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

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

                                    FORM 10-Q

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

          For the quarterly period ended December 31, 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 February 15, 1999, the  Registrant had issued and  outstanding an aggregate 
of 10,537,010 shares of its common stock.

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<PAGE>
                          COYOTE NETWORK SYSTEMS, INC.
                                AND SUBSIDIARIES


                                                                           Page
PART I.   FINANCIAL INFORMATION

          Item 1.    Financial Statements
                     Balance Sheets........................................   2
                     Statement of Operations...............................   3
                     Statement of Cash Flows...............................   4
                     Notes to Financial Statemnts..........................   5
          Item 2.    Management's Discussion and Analysis of Financial 
                         Condition and Results of Operations...............  11


PART II.  OTHER INFORMATION

          Item 1.    Legal Proceedings.....................................  14
          Item 6.    Exhibits and Reports on Form 8-K......................  14
          Signatures ......................................................  15





                                       1
<PAGE>
                         PART I - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

                  COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES
                      Condensed Consolidated Balance Sheets
                             (Dollars In Thousands)

<TABLE>
<CAPTION>
                                                                      December 31,       March 31,
                                                                           1998              1998
                                                                      ------------       ----------
                                     Assets                            (Unaudited)
<S>                                                                   <C>                <C>    
Current assets:
     Cash and cash equivalents                                        $    2,140         $    3,746
     Marketable securities                                                  ---                  16
     Receivables                                                           4,079                715
     Inventories                                                           3,300              2,122
     Notes receivable - current                                            5,597              4,596
     Other current assets                                                  7,723              1,409
                                                                      ----------         ----------
         Total current assets                                             22,839             12,604

Property and equipment, net                                                5,822              2,391
Capitalized  software development                                          1,048               ---
Intangible assets, net                                                     7,480              3,542
Net assets of discontinued operations                                        217                909
Notes receivable - non-current                                             2,291              1,170
Other assets                                                               3,069              1,359
                                                                      ----------         ----------
                                                                      $   42,766         $   21,975
                                                                      ==========         ==========
                      Liabilities and Shareholders' Equity
Current liabilities:
     Accounts payable                                                 $   10,186         $    1,920
     Deferred revenue and customer deposits                                2,546              1,900
     Accrued loss reserve                                                  3,054              2,200
     Accrued professional fees and litigation costs                          176                805
     Other accrued liabilities                                             3,156              1,130
     Notes payable                                                         7,442               ---
     Current portion of long-term debt                                       141                141
                                                                      ----------         ----------
         Total current liabilities                                        26,701              8,096

Long-term debt                                                             1,534              5,349
Other liabilities                                                            447                470
Commitments and contingencies (Note 4)                                      ---                ---

Shareholders' equity:
     Preferred stock - $.01 par value.
     Authorized 5,000,000 shares; 700 issued                                ---                ---
     Common stock - $1 par value.  Authorized 30,000,000 shares,
         issued 11,145,090 and 9,151,920 shares                           11,145              9,152
     Additional paid-in capital                                          116,401            102,360
     Accumulated deficit                                                (107,705)           (97,695)
     Treasury stock at cost                                               (5,757)            (5,757)
                                                                      -----------        -----------

         Total shareholders' equity                                       14,084              8,060
                                                                      ----------         ----------
                                                                      $   42,766         $   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                9 Months Ended
                                                                       -------------------------     --------------------------
                                                                        Dec. 31,       Dec. 31,       Dec. 31,       Dec. 31,
                                                                          1998           1997          1998            1997
<S>                                                                    <C>             <C>          <C>              <C>      
Net sales                                                              $   12,931      $   1,659    $   35,288       $   2,709
Cost of goods sold                                                         10,236            516        22,765             958
                                                                       ----------      ---------    ----------       ---------
         Gross profit                                                       2,695          1,143        12,523           1,751

Selling and administrative expenses                                         3,968          3,056        10,063           9,182
Engineering, research and development                                       2,595          1,395         6,963           2,692
                                                                       ----------      ---------    ----------       ---------

         Total operating expenses                                           6,563          4,451        17,026          11,874
                                                                       ----------      ---------    ----------       ---------

Operating income (loss)                                                    (3,868)        (3,308)       (4,503)        (10,123)
Interest expense                                                             (221)          (150)         (263)           (273)
Non-operating income                                                        ---               44         ---                48
Non-operating expense                                                        (105)         ---            (985)         (5,522)
                                                                       -----------     ---------    -----------      ----------
Loss from continuing operations                                            (4,194)        (3,414)       (5,751)        (15,870)
Loss from discontinued operations                                           ---            ---            (900)          ---
                                                                       ----------    -----------    -----------      -------
         Net loss                                                      $   (4,194)     $  (3,414)   $   (6,651)      $ (15,870)
                                                                       ===========     ==========   ===========      ==========

Loss per common share (basic & diluted):
         Continuing operations                                         $     (.41)     $   (.44)    $     (.60)      $   (2.37)
         Discontinued operations                                            ---            ---            (.09)          ---
                                                                       ----------      ---------    -----------      -------
         Net loss per common share (basic & diluted)                   $     (.41)     $   (.44)    $     (.69)      $   (2.37)
                                                                       ===========     =========    ===========      ==========

Weighted average number of common shares outstanding                       10,216          7,844         9,604           6,685
(basic & diluted)                                                       ==========      =========    ==========       =========
</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>
                                                                                               9 MONTHS ENDED
                                                                                     ---------------------------------
Operating activities:                                                                Dec. 31, 1998       Dec. 31, 1997
                                                                                     -------------       ------------- 
<S>                                                                                  <C>                 <C>        
     Net loss                                                                        $   (6,651)         $  (15,870)
Adjustments to reconcile loss to net cash provided (used) by 
  operating activities:
     Depreciation and amortization                                                        1,165                 565
     Gain on sale of land                                                                   (20)               ---
     Provision for loss on discontinued operations                                          900                ---
     Provision for common stock warrants issued                                             485                 494
     Provision for CTL Class A/B Unit Convertibility                                       ---                5,522
     Net change in discontinued operations                                                 (208)                345
     Changes in current assets and liabilities                                              593               1,610
                                                                                     ----------          ----------

Net cash provided (used) by operating activities                                     $   (3,736)         $   (7,334)

Investing activities:
     Increase in promissory note                                                           ---                 (840)
     Sale of CNC common and preferred stock respectively                                   ---                  397
     Capitalized software development                                                    (1,048)               ---
     Purchases of property and equipment                                                 (2,397)               (132)
     Purchase of marketable securities                                                     ---                 (244)
     Proceeds from sales of marketable securities                                            16                ---
     Proceeds from sale of land                                                              67                ---
     Proceeds of discontinued operations                                                   ---                2,861
     Change in notes receivable                                                             270                ---
     Net change in discontinued operations                                                 ---                 (470)
     Investment in affiliate                                                               (400)               ---
     Cash investment in INET                                                             (1,333)               ---
                                                                                     -----------         ---------

Net cash provided (used) by investing activities                                     $   (4,825)         $    1,572

Financing activities:
     Repayments of long-term debt                                                    $     (142)         $     (141)
     Common stock issued                                                                    752               7,601
     Preference stock issued net of expenses                                              6,345                ---
     Changes in notes payable                                                              ---                  250
     Payment of note payable                                                               ---                  (98)
     Convertible note issued, net of expenses                                              ---                4,635
     Net change in discontinued operations                                                 ---                  229
                                                                                     ----------          ----------
Net cash provided by financing activities                                            $    6,955          $   12,476
                                                                                     ----------          ----------

Increase (decrease) in cash and cash equivalents                                         (1,606)              6,714

Cash and cash equivalents:
     At beginning of the period                                                           3,746                  81
                                                                                     ----------          ----------
     At end of the period                                                            $    2,140          $    6,795
                                                                                     ==========          ==========

Non-cash transactions:
     Issuance of common stock warrants to investment banker and placement agent             485                 494
     Note payable to related party                                                         ---                   98
     Change in convertibility of Class A/B Units                                           ---                5,552
     Conversion of note payable to common stock                                            ---                  250
     Conversion of convertible notes and interest into common stock                       3,407               2,545
     Discount granted for investment in affiliate                                           900                ---
     Issuance of common stock for INET acquisition                                        1,686                ---
     5% Dividend paid in common stock                                                     3,359                ---
</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 and nine months  ended
December 31, 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.


Recent Suspension of Trading in the Company's Common Stock
----------------------------------------------------------

     On December 9, 1998, an Internet publication published articles questioning
the Company's  reported  equipment sale through  Comdisco,  Inc. (which recently
filed a schedule 13G indicating that it beneficially owned 6.6% of the Company's
common  stock) to Crescent  Communications.  The articles  implied that Crescent
Communications  did not exist,  leading to the conclusion  that the sale was not
valid.  The  articles  also  discussed  the filing of the Form S-3  Registration
Statement indicating that numerous insiders were "poised to sell huge chunks" of
their holdings.

     Immediately following the publication of these articles, the trading volume
in the Company common stock reached  approximately  2.2 million shares, a number
significantly in excess of the historical  trading level, and the Company common
stock  price  declined  more  than  50%.  As a result  of the  articles  and the
significant  trading in the common stock,  the Nasdaq National Market  suspended
trading in the Company  common stock on Thursday,  December 10, 1998.  After the
Company  issued  two press  releases  responding  to the  articles  and  further
clarifying the  transaction  with Crescent  Communications,  the Nasdaq National
Market resumed trading in the stock on Friday, December 11, 1998.

     Since the  publication of the articles,  the Nasdaq National Market and the
Securities and Exchange  Commission (the "Commission") have asked the Company to
provide   documents  and  other  material  about  the  Crescent   Communications
transaction. The Company is cooperating with both the Nasdaq National Market and
the  Commission  in  connection  with these  requests.  However,  because of the
Commission's  practice of keeping its inquiries  confidential,  the Company does
not know the  status of the  inquiry.  Inquiries  by the  Commission  and/or the
Nasdaq  National  Market may cause  disruption  in the trading of the  Company's
common stock and/or divert the attention of management. In addition, any adverse
determination  from these inquiries could have a material  adverse effect on the
Company.

     The public  dialogue  and  inquiries  have  focused  attention  on Crescent
Communications  and Gene  Curcio,  its  president.  On September  24, 1998,  the
Company announced that it had signed a three-year equipment and service contract
with Crescent Communications,  Inc. valued at more than $37 million. As reported
in the Company's December 10, 1998 press release,  Comdisco,  Inc. purchased the
initial $12 million of equipment  pursuant to Crescent's  order and leased it to


                                       5
<PAGE>
Crescent.  The  Company  was paid in full  for that  purchase  by  Comdisco  and
Comdisco  cannot recover any of the $12 million  purchase price from the Company
if  Crescent  fails  to make any  lease  payments  due  under  Comdisco's  lease
agreement  with  Crescent.  As  previously  disclosed,  the Company has deferred
recognition  of  approximately  $2.5  million of this sale related to its equity
interest  in  Crescent   and  amounts   reserved   for  service   contingencies.

     While the  Company  remains  committed  to  Crescent's  development  and to
delivering an additional  approximately $16 million in equipment remaining under
Crescent's network order, plus $9 million in services once Crescent's network is
operational,  it should be noted that  Crescent's  development is not within the
Company's  control  and that such  future  sales and  deliveries  may or may not
occur.  Due  diligence  performed  by the Company  indicated  that  Crescent has
letters of intent for more than 30 million  minutes  per month to  international
locations.  The Company's  future sales to Crescent will depend upon  Crescent's
ability  to  retain  such  minutes  and to  obtain  additional  commitments  and
translate  those minutes and  commitments  into  successful  operations and cash
flows. As with the initial delivery to Crescent,  the Company does not intend to
make any additional  equipment deliveries without Crescent first obtaining third
party      financing,      which     has     not     yet     been      obtained.

     In responding to the December  1998 articles and follow-up  questions  from
the  Internet  publication  and in an  effort to  defend  Crescent's  right as a
private  company to refuse to discuss its business  with the press,  the Company
made  positive  statements  regarding  Crescent  and its  founder,  Mr.  Curcio,
relating  to  Crescent's  entrepreneurial  spirit and Mr.  Curcio's  17 years of
experience and beneficial contacts in the telecommunications  business. When the
Company  entered into the equipment sale and services  agreements  with Comdisco
and Crescent,  the Company was aware that Mr. Curcio was an entrepreneur who had
been  involved  with  start-up  companies,  not  all of  which  were  ultimately
successful. The Company's due diligence investigation regarding Crescent focused
on Crescent's  ability to obtain minutes to international  locations and was not
conducted  for the  purpose  of  evaluating  Mr.  Curcio's  business  history or
individual  creditworthiness.  The  Company  did  not  and  cannot  warrant  the
individual  business  history of Crescent or its founder or that of any end user
of its products.  Because the Company will be providing the operational  support
for Crescent under a service contract,  the Company did not and does not believe
that such information  materially relates to the benefits the Company is seeking
from its relationship with  Crescent.

Liquidity
---------

     Primarily  as a result of the negative  publicity  and  consequent  trading
disruption  described above, the Company has experienced  significant  delays in
completing  equipment  supply  contracts  most of which require  customer  lease
financing.  The  disruption  has also delayed the  Company's  ability to arrange
financing  required to complete certain  acquisitions and to provide  additional
working  capital.  As a  consequence  of these delays,  the Company's  plans and
liquidity  have been  significantly  impacted.  The Company is  currently in the
process of seeking to raise funds through debt and equity  financing and if this
process  is  successful,  management  believes  that  it will  provide  adequate
liquidity  to meet the  Company's  planned  capital and  operating  requirements
through March 31, 1999.  Thereafter,  the Company's  operations  will need to be
funded either with funds generated through operations or with additional debt or
equity financing. If the Company's operations do not provide funds sufficient to
fund its  operations  and the Company seeks outside  financing,  there can be no
assurance that the Company will be able to obtain such financing when needed, on
acceptable terms or at all.

                                       6
<PAGE>
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.

     As of February 11, 1999,  the Company had collected all cash related to the
sale of  discontinued  operations  except $470,000 due under a note and the only
asset  of  discontinued  operations  was  real  estate  related  to the land and
buildings of the discontinued APC operation. The real estate is listed for sale.
Based upon an estimate  of the  current  market  value of the real  estate,  the
Company  took an  additional  charge of  $900,000  in the second  quarter  ended
September 30, 1998.  The asset book value as of December 31, 1998,  was $217,000
net of mortgages applicable to the property.


NOTE 3   ACQUISITIONS

     In  February  1999,  the  Company  announced  that it  signed a  definitive
agreement to acquire  controlling  interest in Systeam S.p.A., by increasing its
equity  position to 60% from 9%, for  approximately  $5 million,  including $1.5
million for working  capital and 880,000  unregistered  shares of Coyote  common
stock.  The  transaction is subject to various,  customary  closing  conditions.
Based  in  Rome,  Italy,  Systeam  develops  voice,  data,  video  and  Internet
solutions. As part of the Systeam acquisition,  the Company also will acquire an
indirect controlling interest in Smartech, an information  technology-consulting
firm that provides software solutions for telecom, financial service and utility
companies. Smartech is 51% owned by Systeam.

     In February  1999,  the Company also  announced that it signed a definitive
agreement to acquire Apollo  Telecom,  Inc. for 350,000  unregistered  shares of


                                       7
<PAGE>
Coyote common stock.  The transaction is subject to various,  customary  closing
conditions. Based in Salt Lake City, Utah, Apollo Telecom is an emerging carrier
that offers international long distance voice and data services,  calling cards,
paging, cellular, Internet access and customized billing.

     In October  1998,  the Company  announced  that it entered into a letter of
intent to acquire a 19% equity  position  in DTA  Communications  Network,  Inc.
("DTA"),  a facilities based provider of wholesale  international  long distance
telephone  services.  The parties  are  negotiating  to enter into a  definitive
agreement.


NOTE 4   COMMITMENTS AND CONTINGENCIES

     The Company is a defendant in a consolidated  class action, In re The Diana
Corporation Securities  Litigation,  pending in the United States District Court
for the Central District of California.  Although  originally  commenced as nine
separate,  but  substantively   similar,   actions  the  separate  actions  were
consolidated by the Court for all purposes in a stipulation and order entered on
July 23, 1997.

     On  September  9,  1997,  the  plaintiffs  served  a  consolidated  amended
complaint  (the  "Consolidated  Complaint")  on  behalf  of  purchasers  of  the
Company's  common stock during a class period alleged to extend from December 6,
1994 through May 2, 1997. The Consolidated  Complaint asserts claims against the
Company and others under Section 10(b) of the  Securities  Exchange Act of 1934,
alleging  essentially that the Company was engaged,  together with others,  in a
scheme to inflate  the price of the  Company's  stock  during  the class  period
through false and  misleading  statements  and  manipulative  transactions.  The
Consolidated  Complaint seeks unspecified  damages,  but identifies  significant
price  movements in the Company's  common stock during the putative class period
(a swing of more than $115 per share) to imply  that the  damages  claimed  will
exceed the Company's assets.

     On December  15, 1997,  the Court  denied  motions by the Company and other
defendants to dismiss the Consolidated Complaint.

     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.  The Company  also agreed  that,  following  the
listing of its common stock on Nasdaq,  it would 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  D&O  insurance  carriers  that,  ultimately,  the
settlement receives court approval.  Counsel for the Plaintiffs also offered, in
a letter  dated  July 10,  1998,  to settle the claims  against  the  individual
defendants in exchange for combined policy limits of the Company's D&O insurance
policies.

     In October 1998, counsel for the Plaintiffs,  the individual defendants and
the D&O carriers  executed a further letter  embodying an agreement in principle
to settle the claims against the individual  defendants for $7.5 million,  to be
paid, ultimately,  by the D&O carriers.  That letter agreement is subject to the
terms of a letter  agreement  dated  November  2, 1998,  among  counsel  for the
Company, the individual defendants and the D&O carriers as to the procedures for
payment of funds. The cash component of the settlement,  $7.25 million, has been
paid into an escrow account under a further letter  agreement  dated October 16,
1998.  The  parties  are in the  process  of  negotiating  the terms of a formal
settlement  agreement.  The parties  have agreed to submit the  agreement to the
Court by February 26, 1999,  and the Court has scheduled a preliminary  approval
hearing for March 1999. A final  approval  hearing is expected to occur sometime
in mid-1999.

                                       8
<PAGE>
     The  Company  cautions  that it is unable to  predict  with  certainty  the
ultimate outcome of the action. Among other things, the conditions that there be
a settlement with the individual defendants and the D&O insurers,  and the court
approval of any settlement,  involve third parties and are not matters which the
Company is in a position to control.  However,  based upon the  circumstances of
the  case at this  time,  the  foregoing  negotiations  and  letters,  and  upon
experience in similar securities class actions,  the Company believes that there
is a  reasonable  likelihood  that the  settlement  described  in the  preceding
paragraphs,  or a similar  settlement,  will  eventually be  consummated in this
matter. The Company recorded the fair market value of the warrants of $8,000,000
in the financial statements for fiscal 1998.

     Performed  Line  Products v.  Coyote  Technologies,  LLC,  Case No. 3:98 CV
1871-T,  in the Federal  District Court for the Northern  District of Texas. The
Company's subsidiary, Coyote Technologies, LLC, is the defendant in this action.
PLP alleges that Coyote is infringing  upon the "Coyote"  trademark that PLP has
registered in connection  with its cable and  enclosure  product line.  PLP also
asserts  claims  under  the  Texas  Deceptive  Trade  Practices  Act.  PLP seeks
permanent  injunctive relief preventing Coyote  Technologies' use of any form of
the name "Coyote," and unspecified  damages for past alleged  infringement.  The
Company  defends on the basis that its DSS 10000  product does not infringe upon
the use of the  Coyote  name for PLP's very  dissimilar  products.  The  Company
intends to vigorously defend the action.

     Superior Street Capital Advisors, LLC v. Coyote Network Systems, Inc., Case
No. 98 L 11488, in the Circuit Court for Cook County,  Illinois.  The Company is
the  defendant  in this case in which  Superior  Street  alleges that Coyote has
breached a  consulting  contract.  An Answer to the  Complaint  has not yet been
filed. However, the Company intends to defend this action vigorously.

     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 Dividend
---------------------
     In October 1998,  the Board of Directors  approved the  declaration of a 5%
common stock  dividend to holders of record as of October 21, 1998.  The Company
issued  497,623  shares of common stock on November 4, 1998,  in payment of such
stock dividend.  Certain contractual anti-dilution provisions reduced conversion
and warrant exercise prices by a minor amount.

Common Stock Options and Warrants
---------------------------------
     Since  September 30, 1998, the Company's  Board of Directors has granted to
certain  executives and directors  options to purchase a total of 178,706 shares
of Company  common stock.  During the quarter ended  December 31, 1998,  certain
employees  exercised  options  and  purchased  a total of  79,347  shares of the
Company  common stock under the terms of the  Company's  Employees  Stock Option
Plan.


NOTE 6   LINE OF CREDIT

     As of December 31, 1998,  Coyote Gateway,  LLC ("CGL") has an established a
line of credit of $8,100,000  secured by CGL's trade  receivables and by 708,692
treasury  shares  of the  Company's  common  stock.  As of  December  31,  1998,
$7,442,000 had been drawn against this line of credit.

                                       9
<PAGE>
NOTE 7   YEAR 2000 COMPLIANCE

     The Company  believes that its DSS Switch and Carrier IP Gateway  operating
systems and internal computer systems are Year 2000 compliant.  The Company does
not anticipate that it will incur  significant  expenditures to ensure that such
systems  will  function  properly  with  respect  to dates in the Year  2000 and
beyond.  The Company  has  designed  and tested the  current  version of its DSS
Switch,  Administration  and  Maintenance  Terminal  ("AMT") and Call Management
System ("CMS")  products,  which are the products most  susceptible to Year 2000
related problems.  The Company found no problems with the date rollover issue or
the Year 2000 leap year issue. The products  continued  processing calls without
interruption  during the test cycles.  The Company plans to continue testing all
products  and   components  as  other   adjuncts  are   integrated  and  tested.

     The Company is also  conducting a review of its  significant  suppliers and
other  third  parties to ensure that those  parties  have  appropriate  plans to
remedy any Year 2000  issues  where their  systems  connect  with the  Company's
systems  or  otherwise  have an impact on  Company  operations.  The  Company is
continuing to request and receive Year 2000  certification  documents from third
party software suppliers.  The Company has verified third party software used in
the  development  and  operation  of DSS,  AMT and CMS  products to be Year 2000
compliant.

     To date,  costs  related to the Year 2000 issues have not been  material to
financial  condition or operations  of the Company.  The Company does not have a
documented Year 2000  contingency  plan to cope with a worst case scenario.  The
Company  intends to complete  documentation  of a contingency  plan by March 31,
1999.

     There can be no  assurance  that a  failure  of the CTL  switching  product
operating  systems or that the systems of third  parties on which the  Company's
systems and  operations  rely to be Year 2000 compliant will not have a material
adverse  affect on the  Company's  business,  financial  condition  or operating
results.



                                       10
<PAGE>
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANICAL CONDITION AND 
         RESULTS OF OPERATIONS

Results of Operations
---------------------
     For the third quarter ended December 31, 1998, the Company's  revenues were
$12.9 million from the sale of DSS  switching  and related  equipment as well as
revenues from the Company's  international  long distance  service  subsidiaries
which were  acquired  during fiscal 1999.  This  represents an increase in total
revenues of $11.3 million (680%) over the corresponding  quarter of fiscal 1998.
Revenues for the nine months ended  December 31, 1998,  were $35.3  million,  an
increase of $32.6  million  (1,203%) over the  corresponding  nine months of the
prior fiscal year.

     Switching  equipment sales in the quarter,  which were effected by the lack
of  previously  planned  lease  financing,  included  a sale of $7.2  million to
Wireless  USA, an emerging  domestic and  international  long  distance  service
provider.  The Company has granted extended payment terms to this customer which
is in the process of seeking lease financing for its capital purchases.  In view
of the extended payment terms and its comparatively short operating history, the
Company has  conservatively  deferred  recognition of the profit of $3.7 million
attributable to this sale,  until payment is received or all  contingencies  are
removed.

     As a result of this  deferral,  the gross  profit for the third  quarter of
fiscal 1999 was $2.7  million  and  represented  a gross  margin of 21% of total
revenues. If the profit of $3.7 million had not been deferred,  the gross margin
would have been 51% of total  revenues for the third quarter of fiscal 1999. The
gross margin for the second  quarter of fiscal 1999 was 39% and the gross margin
for the third  quarter  of fiscal  1998 was 69%.  The gross  margin for the nine
months ended  December  31, 1998,  was 35% and would have been 46% if the profit
had not been deferred.  The gross margin for the corresponding nine month period
of the prior fiscal year was 65%.

     Selling, general and administrative expenses in the third quarter were $4.0
million (30% of total  revenue),  which  represented an increase of $0.9 million
over the  corresponding  quarter of fiscal  1998.  This  increase  is  primarily
related to the additional  operating  expenses incurred by the recently acquired
long distance service provider  subsidiary  (INET),  which operating results are
included  in the Company  consolidation  for the third  quarter of fiscal  1999.
Selling,  general and administrative expenses for the nine months ended December
31, 1998, were $10.1 million, which represented an increase of $0.9 million over
the corresponding period of the prior fiscal year.

     Engineering,  research and  development  expenses for the third  quarter of
$2.6 million (20% of total revenues) represents a $1.2 million increase over the
corresponding period for the prior fiscal year. The Company continued to enhance
product   offerings,   including   further   development  of  its  client/server
architecture  as well as the Company's  rollout of voice over Internet  Protocol
(IP) and IP/ATM  (Asynchronous  Transfer  Mode) as an enhancement to the current
product line. Engineering, research and development expenses for the nine months
ended  December  31,  1998,  were $7.0  million  compared to $2.7 million in the
corresponding period of the prior fiscal.

     The  operating  loss  for the  quarter  was  $3.9  million  compared  to an
operating profit of $0.3 million in the prior quarter and $3.3 million operating
loss for the corresponding  quarter of fiscal 1998. The loss is primarily due to
the  conservative  approach  adopted  regarding  the  deferral  of  earnings  on
equipment sales and to the additional operating expenses related to the recently
acquired  subsidiary  (INET).  The operating  loss for the nine months of fiscal
1999  was  $4.5  million  compared  to  $10.1  million  operating  loss  in  the
corresponding period of fiscal 1998.

     The net loss for the quarter was $4.2 million and  represented  a basic and
fully  diluted loss per common share of $.41  compared to the prior quarter loss
of $1.4  million  or $.14 per  share,  and the loss of $3.4  million or $.44 per
share in the corresponding period of the prior fiscal year. The net loss for the
nine months of fiscal 1999 was $6.7 million or $.69 per share  compared to a net
loss of $15.9 million or $2.37 per share for the corresponding  period of fiscal
1998.


                                       11
<PAGE>
Liquidity and Capital Resources
-------------------------------
     The Company used $14.1  million of cash during the third  quarter of fiscal
1999  compared to a positive cash flow of $11.2 million in the prior quarter and
of $12.5 million  generated during the first six months of the fiscal year. As a
result of the negative publicity and consequent trading disruption  described in
the Notes to the Financial  Statements for the third quarter of fiscal 1999, the
Company  has  experienced  significant  delays in  completing  equipment  supply
contracts  most of which require  customer lease  financing.  The disruption has
also delayed the  Company's  ability to arrange  financing  required to complete
certain acquisitions and to provide additional working capital. As a consequence
of these delays,  the  Company's  plans and  liquidity  have been  significantly
impacted.

     Due to the delays encountered in obtaining third party lease financing, the
Company  granted  extended  payment  terms to its  customer  Wireless  USA.  The
extended  terms  are  evidenced  by a  promissory  note  payable  over 42 months
commencing in January 1999 with interest payable in arrears on the maturity date
of the note.  The note is  partially  secured by a personal  guarantee  from the
president of Wireless USA.

     Net cash used in operating  activities during the quarter was $13.4 million
primarily  due to the  delays  referred  to above,  the  provision  of the above
extended payment terms together with the funding  required to support  operating
expenses and inventory requirements associated with the business growth.

     Net cash used in investing  activities  during the third  quarter of fiscal
1999  was  $1.1  million   consisting  of  $0.8  million  for  the  purchase  of
manufacturing  and test equipment and $0.3 million in  engineering  software and
development.

     Financing  activity  during the  quarter  provided  $0.4  million  from the
issuance of the Company  common stock upon the exercise of stock  options  under
the terms of the Company's employee stock option plan.

     At December 31, 1998,  the Company has a negative  working  capital of $3.9
million.  The  Company is  currently  in the  process of seeking to raise  funds
through  debt and equity  financing  to resolve its  immediate  working  capital
issues.  In addition to an immediate  need,  the Company  will need  significant
funds to fund its future operations and acquisitions  already contracted for and
other acquisitions. Management believes that it will be able to continue to fund
its operations  and  acquisitions  by obtaining  additional  outside  financing,
however  there can be no  assurance  that the Company will be able to obtain the
needed  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.

     Under the Systeam  acquisition  agreement,  the Company is obligated to pay
$3.5 million by March 18, 1999. The Company is currently  seeking to raise funds
to meet this obligation.  However,  if the Company in unable to obtain the funds
by March 18, 1999, the Company may ask Systeam to extend such date. There can be
no  assurance  that an  extension  will be  granted  and  this  agreement  maybe
terminated, which could have a material adverse effect on the Company.

     Under the terms of the Preferred Stock Agreement,  the Company is obligated
to pay certain  penalties  aggregating  $280,000  as of  February  1, 1999.  The
Company is currently  negotiating  to redeem the Preferred  Stock,  or a portion
thereof,  subject  to  obtaining  the  required  financing  and a waiver of such
penalties.

                                       12
<PAGE>
Forward Looking Statements
--------------------------

     All statements other than historical statements contained in this Report on
Form 10-Q  constitute  "forward  looking  statements"  within the meaning of the
Private  Securities  Litigation Reform Act of 1995.  Without  limitation,  these
forward  looking  statements  include  statements  regarding  new products to be
introduced by the Company in the future, statements about the Company's business
strategy  and plans,  statements  about the  adequacy of the  Company's  working
capital and other financial resources, and in general statements herein that are
not of a historical nature.  Any Form 10-K, Annual Report to Shareholders,  Form
10-Q,  Form 8-K or press  release of the  Company may  include  forward  looking
statements.  In addition,  other  written or oral  statements  which  constitute
forward  looking  statements  have been made or may in the future be made by the
Company, including statements regarding future operating performance, short- and
long-term revenue and earnings estimates, backlog, the status of litigation, the
value of new  contract  signings,  and industry  growth rates and the  Company's
performance relative thereto. These forward-looking  statements rely on a number
of  assumptions  concerning  future  events,  and are  subject  to a  number  of
uncertainties  and other  factors,  many of which are  outside of the  Company's
control,  that  could  cause  actual  results  to  differ  materially  from such
statements.  These include, but are not limited to: risks associated with recent
operating  losses,  no assurance of  profitability,  the need to increase sales,
liquidity  deficiency  and in general  the other risk  factors  set forth in the
Company's  Annual  Report on Form 10-K for the fiscal year ended March 31, 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.


                                       13
<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 6.  EXHIBITS AND REPORTS ON FORM 8-K

         a)    Exhibits:

               27       Financial Data Schedule

         b)    A Form 8-K/A was filed by the Company on December 11, 1998, 
               which covered:

               Item 7.  Financial Statements and Exhibits

               Item 7 of the  Current  Report  on  Form  8-K of  Coyote  Network
               Systems, Inc. dated September 30, 1998, filed with the Securities
               and Exchange  Commission on October 15, 1998,  was amended in its
               entirety  to  reflect  that  Financial  Statements  and Pro Forma
               financial  information of the acquired business were not required
               to be filed.



                                       14
<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.


DATE:      February 16, 1999      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/ Brian A. Robson                
                                      -----------------------------------------
                                      Brian A. Robson
                                      Executive Vice President,
                                      Chief Financial Officer and Secretary
                                      (Principal Financial & Accounting Officer)



                                       15
<PAGE>