COYOTE NETWORK SYSTEMS, INC.

                  1998 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN


                                    ARTICLE I

                                     PURPOSE

         The purpose of the 1998  Non-Employee  Director  Stock Option Plan (the
"Plan") is to enable Coyote Network Systems, Inc. (the "Company") to attract and
retain outside  directors and to strengthen  the mutuality of interests  between
such directors and the Company's stockholders.

                                   ARTICLE II

                                   DEFINITIONS

         For purposes of the Plan, the following  terms shall have the following
meanings:

     2.1  "Board" shall mean the Board of Directors of the Company.

     2.2  "Code" shall mean the Internal  Revenue Code of 1986, as amended,  and
          rules and  regulations  under the Internal  Revenue  Code of 1986,  as
          amended.

     2.3  "Common Stock" shall mean the Common Stock, par value $1.00 per share,
          of the Company.

     2.4  "Eligible  Director"  shall mean any  member of the Board who,  on the
          date on which Options are to be granted, is not an officer or employee
          of the Company or any of the Company's subsidiaries.

     2.5  "Exchange  Act" shall mean the  Securities  Exchange  Act of 1934,  as
          amended.

     2.6  "Fair  Market  Value"  for  purposes  of the  Plan,  unless  otherwise
          required by the Code,  shall mean,  as of any date,  the closing sales
          prices  of a share  of  Common  Stock  as  reported  on the  principal
          national  securities  exchange on which the Common  Stock is listed or
          admitted to trading, or, if not listed or traded on any such exchange,
          on the Nasdaq Stock Market,  or, if not so listed or traded,  the fair
          market value as determined by the Board, which  determination shall be
          conclusive.

     2.7  "Optionee"  shall mean an  individual  to whom a Stock Option has been
          granted under the Plan.

     2.8  "Stock Option" or "Option" shall mean any option to purchase shares of
          Common Stock granted pursuant to Article VI.
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                                   ARTICLE III

                                 ADMINISTRATION

     3.1  Administration.  The Plan shall be administered and interpreted by the
          Board.

     3.2  Guidelines. Subject to Article VII, the Board shall have the authority
          to: (a) interpret the Plan; (b) establish  such rules and  regulations
          as it deems necessary for the proper operations and  administration of
          the Plan; (c) select  Eligible  Directors to receive Options under the
          Plan; (d) determine the number of shares subject to any Option and all
          the terms, conditions, restrictions and/or limitations, if any, of any
          Option,  including the time and conditions of exercise or vesting, and
          the terms of any form of Option;  (e) determine the performance goals,
          if any,  which will be applicable to the Option;  (f) grant waivers of
          Plan terms, conditions,  restrictions, and limitations; (g) accelerate
          the vesting or exercise of an Option or the  performance  period of an
          Option;  and (h) take any and all other  action it deems  necessary or
          advisable for the proper operation or  administration of the Plan. The
          Board may correct any defect, supply any omission, conform the Plan to
          any change in law or  regulation,  or reconcile any  inconsistency  or
          ambiguity in the Plan or in any Option in the manner and to the extent
          it shall deem necessary to carry the Plan into effect. Notwithstanding
          the  foregoing,  no action of the Board  under this  Section 3.2 shall
          impair the  rights of any  Optionee  without  such  person's  consent,
          unless otherwise required by law.

     3.3  Decisions Final. Any decision,  interpretation or other action made or
          taken in good faith by the Board in accordance  with the Plan shall be
          final, binding and conclusive on the Company, all members of the Board
          and their respective heirs, executors, administrators,  successors and
          assigns.

     3.4  Delegation.  The Board may delegate  any or all of its  administrative
          responsibilities  under  the  Plan to  officers  or  employees  of the
          Company.

                                   ARTICLE IV

                                SHARE LIMITATION

     4.1  Shares.  The maximum  aggregate  number of shares of Common Stock that
          may be issued  under the Plan shall be 150,000  shares of Common Stock
          (subject to any increase or decrease  pursuant to Section 4.2),  which
          may be either authorized and unissued shares of Common Stock or issued
          shares of Common Stock that have been  reacquired  by the Company.  If
          any  Option  granted  under the Plan  shall  expire,  terminate  or be
          canceled for any reason  without  having been  exercised in full,  the
          number of unpurchased shares shall again be available for the purposes
          of the Plan.
<PAGE>
     4.2  Changes. If there is any change in the number of outstanding shares of
          Common Stock through the declaration of stock dividends,  stock splits
          or the like,  the number of shares  available  for Options,  the share
          subject  to any  Option and the  exercise  prices of Options  shall be
          automatically  adjusted.  If  there is any  change  in the  number  of
          outstanding  shares of Common Stock  through any change in the capital
          of the  Company,  or  through  any other  transaction  referred  to in
          Section  424(a) of the Code,  the  Committee  shall  make  appropriate
          adjustments  in the maximum number of shares of Common Stock which may
          be issued under the Plan and any adjustments  and/or  modifications to
          outstanding Options as it deems appropriate. In the event of any other
          change in the capital structure or in the Common Stock of the Company,
          or in the event of a merger, consolidation, combination or exchange of
          shares, or the like, as a result of which Common Stock is changed into
          another  class,  or  securities  of  another  person,  cash  or  other
          property, the exercise price,  consideration to be received, and other
          terms of an Option shall be adjusted as deemed equitable by the Board,
          in its sole discretion. The Board shall have authority to provide for,
          in appropriate  cases upon the  effectiveness of the transaction,  (a)
          waiver, in whole or in part, of remaining  restrictions for vesting or
          earning,  and (b) the conversion of  outstanding  Options into cash or
          other property to be received in the transactions  immediately or over
          the  periods  the  Option  would  have  vested  or  been  earned.  Any
          adjustment,  waiver,  conversion  or the like carried out by the Board
          under this Section shall be conclusive and binding for all purposes of
          the Plan.

                                    ARTICLE V

                                   ELIGIBILITY

     5.1  Eligible  Directors.  Only Eligible Directors shall be granted Options
          under the Plan.

                                   ARTICLE VI

                                  STOCK OPTIONS

     6.1  Options.   All  Stock   Options   granted  under  the  Plan  shall  be
          non-qualified  stock  options  (i.e.,  options  that do not qualify as
          incentive stock options under Section 422 of the Code).

     6.2  Grants.   All  grants  of  Options  to  Eligible  Directors  shall  be
          determined  by the Board.  The Board may  establish a formula by which
          Options  under the Plan shall be  automatically  granted  to  Eligible
          Directors from time to time.

     6.3  Terms of Options.  Options  granted under the Plan shall be subject to
          the following  terms and conditions and shall contain such  additional
          terms and conditions,  not inconsistent with the terms of the Plan, as
          the Board shall, in its discretion, determine:

          (a)  Stock  Option  Certificate.  Each Stock Option shall be evidenced
               by,  and  subject  to the  terms of, a Stock  Option  Certificate
               executed  by the  Company.  The Stock  Option  Certificate  shall
               specify the number of shares of Common Stock subject to the Stock
               Option,  the option price,  the option term,  and the other terms
               and conditions applicable to the Stock Option.
<PAGE>
          (b)  Option  Price.  The  option  price  per  share  of  Common  Stock
               purchasable upon exercise of a Stock Option shall be no less than
               50% of the Fair  Market  Value of a share of Common  Stock on the
               date the Option is granted.

          (c)  Additional  Terms and  Conditions.  The Board may,  by way of the
               Stock  Option  Certificate  or  otherwise,  establish  such other
               terms,  conditions,  restrictions and/or limitations,  if any, of
               any Stock  Option  provided  they are not  inconsistent  with the
               Plan.

          (d)  Exercise Payment. At the option of the Board, upon exercise,  the
               option  price of a Stock  Option  may be paid in cash,  shares of
               Common  Stock,  a  combination  of the  foregoing,  or such other
               consideration as the Board may deem appropriate.  The Board shall
               establish  appropriate methods for accepting Common Stock and may
               impose such conditions as it deems appropriate on the use of such
               Common Stock to exercise a Stock Option.

          (e)  Non-transferability of Option. Unless determined by the Board, no
               Stock Option shall be transferable by an Optionee  otherwise than
               by will or by the laws of descent and distribution, to the extent
               consistent  with the  terms of the Plan and the  Option,  and all
               Stock  Options  shall  be   exercisable,   during  an  Optionee's
               lifetime, only by the Optionee.

                                   ARTICLE VII

                            TERMINATION OR AMENDMENT

     7.1  Termination or Amendment of the Plan. The Board may at any time amend,
          discontinue  or  terminate  the Plan in  whole  or in part;  provided,
          however,  that,  unless  otherwise  required by law,  the rights of an
          Optionee  with  respect to Options  granted  prior to such  amendment,
          discontinuance or termination,  may not be materially impaired without
          the consent of such Optionee.

     7.2  Amendment  of  Options.  The  Board  may  amend the terms of any Stock
          Options,  prospectively or retroactively,  but, subject to Article IV,
          no such amendment or other action by the Board shall materially impair
          the rights of an Optionee without the Optionee's consent.


                                  ARTICLE VIII

                                  UNFUNDED PLAN

     8.1  Unfunded  Status  of  Plan.  The Plan is  intended  to  constitute  an
          "unfunded"  plan  for  incentive  compensation.  With  respect  to any
          payment not yet made to an Optionee by the Company,  nothing contained
          herein shall give any such individual any rights that are greater than
          those of a general creditor of the Company.
<PAGE>
                                   ARTICLE IX

                               GENERAL PROVISIONS

     9.1  Nonassignment.  Except as otherwise provided in the Plan or determined
          by the Board,  Options granted hereunder and the rights and privileges
          conferred  thereby  shall not be  transferred,  assigned,  pledged  or
          hypothecated  in any way (whether by  operation of law or  otherwise),
          and shall not be subject to execution,  attachment or similar process.
          Upon any attempt to transfer, assign, pledge, hypothecate or otherwise
          dispose of such Option,  right or privilege contrary to the provisions
          hereof, or upon the levy of any attachment or similar process thereon,
          such  Option and the rights and  privileges  conferred  thereby  shall
          immediately terminate and the Option shall immediately be forfeited to
          the Company.

     9.2  Legend.  The Board may  require  each  person  purchasing  shares upon
          exercise of an Option to  represent to the Company in writing that the
          Optionee  is  acquiring  the  shares for  investment  only and not for
          resale  or  with  a  view  to  distribution  and to  make  such  other
          representations  as the Board  may  require.  The  stock  certificates
          representing  such shares may include any legend which the Board deems
          appropriate to reflect any restrictions on transfer.

          All certificates  representing  shares of Common Stock delivered under
          the Plan  shall be subject  to such  stock  transfer  orders and other
          restrictions  as  the  Board  may  deem  advisable  under  the  rules,
          regulations  and other  requirements  of the  Securities  and Exchange
          Commission,  any stock  exchange  upon which the Common  Stock is then
          listed or traded or the Nasdaq Stock Market, any applicable Federal or
          state securities law, and any applicable  corporate law, and the Board
          may cause a legend or  legends to be put on any such  certificates  to
          make appropriate reference to such restrictions.

     9.3  Other Plans.  Nothing  contained  in the Plan shall  prevent the Board
          from adopting other or additional compensation arrangements;  and such
          arrangements may be either generally  applicable or applicable only in
          specific cases.

     9.4  No Right to Continue  Relationship.  Neither the Plan nor the grant of
          an Option  under the Plan  shall  confer  upon any person any right to
          continue  as a director  of the  Company or  obligate  the  Company to
          nominate any director for reelection by the Company's stockholders.

     9.5  Other Conditions.

          (a)  If at any time  counsel to the  Company  shall be of the  opinion
               that any sale or delivery of shares of Common Stock upon exercise
               of an Option is or may in the circumstances be unlawful or result
               in the imposition of a material  amount of excise taxes under the
               statutes,  rules or regulations  of any applicable  jurisdiction,
               the  Company  shall  have  no  obligation  to make  such  sale or
               delivery,  or to make any application or to effect or to maintain
               any  qualification  or  registration  under the Securities Act of
               1933, as amended,  or state  securities  laws, or otherwise  with
               respect to shares of Common Stock,  and the right to exercise any
               Option shall be suspended  until, in the opinion of such counsel,
               such sale or delivery  shall be lawful or shall not result in the
               imposition of a material amount of excise taxes.
<PAGE>
          (b)  Upon  termination of any period of suspension  under this Section
               9.5, any Option affected by such suspension  which shall not then
               have expired or  terminated  shall be reinstated as to all shares
               available  before such  suspension  and as to shares  which would
               otherwise  have  become  available  during  the  period  of  such
               suspension,  but no such suspension  shall extend the term of any
               Option.

     9.6  Governing Law. The Plan and actions taken in connection herewith shall
          be governed and construed in accordance  with the laws of the State of
          California.

     9.7  Construction. Wherever any words are used in the Plan in the masculine
          gender  they shall be  construed  as though they were also used in the
          feminine  gender in all cases where they would so apply,  and wherever
          any words are used herein in the singular form they shall be construed
          as though  they were also used in the plural  form in all cases  where
          they would so apply.

     9.8  Liability of the Board. No member of the board nor any employee of the
          Company  or any of its  subsidiaries  shall be  liable  for any act or
          action  hereunder,  whether of  omission or  commission,  by any other
          member of the  Board or  employee  or by any  agent to whom  duties in
          connection with the administration of the Plan have been delegated or,
          except in  circumstances  involving  bad faith,  gross  negligence  or
          fraud, for anything done or omitted to be done by himself.

     9.9  Costs.  The Company shall bear all expenses  incurred in administering
          the Plan, including expenses of issuing Common Stock upon the exercise
          of Options.

     9.10 Severability.  If any  part of the  Plan  shall  be  determined  to be
          invalid or void in any respect,  such determination  shall not affect,
          impair,  invalidate  or nullify the  remaining  provisions of the Plan
          which shall continue in full force and effect.

     9.11 Successors. The Plan shall be binding upon and inure to the benefit of
          any successor or successors of the Company.

     9.12 Heading.  Article  and  section  headings  contained  in the  Plan are
          included for convenience  only and are not to be used in construing or
          interpreting the Plan.

                                    ARTICLE X

                                  TERM OF PLAN

     10.1 Effective Date. The Plan shall be effective as of February 19, 1998.

     10.2 Termination.  The Plan shall continue  until  terminated by the Board.
          Termination of the Plan shall not affect  Options  granted before such
          date,  which shall continue to be exercisable,  in accordance with the
          terms of the Plan, after the Plan terminates.