CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT

                                    Between

                          COYOTE NETWORK SYSTEMS, INC.

                                       and

                            JNC OPPORTUNITY FUND LTD.




                                 August 31, 1998

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         CONVERTIBLE  PREFERRED  STOCK PURCHASE  AGREEMENT  (this  "Agreement"),
dated as of August 31, 1998,  between Coyote Network  Systems,  Inc., a Delaware
corporation  (the  "Company"),  and JNC Opportunity  Fund Ltd., a Cayman Islands
corporation (the "Purchaser").

         WHEREAS,  subject  to the  terms  and  conditions  set  forth  in  this
Agreement,  the  Company  desires  to issue  and sell to the  Purchaser  and the
Purchaser  desires to purchase  from the  Company,  shares of the  Company's  5%
Series A Convertible  Preferred  Stock, par value $.01 per share (the "Preferred
Stock"),  which are convertible  into shares of the Company's  common stock, par
value $ 1.00 per share (the "Common Stock").

         IN CONSIDERATION  of the mutual covenants  contained in this Agreement,
and for other good and  valuable  consideration  the  receipt and  adequacy  are
hereby acknowledged, the Company and Purchaser agree as follows:


                                    ARTICLE I
                                PURCHASE AND SALE

         1.1      The Closing.

                  (a) The Closing.  (i) Subject to the terms and  conditions set
forth in this  Agreement,  the Company shall issue and sell to the Purchaser and
the Purchaser shall purchase 700 shares of Preferred Stock (the "Shares") for an
aggregate purchase price of $7,000,000.  The closing of the purchase and sale of
the Shares (the "Closing") shall take place at the offices of Robinson Silverman
Pearce  Aronsohn  &  Berman  LLP  ("Robinson  Silverman"),  1290  Avenue  of the
Americas,  New York, New York 10104,  immediately following the execution hereof
or such  later  date as the  parties  shall  agree.  The date of the  Closing is
hereinafter referred to as the "Closing Date."

     (ii) At the  Closing,  the  parties  shall  deliver  or  shall  cause to be
delivered the  following:  (A) the Company shall deliver (1) stock  certificates
representing the Shares,  registered in the name of the Purchaser,  (2) a Common
Stock purchase warrant,  in the form of Exhibit D, registered in the name of the
Purchaser,  pursuant to which the Purchaser shall have the right at any time and
from time to time thereafter  through the third  anniversary of the Closing Date
to  acquire  225,000  shares  of  Common  Stock at an  exercise  price per share
(subject to adjustment as provided  therein) of $8.43 (the  "Warrant"),  (3) the
legal  opinion of Reinhart,  Boerner,  Van Deuren,  Norris &  Rieselbach,  P.C.,
outside counsel to the Company,  substantially in the form of Exhibit C, and (4)
all other documents, instruments and writings required to have been delivered at
or  prior  to the  Closing  Date by the  Company  pursuant  to  this  Agreement,
including  an executed  Registration  Rights  Agreement,  dated the date hereof,
between  the  Company  and  the  Purchaser,  in  the  form  of  Exhibit  B  (the
"Registration   Rights   Agreement"),   and  the   Irrevocable   Transfer  Agent
Instructions,  in the form of Exhibit E,  delivered to and  acknowledged  by the
Company's transfer agent (the "Transfer Agent  Instructions");  and 

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(B) the  Purchaser  shall deliver (1)  $7,000,000  in United  States  dollars in
immediately available funds by wire transfer to an account designated in writing
by the Company for such purpose, and (2) all documents, instruments and writings
required to have been delivered at or prior to the Closing Date by the Purchaser
pursuant  to  this  Agreement,   including,   without  limitation,  an  executed
Registration Rights Agreement.

                  1.2 Form of Preferred  Stock.  The Preferred  Stock shall have
the  rights  preferences  and  privileges  set forth in  Exhibit A, and shall be
incorporated  into a Certificate of Designation  ("Certificate of Designation"),
in form and substance mutually agreed to by the parties.

                  For purposes of this Agreement,  "Conversion Price," "Original
Issue Date,"  "Conversion  Date" and  "Trading  Day" shall have the meanings set
forth in Exhibit A;  "Business Day" shall mean any day except  Saturday,  Sunday
and any day which  shall be a federal  legal  holiday or a day on which  banking
institutions in the State of New York are authorized or required by law or other
governmental action to close.


                                   ARTICLE II
                         REPRESENTATIONS AND WARRANTIES

         2.1  Representations,  Warranties  and  Agreements of the Company.  The
Company  hereby  makes  the  following  representations  and  warranties  to the
Purchaser:

                  (a)   Organization  and   Qualification.   The  Company  is  a
corporation, duly incorporated,  validly existing and in good standing under the
laws of the State of Delaware,  with the requisite corporate power and authority
to own and use its  properties  and  assets  and to  carry  on its  business  as
currently conducted.  The Company has no subsidiaries other than as set forth in
Schedule 2.1(a) (collectively the  "Subsidiaries").  Each of the Subsidiaries is
an entity,  duly  incorporated or otherwise  organized,  validly existing and in
good  standing  under  the  laws of the  jurisdiction  of its  incorporation  or
organization (as applicable), with the full corporate power and authority to own
and use its  properties  and assets and to carry on its  business  as  currently
conducted.  Each of the Company and the  Subsidiaries  is duly  qualified  to do
business and is in good standing as a foreign  corporation in each  jurisdiction
in which the nature of the business conducted or property owned by it makes such
qualification necessary,  except where the failure to be so qualified or in good
standing, as the case may be, could not,  individually or in the aggregate,  (x)
adversely affect the legality,  validity or enforceability of the Securities (as
defined below) or any of this Agreement,  the  Certificate of  Designation,  the
Registration  Rights  Agreement or the Warrant  (collectively,  the "Transaction
Documents"),  (y) have or result in a material  adverse effect on the results of
operations,  assets,  prospects,  or condition  (financial  or otherwise) of the
Company and the  Subsidiaries,  taken as a whole,  or (z)  adversely  impair the
Company's  ability to perform fully on a timely basis its obligations  under any
of the  Transaction  Documents  (any of (x),  (y) or (z),  a  "Material  Adverse
Effect").

                  (b) Authorization;  Enforcement. The Company has the requisite
corporate  power and authority to enter into and to consummate the  transactions
contemplated  by each of the Transaction  Documents,  and otherwise to carry out
its  obligations  thereunder.   The  execution  and  delivery  of  each  of  the


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<PAGE>
Transaction  Documents  by  the  Company  and  the  consummation  by it  of  the
transactions  contemplated  thereby have been duly  authorized  by all necessary
corporate  action on the part of the Company and no further  corporate action is
required  by the  Company.  Each of the  Transaction  Documents  has  been  duly
executed by the Company and, when  delivered  (or filed,  as the case may be) in
accordance  with the  terms  hereof,  will  constitute  the  valid  and  binding
obligation of the Company enforceable against the Company in accordance with its
terms.  Neither the Company nor any  Subsidiary  is in  violation  of any of the
provisions of its  respective  certificate  of  incorporation,  by-laws or other
charter documents.

                  (c)  Capitalization.  The  number of  authorized,  issued  and
outstanding  capital  stock of the Company is set forth in Schedule  2.1(c).  No
shares of Common Stock are entitled to preemptive or similar rights,  nor is any
holder of the Common Stock  entitled to preemptive or similar rights arising out
of any  agreement  or  understanding  with the  Company  by virtue of any of the
Transaction  Documents.  Except as  disclosed in Schedule  2.1(c),  there are no
outstanding  options,   warrants,  script  rights  to  subscribe  to,  calls  or
commitments of any character  whatsoever  relating to, or, except as a result of
the  purchase  and sale of the Shares  and the  Warrant,  securities,  rights or
obligations convertible into or exchangeable for, or giving any Person any right
to  subscribe  for  or  acquire  any  shares  of  Common  Stock,  or  contracts,
commitments,  understandings,  or  arrangements  by  which  the  Company  or any
Subsidiary is or may become bound to issue additional shares of Common Stock, or
securities or rights convertible or exchangeable into shares of Common Stock. To
the  knowledge  of the  Company,  except as  specifically  disclosed  in the SEC
Documents (as defined below) or Schedule  2.1(c),  no Person or group of related
Persons  beneficially  owns (as  determined  pursuant to Rule 13d-3  promulgated
under the Securities  Exchange Act of 1934, as amended (the "Exchange  Act")) or
has the right to acquire by  agreement  with or by  obligation  binding upon the
Company beneficial  ownership of in excess of 5% of the Common Stock. A "Person"
means  an  individual  or  corporation,   partnership,  trust,  incorporated  or
unincorporated  association,  joint venture,  limited liability  company,  joint
stock company,  government (or an agency or subdivision thereof) or other entity
of any kind.

                  (d) Issuance of the Shares and the Warrant. The Shares and the
Warrant are duly  authorized,  and, when issued and paid for in accordance  with
the terms hereof,  shall have been validly issued, fully paid and nonassessable,
free and clear of all liens,  encumbrances  and  rights of first  refusal of any
kind  (collectively,  "Liens").  The Company has on the date hereof and will, at
all times while the Shares and the Warrant are outstanding, maintain an adequate
reserve of duly authorized shares of Common Stock,  reserved for issuance to the
holders of the Shares,  to enable it to perform  its  conversion,  exercise  and
other obligations  under this Agreement,  the Certificate of Designation and the
Warrant.  Such number of reserved  and  available  shares of Common Stock is not
less than the sum of (i) 200% of the  number of  shares  of Common  Stock  which
would  be  issuable  upon  conversion  in  full  of the  Shares,  assuming  such
conversion occurred on the Original Issue Date or the Filing Date (as defined in
the Registration  Rights Agreement),  whichever yields a lower Conversion Price,
(ii) the number of shares of Common Stock issuable upon exercise of the Warrant,
and (iii) the number of shares Common Stock which would be issuable upon payment
of dividends on the Shares,  assuming each Share is outstanding  for three years
and all dividends are paid in shares of Common Stock (such number of shares, the
"Initial  Minimum").  All such  authorized  shares of Common Stock shall be duly
reserved for  issuance to the holders of such Shares and Warrant.  The shares of


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<PAGE>
Common Stock  issuable upon  conversion  of the Shares,  as payment of dividends
thereon and upon exercise of the Warrant are collectively  referred to herein as
the "Underlying  Shares." The Shares,  the Warrant and the Underlying Shares are
collectively,  the "Securities."  When issued in accordance with the Certificate
of Designation and the Warrant,  in accordance with their respective  terms, the
Underlying  Shares shall have been duly authorized,  validly issued,  fully paid
and nonassessable, free and clear of all Liens.

                  (e) No Conflicts.  The execution,  delivery and performance of
the Transaction  Documents by the Company and the consummation by the Company of
the transactions  contemplated  thereby do not and will not (i) conflict with or
violate any  provision  of its  certificate  of  incorporation,  bylaws or other
charter documents (each as amended through the date hereof),  or (ii) subject to
obtaining  the  Required  Approvals  (as  defined  below),   conflict  with,  or
constitute  a default  (or an event  which with  notice or lapse of time or both
would  become a default)  under,  or give to others  any rights of  termination,
amendment,  acceleration or cancellation (with or without notice,  lapse of time
or both) of, any agreement, credit facility, indenture or instrument (evidencing
a Company debt or otherwise)  to which the Company or any  Subsidiary is a party
or by which any property or asset of the Company or any  Subsidiary  is bound or
affected,  or (iii) result in a violation of any law, rule,  regulation,  order,
judgment,  injunction,  decree or other restriction of any court or governmental
authority  to  which  the  Company  is  subject  (including  Federal  and  state
securities  laws and  regulations),  or by which  any  property  or asset of the
Company is bound or  affected,  except in the case of each of  clauses  (ii) and
(iii),  as could  not,  individually  or in the  aggregate,  have or result in a
Material  Adverse Effect.  The business of the Company is not being conducted in
violation of any law,  ordinance or  regulation of any  governmental  authority,
except for violations which, individually or in the aggregate, could not have or
result in a Material Adverse Effect.

                  (f)  Consents  and  Approvals.  Neither  the  Company  nor any
Subsidiary is required to obtain any consent, waiver, authorization or order of,
give any notice to, or make any filing or registration  with, any court or other
Federal,  state,  local or other  governmental  authority  or  other  Person  in
connection  with the execution,  delivery and  performance by the Company of the
Transaction  Documents,  other  than  (i)  the  filing  of  the  Certificate  of
Designation  with the Secretary of State of Delaware,  (ii) the filings required
pursuant  to  Section  3.12,  (iii)  the  filing  of the  Underlying  Securities
Registration   Statement  with  the  Securities  and  Exchange  Commission  (the
"Commission")  meeting the  requirements  set forth in the  Registration  Rights
Agreement  and covering the resale of the  Underlying  Shares by the  Purchaser,
(iv)  applicable  Blue Sky  filings  and,  and (v) in all other  cases where the
failure to obtain such consent, waiver,  authorization or order, or to give such
notice  or make  such  filing  or  registration  could  not have or  result  in,
individually or in the aggregate,  a Material Adverse Effect (collectively,  the
"Required Approvals").

                  (g) Litigation;  Proceedings. Except as specifically disclosed
in the SEC Documents or in Schedule 2.1(g),  there is no action, suit, notice of
violation,  proceeding  or  investigation  pending or, to the  knowledge  of the
Company,  threatened  against the Company or any of its  Subsidiaries  or any of
their   respective   properties   before  or  by  any  court,   governmental  or
administrative agency or regulatory authority (Federal,  state, county, local or
foreign)  which (i) adversely  affects or challenges  the legality,  validity or
enforceability  of any of the  Transaction  Documents or the  Securities or (ii)
could,  individually or in the aggregate,  have or result in a Material  Adverse
Effect.

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                  (h) No Default  or  Violation.  Neither  the  Company  nor any
Subsidiary (i) is in default under or in violation of (and no event has occurred
which has not been waived  which,  with  notice or lapse of time or both,  would
result in a default by the Company or any Subsidiary under), nor has the Company
or any Subsidiary received notice of a claim that it is in default under or that
it is in  violation  of, any  indenture,  loan or credit  agreement or any other
agreement  or  instrument  to  which  it is a party or by which it or any of its
properties is bound, (ii) is in violation of any order of any court,  arbitrator
or  governmental  body,  or  (iii)  is in  violation  of any  statute,  rule  or
regulation of any governmental authority, except as could not individually or in
the aggregate, have or result in a Material Adverse Effect.

                  (i)   Private   Offering.   Assuming   the   accuracy  of  the
representations   and   warranties  of  the  Purchaser  set  forth  in  Sections
2.2(b)-(g),  the offer,  issuance and sale of the Securities to the Purchaser as
contemplated  hereby  are  exempt  from  the  registration  requirements  of the
Securities Act of 1933, as amended (the "Securities  Act").  Neither the Company
nor any Person  acting on its behalf has taken any action that could subject the
offering, issuance or sale of the Securities to the registration requirements of
the Securities Act.

                  (j) SEC Documents;  Financial Statements.  Except as set forth
in Schedule 2.1(j), the Company has filed all reports required to be filed by it
under the Exchange Act,  including  pursuant to Section 13(a) or 15(d)  thereof,
for the three years  preceding  the date hereof (or such  shorter  period as the
Company was  required by law to file such  material)  (the  foregoing  materials
being collectively  referred to herein as the "SEC Documents" and, together with
the Schedules to this Agreement the "Disclosure Materials") on a timely basis or
has received a valid extension of such time of filing and has filed any such SEC
Documents prior to the expiration of any such extension.  As of their respective
dates, the SEC Documents complied in all material respects with the requirements
of the Securities Act and the Exchange Act and the rules and  regulations of the
Commission promulgated  thereunder,  and none of the SEC Documents,  when filed,
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated  therein or necessary in order to make the statements
therein,  in  light  of the  circumstances  under  which  they  were  made,  not
misleading.  All material agreements to which the Company is a party or to which
the property or assets of the Company are subject have been filed as exhibits to
the SEC  Documents  as required by Item 601 of  Regulation  S-K.  The  financial
statements of the Company  included in the SEC Documents  comply in all material
respects with applicable  accounting  requirements and the rules and regulations
of the Commission with respect thereto as in effect at the time of filing.  Such
financial  statements have been prepared in accordance  with generally  accepted
accounting  ("GAAP") principles applied on a consistent basis during the periods
involved,  except as may be otherwise specified in such financial  statements or
the notes  thereto,  and fairly  present in all material  respects the financial
position  of the  Company and its  consolidated  subsidiaries  as of and for the
dates thereof and the results of operations  and cash flows for the periods then
ended,  subject,  in the case of unaudited  statements,  to normal,  immaterial,
year-end  audit  adjustments.  Since  March 31,  1998,  except  as  specifically
disclosed  in the SEC  Documents,  (a) there has been no  event,  occurrence  or
development  that has had or that  could  have or result in a  Material  Adverse
Effect,  (b) the  Company  has  not  incurred  any  liabilities  (contingent  or
otherwise)  other  than (x)  liabilities  incurred  in the  ordinary  course  of
business  consistent  with past practice and (y)  liabilities not required to be
reflected in the Company's financial  statements pursuant to GAAP or required to
be  disclosed  in filings  made with the  Commission,  (c) the  Company  has not


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altered its method of  accounting  or the  identity of its  auditors and (d) the
Company has not  declared or made any payment or  distribution  of cash or other
property to its  stockholders or officers or directors (other than in compliance
with existing  Company stock option plans) with respect to its capital stock, or
purchased, redeemed (or made any agreements to purchase or redeem) any shares of
its capital stock. The Company last filed audited financial  statements with the
Commission  on July  14,  1998,  and has not  received  any  comments  from  the
Commission in respect thereof.

                  (k)  Investment  Company.  The  Company is not,  and is not an
Affiliate (as defined in Rule 405 under the  Securities  Act) of, an "investment
company" within the meaning of the Investment Company Act of 1940, as amended.

                  (l)  Certain  Fees.  Except for  certain  fees  payable by the
Company to Jesup & Lamont Securities  Corporation and the Shemano Group, no fees
or commissions will be payable by the Company to any broker,  financial  advisor
or consultant,  finder, placement agent, investment banker, or bank with respect
to the transactions  contemplated by this Agreement. The Purchaser shall have no
obligation  with respect to any fees or with respect to any claims made by or on
behalf of other Persons for fees of a type contemplated in this Section that may
be due in connection with the transactions  contemplated by this Agreement.  The
Company  shall  indemnify  and  hold  harmless  the  Purchaser,  its  employees,
officers, directors, agents, and partners, and their respective Affiliates, from
and  against  all  claims,  losses,  damages,  costs  (including  the  costs  of
preparation  and attorney's  fees) and expenses  suffered in respect of any such
claimed or existing fees, as such fees and expenses are incurred.

                  (m) Solicitation Materials. Neither the Company nor any Person
acting  on the  Company's  behalf  has  solicited  any  offer to buy or sell the
Securities by means of any form of general solicitation or advertising.

                  (n) Form S-1 Eligibility.  The Company is eligible to register
securities for resale with the Commission  under Form S-1 promulgated  under the
Securities Act.

                  (o)   Exclusivity.   As  long  as  the   Preferred   Stock  is
outstanding,  the Company shall not issue and sell shares of the Preferred Stock
to any  Person  other than the  Purchaser  other  than with the  specific  prior
written consent of the Purchaser.

                  (p) Seniority. No class of equity securities of the Company is
senior  to  the  Shares  in  right  of  payment,  whether  upon  liquidation  or
dissolution, or otherwise.

                  (q)  Patents  and  Trademarks.  Except as may result  from the
litigation  described in Schedule 2.1(g), the Company has, or has rights to use,
all patents, patent applications,  trademarks,  trademark applications,  service
marks,  trade  names,  copyrights,   licenses  and  rights  (collectively,   the
"Intellectual  Property  Rights")  which are  necessary  or material  for use in
connection  with its  business,  and which the  failure  to so have would have a
Material  Adverse  Effect.  To the best knowledge of the Company,  except as may
result from the litigation  described in Schedule 2.1(g),  all such Intellectual
Property Rights are enforceable and there is no existing infringement by another
Person of any of the Intellectual Property Rights.

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<PAGE>
                  (r) Registration  Rights;  Rights of Participation.  Except as
set forth on Schedule 6(b) to the Registration Rights Agreement, the Company has
not granted or agreed to grant to any Person any rights (including  "piggy-back"
registration  rights) to have any securities of the Company  registered with the
Commission or any other governmental authority which has not been satisfied.  No
Person,   has  any  right  of  first  refusal,   preemptive   right,   right  of
participation,   or  any  similar  right  to  participate  in  the  transactions
contemplated by the Transaction Documents.

                  (s)  Regulatory  Permits.  The  Company  and its  Subsidiaries
possess all certificates,  authorizations  and permits issued by the appropriate
Federal,  state or foreign  regulatory  authorities  necessary to conduct  their
respective  businesses  as  described  in the SEC  Documents,  except  where the
failure to possess such permits  could not,  individually  or in the  aggregate,
have or result in a Material Adverse Effect  ("Material  Permits"),  and neither
the Company  nor any such  Subsidiary  has  received  any notice of  proceedings
relating to the revocation or modification of any Material Permit.

                  (t) Title.  The  Company  and the  Subsidiaries  have good and
marketable title in fee simple to all real property and personal  property owned
by them which is material to the  business of the Company and its  Subsidiaries,
in each  case  free and  clear of all  Liens,  except  for such  Liens as do not
materially  affect the value of such property and do not interfere  with the use
made  and  proposed  to be  made  of  such  property  by  the  Company  and  its
Subsidiaries.  Any real property and facilities  held under lease by the Company
and its  Subsidiaries  are held by them under valid,  subsisting and enforceable
leases with such  exceptions as are not material and do not  interfere  with the
use made and proposed to be made of such  property and  buildings by the Company
and its Subsidiaries.

                  (u) Disclosure.  The Company confirms that it has not provided
the Purchaser or its agents or counsel with any information  that constitutes or
might constitute  material non-public  information.  The Company understands and
confirms that the Purchaser shall be relying on the foregoing representations in
effecting  transactions in securities of the Company. All disclosure provided to
the  Purchaser  regarding  the  Company,   its  business  and  the  transactions
contemplated hereby, including the Schedules to this Agreement,  furnished by or
on behalf of the  Company  are true and  correct  and do not  contain any untrue
statement  of a material  fact or omit to state any material  fact  necessary in
order to make the statements made therein,  in light of the circumstances  under
which they were made, not misleading.

          2.2 Representations  and Warranties of the Purchaser.  The Purchaser 
hereby represents and warrants to the Company as follows:

                  (a)  Organization;  Authority.  The Purchaser is a corporation
duly  organized,  validly  existing and in good  standing  under the laws of the
jurisdiction  of its  incorporation  with  the  requisite  corporate  power  and
authority, to enter into and to consummate the transactions  contemplated by the
Transaction Documents and otherwise to carry out its obligations thereunder. The
purchase by the Purchaser of the Securities  hereunder has been duly  authorized
by all necessary action on the part of the Purchaser. Each of this Agreement and
the  Registration  Rights  Agreement  has been  duly  executed,  authorized  and
delivered  by the  Purchaser  and  constitutes  the  valid and  legally  binding
obligation  of the  Purchaser,  enforceable  against it in  accordance  with its
terms.

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<PAGE>
                  (b)  Investment   Intent.   The  Purchaser  is  acquiring  the
Securities for its own account for investment  purposes only and not with a view
to or for  distributing  or  reselling  such  Securities  or any part thereof or
interest therein, without prejudice,  however, to the Purchaser's right, subject
to the provisions of this Agreement and the Registration  Rights  Agreement,  at
all times to sell or  otherwise  dispose  of all or any part of such  Securities
pursuant to an effective  registration statement under the Securities Act and in
compliance with applicable state securities laws or under an exemption from such
registration.

                  (c)  Purchaser  Status.  At the time the Purchaser was offered
the Shares and the  Warrant,  it was,  and at the date hereof it is, and at each
exercise date under the Warrant, it will be, an "accredited investor" as defined
in Rule 501(a) under the Securities Act.

                  (d) Experience of the Purchaser.  The Purchaser,  either alone
or together with its  representatives,  has such knowledge,  sophistication  and
experience in business and  financial  matters so as to be capable of evaluating
the merits and risks of the prospective investment in the Securities, and has so
evaluated the merits and risks of such investment.

                  (e) Ability of the Purchaser to Bear Risk of  Investment.  The
Purchaser is able to bear the economic risk of an  investment in the  Securities
and, at the present time, is able to afford a complete loss of such investment.

                  (f) Access to Information.  The Purchaser acknowledges receipt
of the Disclosure  Materials and further  acknowledges  that it has reviewed the
Disclosure  Materials  and has been  afforded  (i) the  opportunity  to ask such
questions  as  it  has  deemed  necessary  of,  and  to  receive  answers  from,
representatives  of the  Company  concerning  the  terms and  conditions  of the
offering  of the  Securities  and the  merits  and  risks  of  investing  in the
Securities;  (ii) access to  information  about the  Company  and the  Company's
financial condition, results of operations, business, properties, management and
prospects  sufficient  to enable it to evaluate  its  investment;  and (iii) the
opportunity to obtain such additional information which the Company possesses or
can acquire without  unreasonable effort or expense that is necessary to make an
informed  investment  decision with respect to the  investment and to verify the
accuracy  and  completeness  of the  information  contained  in  the  Disclosure
Materials. Neither such inquiries nor any other investigation conducted by or on
behalf of such Purchaser or its  representatives or counsel shall modify,  amend
or affect such Purchaser's right to rely on the truth, accuracy and completeness
of the  Disclosure  Materials and the Company's  representations  and warranties
contained in the Transaction Documents.

                  (g) General Solicitation.  The Purchaser is not purchasing the
Securities as a result of or subsequent to any advertisement, article, notice or
other  communication  regarding  the  Securities  published  in  any  newspaper,
magazine or similar media or broadcast over  television or radio or presented at
any seminar or any other general solicitation or general advertisement.

                  (h) Reliance.  The Purchaser understands and acknowledges that
(i) the Securities are being offered and sold to it without  registration  under
the Securities Act in a private  placement that is exempt from the  registration
provisions of the Securities Act and (ii) the  availability  of such  exemption,
depends in part on, and the Company will rely upon the accuracy and truthfulness
of, the  foregoing  representations  and the Purchaser  hereby  consents to such
reliance.

                                       8
<PAGE>
                  The Company  acknowledges  and agrees that the Purchaser makes
no representations  or warranties with respect to the transactions  contemplated
hereby other than those specifically set forth in this Section 2.2.


                                   ARTICLE III
                         OTHER AGREEMENTS OF THE PARTIES

         3.1  Transfer  Restrictions.  (a)  Securities  may only be  disposed of
pursuant to an effective registration statement under the Securities Act, to the
Company or pursuant  to an  available  exemption  from or in a  transaction  not
subject to the  registration  requirements  of the Securities Act. In connection
with any transfer of Securities other than pursuant to an effective registration
statement or to the Company,  except as otherwise set forth herein,  the Company
may  require  the  transferor  thereof to  provide to the  Company an opinion of
counsel  selected by the  transferor,  the form and  substance of which  opinion
shall be  reasonably  satisfactory  to the  Company,  to the  effect  that  such
transfer does not require registration of such transferred  securities under the
Securities Act.  Notwithstanding  the foregoing,  the Company hereby consents to
and agrees to register on the books of the Company and with any  transfer  agent
for the securities of the Company any transfer of Securities by the Purchaser to
an Affiliate  of the  Purchaser  or to funds under  common  management  with the
Purchaser,  and any transfer among any such  Affiliates or funds,  provided that
transferee  certifies  to the Company  that it is an  "accredited  investor"  as
defined in Rule 501(a) under the  Securities  Act and that it is  acquiring  the
Securities  solely for investment  purposes.  Any such transferee shall agree in
writing to be bound by the terms of this  Agreement and shall have the rights of
a Purchaser under this Agreement and the Registration Rights Agreement.

                  (b) The  Purchaser  agrees  to the  imprinting,  so long as is
required by this Section 3.1(b), of the following legend on the Securities:

     NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE
CONVERTIBLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE  COMMISSION OR
THE  SECURITIES  COMMISSION  OF ANY STATE IN  RELIANCE  UPON AN  EXEMPTION  FROM
REGISTRATION  UNDER THE  SECURITIES  ACT OF 1933,  AS AMENDED  (THE  "SECURITIES
ACT"),  AND,  ACCORDINGLY,  MAY NOT BE OFFERED  OR SOLD  EXCEPT  PURSUANT  TO AN
EFFECTIVE  REGISTRATION  STATEMENT  UNDER THE  SECURITIES  ACT OR PURSUANT TO AN
AVAILABLE  EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE  REGISTRATION
REQUIREMENTS  OF THE  SECURITIES  ACT AND IN ACCORDANCE  WITH  APPLICABLE  STATE
SECURITIES LAWS.

                  Underlying Shares shall not contain the legend set forth above
nor any other  legend if the  conversion  of Shares,  the  payment of  dividends
thereon,  and exercise of the Warrant or other issuances of Underlying Shares as
contemplated  hereby, by the Certificate of Designation or the Warrant occurs at
any time while an  Underlying  Securities  Registration  Statement  is effective
under the Securities  Act or, in the event there is not an effective  Underlying
Securities  Registration Statement at such time, if in the opinion of counsel to
the Company such legend is not required  under  applicable  requirements  of the
Securities Act (including judicial  interpretations and pronouncements issued by


                                       9
<PAGE>
the staff of the  Commission).  The Company shall cause its counsel to issue the
legal  opinion  included in the Transfer  Agent  Instructions  to the  Company's
transfer agent on the day that the Underlying Securities  Registration Statement
is declared effective by the Commission. The Company agrees that it will provide
the Purchaser,  upon request,  with a certificate or  certificates  representing
Underlying  Shares,  free  from such  legend  at such time as such  legend is no
longer required hereunder.  The Company may not make any notation on its records
or give  instructions  to any transfer  agent of the Company  which  enlarge the
restrictions of transfer set forth in this Section.

         3.2  Acknowledgment  of  Dilution.  The Company  acknowledges  that the
issuance of the Underlying  Shares upon (i) conversion of the Shares and payment
of  dividends  thereon  in  accordance  with  the  terms of the  Certificate  of
Designation,  and (ii) exercise of the Warrant in accordance with its terms, may
result in dilution of the outstanding shares of Common Stock, which dilution may
be substantial under certain market conditions. The Company further acknowledges
that its obligation to issue Underlying Shares upon (x) conversion of the Shares
and payment of dividends thereon in accordance with the terms of the Certificate
of Designation, and (y) exercise of the Warrant in accordance with its terms, is
not relieved or otherwise altered by the effect of any such dilution.

         3.3  Furnishing  of   Information.   As  long  as  the  Purchaser  owns
Securities,  the Company  covenants  to use its best  efforts to timely file (or
obtain  extensions  in respect  thereof  and file  within the  applicable  grace
period)  all reports  required to be filed by the Company  after the date hereof
pursuant to Section 13(a) or 15(d) of the Exchange Act. As long as the Purchaser
owns Securities, if the Company is not required to file reports pursuant to such
sections,  it will  prepare  and  furnish  to the  Purchaser  and make  publicly
available in accordance  with Rule 144(c)  promulgated  under the Securities Act
annual and  quarterly  financial  statements,  together  with a  discussion  and
analysis  of such  financial  statements  in form  and  substance  substantially
similar to those that would  otherwise  be  required  to be  included in reports
required  by Section  13(a) or 15(d) of the  Exchange  Act, as well as any other
information  required  thereby,  in the time period that such filings would have
been  required to have been made under the  Exchange  Act.  The Company  further
covenants  that it will take such further action as any holder of Securities may
reasonably request,  all to the extent required from time to time to enable such
Person to sell Underlying Shares without  registration  under the Securities Act
within the limitation of the exemptions  provided by Rule 144 promulgated  under
the  Securities  Act,  including  the  legal  opinion  referenced  above in this
Section.  Upon the request of any such Person, the Company shall deliver to such
Person a written certification of a duly authorized officer as to whether it has
complied with such requirements.

         3.4 Subsequent  Nasdaq Listing.  The Company shall use its best efforts
to cause the  Common  Stock to be listed  for  trading  and quoted on the Nasdaq
National Market or the Nasdaq  SmallCap  Market as soon as possible,  but in any
event  prior to the Filing  Date (as such term is  defined  in the  Registration
Rights Agreement).

         3.5 Integration.  The Company shall not, and shall use its best efforts
to ensure that, no Affiliate  shall,  sell,  offer for sale or solicit offers to
buy or  otherwise  negotiate in respect of any security (as defined in Section 2


                                       10
<PAGE>
of the  Securities  Act) that would be integrated  with the offer or sale of the
Securities in a manner that would require the registration  under the Securities
Act of the sale of the Securities to the Purchaser.

         3.6 Increase in Authorized  Shares.  At such times as the Company would
be,  if a  notice  of  conversion  or  exercise  (as the case may be) were to be
delivered  on such  date,  precluded  from (a)  issuing  200% of the  number  of
Underlying  Shares as would then be issuable  upon a  conversion  in full of the
Shares and as payment of any accrued and unpaid  dividends in respect thereof in
shares of Common Stock, or (b) honoring the exercise in full of the Warrant,  in
either  case,  due to the  unavailability  of a  sufficient  number of shares of
authorized but unissued or reserved Common Stock,  the Board of Directors of the
Company shall promptly (and in any case, within 30 Business Days from such date)
prepare and mail to the  stockholders of the Company proxy materials  requesting
authorization  to amend the Company's  Certificate of  Incorporation to increase
the number of shares of Common Stock which the Company is authorized to issue to
at least such number of shares as reasonably requested by the Purchaser in order
to provide for such number of authorized and unissued  shares of Common Stock to
enable the Company to comply with its  conversion  exercise and  reservation  of
shares  obligations  as  set  forth  in  this  Agreement,   the  Certificate  of
Designation and the Warrant (the sum of (x) the number of shares of Common Stock
then authorized,  (y) the number of shares of Common Stock then outstanding plus
all shares of Common Stock  issuable upon exercise of all  outstanding  options,
warrants and convertible instruments,  and (z) the sum of (i) 200% of the number
of  Underlying  Shares as are then  issuable  upon a  conversion  in full of all
Shares and as payment of dividends  thereon,  and (ii) the number of  Underlying
Shares  as are  issuable  upon  exercise  in full  of the  Warrant,  shall  be a
reasonable  number). In connection  therewith,  the Board of Directors shall (a)
adopt  proper  resolutions  authorizing  such  increase,  (b)  recommend  to and
otherwise use its best efforts to promptly and duly obtain stockholder  approval
to carry out such resolutions (and hold a special meeting of the stockholders no
later than the 60th day after delivery of the proxy  materials  relating to such
meeting) and (c) within five (5) Business  Days of  obtaining  such  stockholder
authorization,  file an  appropriate  amendment to the Company's  Certificate of
Incorporation to evidence such increase.

                  3.7  Reservation  and Listing of  Underlying  Shares.  (a) The
Company shall maintain a reserve of Common Stock for issuance upon conversion of
the Shares (and for payment of dividends  thereon in shares of Common Stock) and
exercise  of the  Warrant  in such  amount as may be  required  to  perform  its
obligations in full under the Transaction Documents, which reserve shall include
a number of shares of Common  Stock equal to no less than (i) 200% of the number
of shares of Common Stock as would be issuable  upon  conversion  in full of the
Shares and upon payment of dividends  thereon,  and (ii) the number of shares of
Common Stock issuable upon exercise of the Warrant.

                  (b) The Company  shall (i) not later than the Tenth (10th) day
following  the date,  if any, on which the shares of Common Stock become  listed
for  trading on any of the New York Stock  Exchange,  American  Stock  Exchange,
Nasdaq National  Market or Nasdaq SmallCap Market (each a "Subsequent  Market"),
prepare and file with any such  Subsequent  Market an additional  shares listing
application  covering a number of shares of Common Stock which is at least equal
to the number of shares required to be reserved pursuant to Section 2.1(d), (ii)
take all steps  necessary to cause the such shares to be approved for listing on
such Subsequent Market as soon as possible thereafter,  and (iii) provide to the
Purchaser  evidence of such listing,  and the Company shall maintain the listing


                                       11
<PAGE>
of its Common Stock thereon or on another  Subsequent  Market.  If the number of
Underlying  Shares as are  issuable  upon  conversion  in full of the  number of
Shares then  outstanding,  as payment of  dividends  thereon and exercise of the
Warrant  exceeds 85% of the number of  Underlying  Shares  previously  listed on
account  thereof  with  such  Subsequent  Market,  the  Company  shall  take the
necessary  actions to immediately  list a number of Underlying  Shares as equals
(i) 200% of the number of Underlying  Shares then  issuable  upon  conversion in
full of the Shares and upon payment of dividends thereon, and (ii) the number of
Underlying Shares issuable upon exercise of the Warrant.

         3.8 Conversion Procedures. The Transfer Agent Instructions,  Conversion
Notice (as  defined in Exhibit A) and Notice of  Exercise  under the Warrant set
forth the  totality of the  procedures  with  respect to the  conversion  of the
Shares and  exercise of the Warrant,  including  the form of legal  opinion,  if
necessary, that shall be rendered to the Company's transfer agent and such other
information  and  instructions  as may be  reasonably  necessary  to enable  the
Purchaser to convert its Shares and exercise the Warrant as  contemplated in the
Certificate of Designation and the Warrant (as applicable).

         3.9 Notice of Breaches. (a) Each of the Company and the Purchaser shall
give  prompt   written  notice  to  the  other  of  any  breach  by  it  of  any
representation,  warranty  or  other  agreement  contained  in  any  Transaction
Document,  as well as any events or  occurrences  arising  after the date hereof
which  would  reasonably  be likely to cause any  representation  or warranty or
other  agreement  of such  party,  as the case may be,  contained  therein to be
incorrect or breached as of the Closing Date.  However,  no disclosure by either
party  pursuant  to this  Section  shall be  deemed  to cure any  breach  of any
representation,  warranty  or  other  agreement  contained  in  any  Transaction
Document.

                  (b)  Notwithstanding  the  generality of Section  3.9(a),  the
Company shall  promptly  notify the Purchaser of any notice or claim (written or
oral) that it  receives  from any lender of the  Company to the effect  that the
consummation  of the  transactions  contemplated  by the  Transaction  Documents
violates or would violate any written  agreement or  understanding  between such
lender and the Company,  and the Company shall promptly  furnish by facsimile to
the holders of the  Securities a copy of any written  statement in support of or
relating to such claim or notice.

         3.10  Conversion and Exercise  Obligations of the Company.  The Company
shall honor  conversions  of the Shares and  exercises  of the Warrant and shall
deliver  Underlying Shares in accordance with the respective  terms,  conditions
and time periods set forth in the respective  Certificate of Designation and the
Warrant.

         3.11 Right of First Refusal; Subsequent Registrations.  (a) The Company
shall not,  directly or  indirectly,  without the prior  written  consent of the
Purchaser,  offer,  sell, grant any option to purchase,  or otherwise dispose of
(or  announce  any  offer,  sale,  grant  or any  option  to  purchase  or other
disposition)  any  of  its  or  its  Affiliates'  equity  or   equity-equivalent
securities or a transaction intended to be exempt or not subject to registration
under the  Securities Act (a  "Subsequent  Placement")  for a period of 180 days
after the  Closing  Date,  except  (i) the  granting  of Common  Stock  options,
warrants or other securities to acquire Common Stock to employees,  officers and
directors,  and the issuance of shares upon exercise of such  securities,  under
any  stock  option  plan or  other  employee  compensation  plan  heretofore  or
hereinafter duly adopted by the Company, (ii) shares of Common Stock issued upon


                                       12
<PAGE>
exercise  of any  currently  outstanding  warrants  and upon  conversion  of any
currently  outstanding  convertible  securities  of the  Company,  in each  case
disclosed  in  Schedule  2.1(c),  (iii)  shares  of  Common  Stock  issued  upon
conversion  of  Preferred  Stock and as payment of  dividends  thereon  and upon
exercise of the Warrant in accordance with the Certificate of Designation or the
Warrant, respectively, (iv) shares of Common Stock, warrants or other securities
to acquire  shares of Common Stock,  in either case,  issued in connection  with
acquisitions by the Company of non-affiliated third parties or as inducement for
debt or lease financing with non-affiliated  third party  institutional  lenders
whose primary business is not trading or investing in securities,  (v) shares of
Common  Stock,  warrants or other  securities  to acquire  Common  Stock  issued
pursuant to any  agreement  entered into with the Company which are unrelated to
the  raising of  capital,  and (vi)  shares of Common  Stock,  warrants or other
securities  to  acquire  shares  of Common  Stock,  in  either  case,  issued in
connection  with the raising of capital by the Company in order to redeem all of
the Shares then held by the Purchaser  pursuant to Section 6 of the  Certificate
of  Designation  (but only if (1) such  redemption be made in full within twenty
(20)  Trading Days of the  consummation  of an issuance of such shares of Common
Stock,  warrants or other  securities to acquire  shares of Common Stock and (2)
the  documents,  if any,  entered into in connection  with such capital  raising
explicitly  state  that  proceeds  therefrom  shall  first be used to redeem the
Shares in accordance with this clause (vi)),  unless (A) the Company delivers to
the  Purchaser  a written  notice  (the  "Subsequent  Placement  Notice") of its
intention effect such Subsequent  Placement,  which Subsequent  Placement Notice
shall  describe  in  reasonable  detail the  proposed  terms of such  Subsequent
Placement,  the amount of proceeds intended to be raised thereunder,  the Person
with whom such  Subsequent  Placement  shall be effected,  and attached to which
shall be a term sheet or similar document relating thereto and (B) the Purchaser
shall not have  notified  the  Company by 5:00 p.m.  (New York City time) on the
tenth (10th) Trading Day after its receipt of the Subsequent Placement Notice of
its willingness to cause the Purchaser to provide (or to cause its sole designee
to  provide),  subject  to  completion  of  mutually  acceptable  documentation,
financing to the Company on substantially  the terms set forth in the Subsequent
Placement  Notice.  If the  Purchaser  shall fail to notify  the  Company of its
intention to enter into such negotiations  within such time period,  the Company
may  effect the  Subsequent  Placement  substantially  upon the terms and to the
Persons (or  Affiliates of such Persons) set forth in the  Subsequent  Placement
Notice;  provided,  that the Company shall  provide the Purchaser  with a second
Subsequent  Placement  Notice,  and the Purchaser  shall again have the right of
first refusal set forth above in this paragraph (a), if the Subsequent Placement
subject  to  the  initial  Subsequent  Placement  Notice  shall  not  have  been
consummated for any reason on the terms set forth in such  Subsequent  Placement
Notice within thirty (30) Trading Days after the date of the initial  Subsequent
Placement Notice with the Person (or an Affiliate of such Person)  identified in
the Subsequent Placement Notice.
                  (b) Except for (x) Underlying  Shares,  (y) other "Registrable
Securities" (as such term is defined in the Registration Rights Agreement) to be
registered, and securities of the Company permitted pursuant to Schedule 6(b) of
the  Registration's  Rights  Agreement  to  be  registered,  in  the  Underlying
Securities  Registration in accordance with the Registration  Rights  Agreement,
and (z) Common Stock to be registered for resale in connection  with  financings
permitted pursuant to paragraph (a)(i) and (vi) of Section 3.11(a) (provided, in
the case of a financing permitted pursuant paragraph (a)(vi) of Section 3.11(a),
it  shall be a  condition  precedent  to such  registration  that  the  Optional
Redemption Price for the Shares shall have been paid in full), the Company shall
not, without the prior written consent of the Purchaser (i) issue or sell any of


                                       13
<PAGE>
its or any of its Affiliates' equity or equity-equivalent securities pursuant to
Regulation S promulgated  under the Securities  Act, or (ii) register for resale
any  securities  of the  Company  for a period of not less than 90 Trading  Days
after the date that the Underlying Securities Registration Statement is declared
effective  by the  Commission.  Any days  that a  Purchaser  is  unable  to sell
Underlying  Securities under the Underlying  Securities  Registration  Statement
shall be added to such 90 Trading  Day period for the  purposes  of (i) and (ii)
above.

         3.12 Certain Securities Laws Disclosures; Publicity. The Company shall:
(i)  issue  a  press  release   acceptable  to  the  Purchaser   disclosing  the
transactions  contemplated  hereby on the Closing Date,  (ii) either include the
disclosure of this  transaction in the Company's  Quarterly  Report on Form 10-Q
for the  quarterly  period  ended June 30,  1998 or file with the  Commission  a
Report  on Form 8-K  disclosing  the  transactions  contemplated  hereby  within
fifteen (15) Business  Days after the Closing  Date,  and (iii) timely file with
the  Commission a Form D promulgated  under the Securities Act as required under
Regulation D promulgated  under the Securities Act and provide a copy thereof to
the Purchaser promptly after the filing thereof. The Company shall, no less than
two (2) Business Days prior to the filing of any disclosure  required by clauses
(ii) and (iii)  above,  provide a copy  thereof  to Encore  Capital  Management,
L.L.C. ("Encore").

         3.13 Use of Proceeds.  The Company  shall not use the net proceeds from
the  sale  of  the  Securities   hereunder  to  redeem  any  Company  equity  or
equity-equivalent securities or to pay down debt other than trade debt.

         3.14  Transfer  of  Intellectual  Property  Rights.  For so long as any
Shares  are  outstanding,   except  in  connection  with  the  sale  of  all  or
substantially all of the assets of the Company,  the Company shall not transfer,
sell or otherwise  dispose of any Intellectual  Property Rights, or allow any of
the  Intellectual  Property  Rights to become  subject to any Liens,  or fail to
renew such  Intellectual  Property  Rights (if renewable and it would  otherwise
lapse if not renewed), without the prior written consent of the Purchaser.

         3.15 Reimbursement. If the Purchaser, other than by reason of its gross
negligence,  willful  misconduct  or violation of law,  becomes  involved in any
capacity in any action,  proceeding or  investigation  brought by or against any
Person, including stockholders of the Company but not including investors in the
Purchaser or  investment  funds managed by Encore,  in  connection  with or as a
result of the  consummation  of the  transactions  contemplated  by  Transaction
Documents, the Company will reimburse the Purchaser for its reasonable legal and
other  expenses  (including  the  cost  of any  investigation  and  preparation)
incurred  in  connection   therewith,   as  such  expenses  are  incurred.   The
reimbursement  obligations  of the  Company  under  this  paragraph  shall be in
addition to any  liability  which the Company may otherwise  have,  shall extend
upon the same terms and  conditions  to any  Affiliates of the Purchaser who are
actually  named in such  action,  proceeding  or  investigation,  and  partners,
directors,  agents,  employees and controlling persons (if any), as the case may
be, of the Purchaser and any such Affiliate, and shall be binding upon and inure
to the benefit of any successors, assigns, heirs and personal representatives of
the Company,  the  Purchaser  and any such  Affiliate  and any such Person.  The
Company  also  agrees  that  neither  the  Purchaser  nor any  such  Affiliates,
partners,  directors,  agents,  employees or controlling  persons shall have any
liability to the Company or any Person asserting claims on behalf of or in right
of the  Company in  connection  with or as a result of the  consummation  of the
Transaction  Documents  except to the extent that any losses,  claims,  damages,


                                       14
<PAGE>
liabilities  or  expenses   incurred  by  the  Company  result  from  the  gross
negligence, willful misconduct or violation of law of the Purchaser or entity in
connection with the transactions contemplated by this Agreement.


                                   ARTICLE IV
                                  MISCELLANEOUS

                  4.1 Fees and  Expenses.  At the Closing the Company  shall (i)
pay  $15,000 to  Robinson  Silverman  in  connection  with the  preparation  and
negotiation of the Transaction  Documents and (ii) pay $10,000 to Encore for its
due diligence  expenses and  disbursements  in connection with the  transactions
contemplated  hereby.  Other than the amounts  contemplated  in the  immediately
preceding sentence, and except as otherwise set forth in the Registration Rights
Agreement, each party shall pay the fees and expenses of its advisers,  counsel,
accountants and other experts,  if any, and all other expenses  incurred by such
party  incident  to  the  negotiation,   preparation,  execution,  delivery  and
performance of this  Agreement.  The Company shall pay all stamp and other taxes
and duties levied in connection with the issuance of the Securities.

                  4.2 Entire Agreements;  Amendments.  This Agreement,  together
with the Exhibits and Schedules hereto, the Registration  Rights Agreement,  the
Certificate  of  Designation,  the Transfer Agent  Instructions  and the Warrant
contain  the entire  understanding  of the parties  with  respect to the subject
matter hereof and supersede all prior  agreements  and  understandings,  oral or
written,  with respect to such matters,  which the parties acknowledge have been
merged into such documents, exhibits and schedules.

                  4.3 Notices.  Any and all notices or other  communications  or
deliveries  required or permitted to be provided  hereunder  shall be in writing
and  shall be deemed  given and  effective  on the  earliest  of (i) the date of
transmission,  if such notice or communication is delivered via facsimile at the
facsimile  telephone  number  specified in this Section  prior to 8:00 p.m. (New
York City  time) on a  Business  Day,  (ii) the  Business  Day after the date of
transmission,  if such notice or communication is delivered via facsimile at the
facsimile  telephone number specified in the Purchase  Agreement later than 8:00
p.m. (New York City time) on any date and earlier than 11:59 p.m. (New York City
time) on such date,  (iii) the Business Day  following  the date of mailing,  if
sent by nationally  recognized  overnight  courier service,  or (iv) upon actual
receipt by the party to whom such notice is  required  to be given.  The address
for such notices and communications shall be as follows:

    If to the Company:  Coyote Network Systems, Inc.
                        4360 Park Terrace Drive
                        Westlake Village, CA 91361
                        Facsimile No.: (818) 735-7633
                        Attn:  Chief Financial Officer

                                       15
<PAGE>
    With copies to:     Reinhart, Boerner, Van Deuren, Norris & Rieselbach, P.C.
                        One Norwest Center
                        1700 Lincoln Street, Suite 3725
                        Denver, CO 80203-4537
                        Facsimile No.: (303) 831-4805
                        Attn: Timothy G. Atkinson

    If to the           JNC Opportunity Fund Ltd.
       Purchaser:       c/o Olympia Capital (Cayman) Ltd.
                        Williams House, 20 Reid Street
                        Hamilton HM11, Bermuda
                        Facsimile No.:  (441) 295-2305
                        Attn: Director

    With copies to:     Encore Capital Management, L.L.C.
                        12007 Sunrise Valley Drive, Suite 460
                        Reston, VA 20191
                        Facsimile No.: (703) 476-7711
                        Attn: Managing Member

    With copies to:     Robinson Silverman Pearce Aronsohn & Berman LLP
                        1290 Avenue of the Americas
                        New York, NY  10104
                        Facsimile No.:  (212) 541-4630
                        Attn: Eric L. Cohen

or such other  address as may be designated  in writing  hereafter,  in the same
manner, by such Person.

                  4.4 Amendments; Waivers. No provision of this Agreement may be
waived  or  amended  except in a written  instrument  signed,  in the case of an
amendment,  by both the Company and the Purchaser;  or, in the case of a waiver,
by the party against whom enforcement of any such waiver is sought. No waiver of
any default with respect to any  provision,  condition  or  requirement  of this
Agreement shall be deemed to be a continuing waiver in the future or a waiver of
any other  provision,  condition or requirement  hereof,  nor shall any delay or
omission of either  party to exercise any right  hereunder in any manner  impair
the exercise of any such right accruing to it thereafter.

                  4.5 Headings. The headings herein are for convenience only, do
not  constitute  a part of this  Agreement  and  shall not be deemed to limit or
affect any of the provisions hereof.

                  4.6  Successors and Assigns.  This Agreement  shall be binding
upon and inure to the benefit of the parties and their  successors and permitted
assigns.  The Company may not assign this Agreement or any rights or obligations
hereunder  without the prior  written  consent of the  Purchaser.  Except as set
forth in Section  3.1(a),  the Purchaser may not assign this Agreement or any of
the  rights  or  obligations  hereunder  (other  than  to an  Affiliate  of  the
Purchaser)  without the consent of the Company,  except that the  Purchaser  may


                                       16
<PAGE>
assign its rights  hereunder  and under the  Transaction  Documents  without the
consent of the Company as long as such assignee  demonstrates  to the reasonable
satisfaction  of  the  Company  its  satisfaction  of  the  representations  and
warranties  set  forth in  Section  2.2.  This  provision  shall  not  limit the
Purchaser's right to transfer  securities or transfer or assign rights hereunder
or under the Registration Rights Agreement.

                  4.7 No Third-Party  Beneficiaries.  This Agreement is intended
for the  benefit of the  parties  hereto  and their  respective  successors  and
permitted  assigns  and,  other  with  respect  to  Encore  who  is an  intended
beneficiary of, and entitled to enforce, Sections 3.12, 4.1 and 4.11, is not for
the benefit of, nor may any provision hereof be enforced by, any other Person.

                  4.8  Governing  Law. This  Agreement  shall be governed by and
construed and enforced in accordance  with the internal laws of the State of New
York without  regard to the  principles of conflicts of law thereof.  Each party
hereby  irrevocably  submits  to the  exclusive  jurisdiction  of the  state and
federal  courts sitting in the City of New York,  borough of Manhattan,  for the
adjudication  of any dispute  hereunder  or in  connection  herewith or with any
transaction  contemplated  hereby or discussed herein (including with respect to
the enforcement of the any of the Transaction Documents), and hereby irrevocably
waives,  and agrees not to assert in any suit,  action or proceeding,  any claim
that it is not personally  subject to the  jurisdiction of any such court,  that
such suit,  action or  proceeding  is improper.  Each party  hereby  irrevocably
waives  personal  service of process and consents to process being served in any
such suit,  action or  proceeding by mailing a copy thereof to such party at the
address in effect for  notices to it under this  Agreement  and agrees that such
service  shall  constitute  good and  sufficient  service of process  and notice
thereof.  Nothing contained herein shall be deemed to limit in any way any right
to serve process in any manner permitted by law.

                  4.9 Survival. The representations,  warranties, agreements and
covenants  contained  herein  shall  survive the Closing  and the  delivery  and
conversion or exercise (as the case may be) of the Shares and the Warrant.

                  4.10 Execution.  This Agreement may be executed in two or more
counterparts,  all of which when taken  together shall be considered one and the
same agreement and shall become effective when  counterparts have been signed by
each party and  delivered  to the other  party,  it being  understood  that both
parties need not sign the same  counterpart.  In the event that any signature is
delivered by facsimile  transmission,  such  signature  shall create a valid and
binding  obligation of the party executing (or on whose behalf such signature is
executed) the same with the same force and effect as if such facsimile signature
page were an original thereof.

                  4.11  Publicity.  The Company and the Purchaser  shall consult
with each  other in  issuing  any press  releases  or  otherwise  making  public
statements  or  filings  and other  communications  with the  Commission  or any
regulatory  agency or stock  market or  trading  facility  with  respect  to the
transactions  contemplated  hereby and neither  party shall issue any such press
release  or  otherwise  make  any  such  public  statement,   filings  or  other
communications  without the prior  written  consent of the other,  which consent
shall not be  unreasonably  withheld  or delayed,  except that no prior  consent
shall be required if such  disclosure is required by law, in which such case the
disclosing  party shall provide the other party with prior notice of such public


                                       17
<PAGE>
statement,  filing or other  communication.  Notwithstanding the foregoing,  the
Company  shall not  publicly  disclose the name of the  Purchaser or Encore,  or
include the name of the  Purchaser or Encore in any filing with the  Commission,
or any  regulatory  agency,  trading  facility or stock market without the prior
written  consent of Encore,  except to the extent such  disclosure  (but not any
disclosure as to the controlling  Persons  thereof) is required by law, in which
case the Company  shall  provide the  Purchaser  and Encore with prior notice of
such disclosure.

                  4.12  Severability.  In case any one or more of the provisions
of this Agreement shall be invalid or unenforceable in any respect, the validity
and enforceability of the remaining terms and provisions of this Agreement shall
not in any way be affecting or impaired  thereby and the parties will attempt to
agree  upon a valid  and  enforceable  provision  which  shall  be a  reasonable
substitute  therefor,  and upon so agreeing,  shall  incorporate such substitute
provision in this Agreement.


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                                       18
<PAGE>
                 Convertible Preferred Stock Purchase Agreement

                  IN WITNESS  WHEREOF,  the  parties  hereto  have  caused  this
Convertible  Preferred  Stock  Purchase  Agreement to be duly  executed by their
respective authorized signatories as of the date first indicated above.

                            COYOTE NETWORK SYSTEMS, INC.


                            By:      /s/ James J. Fiedler
                                     ------------------------------------------
                            Name:    James J. Fiedler
                            Title:   Chairman and Chief Executive Officer



                            JNC OPPORTUNITY FUND LTD.



                            By:      /s/ Neil T. Chau
                                     -------------------------------------------
                            Name:    Neil T. Chau
                            Title:   Managing Member



                                       19
<PAGE>
                                    ---------
                                    EXHIBIT A
                                    ---------
                          COYOTE NETWORK SYSTEMS, INC.

                   CERTIFICATE OF DESIGNATIONS OF THE POWERS,
                     PREFERENCES AND RELATIVE PARTICIPATING,
                        OPTIONAL AND OTHER SPECIAL RIGHTS
                 OF 5% SERIES A CONVERTIBLE PREFERRED STOCK, AND
              QUALIFICATIONS, LIMITATIONS AND RESTRICTIONS THEREOF

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

                         Pursuant to Section 151 of the
                General Corporation Law of the State of Delaware
                 -----------------------------------------------

                  Coyote  Network  Systems,  Inc., a  corporation  organized and
existing  under  the  General  Corporation  Law of the  State of  Delaware  (the
"Company"),  does hereby certify that,  pursuant to authority conferred upon the
Board of  Directors  of the Company by the  Company's  Restated  Certificate  of
Incorporation,  as amended, and expressly delegated by the Board of Directors to
the Pricing Committee of the Board of Directors (the "Pricing  Committee"),  and
pursuant to Section 151 of the General Corporation Law of the State of Delaware,
the  Pricing  Committee  with full power and  authority  to act on behalf of the
Board of Directors,  by unanimous  written consent of the members of the Pricing
Committee  dated  August 28,  1998,  duly  approved  and adopted  the  following
resolution:

                  RESOLVED,  that,  pursuant to authority vested in the Board of
Directors by the Company's  Restated  Certificate of Incorporation and delegated
to the Pricing  Committee by the Board of Directors,  the Pricing Committee does
hereby  create,  authorize  and provide for the issue of 5% Series A Convertible
Preferred Stock, par value $0.01 per share, consisting of 700 shares, and having
the  designations,   voting  power,  preferences  and  relative,  participating,
optional and other special rights, qualifications,  limitations and restrictions
that are set forth in the Restated Certificate of Incorporation and as follows:



                  Section 1.  Designation,  Amount and Par Value.  The series of
preferred  stock shall be designated as 5% Series A Convertible  Preferred Stock
(the  "Preferred  Stock")  and the number of shares so  designated  shall be 700
(which  shall not be subject to  increase  without the consent of the holders of
the Preferred Stock (each, a "Holder" and  collectively,  the "Holders")).  Each
share of  Preferred  Stock shall have a par value of $.01 and a stated  value of
$10,000 (the "Stated Value").


<PAGE>
         Section 2.        Dividends.

     (a) Holders shall be entitled to receive, when and as declared by the Board
of Directors out of funds legally available therefor, and the Company shall pay,
cumulative  dividends at the rate per share (as a percentage of the Stated Value
per share) equal to 5% per annum, payable on a quarterly basis on March 31, June
30,  September  30 and  December 31 of each year during the term hereof  (each a
"Dividend Payment Date"), commencing on September 30, 1998 and thereafter,  upon
the  earlier  to occur of a  Dividend  Payment  Date and a  Conversion  Date (as
defined herein), in cash or shares of Common Stock (as defined in Section 8) at,
subject to the terms and conditions set forth herein, the option of the Company.
Dividends on the  Preferred  Stock shall be calculated on the basis of a 360-day
year,  shall accrue daily  commencing on the Original  Issue Date (as defined in
Section 8), and shall be deemed to accrue  from such date  whether or not earned
or declared and whether or not there are profits,  surplus or other funds of the
Company legally  available for the payment of dividends.  Any dividends not paid
on any  Dividend  Payment  Date  shall  continue  to accrue and shall be due and
payable upon  conversion  of the Preferred  Stock.  A party that holds shares of
Preferred  Stock on a Dividend  Payment  Date will be entitled  to receive  such
dividend  payment and any other accrued and unpaid dividends which accrued prior
to such Dividend Payment Date, without regard to any sale or disposition of such
Preferred  Stock  subsequent to the applicable  record date. All overdue accrued
and unpaid  dividends and other amounts due herewith  shall entail a late fee at
the rate of 15% per annum (to accrue  daily,  from the date such dividend is due
hereunder  through  and  including  the date of  payment).  Except as  otherwise
provided  herein,  if at any time the Company pays less than the total amount of
dividends then accrued on account of the Preferred Stock,  such payment shall be
distributed  ratably  among the Holders  based upon the number of shares held by
each Holder.  The Company shall  provide the Holders  notice of its intention to
pay  dividends  in cash or shares of Common  Stock not less than 10 Trading Days
prior to any Dividend  Payment Date for so long as shares of Preferred Stock are
outstanding.  If  dividends  are paid in shares of Common  Stock,  the number of
shares of Common Stock issuable on account of such dividend shall equal the cash
amount of such dividend on such Dividend  Payment Date divided by the Conversion
Price (as defined below) on such date.

     (b) Notwithstanding  anything to the contrary contained herein, the Company
may not issue shares of Common  Stock in payment of  dividends on the  Preferred
Stock (and must deliver cash in respect thereof) if:

          (i) the  number  of shares  of  Common  Stock at the time  authorized,
     unissued  and  unreserved  for all  purposes  is  insufficient  to pay such
     dividends in shares of Common Stock;

          (ii) such  shares  of  Common  Stock  are not  registered  for  resale
     pursuant to an effective Underlying Securities  Registration  Statement (as
     defined  in  Section  8) and may not be sold  without  volume  restrictions
     pursuant  to Rule 144  promulgated  under the  Securities  Act of 1933,  as
     amended (the  "Securities  Act"),  as  determined by counsel to the Company
     pursuant to a written opinion letter,  addressed to the Company's  transfer
     agent in the form and substance acceptable to the Holders and such transfer
     agent (such shares, "Restricted Shares"),  provided, that the Company shall
     be entitled,  prior to the earlier to occur of (A) the  Effectiveness  Date
     (as  defined in the  Registration  Rights  Agreement)  and (B) the date the
     Underlying Securities  Registration  Statement is declared effective by the
     Securities and Exchange Commission (the "Commission"),  to issue Restricted
     Shares in payment of dividends on the Preferred Stock,  provided,  however,
     that,  no  later  than  three  (3)  Trading  Days  following  the  date the
     Underlying Securities  Registration  Statement is declared effective by the
     Securities  and  Exchange   Commission,   the  Company  shall  replace  any
     Restricted  Shares  issued in payment of dividends on the  Preferred  Stock
     with the equivalent  stock  certificates  evidencing  such shares of Common
     Stock issued in payment of dividends on the Preferred  Stock which shall be
     free of any restrictive legend;

          (iii) the Common  Stock is not then  Actively  Traded  (as  defined in
     Section 8) or listed for trading on the New York Stock  Exchange,  American
     Stock  Exchange,  Nasdaq  National Market or Nasdaq SmallCap Market (each a
     "Subsequent Market");

          (iv)  the  Company  has  failed  to  timely   satisfy  its  conversion
     obligations hereunder; or

          (v) the  issuance of such shares of Common  Stock would  result in the
     recipient  thereof  beneficially  owning,  as determined in accordance with
     Rule  13d-3  promulgated  under the  Securities  Exchange  Act of 1934,  as
     amended  (the  `Exchange  Act"),  more than  4.999% of the then  issued and
     outstanding shares of Common Stock.

     (c) So long as any Preferred  Stock shall remain  outstanding,  neither the
Company nor any subsidiary  thereof shall redeem,  purchase or otherwise acquire
directly  or  indirectly  any Junior  Securities  (as defined in Section 8), nor
shall the Company directly or indirectly pay or declare any dividend or make any
distribution  (other than a dividend  or  distribution  described  in Section 5)
upon, nor shall any  distribution  be made in respect of, any Junior  Securities
(as  defined in Section  8), nor shall any monies be set aside for or applied to
the purchase or  redemption  (through a sinking fund or otherwise) of any Junior
Securities  (unless,  in the case of pari passu securities,  the Preferred Stock
receives such amount on a pro rata basis with such other pari passu securities).

                  Section 3. Voting Rights.  Except as otherwise provided herein
and as  otherwise  required  by law,  the  Preferred  Stock shall have no voting
rights.  However, so long as any shares of Preferred Stock are outstanding,  the
Company  shall  not  and  shall  cause  its  subsidiaries  not to,  without  the
affirmative  vote of the  Holders  of two  thirds  of all of the  shares  of the
Preferred  Stock then  outstanding,  (a) alter or change  adversely  the powers,
preferences  or rights  given to the  Preferred  Stock,  (b) alter or amend this
Certificate of  Designation,  (c) authorize or create any class of stock ranking
as to  dividends or  distribution  of assets upon a  Liquidation  (as defined in
Section 4) senior to or  otherwise  pari  passu with or senior to the  Preferred
Stock,  (d) amend its  Certificate  of  Incorporation,  bylaws or other  charter
documents so as to affect adversely any rights of any Holders,  (e) increase the
authorized  number of shares of Preferred Stock, or (f) enter into any agreement
with respect to the foregoing.

                  Section 4. Liquidation.  Upon any liquidation,  dissolution or
winding-up of the Company,  whether voluntary or involuntary (a  "Liquidation"),
the  Holders  shall be  entitled  to receive  out of the assets of the  Company,
whether such assets are capital or surplus, for each share of Preferred Stock an
amount  equal to the Stated Value plus all due but unpaid  dividends  per share,
whether declared or not, before any distribution or payment shall be made to the
holders of any Junior  Securities,  and if the  assets of the  Company  shall be
insufficient  to  pay in  full  such  amounts,  then  the  entire  assets  to be
distributed  to the Holders shall be  distributed  among the Holders  ratably in
accordance  with the respective  amounts that would be payable on such shares if
all amounts payable thereon were paid in full. A sale, conveyance or disposition
of all or substantially  all of the assets of the Company or the effectuation by
the Company of a  transaction  or series of related  transactions  in which more
than 33% of the voting power of the Company is disposed  of, or a  consolidation
or merger of the Company with or into any other  company or companies  shall not
be treated as a  Liquidation,  but instead shall be subject to the provisions of
Section 5. The Company shall mail written  notice of any such  Liquidation,  not
less than 45 days prior to the  payment  date  stated  therein,  to each  record
Holder.

                  Section 5.        Conversion.

     (a)(i) Conversions at Option of Holder. Each share of Preferred Stock shall
be convertible into shares of Common Stock (subject to the limitations set forth
in Section  5(a)(iii)  hereof) at the Conversion Ratio (as defined in Section 8)
at the option of the Holder,  at any time and from time to time,  from and after
the 120th day following the Original Issue Date (the "Initial Conversion Date"),
thereafter any conversions of Preferred Stock are limited in each monthly period
to 25% of the  number of  shares of  Preferred  Stock  originally  issued to the
Holder on the Original  Issue Date, on a cumulative  basis (for example,  during
the first month following the Initial Conversion Date, the Holder may convert up
to 25% of the number of shares of  Preferred  Stock issued to it on the Original
Issue Date and during the first two (2) months following the Initial  Conversion
Date the Holder may convert up to 50% of the number of shares of Preferred Stock
issued to it on the Original  Issue Date).  Holders shall effect  conversions by
surrendering  the  certificate  or  certificates   representing  the  shares  of
Preferred  Stock  to be  converted  to the  Company,  together  with the form of
conversion  notice  attached hereto as Exhibit A (a "Conversion  Notice").  Each
Conversion  Notice shall  specify the number of shares of Preferred  Stock to be
converted and the date on which such  conversion  is to be effected,  which date
may not be prior to the date the  Holder  delivers  such  Conversion  Notice  by
facsimile  (the  "Conversion  Date").  If no  Conversion  Date is specified in a
Conversion  Notice,  the  Conversion  Date shall be the date that the Conversion
Notice is deemed delivered hereunder.  If the Holder is converting less than all
shares  of  Preferred  Stock  represented  by the  certificate  or  certificates
tendered by the Holder with the Conversion Notice, or if a conversion  hereunder
cannot be effected in full for any reason, the Company shall promptly deliver to
such  Holder (in the  manner  and  within the time set forth in Section  5(b)) a
certificate for such number of shares as have not been converted.

          (ii)  Automatic   Conversion.   Subject  to  the  provisions  in  this
     paragraph,  all outstanding  shares of Preferred Stock for which conversion
     notices have not previously  been received or for which  redemption has not
     been made or required  hereunder  shall be  automatically  converted on the
     third  anniversary of the Original  Issue Date at the  Conversion  Price on
     such date. The conversion contemplated by this paragraph shall not occur if
     (a)  (1) an  Underlying  Securities  Registration  Statement  is  not  then
     effective or (2) the Holder is not  permitted to resell  Underlying  Shares
     pursuant to Rule  144(k)  promulgated  under the  Securities  Act,  without
     volume  restrictions,   as  evidenced  by  an  opinion  letter  of  counsel
     acceptable to the Holder and the transfer  agent for the Common Stock;  (b)
     there are not sufficient shares of Common Stock authorized and reserved for
     issuance upon such  conversion;  or (c) the Company shall have defaulted on
     its covenants and obligations  hereunder or under the Purchase Agreement or
     Registration   Rights  Agreement.   Notwithstanding   the  foregoing,   the
     three-year period for conversion under this Section shall be extended (on a
     day-for-day  basis)  for any  Trading  Days  after the  earlier  of (i) the
     Effectiveness   Date,   and  (ii)  the  date  the   Underlying   Securities
     Registration  Statement is declared  effective by the  Commission  that the
     Purchaser  is  unable  to  resell  Underlying  Shares  under an  Underlying
     Securities  Registration  Statement  due to (a) the Common  Stock not being
     Actively Traded or not listed on any Subsequent Market , (b) the failure of
     an Underlying Securities Registration Statement to be declared effective by
     the  Commission  by  the  Effectiveness  Date,  or  (c)  if  an  Underlying
     Securities Registration Statement shall have been declared effective by the
     Commission,  (x) the  failure of such  Underlying  Securities  Registration
     Statement to remain  effective at all times thereafter as to all Underlying
     Shares,  or (y) the suspension of the Holder's ability to resell Underlying
     Shares thereunder.

          (iii) Certain Conversion Restrictions.

          (A)(1) The Holder shall not convert  shares of Preferred  Stock to the
     extent such conversion would result in the Holder  beneficially  owning (as
     determined  in  accordance  with Section  13(d) of the Exchange Act and the
     rules  thereunder)  in excess of 4.999% of the then issued and  outstanding
     shares of Common Stock,  including  shares  issuable upon conversion of the
     shares of  Preferred  Stock held by such Holder after  application  of this
     Section.  To the  extent  that the  limitation  contained  in this  Section
     applies,  the  determination  of  whether  shares  of  Preferred  Stock are
     convertible  (in  relation  to other  securities  owned by a Holder) and of
     which  shares  of  Preferred  Stock  are  convertible  shall be in the sole
     discretion of the Holder,  and the submission of shares of Preferred  Stock
     for conversion shall be deemed to be the Holder's  determination of whether
     such  shares of  Preferred  Stock are  convertible  (in  relation  to other
     securities  owned by the  Holder)  and of which  portion of such  shares of
     Preferred  Stock are  convertible,  in each case subject to such  aggregate
     percentage  limitation,  and the Company shall have no obligation to verify
     or confirm the accuracy of such  determination.  Nothing  contained  herein
     shall be deemed to  restrict  the right of the Holder to convert  shares of
     Preferred  Stock  at such  time as such  conversion  will not  violate  the
     provisions of this Section.  The  provisions of this Section will not apply
     to any conversion  pursuant to Section 5 (a)(ii) hereof,  and may be waived
     by a Holder  (but only as to itself and not to any other  Holder)  upon not
     less than 75 days prior  notice to the Company  (in which case,  the Holder
     shall make such filings with the  Commission,  including  under Rule 13D or
     13G, as are required by applicable law), and the provisions of this Section
     shall  continue  to apply  until such 75th day (or later,  if stated in the
     notice of waiver). Other Holders shall be unaffected by any such waiver.

     (2) The Holder shall not convert  shares of  Preferred  Stock to the extent
such conversion would result in the Holder beneficially owning (as determined in
accordance  with Section 13(d) of the Exchange Act and the rules  thereunder) in
excess of 9.999% of the then  issued  and  outstanding  shares of Common  Stock,
including  shares issuable upon conversion of the shares of Preferred Stock held
by such  Holder  after  application  of this  Section.  To the  extent  that the
limitation  contained  in this Section  applies,  the  determination  of whether
shares of Preferred Stock are convertible (in relation to other securities owned
by a Holder) and of which shares of Preferred Stock are convertible  shall be in
the sole  discretion  of the Holder,  and the  submission of shares of Preferred
Stock for conversion shall be deemed to be the Holder's determination of whether
such shares of Preferred Stock are convertible (in relation to other  securities
owned by the Holder) and of which portion of such shares of Preferred  Stock are
convertible,  in each case subject to such aggregate percentage limitation,  and
the Company  shall have no  obligation to verify or confirm the accuracy of such
determination. Nothing contained herein shall be deemed to restrict the right of
the Holder to convert shares of Preferred  Stock at such time as such conversion
will not violate the provisions of this Section.  The provisions of this Section
will not apply to any conversion  pursuant to Section 5 (a)(ii) hereof,  and may
be waived by a Holder (but only as to itself and not to any other  Holder)  upon
not less than 75 days prior notice to the Company,  and the  provisions  of this
Section shall continue to apply until such 75th day (or later,  if stated in the
notice of waiver). Other Holders shall be unaffected by any such waiver.

     (B) If on any Conversion Date (A) the Common Stock is listed for trading on
the Nasdaq  SmallCap Market or the Nasdaq  National  Market,  (B) the Conversion
Price then in effect is such that the aggregate number of shares of Common Stock
that would then be  issuable  upon  conversion  in full of all then  outstanding
shares of  Preferred  Stock and as  payment  of  dividends  thereon in shares of
Common  Stock,  together with any shares of the Common Stock  previously  issued
upon  conversion  of  shares of  Preferred  Stock and as  payment  of  dividends
thereon,  would equal or exceed 20% of the number of shares of the Common  Stock
outstanding on the Original Issue Date (such number of shares as would not equal
or exceed such 20% limit,  the "Issuable  Maximum" and any such Conversion Date,
the "Record Date"),  and (C) the Company shall not have previously  obtained the
vote of shareholders (the "Shareholder Approval"), if any, as may be required by
the applicable  rules and regulations of The Nasdaq Stock Market (or any success
entity)  applicable  to approve the issuance of shares of Common Stock in excess
of the Issuable  Maximum in a private  placement  whereby shares of Common Stock
are deemed to have been  issued at a price that is less than the greater of book
or fair market value of the Common  Stock,  then the Company  shall issue to the
Holder so  requesting  a  conversion a number of shares of Common Stock equal to
the Issuable  Maximum and, with respect to the remainder of the aggregate Stated
Value of the  shares of  Preferred  Stock  then held by such  Holder for which a
conversion in accordance  with the Conversion  Price would result in an issuance
of Common Stock in excess of the Issuable  Maximum (the "Excess Stated  Value"),
the  Company  shall,  within  three (3) days of the  Record  Date,  provide  the
converting  Holder  with a notice  (the  "Notice")  as to  whether or not it has
elected to use its best efforts to obtain the Shareholder Approval applicable to
such  issuance.  If the Company shall either (i) fail to provide the  converting
Holder  with the  Notice  within  three  (3) days of the  Record  Date,  or (ii)
indicate  in the  Notice  that it does not  intend  to  obtain  the  Shareholder
Approval  applicable to such issuance,  or (iii) fail to obtain the  Shareholder
Approval  applicable to such issuance prior to the 60th day following the Record
Date,  the  converting  Holder  shall have the option to require  the Company to
either (1) if the Company has not prior  thereto  attempted and failed to obtain
the Shareholder  Approval in accordance with this Section,  use its best efforts
to obtain the  Shareholder  Approval  applicable  to such issuance as soon as is
possible,  but in any event not later than the 60th day after such  request,  or
(2)(i)  issue and deliver to such  Holder a number of shares of Common  Stock as
equals (x) the Excess  Stated  Value,  plus accrued and unpaid  dividends on all
shares of  Preferred  Stock being  converted,  divided by (y) the closing  sales
price of the Common Stock on the Original Issue Date, and (ii) cash in an amount
equal to the product of (x) the Per Share  Market Value on the  Conversion  Date
and (y) the number of shares of Common Stock in excess of such Holder's pro rata
portion of the Issuable  Maximum that would have  otherwise been issuable to the
Holder in respect of such  conversion  but for the  provisions  of this  Section
(such  amount  of  cash  being   hereinafter   referred  to  as  the   "Discount
Equivalent"), or (3) pay cash to the converting Holder in an amount equal to the
Mandatory  Redemption  Amount (as  defined  in Section 8) for the Excess  Stated
Value.  If the Company  fails to pay the Discount  Equivalent  or the  Mandatory
Redemption  Amount,  as the case may be, in full pursuant to this Section within
seven (7) days after the date payable,  the Company will pay interest thereon at
a rate of 15% per  annum  to the  converting  Holder,  accruing  daily  from the
Conversion Date until such amount,  plus all such interest  thereon,  is paid in
full.

          (iv)(1)  Subject  to  compliance  with  the  conditions  set  forth in
     paragraph (2) of this Section 5(a)(iv),  if the Conversion Price applicable
     to a conversion at the option of the Holder is less than $5.50, the Company
     shall  have the  option  of  either  (i)  converting  all of the  shares of
     Preferred  Stock  specified in the Conversion  Notice into shares of Common
     Stock, as provided in Section 5(a)(i), (ii) paying such Holder within three
     (3) Trading  Days of the  Conversion  Date cash in the amount  equal to the
     product of (A) the  number of  Underlying  Shares  into which the shares of
     Preferred  Stock  specified in the  Conversion  Notice  would  otherwise be
     convertible  and (B) the  closing  sales  price of the Common  Stock on the
     Conversion  Date or (iii)  converting  certain of the  shares of  Preferred
     Stock  specified in the Conversion  Notice into shares of Common Stock (the
     shares of  Preferred  Stock not so  converted,  called  the  "Non-Converted
     Preferred  Shares")  and paying such Holder cash in the amount equal to the
     product of (A) the number of Underlying Shares into which the Non-Converted
     Preferred  Shares would  otherwise be convertible and (B) the closing sales
     price of the Common Stock on the Conversion Date.

     (2) The Company may not pay cash in lieu of issuing  Underlying Shares upon
conversions  of  Preferred  Stock or as payment of  dividends  thereon (and must
deliver Underlying Shares in respect thereof) unless the Company shall, no later
than the Trading Day prior to the Conversion  Date,  have delivered by facsimile
to the  Holders  a notice  stating  its  intention  to pay such cash in lieu and
setting forth the total amount of cash it intends to pay for such  purpose.  The
Company's  ability  to pay  cash in lieu of  issuing  Underlying  Shares  upon a
conversion  of  Preferred  Stock and as payment of  dividends  thereon  shall be
limited to the amount  indicated  in such  notice.  The  Company  may state in a
notice under this  Section that such notice shall remain in effect  either for a
defined period of time or until revoked in writing by the Company. Holders shall
be  affected  by any such  notice  pro rata in  accordance  with the  shares  of
Preferred Stock then held by them. If the Company shall have elected to pay cash
in lieu of issuing  Underlying  Shares upon a conversion of Preferred  Stock and
shall have  failed to deliver  payment of the amount of such cash due on account
of such  conversion  by the third (3rd)  Trading  Day  following  such  election
pursuant  to Section  5(b)(iv)  hereof,  the Holder  shall be entitled to demand
delivery  within three (3) Trading Days  thereafter of the Common Stock issuable
upon conversion of such Preferred Stock.

          (b)(i) Not later than three (3) Trading Days after any Conversion Date
     and subject to Sections  5(a)(iii)-(iv),  the Company  will  deliver to the
     Holder  (i)  except  where the  Company is  permitted  pursuant  to Section
     5(a)(iv) to pay cash in lieu of issuing  Underlying Shares upon conversion,
     a certificate or  certificates  which shall be free of restrictive  legends
     and trading  restrictions  (other than those  required by Section 3.1(b) of
     the Purchase  Agreement)  representing the number of shares of Common Stock
     being acquired upon the conversion of shares of Preferred Stock (subject to
     the  limitations  set  forth  in  Section  5(a)(iii)(B),  (ii)  one or more
     certificates  representing  the  number of shares  of  Preferred  Stock not
     converted, (iii) a bank check in the amount of accrued and unpaid dividends
     (if the Company has elected to pay accrued and unpaid  dividends  in cash),
     (iv) if the Company has elected and is  permitted  hereunder to pay accrued
     and unpaid dividends in shares of Common Stock,  certificates,  which shall
     be free of restrictive  legends and trading  restrictions (other than those
     required by Section 3.1(b) of the Purchase  Agreement),  representing  such
     shares of Common Stock, and (v) if the Company is permitted and has elected
     pursuant  to Section  5(a)(iv)  to pay cash in lieu of  issuing  Underlying
     Shares upon a conversion  of Preferred  Stock,  payment by wire transfer of
     immediately available funds to an account designated by the Holder for such
     purpose of an amount equal to the amount due  pursuant to Section  5(a)(iv)
     in respect of such conversion (in the event the amount of cash permitted to
     be  paid  by  the  Company  in  accordance  with  Section  5(a)(iv)  is not
     sufficient  to cover the  conversion  in full of shares of Preferred  Stock
     tendered for such conversion,  the Company shall issue Underlying Shares in
     respect  of  such  excess  in  accordance  with  subparagraph  (i) of  this
     Section);  provided,  however,  that the Company  shall not be obligated to
     issue  certificates  evidencing  the shares of Common Stock  issuable  upon
     conversion of any shares of Preferred Stock until  certificates  evidencing
     such shares of Preferred  Stock are either  delivered for conversion to the
     Company or any transfer agent for the Preferred  Stock or Common Stock,  or
     the  Holder  of  such  Preferred  Stock  notifies  the  Company  that  such
     certificates  have been lost,  stolen or destroyed  and provides a bond (or
     other  adequate  security)  reasonably   satisfactory  to  the  Company  to
     indemnify the Company from any loss incurred by it in connection therewith.
     The Company  shall,  upon  request of the  Holder,  if  available,  use its
     reasonable  efforts to deliver any certificate or certificates  required to
     be delivered by the Company under this Section  electronically  through the
     Depository Trust Corporation or another  established  clearing  corporation
     performing similar functions.  If in the case of any Conversion Notice such
     certificate or certificates,  including for purposes hereof,  any shares of
     Common Stock to be issued on the Conversion  Date on account of accrued but
     unpaid  dividends  hereunder,  are not  delivered  to or as directed by the
     applicable Holder by the third (3rd) Trading Day after the Conversion Date,
     the Holder  shall be entitled by written  notice to the Company at any time
     on or before its receipt of such certificate or certificates thereafter, to
     rescind  such  conversion,  in which  event the Company  shall  immediately
     return the certificates representing the shares of Preferred Stock tendered
     for conversion.

          (ii) Except  where the  Company is  permitted  and has  elected  under
     Section  5(a)(iv)  to pay solely  cash in lieu of  Underlying  Shares  upon
     conversion  hereunder,  if the Company  fails to deliver to the Holder such
     certificate  or  certificates  pursuant to Section  5(b)(i),  including for
     purposes hereof,  any shares of Common Stock to be issued on the Conversion
     Date on account of accrued but unpaid  dividends  hereunder,  by the fourth
     (4th) Trading Day after the Conversion  Date, the Company shall pay to such
     Holder,  in cash,  as liquidated  damages and not as a penalty,  $2,500 for
     each day after such fourth (4th)  Trading Day until such  certificates  are
     delivered.  Nothing  herein shall limit a Holder's  right to pursue  actual
     damages  for the  Company's  failure to deliver  certificates  representing
     shares of Common Stock upon conversion  within the period  specified herein
     and such Holder shall have the right to pursue all remedies available to it
     at law or in equity  including,  without  limitation,  a decree of specific
     performance and/or injunctive relief. The exercise of any such rights shall
     not prohibit a Holder from seeking to enforce damages pursuant to any other
     Section hereof or under applicable law.  Further,  if the Company shall not
     have delivered any cash due in respect of conversions of Preferred Stock or
     as payment of dividends  thereon by the fourth (4th)  Trading Day after the
     Conversion  Date,  the Holder  may, by notice to the  Company,  require the
     Company to issue  Underlying  Shares pursuant to Section 5(c),  except that
     for such  purpose the  Conversion  Price  applicable  thereto  shall be the
     lesser of the Conversion  Price on the  Conversion  Date and the Conversion
     Price on the date of such Holder demand. Any such Underlying Shares will be
     subject to the provision of this Section.

          (iii) In  addition  to any other  rights  available  to the Holder and
     except  where the  Company  is  permitted  and has  elected  under  Section
     5(a)(iv) to pay solely cash in lieu of  Underlying  Shares upon  conversion
     hereunder,  if the Company fails to deliver to the Holder such  certificate
     or certificates pursuant to Section 5(b)(i), including for purposes hereof,
     any shares of Common Stock to be issued on the  Conversion  Date on account
     of accrued but unpaid dividends hereunder,  by the fourth (4th) Trading Day
     after the  Conversion  Date, and if after such fourth (4th) Trading Day the
     Holder  purchases (in an open market  transaction  or otherwise)  shares of
     Common  Stock to deliver in  satisfaction  of a sale by such  Holder of the
     Underlying  Shares  which  the  Holder  anticipated   receiving  upon  such
     conversion (a  "Buy-In"),  then the Company shall pay in cash to the Holder
     (in  addition to any  remedies  available  to or elected by the Holder) the
     amount by which (x) the Holder's total purchase price (including  brokerage
     commissions,  if any) for the shares of Common Stock so  purchased  exceeds
     (y) the aggregate  stated value of the shares of Preferred  Stock for which
     such  conversion  was  not  timely  honored.  For  example,  if the  Holder
     purchases  shares of Common Stock having a total  purchase price of $11,000
     to cover a Buy-In  with  respect  to an  attempted  conversion  of  $10,000
     aggregate  stated value of the shares of Preferred Stock, the Company shall
     be required to pay the Holder $1,000.  The Holder shall provide the Company
     written notice  indicating the amounts  payable to the Holder in respect of
     the Buy-In.

          (c)(i) The  conversion  price for each share of  Preferred  Stock (the
     "Conversion Price") in effect on any Conversion Date shall be the lesser of
     (a) the  Initial  Conversion  Price (as  defined in Section 8), and (b) 87%
     (the "Discount Rate") multiplied by the average of the three (3) lowest Per
     Share  Market  Values  during the ten (10)  Trading Day period  immediately
     preceding the applicable Conversion Date, provided,  however, that such ten
     (10) Trading Day period  shall be extended for the number of Trading  Days,
     if any, during such period in which (A) trading in the Common Stock was not
     Actively  Traded  or  suspended  from such  Subsequent  Market on which the
     Common Stock is then listed,  or (B) after the date  declared  effective by
     the Commission,  the Underlying  Securities  Registration  Statement is not
     effective, or (C) after the date declared effective by the Commission,  the
     Prospectus included in the Underlying Securities Registration Statement may
     not be used by the Holder for the resale of Underlying  Shares.  If: (a) an
     Underlying  Securities  Registration  Statement is not filed on or prior to
     the  Filing  Date  (if  the  Company  files  such   Underlying   Securities
     Registration  Statement  without  affording the Holder the  opportunity  to
     review  and  comment  on the  same  as  required  by  Section  3(a)  of the
     Registration  Rights  Agreement,  the  Company  shall not be deemed to have
     satisfied  this  clause  (a)),  or (b) the  Company  fails to file with the
     Commission  a request  for  acceleration  in  accordance  with Rule  12d1-2
     promulgated under the Securities  Exchange Act of 1934, as amended,  within
     five (5) days of the  date  that the  Company  is  notified  (orally  or in
     writing,  whichever  is  earlier)  by the  Commission  that  an  Underlying
     Securities Registration Statement will not be "reviewed," or not subject to
     further review, or (c) the Underlying Securities  Registration Statement is
     not declared  effective by the Commission on or prior to the  Effectiveness
     Date  (as  defined  in the  Registration  Rights  Agreement),  or (d)  such
     Underlying  Securities  Registration  Statement  is filed with and declared
     effective by the Commission but thereafter ceases to be effective as to all
     Registrable Securities (as defined in the Registration Rights Agreement) at
     any time prior to the expiration of the "Effectiveness  Period" (as defined
     in the Registration  Rights Agreement),  without being succeeded within ten
     (10) days by a  subsequent  Underlying  Securities  Registration  Statement
     filed with and  declared  effective  by the  Commission,  or (e) the Common
     Stock shall fail to be Actively  Traded,  or (f) the Common  Stock shall be
     delisted or suspended  from trading on any  Subsequent  Market on which the
     Common  Stock is then listed for more than three (3)  Business  Days (which
     need not be consecutive days), (g) the conversion rights of the Holders are
     suspended for any reason or (h) an amendment to the  Underlying  Securities
     Registration  Statement  is not filed by the  Company  with the  Commission
     within ten (10) days of the  Commission's  notifying  the Company that such
     amendment is required in order for the Underlying  Securities  Registration
     Statement  to be  declared  effective  (any such  failure  or breach  being
     referred to as an "Event," and for  purposes of clauses  (a),  (c), (e) and
     (g) the date on which such Event occurs,  or for purposes of clause (b) the
     date on which  such five (5) day period is  exceeded,  or for  purposes  of
     clauses (d) and (h) the date which such 10 day-period  is exceeded,  or for
     purposes  of  clause  (f)  the  date  on  which  such  three  (3)  Business
     Day-period,  is exceeded,  being referred to as "Event Date"),  then on the
     Event  Date and each  monthly  anniversary  thereof  until such time as the
     applicable Event is cured, the Company shall, within five (5) Business Days
     of each  such  date,  either  (x) pay to the  Holder,  in  cash,  2% of the
     aggregate  Stated Value of the shares of Preferred  Stock then held by such
     Holder,  as  liquidated  damages  and not as a penalty,  or (y) each of the
     Initial  Conversion Price and the Discount Rate shall be decreased by 2% on
     the Event Date and on each monthly  anniversary  thereof until such time as
     the  applicable  Event is cured (i.e.,  the Discount Rate would decrease to
     85% as of the  Event  Date and 83% as of the one month  anniversary  of the
     Event Date); provided,  that, commencing on the second month anniversary of
     the Event Date,  the Holder (and not the  Company)  shall have the right to
     require either  further  cumulative 2% discounts to continue or require the
     Company to pay the 2% cash  amounts  referenced  in clause (x) above  until
     such time as the Event in  question is cured.  Any  decrease in the Initial
     Conversion Price and Discount Rate pursuant to this Section shall remain in
     effect  notwithstanding  the fact that the Event  causing such decrease has
     been  subsequently  cured and further  monthly  decreases have ceased.  The
     provisions  of this Section are not exclusive and shall in no way limit the
     Company's obligations under the Registration Rights Agreement.

          (ii) If the Company,  at any time while any shares of Preferred  Stock
     are  outstanding,  shall  (a)  pay a stock  dividend  or  otherwise  make a
     distribution or  distributions  on shares of its Junior  Securities or pari
     passu  securities  (in  the  case of pari  passu  securities,  only if such
     dividend  or  distribution  is not  also  made on a pro  rata  basis to the
     Preferred   Stock)  payable  in  shares  of  Common  Stock,  (b)  subdivide
     outstanding  shares of Common  Stock into a larger  number of  shares,  (c)
     combine outstanding shares of Common Stock into a smaller number of shares,
     or (d) issue by  reclassification  of shares of Common  Stock any shares of
     capital  stock  of the  Company,  the  Initial  Conversion  Price  shall be
     multiplied  by a  fraction  of which the  numerator  shall be the number of
     shares of  Common  Stock  outstanding  before  such  event and of which the
     denominator shall be the number of shares of Common Stock outstanding after
     such event.  Any  adjustment  made pursuant to this Section  5(c)(ii) shall
     become effective immediately after the record date for the determination of
     stockholders  entitled to receive such dividend or  distribution  and shall
     become  effective  immediately  after the  effective  date in the case of a
     subdivision, combination or re-classification.

          (iii) If the Company,  at any time while any shares of Preferred Stock
     are outstanding,  shall issue rights, warrants or options to all holders of
     Common Stock  entitling them to subscribe for or purchase  shares of Common
     Stock at a price per share  less  than the Per  Share  Market  Value at the
     record date mentioned  below,  then the Initial  Conversion  Price shall be
     multiplied  by a fraction,  the  numerator  of which shall be the number of
     shares of Common  Stock  outstanding  immediately  prior to the issuance of
     such rights, warrants or options, plus the number of shares of Common Stock
     which the aggregate offering price of the total number of shares so offered
     would purchase at such Per Share Market Value, and the denominator of which
     shall be the sum of the  number  of  shares  of  Common  Stock  outstanding
     immediately  prior to such  issuance  plus the  number  of shares of Common
     Stock offered for  subscription or purchase.  Such adjustment shall be made
     whenever  such rights or warrants are issued,  and shall  become  effective
     immediately  after the record date for the  determination  of  stockholders
     entitled to receive such rights or warrants.  However,  upon the expiration
     of any right,  warrant  or option to  purchase  shares of Common  Stock the
     issuance  of  which  resulted  in an  adjustment  in the  Conversion  Price
     pursuant to this Section  5(c)(iii),  if any such right,  warrant or option
     shall expire and shall not have been exercised,  the Conversion Price shall
     immediately   upon  such  expiration  shall  be  recomputed  and  effective
     immediately  upon such expiration  shall be increased to the price which it
     would have been (but  reflecting  any other  adjustments  in the Conversion
     Price made  pursuant to the  provisions of this Section 5 upon the issuance
     of other rights or warrants)  had the  adjustment of the  Conversion  Price
     made upon the  issuance of such rights,  warrants,  or options been made on
     the basis of offering  for  subscription  or  purchase  only that number of
     shares of Common Stock actually purchased upon the exercise of such rights,
     warrants or options actually exercised.

          (iv) If the Company or any  subsidiary  thereof,  as  applicable  with
     respect to Common Stock  Equivalents (as defined below),  at any time while
     any shares of Preferred Stock are outstanding, shall issue shares of Common
     Stock or  rights,  warrants,  options or other  securities  or debt that is
     convertible  into or exchangeable for shares of Common Stock ("Common Stock
     Equivalents")  entitling any Person to acquire  shares of Common Stock at a
     price per share less than the Conversion  Price,  then the Conversion Price
     shall be  multiplied  by a fraction,  the  numerator  of which shall be the
     number  of  shares of Common  Stock  outstanding  immediately  prior to the
     issuance of shares of Common  Stock or such Common Stock  Equivalents  plus
     the  number of shares of Common  Stock  which the  offering  price for such
     shares of Common Stock or Common Stock  Equivalents  would  purchase at the
     Conversion  Price,  and the  denominator  of which  shall be the sum of the
     number  of shares of Common  Stock  outstanding  immediately  prior to such
     issuance  plus the number of shares of Common  Stock so issued or issuable,
     provided,  that for  purposes  hereof,  all shares of Common Stock that are
     issuable  upon  exercise or exchange of Common Stock  Equivalents  shall be
     deemed  outstanding  immediately  after the  issuance of such Common  Stock
     Equivalents.  Such adjustment  shall be made whenever such shares of Common
     Stock or  Common  Stock  Equivalents  are  issued,  provided,  that no such
     adjustment  shall be made in the case of issuances by the Company of Common
     Stock  Equivalents  pursuant  to Section  3.11(a)(i)-(vi)  of the  Purchase
     Agreement (the "Permitted Issuances"),  provided, however, that an issuance
     of by the  Company  of Common  Stock  Equivalents,  in  connection  with an
     acquisition  by the  Company of  non-affiliated  third  parties,  shall not
     constitute a Permitted  Issuance if a  Shareholder  Approval is required by
     the  applicable  rules and  regulations  of The Nasdaq Stock Market (or any
     success entity) applicable to approve such acquisition.

          (v) If the Company,  at any time while  shares of Preferred  Stock are
     outstanding,  shall  distribute  to all holders of Common Stock (and not to
     Holders)  evidences of its  indebtedness or assets or rights or warrants to
     subscribe  for or purchase any  security  (excluding  those  referred to in
     Sections   5(c)(ii)-(iv)  above),  then  in  each  such  case  the  Initial
     Conversion Price at which each share of Preferred Stock shall thereafter be
     convertible shall be determined by multiplying the Initial Conversion Price
     in effect  immediately  prior to the record date fixed for determination of
     stockholders  entitled to receive such  distribution by a fraction of which
     the  denominator  shall  be the Per  Share  Market  Value of  Common  Stock
     determined  as of  the  record  date  mentioned  above,  and of  which  the
     numerator  shall be such Per Share Market Value of the Common Stock on such
     record  date less the then fair  market  value at such  record  date of the
     portion  of  such  assets  or  evidence  of   indebtedness  so  distributed
     applicable  to one  outstanding  share of Common Stock as determined by the
     Board of Directors in good faith; provided, however, that in the event of a
     distribution  exceeding ten percent (10%) of the net assets of the Company,
     if the Holders of a majority in interest  of the  Preferred  Stock  dispute
     such valuation,  such fair market value shall be determined by a nationally
     recognized or major regional investment banking firm or firm of independent
     certified public accountants of recognized  standing (which may be the firm
     that  regularly  examines  the  financial  statements  of the  Company) (an
     "Appraiser")  selected  in good  faith  by the  Holders  of a  majority  in
     interest of the shares of Preferred Stock then  outstanding;  and provided,
     further,  that the  Company,  after  receipt of the  determination  by such
     Appraiser shall have the right to select an additional  Appraiser,  in good
     faith, in which case the fair market value shall be equal to the average of
     the  determinations by each such Appraiser.  In either case the adjustments
     shall be described in a statement provided to the Holders of the portion of
     assets or evidences of  indebtedness  so distributed  or such  subscription
     rights  applicable to one share of Common Stock.  Such adjustment  shall be
     made  whenever any such  distribution  is made and shall  become  effective
     immediately after the record date mentioned above.

          (vi)  All  calculations  under  this  Section  5 shall  be made to the
     nearest cent or the nearest 1/100th of a share, as the case may be.

          (vii)  Whenever the Conversion  Price is adjusted  pursuant to Section
     5(c)(i),(ii),(iii),(iv),  or (v) the Company  shall  promptly  mail to each
     Holder,  a notice setting forth the Conversion  Price after such adjustment
     and setting forth a brief statement of the facts requiring such adjustment.

          (viii) In case of any  reclassification  of the Common  Stock,  or any
     compulsory  share exchange  pursuant to which the Common Stock is converted
     into other  securities,  cash or  property  (other  than  compulsory  share
     exchanges which constitute Change of Control Transactions),  the Holders of
     the Preferred  Stock then  outstanding  shall have the right  thereafter to
     convert  such  shares  only into the shares of stock and other  securities,
     cash and property receivable upon or deemed to be held by holders of Common
     Stock following such reclassification or share exchange, and the Holders of
     the  Preferred  Stock  shall be  entitled  upon such event to receive  such
     amount of securities,  cash or property as a holder of the number of shares
     of the Common  Stock of the  Company  into which such  shares of  Preferred
     Stock could have been converted  immediately prior to such reclassification
     or share exchange would have been entitled.  This provision shall similarly
     apply to successive reclassifications or share exchanges.

          (ix) If (a)  the  Company  shall  declare  a  dividend  (or any  other
     distribution)  on its Common Stock, (b) the Company shall declare a special
     nonrecurring  cash dividend on or a redemption of its Common Stock, (c) the
     Company  shall  authorize  the  granting to all holders of the Common Stock
     rights or warrants to subscribe for or purchase any shares of capital stock
     of any class or of any rights,  (d) the approval of any stockholders of the
     Company shall be required in connection  with any  reclassification  of the
     Common  Stock of the  Company,  any  consolidation  or  merger to which the
     Company is a party, any sale or transfer of all or substantially all of the
     assets of the  Company,  of any  compulsory  share of exchange  whereby the
     Common Stock is converted into other securities,  cash or property,  or (e)
     the Company  shall  authorize  the  voluntary or  involuntary  dissolution,
     liquidation  or winding up of the affairs of the Company;  then the Company
     shall cause to be filed at each office or agency maintained for the purpose
     of  conversion  of  Preferred  Stock,  and shall  cause to be mailed to the
     Holders at their last  addresses  as they shall appear upon the stock books
     of the Company, at least 20 calendar days prior to the applicable record or
     effective  date  hereinafter  specified,  a notice  stating (x) the date on
     which  a  record  is  to  be  taken  for  the  purpose  of  such  dividend,
     distribution,  redemption,  rights or warrants, or if a record is not to be
     taken,  the date as of which the  holders  of Common  Stock of record to be
     entitled to such dividend,  distributions,  redemption,  rights or warrants
     are to be  determined  or (y) the  date  on  which  such  reclassification,
     consolidation,  merger,  sale,  transfer  or share  exchange is expected to
     become  effective  or close,  and the date as of which it is expected  that
     holders of Common  Stock of record  shall be  entitled  to  exchange  their
     shares of Common Stock for securities,  cash or other property  deliverable
     upon such reclassification,  consolidation, merger, sale, transfer or share
     exchange;  provided,  however,  that the failure to mail such notice or any
     defect  therein or in the mailing  thereof shall not affect the validity of
     the corporate  action required to be specified in such notice.  Holders are
     entitled to convert  shares of  Preferred  Stock  during the 20-day  period
     commencing  the date of such  notice  to the  effective  date of the  event
     triggering such notice.

          (x) If the Company (i) makes a public  announcement that it intends to
     enter into a Change of  Control  Transaction  (as  defined in Section 8) or
     (ii) any person,  group or entity  (including the Company,  but excluding a
     Holder or any affiliate of a Holder) publicly  announces a bona fide tender
     offer,  exchange offer or other  transaction to purchase 33% or more of the
     Common  Stock  (such  announcement  being  referred  to  herein as a "Major
     Announcement"  and the date on  which a Major  Announcement  is  made,  the
     "Announcement  Date"),  then,  in the event that a Holder  seeks to convert
     shares of  Preferred  Stock on or  following  the  Announcement  Date,  the
     Conversion Price shall, effective upon the Announcement Date and continuing
     through  the  earlier  to  occur  of  the   consummation  of  the  proposed
     transaction or tender offer,  exchange offer or other  transaction  and the
     Abandonment  Date (as  defined  below),  be  equal to the  lower of (x) the
     average  Per  Share  Market  Value on the  five  Trading  Days  immediately
     preceding (but not including) the Announcement  Date and (y) the Conversion
     Price that would  otherwise have been in effect on the Conversion  Date for
     such Preferred Stock but for the application of this section.  "Abandonment
     Date"  means with  respect to any  proposed  transaction  or tender  offer,
     exchange  offer or other  transaction  for which a public  announcement  as
     contemplated  by this  paragraph  has been  made,  the date upon  which the
     Company  (in the case of clause (i) above) or the  person,  group or entity
     (in the case of clause (ii) above)  publicly  announces the  termination or
     abandonment of the proposed transaction or tender offer,  exchange offer or
     another transaction which caused this paragraph to become operative.

     (d) The  Company  covenants  that it will at all  times  reserve  and  keep
available out of its authorized and unissued Common Stock solely for the purpose
of issuance  upon  conversion  of  Preferred  Stock and payment of  dividends on
Preferred  Stock,  each as herein provided,  free from preemptive  rights or any
other actual contingent  purchase rights of persons other than the Holders,  not
less than  such  number of  shares  of  Common  Stock as shall  (subject  to any
additional  requirements  of the  Company as to  reservation  of such shares set
forth  in  the  Purchase   Agreement)  be  issuable  (taking  into  account  the
adjustments  and  restrictions  of  Section  5(a)  and  Section  5(c))  upon the
conversion of all outstanding shares of Preferred Stock and payment of dividends
hereunder.  The Company  covenants that all shares of Common Stock that shall be
so issuable shall, upon issue, be duly and validly authorized,  issued and fully
paid, nonassessable and freely tradeable,  subject to the legend requirements of
Section 3.1(b) of the Purchase Agreement.

     (e) Upon a conversion  hereunder the Company shall not be required to issue
stock certificates  representing fractions of shares of Common Stock, but may if
otherwise  permitted,  make a cash payment in respect of any final fraction of a
share based on the Per Share  Market Value at such time.  If the Company  elects
not,  or is  unable,  to make  such a cash  payment,  the  Holder  of a share of
Preferred Stock shall be entitled to receive, in lieu of the final fraction of a
share, one whole share of Common Stock.

     (f) The issuance of  certificates  for shares of Common Stock on conversion
of Preferred  Stock shall be made without charge to the Holders  thereof for any
documentary  stamp or similar  taxes that may be payable in respect of the issue
or delivery of such certificate, provided that the Company shall not be required
to pay any tax that may be payable in respect of any  transfer  involved  in the
issuance and delivery of any such  certificate  upon  conversion in a name other
than that of the Holder of such shares of Preferred  Stock so converted  and the
Company  shall not be required to issue or deliver such  certificates  unless or
until the person or persons  requesting the issuance  thereof shall have paid to
the Company the amount of such tax or shall have established to the satisfaction
of the Company that such tax has been paid.

     (g)  Shares  of  Preferred  Stock  converted  into  Common  Stock  shall be
canceled. The Company may not reissue any shares of Preferred Stock.

     (h) Any  and all  notices  or  other  communications  or  deliveries  to be
provided by the Holders of the Preferred  Stock  hereunder,  including,  without
limitation, any Conversion Notice, shall be in writing and delivered personally,
by facsimile  or sent by a  nationally  recognized  overnight  courier  service,
addressed to the attention of the Chief Financial  Officer of the Company at the
facsimile  telephone number or address of the principal place of business of the
Company as set forth in the  Purchase  Agreement.  Any and all  notices or other
communications or deliveries to be provided by the Company hereunder shall be in
writing  and  delivered  personally,  by  facsimile  or  sent  by  a  nationally
recognized overnight courier service,  addressed to each Holder at the facsimile
telephone  number  or  address  of such  Holder  appearing  on the  books of the
Company,  or if no such facsimile  telephone number or address  appears,  at the
principal place of business of the Holder. Any notice or other  communication or
deliveries  hereunder shall be deemed given and effective on the earliest of (i)
the date of  transmission,  if such notice or  communication  is  delivered  via
facsimile at the facsimile  telephone  number specified in this Section prior to
8:00 p.m. (New York City Time), (ii) the date after the date of transmission, if
such  notice or  communication  is  delivered  via  facsimile  at the  facsimile
telephone  number  specified in this Section later than 8:00 p.m. (New York City
Time) on any date and earlier than 11:59 p.m. (New York City Time) on such date,
(iii)  upon  receipt,  if  sent by a  nationally  recognized  overnight  courier
service,  or (iv)  upon  actual  receipt  by the  party to whom  such  notice is
required to be given.

                  Section 6.        Optional Redemption.

     (a) The  Company  shall  have the  right,  exercisable  at any time upon 20
Trading  Days' notice (an  "Optional  Redemption  Notice") to the Holders of the
Preferred Stock given at any time after the Original Issue Date to redeem all or
any  portion of the shares of  Preferred  Stock which have not  previously  been
converted or redeemed,  at a price equal to the  Optional  Redemption  Price (as
defined  below).  The entire  Optional  Redemption  Price shall be paid in cash.
Holders may convert (and the Company shall honor such  conversions in accordance
with the terms hereof) any shares of Preferred  Stock,  including shares subject
to an  Optional  Redemption  Notice,  during  the period  from the date  thereof
through the 20th Trading Day after the receipt of an Optional Redemption Notice,
provided,  however,  that in the event that the Optional Redemption Price is not
paid in full prior to the  expiration  of the 20th Trading Day after the receipt
of an Optional Redemption Notice, such conversion rights shall continue to exist
as if no Optional Redemption Notice were delivered.

     (b) If any portion of the  Optional  Redemption  Price shall not be paid by
the Company by the 20th Trading Day after the delivery of an Optional Redemption
Notice, the Optional  Redemption Notice with regard to such unpaid portion shall
be null and void and ab initio.  In such event,  the Company  shall not again be
permitted  to  exercise  any  optional  redemption  rights  with  respect to the
Preferred Stock without the consent of the Holders.

     (c) "Optional  Redemption  Price" shall equal the sum of (i) the greater of
(A) 125% of the  aggregate  Stated Value of the shares of Preferred  Stock to be
redeemed and all accrued and unpaid  dividends  thereon,  and (B) the product of
(a) the Per Share Market Value on the Trading Day immediately  preceding (x) the
date of the Optional  Redemption  Notice,  or (y) the date of payment in full by
the Company of the Optional Redemption Price,  whichever is greater, and (b) the
Conversion Ratio calculated on the date of the Optional  Redemption  Notice, and
(ii) all other amounts, costs, expenses and liquidated damages due in respect of
such shares of Preferred Stock.


                  Section 7.        Redemption Upon Triggering Events.

     (a) Upon the  occurrence  of a  Triggering  Event,  each  Holder  shall (in
addition to all other  rights it may have  hereunder or under  applicable  law),
have the right,  exercisable  at the sole option of such Holder,  to require the
Company  to redeem  all or a portion  of the  Preferred  Stock then held by such
Holder for a redemption  price,  in cash,  equal to the sum of (i) the Mandatory
Redemption  Amount plus (ii) the product of (A) the number of Underlying  Shares
issued in respect of conversions  or as payment of dividends  hereunder and then
held by the  Holder  and (B)  the  Per  Share  Market  Value  on the  date  such
redemption  is demanded or the date the  redemption  price  hereunder is paid in
full,  whichever is greater (the "Redemption Price"). The Redemption Price shall
be due and payable  within ten (10) days of the date on which the notice for the
payment therefor is provided by a Holder.

     (b) If the Company  fails to pay the  redemption  price  hereunder  in full
pursuant  to this  Section  within  seven  (7) days  after  the date when due in
accordance with the terms of Section 7(a), the Company will pay interest thereon
at a rate of 15% per  annum,  accruing  daily  from such  seventh  day until the
redemption price, plus all such interest thereon,  is paid in full. For purposes
of this Section,  a share of Preferred  Stock is outstanding  until such date as
the Holder shall have received Underlying Shares upon a conversion (or attempted
conversion) thereof.

     (c) A  "Triggering  Event"  means any one or more of the  following  events
(whatever  the  reason and  whether  it shall be  voluntary  or  involuntary  or
effected by operation of law or pursuant to any judgment, decree or order of any
court, or any order,  rule or regulation of any  administrative  or governmental
body):

          (i) the failure of an Underlying Securities  Registration Statement to
     be declared  effective by the Commission on or prior to the 180th day after
     the Original Issue Date;

          (ii) if, during the  Effectiveness  Period,  the  effectiveness of the
     Underlying Securities  Registration Statement lapses for any reason, or the
     Holder shall not be permitted to resell  Registrable  Securities  under the
     Underlying Securities Registration Statement;

          (iii) the failure of the Common Stock to be Actively Traded or, if the
     Common Stock shall have become listed on a Subsequent Market, the delisting
     or the  suspension  from trading of the Common  Stock from such  Subsequent
     Market for more than three (3) Business Days (which need not be consecutive
     Business Days);

          (iv) the  Company  shall fail for any  reason to deliver  certificates
     representing  Underlying  Shares issuable upon a conversion  hereunder that
     comply  with  the  provisions  hereof  prior  to the  10th  day  after  the
     Conversion  Date  or the  Company  shall  provide  notice  to  any  Holder,
     including by way of public announcement,  at any time, of its intention not
     to comply with requests for conversion of any Preferred Stock in accordance
     with the terms hereof;

          (v) (A) the Company shall consummate a Change of Control  Transaction,
     or  shall  sell  (in  one  or a  series  of  related  transactions)  all or
     substantially  all of its assets (whether or not such sale would constitute
     a Change of Control  Transaction),  provided,  that (x) the  Company  shall
     notify the Holder if it enters into an  agreement  for such a  transaction,
     (y) the  agreement for such  transaction  shall  explicitly  state that the
     redemption  contemplated  by this Section shall be made in full at the time
     of the  consummation  of such  transaction  and (z) if such  transaction is
     consummated, the dated used for calculating the Per Share Market Value used
     in  calculating  the  Redemption  Price  shall be the date on which (i) the
     Company  enters  into  an  agreement  for  such   transaction,   (ii)  such
     transaction is consummated,  or (iii) the Redemption Price is paid in full,
     whichever of such dates  contemplated  in clauses (i),  (ii) or (iii) above
     yields the greatest Per Share Market Value, or (B) the Company shall redeem
     more than a de  minimis  number of shares of Common  Stock or other  Junior
     Securities (other than redemptions of Underlying Shares);

          (vi) an Event  shall not have been  cured to the  satisfaction  of the
     Holders  prior to the  expiration  of thirty  (30) days from the Event Date
     relating thereto;

          (vii) the Company shall fail for any reason to deliver the certificate
     or certificates required pursuant to Section 5(b)(iii) or the cash pursuant
     to a Buy-In  within  seven  (7)  days  after  notice  is  deemed  delivered
     hereunder;

          (viii) the Company shall fail to have available a sufficient number of
     authorized  and  unreserved  shares of Common Stock to issue to such Holder
     upon a conversion hereunder; or

          (ix) the Consolidated Tangible Net Worth of the Company as of any date
     on which any shares of Preferred Stock are outstanding (the  "Determination
     Date") shall be less than the sum of (A) the aggregate  Redemption Price as
     of the  Determination  Date for all of the shares of  Preferred  Stock then
     outstanding,  and (B) $1,500,000,  unless the Company within 10 days of the
     Determination  Date provides  written notice to the Holder that the Company
     irrevocably  elects to redeem in whole the  Company's  11.25%  Subordinated
     Debentures due 2002 issued  pursuant to the Indenture,  dated as of January
     1, 1992, between the Company and National City Bank, as trustee,  excluding
     any  amendments  thereto  (the  "Indenture")  and the Company  subsequently
     redeems such Subordinated  Debentures in whole in accordance with the terms
     and conditions of the Indenture.

                   Section 8.  Definitions.  For the purposes hereof,  the 
following terms shall have the following meanings:

                  "Actively  Traded" shall mean,  on any date of  determination,
that the average daily trading volume of the Common Stock for the previous three
(3) months is greater than 75,000 shares of Common Stock.

                  "Change of Control Transaction" means the occurrence of any of
(i) an  acquisition  after the date hereof by an  individual  or legal entity or
"group" (as described in Rule 13d-5(b)(1) promulgated under the Exchange Act) of
in excess of 33% of the voting securities of the Company,  (ii) a replacement of
more than one-half of the members of the Company's  board of directors  which is
not approved by those  individuals  who are members of the board of directors on
the date hereof in one or a series of related transactions,  (iii) the merger of
the  Company  with  or  into  another  entity,  consolidation  or sale of all or
substantially  all of the  assets of the  Company  in one or a series of related
transactions,  unless following such  transaction,  the holders of the Company's
securities  continue  to hold at least  33% of such  securities  following  such
transaction  or (iv) the  execution  by the Company of an agreement to which the
Company is a party or by which it is bound,  providing for any of the events set
forth above in (i), (ii) or (iii).

                  "Common  Stock" means the Company's  common  stock,  par value
$1.00 per  share,  and stock of any other  class  into  which  such  shares  may
hereafter have been reclassified or changed.

                  "Consolidated  Subsidiary"  means a subsidiary  of the Company
whose financial  statements are included in the most recent annual  consolidated
financial statements of the Company.

                  "Consolidated  Tangible  Net  Worth"  means  the  total of all
assets  appearing  on a  consolidated  balance  sheet  of the  Company  and  all
Consolidated  Subsidiaries,  prepared  in  accordance  with  generally  accepted
accounting  principles  less the sum of (i) the book  value of all assets of the
Company  and all of its  Consolidated  Subsidiaries  which  would be  treated as
intangibles under generally accepted accounting  principles  including,  without
limitation,  such items as goodwill,  trademarks,  trade names,  service  marks,
copyrights,  patents and licenses and rights with respect to the  foregoing  but
excluding  as an  intangible  any item  representing  the  deferred  portion  of
expenses  incurred in  connection  with the issuance of  indebtedness,  (ii) all
liabilities of the Company and all of its Consolidated  Subsidiaries  determined
in accordance  with  generally  accepted  accounting  principles,  and (iii) the
portion  of the  total  of all  assets  of  all  of the  Company's  Consolidated
Subsidiaries  are attributable to minority  interests  (excluding any portion of
the assets referred to in (i) above attributable to minority interests).

                  "Conversion  Ratio"  means,  at  any  time,  a  fraction,  the
numerator of which is Stated Value plus accrued but unpaid dividends  (including
any  accrued but unpaid  late fees  thereon)  but only to the extent not paid in
shares of Common Stock in accordance with the terms hereof,  and the denominator
of which is the Conversion Price at such time.

                  "Initial Conversion Price" means $6.32.

                  "Junior  Securities"  means  the  Common  Stock  and all other
equity  securities  of the  Company  which are junior in rights and  liquidation
preference to the Preferred Stock.

                  "Mandatory  Redemption  Amount"  for each  share of  Preferred
Stock means the sum of (i) the  greater of (A) 125% of the Stated  Value and all
accrued and unpaid  dividends with respect to such share, and (B) the product of
(a) the Per Share Market Value on the Trading Day immediately  preceding (x) the
date of the Triggering  Event or the Conversion Date, as the case may be, or (y)
the date of payment in full by the Company of the applicable  redemption  price,
whichever is greater, and (b) the Conversion Ratio calculated on the date of the
Triggering Event, or the Conversion Date, as the case may be, and (ii) all other
amounts, costs, expenses and liquidated damages due in respect of such shares of
Preferred Stock.

                  "Original  Issue  Date"  shall  mean  the  date  of the  first
issuance  of any  shares of the  Preferred  Stock  regardless  of the  number of
transfers of any  particular  shares of Preferred  Stock and  regardless  of the
number of certificates which may be issued to evidence such Preferred Stock.

                  "Per Share Market Value" means on any particular  date (a) the
closing bid price per share of the Common Stock on such date on such  Subsequent
Market on which the  Common  Stock is then  listed or  quoted,  as  reported  by
Bloomberg Information Services,  Inc. (or any successor entity succeeding to its
function of reporting  prices),  or if there is no such price on such date, then
the closing bid price on such  Subsequent  Market on the date nearest  preceding
such date, as reported by Bloomberg Information Services, Inc. (or any successor
entity  succeeding  to its function of reporting  prices),  or (b) if the Common
Stock is not then listed or quoted on a Subsequent Market, the closing bid price
for a share of Common Stock in the  over-the-counter  market, as reported by the
National  Quotation  Bureau  Incorporated  or  similar  organization  or  agency
succeeding  to its  functions  of  reporting  prices) and as listed on Bloomberg
Information  Services,  Inc. (or any successor entity succeeding to its function
of  reporting  prices),  at the close of  business  on such date,  or (c) if the
Common Stock is not then reported by the National Quotation Bureau  Incorporated
(or similar  organization  or agency  succeeding  to its  functions of reporting
prices) and as listed on Bloomberg Information Services,  Inc. (or any successor
entity succeeding to its function of reporting prices),  then the average of the
"Pink Sheet" quotes for the relevant  conversion  period,  as determined in good
faith by the Holder,  or (d) if the Common Stock is not then publicly traded the
fair  market  value of a share of Common  Stock as  determined  by an  Appraiser
selected  in good  faith by the  Holders  of a  majority  of the  shares  of the
Preferred Stock.

                  "Person" means a corporation,  an association,  a partnership,
organization,  a business, an individual,  a government or political subdivision
thereof or a governmental agency.

                  "Purchase  Agreement"  means the  Convertible  Preferred Stock
Purchase Agreement, dated as of the Original Issue Date, between the Company and
the original Holder of the Preferred Stock.

                  "Registration  Rights Agreement" means the Registration Rights
Agreement,  dated as of the  Original  Issue  Date,  between the Company and the
original Holder of the Preferred Stock.

                  "Trading  Day"  means (a) a day on which the  Common  Stock is
traded on such  Subsequent  Market on which the Common  Stock is then  listed or
quoted, as reported on Bloomberg  Information  Services,  Inc. (or any successor
entity  succeeding  to its function of reporting  prices),  or (b) if the Common
Stock is not listed on a Subsequent  Market,  a day on which the Common Stock is
traded in the over-the-counter market, as reported by the OTC Bulletin Board, as
reported on  Bloomberg  Information  Services,  Inc.  (or any  successor  entity
succeeding to its function of reporting  prices),  or (c) if the Common Stock is
not quoted on the OTC Bulletin  Board, a day on which the Common Stock is quoted
in the  over-the-counter  market as reported by the  National  Quotation  Bureau
Incorporated (or any similar  organization or agency succeeding its functions of
reporting prices) and as listed on Bloomberg Information Services,  Inc. (or any
successor  entity  succeeding  to its function of reporting  prices);  provided,
however,  that in the event that the Common Stock is not listed or quoted as set
forth in (a),  (b) and (c)  hereof,  then  Trading Day shall mean any day except
Saturday,  Sunday and any day which  shall be a legal  holiday or a day on which
banking  institutions in the State of New York are authorized or required by law
or other government action to close.

                  "Underlying   Securities   Registration   Statement"  means  a
registration  statement that meets the  requirement of the  Registration  Rights
Agreement  and registers  the resale of all  Underlying  Shares by the recipient
thereof, who shall be named as a "selling stockholder" thereunder.

                  "Underlying Shares" means, collectively,  the shares of Common
Stock  into  which the Shares  are  convertible  and the shares of Common  Stock
issuable upon payment of dividends thereon in accordance with the terms hereof.

     IN  WITNESS  WHEREOF,   Coyote  Network  Systems,   Inc.  has  caused  this
Certificate  of  Designations  to be executed in its corporate name by Daniel W.
Latham, its President, and attested by Edward A. Beeman, its Secretary, this 1st
day of September, 1998.

                                COYOTE NETWORK SYSTEMS, INC.

                                BY   /s/ Daniel W. Latham 
                                     -------------------------------------
                                     Daniel W. Latham, President

                     Attest:
     
                                BY   /s/ Edward A. Beeman               
                                     -------------------------------------
                                     Edward A. Beeman, Secretary



<PAGE>
                                    EXHIBIT A

                              NOTICE OF CONVERSION

(To be Executed by the Registered Holder
in order to Convert shares of Preferred Stock)

The  undersigned  hereby  elects to convert  the number of shares of 5% Series A
Convertible  Preferred Stock indicated  below,  into shares of Common Stock, par
value $1.00 per share (the "Common Stock"), of Coyote Network Systems, Inc. (the
"Company")  according to the conditions hereof, as of the date written below. If
shares  are to be issued in the name of a person  other  than  undersigned,  the
undersigned  will pay all transfer  taxes  payable  with respect  thereto and is
delivering  herewith such  certificates and opinions as reasonably  requested by
the Company in  accordance  therewith.  No fee will be charged to the Holder for
any conversion, except for such transfer taxes, if any.

Conversion calculations:    ________________________________________
                            Date to Effect Conversion

                            ________________________________________
                            Number of shares of Preferred Stock to be Converted

                            ________________________________________
                            Number of shares of Common Stock to be Issued

                            ________________________________________
                            Applicable Conversion Price

                            ________________________________________
                            Signature

                            ________________________________________
                            Name

                            ________________________________________
                            Address


<PAGE>
                                   ---------
                                   EXHIBIT B
                                   ---------

                         REGISTRATION RIGHTS AGREEMENT

                  This Registration  Rights Agreement (this "Agreement") is made
and entered into as of August 31, 1998, between Coyote Network Systems,  Inc., a
Delaware  corporation (the  "Company"),  and JNC Opportunity Fund Ltd., a Cayman
Islands corporation (the "Purchaser ").

                  This Agreement is made pursuant to the  Convertible  Preferred
Stock  Purchase  Agreement,  dated as of the date hereof between the Company and
the Purchaser (the "Purchase Agreement").

                  The Company and the Purchaser hereby agree as follows:

         1.       Definitions

                  Capitalized  terms used and not otherwise  defined herein that
are defined in the Purchase  Agreement  shall have the meanings given such terms
in the Purchase Agreement. As used in this Agreement,  the following terms shall
have the following meanings:

                  "Advice" shall have meaning set forth in Section 3(o).

                  "Affiliate"  means,  with  respect  to any  Person,  any other
Person that directly or indirectly  controls or is controlled by or under common
control with such Person.  For the purposes of this definition,  "control," when
used with respect to any Person,  means the possession,  direct or indirect,  of
the power to direct or cause the  direction  of the  management  and policies of
such Person, whether through the ownership of voting securities,  by contract or
otherwise;  and the terms of "affiliated,"  "controlling"  and "controlled" have
meanings correlative to the foregoing.

                  "Business Day" means any day except  Saturday,  Sunday and any
day which shall be a legal holiday or a day on which banking institutions in the
state  of New  York  generally  are  authorized  or  required  by  law or  other
government actions to close.

    "Closing Date" shall have the meaning set forth in the Purchase Agreement.

    "Commission" means the Securities and Exchange Commission.

    "Common Stock" means the Company's common stock, par value $1.00 per share.

    "Effectiveness Date" means the 120th day following the Closing Date.

    "Effectiveness Period" shall have the meaning set forth in Section 2(a).

    "Exchange Act" means the Securities Exchange Act of 1934, as amended.


<PAGE>
                  "Filing  Date" means the 90th day  following the Closing Date;
provided,  that, if the Company shall,  prior to such 90th day after the Closing
Date, have reason to believe that it will not be eligible to register for resale
shares of Common  Stock  under Form S-3  promulgated  under the  Securities  Act
(whether by reason of being  notified by the Nasdaq Stock Market,  Inc. that the
Common Stock will not be eligible for quotation on the Nasdaq National Market or
Nasdaq  SmallCap  Market  prior to such 90th day,  by reason of  failing to make
timely  filings under the Exchange Act or Securities Act in order to be eligible
to utilize Form S-3 for resales of Common Stock by such 90th day, or otherwise),
then Filing Date shall mean the later to occur of the tenth  Business  Day after
the  Company  has reason to believe it will not be so S-3  eligible  within such
time period and the 60th day after the Closing Date,  but in no event later than
the 90th day after the Closing Date.

                  "Holder" or "Holders" means the holder or holders, as the case
may be, from time to time of Registrable Securities.

       "Indemnified Party" shall have the meaning set forth in Section 5(c).

       "Indemnifying Party" shall have the meaning set forth in Section 5(c).

       "Losses" shall have the meaning set forth in Section 5(a).

       "Person"  means an individual or a  corporation,  partnership,
trust,  incorporated  or  unincorporated  association,  joint  venture,  limited
liability  company,  joint stock company,  government (or an agency or political
subdivision thereof) or other entity of any kind.

                  "Preferred  Stock" means the  Company's  shares of 5% Series A
Convertible  Preferred  Stock,  $.01 par  value,  to be issued to the  Purchaser
pursuant to the Purchase Agreement.

                  "Proceeding" means an action,  claim,  suit,  investigation or
proceeding   (including,   without  limitation,   an  investigation  or  partial
proceeding, such as a deposition), whether commenced or threatened.

                  "Prospectus" means the prospectus included in the Registration
Statement  (including,  without  limitation,  a  prospectus  that  includes  any
information  previously  omitted from a prospectus filed as part of an effective
registration  statement  in  reliance  upon  Rule  430A  promulgated  under  the
Securities Act), as amended or supplemented by any prospectus  supplement,  with
respect  to  the  terms  of  the  offering  of any  portion  of the  Registrable
Securities covered by the Registration  Statement,  and all other amendments and
supplements to the  Prospectus,  including  post-effective  amendments,  and all
material  incorporated by reference or deemed to be incorporated by reference in
such Prospectus.

                  "Registrable  Securities"  means the  shares  of Common  Stock
issuable (i) upon conversion in full of the Preferred Stock,  (ii) as payment of
dividends in respect of the  Preferred  Stock,  assuming all such  dividends are
paid in shares of Common  Stock and that the shares of  Preferred  Stock  remain
outstanding for three years, and (iii) upon exercise of the Warrants;  provided,
however  that in order to  account  for the fact  that the  number  of shares of
Common Stock issuable upon conversion of the shares of Preferred Stock (together
with the payment of  dividends  thereon) is  determined  in part upon the market
price  of  the  Common  Stock  prior  to the  time  of  conversion,  Registrable
Securities  contemplated by clauses (i) and (ii) above shall include (but not be
limited to) a number of shares of Common Stock equal to no less than 200% of the
number of shares  of Common  Stock  into  which the  shares of  Preferred  Stock
(together with the payment of dividends thereon) are convertible,  assuming such
conversion  occurred on the Closing Date or the Filing Date,  whichever yields a
lower Conversion Price (as defined in the Purchase Agreement). The Company shall
be required to file additional  Registration Statements to the extent the sum of
(i) the number of the shares of Common  Stock into which the shares of Preferred
Stock are convertible (together with the payment of dividends thereon), and (ii)
the  number of shares of Common  Stock  issuable  upon  exercise  in full of the
Warrants,  exceeds the number of shares of Common Stock initially  registered in
accordance with the immediately prior sentence.  The Company shall have ten (10)
days to  file  such  additional  Registration  Statements  after  notice  of the
requirement thereof,  which the Holders may give at such time when the number of
shares of Common Stock as are issuable  upon  conversion  of shares of Preferred
Stock (together with the payment of dividends  thereon) and upon exercise of the
Warrants,  exceeds 85% of the number of shares of Common Stock to be  registered
in a Registration Statement hereunder.

                  "Registration  Statement" means the registration statement and
any additional  registration  statements contemplated by Section 2(a), including
(in each case) the Prospectus,  amendments and supplements to such  registration
statement or  Prospectus,  including  pre- and  post-effective  amendments,  all
exhibits  thereto,  and all material  incorporated  by reference or deemed to be
incorporated by reference in such registration statement.

                  "Rule  144"  means  Rule  144  promulgated  by the  Commission
pursuant to the  Securities  Act, as such Rule may be amended from time to time,
or any similar rule or regulation  hereafter  adopted by the  Commission  having
substantially the same effect as such Rule.

                  "Rule  158"  means  Rule  158  promulgated  by the  Commission
pursuant to the  Securities  Act, as such Rule may be amended from time to time,
or any similar rule or regulation  hereafter  adopted by the  Commission  having
substantially the same effect as such Rule.

                  "Rule  415"  means  Rule  415  promulgated  by the  Commission
pursuant to the  Securities  Act, as such Rule may be amended from time to time,
or any similar rule or regulation  hereafter  adopted by the  Commission  having
substantially the same effect as such Rule.

                  "Securities Act" means the Securities Act of 1933, as amended.

                  "Special  Counsel"  means one special  counsel to the Holders,
for which the Holders will be reimbursed by the Company pursuant to Section 4.

                  "Underwritten  Registration or Underwritten  Offering" means a
registration in connection  with which  securities of the Company are sold to an
underwriter for reoffering to the public  pursuant to an effective  registration
statement.


<PAGE>
                  "Warrants"  means  collectively  (i) the Common Stock purchase
warrant issued to the Purchaser pursuant to the Purchase Agreement, and (ii) the
Common Stock purchase warrant issued to Jesup & Lamont Securities Corporation in
connection with consulting services provided to the Company.

         2.       Shelf Registration

                  (a) On or prior to the Filing Date,  the Company shall prepare
and file with the  Commission  a "Shelf"  Registration  Statement  covering  all
Registrable Securities for an offering to be made on a continuous basis pursuant
to Rule 415. The Registration  Statement shall be on Form S-3 (or if the Company
is not then eligible to register for resale the  Registrable  Securities on Form
S-3  such  registration  shall  be on  another  appropriate  form in  accordance
herewith  (including Form S-1), or, in connection with an Underwritten  Offering
hereunder,  such  other  form  agreed to by the  Company  and by the  Holders of
Registrable  Securities).  The Registration Statement shall state, to the extent
permitted  by Rule 416  under  the  Securities  Act,  that it also  covers  such
indeterminate  number of shares of  Common  Stock as may be  required  to effect
conversion of the shares of Preferred  Stock (and payment of dividends  thereon)
or exercise of the Warrants,  in each case to prevent  dilution  resulting  from
stock splits,  stock dividends or similar events, or by reason of changes in the
Conversion  Price in accordance with the terms of the Certificate of Designation
(as defined in the Purchase  Agreement)  or by reason of changes in the Exercise
Price (as defined in the Warrants) in accordance with the terms of the Warrants.
The Company shall use its best efforts to cause the Registration Statement to be
declared  effective  under the  Securities Act as promptly as possible after the
filing thereof,  but in any event prior to the Effectiveness Date, and shall use
its best  efforts to keep such  Registration  Statement  continuously  effective
under the Securities Act until the date which is three years after the date that
such  Registration  Statement is declared  effective by the  Commission  or such
earlier  date  when all  Registrable  Securities  covered  by such  Registration
Statement have been sold or may be sold without volume restrictions  pursuant to
Rule 144(k) as  determined  by the counsel to the Company  pursuant to a written
opinion  letter  to such  effect,  addressed  and  acceptable  to the  Company's
transfer agent (the "Effectiveness Period"), provided, however, that the Company
shall  not be  deemed to have  used its best  efforts  to keep the  Registration
Statement effective during the Effectiveness  Period if it voluntarily takes any
action that would  result in the Holders not being able to sell the  Registrable
Securities  covered by such  Registration  Statement  during  the  Effectiveness
Period,  unless such action is required under  applicable law or the Company has
filed  a  post-effective   amendment  to  the  Registration  Statement  and  the
Commission has not declared it effective.

                  (b) If (i) the Common  Stock is not  Actively  Traded (as such
term is defined in the Certificate of Designation), (ii) the Holders of at least
two  thirds of the  Registrable  Securities  have  exercised  their  rights to a
mandatory  redemption  and the Company has failed to pay the  redemption  amount
applicable thereto by the tenth (10th) day after demand is made therefor,  (iii)
the  Registration  Statement  shall either fail to be declared  effective by the
Commission by the thirtieth  (30th) day after the  Effectiveness  Date or, if so
declared  effective  by the  Commission,  shall  fail to  remain  effective  and
available  to the  Holders  for more  than ten (10)  Business  Days  during  the
Effectiveness Period, if the Holders of two-thirds of the Registrable Securities
so elect,  an offering of Registrable  Securities  pursuant to the  Registration
Statement  may be  effected  in the form of an  Underwritten  Offering.  In such
event, and, if the managing  underwriters advise the Company and such Holders in
writing that in their opinion the amount of Registrable  Securities  proposed to
be sold  in  such  Underwritten  Offering  exceeds  the  amount  of  Registrable
Securities  which  can be sold in such  Underwritten  Offering,  there  shall be
included in such Underwritten Offering the amount of such Registrable Securities
which in the opinion of such managing  underwriters can be sold, and such amount
shall be  allocated  pro rata among the Holders  proposing  to sell  Registrable
Securities in such Underwritten Offering.

                  (c) If any of the Registrable  Securities are to be sold in an
Underwritten  Offering,  the investment  banker in interest that will administer
the  offering  will be selected by the Holders of a majority of the  Registrable
Securities  included in such offering  upon  consultation  with the Company.  No
Holder may participate in any Underwritten Offering hereunder unless such Holder
(i)  agrees to sell its  Registrable  Securities  on the basis  provided  in any
underwriting  agreements  approved by the Persons entitled  hereunder to approve
such arrangements and (ii) completes and executes all questionnaires,  powers of
attorney,  indemnities,  underwriting  agreements and other  documents  required
under the terms of such arrangements.

         3.       Registration Procedures

                  In  connection  with the  Company's  registration  obligations
hereunder, the Company shall:

                  (a)  Prepare and file with the  Commission  on or prior to the
Filing Date, a Registration Statement on Form S-3 (or if the Company is not then
eligible  to register  for resale the  Registrable  Securities  on Form S-3 such
registration shall be on another appropriate form in accordance herewith, or, in
connection with an Underwritten Offering hereunder, such other form agreed to by
the Company and by the Holders of  Registrable  Securities)  which shall contain
the "Plan of  Distribution"  attached  hereto as Annex A  (except  if  otherwise
directed  by the  Holders),  and  cause  the  Registration  Statement  to become
effective and remain effective as provided herein;  provided,  however, that not
less  than  five (5)  Business  Days  prior to the  filing  of the  Registration
Statement  or any related  Prospectus  or any  amendment or  supplement  thereto
(including any document that would be  incorporated or deemed to be incorporated
therein by  reference),  the Company  shall,  (i) furnish to the Holders,  their
Special  Counsel and any  managing  underwriters,  copies of all such  documents
proposed to be filed,  which documents (other than those  incorporated or deemed
to be  incorporated by reference) will be subject to the review of such Holders,
their  Special  Counsel  and such  managing  underwriters,  and (ii)  cause  its
officers and directors,  counsel and independent certified public accountants to
respond to such inquiries as shall be necessary,  in the  reasonable  opinion of
respective  counsel  to  such  Holders  and  such  underwriters,  to  conduct  a
reasonable  investigation  within the meaning of the Securities Act. The Company
shall  not  file  the  Registration  Statement  or any  such  Prospectus  or any
amendments  or  supplements  thereto to which the  Holders of a majority  of the
Registrable  Securities,  their Special Counsel,  or any managing  underwriters,
shall reasonably object on a timely basis.

                  (b) (i) Prepare and file with the Commission such  amendments,
including  post-effective  amendments,  to the Registration  Statement as may be
necessary to keep the Registration  Statement  continuously  effective as to the
applicable  Registrable  Securities for the Effectiveness Period and prepare and
file with the Commission  such  additional  Registration  Statements in order to
register for resale under the Securities Act all of the Registrable  Securities;
(ii) cause the related  Prospectus to be amended or supplemented by any required
Prospectus supplement, and as so supplemented or amended to be filed pursuant to
Rule  424 (or any  similar  provisions  then in  force)  promulgated  under  the
Securities Act; (iii) respond as promptly as reasonably possible to any comments
received from the Commission with respect to the  Registration  Statement or any
amendment  thereto and as promptly as  reasonably  possible  provide the Holders
true and  complete  copies  of all  correspondence  from  and to the  Commission
relating to the Registration Statement; and (iv) comply in all material respects
with the  provisions of the  Securities Act and the Exchange Act with respect to
the  disposition  of all  Registrable  Securities  covered  by the  Registration
Statement  during the applicable  period in accordance with the intended methods
of disposition by the Holders thereof set forth in the Registration Statement as
so amended or in such Prospectus as so supplemented.

                  (c) Notify the Holders of  Registrable  Securities to be sold,
their Special  Counsel and any managing  underwriters  as promptly as reasonably
possible (and, in the case of (i)(A) below, not less than five (5) days prior to
such  filing)  and (if  requested  by any such  Person)  confirm  such notice in
writing no later  than one (1)  Business  Day  following  the day (i)(A)  when a
Prospectus  or any  Prospectus  supplement  or  post-effective  amendment to the
Registration Statement is proposed to be filed; (B) when the Commission notifies
the Company whether there will be a "review" of such Registration  Statement and
whenever the Commission comments in writing on such Registration  Statement (the
Company shall provide true and complete copies thereof and all written responses
thereto  to each of the  Holders);  and (C)  with  respect  to the  Registration
Statement or any post-effective  amendment,  when the same has become effective;
(ii) of any request by the Commission or any other Federal or state governmental
authority  for  amendments  or  supplements  to the  Registration  Statement  or
Prospectus  or  for  additional  information;  (iii)  of  the  issuance  by  the
Commission of any stop order  suspending the  effectiveness  of the Registration
Statement covering any or all of the Registrable Securities or the initiation of
any Proceedings for that purpose; (iv) if at any time any of the representations
and  warranties  of the  Company  contained  in  any  agreement  (including  any
underwriting agreement) contemplated hereby ceases to be true and correct in all
material  respects;  (v) of the receipt by the Company of any notification  with
respect to the suspension of the  qualification or exemption from  qualification
of any of the  Registrable  Securities  for  sale  in any  jurisdiction,  or the
initiation or threatening  of any  Proceeding for such purpose;  and (vi) of the
occurrence  of any event  that  makes  any  statement  made in the  Registration
Statement  or  Prospectus  or  any  document   incorporated   or  deemed  to  be
incorporated  therein  by  reference  untrue  in any  material  respect  or that
requires  any  revisions  to the  Registration  Statement,  Prospectus  or other
documents so that, in the case of the Registration  Statement or the Prospectus,
as the case may be, it will not contain any untrue  statement of a material fact
or omit to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading.

                  (d) Use its reasonable  best efforts to avoid the issuance of,
or,  if  issued,   obtain  the  withdrawal  of  (i)  any  order  suspending  the
effectiveness  of the  Registration  Statement,  or (ii) any  suspension  of the
qualification  (or  exemption  from  qualification)  of any  of the  Registrable
Securities for sale in any jurisdiction, at the earliest practicable moment.


<PAGE>


                  (e) In the event of an Underwritten  Offering, if requested by
any  managing  underwriter  or the  Holders of a  majority  in  interest  of the
Registrable  Securities to be sold in connection with an Underwritten  Offering,
(i) promptly incorporate in a Prospectus supplement or post-effective  amendment
to the Registration Statement such information as such managing underwriters and
such  Holders  reasonably  agree should be included  therein,  and (ii) make all
required filings of such Prospectus supplement or such post-effective  amendment
as soon as  practicable  after the  Company  has  received  notification  of the
matters to be  incorporated  in such  Prospectus  supplement  or  post-effective
amendment; provided, however, that the Company shall not be required to take any
action  pursuant to this Section 3(e) that would,  in the opinion of counsel for
the Company, violate applicable law or be materially detrimental to the business
prospects of the Company.

                  (f)  Furnish to each  Holder,  their  Special  Counsel and any
managing  underwriters,  without  charge,  at least one  conformed  copy of each
Registration   Statement  and  each  amendment  thereto,   including   financial
statements  and  schedules,   all  documents   incorporated   or  deemed  to  be
incorporated  therein by reference,  and all exhibits to the extent requested by
such Person (including those previously  furnished or incorporated by reference)
promptly after the filing of such documents with the Commission.

                  (g) Promptly  deliver to each Holder,  their Special  Counsel,
and any  underwriters,  without  charge,  as many  copies of the  Prospectus  or
Prospectuses   (including  each  form  of  prospectus)  and  each  amendment  or
supplement  thereto as such  Persons  may  reasonably  request;  and the Company
hereby  consents to the use of such  Prospectus and each amendment or supplement
thereto by each of the selling  Holders and any  underwriters in connection with
the offering and sale of the Registrable  Securities  covered by such Prospectus
and any amendment or supplement thereto.

                  (h) Prior to any public  offering of  Registrable  Securities,
use its best  efforts  to  register  or qualify or  cooperate  with the  selling
Holders,  any  underwriters  and their Special  Counsel in  connection  with the
registration  or   qualification   (or  exemption  from  such   registration  or
qualification)  of such  Registrable  Securities  for offer  and sale  under the
securities  or Blue Sky laws of such  jurisdictions  within the United States as
any Holder or underwriter requests in writing, to keep each such registration or
qualification (or exemption therefrom) effective during the Effectiveness Period
and to do any and all other acts or things  necessary or advisable to enable the
disposition in such  jurisdictions  of the Registrable  Securities  covered by a
Registration  Statement;  provided,  however,  that  the  Company  shall  not be
required to qualify generally to do business in any jurisdiction where it is not
then so qualified or to take any action that would subject it to general service
of process in any such  jurisdiction  where it is not then so subject or subject
the Company to any material tax in any such jurisdiction where it is not then so
subject.

                  (i) Cooperate  with the Holders and any managing  underwriters
to facilitate the timely  preparation and delivery of certificates  representing
Registrable   Securities  to  be  delivered  to  a  transferee   pursuant  to  a
Registration  Statement,  which  certificates  shall  be  free,  to  the  extent
permitted by  applicable  law, of all  restrictive  legends,  and to enable such
Registrable  Securities to be in such denominations and registered in such names
as any such managing  underwriters  or Holders may request at least two Business
Days prior to any sale of Registrable Securities.

                  (j) Upon the occurrence of any event  contemplated  by Section
3(c)(vi), as promptly as reasonably possible, prepare a supplement or amendment,
including  a  post-effective  amendment,  to  the  Registration  Statement  or a
supplement to the related  Prospectus or any document  incorporated or deemed to
be incorporated  therein by reference,  and file any other required  document so
that,  as  thereafter  delivered,  neither the  Registration  Statement nor such
Prospectus will contain an untrue  statement of a material fact or omit to state
a  material  fact  required  to be  stated  therein  or  necessary  to make  the
statements  therein,  in light of the circumstances  under which they were made,
not misleading.

                  (k) If the shares of Common Stock become listed for trading on
any of the New York Stock  Exchange,  American Stock  Exchange,  Nasdaq National
Market or Nasdaq  SmallCap  Market (each a  "Subsequent  Market"),  use its best
efforts  to cause  all  Registrable  Securities  relating  to such  Registration
Statement to be listed on such Subsequent  Market as and when required  pursuant
to the Purchase Agreement.

                  (l) In the case of an Underwritten  Offering,  enter into such
agreements (including an underwriting  agreement in form, scope and substance as
is  customary  in  Underwritten  Offerings)  and take all such other  actions in
connection  therewith  (including  those  reasonably  requested  by any managing
underwriters  and the Holders of a majority of the Registrable  Securities being
sold) in order to expedite or facilitate  the  disposition  of such  Registrable
Securities,  and whether or not an  underwriting  agreement is entered into, (i)
make such  representations  and warranties to such Holders and such underwriters
as are  customarily  made by  issuers to  underwriters  in  underwritten  public
offerings,  and confirm the same if and when requested;  (ii) obtain and deliver
copies thereof to each Holder and the managing underwriters, if any, of opinions
of counsel to the Company and updates thereof  addressed to each Holder and each
such underwriter,  in form, scope and substance  reasonably  satisfactory to any
such managing  underwriters  and Special Counsel to the selling Holders covering
the matters customarily covered in opinions requested in Underwritten  Offerings
and such other  matters as may be reasonably  requested by such Special  Counsel
and  underwriters;  (iii) at the time of delivery of any Registrable  Securities
sold pursuant  thereto,  use its best  reasonable  efforts to obtain and deliver
copies to the Holders and the managing  underwriters,  if any, of "cold comfort"
letters and updates thereof from the independent certified public accountants of
the  Company  (and,  if  necessary,   any  other  independent  certified  public
accountants of any subsidiary of the Company or of any business  acquired by the
Company for which financial  statements and financial data is, or is required to
be, included in the  Registration  Statement),  addressed to the Company in form
and substance as are customary in connection with Underwritten  Offerings;  (iv)
if  an   underwriting   agreement  is  entered  into,  the  same  shall  contain
indemnification  provisions  and  procedures  no less  favorable  to the selling
Holders and the underwriters, if any, than those set forth in Section 5 (or such
other provisions and procedures acceptable to the managing underwriters, if any,
and  holders of a  majority  of  Registrable  Securities  participating  in such
Underwritten  Offering);  and (v) deliver such documents and certificates as may
be  reasonably  requested  by the  Holders  of a  majority  of  the  Registrable
Securities  being sold,  their Special Counsel and any managing  underwriters to
evidence the  continued  validity of the  representations  and  warranties  made
pursuant to clause 3(l)(i) above and to evidence  compliance  with any customary
conditions  contained in the underwriting  agreement or other agreement  entered
into by the Company.

                  (m) Make available for inspection by the selling Holders,  any
representative of such Holders, any underwriter participating in any disposition
of  Registrable  Securities,  and any  attorney or  accountant  retained by such
selling  Holders or  underwriters,  at the offices where normally  kept,  during
reasonable business hours, all financial and other records,  pertinent corporate
documents  and  properties  of the Company and its  subsidiaries,  and cause the
officers, directors, agents and employees of the Company and its subsidiaries to
supply all  information  in each case  reasonably  requested by any such Holder,
representative,  underwriter,  attorney or  accountant  in  connection  with the
Registration  Statement;   provided,  however,  that  any  information  that  is
determined  in good faith by the  Company  in  writing  to be of a  confidential
nature at the time of delivery of such information shall be kept confidential by
such Persons,  unless (i) disclosure of such information is required by court or
administrative  order or is  necessary  to respond to  inquiries  of  regulatory
authorities;  (ii) disclosure of such information,  in the opinion of counsel to
such  Person,  is  required by law;  (iii) such  information  becomes  generally
available  to the public  other than as a result of a  disclosure  or failure to
safeguard by such Person;  or (iv) such  information  becomes  available to such
Person from a source other than the Company and such source is not known by such
Person to be bound by a confidentiality agreement with the Company.

                  (n) Comply with all  applicable  rules and  regulations of the
Commission.

                  (o) The Company may require each selling  Holder to furnish in
writing to the Company  such  information  regarding  the  distribution  of such
Registrable Securities and the beneficial ownership of Common Stock held by such
Holder as is required by law to be disclosed in the Registration Statement,  and
the Company may exclude from such registration the Registrable Securities of any
such  Holder  who  unreasonably  fails  to  furnish  such  information  within a
reasonable time after receiving such request.

                  If the Registration  Statement refers to any Holder by name or
otherwise as the holder of any securities of the Company, then such Holder shall
have the right to require (if such reference to such Holder by name or otherwise
is not required by the  Securities  Act or any similar  Federal  statute then in
force)  the  deletion  of the  reference  to such  Holder  in any  amendment  or
supplement to the  Registration  Statement  filed or prepared  subsequent to the
time that such reference ceases to be required.

                  Each Holder covenants and agrees that (i) it will not sell any
Registrable  Securities under the  Registration  Statement until it has received
copies of the  Prospectus as then amended or  supplemented  as  contemplated  in
Section 3(g) and notice from the Company that such  Registration  Statement  and
any  post-effective  amendments thereto have become effective as contemplated by
Section 3(c) and (ii) it and its officers, directors or Affiliates, if any, will
comply  with the  prospectus  delivery  requirements  of the  Securities  Act as
applicable to it in connection with sales of Registrable  Securities pursuant to
the Registration Statement.

                  Each  Holder  agrees by its  acquisition  of such  Registrable
Securities  that, upon receipt of a notice from the Company of the occurrence of
any  event of the kind  described  in  Section  3(c)(ii),  3(c)(iii),  3(c)(iv),
3(c)(v) or 3(c)(vi),  such Holder will forthwith discontinue disposition of such
Registrable  Securities  under the  Registration  Statement  until such Holder's
receipt of the copies of the supplemented Prospectus and/or amended Registration
Statement  contemplated  by Section 3(j), or until it is advised in writing (the
"Advice")  by the  Company  that  the use of the  applicable  Prospectus  may be
resumed,  and,  in  either  case,  has  received  copies  of any  additional  or
supplemental  filings  that are  incorporated  or deemed to be  incorporated  by
reference in such Prospectus or Registration Statement.

                  4.       Registration Expenses

                  (a) All fees and expenses  incident to the  performance  of or
compliance  with this  Agreement  by the  Company,  except as and to the  extent
specified in Section 4(b), shall be borne by the Company whether or not pursuant
to an  Underwritten  Offering and whether or not the  Registration  Statement is
filed or becomes  effective and whether or not any  Registrable  Securities  are
sold pursuant to the Registration  Statement.  The fees and expenses referred to
in  the  foregoing  sentence  shall  include,   without   limitation,   (i)  all
registration and filing fees (including,  without limitation,  fees and expenses
(A) with respect to filings  required to be made with any  Subsequent  Market on
which the Common Stock is then listed for trading,  and (B) in  compliance  with
state  securities  or Blue Sky laws  (including,  without  limitation,  fees and
disbursements   of  counsel  for  the  Holders  in  connection   with  Blue  Sky
qualifications or exemptions of the Registrable  Securities and determination of
the eligibility of the Registrable  Securities for investment  under the laws of
such  jurisdictions  as the managing  underwriters,  if any, or the Holders of a
majority of  Registrable  Securities  may  designate)),  (ii) printing  expenses
(including,   without   limitation,   expenses  of  printing   certificates  for
Registrable   Securities  and  of  printing  prospectuses  if  the  printing  of
prospectuses  is  requested  by the  managing  underwriters,  if any,  or by the
holders of a majority of the Registrable Securities included in the Registration
Statement),  (iii)  messenger,  telephone and delivery  expenses,  (iv) fees and
disbursements  of counsel for the Company and Special  Counsel for the  Holders,
(v)  Securities  Act  liability  insurance,  if  the  Company  so  desires  such
insurance,  and (vi) fees and  expenses  of all other  Persons  retained  by the
Company in connection with the consummation of the transactions  contemplated by
this  Agreement.  In addition,  the Company shall be responsible  for all of its
internal   expenses   incurred  in  connection  with  the  consummation  of  the
transactions contemplated by this Agreement (including,  without limitation, all
salaries  and  expenses  of its  officers  and  employees  performing  legal  or
accounting  duties),  the  expense of any annual  audit,  the fees and  expenses
incurred in  connection  with the listing of the  Registrable  Securities on any
securities exchange as required hereunder.

                  (b) If the Holders require an Underwritten  Offering  pursuant
to the terms hereof,  the Company shall be responsible  for all costs,  fees and
expenses in connection  therewith,  except for the fees and disbursements of the
Underwriters  (including any  underwriting  commissions and discounts) and their
legal counsel and accountants.  By way of illustration  which is not intended to
diminish  from  the  provisions  of  Section  4(a),  the  Holders  shall  not be
responsible  for,  and  the  Company  shall  be  required  to pay  the  fees  or
disbursements  incurred  by the  Company  (including  by its legal  counsel  and
accountants)  in connection  with, the  preparation and filing of a Registration
Statement and related  Prospectus  for such  offering,  the  maintenance of such
Registration  Statement in accordance with the terms hereof,  the listing of the
Registrable  Securities in accordance with the requirements hereof, and printing
expenses incurred to comply with the requirements hereof.

         5.       Indemnification

                  (a)  Indemnification  by  the  Company.   The  Company  shall,
notwithstanding  any termination of this Agreement,  indemnify and hold harmless
each  Holder,  the  officers,  directors,  agents  (including  any  underwriters
retained by such  Holder in  connection  with the offer and sale of  Registrable
Securities),   brokers   (including  brokers  who  offer  and  sell  Registrable
Securities  as principal as a result of a pledge or any failure to perform under
a margin call of Common  Stock),  investment  advisors and  employees of each of
them, each Person who controls any such Holder (within the meaning of Section 15
of the  Securities  Act or Section  20 of the  Exchange  Act) and the  officers,
directors,  agents and employees of each such controlling Person, to the fullest
extent permitted by applicable law, from and against any and all losses, claims,
damages, liabilities, costs (including, without limitation, costs of preparation
and attorneys' fees) and expenses (collectively, "Losses"), as incurred, arising
out of or relating to any untrue or alleged untrue  statement of a material fact
contained  in  the  Registration  Statement,  any  Prospectus  or  any  form  of
prospectus  or in any  amendment  or  supplement  thereto or in any  preliminary
prospectus, or arising out of or relating to any omission or alleged omission of
a  material  fact  required  to be  stated  therein  or  necessary  to make  the
statements  therein  (in the case of any  Prospectus  or form of  prospectus  or
supplement  thereto,  in light of the circumstances  under which they were made)
not misleading,  except to the extent, but only to the extent,  that such untrue
statements or omissions are based solely upon information  regarding such Holder
furnished  in writing to the Company by such Holder  expressly  for use therein,
which  information was reasonably relied on by the Company for use therein or to
the  extent  that such  information  relates  to such  Holder  or such  Holder's
proposed method of  distribution of Registrable  Securities and was reviewed and
expressly  approved  in  writing  by  such  Holder  expressly  for  use  in  the
Registration  Statement,  such  Prospectus  or such form of Prospectus or in any
amendment or supplement  thereto.  The Company shall notify the Holders promptly
of the  institution,  threat or assertion of any Proceeding of which the Company
is aware in connection with the transactions contemplated by this Agreement.

                  (b) Indemnification by Holders.  Each Holder shall,  severally
and not  jointly,  indemnify  and hold  harmless  the  Company,  its  directors,
officers, agents and employees, each Person who controls the Company (within the
meaning of Section 15 of the Securities Act and Section 20 of the Exchange Act),
and the directors, officers, agents or employees of such controlling Persons, to
the fullest extent  permitted by applicable law, from and against all Losses (as
determined by a court of competent  jurisdiction in a final judgment not subject
to appeal or review)  arising out of or based solely on either (i) a sale of the
Registrable  Securities  by a Holder  in a  manner  not  covered  by the Plan of
Distribution  of the  Registration  Statement or (ii) any untrue  statement of a
material fact contained in the Registration  Statement,  any Prospectus,  or any
form of prospectus, or in any amendment or supplement thereto, or arising solely
out of or based  solely  upon any  omission  of a material  fact  required to be
stated therein or necessary to make the statements therein not misleading to the
extent,  but only to the  extent,  that such  untrue  statement  or  omission is
contained  in any  information  so  furnished  in writing by such  Holder to the
Company  specifically  for  inclusion  in the  Registration  Statement  or  such
Prospectus and that such  information was reasonably  relied upon by the Company
for  use  in the  Registration  Statement,  such  Prospectus  or  such  form  of
prospectus or to the extent that such information relates to such Holder or such
Holder's  proposed  method of  distribution  of  Registrable  Securities and was
reviewed and expressly  approved in writing by such Holder  expressly for use in
the Registration  Statement,  such Prospectus or such form of Prospectus,  or in
any  amendment or  supplement  thereto.  In no event shall the  liability of any
selling Holder  hereunder be greater in amount than the dollar amount of the net
proceeds  received by such Holder  upon the sale of the  Registrable  Securities
giving  rise to such  indemnification  obligation.  A Holder  shall  notify  the
Company  promptly of the  institution,  threat or assertion of any Proceeding of
which such Holder is aware in connection with the  transactions  contemplated by
this Agreement.

                  (c) Conduct of Indemnification  Proceedings. If any Proceeding
shall be brought or asserted against any Person entitled to indemnity  hereunder
(an  "Indemnified  Party"),  such  Indemnified  Party shall promptly  notify the
Person from whom indemnity is sought (the "Indemnifying  Party") in writing, and
the  Indemnifying  Party  shall  assume  the  defense  thereof,   including  the
employment of counsel  reasonably  satisfactory to the Indemnified Party and the
payment of all fees and expenses  incurred in connection  with defense  thereof;
provided,  that the failure of any  Indemnified  Party to give such notice shall
not relieve the Indemnifying Party of its obligations or liabilities pursuant to
this  Agreement,  except  (and  only) to the  extent  that it  shall be  finally
determined  by a court of competent  jurisdiction  (which  determination  is not
subject to appeal or further  review) that such failure  shall have  proximately
and materially adversely prejudiced the Indemnifying Party.

                  An Indemnified  Party shall have the right to employ  separate
counsel in any such  Proceeding and to participate in the defense  thereof,  but
the  fees  and  expenses  of  such  counsel  shall  be at the  expense  of  such
Indemnified  Party or Parties unless:  (1) the Indemnifying  Party has agreed in
writing to pay such fees and expenses;  or (2) the Indemnifying Party shall have
failed  promptly to assume the defense of such  Proceeding and to employ counsel
reasonably satisfactory to such Indemnified Party in any such Proceeding; or (3)
the named  parties to any such  Proceeding  (including  any  impleaded  parties)
include  both  such  Indemnified  Party  and the  Indemnifying  Party,  and such
Indemnified Party shall have been advised by counsel that a conflict of interest
is likely to exist if the same counsel were to represent such Indemnified  Party
and the Indemnifying  Party (in which case, if such  Indemnified  Party notifies
the  Indemnifying  Party in writing that it elects to employ separate counsel at
the expense of the Indemnifying Party, the Indemnifying Party shall not have the
right to assume the defense  thereof and such counsel shall be at the expense of
the  Indemnifying  Party).  The  Indemnifying  Party shall not be liable for any
settlement of any such Proceeding  effected without its written  consent,  which
consent shall not be unreasonably withheld. No Indemnifying Party shall, without
the prior written consent of the Indemnified Party, effect any settlement of any
pending Proceeding in respect of which any Indemnified Party is a party,  unless
such settlement includes an unconditional release of such Indemnified Party from
all liability on claims that are the subject matter of such Proceeding.

                  All fees and  expenses  of the  Indemnified  Party  (including
reasonable  fees  and  expenses  to  the  extent  incurred  in  connection  with
investigating   or  preparing  to  defend  such   Proceeding  in  a  manner  not
inconsistent  with this  Section)  shall be paid to the  Indemnified  Party,  as
incurred,  within  ten (10)  Business  Days of  written  notice  thereof  to the
Indemnifying  Party  (regardless of whether it is ultimately  determined that an
Indemnified Party is not entitled to indemnification  hereunder;  provided, that
the  Indemnifying  Party may require  such  Indemnified  Party to  undertake  to
reimburse  all such fees and  expenses  to the extent it is  finally  judicially
determined  that  such  Indemnified  Party is not  entitled  to  indemnification
hereunder).

                  (d) Contribution. If a claim for indemnification under Section
5(a) or 5(b) is unavailable to an Indemnified  Party (by reason of public policy
or  otherwise),  then each  Indemnifying  Party,  in lieu of  indemnifying  such
Indemnified  Party,  shall  contribute  to the  amount  paid or  payable by such
Indemnified  Party  as a  result  of  such  Losses,  in  such  proportion  as is
appropriate  to  reflect  the  relative  fault  of the  Indemnifying  Party  and
Indemnified  Party in connection with the actions,  statements or omissions that
resulted in such Losses as well as any other relevant equitable  considerations.
The relative fault of such  Indemnifying  Party and  Indemnified  Party shall be
determined by reference to, among other things,  whether any action in question,
including any untrue or alleged untrue  statement of a material fact or omission
or alleged omission of a material fact, has been taken or made by, or relates to
information  supplied by, such Indemnifying  Party or Indemnified Party, and the
parties'  relative intent,  knowledge,  access to information and opportunity to
correct or prevent  such  action,  statement  or  omission.  The amount  paid or
payable by a party as a result of any Losses shall be deemed to include, subject
to the limitations set forth in Section 5(c), any reasonable attorneys' or other
reasonable  fees or  expenses  incurred  by such  party in  connection  with any
Proceeding to the extent such party would have been indemnified for such fees or
expenses if the  indemnification  provided for in this Section was  available to
such party in accordance with its terms.

                  The  parties  hereto  agree  that it  would  not be  just  and
equitable if  contribution  pursuant to this Section 5(d) were determined by pro
rata  allocation  or by any other method of  allocation  that does not take into
account the equitable  considerations  referred to in the immediately  preceding
paragraph.  Notwithstanding the provisions of this Section 5(d), no Holder shall
be required to contribute,  in the aggregate, any amount in excess of the amount
by which the  proceeds  actually  received  by such  Holder from the sale of the
Registrable  Securities  subject  to the  Proceeding  exceeds  the amount of any
damages that such Holder has  otherwise  been  required to pay by reason of such
untrue or alleged untrue  statement or omission or alleged  omission.  No Person
guilty of fraudulent  misrepresentation  (within the meaning of Section 11(f) of
the Securities  Act) shall be entitled to  contribution  from any Person who was
not guilty of such fraudulent misrepresentation.

                  The indemnity and  contribution  agreements  contained in this
Section are in addition to any liability that the Indemnifying  Parties may have
to the Indemnified Parties.


         6.       Miscellaneous

                  (a) Remedies.  In the event of a breach by the Company or by a
Holder,  of any of their  obligations  under this Agreement,  each Holder or the
Company,  as the case may be, in  addition to being  entitled  to  exercise  all
rights granted by law and under this Agreement,  including  recovery of damages,
will be entitled to specific performance of its rights under this Agreement. The
Company and each Holder agree that monetary  damages would not provide  adequate
compensation  for any losses  incurred by reason of a breach by it of any of the
provisions of this Agreement and hereby further agrees that, in the event of any
action for specific  performance  in respect of such breach,  it shall waive the
defense that a remedy at law would be adequate.

                  (b) No Inconsistent Agreements. Neither the Company nor any of
its subsidiaries has, as of the date hereof, nor shall the Company or any of its
subsidiaries,  on or after the date of this Agreement,  enter into any agreement
with respect to its securities that is  inconsistent  with the rights granted to
the Holders in this Agreement or otherwise conflicts with the provisions hereof.
Except as and to the extent  specified  in  Schedule  6(b)  hereto,  neither the
Company nor any of its  subsidiaries  has previously  entered into any agreement
granting any  registration  rights with respect to any of its  securities to any
Person.  Without  limiting the generality of the foregoing,  without the written
consent  of the  Holders  of a  majority  of the  then  outstanding  Registrable
Securities,  the Company  shall not grant to any Person the right to request the
Company to register  any  securities  of the Company  under the  Securities  Act
unless the rights so granted are subject in all  respects to the prior rights in
full of the  Holders  set forth  herein,  and are not  otherwise  in conflict or
inconsistent with the provisions of this Agreement.

                  (c) No Piggyback on Registrations. Except as and to the extent
specified in Schedule  6(b) hereto,  neither the Company nor any of its security
holders  (other than the Holders in such capacity  pursuant  hereto) may include
securities  of  the  Company  in  the  Registration  Statement  other  than  the
Registrable  Securities,  and the Company  shall not after the date hereof enter
into any agreement providing any such right to any of its security holders.

                  (d) Piggy-Back Registrations. If at any time when there is not
an effective  Registration  Statement covering all of the Registrable Securities
and the Underlying  Shares, the Company shall determine to prepare and file with
the  Commission  a  registration  statement  relating to an offering for its own
account or the account of others under the  Securities  Act of any of its equity
securities,  other than on Form S-4 or Form S-8 (each as  promulgated  under the
Securities Act) or their then  equivalents  relating to equity  securities to be
issued solely in connection  with any  acquisition  of any entity or business or
equity  securities  issuable in connection  with stock option or other  employee
benefit  plans,  then the  Company  shall  send to each  holder  of  Registrable
Securities  written notice of such determination and, if within twenty (20) days
after receipt of such notice,  any such holder shall so request in writing,  the
Company  shall  include in such  registration  statement all or any part of such
Registrable Securities such holder requests to be registered; provided, however,
that the Company  shall not be required to register any  Registrable  Securities
pursuant to this Section 7(d) that are eligible for sale pursuant to Rule 144(k)
of the Commission.

                  (e) Amendments and Waivers.  The provisions of this Agreement,
including  the  provisions  of this  sentence,  may not be amended,  modified or
supplemented,  and waivers or consents to departures from the provisions  hereof
may not be given,  unless the same shall be in writing and signed by the Company
and the  Holders  of at least  two-thirds  of the then  outstanding  Registrable
Securities;  provided,  however,  that,  for  the  purposes  of  this  sentence,
Registrable  Securities that are owned, directly or indirectly,  by the Company,
or an Affiliate of the Company are not deemed  outstanding.  Notwithstanding the
foregoing, a waiver or consent to depart from the provisions hereof with respect
to a matter that relates  exclusively to the rights of Holders and that does not
directly  or  indirectly  affect  the  rights of other  Holders  may be given by
Holders  of at least a  majority  of the  Registrable  Securities  to which such
waiver or  consent  relates;  provided,  however,  that the  provisions  of this
sentence may not be amended, modified, or supplemented except in accordance with
the provisions of the immediately preceding sentence.

                  (f) Notices.  Any and all notices or other  communications  or
deliveries  required or permitted to be provided  hereunder  shall be in writing
and  shall be deemed  given and  effective  on the  earliest  of (i) the date of
transmission,  if such notice or communication is delivered via facsimile at the
facsimile  telephone  number  specified in this Section  prior to 8:00 p.m. (New
York City  time) on a  Business  Day,  (ii) the  Business  Day after the date of
transmission,  if such notice or communication is delivered via facsimile at the
facsimile  telephone number specified in the Purchase  Agreement later than 8:00
p.m. (New York City time) on any date and earlier than 11:59 p.m. (New York City
time) on such date,  (iii) the Business Day  following  the date of mailing,  if
sent by nationally  recognized  overnight  courier service,  or (iv) upon actual
receipt by the party to whom such notice is  required  to be given.  The address
for such notices and communications shall be as follows:

      If to the Company: Coyote Network Systems, Inc.
                         4360 Park Terrace Drive
                         Westlake Village, CA 91361
                         Facsimile No.: (818) 735-7633
                         Attn:  Chief Financial Officer

      With copies to:   Reinhart, Boerner, Van Deuren, Norris & Rieselbach,P.C.
                        One Norwest Center
                        1700 Lincoln Street, Suite 3725
                        Denver, CO 80203-4537
                        Facsimile No.: (303) 831-4805
                        Attn: Timothy G. Atkinson

      If to the
      Purchaser:        JNC Opportunity Fund Ltd.
                        c/o Olympia Capital (Cayman) Ltd.
                        Williams House, 20 Reid Street
                        Hamilton HM11, Bermuda
                        Facsimile No.:  (441) 295-2305
                        Attn: Director

      With copies to:    Encore Capital Management, L.L.C.
                         12007 Sunrise Valley Drive, Suite 460
                         Reston, VA 20191
                         Facsimile No.:  (703) 476-7711
                         Attn: Managing Member

      With copies to:    Robinson Silverman Pearce Aronsohn & Berman LLP
                         1290 Avenue of the Americas
                         New York, NY 10104
                         Facsimile No.:  (212) 541-4630
                         Attn: Eric L. Cohen

         If to any other Person who is then the registered Holder:

     To the address of such Holder as it appears in the stock  transfer books of
the Company or such other address as may be designated in writing hereafter,  in
the same manner, by such Person.

                  (g) Successors and Assigns.  This Agreement shall inure to the
benefit of and be binding upon the successors  and permitted  assigns of each of
the parties and shall inure to the benefit of each  Holder.  The Company may not
assign its rights or obligations  hereunder without the prior written consent of
each Holder.  Each Holder may assign their  respective  rights  hereunder in the
manner and to the Persons as permitted under the Purchase Agreement.

                  (h)  Assignment  of  Registration  Rights.  The rights of each
Holder  hereunder,  including the right to have the Company  register for resale
Registrable Securities in accordance with the terms of this Agreement,  shall be
automatically  assignable  by each Holder to any  Affiliate of such Holder,  any
other  Holder or  Affiliate  of any other  Holder if:  (i) the Holder  agrees in
writing with the  transferee  or assignee to assign such  rights,  and a copy of
such agreement is furnished to the Company  within a reasonable  time after such
assignment, (ii) the Company is, within a reasonable time after such transfer or
assignment,  furnished  with written  notice of (a) the name and address of such
transferee  or  assignee,  and (b) the  securities  with  respect  to which such
registration  rights are being  transferred  or assigned,  (iii)  following such
transfer  or  assignment  the  further  disposition  of such  securities  by the
transferee or assignees is restricted  under the  Securities  Act and applicable
state  securities  laws,  (iv) at or before the time the  Company  receives  the
written notice  contemplated  by clause (ii) of this Section,  the transferee or
assignee agrees in writing with the Company to be bound by all of the provisions
of this Agreement, and (v) such transfer shall have been made in accordance with
the applicable requirements of the Purchase Agreement.  The rights to assignment
shall apply to the Holders (and to subsequent) successors and assigns.

                  (i) Counterparts. This Agreement may be executed in any number
of  counterparts,  each of  which  when so  executed  shall be  deemed  to be an
original  and, all of which taken  together  shall  constitute  one and the same
Agreement.   In  the  event  that  any   signature  is  delivered  by  facsimile
transmission,  such  signature  shall create a valid  binding  obligation of the
party  executing  (or on whose behalf such  signature is executed) the same with
the same  force and  effect as if such  facsimile  signature  were the  original
thereof.

                  (j)  Governing  Law. This  Agreement  shall be governed by and
construed and enforced in accordance  with the internal laws of the State of New
York without  regard to the  principles of conflicts of law thereof.  Each party
hereby  irrevocably  submits  to the  exclusive  jurisdiction  of the  state and
federal  courts sitting in the City of New York,  borough of Manhattan,  for the
adjudication  of any dispute  hereunder  or in  connection  herewith or with any
transaction  contemplated  hereby or discussed herein (including with respect to
the enforcement of the any of the Transaction Documents), and hereby irrevocably
waives,  and agrees not to assert in any suit,  action or proceeding,  any claim
that it is not personally  subject to the  jurisdiction of any such court,  that
such suit,  action or  proceeding  is improper.  Each party  hereby  irrevocably
waives  personal  service of process and consents to process being served in any
such suit,  action or  proceeding by mailing a copy thereof to such party at the
address in effect for  notices to it under this  Agreement  and agrees that such
service  shall  constitute  good and  sufficient  service of process  and notice
thereof.  Nothing contained herein shall be deemed to limit in any way any right
to serve process in any manner permitted by law.

                  (k)  Cumulative  Remedies.  The remedies  provided  herein are
cumulative and not exclusive of any remedies provided by law.

                  (l)  Severability.   If  any  term,  provision,   covenant  or
restriction of this Agreement is held by a court of competent jurisdiction to be
invalid, illegal, void or unenforceable, the remainder of the terms, provisions,
covenants  and  restrictions  set forth  herein  shall  remain in full force and
effect and shall in no way be affected, impaired or invalidated, and the parties
hereto  shall use their  reasonable  efforts to find and  employ an  alternative
means to achieve the same or substantially  the same result as that contemplated
by such term,  provision,  covenant or restriction.  It is hereby stipulated and
declared to be the  intention of the parties  that they would have  executed the
remaining terms, provisions, covenants and restrictions without including any of
such that may be hereafter declared invalid, illegal, void or unenforceable.

                  (m)  Headings.   The  headings  in  this   Agreement  are  for
convenience  of  reference  only and  shall not limit or  otherwise  affect  the
meaning hereof.

                  (n) Shares Held by The Company  and its  Affiliates.  Whenever
the  consent or approval of Holders of a  specified  percentage  of  Registrable
Securities is required hereunder,  Registrable Securities held by the Company or
its  Affiliates  (other than any Holder or  transferees or successors or assigns
thereof  if such  Holder is deemed  to be an  Affiliate  solely by reason of its
holdings of such  Registrable  Securities)  shall not be counted in  determining
whether  such  consent or  approval  was given by the  Holders of such  required
percentage.


                   [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
                            SIGNATURE PAGE TO FOLLOW]

<PAGE>
                  IN  WITNESS   WHEREOF,   the  parties   have   executed   this
Registration Rights Agreement as of the date first written above.

                          COYOTE NETWORK SYSTEMS, INC.



                          By:  /S/ JAMES J. FIEDLER
                               -----------------------------------
                               Name:    James J. Fiedler
                               Title:   Chairman and Chief Financial Officer


                          JNC OPPORTUNITY FUND LTD.



                          By:  /S/ NEIL T. CHAU
                               -----------------------------------
                               Name:    Neil T. Chau
                               Title:   Managing Member
     


<PAGE>
                          Registration Rights Agreement
                                     Annex A

                              Plan of Distribution

         The Selling Stockholders,  their pledgees, donees, transferees or other
successors-in-interest,  may,  from time to time,  sell all or a portion  of the
shares of Common Stock being  registered  hereunder  (the "Shares") in privately
negotiated  transactions or otherwise,  at fixed prices that may be changed,  at
market prices  prevailing at the time of sale, at prices  related to such market
prices  or at  negotiated  prices.  The  Shares  may  be  sold  by  the  Selling
Stockholders by one or more of the following methods,  without  limitation:  (a)
block  trades in which the broker or dealer so engaged  will attempt to sell the
Shares as agent but may  position and resell a portion of the block as principal
to facilitate the transaction,  (b) purchases by a broker or dealer as principal
and resale by such broker or dealer for its account pursuant to this Prospectus,
(c) an exchange  distribution  in  accordance  with the rules of the  applicable
exchange,  (d) ordinary  brokerage  transactions  and  transactions in which the
broker solicits purchasers, (e) privately negotiated transactions,  (f) delivery
of Shares in satisfaction of open positions in the Company's  securities,  (g) a
combination  of any such  methods  of sale and (h) any  other  method  permitted
pursuant to applicable law.

         In  effecting  sales,  brokers  and  dealers  engaged  by  the  Selling
Stockholders  may arrange for other  brokers or dealers to  participate  in such
sales.  Brokers or dealers may receive commissions or discounts from the Selling
Stockholders (or, if any such  broker-dealer  acts as agent for the purchaser of
such shares,  from such  purchaser)  in amounts to be  negotiated  which are not
expected  to  exceed  those  customary  in the types of  transactions  involved.
Broker-dealers  may agree  with the  Selling  Stockholders  to sell a  specified
number of such Shares at a stipulated  price per share,  and, to the extent such
broker-dealer is unable to do so acting as agent for a Selling  Stockholder,  to
purchase as  principal  any unsold  Shares at the price  required to fulfill the
broker-dealer commitment to the Selling Stockholders. Broker-dealers who acquire
Shares as  principal  may  thereafter  resell  such  Shares from time to time in
transactions  (which may  involve  block  transactions  and sales to and through
other broker-dealers,  including  transactions of the nature described above) in
the over-the-counter  market or otherwise at prices and on terms then prevailing
at the time of sale, at prices then related to the then-current  market price or
in negotiated  transactions and, in connection with such resales,  may pay to or
receive from the purchasers of such Shares  commissions as described  above. The
Selling  Stockholders may also sell the Shares in accordance with Rule 144 under
the Securities Act, rather than pursuant to this Prospectus.

         The  Selling   Stockholders  and  any  broker-dealers  or  agents  that
participate  with the Selling  Stockholders in sales of the Shares may be deemed
to be "underwriters" within the meaning of the Securities Act in connection with
such sales. In such event, any commissions  received by such  broker-dealers  or
agents  and any  profit on the  resale of the  Shares  purchased  by them may be
deemed to be underwriting commissions or discounts under the Securities Act.

         The Company is required  to pay all fees and  expenses  incident to the
registration of the Shares,  including fees and  disbursements of counsel to the
Selling   Stockholders.   The  Company  has  agreed  to  indemnify  the  Selling
Stockholders against certain losses, claims, damages and liabilities,  including
liabilities under the Securities Act.

 
<PAGE>
                                   ---------
                                   EXHIBIT D
                                   ---------
NEITHER THESE  SECURITIES  NOR THE  SECURITIES  INTO WHICH THESE  SECURITIES ARE
EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE  COMMISSION OR
THE  SECURITIES  COMMISSION  OF ANY STATE IN  RELIANCE  UPON AN  EXEMPTION  FROM
REGISTRATION  UNDER SECURITIES ACT OF 1933, AS AMENDED (THE  "SECURITIES  ACT"),
AND,  ACCORDINGLY,  MAY NOT BE OFFERED OR SOLD EXCEPT  PURSUANT TO AN  EFFECTIVE
REGISTRATION  STATEMENT  UNDER THE  SECURITIES  ACT OR PURSUANT TO AN  AVAILABLE
EXEMPTION FROM THE REGISTRATION  REQUIREMENTS  THEREUNDER AND IN COMPLIANCE WITH
APPLICABLE STATE SECURITIES OR BLUE SKY LAWS.


                          COYOTE NETWORK SYSTEMS, INC.

                                     WARRANT

                             Dated: August 31, 1998


         Coyote Network Systems,  Inc., a Delaware  corporation (the "Company"),
hereby  certifies  that, for value received,  JNC Opportunity  Fund Ltd., or its
registered  assigns  ("Holder"),  is  entitled,  subject  to the terms set forth
below,  to purchase  from the Company up to a total of 225,000  shares of Common
Stock, $1.00 par value per share (the "Common Stock"), of the Company (each such
share,  a "Warrant  Share" and all such  shares,  the  "Warrant  Shares")  at an
exercise  price  equal to $8.43  per  share  (as  adjusted  from time to time as
provided in Section 8, the "Exercise Price"),  at any time and from time to time
from and after the date hereof and through  and  including  August 31, 2001 (the
"Expiration Date"), and subject to the following terms and conditions:

                  1.  Registration  of Warrant.  The Company shall register this
Warrant,  upon  records to be  maintained  by the Company for that  purpose (the
"Warrant Register"),  in the name of the record Holder hereof from time to time.
The  Company  may deem and treat the  registered  Holder of this  Warrant as the
absolute owner hereof for the purpose of any exercise hereof or any distribution
to the Holder, and for all other purposes, and the Company shall not be affected
by notice to the contrary.

                  2.       Registration of Transfers and Exchanges.

     (a) This Warrant may not be offered or sold except in  accordance  with the
legend on the first page hereof and subject to compliance with such legend.  The
Company  shall  register  the  transfer  of any  portion of this  Warrant in the
Warrant  Register,  upon surrender of this Warrant,  with the Form of Assignment
attached  hereto duly  completed  and signed,  to the  Transfer  Agent or to the
Company at the office  specified in or pursuant to Section  3(b).  Upon any such
registration   or  transfer,   a  new  warrant  to  purchase  Common  Stock,  in
substantially the form of this Warrant (any such new warrant,  a "New Warrant"),
evidencing  the portion of this  Warrant so  transferred  shall be issued to the
transferee and a New Warrant  evidencing  the remaining  portion of this Warrant
not so  transferred,  if any, shall be issued to the  transferring  Holder.  The
acceptance  of the New  Warrant by the  transferee  thereof  shall be deemed the
acceptance of such  transferee of all of the rights and  obligations of a holder
of a Warrant.

     (b) This Warrant is  exchangeable,  upon the surrender hereof by the Holder
to the office of the Company specified in or pursuant to Section 3(b) for one or
more New Warrants,  evidencing in the aggregate the right to purchase the number
of Warrant  Shares which may then be purchased  hereunder.  Any such New Warrant
will be dated the date of such exchange.

                  3.       Duration and Exercise of Warrants.

     (a) This  Warrant  shall be  exercisable  by the  registered  Holder on any
business day before 5:30 P.M.,  Eastern  time, at any time and from time to time
on or after the date hereof to and including the Expiration  Date. At 5:30 P.M.,
Eastern time on the  Expiration  Date, the portion of this Warrant not exercised
prior thereto shall be and become void and of no value.  Prior to the Expiration
Date,  the Company may not call or  otherwise  redeem this  Warrant  without the
prior written consent of the Holder.

     (b) Subject to Sections 2(b), 6 and 9, upon surrender of this Warrant, with
the Form of Election to Purchase  attached hereto duly completed and signed,  to
the Company at its  address for notice set forth in Section 11 and upon  payment
of the Exercise Price multiplied by the number of Warrant Shares that the Holder
intends to purchase hereunder,  in lawful money of the United States of America,
in cash or by  certified or official  bank check or checks,  all as specified by
the Holder in the Form of Election to Purchase,  the Company shall promptly (but
in no event  later than 3 business  days  after the Date of  Exercise)  issue or
cause to be issued and cause to be delivered to or upon the written order of the
Holder and in such name or names as the Holder may designate,  a certificate for
the Warrant  Shares  issuable upon such exercise,  free of  restrictive  legends
other than as required by applicable law. Any person so designated by the Holder
to receive  Warrant  Shares  shall be deemed to have become  holder of record of
such Warrant Shares as of the Date of Exercise of this Warrant.

     A "Date of  Exercise"  means  the  date on which  the  Company  shall  have
received (i) this Warrant (or any New Warrant, as applicable),  with the Form of
Election  to  Purchase  attached  hereto  (or  attached  to  such  New  Warrant)
appropriately  completed and duly signed, and (ii) payment of the Exercise Price
for the  number  of  Warrant  Shares so  indicated  by the  holder  hereof to be
purchased.

     (c) This Warrant shall be exercisable, either in its entirety or, from time
to time, for a portion of the number of Warrant Shares.  If less than all of the
Warrant  Shares which may be purchased  under this Warrant are  exercised at any
time,  the Company  shall  issue or cause to be issued,  at its  expense,  a New
Warrant  evidencing the right to purchase the remaining number of Warrant Shares
for which no exercise has been evidenced by this Warrant.

                  4.  Piggyback  Registration  Rights.  During  the term of this
Warrant, the Company may not file any registration statement with the Securities
and Exchange Commission (other than registration statements of the Company filed
on Form S-8 or Form S-4, each as  promulgated  under the Securities Act of 1933,
as amended (the "Securities Act"),  pursuant to which the Company is registering
securities  pursuant to a Company employee benefit plan or pursuant to a merger,
acquisition  or  similar  transaction  including  supplements  thereto,  but not
additionally filed registration statements in respect of such securities) at any
time when there is not an effective  registration  statement covering the resale
of the Warrant Shares and naming the Holder as a selling stockholder thereunder,
unless the Company  provides the Holder with not less than 20 days notice of its
intention to file such registration statement and provides the Holder the option
to include any or all of the applicable  Warrant Shares  therein.  The piggyback
registration  rights  granted  to the  Holder  pursuant  to this  Section  shall
continue  until all of the Holder's  Warrant Shares have been sold in accordance
with an  effective  registration  statement  or upon the  Expiration  Date.  The
Company will pay all registration expenses in connection therewith.

                  5.  Payment of Taxes.  The  Company  will pay all  documentary
stamp taxes  attributable to the issuance of Warrant Shares upon the exercise of
this Warrant;  provided,  however, that the Company shall not be required to pay
any tax  which  may be  payable  in  respect  of any  transfer  involved  in the
registration of any  certificates for Warrant Shares or Warrants in a name other
than that of the Holder, and the Company shall not be required to issue or cause
to be issued or deliver or cause to be delivered  the  certificates  for Warrant
Shares  unless or until the person or persons  requesting  the issuance  thereof
shall have paid to the Company the amount of such tax or shall have  established
to the satisfaction of the Company that such tax has been paid. The Holder shall
be responsible for all other tax liability that may arise as a result of holding
or transferring this Warrant or receiving Warrant Shares upon exercise hereof.

                  6. Replacement of Warrant. If this Warrant is mutilated, lost,
stolen or  destroyed,  the Company shall issue or cause to be issued in exchange
and  substitution  for  and  upon  cancellation   hereof,  or  in  lieu  of  and
substitution for this Warrant, a New Warrant,  but only upon receipt of evidence
reasonably  satisfactory  to the Company of such loss,  theft or destruction and
indemnity, if requested,  satisfactory to it. Applicants for a New Warrant under
such circumstances shall also comply with such other reasonable  regulations and
procedures and pay such other reasonable charges as the Company may prescribe.

                  7. Reservation of Warrant Shares.  The Company  covenants that
it will at all times  reserve and keep  available  out of the  aggregate  of its
authorized but unissued  Common Stock,  solely for the purpose of enabling it to
issue  Warrant  Shares upon  exercise of this  Warrant as herein  provided,  the
number of  Warrant  Shares  which are then  issuable  and  deliverable  upon the
exercise of this entire Warrant, free from preemptive rights or any other actual
contingent purchase rights of persons other than the Holder (taking into account
the adjustments and  restrictions of Section 8). The Company  covenants that all
Warrant Shares that shall be so issuable and  deliverable  shall,  upon issuance
and the payment of the applicable  Exercise  Price in accordance  with the terms
hereof, be duly and validly authorized, issued and fully paid and nonassessable.

                  8.  Certain  Adjustments.  The  Exercise  Price and  number of
Warrant Shares  issuable upon exercise of this Warrant are subject to adjustment
from time to time as set forth in this Section 8. Upon each such  adjustment  of
the Exercise Price pursuant to this Section 8, the Holder shall thereafter prior
to the Expiration Date be entitled to purchase,  at the Exercise Price resulting
from such  adjustment,  the number of Warrant Shares obtained by multiplying the
Exercise Price in effect  immediately  prior to such adjustment by the number of
Warrant Shares issuable upon exercise of this Warrant  immediately prior to such
adjustment and dividing the product thereof by the Exercise Price resulting from
such adjustment.

     (a) If the  Company,  at any time while this  Warrant is  outstanding,  (i)
shall pay a stock  dividend  (except  scheduled  dividends  paid on  outstanding
preferred  stock as of the date hereof which  contain a stated  divided rate) or
otherwise make a distribution or distributions on shares of its Common Stock (as
defined  below) or on any other class of capital stock and not the Common Stock)
payable in shares of Common Stock, (ii) subdivide  outstanding  shares of Common
Stock into a larger  number of shares,  or (iii) combine  outstanding  shares of
Common  Stock  into a smaller  number of shares,  the  Exercise  Price  shall be
multiplied by a fraction of which the numerator shall be the number of shares of
Common Stock (excluding  treasury shares, if any) outstanding  before such event
and of which the  denominator  shall be the  number  of  shares of Common  Stock
(excluding treasury shares, if any) outstanding after such event. Any adjustment
made  pursuant to this Section  shall  become  effective  immediately  after the
record date for the  determination  of  stockholders  entitled  to receive  such
dividend  or  distribution  and shall  become  effective  immediately  after the
effective date in the case of a subdivision or  combination,  and shall apply to
successive subdivisions and combinations.

     (b) In case of any  reclassification of the Common Stock, any consolidation
or merger of the Company  with or into another  person,  the sale or transfer of
all or  substantially  all of the assets of the Company or any compulsory  share
exchange  pursuant to which the Common Stock is converted into other securities,
cash or property,  then the Holder shall have the right  thereafter  to exercise
this  Warrant  only into the shares of stock and other  securities  and property
receivable  upon or deemed to be held by holders of Common Stock  following such
reclassification,  consolidation,  merger, sale, transfer or share exchange, and
the  Holder  shall be  entitled  upon  such  event to  receive  such  amount  of
securities or property  equal to the amount of Warrant  Shares such Holder would
have been entitled to had such Holder exercised this Warrant  immediately  prior
to  such  reclassification,  consolidation,  merger,  sale,  transfer  or  share
exchange.  The terms of any such consolidation,  merger, sale, transfer or share
exchange  shall  include  such terms so as to continue to give to the Holder the
right to receive the  securities or property set forth in this Section 8(b) upon
any exercise following any such reclassification,  consolidation,  merger, sale,
transfer or share exchange.

     (c) If the Company,  at any time while this Warrant is  outstanding,  shall
distribute  to all holders of Common Stock (and not to holders of this  Warrant)
evidences of its  indebtedness  or assets or rights or warrants to subscribe for
or purchase any security  (excluding those referred to in Sections 8(a), (b) and
(d)),  then in each  such  case  the  Exercise  Price  shall  be  determined  by
multiplying  the Exercise Price in effect  immediately  prior to the record date
fixed for determination of stockholders entitled to receive such distribution by
a fraction of which the denominator shall be the Exercise Price determined as of
the  record  date  mentioned  above,  and of which the  numerator  shall be such
Exercise  Price on such  record  date  less the then fair  market  value at such
record  date of the  portion  of such  assets or  evidence  of  indebtedness  so
distributed applicable to one outstanding share of Common Stock as determined by
the Company's  independent  certified public accountants that regularly examines
the financial statements of the Company (an "Appraiser").

     (d) If, at any time while this Warrant is  outstanding,  the Company  shall
issue or cause to be issued  rights or warrants to acquire or otherwise  sell or
distribute  shares  of  Common  Stock  to all  holders  of  Common  Stock  for a
consideration  per share less than the  Exercise  Price  then in  effect,  then,
forthwith  upon such issue or sale,  the Exercise  Price shall be reduced to the
price  (calculated to the nearest cent)  determined by multiplying  the Exercise
Price in effect immediately prior thereto by a fraction,  the numerator of which
shall  be the sum of (i) the  number  of  shares  of  Common  Stock  outstanding
immediately  prior to such  issuance,  and (ii) the  number  of shares of Common
Stock which the aggregate  consideration  received (or to be received,  assuming
exercise  or  conversion  in full  of  such  rights,  warrants  and  convertible
securities)  for the  issuance of such  additional  shares of Common Stock would
purchase at the Exercise Price, and the denominator of which shall be the sum of
the number of shares of Common Stock outstanding  immediately after the issuance
of such additional shares.  Such adjustment shall be made successively  whenever
such an issuance is made.

     (e) For the purposes of this Section 8, the following clauses shall also be
applicable:

     (i) Record Date.  In case the Company shall take a record of the holders of
its Common Stock for the purpose of entitling  them (A) to receive a dividend or
other  distribution  payable in Common  Stock or in  securities  convertible  or
exchangeable  into shares of Common  Stock,  or (B) to subscribe for or purchase
Common Stock or securities  convertible  or  exchangeable  into shares of Common
Stock, then such record date shall be deemed to be the date of the issue or sale
of the  shares of  Common  Stock  deemed  to have  been  issued or sold upon the
declaration  of such  dividend or the making of such other  distribution  or the
date of the granting of such right of subscription or purchase,  as the case may
be.

     (ii) Treasury Shares.  The number of shares of Common Stock  outstanding at
any given time shall not include  shares  owned or held by or for the account of
the Company, and the disposition of any such shares shall be considered an issue
or sale of Common Stock.

     (f) All calculations under this Section 8 shall be made to the nearest cent
or the nearest 1/100th of a share, as the case may be.

     (g) Whenever the Exercise Price is adjusted pursuant to Section 8(c) above,
the Holder, after receipt of the determination by the Appraiser,  shall have the
right to select an additional appraiser (which shall be a nationally  recognized
accounting  firm), in which case the adjustment shall be equal to the average of
the  adjustments  recommended by each of the Appraiser and such  appraiser.  The
Holder  shall  promptly  mail or cause to be  mailed  to the  Company,  a notice
setting forth the Exercise Price after such adjustment and setting forth a brief
statement of the facts requiring such  adjustment.  Such adjustment shall become
effective immediately after the record date mentioned above.

     (h) If:

          (i) the Company shall  declare a dividend (or any other  distribution)
     on its Common Stock; or

          (ii) the Company shall declare a special nonrecurring cash dividend on
     or a redemption of its Common Stock; or

          (iii) the Company  shall  authorize the granting to all holders of the
     Common Stock rights or warrants to subscribe  for or purchase any shares of
     capital stock of any class or of any rights; or

          (iv) the approval of any stockholders of the Company shall be required
     in connection with any reclassification of the Common Stock of the Company,
     any  consolidation  or merger to which the Company is a party,  any sale or
     transfer of all or substantially  all of the assets of the Company,  or any
     compulsory  share exchange whereby the Common Stock is converted into other
     securities, cash or property; or

          (v) the Company shall authorize the voluntary dissolution, liquidation
     or winding up of the affairs of the Company,  then the Company  shall cause
     to be mailed to each Holder at their last  addresses  as they shall  appear
     upon  the  Warrant  Register,  at  least  30  calendar  days  prior  to the
     applicable record or effective date hereinafter specified, a notice stating
     (x) the date on  which a record  is to be  taken  for the  purpose  of such
     dividend,  distribution,  redemption, rights or warrants, or if a record is
     not to be taken, the date as of which the holders of Common Stock of record
     to be  entitled  to such  dividend,  distributions,  redemption,  rights or
     warrants   are  to  be   determined   or  (y)  the  date  on   which   such
     reclassification,  consolidation,  merger, sale, transfer or share exchange
     is expected to become  effective  or close,  and the date as of which it is
     expected  that  holders  of Common  Stock of record  shall be  entitled  to
     exchange  their  shares  of  Common  Stock  for  securities,  cash or other
     property  deliverable upon such  reclassification,  consolidation,  merger,
     sale,  transfer,  share exchange,  dissolution,  liquidation or winding up;
     provided,  however,  that the  failure  to mail such  notice or any  defect
     therein or in the  mailing  thereof  shall not affect the  validity  of the
     corporate action required to be specified in such notice.

                  9. Payment of Exercise Price.  The Holder may pay the Exercise
Price in one of the following manners:

          (a) Cash  Exercise.  The Holder shall  deliver  immediately  available
     funds; or 

          (b) Cashless Exercise.  The Holder shall surrender this Warrant to the
     Company  together  with a notice of cashless  exercise,  in which event the
     Company shall issue to the Holder the number of Warrant  Shares  determined
     as follows:

                             X =  Y (A-B)/A
          where:
                             X =  the  number  of  Warrant  Shares  to be issued
                                  to the Holder.
                             Y =  the  number  of  Warrant  Shares  with respect
                                  to which this Warrant is being exercised.

                             A =  the average of the  closing  sale prices
                                  of the Common Stock for the five (5) trading
                                  days   immediately   prior   to   (but   not
                                  including) the Date of Exercise.

                             B =  the Exercise Price.

For purposes of Rule 144  promulgated  under the Securities Act, it is intended,
understood  and  acknowledged  that the  Warrant  Shares  issued  in a  cashless
exercise  transaction  shall be deemed to have been acquired by the Holder,  and
the  holding  period  for the  Warrant  Shares  shall  be  deemed  to have  been
commenced, on the issue date.

                  10.  Fractional  Shares.  The Company shall not be required to
issue or cause to be issued  fractional  Warrant  Shares on the exercise of this
Warrant.  The number of full  Warrant  Shares  which shall be issuable  upon the
exercise of this Warrant shall be computed on the basis of the aggregate  number
of Warrant Shares  purchasable on exercise of this Warrant so presented.  If any
fraction of a Warrant Share would, except for the provisions of this Section 10,
be issuable on the exercise of this Warrant,  the Company shall pay an amount in
cash equal to the Exercise Price multiplied by such fraction.

                  11. Notices.  Any and all notices or other  communications  or
deliveries hereunder shall be in writing and shall be deemed given and effective
on the earliest of (i) the date of transmission, if such notice or communication
is delivered via facsimile at the facsimile  telephone  number specified in this
Section  prior to 4:30 p.m.  (New York City  time) on a business  day,  (ii) the
business day after the date of transmission,  if such notice or communication is
delivered  via  facsimile at the facsimile  telephone  number  specified in this
Section  later than 4:30 p.m.  (New York City time) on any date and earlier than
11:59 p.m.  (New York City time) on such date,  (iii) the business day following
the date of mailing, if sent by nationally recognized overnight courier service,
or (iv) upon  actual  receipt by the party to whom such notice is required to be
given. The addresses for such communications shall be: (i) if to the Company, to
4360 Park Terrace Drive, Westlake Village, CA 91361, Attention:  Chief Financial
Officer,  or to facsimile no. (818) 735-7633,  or (ii) if to the Holder,  to the
Holder at the address or facsimile  number  appearing on the Warrant Register or
such other address or facsimile  number as the Holder may provide to the Company
in accordance with this Section 11.

                  12.      Warrant Agent.

     (a) The Company  shall  serve as warrant  agent  under this  Warrant.  Upon
thirty (30) days'  notice to the  Holder,  the Company may appoint a new warrant
agent.

     (b) Any corporation  into which the Company or any new warrant agent may be
merged or any corporation  resulting from any consolidation to which the Company
or any new  warrant  agent  shall be a party  or any  corporation  to which  the
Company or any new warrant agent  transfers  substantially  all of its corporate
trust or shareholders services business shall be a successor warrant agent under
this Warrant  without any further act. Any such  successor  warrant  agent shall
promptly  cause notice of its succession as warrant agent to be mailed (by first
class mail, postage prepaid) to the Holder at the Holder's last address as shown
on the Warrant Register.

                  13.      Miscellaneous.

     (a) This  Warrant  shall be  binding  on and  inure to the  benefit  of the
parties  hereto and their  respective  successors  and permitted  assigns.  This
Warrant may be amended only in writing signed by the Company and the Holder.

     (b)  Subject to Section  13(a),  above,  nothing in this  Warrant  shall be
construed  to give to any person or  corporation  other than the Company and the
Holder any legal or equitable  right,  remedy or cause under this Warrant.  This
Warrant  shall  inure to the sole and  exclusive  benefit of the Company and the
Holder.

     (c) This  Warrant  shall be  governed  by and  construed  and  enforced  in
accordance with the internal laws of the State of New York without regard to the
principles of conflicts of law thereof.

     (d) The headings herein are for convenience  only, do not constitute a part
of this Warrant and shall not be deemed to limit or affect any of the provisions
hereof.


<PAGE>

     (e) In case  any one or more of the  provisions  of this  Warrant  shall be
invalid or unenforceable in any respect,  the validity and enforceability of the
remaining  terms and provisions of this Warrant shall not in any way be affected
or impaired  thereby and the parties  will attempt in good faith to agree upon a
valid  and  enforceable  provision  which  shall  be a  commercially  reasonable
substitute  therefor,  and upon so agreeing,  shall  incorporate such substitute
provision in this Warrant.


                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK,
                             SIGNATURE PAGE FOLLOWS]



<PAGE>


IN WITNESS  WHEREOF,  the Company has caused this Warrant to be duly executed by
its authorized officer as of the date first indicated above.


                          COYOTE NETWORK SYSTEMS, INC.

                          By:      /s/ James J. Fiedler          
                                   ------------------------------------
                          Name:    James J. Fiedler    

                          Title:   Chairman and Chief Executive Officer


<PAGE>

                          FORM OF ELECTION TO PURCHASE

(To be executed by the Holder to exercise the right to purchase shares of Common
Stock under the foregoing Warrant)

To Coyote Network Systems, Inc.:

         In accordance  with the Warrant  enclosed with this Form of Election to
Purchase,  the undersigned hereby  irrevocably elects to purchase  _____________
shares of Common Stock ("Common  Stock"),  $1.00 par value per share,  of Coyote
Network  Systems,  Inc.  and , if such  Holder  is not  utilizing  the  cashless
exercise  provisions set forth in this Warrant,  encloses herewith  $________ in
cash,  certified  or official  bank check or checks,  which sum  represents  the
aggregate Exercise Price (as defined in the Warrant) for the number of shares of
Common Stock to which this Form of Election to Purchase  relates,  together with
any applicable taxes payable by the undersigned pursuant to the Warrant.

         The  undersigned  requests that  certificates  for the shares of Common
Stock issuable upon this exercise be issued in the name of

                        PLEASE INSERT SOCIAL SECURITY OR
                            TAX IDENTIFICATION NUMBER




                         (Please print name and address)




         If the number of shares of Common  Stock  issuable  upon this  exercise
shall not be all of the shares of Common Stock which the undersigned is entitled
to purchase in accordance with the enclosed  Warrant,  the undersigned  requests
that a New Warrant (as defined in the Warrant)  evidencing the right to purchase
the shares of Common  Stock not  issuable  pursuant  to the  exercise  evidenced
hereby be issued in the name of and delivered to:


                         (Please print name and address)





Dated: ____________________         Name of Holder:  __________________________


                                    (Print)  

                                    (By:)    
                                    (Name:)
                                    (Title:)

(Signature must conform in all respects to name of holder as specified on the 
 face of the Warrant)


<PAGE>


                               FORM OF ASSIGNMENT

           [To be completed and signed only upon transfer of Warrant]

         FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto  ________________________________  the  right  represented  by  the  within
Warrant  to  purchase  ____________  shares  of Common  Stock of Coyote  Network
Systems, Inc. to which the within Warrant relates and appoints  ________________
attorney to transfer said right on the books of Coyote Network Systems, Inc.
with full power of substitution in the premises.

Dated:

---------------, ----


                                         ---------------------------------------
                                         (Signature  must  conform in all 
                                          respects to name of holder as 
                                          specified on the face of the Warrant)


                                         ---------------------------------------
                                         Address of Transferee

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

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In the presence of:


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