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


NOTE 11 -- RELATED PARTY TRANSACTIONS


     On November 11, 1996, the Company loaned $300,000 each to James J. Fiedler
and Daniel W. Latham. Mr. Fiedler is the Company's Chairman and Chief Executive
Officer and Mr. Latham is the Company's President and Chief Operating Officer.
Messrs. Fiedler and Latham both executed unsecured Promissory Notes due November
1, 1999 which provide interest at 6.07% per annum compounded on the anniversary
date and payable on November 1, 1999. In addition, each person agreed to
surrender previously awarded options they each held to purchase 150,000 shares
of the Company's common stock.

     The Promissory Notes provide for full repayment prior to November 1, 1999
in the event of the following: (a) upon any transfer of Messrs. Fiedler's or
Latham's Class B Units in CTL (other than to a Permitted Transferee, as defined
in the Agreement Regarding Award of Class B Units (the "Award Agreement")), or
by any such Permitted Transferee (including without limitation certain transfers
contemplated by the Award Agreement) or (b) upon any exchange or conversion of
Class B Units for or into securities registered under the Securities Exchange
Act of 1934, as amended, in accordance with the Award Agreement. In connection
with the employment agreements with Messrs. Fiedler and Latham entered into on
September 4, 1997, the Company's Board of Directors agreed to forgive the notes.
Under the employment agreements, equal one third portions of the notes were
forgiven at September 4, 1997 and, if their respective employments are renewed,
will be forgiven at each of the next two anniversaries of the date of the
employment agreements, provided that each individual remains as an employee of
the Company at each such forgiveness date.

     Messrs. Fiedler and Latham used the proceeds of the loan to each purchase
100 non-forfeitable Class B Units of CTL from Mark Jacques, a former officer of
CTL, for an aggregate purchase price of $600,000. On November 12, 1996, CTL
entered into a settlement agreement with Mr. Jacques whereby Mr. Jacques (i)
agreed to the assignment to the Company of the employment agreement between him
and CTL and (ii) retained his remaining 250 Class B Units of CTL. Mr. Jacques
was terminated as an employee of the Company in January 1997. The Company has
accounted for the loans to Messrs. Fiedler and Latham and their purchase of
Class B Units from Mr. Jacques as a settlement with Mr. Jacques and recorded an
expense of $600,000 during the third quarter of fiscal 1997.

     The Company entered into Separation Agreements, dated November 20, 1996
(the "Separation Agreements"), with each of Richard Y. Fisher, Sydney B. Lilly
and Donald E. Runge (the "Departing Officers") that provide for termination of
employment and resignation from all offices and directorships in the Company and
its subsidiaries by the Departing Officers, except for Mr. Lilly's directorship
of the Company. The Separation Agreements provide for payment by the Company, as
of November 29, 1996, of $186,000 and $749,000, respectively, to Mr. Runge and
Mr. Fisher, in settlement of deferred compensation previously earned and
payments of $343,000 to Mr. Fisher and $83,000 to each of Mr. Runge and Mr.
Lilly as severance settlements resulting in total payments to the Departing
Officers of $1,444,000. In accordance with provisions of the Amended and
Restated Employment Agreements entered into by the Company and each of the
Departing Officers on April 2, 1995, each Departing Officer shall be entitled to
have all medical, dental, hospital, optometrical, nursing, nursing home and drug
expenses for themselves and their spouses paid by the Company for life, or in
the case of Mr. Lilly, until March 31, 2000. The Separation Agreement for Mr.
Fisher

                                       53
<PAGE>   54
                 COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 2000

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. 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. 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 2000, 1999
and, 1998 are $133,333, $0 and $50,000, respectively.


     Mr. Fiedler, the Company's former 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 CTL at June
30, 1997. (See Note 3). In fiscal 2000, the following holders of Class A and
Class B Units converted their holdings into shares of common stock in accordance
with the terms of conversion available to such holders.


<TABLE>
<CAPTION>
                    UNIT HOLDER                      UNIT CONVERTED    COMMON STOCK ISSUED
                    -----------                      --------------    -------------------
<S>                                                  <C>               <C>
James J. Fiedler, former Chairman and CEO..........    350 B Units           192,938
Daniel W. Latham, President and CEO................    212 B Units           116,813
David Held, employee...............................    250 B Units           137,812
Bruce Thomas, employee.............................    250 B Units           137,812
Charles Chandler, former executive.................    350 A Units           175,000
Sydney B. Lilly, former executive..................    100 A Units            50,000
</TABLE>

     In fiscal 2000, Mr. James J. Fiedler, the Company's former Chairman and
Chief Executive Officer, exercised warrants to acquire 75,075 shares of common
stock at an exercise price of $2.86 per share

     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, 2000, $421,000 was funded under this agreement. In October 1998, the
Company amended the terms of the loan and in agreement with Mr. Latham

                                       54
<PAGE>   55
                 COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 2000

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 gross
profit on this sale related to its equity interest in the buyer and amounts
reserved for payment contingencies. The entire cash proceeds related to the sale
were collected prior to September 30, 1998.


     Comdisco, Inc., a technology services and finance company, is the owner of
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. Prior to the sale by the Company in October 1999 of its
80% membership interest in Coyote Gateway, LLC (dba AGT), PrinVest Corporation,
a financing and leasing corporation, had a minority interest of approximately 4%
in AGT. During fiscal 2000 and 1999, PrinVest provided financing to AGT ($10.2
million at September 30, 1999) in connection with deposits required to be made
by AGT to other long distance telecommunications carriers and for working
capital. The Company had pledged 708,692 shares of common stock as collateral on
the notes payable to PrinVest. The shares were returned in connection with the
sale of AGT (See Note 4). As of March 31, 1999, PrinVest was the
purchaser/lessor on approximately $15.0 million of equipment that it is leasing
to end-users.


     In November 1997, the Company completed the sale of C&L Communications,
Inc. ("C&L") to the management of C&L (See Note 2). During the years ended March
31, 2000 and 1999, the Company had the following transactions with C&L.


<TABLE>
<CAPTION>
                                                         2000         1999
                                                       --------    ----------
<S>                                                    <C>         <C>
Purchases from C&L(1)................................  $717,000    $9,498,000
Sales to C&L(1)......................................  $     --    $       --
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.


     In October and November 1999, the Company completed and received funding
under a series of two demand loans. The first loan for a total amount of
$600,000 was provided to the Company by Mr. Fiedler in the amount of $175,000,
by Mr. Latham in the amount of $75,000 and by Mr. Alan J. Andreini, an affiliate
shareholder of the Company, in the amount of $350,000 in October 1999. This loan
bore interest at bank's prime rate (8.25% at December 31, 1999) plus 1% per
year, was repayable on demand and was secured against the Company's investment
in Systeam, S.p.A. These borrowings together with accrued interest were fully
repaid in April 2000.


     The second loan for a total amount of $1,225,000 was provided to the
Company by Mr. Richard L. Haydon, an affiliate shareholder of the Company, in
the amount of $500,000, by Mr. Alan J. Andreini in the amount of $225,000 and by
three non-affiliate 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 a
pledge of shares of the common stock of INET Interactive Network System, Inc.,

                                       55
<PAGE>   56
                 COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 2000

a wholly owned subsidiary of the Company. 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 common stock of the Company at an exercise price of $4.50
per share. These borrowings together with accrued interest were fully repaid in
February and March 2000.

     On January 25, 2000, the Company entered into a Financial Services
Agreement with First Venture Leasing LLC ("First Venture"), pursuant to which a
limited liability company (the "LLC") was formed by First Venture to offer
certain leasing and credit packages to the Company's customers. First Venture is
an entity in which Mr. James McCullough, the Company's Chief Executive Officer
and a director, had a 25% interest, which he relinquished effective upon his
becoming an officer and director of the Company on February 2, 2000. The terms
of the agreement with First Venture were the result of arms' length negotiation
in which Mr. McCullough did not participate. The agreement with First Venture
was approved by our Board of Directors.

     In connection with the Financial Services Agreement, First Venture was
issued 620,000 warrants to purchase common stock at $5.00 per share and 261,600
warrants at $7.35. The closing price of the Company's common stock on the date
of grant was $11.00. These warrants vested upon grant.


     On January 26, 2000, the Company also entered into a Consulting Agreement
with KRJ, LLC ("KRJ"). Pursuant to the Consulting Agreement, KRJ provided
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. The Company issued to KRJ 2,000,000 shares of common stock.
Of such shares, 1,250,000 are held 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 or if a change in control occurs. In addition,
unless there is a change of control of the Company (as defined in the Consulting
Agreement), KRJ has agreed not to sell, pledge, hypothecate or otherwise
transfer any of the 2,000,000 shares for a period 12 months after the respective
dates of delivery of any of such shares. Mr. McCullough has an approximately
one-third interest in KRJ and the balance of KRJ is owned by affiliates of First
Venture. The Consulting Agreement also provides that over the next three years,
KRJ may provide assistance in further identification of additional business
opportunities both in the domestic and international markets. Compensation for
these additional services will be specifically negotiated at a future date. The
Consulting Agreement has been approved by the Company's Board of Directors and
the terms of the agreement with KRJ were the result of arms' length negotiation
in which Mr. McCullough did not participate.



     The services related to the 2,000,000 shares were performed in the last
quarter of 2000 and the fair value of $12.6 million was charged to operations in
the fourth quarter. Pursuant to the agreement, the shares will be released from
escrow whether or not KRJ provides additional services.



     In January 2000, the Company restructured its management and business
strategy. On January 14, 2000, the Company issued options to Mr. McCullough to
purchase 750,000 shares of common stock at $5.00 per share. The closing price of
the Company's common stock on the date of grant was $5.50. Three hundred
thousand options vested upon grant, with the remaining options vesting in
increments over three years, beginning January 14, 2001, subject to acceleration
if certain common stock price targets are met and sustained or if a change in
control occurs.



     In February 2000, the Board of Directors accepted the tendered resignation
of Mr. Fiedler as a Director, Chairman and Chief Executive Officer of the
Company. The Company entered into a separation agreement with Mr. Fiedler
effective February 16, 2000. The separation agreement provides for payment of
severance pay, health benefits for a specified period of time, the acceleration
of vesting of options and a repricing of options. The total value of the
severance package approximated $1,700,000.


                                       56
<PAGE>   57
                 COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 2000


NOTE 12 -- BUSINESS SEGMENT INFORMATION


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


NOTE 13 -- 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>
                                                               2000       1999       1998
                                                              -------    -------    ------
<S>                                                           <C>        <C>        <C>
Cash paid for interest......................................  $ 1,138    $ 1,808    $  444
Cash paid for income tax....................................  $     9          6         6
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        --
  Conversion of preferred stock to common stock.............    6,025         --        --
  Conversion of A & B units.................................      812         --        --
  Preferred stock conversion inducement.....................      200
  Conversion of debt to common stock........................       --      3,789        --
  Securities litigation warrant expense.....................       --         --     8,000
  Dividend paid in common stock.............................      220      3,359        --
  Beneficial conversion feature on preference shares........   13,388      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 14 -- SUBSEQUENT EVENTS



     On May 10, 2000, the Company entered into an Agreement and Plan of Merger,
subsequently amended on May 26, 2000 (the "Merger Agreement"), under which the
Company agreed to acquire Primary Knowledge, Inc., a California corporation in
the process of changing its name to HomeAccess MicroWeb, Inc. ("HomeAccess").
HomeAccess is a developer of local community on-line 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. Upon consummation of the merger, the Company has agreed to issue
1,384,178 shares of Series C Preferred Stock and between 3,229,747 and 4,556,250
shares of Common Stock (dependent upon the price of the Common Stock on the
closing date) to the stockholders of HomeAccess. The shares of Series C
Preferred Stock are convertible into between 1,952,679 and 1,384,178 shares of
Common Stock, dependent upon the price of the Common Stock on the closing date.
For a period of four years after consummation of the merger, the Company has
agreed to issue to the shareholders of HomeAccess, collectively, two shares of
Common Stock for each new customer acquired by HomeAccess; provided the customer
has been preapproved by the Company and has met certain performance criteria. In
no event will the maximum number of shares issued under this program exceed 13%
of the total number of shares of Common Stock outstanding, on a fully diluted
basis, on the closing date. The Company has also agreed to issue a warrant to
purchase up to 3,600,000 shares of Common Stock at an exercise price of $20 per
share if certain performance criteria are met. The consummation of the
transactions contemplated by the Merger Agreement are subject to certain
contingencies, including stockholder approval.


                                       57
<PAGE>   58
                 COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 2000


     The Company has also agreed to acquire Ariana, Inc., an international and
domestic long distance carrier, through the issuance of 441,175 shares of Common
Stock. The Company could issue up to an additional 300,000 shares of Common
Stock if an earn-out event occurs. The Company has also agreed to acquire
Polylink Ltd., a Hong Kong based telecommunications provider, for 250,000 shares
of Common Stock.



     These acquisitions are subject to certain closing conditions.



     In June, 2000 the Board of Directors approved the grant of options to
purchase an additional 750,000 shares of Common Stock to James McCullough, CEO
at $7.00 per share. The exercisability of the options is dependent on the
closing bid price of the Company's Common Stock exceeding certain amounts
ranging from $12.00 to $20.00 per share.



     The Board of Directors resolved in June 2000 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 $7.00 per share to KRJ.
The vesting of the shares and the exercisability of the warrants would be
dependent on the average bid price of the Company's Common Stock exceeding
certain amounts that range from $12 to $30 per share.


                                       58
<PAGE>   59

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

     None.

                                   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.


                                       59
<PAGE>   60

                      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
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>   61

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,
2000, the total annual compensation paid to, or accrued by us for the account of
each individual who served as the Company's Chief Executive Officer during the
fiscal year ended March 31, 2000 and each of the Company's most highly
compensated executive officers whose salary and bonus was in excess of $100,000
during the fiscal year (the "Named Executives"):

                           SUMMARY COMPENSATION TABLE


<TABLE>
<CAPTION>
                                                                               LONG-TERM
                                                                              COMPENSATION
                                               ANNUAL COMPENSATION            ------------
                                       ------------------------------------    SECURITIES
           NAME AND                                          OTHER ANNUAL      UNDERLYING     ALL OTHER
      PRINCIPAL POSITION        YEAR    SALARY     BONUS    COMPENSATION(5)     OPTIONS      COMPENSATION
      ------------------        ----   --------   -------   ---------------    ----------    ------------
<S>                             <C>    <C>        <C>       <C>               <C>            <C>
James R. McCullough(1)........  2000   $ 31,385   $    --            --          750,000       $    --
  Chairman and Chief Executive
     Officer
James J. Fiedler(2)...........  2000   $300,000        --       $22,500          472,500       $ 7,200(8)
  Former Chairman, CEO and      1999   $300,000   $ 9,335       $20,000           94,500(6)    $ 7,200(8)
  Director                      1998   $200,000   $19,746       $15,000               --       $ 7,200(8)
Daniel W. Latham(3)...........  2000   $300,000        --       $15,000          472,500         7,200(8)
  President, COO and Director   1999   $300,000   $ 9,335       $20,000           94,500(6)    $ 7,200(8)
                                1998   $175,000   $19,746       $15,000               --       $ 7,200(8)
Brian A. Robson(4)............  2000   $160,000        --            --               --       $ 8,000(8)
  Former Executive Vice         1999   $152,487   $12,875            --           98,125(7)         --
  President, CFO and Secretary  1998   $139,907        --            --           13,125       $21,921(9)
</TABLE>


---------------
(1) Mr. McCullough succeeded Mr. Fiedler as our Chief Executive Officer on
    January 26, 2000. (See "Employment Agreements")

(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) Compensation for serving on the board of directors.

(6) 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>   62

(7) 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.

(8) Represents automobile allowance.

(9) Represents relocation assistance paid by us.

     The table below provides information regarding stock options granted during
the fiscal year ended March 31, 2000 to the Named Executives:


                      OPTIONS GRANTED IN LAST FISCAL YEAR



<TABLE>
<CAPTION>
                                                                 INDIVIDUAL GRANTS
                           ----------------------------------------------------------------------------------------------
                           NUMBER OF       % OF TOTAL                              POTENTIAL REALIZABLE VALUE AT ASSUMED
                             SHARES         OPTIONS                                     ANNUAL RATE OF STOCK PRICE
                           UNDERLYING      GRANTED TO                                 APPRECIATION FOR OPTION TERM(1)
                            OPTIONS        EMPLOYEES      EXERCISE   EXPIRATION   ---------------------------------------
                            GRANTED      IN FISCAL YEAR    PRICE        DATE          0%            5%            10%
                           ----------    --------------   --------   ----------   -----------   -----------   -----------
<S>                        <C>           <C>              <C>        <C>          <C>           <C>           <C>
James R. McCullough......   750,000(2)        13.8%        $5.00      1/26/06     $3,750,000    $6,300,000    $9,536,708
James J. Fiedler.........    94,500(3)         1.7%        $7.62      4/01/09     $       --    $  268,085    $  794,332
                            378,000(4)         6.9%        $5.00      1/24/10     $  543,375    $2,222,404    $4,412,441
Daniel W. Latham.........    94,500(3)         1.7%        $7.62      4/01/09     $       --    $  268,085    $  794,332
                            378,000(4)         6.9%        $5.00      1/24/10     $  543,375    $2,222,404    $4,412,441
Brian A. Robson..........        --             --         $  --           --     $       --    $       --    $       --
</TABLE>


---------------
(1) 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.

(2) On January 26, 2000, Mr. McCullough was granted 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.


(3) On January 24, 2000, the Board of Directors repriced these options to an
    exercise price of $5.00 per share and extended the option expiration date to
    January 24, 2010. See Note 4 below.



(4) 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.


    AGGREGATED OPTION EXERCISES DURING THE FISCAL YEAR ENDED MARCH 31, 2000
                       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, 2000. The
Named Executives did not exercise any stock options during the fiscal year.



<TABLE>
<CAPTION>
                                                                                VALUE OF UNEXERCISED
                                               NUMBER OF UNEXERCISED            IN-THE-MONEY OPTIONS
                                             OPTIONS AT MARCH 31, 2000          AT MARCH 31, 2000(1)
                                            ----------------------------    ----------------------------
                                            EXERCISABLE    UNEXERCISABLE    EXERCISABLE    UNEXERCISABLE
                                            -----------    -------------    -----------    -------------
<S>                                         <C>            <C>              <C>            <C>
James R. McCullough.......................    300,000         450,000       $1,800,000      $2,700,000
James J. Fiedler..........................    472,500              --       $2,835,000      $       --
Daniel W. Latham..........................    472,500              --       $2,835,000      $       --
Brian A. Robson...........................     41,458          69,792       $   22,086      $  349,339
</TABLE>


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

(1) Value based on the closing price of $11.00 of the common stock on The Nasdaq
    National Market on March 31, 2000, less the option exercise price.


                                       62
<PAGE>   63

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.

     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
                                       63
<PAGE>   64

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 vests 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.


     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.

                                       64
<PAGE>   65

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.

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)          7.7%
                                                                         (6)(16)
</TABLE>

                                       65
<PAGE>   66

---------------
  *  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 of Proposal 2. 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 of Proposal 2. 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.



 (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.

                                       66
<PAGE>   67

(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.

     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.

                                       67
<PAGE>   68


     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, 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.


                                       68
<PAGE>   69

                                    PART IV.

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

(a) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES


<TABLE>
<CAPTION>
                                                                  FORM 10-K
                                                                    PAGE
                                                                   NUMBER
                                                                  ---------
    <S>                                                           <C>
         (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.........................................     26
              Consolidated Balance Sheets -- March 31, 2000 and
              March 31, 1999......................................     27
              Consolidated Statements of Operations -- Fiscal
              Years Ended March 31, 2000, March 31, 1999 and March
              31, 1998............................................     28
              Consolidated Statements of Shareholders'
              Equity -- Fiscal Years Ended March 31, 2000, March
              31, 1999 and March 31, 1998.........................     29
              Consolidated Statements of Cash Flows -- Fiscal
              Years Ended March 31, 2000, March 31, 1999 and March
              31, 1998............................................     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 II -- Valuation and Qualifying
              Accounts............................................     74
</TABLE>



     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 filed the following reports on Form 8-K during the quarter
ended March 31, 2000:


     (1) A Form 8-K/A dated October 27, 1999 was filed by the Company on January
10, 2000, amending the Company's Form 8-K filed on November 12, 1999 to include
a Pro Forma Condensed Consolidated Balance Sheet at June 30, 1999 and Pro Forma
Condensed Consolidated Statement of Operations for the fiscal year ended March
31, 1999 and for the three months ended June 30, 1999 reflecting the sale of the
Company's 80% membership interest in Coyote Gateway, LLC (d/b/a American Gateway
Telecommunications, Inc.).



     (2) A Form 8-K dated January 25, 2000 was filed by the Company on February
4, 2000 reporting James McCullough's appointment as Chief Executive Officer, the
execution of an Employment Agreement with Mr. McCullough, the execution of a
Financial Services Agreement with First Venture Leasing LLC, a Remarketing
Agreement and two License Agreements with a limited liability company formed by
First Venture Leasing and a Consulting Agreement with KRJ, LLC and the issuance
of two million shares of common stock to KRJ, LLC.



     (3) A Form 8-K/A dated January 31, 2000 was filed by the Company on
February 14, 2000, reporting the Company's sale of $15 million of 6% Series B
Preferred Stock in a private placement to accredited investors.


                                       69
<PAGE>   70

(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      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.
 4.2      Form of Subscription Agreement (incorporated herein by
          reference to Exhibit 4.1 of Registrant's Form 8-K dated
          December 22, 1997 filed on January 5, 1998).
 4.3      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).
 4.4      Form of Offshore Warrant Subscription Agreement
          (incorporated herein by reference to Exhibit 4.4 of
          Registrant's Form 8-K filed on July 31, 1997).
 4.5      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, 1997).
 4.6      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, 1997).
 4.7      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, 1997).
 4.8      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).
 4.9      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).
 4.10     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).
 4.11     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).
</TABLE>


                                       70
<PAGE>   71


<TABLE>
<CAPTION>
EXHIBIT
NUMBER                            DESCRIPTION
-------                           -----------
<C>       <S>
 4.12     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).
 4.13     Warrant Agreement dated as of June 30, 1999 to purchase
          2,225,000 shares of common stock (incorporated by reference
          to Exhibit 4.1 to Registrant's Form 8-K dated May 24, 1999
          filed July 6, 1999).
 4.14     Form of Demand Loan Agreement between Coyote Network
          Systems, Inc. and certain affiliate and non-affiliate
          shareholders dated November 1, 1999 (incorporated herein by
          reference to Exhibit 4.04 of the Registrant's Form 10-Q for
          the quarter ended September 30, 1999 filed November 15,
          1999).
 4.15     Form of Pledge Agreement between Coyote Network Systems,
          Inc. and certain affiliate and non-affiliate shareholders
          dated November 1, 1999 (incorporated herein by reference to
          Exhibit 4.05 of the Registrant's Form 10-Q for the quarter
          ended September 30, 1999 filed November 15, 1999).
 4.16     Form of Common Stock Purchase Warrant Certificate between
          Coyote Network Systems, Inc. and certain affiliate and
          non-affiliate shareholders dated November 1, 1999
          (incorporated herein by reference to Exhibit 4.06 of the
          Registrant's Form 10-Q for the quarter ended September 30,
          1999 filed November 15, 1999).
 4.17     Form of Subscription Agreement relating to shares of Series
          B Preferred Stock (incorporated by reference to Exhibit 4.1
          to Registrant's Form 8-K dated January 31, 2000 filed
          February 14, 2000).
 4.18     Common Stock Purchase Warrant Certificate dated June 13,
          1999 issued to PrinVest Corp. to purchase 90,000 shares of
          common stock.
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).
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).
</TABLE>


                                       71
<PAGE>   72

<TABLE>
<CAPTION>
EXHIBIT
NUMBER                            DESCRIPTION
-------                           -----------
<C>       <S>
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).
10.19     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).
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     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).
10.23     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).
10.24     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).
10.25     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).
</TABLE>

                                       72
<PAGE>   73


<TABLE>
<CAPTION>
EXHIBIT
NUMBER                            DESCRIPTION
-------                           -----------
<C>       <S>
10.26     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).
10.27     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).
10.28     Purchase Agreement, dated September 30, 1999, among Coyote
          Network Systems, Inc., American Gateway Telecommunications,
          Inc., Coyote Gateway, LLC, PrinVest Corp., PrinVest
          Financial Corp. and Arnold A. Salinas (incorporated by
          reference to Exhibit 2 to the Registrant's Form 8-K dated
          October 27, 1999, filed November 12, 1999).
10.29     Employment Agreement dated as of January 26, 2000 by and
          between Coyote Network Systems, Inc. and James R. McCullough
          (incorporated herein by reference to Exhibit 10.1 of
          Registrant's Form 8-K dated January 25, 2000 filed February
          14, 2000).
10.30     Consulting Agreement dated as of January 26, 2000 by and
          between Coyote Network Systems, Inc. and KRJ, LLC
          (incorporated herein by reference to Exhibit 10.2 of
          Registrant's Form 8-K dated January 25, 2000 filed February
          14, 2000).
10.31     Agreement and Plan of Merger dated May 10, 2000 by and among
          Coyote Network Systems, Inc., Primary Knowledge, Inc., DQE
          Enterprises, Inc., Barbara Conrad and Jerry Conrad
          (incorporated by reference to Exhibit 10.1 of the
          Registrant's Form 8-K dated May 10, 2000 filed June 9,
          2000).
10.32     First Amendment to Agreement and Plan of Merger dated May
          26, 2000 by and among Coyote Network Systems, Inc., Primary
          Knowledge, Inc., DQE Enterprises, Inc., Barbara Conrad and
          Jerry Conrad (incorporated by reference to Exhibit 10.1 of
          the Registrant's Form 8-K dated May 10, 2000 filed June 9,
          2000).
10.33     Financial Services Agreement dated as of March 31, 2000
          among Coyote Technologies, LLC, Coyote Network Systems, Inc.
          and First Venture Leasing, LLC.
10.34     Master Remarketing Agreement dated as of March 31, 2000
          between Coyote Technologies, LLC, and First Venture Leasing,
          LLC.
10.35     Separation Agreement dated as of February 16, 2000 between
          Coyote Network Systems, Inc. and James J. Fiedler.
10.36     Bill of Sale dated March 22, 1999 of Wireless USA, Inc.,
          agreed to by Coyote Technologies, LLC.
21        Subsidiaries of Registrant
23        Consent of Independent Accountants
27        Financial Data Schedule
</TABLE>


                                       73
<PAGE>   74

                    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 June 29, 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

June 29, 2000


                                       74
<PAGE>   75


                 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, 1998..........      $ --           $ --          $ --         $ --          $ --
  Year ended March 31, 1999..........      $ --           $ --          $377         $ --          $377
  Year ended March 31, 2000..........      $377           $ --          $216         $ --          $593
</TABLE>


                                       75
<PAGE>   76

                                   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 in the
capacities and on the dates indicated.


<TABLE>
<CAPTION>
                      SIGNATURE                                      TITLE                    DATE
                      ---------                                      -----                    ----
<S>                                                    <C>                                <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              June 29, 2000
-----------------------------------------------------       Principal Financial and
                   Cheryl Johnson                             Accounting Officer

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

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


                                       76