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            June 30, 1997                          

                                    or

[ ] 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                       


                           THE DIANA CORPORATION                           
          (Exact name of registrant as specified in its charter)


             Delaware                                 36-2448698           
 (State or other jurisdiction of                  (I.R.S. Employer
 incorporation or organization)                  Identification No.)


        26025 Mureau Road, Calabasas, California                   91302   
(Address of principal executive offices)                         (Zip Code)

Registrant's telephone number, including area code      (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.

                                                           ___ Yes    X  No


     At October 17, 1997, the registrant had issued and outstanding an
aggregate of 7,499,377 shares of its common stock.

<PAGE>

                      Part I - Financial Information

Item 1.  Financial Statements

                  The Diana Corporation and Subsidiaries
                  Condensed Consolidated Balance Sheets
                          (Dollars in Thousands)

                                                   June 30,     March 31,
                                                     1997          1997   
                                                  -----------   ----------
                                                  (Unaudited)

                                  Assets
Current assets                              
  Cash and cash equivalents                       $    122      $     81
  Receivables, net                                   4,825         4,594
  Inventories                                        2,976         2,937
  Net assets of discontinued operations                379           893
  Other current assets                               1,698         1,716
                                                    ------        ------
    Total current assets                            10,000        10,221
 
Property and equipment                               1,795         1,944
Intangible assets                                    3,702         3,755
Net assets of discontinued operations                6,784         7,308
Other assets                                           ---            16
                                                    ------        ------
                                                  $ 22,281      $ 23,244
                                                    ======        ======

              Liabilities and Shareholders' Equity          
Current liabilities 
  Accounts payable                                $  3,938      $  2,559
  Accrued liabilities                                2,439         1,360
  Note payable to related party                        348           ---
  Current portion of long-term debt                    141           141
                                                    ------        ------
    Total current liabilities                        6,866         4,060

Long-term debt                                       1,746         1,817
Other liabilities                                      526           533
Commitments and contingencies 
 
Shareholders' equity         
  Preferred stock - $.01 par value                     ---           ---
  Common stock - $1 par value                        6,007         6,007
  Additional paid-in capital                        80,124        80,124
  Accumulated deficit                              (67,231)      (63,540)
  Treasury stock                                    (5,757)       (5,757)
                                                    ------        ------
    Total shareholders' equity                      13,143        16,834
                                                    ------        ------
                                                  $ 22,281      $ 23,244
                                                    ======        ======
See notes to condensed consolidated financial statements.

                                   1
<PAGE>

                  The Diana Corporation and Subsidiaries
              Condensed Consolidated Statements of Operations
                                (Unaudited)
                 (In Thousands, Except Per Share Amounts)

                                            3 Months Ended  16 Weeks Ended
                                            June 30, 1997   July 20, 1996  
                                            --------------  --------------

Net sales..................................    $    944        $    841
Cost of goods sold.........................         405             146 
                                                -------         -------
Gross profit...............................         539             695

Selling and administrative expenses........       3,536           1,768
Engineering, research and development......         694             364
                                                -------         -------
Total operating expenses...................       4,230           2,132
                                                -------         -------
Operating loss.............................      (3,691)         (1,437)

Interest expense...........................         ---             (26)
Non-operating income ......................         ---             183
Minority interest..........................         ---             131
                                                -------         -------
Loss from continuing operations............      (3,691)         (1,149)

Loss from discontinued operations..........         ---            (173)
                                                -------         -------
Net loss...................................    $ (3,691)       $ (1,322)
                                                =======         =======
Loss per common share:
   Continuing operations...................    $   (.70)       $   (.22)
   Discontinued operations.................         ---            (.03)
                                                -------         -------
   Net loss per common share...............    $   (.70)       $   (.25)
                                                =======         =======
Weighted average number of common shares
   outstanding.............................       5,298           5,227
                                                =======         =======

          See notes to condensed consolidated financial statements.

                                   2
<PAGE>

                  The Diana Corporation and Subsidiaries
              Condensed Consolidated Statements of Cash Flows
                               (Unaudited)
                              (In Thousands)

                                                    3 Months     16 Weeks
                                                     Ended        Ended
                                                    June 30,     July 20,
                                                      1997         1996
                                                    --------     --------
Operating Activities:
  Net loss                                          $(3,691)     $(1,322)
  Reconciliation of net loss to net cash      
   provided by operating activities:
    Depreciation and amortization                       184          150
    Provision for common stock warrants issued          280          ---
    Minority interest                                   ---         (131)
    Net change in discontinued operations               879       (1,875)
    Changes in operating assets and liabilities       2,032       (1,501) 
                                                     ------       ------
Net cash provided (used) by operating activities       (315)      (4,679)

Investing activities:
  Increase in promissory note                           ---       (5,000)
  Additions to property and equipment                   ---         (195)
  Net change in discontinued operations                (315)        (349)
  Other                                                  17          --- 
                                                     ------       ------
Net cash provided (used) by investing activities       (298)      (5,544)

Financing activities:
  Repayments of long-term debt                          (71)         (70)
  Change in note payable                                250          --- 
  Common stock issued                                   ---       13,918 
  Net change in discontinued operations                 475        2,066 
                                                     ------       ------
Net cash provided (used) by financing activities        654       15,914
                                                     ------       ------
Increase in cash and cash equivalents                    41        5,691

Cash and cash equivalents at the beginning
  of the period                                          81        4,480
                                                     ------       ------
Cash and cash equivalents at the end
  of the period                                     $   122      $10,171
                                                     ======       ======
Non-cash transactions:
  Acquisition of common stock held by
   minority shareholder                             $   ---      $ 2,325
  Issuance of common stock warrants to
   investment banker                                    280          ---
  Note payable to related party                          98          ---


See notes to condensed consolidated financial statements.

                                   3
<PAGE>

                  The Diana Corporation and Subsidiaries
           Notes to Condensed Consolidated Financial Statements
                               (Unaudited)

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 June 30, 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 "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-Sattel 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.  At present, $100,000 remains in escrow and will be
held there until the earlier of February 1998 or the date on which valid
claims against the escrow result in funds being released to Colorado. 
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. 

                                   4
<PAGE>

NOTE 2 - Discontinued Operations (Continued)

     APC retained real estate with a net book value of $2.6 million.  The
real estate is collateral for two mortgage notes that amounted to $781,000. 
APC has entered into a lease with Colorado that terminates on approximately
November 15, 1997.  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-Sattel 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.  The Company anticipates the sale of
these businesses will be completed prior to March 31, 1998.  The Company
believes that the reserve for loss on disposal recorded at June 30, 1997 of
$1,991,000 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 - 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.  There are no material
developments to report at this time.

NOTE 4 - Shareholders' Equity

     On May 13, 1997, the Company issued warrants to Superior St. Capital,
its investment banking firm, in connection with the equity financing
discussed in Note 6.  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 is 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.

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

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

                                   5
<PAGE>

NOTE 4 - Shareholders' Equity (Continued)

     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.

NOTE 5 - Related Party Transactions

     On November 11, 1996 the Company loaned $300,000 to each of 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 Sattel (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.

NOTE 6 - Subsequent Events

     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.

                                   6
<PAGE>

NOTE 6 - Subsequent Events (Continued)

     In July 1997, the Company received $2,235,000 upon the issuance of
$2,500,000 in 8% convertible notes.  Fees and expenses amounted to $265,000. 
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 $6.64 or 80% of the 5 day
average closing bid price on a conversion date with a conversion floor price
(the "Conversion Floor Price") of $1.50 per share, provided that if the
average closing bid price for any 20 consecutive trading days prior to a
conversion date is less than $1.50 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 can be converted equally beginning 45, 75 and 105 days following
July 17, 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 or
the Nasdaq Stock Market.

     Through October 17, 1997, 320,144 shares of common stock have been
issued in connection with conversions of $1,673,000 of convertible notes and
accrued interest.

     In addition, warrants to purchase 37,037 of common stock at an exercise
price of $6.75 per share were issued 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 will be recorded
as debt issue costs in the second quarter of fiscal 1998.

                                   7
<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 have been restated to
reflect the operations of APC, C&L and Valley as discontinued operations. 
The following discussion encompasses the results of operations of Sattel and
the Company's corporate office.  Sattel's operations were conducted through
Sattel Communications Corp. ("SCC") prior to Sattel's formation in April
1996.  SCC commenced operations in November 1994 as a 50/50 joint venture
between the Company and STI.  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 June 30, 1997, Sattel's revenues were $944,000
from the sales of DSS switches to three customers, including the first
shipment of a DSS switch to Apollo Inc. which represents 46% of the sales for
the quarter.  Sales for the quarter were $103,000 higher than for the first
quarter of the prior year.  Revenue growth was constrained by the negative
impact that the liquidity deficiency and class action suits have had on
customer perception.  Additionally, the Company's management was required to
expend significant time and energy with respect to these issues which further
impacted business development.  

     Gross profit of $539,000 for the quarter ended June 30, 1997, was
$156,000 lower than the corresponding period of the prior year due in part to
the higher proportion of lower margin OEM product necessary to complete the
initial installation of the Apollo Inc. switch.

     Selling and administration expense for the quarter ended June 30, 1997
increased $1,769,000 over the prior year corresponding period in part due to
further development of the Sattel business and in part due to increases in
certain corporate office expenses and a provision for doubtful accounts of
$226,000.  Corporate expenses for the quarter include $467,000 in respect to
external audit and tax consulting fees, as well as a charge of $280,000 in
respect to warrants issued on May 13, 1997, to Superior St. Capital, the
Company's investment banking firm, in connection with an equity financing
(see Note 4 to the Condensed Consolidated Financial Statements) and further
investment planning.  The provision for doubtful accounts related to one
customer which filed for bankruptcy protection in September 1997.  

     Engineering, research and development costs include all engineering
charges related to new products and the DSS switch and are charged to
operations when incurred.  Engineering, research and development costs
increased to $694,000 in the first quarter of fiscal 1998 from $364,000 in
the first quarter of fiscal 1997.  Engineering, research and development
costs were not incurred by the Company prior to the fourth quarter of fiscal
1996 since the intellectual property rights for the switching products were
not acquired until January 1996.  These expenses ramped up during fiscal 1997
and on a quarterly basis were as follows; $364,000, $873,000, $1,798,000 and
$1,025,000 for the first, second, third and fourth quarters of fiscal 1997,
respectively.  The decrease in spending for the first quarter of 1998 is
directly related to the liquidity deficiency which the Company experienced in
late fiscal 1997 and early fiscal 1998.  Management anticipates the spending
levels and engineering research and development will increase in the future
in order to further develop the Company's product line.


                                   8
<PAGE>

     The loss from continuing operations for the quarter ended June 30, 1997
and the increase in loss from continuing operations over the corresponding
period in fiscal 1997 is primarily due to the increase in the Company's
corporate office expenses and the increase in the business operating expenses
of Sattel occasioned by the further development of Sattel's business.

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 Sattel were past due on receivables, (ii)
Sattel granted certain customers extended payment terms, (iii) Sattel'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, the
Company raised $5,597,000 through equity and debt financing (see Note 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, and the anticipated sales of C&L, 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 seeking buyers for C&L and Valley.  The Company believes
that these businesses and APC's real estate will be sold prior to March 31,
1998.  It is anticipated that the proceeds of the sales of these businesses
and assets will be used to fund a portion of the Company's capital and
operating requirements in fiscal 1998.  Restrictions in the revolving lines
of credit of C&L and Valley prevent the Company from presently accessing
funds from these subsidiaries.  Such restrictions in C&L's revolving line of
credit may also initially limit the Company's access to the total proceeds
from a sale of Valley prior to any ultimate sale of C&L given the existing
ownership structure of Valley.

     The Company used cash in operating activities of $315,000 during the
first quarter of fiscal 1998 as compared to $4,679,000 for the first quarter
of fiscal 1997.  The decrease in the use of cash is primarily attributable to
the liquidity deficiency which the Company experienced.  Operations were
supported by increases in accounts payable and accrued expenses during the
first quarter.  In addition, cash generated by discontinued operations
provided some capital for operations.


                                   9
<PAGE>

     The Company's net receivables consisted of the following at June 30,
1997:

     CNC                                       $ 4,217
     All other receivables                         608
                                                ------
        Total receivables                      $ 4,825
                                                ======

     The increase in receivables at June 30, 1997 is due to the increase in
Sattel's sales.  At August 15, 1997, Sattel had collected $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, Sattel 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, Sattel received a court ordered judgment
in its favor whereby, among other things, Sattel executed upon a judgment of
$4.4 million against CNC on August 15, 1997.  In addition, CNC repurchased
from Sattel 25% of CNC Preferred Stock owned by Sattel 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.

     There were no capital expenditures during the first quarter of fiscal
1998 compared to capital expenditures of $195,000 in the first quarter of
fiscal 1997.  The decrease in capital expenditures is primarily due to the
liquidity deficiency which the Company experienced.  The Company anticipates
that Sattel's fiscal 1998 capital expenditure requirements will approximate
$1.2 million primarily for test equipment and development hardware.

     In June 1996, CNC executed a Promissory Note for $5,000,000 in favor of
Sattel for a bridge loan.  CNC granted to Sattel 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.  The warrant is exercisable immediately and expires on June 6, 1999.  In
August 1996, the Promissory Note and accrued interest receivable were
converted into 3,729,110 shares of CNC Preferred Stock.  In September 1996,
Sattel 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 IPO at an offering price of $12.00 per
share.  The CNC Preferred Stock owned by Sattel was automatically converted
into CNC common stock immediately prior to the closing of the IPO.  The value
of Sattel's investment in CNC Preferred Stock, after giving effect to a
reverse 1 for 15 stock split and based on a $12.00 per share offering price,
is approximately $1,512,000.  Consequently, Sattel recorded a non-operating
loss of $1,060,000 in the fourth quarter of fiscal 1997 related to the
impairment in value of its investment.  The investment in CNC Preferred Stock
of $1,512,000 is classified within other current assets in the Condensed
Consolidated Balance Sheet.  Sattel is prohibited from selling 75% of its CNC
common stock for six months following CNC's IPO.  Sattel sold 25% of its CNC
common stock in August 1997 at $12.00 per share and received $396,000. 
Sattel continues to own the warrant from CNC which is now a warrant for CNC
common stock as a result of the conversion discussed above.

                                   10
<PAGE>

     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 has restricted cash of $100,000
that is held in an escrow account for reimbursement of indemnification claims
by the Buyer.  The escrow account will remain in existence until February 3,
1998.  At that time, indemnification claims by the Buyer of APC up to
$100,000 will be repaid and any remaining escrow funds will be disbursed to
APC.  APC has entered into a lease with the Buyer of APC for the building
that terminates on approximately November 15, 1997.  In addition, APC has
listed the building for sale.  The real estate is collateral for two
mortgages that amount to $768,000 at June 30, 1997.

     Mr. Fiedler, the Company's Chairman and Chief Executive Officer, loaned
the Company $250,000 in June 1997.  The principal amount of the loan was
converted to common stock in conjunction with Mr. Fiedler's purchase of
Company common stock pursuant to the Regulation D private placement in July
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 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.

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<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.  There are no material
developments to report at this time.


Item 6.   Exhibits and Reports on Form 8-K

          a)   Exhibits:

               27    -   Financial Data Schedule

          b)   A Form 8-K was filed by the Company on May 6, 1997 which
               covered:

               Item 5.   Other Events
                         On April 24, 1997, the Company entered into a
                         Purchase Agreement with Security Services, Inc.
                         ("SSI") pursuant to which SSI agreed to purchase
                         100% of the common stock of C&L Acquisition
                         Corporation, which owns 80% of the common stock
                         of Valley Communications, Inc.  Subsequently, the
                         transaction contemplated was not consummated and
                         the agreement was terminated.

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<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.


                                        THE DIANA CORPORATION



                                        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:  October 17, 1997

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