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



                                    FORM 10-Q




              |X| Quarterly Report Pursuant to Section 13 or 15(d)
                     of the Securities Exchange Act of 1934

                     For the Period ended December 31, 1997

                                       OR

             |_| Transition Report Pursuant to Section 13 or 15 (d)
                     of the Securities Exchange Act of 1934



                          Commission file number 1-5486

                          COYOTE NETWORK SYSTEMS, INC.
           Incorporated pursuant to the Laws of the State of Delaware



        Internal Revenue Service - Employer Identification No. 36-2448698

               4360 Park Terrace Drive, Westlake Village, CA 91361
                                 (818) 735-7600

             Former Address: 20625 Mureau Road, Calabasas, CA 91302
                                 (818) 878-7711



Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed  by  Section  13 or 15 (d) of the  Securities  Exchange  Act of 1934
during the preceding 12 months (or for such shorter  period that the  Registrant
was  required  to file such  reports),  and (2) has been  subject to such filing
requirements for the past 90 days. |X| YES |_| NO

At February 13, 1998, the Registrant has issued and  outstanding an aggregate of
8,260,463 shares of its common stock.

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<PAGE>


                          COYOTE NETWORK SYSTEMS, INC.
                                AND SUBSIDIARIES


                                                                           Page
PART I.  FINANCIAL INFORMATION

         Item 1. Financial Statements
                 Balance Sheet..............................................  2
                 Statement of Operations....................................  3
                 Statement of Cash Flows....................................  4
                 Notes to Financial Statements..............................  5
         Item 2. Management's Discussion and Analysis of Financial Condition 10


PART II. OTHER INFORMATION

         Item 1. Legal Proceedings.........................................  14
         Item 2. Changes in Securities and Use of Proceeds.................  14
         Item 4. Submission of Matters to a Vote of Security Holders.......  14
         Item 6. Exhibits and Reports on Form 8-K..........................  14
         Signature    .....................................................  16




<PAGE>


                  COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES
                      Condensed Consolidated Balance Sheet
                                 (In Thousands)
<TABLE>
<CAPTION>
                                                                                     December 31,             March 31,
                                                                                         1997                   1997
                                                                                   -----------------        -------------
                                                                                      (Unaudited)
<S>                                                                                   <C>                     <C>
                                            Assets
Current assets
     Cash and cash equivalents                                                        $     6,795             $      81
     Marketable securities                                                                  1,180                ---
     Receivables                                                                              999                 4,594
     Inventories                                                                            3,298                 2,937
     Net assets of discontinued operations                                                 ---                      893
     Other current assets                                                                     913                 1,716
                                                                                         --------               -------
         Total current assets                                                              13,185                10,221

Property and equipment                                                                      1,672                 1,944
Intangible assets                                                                           3,595                 3,755
Net assets of discontinued operations                                                       3,123                 7,308
Other assets                                                                                2,948                    16
                                                                                        ---------             ---------
                                                                                       $   24,523            $   23,244
                                                                                        =========             =========

                           Liabilities and Shareholders' Equity
Current liabilities
     Accounts payable                                                                  $    1,635            $    2,559
     Accrued liabilities                                                                    1,227                 1,360
     Accrued common stock conversion expense                                                5,522                ---
     Accrued common stock warrant expense                                                     494                ---
     Current portion of long-term debt                                                        141                   141
                                                                                         --------               -------
                Total current liabilities                                                   9,019                 4,060

11.25% subordinated debentures, due 2002                                                    1,676                 1,817
8.0% convertible notes, due 2000                                                            5,000                ---
Other liabilities                                                                             513                   533

Shareholders' equity
     Preferred stock - $.01 par value                                                      ---                   ---
     Common stock - $1 par value                                                            8,816                 6,007
     Additional paid-in capital                                                            84,847                80,124
     Accumulated deficit                                                                  (79,411)              (63,540)
     Unrealized (loss) on marketable securities                                              (180)               ---
     Treasury stock                                                                        (5,757)               (5,757)
                                                                                         ---------              --------
                Total Shareholders' equity                                                  8,315                16,834
                                                                                         --------                ------
                                                                                       $   24,523             $  23,244
                                                                                        =========              ========
</TABLE>




            See notes to condensed consolidated financial statements.


<PAGE>


                  COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES
                 Condensed Consolidated Statements of Operations
                                   (Unaudited)
                    (In Thousands, Except Per Share Amounts)

<TABLE>
<CAPTION>
                                                       3 Months             12 Weeks               9 Months            40 Weeks
                                                         Ended                Ended                 Ended                Ended
                                                      Dec 31, 1997         Jan 4, 1997           Dec 31, 1997         Jan 4, 1997
                                                      --------------------------------           --------------------------------
<S>                                                       <C>                <C>                   <C>                 <C>

Net Sales                                                 $  1,659           $   2,552             $    2,709          $    7,059
Cost of sales                                                  516                 710                    958               1,747
                                                         ---------            --------              ---------            --------
Gross profit                                                 1,143               1,842                  1,751               5,312

Selling and Administrative expenses                          3,056               3,965                  9,182               8,555
Engineering, Research and Development                        1,395               1,798                  2,692               3,035
                                                          --------            --------               --------            --------
         Total operating expenses                            4,451               5,763                 11,874              11,590
                                                          --------            --------               --------            --------
         Operating loss                                     (3,308)             (3,921)               (10,123)             (6,278)

Interest expense                                              (150)                 (7)                  (273)                (52)
Non-operating income (loss)                                     44                (626)                    48                (281)
Non-operating expense                                      ---                 ---                     (5,522)            ---
Minority interest                                          ---                      55                ---                     181
Income tax credit                                          ---                     836                ---                     836
                                                        ----------            --------            -----------            --------
         Loss from continuing operations                    (3,414)             (3,663)               (15,870)             (5,594)

Loss from discontinued operations                          ---                    (223)               ---                    (625)
Estimated loss on disposal of
  discontinued operations                                  ---                  (2,050)               ---                  (5,550)
                                                        ----------            ---------           -----------            ---------
         Loss before extraordinary item                     (3,414)             (5,936)               (15,870)            (11,769)
Extraordinary item                                         ---                 ---                     --                    (227)
                                                        ----------          ----------            -----------           ----------
         Net loss                                         $ (3,414)          $  (5,936)            $  (15,870)         $  (11,996)
                                                           ========           =========             ==========             =======

Loss per common share (basic & diluted):
  Continuing operations                                   $  (.44)           $   (.69)             $   (2.37)          $   (1.06)
  Discontinued operations                                    ---                 (.04)                 ---                  (.12)
  Estimated loss on disposal                                 ---                 (.39)                 ---                 (1.06)
  Extraordinary item                                        ---                ---                   ---                    (.04)
                                                        -----------        -----------           ------------          ----------
Net loss per common share (basic & diluted)               $  (.44)           $  (1.12)             $   (2.37)          $   (2.28)
                                                           =======             =======              =========           =========

Weighted average number of common
  shares outstanding (basic & diluted)                       7,844               5,294                  6,685               5,263
</TABLE>







            See notes to condensed consolidated financial statements.

<PAGE>


                  COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES
                 Condensed Consolidated Statements of Cash Flows
                                   (Unaudited)
                                 (In Thousands)
<TABLE>
<CAPTION>
                                                                                          9 Months               40 Weeks
                                                                                            Ended                  Ended
                                                                                         Dec 31, 1997           Jan 4, 1997
                                                                                         ------------           -----------
<S>                                                                                       <C>                   <C>
Operating Activities:
     Loss before extraordinary item                                                       $  (15,870)           $  (11,769)
     Reconciliation of loss to net cash provided by operating activities:
         Losses on sales of marketable securities                                            ---                       736
         Depreciation and amortization                                                           565                   346
         Provision for common stock warrants issued                                              494               ---
         Provision for CTL Class A/B Unit Convertibility                                       5,522               ---
         Minority Interest                                                                   ---                      (181)
         Estimated loss on disposal of discontinued operations                               ---                     5,550
         Net change in discontinued operations                                                   345                (2,808)
         Other                                                                               ---                       (70)
         Changes in operating assets and liabilities                                           1,610                (5,544)
                                                                                            --------              ---------
Net cash provided (used) by operating activities                                              (7,334)              (13,740)
Investing activities:
     Increase in promissory note                                                                (840)               (5,600)
     Sale of CNC common and preferred stock respectively                                         397                 2,500
     Additions to property and equipment                                                        (132)               (1,977)
     Proceeds of sales of marketable securities                                              ---                     1,227
     Purchase of marketable securities                                                          (244)              ---
     Net change in discontinued operations                                                      (470)                 (792)
     Proceeds of discontinued operations                                                       2,861               ---
     Other                                                                                   ---                       284
                                                                                          ----------               -------
Net cash provided (used) by investing activities                                               1,572                (4,358)
Financing activities:
     Repayments of long-term debt                                                               (141)                 (141)
     Change in note payable                                                                      250               ---
     Payment of note payable                                                                     (98)              ---
     Convertible note issued, net of expenses                                                  4,635               ---
     Common stock issued, net of expenses                                                      7,601                13,918
     Net change in discontinued operations                                                       229                 2,890
     Extraordinary item                                                                      ---                      (227)
     Other                                                                                   ---                       (22)
                                                                                          ----------              ---------
Net cash provided (used) by financing activities                                              12,476                16,418
                                                                                              ------                ------
Increase (decrease) in cash and cash equivalents                                               6,714                (1,680)
Cash and cash equivalents at the beginning of the period                                          81                 4,480
                                                                                          ----------              --------
Cash and cash equivalents at the end of the period                                        $    6,795            $    2,800
                                                                                           =========             =========
Non-cash transactions:
     Conversion of promissory note to CNC preferred stock                                    ---                 $   5,000
     Acquisition of common stock held by minority shareholder                                ---                     2,832
     Issuance of common stock warrants to
       investment banker and placement agent                                                     494               ---
     Note payable to related party                                                                98               ---
     Change in convertibility of CTL A/B Units                                                 5,552               ---
     Conversion of note payable to common stock                                                  250               ---
     Conversion of convertible notes and interest into common stock                            2,545               ---
</TABLE>

            See notes to condensed consolidated financial statements.


<PAGE>


                  COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES
              Notes to Condensed Consolidated Financial Statements
                                   (Unaudited)

              At the Annual Meeting of  Shareholders  held on November 20, 1997,
the Registrant's  shareholders adopted and ratified a change of the Registrant's
name to Coyote Network Systems, Inc.

              At a meeting of the members of the Registrant's  subsidiary Sattel
Communications,  LLC held on December 16, 1997, the members adopted and ratified
a change of the subsidiary's name to Coyote Technologies, LLC ("CTL").

NOTE 1        Basis of Presentation

         The accompanying  unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted  accounting  principles
for interim  financial  information  and with the  instructions to Form 10-Q and
Article  10 of  Regulation  S-X.  Accordingly,  they do not  include  all of the
information and footnotes required by generally accepted  accounting  principles
for complete financial statements. In the opinion of management, all adjustments
(consisting  of  normal  recurring  accruals)  considered  necessary  for a fair
presentation  have been included.  Operating  results for the three months ended
December  31, 1997 are not  necessarily  indicative  of the results  that may be
expected  for the fiscal year ended  March 31,  1998.  For further  information,
refer to the consolidated financial statements and footnotes thereto included in
the  Company's  annual  report on Form 10-K for the fiscal  year ended March 31,
1997.

         The  computation  of loss per common share is  determined  by using the
weighted  average  number  of shares of common  stock  outstanding  during  each
period.


NOTE 2        Discontinued Operations

         On November 20, 1996, the Board of Directors of the Company  approved a
restructuring  plan (the  "Restructuring")  to separate its central office voice
and data switching  equipment  business (the "CTL Business" formerly the "Sattel
Business") from the following businesses:

                SEGMENT                                    COMPANY
    Telecommunications equipment distribution               C&L
    Voice and data network installation and service         Valley
    Wholesale distribution of meat and seafood              Entree/APC

         The  Restructuring  provided for a spin-off of the non-CTL  businesses,
through a special  dividend to the  Company's  shareholders.  Consequently,  the
Company reported the results of operations of the  telecommunications  equipment
distribution  segment,  the  voice and data  network  installation  and  service
segment and the wholesale distribution of meat and seafood segment separately as
discontinued operations. Subsequently, the Company received a purchase offer for
a majority of the assets of APC. On February 3, 1997,  the Board of Directors of
the  Company  approved  the sale of a majority  of the assets of APC to Colorado
Boxed Beef Company ("Colorado"). The sale closed on February 3, 1997.

         Colorado  purchased  the  following  assets of APC for  $13.5  million:
receivables,  inventories,  machinery and equipment, furniture and fixtures, and
certain  other  current  assets.  Colorado  made a cash  payment  to APC of $6.9
million of which  $712,000  was  restricted  pursuant  to the terms of the Asset
Purchase Agreement. As of December 31, 1997, $100,000 was held in escrow and was
released  on  February  5,  1998 at which  time all  valid

<PAGE>

NOTE 2  Discontinued Operations (Continued)

claims  against the escrow had been  settled.  Colorado  also  assumed  accounts
payable and accrued liabilities of APC of $6.6 million.  APC repaid $5.8 million
to its lender to extinguish all obligations under its revolving line of credit.

         APC  retained  real estate with a net book value of $2.5  million.  The
real estate is collateral for two mortgage notes that amounted to $754,000.  The
real estate is listed for sale.

         As a  result  of the  sale of  APC's  assets,  the  Company's  Board of
Directors  terminated  the  original  Restructuring  Plan for a spin-off  of the
non-CTL businesses. The Company adopted a revised Restructuring Plan to sell C&L
and  Valley.  The  revised  Restructuring  Plan  was  approved  by the  Board of
Directors in February 1997.

         On  November  20,  1997,   the  Company   completed  the  sale  of  its
telecommunications distributor subsidiary, C&L Communications,  Inc. ("C&L"), to
the current management of C&L, including Michael Sonaco, James Olson and William
Cain. Prior to the sale, $645,000 of non-operating assets were dividended by C&L
to the  Company,  and under the terms of the  agreement,  the  Company  received
$2,750,000  in cash,  and  $1,000,000  secured  promissory  note due in  monthly
installments  and  maturing  on  January  1, 2001 and  non-voting,  subordinated
preferred stock with a liquidation preference of $2,000,000. The note receivable
was recorded at face value of $1,000,000 and the preferred stock was recorded at
a value of $800,000.

         The Company  anticipates  the sale of Valley will be completed prior to
March 31,  1998.  The  Company  believes  that the  reserve for loss on disposal
recorded at December 31, 1997 of $1,807,000 is sufficient to cover all estimated
expenses and net losses of the remaining discontinued  operations to be incurred
with respect to its revised Restructuring Plan.

         Discontinued  operations  include  management's  best  estimates of the
amounts expected to be realized on the sale of these businesses and assets.  The
estimates  are based on valuations by  independent  appraisers.  The amounts the
Company will  ultimately  realize could differ  materially in the near term from
the  amounts  assumed in  arriving  at the  estimated  loss on  disposal  of the
discontinued operations.


NOTE 3        Notes Payable

In  December  1997,  the  Company  received  $4,635,000  upon  the  issuance  of
$5,000,000 in 8% convertible notes. Fees and expenses amounted to $365,000.  The
notes are  convertible  into the  Company's  common  stock  which will be issued
pursuant to the exemption  provisions of Regulation S of the  Securities  Act of
1933.  The  conversion  price is the lessor of $7.00 or 80% of the 5 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.  A further  restriction on conversion
provides that in no event shall the holder be entitled to convert any portion of
the note in excess of that portion of the note upon  conversion of which the sum
of (1) the number of shares of common stock beneficially owned by the holder and
its  affiliates  (other  than  shares  of  common  stock  which  may  be  deemed
beneficially owned through the ownership of the unconverted portion of this note
as defined in the Subscription  Agreement) and (2) the number of shares issuable
upon the  conversion  of the  portion  of the note  with  respect  to which  the
determination  of this  proviso  is  being  made,  would  result  in  beneficial
ownership by the holder and its affiliates of more than 4.9% of the  outstanding
common stock of the Company. The note

<PAGE>

NOTE 3        Notes Payable  (Continued)

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.

After one year,  the Company may, by written  notice to the holders,  prepay the
notes in whole or in part.  The  notice  shall be given at least  ten (10)  days
prior to the payment date and on such date the Company shall pay the outstanding
principal  and all accrued  interest on the note,  unless  prior to such payment
date the holder has delivered a notice of conversion.  Any unconverted principal
amount and accrued  interest  thereon shall at the maturity date be paid, at the
option of the Company,  in either (a) cash or (b) common stock valued at a price
equal to the  average  closing  bid price of the  common  stock for the five (5)
trading days  immediately  preceding  the maturity  date.  The fair value of the
"in-the-money"  portion of the notes at the date of issuance will be recorded as
a debt discount and amortized prospectively as interest expense.

         The 8% convertible  notes contain certain event of default  provisions.
If an event of default  occurs and is not waived by the holders of a majority of
all  notes,  the  Company  must  redeem  the  notes  at 125% of the  outstanding
principal  amount due.  Significant  event of default  provisions  include among
other things:  proceedings for relief under  bankruptcy law,  insolvency,  money
judgment or writ of attachment  in excess of $500,000  filed against the Company
and the delisting of the  Company's  common stock from an exchange.

         Through  February  13, 1998,  153,310  shares of common stock have been
issued in  connection  with  conversions  of $613,000 of  convertible  notes and
accrued interest.  Of those conversion  shares,  none were issued as of December
31, 1997.

         In addition, warrants to purchase 48,611 of common stock at an exercise
price of $7.20 per share were issued to the escrow  agent for the  Regulation  S
offering.  These warrants are exercisable immediately and expire on December 31,
2002. Upon exercise of the warrants,  the Company's  common stock will be issued
pursuant to the exemption  provisions of Regulation S of the  Securities  Act of
1933.  The fair  value of the  warrants  of  $128,000  was  estimated  using the
Black-Scholes  Option Pricing Model and was recorded as interest  expense in the
third quarter of fiscal 1998.


NOTE 4        Commitments and Contingencies

         Please see Note 6 to the Consolidated  Financial Statements included in
the  Company's  Annual  Report on Form 10-K for the fiscal  year ended March 31,
1997 for  information  on various  legal  proceedings.  With respect to the case
captioned In Re The Diana  Corporation  Securities  Litigation,  as described in
such Note 6 to the Consolidated Financial Statements in Form 10-K for the fiscal
year  ended  March  31,  1997,  a motion to  dismiss  the  consolidated  amended
complaint  filed by the Company was denied on December  15,  1997.  There are no
other material developments to report at this time.


NOTE 5        Other Assets

              On December 11, 1997, the Company  entered into a letter of intent
regarding  a merger  between  the Company  and NUKO  Information  Systems,  Inc.
("NUKO").  NUKO is a manufacturer of compression and transmission technology for
a variety of video  applications.  The  proposed  merger  could  provide  both a
complement and synergy with the Company's  telecommunications  products and be a
strategic step in the Company's plan to provide  comprehensive systems solutions
in the emerging telecommunications markets.

<PAGE>

NOTE 5        Other Assets (Continued)

The  proposed  merger  is to be  effected  by an  exchange  of one  share of the
Company's common stock plus warrants for the purchase of one and one-half shares
of the Company's common stock at an exercise price of $5.00 per share, for every
10 shares of NUKO common stock.  The proposed merger is contingent upon a number
of factors  including NUKO's  financial status and satisfactory  completion of a
due diligence exercise currently being performed.  Pending conclusion of the due
diligence  activity,  the  Company  has  provided  funds to NUKO under a secured
promissory  note  executed by NUKO in favor of the  Company.  As of December 31,
1997,  funds in the amount of $840,000 have been advanced by the Company to NUKO
under the promissory note agreement. As of February 10, 1998, a further $675,000
has been advanced by the Company bringing the total value payable under the note
by NUKO to $1,515,000.


NOTE 6        Shareholders' Equity

         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 which was issued pursuant to the exemption  provisions on
Regulation S of the Securities Act of 1933. 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. In
addition,  warrants to  purchase  37,037  shares of common  stock at an exercise
price of $6.75 per share were  issued in July 1997 to the  escrow  agent for the
Regulation S offering.  These warrants are exercisable after 41 days of issuance
and expire on July 17, 2000. Upon exercise of the warrants, the Company's common
stock will be issued pursuant to the exemption provisions of Regulation S of the
Securities  Act of 1933. The fair value of the warrants of $86,000 was estimated
using the  Black-Sholes  Option Pricing Model and was recorded as expense in the
second  quarter of fiscal 1998.  Through  February 14, 1998,  none of the 37,037
warrants had been exercised.

         In July 1997, the Company issued  1,880,750  shares of its common stock
at $2.00 per share in a private  placement under  Regulation D of the Securities
Act of 1933. The Company received $3,362,000 from the private placement,  net of
fees of $400,000.  In  addition,  warrants to purchase  1,880,750  shares of the
Company's  common  stock at $3.00 per share  were  issued  to the  Regulation  D
participants.  The warrants are exercisable  immediately and expire 5 years from
issuance.  Mr.  Fiedler,  the Company's  Chairman and Chief  Executive  Officer,
participated  in the private  placement and purchased  175,000  shares of common
stock and received  warrants to purchase  175,000 shares of the Company's common
stock.  In  addition,  Mr.  Stephen W.  Portner,  a Director,  and his  daughter
collectively  participated in the private  placement and purchased 11,250 shares
of common stock and received warrants to purchase 11,250 shares of the Company's
common stock.  The common stock and common stock warrants  issued in the private
placement are subject to registration rights.

         On May 13,  1997,  the  Company  issued  warrants  to  Superior  Street
Capital,  its investment  banking firm, in connection with the equity  financing
discussed.  The warrants are for the purchase of 324,000 shares of the Company's
common stock at $2.25 per share. A warrant to purchase  273,000 shares of common
stock is exercisable immediately and expires five years from issue. A warrant to
purchase  51,000 shares of common stock was exercisable on November 13, 1997 and
expires on November 13, 2002.  Registration rights were provided to the owner of
the warrants.  During the first quarter of fiscal 1998,  the Company  recorded a
charge of  $280,000  for the fair value of these  warrants  which was  estimated
using the Black-Scholes Option Pricing Model.


<PAGE>

NOTE 6   Shareholders' Equity  (Continued)

         In June 1997, the Company's Board of Directors authorized the following
items with respect to the Company's two non-qualified stock option plans:

         a)   Stock options to purchase  46,897  shares of the Company's  common
              stock were granted to certain  employees of CTL. In addition,  the
              Board  of  Directors  authorized  the  issuance  of an  additional
              100,000  stock  options  pursuant  to the  Company's  plan  to CTL
              employees.

         b)   All current employees that have been granted stock options will be
              eligible to exchange  existing  stock options for new options that
              have an exercise  price of $3.00 per share.  The new options  vest
              equally over a three year period commencing June 1, 1997.

         c)   Stock  options to purchase  5,000 shares of the  Company's  common
              stock were granted to each of two outside  members of the Board of
              Directors  that  joined  the Board in fiscal  1997,  namely  Bruce
              Borchardt and Michael Camp.  These options have an exercise  price
              of $3.00 per share.

         d)   The expiration  date of stock options owned by outside  members of
              the  Board  of  Directors  as of June 5,  1997 was  extended  from
              December 31, 1997 to December 31, 2000. This extension established
              a new  measurement  date for accounting  purposes,  the effects of
              which were to record compensation  expense of $7,000, in the first
              quarter of fiscal 1998.

         During  the three  months  ended  December  31,  1997,  certain  former
executive  officers of the Company  exercised stock options.  A total of 398,956
shares of common stock were issued at an aggregate  exercise price of $2,067,000
with respect to these transactions.



<PAGE>

ITEM 2.  Management's Discussion and Analysis of Financial Condition 
         and Results of Operations

Results of Operations

         The Company's  historical  results of operations reflect the operations
of APC, C&L and Valley as  discontinued  operations.  The  following  discussion
encompasses the results of operations of Coyote Technologies, LLC ("CTL") and of
the Company's  corporate  office.  CTL operations were conducted  through Sattel
Communications  Corp.  ("SCC")  prior to CTL's  formation  in  April  1996.  SCC
commenced  operations  in  November  1994 as a 50/50 joint  venture  between the
Company and Sattel Technologies, Inc. In January 1996, the Company increased its
ownership  interest  in SCC from 50% to 80% and SCC  acquired  the  intellectual
property  and  technology  rights  of the DSS  Switch.  SCC is  included  in the
consolidated financial statements since the beginning of fiscal 1996.

         For the  quarter  ended  December  31,  1997,  CTL  revenue  growth and
business development continued to be constrained by the negative impact that the
class action suits and the liquidity deficiency experienced prior to August 1997
have  had on  customer  perception.  Revenues  for the  quarter  of  $1,659,000,
consisting  primarily  of the sale of four DSS Switch  Systems,  were,  however,
significantly  higher than the  $106,000  achieved  in the prior  quarter of the
current  fiscal year.  Revenues for the  corresponding  period in the prior year
were  $2,552,000  consisting  primarily of the shipments of DSS Switches under a
specific  contract  with  Concentric  Network  Corporation.  This  contract  was
completed  in the fiscal year ended March 31,  1997.  CTL's  fiscal year to date
sales were  $2,709,000  compared to $7,059,000 for the  corresponding  period in
fiscal 1997.

         Gross profit of $1,143,000 for the quarter ended December 31, 1997, was
$699,000 lower than the corresponding period for the prior year due to its lower
revenue.

         Selling and  Administration  expense for the quarter ended December 31,
1997 was $3,056,000 compared to $2,590,000 for the prior quarter ended September
30, 1997 and $3,965,000 for the corresponding quarter in the prior year.

         Engineering, Research and Development costs include all charges related
to new products and the DSS Switch and are charged to operations  when incurred.
Engineering,  Research and Development  costs for the quarter ended December 31,
1997 were $1,395,000  compared to $603,000 for the prior quarter ended September
30, 1997 and $1,798,000 for the corresponding quarter ended January 4, 1997.

         The increases from the prior quarter in operating expense spending were
primarily  related  to the  recovery  from the  liquidity  deficiency  which the
Company  experienced  in late fiscal 1997 and in early fiscal  1998.  Management
anticipates the spending levels for  Engineering,  Research and Development will
continue  to increase  in the future in order to further  develop the  Company's
product line and business expansion.

         In regard to the business growth, CTL has received orders for shipments
to Japan,  South America,  and the United States to provide local, long distance
and international gateway services. Subsequent to December 31, 1997, the Company
has received a three year OEM Supply Contract from Apollo KK, Tokyo, Japan, with
a stated minimum value of $20,000,000. The contract provides Apollo KK exclusive
distribution  rights,  within certain defined parameters,  to distribute CTL DSS
Switches in Japan. In addition, Apollo KK has non-exclusive rights to distribute
CTL products in a number of other countries.  The Company is also in discussions
involving strategic  alliances,  joint ventures and potential  acquisitions with
entities that have complementary technologies, services and/or established sales
and  marketing  channels  and  that  are  strategically  aligned  with  its core
business.



<PAGE>

Results of Operations  (Continued)

         Non-operating  expense for the nine months  ended  December  31,  1997,
comprised  a one time  charge of  $5,522,000  in respect  of an accrued  expense
recorded in the prior quarter ended September 30, 1997 relating to the amendment
of  certain  Class A and B Units as  authorized  by the  Board of  Directors  on
September 4, 1997.

         The loss from continuing  operations for the quarter ended December 31,
1997 and the increase in loss from continuing  operations over the corresponding
period in fiscal 1997 is due to the lower  revenue and to the  incidence  of the
one-time  charge  in  respect  of the  Class  A and B Units  (see  Note 6 to the
Financial Statements).


Liquidity and Capital Resources

         As previously disclosed in the Company's Annual Report on Form 10-K for
the fiscal  year ended  March 31,  1997,  the  Company  encountered  a liquidity
deficiency  during the end of fiscal 1997 and in early  fiscal  1998,  primarily
because  (i) certain  customers  of CTL were past due on  receivables,  (ii) CTL
granted certain customers extended payment terms, (iii) CTL's revenue growth has
been lower than  expected and (iv) the Company made  payments of  $2,349,000  in
connection  with the  Restructuring,  as  discussed  in Note 2 to the  Condensed
Consolidated Financial Statements.

         As a  result  of the  liquidity  deficiency,  the  Company  had  become
delinquent  on  certain of its  working  capital  obligations.  In July 1997 and
December  1997,  the Company  raised  $5,597,000  and  $4,635,000  respectively,
through  equity  and  debt  financing  (see  Notes  3  and  6 to  the  Condensed
Consolidated Financial Statements for additional information).  After completion
of the equity and debt financing,  collection of $4.4 million from CNC in August
1997,  the sale of C&L (Note 2) and the  anticipated  sales of Valley  and APC's
real  estate,  management  believes  that it will have  sufficient  resources to
provide adequate  liquidity to meet the Company's  planned capital and operating
requirements through March 31, 1998 and for the foreseeable future.  Thereafter,
the  Company's  operations  will need to be funded  either with funds  generated
through operations or with additional debt or equity financing. If the Company's
operations  do not  provide  funds  sufficient  to fund its  operations  and the
Company seeks outside financing, there can be no assurance that the Company will
be able to obtain such financing when needed,  on acceptable terms or at all. In
addition,  any future equity financing or convertible debt financing would cause
the  Company's  shareholders  to incur  dilution in common  stock  holdings as a
percentage of the total outstanding shares.

         The  Company  is  currently  negotiating  with  prospective  buyers for
Valley.  The Company  believes  that this business and APC's real estate will be
sold prior to March 31, 1998. It is  anticipated  that the proceeds of the sales
of this  business and assets will be used  primarily  toward  funding  potential
acquisitions  and the  Company's  capital and operating  requirements  in fiscal
1998.

         During  the three  months  ended  December  31,  1997,  certain  former
executive  officers of the Company  exercised stock options.  A total of 398,956
shares of common stock were issued at an aggregate  exercise price of $2,067,000
with respect to these transactions.

         The Company used cash in operating  activities of $7,334,000 during the
first three  quarters of fiscal  1998 as compared to  $13,740,000  for the first
three  quarters of fiscal  1997.  The  decrease in the use of cash is  primarily
attributable  to the collection of accounts  receivable by CTL and the liquidity
deficiency  which the  Company  experienced.  In  addition,  cash  generated  by
discontinued  operations  provided  some capital for  operations  in fiscal 1998
while  discontinued  operations  used $2,808,000 in cash during fiscal 1997, the
majority of which was funded through the increase in various lines of credit.


<PAGE>

Liquidity and Capital Resources  (Continued)

         The decrease in  receivables  at December 31, 1997 is due  primarily to
the collection of $4.3 million of receivables that were outstanding at March 31,
1997, of which $4.2 million was the result of the judgment discussed in the next
paragraph.

         In April 1997, CTL commenced legal  proceedings  against CNC for, among
other things, breach of contract relating to payment of $4.2 million of accounts
receivable.  In July 1997,  CTL received a court  ordered  judgment in its favor
whereby,  among other  things,  CTL  executed  upon a judgment  of $4.4  million
against CNC on August 15, 1997. In addition, CNC repurchased from CTL 25% of CNC
Preferred Stock owned by CTL at $12.00 per share or $396,000 on August 2, 1997.

         The increase in inventory is primarily attributable to purchases of raw
materials for DSS switches.

         Capital  expenditures  of $132,000  during the first three  quarters of
fiscal 1998  compared to capital  expenditures  of $1,974,000 in the first three
quarters of fiscal 1997. The decrease in capital  expenditures  is primarily due
to  the  liquidity  deficiency  which  the  Company  experienced.   The  Company
anticipates  that  CTL's  fiscal  1998  capital  expenditure  requirements  will
approximate $0.8 million primarily for test equipment and development hardware.

         In February 1997, the Company sold a majority of APC's assets (see Note
2 to the Consolidated Financial Statements).  The Company has received preferred
stock  dividends  of  $797,000  from APC  subsequent  to the sale of its assets.
Further  preferred stock dividends will be available when cash held in escrow is
released or when APC's building is sold as a result of preferred stock dividends
currently in arrears.  APC had  restricted  cash of $100,000  that is held in an
escrow account as of December 31, 1997,  for  reimbursement  of  indemnification
claims by the Buyer.  The escrow account  restriction  was lifted on February 3,
1998,  and the escrow  funds were paid to APC. APC entered into a lease with the
Buyer of APC for the building that terminated in February,  1998. APC has listed
the building for sale.  The real estate is  collateral  for two  mortgages  that
amount to $754,000 at December 31, 1997.

         In the fourth quarter of fiscal 1996 and in the first quarter of fiscal
1997, the Company raised  approximately  $17.4 million,  after  commissions  and
expenses, through the sale of 600,000 shares of common stock.


Forward-Looking Statements

         All  statements  other than  historical  statements  contained  in this
Report on Form 10-Q 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 the Company in the future, statements about the Company's business
strategy  and plans,  statements  about the  adequacy of the  Company's  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 the  Company  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 the
Company, including statements regarding future operating performance, short- and
long-term revenue and earnings estimates, backlog, the status of litigation, the
value of new  contract  signings,  and industry  growth rates and the  Company's
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 the  Company's
control,  that could cause actual results to differ  materially  Forward-Looking
Statements (Continued)

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 in general the other risk factors set
forth in the  Company's  Annual  Report on Form 10-K for the  fiscal  year ended
March 31, 1997.  The Company  disclaims any intention or obligation to update or
revise any  forward-looking  statements  whether as a result of new information,
future events or otherwise.


<PAGE>

                           PART II. OTHER INFORMATION

ITEM 1.       Legal Proceedings

         Please see Note 6 to the Consolidated  Financial Statements included in
the  Company's  Annual  Report on Form 10-K for the fiscal  year ended March 31,
1997 for  information  on various  legal  proceedings.  With respect to the case
captioned In Re The Diana  Corporation  Securities  Litigation,  as described in
such Note 6 to the Consolidated Financial Statements in Form 10-K for the fiscal
year  ended  March  31,  1997,  a motion to  dismiss  the  consolidated  amended
complaint  filed by the Company was denied on December  15,  1997.  There are no
other material developments to report at this time.


ITEM 2.       Changes in Securities and Use of Proceeds

c)   Issuances of equity  securities not registered  under the Securities Act
     of 1933 are described in Notes 3 and 6 of the Condensed  Consolidated  
     Financial Statements.


ITEM 4.       Submission of Matters to a Vote of Security Holders

a)   Annual Meeting of Shareholders held November 20, 1997.

b)   Matters voted upon:

     Proposal #1                              Votes Cast
       Election of Directors             For           Against
         James J. Fiedler             5,982,242         45,042
         Stephen W. Portner           5,983,192         44,092

     Proposal #2
       Amendment to the  Certificate of  Incorporation  to change the
       name of The Diana Corporation to Coyote Network Systems, Inc.

         Votes Cast:                      For          Against      Abstained
                                       5,788,700       201,646       36,938


ITEM 6.  Exhibits and Reports on Form 8-K

a)   Exhibits:

     27 - Financial Data Schedule

b)   Reports on Form 8-K:

     (1) A Form 8-K was filed by the Company on October 23, 1997 which covered:

         Item 4, "Changes in Registrant's  Certifying  Accountant".  On
         October 15, 1997,  Price  Waterhouse  LLP  confirmed  that the
         client - auditor  relationship  between The Diana  Corporation
         and Price Waterhouse LLP had ceased.
<PAGE>

ITEM 6.  Exhibits and Reports on Form 8-K  (Continued)

     (2) A Form  8-K/A  (Amendment  #1) was  filed  by the  Company  on
         October 28, 1997 to include a letter from Price Waterhouse LLP
         which was not  available  for the original  Form 8-K filing on
         October 23, 1997.

     (3) A Form  8-K/A  (Amendment  #2) was  filed  by the  Company  on
         November 5, 1997 at the request of the Securities and Exchange
         Commission  which  covered  Item 4,  "Changes in  Registrant's
         Certifying  Accountant" and Item 7, "Financial  Statements and
         Exhibits."

     (4) A Form 8-K was filed by the Company on December 5, 1997 which covered:

         Item 2,  "Acquisition  or  Disposition of Assets" and Item 7,
         "Financial Statements or Exhibits".  On November 20, 1997, the
         Company   completed   the   sale  of  its   telecommunications
         distributor subsidiary C&L Communications, Inc. to the current
         management of C&L.

         Item 5,  "Change  of  Name"  At the  Annual  Meeting  held on
         November 20, 1997, the Registrant's  shareholders  adopted and
         ratified a change of the  Registrant's  name to Coyote Network
         Systems, Inc.

     (5) A Form 8-K was filed by the Company on December 11, 1997 which covered:

         Item 4, "Changes in Registrant's Certifying Accountants". The
         Registrant  engaged Arthur Andersen LLP as its new independent
         accountants as of December 9, 1997.

     (6) A Form 8-K was filed by the Company on January 5, 1998 which covered:

         Item 7, "Financial Statements and Exhibits" and Item 9, "Sales
         of Equity  Securities  Pursuant to Regulations S". On December
         22, 1997, the Company sold $5,000,000 in 8% Convertible  Notes
         due December 22, 2000.


<PAGE>



                                   Signatures


         Pursuant to the  requirements  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.

                                           COYOTE NETWORK SYSTEMS, INC.



                                           By:   /s/ James J. Fiedler
                                                 Chairman of the Board and
                                                 Chief Executive Officer
                                                 (Principal Executive Officer)

                                           By:   /s/ Brian A. Robson
                                                 Vice President, Controller
                                                 and Secretary (Principal
                                                 Financial and Accounting
                                                 Officer)




DATE:    February 13, 1998