================================================================================

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

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

                                    FORM 10-Q

|X|  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE 
     SECURITIES EXCHANGE ACT OF 1934

     For the quarterly period ended June 30, 1998

                                       OR

|_|  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE 
     SECURITIES EXCHANGE ACT OF 1934

     For the transition period from ___________ to ___________


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

                          Commission file number 1-5486

                          COYOTE NETWORK SYSTEMS, INC.
             (Exact name of registrant as specified in its charter)

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


               4360 Park Terrace Drive, Westlake Village, CA 91361
               ---------------------------------------------------
               (Address of principal executive offices) (Zip Code)

                                 (818) 735-7600
              ----------------------------------------------------
              (Registrant's telephone number, including area code)

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

At August 4, 1998,  the  Registrant  had issued and  outstanding an aggregate of
9,583,628 shares of its common stock.

================================================================================
<PAGE>
                          COYOTE NETWORK SYSTEMS, INC.
                                AND SUBSIDIARIES


                                                                           Page
PART I.   FINANCIAL INFORMATION

          Item 1.    Financial Statements
                     Balance Sheets........................................   2
                     Statement of Operations...............................   3
                     Statement of Cash Flows...............................   4
                     Notes to Financial Statements.........................   5
          Item 2.    Management's Discussion and Analysis of Financial 
                       Condition and Results of Operations.................   8


PART II.  OTHER INFORMATION

          Item 1.    Legal Proceedings.....................................  10
          Item 2.    Changes in Securities and Use of Proceeds.............  10
          Item 5.    Other Information.....................................  10
          Item 6.    Exhibits and Reports on Form 8-K......................  10
          Signature  ......................................................  12




                                       1
<PAGE>
                         PART I - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

                  COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES
                      Condensed Consolidated Balance Sheets
                                 (In Thousands)
<TABLE>
<CAPTION>
                                                                       June 30,   March 31,
                                                                         1998       1998
                                                                     -----------  ---------
                                    Assets                           (Unaudited)
Current assets:
<S>                                                                    <C>         <C>     
     Cash and cash equivalents                                         $  5,014    $  3,746
     Marketable securities                                                 ---           16
     Receivables                                                          2,817         715
     Inventories                                                          1,726       2,122
     Notes receivable - current                                           2,416       4,596
     Other current assets                                                 1,906       1,409
                                                                       --------    --------
         Total current assets                                            13,879      12,604

Property and equipment, net                                               2,944       2,391
Intangible assets, net                                                    3,615       3,542
Net assets of discontinued operations                                     1,005         909
Notes receivable - non-current                                              830       1,170
Other assets                                                              1,354       1,359
                                                                       --------    --------
                                                                       $ 23,627    $ 21,975
                                                                       ========    ========
                         Liabilities and Shareholders' Equity
Current liabilities:
     Accounts payable                                                  $  3,899    $  1,920
     Deferred revenue and customer deposits                               2,210       1,900
     Accrued loss reserve                                                 1,960       2,200
     Accrued professional fees and litigation costs                         343         805
     Other accrued liabilities                                            1,730       1,130
     Notes payable                                                          590        ---
     Current portion of long-term debt                                      141         141
                                                                       --------    --------
         Total current liabilities                                     $ 10,873    $  8,096

Long-term debt                                                            1,605       5,349
Other liabilities                                                           461         470
Commitments and contingencies (Note 4)

Shareholders' equity:
     Preferred stock - $.01 par value.
     Authorized 5,000,000 shares; none issued                             ---         ---
     Common stock - $1 par value.  Authorized 30,000,000 shares,
         issued 10,292,320 and 9,151,920 shares                          10,292       9,152
     Additional paid-in capital                                          04,927     102,360
     Accumulated deficit                                                 98,774)    (97,695)
     Treasury stock at cost                                              (5,757)     (5,757)
                                                                       ---------   ---------
         Total shareholders' equity                                      10,688       8,060
                                                                       --------    --------
                                                                       $ 23,627    $ 21,975
                                                                       ========    ========
</TABLE>
            See notes to condensed consolidated financial statements.

                                       2
<PAGE>
                  COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES
                 Condensed Consolidated Statements of Operations
                                   (Unaudited)
                    (In Thousands, Except Per Share Amounts)

<TABLE>
<CAPTION>
                                                        3 MONTHS ENDED
                                                     ---------------------
                                                     June 30,    June 30,
                                                       1998         1997
                                                     --------    ---------
<S>                                                  <C>          <C>    
Net sales                                            $ 7,193      $   944
Cost of goods sold                                     3,220          405
                                                     -------      -------
    Gross profit                                       3,973          539
                                                     -------      -------

Selling and administrative expenses                    2,940        3,536
Engineering, research and development                  1,937          694
                                                     -------      -------

    Total operating expenses                           4,877        4,230
                                                     -------      -------

Operating loss                                          (904)      (3,691)

Interest expense                                         (15)       ---
Non-operating expense                                   (159)       ---
                                                     -------      -------
Loss from continuing operations                       (1,078)      (3,691)

Loss from discontinued operations                      ---          ---
                                                     -------      -------

    Net loss                                         $(1,078)     $(3,691)
                                                     ========     ========

Loss per common share (basic & diluted):
    Continuing operations                            $ (.12)      $ (.70)
    Discontinued operations                             ---          ---
                                                     -------      -------
    Net loss per common share (basic & diluted)      $ (.12)      $ (.70)
                                                     =======      =======

Weighted average number of common 
  shares outstanding (basic & diluted)                 9,016        5,298
                                                     =======      =======
</TABLE>


            See notes to condensed consolidated financial statements.

                                       3
<PAGE>
                  COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES
                 Condensed Consolidated Statements of Cash Flows
                                   (Unaudited)
                                 (In Thousands)
<TABLE>
<CAPTION>
                                                               3 MONTHS ENDED
                                                           ----------------------
                                                            June 30,    June 30, 
                                                              1998        1997
                                                            --------    --------
Operating activities:
<S>                                                         <C>         <C>     
     Net loss                                               $(1,078)    $(3,691)
Adjustments to reconcile loss to net cash
  provided (used) by operating activities:
     Depreciation and amortization                              276         184
     Loss (gain) on sales of  marketable securities            ---          280
     Net change in discontinued operations                     ---          879
     Changes in current assets and liabilities                1,703       2,033
                                                            -------     -------

Net cash provided (used) by operating activities                901        (315)
                                                            -------     -------

Investing activities:
     Purchases of property and equipment                       (722)      ---
     Proceeds from sales of marketable securities                30       ---
     Change in notes receivable                                 340       ---
     Net change in discontinued operations                      (96)       (315)
     Other items                                                  5          17
                                                            -------     -------

Net cash provided (used) by investing activities               (443)       (298)
                                                            --------    -------

Financing activities:
     Repayments of long-term debt                               (71)        (71)
     Common stock issued                                        300       ---
     Change in note payable                                    590          250
     Net change in discontinued operations                     ---          475
     Other items                                                 (9)      ---
                                                            --------    -------

Net cash provided by financing activities                       810         654
                                                            -------     -------

Increase (decrease) in cash and cash equivalents              1,268          41

Cash and cash equivalents:
     At beginning of the period                               3,746          81
                                                            -------     -------

     At end of the period                                   $ 5,014     $   122
                                                            =======     =======
</TABLE>

            See notes to condensed consolidated financial statements.

                                       4
<PAGE>
                  COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

NOTE 1   BASIS OF PRESENTATION

         The accompanying  unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted  accounting  principles
for interim  financial  information  and with the  instructions to Form 10-Q and
Article  10 of  Regulation  S-X.  Accordingly,  they do not  include  all of the
information and footnotes required by generally accepted  accounting  principles
for complete financial statements. In the opinion of management, all adjustments
(consisting  of  normal  recurring  accruals)  considered  necessary  for a fair
presentation  have been included.  Operating  results for the three months ended
June  30,  1998,  are not  necessarily  indicative  of the  results  that may be
expected  for the fiscal year ending March 31,  1999.  For further  information,
refer to the consolidated financial statements and footnotes thereto included in
the  Company's  annual  report on Form 10-K for the fiscal  year ended March 31,
1998.

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


NOTE 2   DISCONTINUED OPERATIONS

         On November 20, 1996, the Board of Directors of Coyote Network Systems,
Inc. (the "Company")  approved a  restructuring  plan (the  "Restructuring")  to
separate its telecom switching equipment business (the "CTL Business") performed
through its  operating  subsidiary  Coyote  Technologies,  LLC ("CTL")  from the
following businesses:

                       Segment                          Company
                       -------                          -------         
    Telecommunications equipment distribution          C&L
    Wire installation and service                      Valley
    Wholesale distribution of meat and seafood         Entree/APC

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

         As a  result  of the  sale of  APC's  assets,  the  Company's  Board of
Directors  terminated  the  original  Restructuring  plan for a spin-off  of the
non-CTL businesses. The Company adopted a revised Restructuring plan to sell C&L
and  Valley.  The  revised  Restructuring  plan  was  approved  by the  Board of
Directors in February 1997. On November 20, 1997, the Company completed the sale
of its telecommunications  equipment distributor subsidiary, C&L Communications,
Inc. ("C&L"), to the management of C&L.

         In March 1998,  the Company  reached  agreement  on the sale of its 80%
owned wire  installation  and service  subsidiary,  Valley  Communications  Inc.
("Valley") to Technology Services  Corporation  ("TSC").  Under the terms of the
agreement, the Company received $2,300,000, which was paid in cash in June 1998,
and $811,000 paid by the  assumption by TSC of the  Company's  entire  liability
under certain  promissory notes to and among the Company and other  shareholders
of Valley dated August 1995.

                                       5
<PAGE>
         As of August 4, 1998, the Company had collected all cash related to the
sale of  discontinued  operations  except $610,000 due under a note and the only
asset of discontinued  operations was real estate with a net asset book value of
$983,000. The real estate is listed for sale.


NOTE 3   ACQUISITIONS

         On April 16,  1998,  the Company  established  Coyote  Gateway,  LLC, a
Colorado  limited  liability  company  ("CGL").  The Company owns 80% of CGL and
American Gateway Telecommunications, Inc., a Texas corporation ("AGT") owns 20%.
The Company  founded CGL with a capital  contribution of $240,000 and has agreed
to make certain additional working capital contributions through April 15, 1999.
Total working capital contributed to CGL through June 30, 1998, was $795,000. In
consideration  of its 20% ownership  interest,  AGT  contributed  assets to CGL,
consisting  of  customer  contracts  for the  transmission  of up to 31  million
minutes of  international  traffic  monthly to 11 countries when fully deployed,
and vendor and carrier  contracts  to service  those  minutes.  CGL has employed
AGT's operating and management  personnel,  and they are  participating in stock
option and bonus plans tied to the success of the venture.

         In April  1998,  the  Company  announced  that it  intends  to  acquire
privately held INET Interactive  Network Systems,  Inc. ("INET"),  a provider of
international  long  distance  services.  The  acquisition  is  expected  to  be
completed in the second quarter of fiscal 1999.


NOTE 4   COMMITMENTS AND CONTINGENCIES

         Coyote  Network  Systems,  Inc.  (The  Diana  Corporation)   Securities
Litigation (Civ. No.  97-3186).  This is a consolidation of what were originally
nine  separate  actions  brought in the  United  States  District  Court for the
Central  District of California on behalf of purchasers of the Company's  common
stock during a class period that  extended  from December 6, 1994 through May 2,
1997. On July 23, 1997, the Court entered a stipulation and order  consolidating
the nine actions for all  purposes.  On September  9, 1997,  plaintiffs  filed a
consolidated amended complaint (the "Consolidated  Complaint")  asserting claims
against the Company,  certain of its present and former  directors and officers,
and others under  Section  10(b) of the  Securities  Exchange  Act of 1934.  The
Consolidated Complaint alleges essentially that the Company and other defendants
were  engaged in a scheme to inflate  the price of the  Company's  common  stock
during the class period through false and misleading statements and manipulative
transactions.   The  Consolidated   Complaint  seeks  unspecified  damages,  but
identifies  the  significant  movement in the  Company's  stock price during the
putative  class  period (a swing of more than $115 per  share) to imply that the
damages that will be claimed will exceed the Company's assets.

         On December 15, 1997,  the Court denied a motion by the Company and the
other defendants to dismiss the consolidated amended complaint. Since that time,
the parties have begun the early stages of  discovery  and have had  preliminary
discussions  concerning  settlement.  On April 20, 1998, the Plaintiffs  filed a
motion to have the action certified as a class action.  That motion is currently
scheduled to be heard by the Court on September 21, 1998. The Company intends to
defend the action  vigorously,  but is continuing  discussions  with  Plaintiffs
concerning potential settlement.

         On July 9, 1998, the respective  counsel for the Plaintiffs and for the
Company executed a letter agreeing in principle,  subject to various  conditions
and contingencies, to settle the claims against the Company and its subsidiaries
in The Diana Securities Litigation. If consummated,  the settlement will require
the  Company to issue  warrants  to acquire  2,500,000  shares of the  Company's
common stock.  The warrants will be exercisable for three years from the date of
issuance and will have an exercise  price of $9 per share in the first year, $10
per share in the  second  year and $11 per share in the third  year,  subject to
adjustment in certain  events.  If the Company lists its common stock on Nasdaq,
it will also use its best  efforts to arrange  for a listing of the  warrants on
Nasdaq.  Among the conditions to the  settlement  are that the  Plaintiffs  also
reach a settlement  with the  individual  defendants in the litigation and their


                                       6
<PAGE>
D&O insurance  carriers and that,  ultimately,  the  settlement  receives  court
approval.  The Company  regards this agreement in principle as a step toward the
resolution of this litigation,  but cautions that, in view of the conditions and
contingencies  associated with this preliminary agreement, the Company is unable
to predict  with  certainty  the nature or timing of an actual  settlement.  The
Company  recorded  the fair market value of the  warrants of  $8,000,000  in the
financial statements for fiscal 1998.

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


NOTE 5   SHAREHOLDERS' EQUITY

Common Stock and Convertible Notes

         In December 1997, the Company received  $4,635,000 upon the issuance of
$5,000,000 in 8% convertible  notes. As of June 9, 1998, the full value of notes
and accrued  interest to the date of conversion  had been converted into Company
common  stock,  which  was  issued  pursuant  to  the  exemption  provisions  of
Regulation S of the  Securities  Act of 1933.  Common stock  totaling  1,404,825
shares was issued in connection  with  conversions  of $5,133,000 of convertible
notes and accrued interest.

         In May 1998, the Company received  $300,000 upon the issuance of 71,650
shares of the Company  common stock which was issued  pursuant to the  exemption
provisions of Regulation S of the Securities Act of 1933.

Common Stock Options

         Since March 31, 1998,  the Company's  Board of Directors has granted to
certain executives,  employees and non-employee  directors options to purchase a
total of 1,004,000 shares of the company common stock.


NOTE 6   RELATED PARTY TRANSACTIONS

         In January  1998,  the Board of  Directors  of the Company  approved an
interest-free  loan to Daniel W.  Latham for a maximum  amount of $500,000 to be
used solely for the purpose of  providing  partial  down  payment  monies on his
purchase  of a  residence  in  California.  The  funding is to be secured by the
residential property and is for a five-year term unless specifically extended by
the Board of  Directors.  Earlier  repayment of the loan will be demanded in the
event of either (1) sale or refinancing of the property;  (2) termination of Mr.
Latham's  employment either  voluntarily or for cause; or (3) sale by Mr. Latham
of all, or substantially all, of his stock in Coyote Network Systems, Inc. As of
March 31, 1998, $150,000 was funded under this agreement and a further amount of
$271,000  was funded in April 1998,  for a total  funding of $421,000 as of June
30, 1998.

         In July 1998, the Company authorized an interest-free loan to Edward A.
Beeman in the amount of $75,000 to be used solely for the  purpose of  providing
partial down payment  monies on his purchase of a residence in  California.  The
funding is for a five year term unless  specifically  extended  by the  Company.
Earlier  repayment of the loan will be demanded in the event of  termination  of
Mr. Beeman's employment either voluntarily or for cause. This loan was funded in
July 1998.

NOTE 7   LINE OF CREDIT

         In May 1998, CGL established a line of credit of $3,500,000  secured by
CGL trade  receivables and by 708,692  treasury  shares of the Company's  common
stock. As of June 30, 1998, $590,000 had been drawn against this line of credit.

                                       7
<PAGE>
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANICAL CONDITION AND 
         RESULTS OF OPERATIONS


Results of Operations

         For the first quarter of fiscal 1999 ended June 30, 1998, the Company's
revenues were $7,193,000, primarily from the sale of DSS Switches and associated
OEM equipment,  compared to revenues of $944,000 in the corresponding quarter of
fiscal 1998. The increase is  attributable  to shipments  under a major contract
which accounted for 90% of the revenue for the quarter.

          The increased  revenue  generated an increase of $3,434,000 in gross 
profit compared to the corresponding quarter of the prior fiscal year.

         Selling and general administration expenses for the quarter were almost
$600,000  lower  than  the  corresponding  quarter  of the  prior  fiscal  year,
primarily due to a reduction in professional and legal fees.

         Engineering,  research  and  development  expenses  for the  quarter of
$1,937,000 were $1,243,000 above the corresponding  period expense for the prior
year as the Company continued to enhance product  offerings.  Specifically,  the
Company is accelerating development of its client/server architecture as well as
the  Company's  roll out of voice over  Internet  Protocol (IP) and IP/ATM as an
enhancement to the current product line.

         Non-operating  expense for the quarter was  $159,000,  primarily due to
investment banking consulting expenses.

         The net loss for the quarter was  $1,078,000  compared to a net loss of
$3,691,000 in the corresponding quarter of the prior year. This reduction in the
net loss was  primarily  due to the  increase in gross  profit  generated by the
higher level of revenues.


Liquidity and Capital Resources

         The Company  generated  an increase  in cash of  $1,268,000  during the
quarter  ended  June 30,  1998,  and  closed  the  quarter  with a cash and cash
equivalents balance of $5,014,000.

         Prompt collection of trade receivables from customers and collection of
cash due on short-term notes contributed to the cash increase.

         As previously disclosed in the Company's Annual Report on Form 10-K for
the fiscal year ended March 31, 1998, the Company's  operations  will need to be
funded during fiscal 1999 either with funds generated through operations or with
additional debt or equity financing.  If the Company's operations do not provide
funds sufficient to fund its operations and the Company seeks outside financing,
there can be no assurance that the Company will be able to obtain such financing
when  needed,  on  acceptable  terms or at all. In addition,  any future  equity
financing or convertible  debt financing would cause the Company's  shareholders
to incur  dilution  in  common  stock  holdings  as a  percentage  of the  total
outstanding shares.

Forward Looking Statements

         All  statements  other than  historical  statements  contained  in this
Report on Form 10-Q constitute  "forward looking  statements" within the meaning
of the Private  Securities  Litigation Reform Act of 1995.  Without  limitation,
these forward looking statements include statements regarding new products to be


                                       8
<PAGE>
introduced by the Company in the future, statements about the Company's business
strategy  and plans,  statements  about the  adequacy of the  Company's  working
capital and other financial resources, and in general statements herein that are
not of a historical nature.  Any Form 10-K, Annual Report to Shareholders,  Form
10-Q,  Form 8-K or press  release of the  Company may  include  forward  looking
statements.  In addition,  other  written or oral  statements  which  constitute
forward  looking  statements  have been made or may in the future be made by the
Company, including statements regarding future operating performance, short- and
long-term revenue and earnings estimates, backlog, the status of litigation, the
value of new  contract  signings,  and industry  growth rates and the  Company's
performance relative thereto. These forward-looking  statements rely on a number
of  assumptions  concerning  future  events,  and are  subject  to a  number  of
uncertainties  and other  factors,  many of which are  outside of the  Company's
control,  that  could  cause  actual  results  to  differ  materially  from such
statements.  These include, but are not limited to: risks associated with recent
operating  losses,  no assurance of  profitability,  the need to increase sales,
liquidity  deficiency  and in general  the other risk  factors  set forth in the
Company's  Annual  Report on Form 10-K for the fiscal year ended March 31, 1998.
The  Company  disclaims  any  intention  or  obligation  to update or revise any
forward looking statements whether as a result of new information, future events
or otherwise.
                                                                                
                                       9                                        
<PAGE>                              
                           PART II. OTHER INFORMATION
ITEM 1.  LEGAL PROCEEDINGS

         Please see Note 4 to the Condensed  Consolidated  Financial  Statements
herein  and Note 6 to the  Consolidated  Financial  Statements  included  in the
Company's  Annual  Report on Form 10-K for the fiscal year ended March 31, 1998,
for information on various legal proceedings. There are no material developments
to report at this time.


ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS

c)        Issuances of equity  securities not registered under Securities Act of
          1933 are described in Note 5 of the Condensed  Consolidated  Financial
          Statements.


ITEM 5.  OTHER INFORMATION

         Mr.  Sydney B. Lilly  would have been the only  director  standing  for
re-election  in 1998 since the terms of the other  directors  expire in 1999 and
2000.  Mr. Lilly has advised the Company that he wishes to retire from the Board
of Directors.  Therefore, the Company has determined that, as there are no items
to propose for consideration by shareholders,  a general meeting of shareholders
will not be held in respect to the fiscal year ended March 31, 1998. The Company
does intend to call a general meeting in respect of the fiscal year ending March
31, 1999.


ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

a)        Exhibits:

          3.01      Restated   Certificate  of   Incorporation  of  the  Company
                    incorporated  herein  by  reference  to  Exhibit  3.1 of the
                    Company's Form 10-K for the year ended April 3, 1993

          3.02      By-Laws of the Company  incorporated  herein by reference to
                    Exhibit  3.2 of the  Company's  Form 10-K for the year ended
                    March 31, 1997.

          4.01      Restated  Certificate of  Incorporation  of the Company (See
                    Note 3.01 above).

          4.02      By-Laws of the Company (See Note 3.02 above).

          10.01     Employment Agreement effectively dated April 1, 1998, by and
                    between Coyote Network Systems, Inc. and James J. Fiedler.

          10.02     Employment Agreement effectively dated April 1, 1998, by and
                    between Coyote Network Systems, Inc. and Daniel W. Latham.

          27        Financial Data Schedule


                                       10
<PAGE>

b)        A Form 8-K was filed by the Company on June 19, 1998, which covered:

          Item      2. Acquisition or Disposition of Assets.

                    On June 4, 1998,  the Company  completed the sale of its 80%
                    interest in Valley Communications,  Inc. pursuant to a stock
                    purchase agreement dated March 31, 1998.

          Item      5. Other Events.

                    1.     Formation of Coyote  Gateway,  LLC ("CGL").  On April
                           16, 1998,  the Company  established  CGL. The Company
                           owns 80% and American Gateway Telecommunication, Inc.
                           owns 20% of CGL.
                    2.     On June 1,  1998,  the  Company  appointed  Edward A.
                           Beeman  as  Executive   Vice   President   and  Chief
                           Financial Officer.



                                       11
<PAGE>

                                   SIGNATURES


         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
the  Registrant  has duly  caused  this report to be signed on its behalf by the
undersigned thereunto duly authorized.


                              COYOTE NETWORK SYSTEMS, INC.



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




                              By:   /s/ Edward A. Beeman
                                    -------------------------------------------
                                    Edward A. Beeman
                                    Executive Vice President,
                                    Chief Financial Officer and Secretary
                                    (Principal Financial and Accounting Officer)




DATE:  August 14, 1998

                                       12
<PAGE>