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

                                    FORM 10-K

              [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

                   For the fiscal year ended December 31, 1998

                                       OR

            [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

                         Commission file number 0-23970

                            NETWORK PERIPHERALS INC.
             (Exact name of registrant as specified in its charter)

                  DELAWARE                                    77-0216135
         (State or other Jurisdiction of                   (I.R.S. Employer
         Incorporation or Organization)                 Identification Number)

                             1371 McCarthy Boulevard
                           Milpitas, California 95035
          (Address, including zip code of principal executive offices)

                                 (408) 321-7300
              (Registrant's telephone number, including area code)

           Securities registered pursuant to Section 12(g) of the Act:

                                 Title of class
                                  Common Stock

Indicate by checkmark  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 the  filing
requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained to the best
of the registrant's  knowledge,  in definitive  proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

The  aggregate  market value of the voting stock held by  non-affiliates  of the
Registrant as of March 5, 1999 was  $82,541,679  based upon the closing price of
the Registrant's Common Stock on the Nasdaq National Market System on that date.

The number of shares of the Registrant's Common Stock outstanding as of March 5,
1999 was 12,342,681.


                       DOCUMENTS INCORPORATED BY REFERENCE

Portions  of  the  Registrant's  proxy  statement  for  its  annual  meeting  of
stockholders  to be held on April 29, 1999 are  incorporated  by reference  into
Part III of this Annual Report on Form 10-K.

                                       1

<PAGE>


                            NETWORK PERIPHERALS INC.

                                    FORM 10-K

                                TABLE OF CONTENTS


PART I                                                                      Page

ITEM 1.  Business............................................................  3

ITEM 2.  Properties..........................................................  9

ITEM 3.  Legal Proceedings...................................................  9

ITEM 4.  Submission of Matters to a Vote of Security Holders.................  9


PART II

ITEM 5.  Market for the Registrant's Common Stock and Related
             Stockholder Matters............................................. 10

ITEM 6.  Selected Financial Data............................................. 11

ITEM 7.  Management's Discussion and Analysis of Financial Condition and
             Results of Operations........................................... 12

ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk.......... 16

ITEM 8.  Financial Statements and Supplementary Data......................... 17

ITEM 9.  Changes in and Disagreements with Accountants on Accounting and
             Financial Disclosure............................................ 33


PART III

ITEM 10. Directors and Executive Officers of the Registrant.................. 34

ITEM 11. Executive Compensation.............................................. 34

ITEM 12. Security Ownership of Certain Beneficial Owners and Management...... 34

ITEM 13. Certain Relationships and Related Transactions...................... 34


PART IV

ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K..... 35


         Signatures.......................................................... 37

         Supplemental Schedule............................................... 38

                                       2

<PAGE>


                                     PART I

ITEM 1. BUSINESS

Network Peripherals Inc. (the "Company") was incorporated in California in March
1989 and reincorporated in Delaware in June 1994. The Company's principal office
is located at 1371  McCarthy  Boulevard,  Milpitas,  California  95035,  and its
telephone number is (408) 321-7300.


BUSINESS

The  Company  designs,  manufactures,  markets  and  supports  a full  range  of
10/100/1000  Layer 2 and Layer 3 Ethernet  switching  products  for  workgroups,
wiring closets and network backbones,  and a full range of high performance FDDI
adapters and  switches.  These  products are designed to increase the  available
bandwidth and enhance the  performance of corporate and  departmental  networks.
The Company  delivers  the most  advanced  high-speed  network  technologies  to
preserve its customer's existing Ethernet investments.

The Company  introduced its first FDDI network adapter  products in 1990 and has
since  established  a leading share of the installed  FDDI adapter  market.  The
Company also  introduced its first FDDI  concentrator  product in 1991 and began
commercial  shipments  of its first  FDDI LAN  (local  area  network)  switching
product,  the EIFO series,  in the first quarter of 1994.  In 1995,  the Company
announced its Fast Ethernet product line and made initial  shipments of its Fast
Ethernet LAN switching  products in early 1996. In 1997, the Company  introduced
switches designed to interconnect  workgroups to enterprise  backbone  networks,
switches with 10/100 auto-sensing features, and standard and custom OEM adapters
based on the industry  standard  PCI bus  architecture.  In the  price-sensitive
market for Layer 2 switches,  the Company in 1998  developed  and shipped a full
range of 12-port,  16-port and 24-port  Fast  Ethernet  hubs and  switches  with
advanced management features.

In  March  1996,  the  Company  acquired  NuCom  Systems,   Inc.  ("NuCom"),   a
Taiwan-based  networking  company focused on Fast Ethernet  switching  products.
This  acquisition  enabled the Company to introduce a number of new Layer 2 Fast
Ethernet  switching  products  during  that year.  A majority  of the  Company's
current Fast Ethernet  product  offerings  are based on the switch  architecture
developed by the research and development activities in Taiwan.

In April 1997,  the Company  acquired  NetVision  Corporation  ("NetVision"),  a
privately held company located in Long Island, New York.  NetVision  specialized
in the  development  of very high  bandwidth  Layer 3 LAN  switching and gigabit
Ethernet  technologies.  This acquisition  positioned the Company to develop its
next generation of Ethernet switching products to be introduced in mid-1999.

The Company markets its products worldwide through OEMs, distributors,  VARs and
system integrators.


PRODUCTS

The Company's  current line of products consists of a range of Fast Ethernet and
FDDI  LAN  switches  and  hubs,  FDDI to Fast  Ethernet  bridges,  FDDI  Network
Interface Cards,  and network  management  software.  Most of these products are
based  on core  technology  and  proprietary  ASIC  components  designed  by the
Company.  The  products are offered in a variety of models,  configurations  and
forms.

The information in the following paragraphs contains forward-looking  statements
describing  new products  that are expected to be available  for shipment to the
Company's customers during 1999. The successful completion and shipment of these
products is subject to a number of uncertainties, including verification testing
to  confirm  that  the  products  meet  the  Company's  standards  for  quality,
reliability and interoperability; availability of components; pricing actions by
competitors  that may render it unprofitable  to introduce the products;  market
acceptance  of the  products;  and the  emergence  or  broad  acceptance  of new
technologies that may render the products obsolete.

In the early  stages of 1999,  the Company once again  consolidated  its product
development   efforts  to  better  leverage  core   competencies  and  to  bring
consistency and continuity to these efforts.  Although the Company will continue
its sustaining engineering efforts of its legacy products, especially support of
its OEM  base,  the  bulk  of its  engineering  resources  will  concentrate  on
development  efforts to bring the NuWave  Architecture Layer 3 gigabit family of
switches to market.  The Company intends to introduce gigabit Ethernet solutions
aimed at the small-to-medium enterprises (SME) in mid-1999.

                                       3

<PAGE>


NuSwitch Product Line

Network Adapter Products

The Company's line of FDDI network adapters connects high-performance servers or
desktop computers directly to 100 Mbps FDDI networks.  The adapters support both
fiber and  unshielded  twisted pair (UTP) copper  wiring and are  available  for
popular platform bus architectures,  including SBus and PCI. Customized versions
have been developed for resale under OEM arrangements  with Sun Microsystems and
Network Associates. The adapters and software developed for Sun Microsystems are
based on the Company's  standard SBus  architecture and PCI  architecture.  They
support Sun  Microsystems'  SPARC and UltraSPARC work station and server product
lines,  including  their  current lines of PCI based  workstations.  The Network
Associates  product is a customized  version of the  Company's  PCI adapter with
enhanced features for use with the Network Associates Sniffer Network Analyzer.

The  Company's  adapters   incorporate  software  drivers  for  leading  network
operating systems including Novell NetWare,  Microsoft NT, and Sun Microsystems'
Solaris.  The  Company  provides  a  standard  set  of  diagnostics,  connection
management  (CMT) and station  management  (SMT)  software  tools.  CMT software
continuously  monitors  network  connections  for bit errors and network faults,
while  SMT  software  provides  network  management  and  gathering  of  network
performance statistics.

LAN Switching Products

LAN  Switches.  In 1998,  the Company  added a number of new Fast  Ethernet  LAN
switching  products to its NuSwitch product line that offers  solutions  ranging
from desktop to backbone connectivity,  including the DS-12A and the DS-16, both
Layer 2 Ethernet  switches.  These two  products  are  10/100Mbps  auto-sensing,
12-port and 16-port switches,  with optional connections to either fiber or UTP.
They are  designed  to satisfy the  requirements  of mission  critical  networks
running high-demand  applications in campus  environments.  

LAN Network  Management  Software.  The Company believes that network management
software is an  important  tool for network  administrators  who need to manage,
maintain  and control  the  operation  of  client/server  remotely.  The Company
provides  standards-based  network  management  software  in all of its  managed
products.  The Company's LAN switching products come standard with SNMP and RMON
software  that  allows  its  switches  to be  configured  and  monitored  from a
management  station.  In 1998,  the Company  introduced  some  revisions  to its
NuSight SNMP  management  platform,  which now provides  RMON Manager  tools for
network diagnostics and performance monitoring. NuSight 2.0 provides a graphical
view of the  switching  product to enable the  network  administrator  to manage
network  connections  and  configuration,  gather  statistics to monitor network
traffic  and  plan  for  future  growth.  It  operates  in a  Microsoft  Windows
environment,  including  Windows 95, Windows NT  Workstation  4.0 and Windows NT
Server 4.0.

The Company  intends to  introduce a number of new products in 1999 based on its
revolutionary NuWave Architecture.  NuWave products will be aimed at the rapidly
growing Layer 3 Fast Ethernet and gigabit switching markets. These products will
be  high-density,   low  cost  10/100/1000  auto-sensing  switches  for  use  in
departmental networks and large corporate backbone networks.

NuWave Product Line

NuWave is an innovative line of Ethernet,  Fast Ethernet,  and gigabit  Ethernet
solutions  being  designed  for the SME  market  based on  technology  and ASICs
developed primarily by the Company.

The  NuWave  product  family is  expected  to  consist  of very  high  bandwidth
switching  platforms in flexible,  "building block" form that offer high-density
switched/hub   ports  that  are  stackable  and  scaleable  in  performance  and
configurations for networks up to 1,500 nodes with complex and stringent network
requirements.  Networks  of this  scale  require  reliability,  scalability  and
flexibility  since as many as 30% of their nodes move or change annually.  Thus,
the devices  themselves need to be intelligent,  fault-tolerant  and flexible in
their configurations while being affordable and simple to use.

The NuWave family of 10/100 and gigabit  Ethernet  switching  solutions is being
designed with a 64-Gbps switching fabric to deliver wire-speed Layer 2 and Layer
3 (IP/IPX)  switching for 10/100/1000 Mbps Ethernet  networks in a scaleable and
non-blocking  stackable form factor. The new platform is designed to accommodate
options  such as  high-speed  LAN/WAN  uplinks,  advanced  web-based  management
functions, with intuitive,  policy-based network management software,  redundant
power supplies and flexible media  connections  --  capabilities  that are found
currently only in expensive, large-scale enterprise systems.

                                       4

<PAGE>


The  NuWave  switching  family,  with a very  high  bandwidth  architecture  and
flexible configuration plus a comprehensive collection of advanced switching and
network management functionalities, offers networking and system OEM customers a
next  generation  switching  platform.  The  Company  plans  to use  the  NuWave
Architecture  product  line  to  penetrate  the  rapidly  emerging  gigabit  and
stackable Layer 2/3 10/100 Ethernet switching market in 1999.


MARKETING, SALES AND SUPPORT

The Company sells its product  worldwide  through OEMs,  VARs,  distributors and
system  integrators.  As of December 31, 1998, the Company employed 24 full-time
technically trained marketing, sales and support personnel located in the United
States, the Netherlands,  Singapore and Taiwan. These personnel,  in addition to
traditional  marketing and sales  functions,  are responsible for initiating and
developing  relationships  with major end-user  accounts and with OEM leaders in
the computer networking  industry.  The Company believes that such relationships
are crucial to early development and deployment of optimal solutions for network
applications.

The majority of the Company's  historical and current sales are to OEM customers
with the balance of the sales to distributors  and VARs.  While the Company does
not generally obtain long-term purchase  commitments from its OEM customers,  it
does customarily  enter into contracts with OEM customers to establish the terms
and  conditions  of sales  made  pursuant  to orders  from OEMs.  The  Company's
standard  products are  distributed  globally  through the reseller  channels in
North America, Asia and Europe.

In addition to North America,  the Company's products are currently  distributed
internationally,  primarily  in Europe and Asia.  The Company has  international
sales  offices in the  Netherlands,  Taiwan and  Singapore.  Sales to  customers
outside of North America represented 31% of the Company's net sales in 1998. The
geographic  regions  with the major  portions of export  sales in 1998,  and the
approximate  respective  percentages  represented by each, were Europe,  10% and
Asia,  21%. All payments  for sales  outside the United  States are made in U.S.
dollars.

Sun  Microsystems  accounted  for 35% of net  sales in 1998.  In the  past,  the
Company has  experienced  fluctuations in the volume of activity with individual
OEM  customers  and  distributors  as well as  changes in its OEM  customer  and
distributor  base, and it expects such  fluctuations  and changes to continue in
the future.  The loss of a major customer,  reductions of a major order or delay
in a major shipment could adversely affect the Company's  business and financial
performance.

OEM customers  typically  provide the Company with a rolling forecast placed two
to three months in advance of shipment,  while resellers  typically  provide the
Company with orders placed 30 days or less in advance of shipment.  However, due
to order  cancellations  and order  changes and depending on the mix between OEM
and  reseller  orders and the ability or resources of the Company to meet demand
schedules,  the Company's backlog may or may not be indicative of revenue in the
future periods.

The information in the following  paragraph  contains forward looking statements
describing  the Company's  sales and marketing  strategy.  There are a number of
uncertainties  that could  affect the success of the plan  including  the timely
availability of new products by the Company, reliability,  price and performance
characteristics of the components,  new and existing products,  the introduction
of similar  products by  competitors,  pricing  actions by  competitors  and the
inability  of the Company to recruit  and retain  required  sales and  marketing
staff with the needed skills.

In 1999,  the  Company's  sales  and  marketing  strategy  for its  Layer 3 Fast
Ethernet and gigabit Ethernet switching products will emphasize on developing an
OEM customer base, a potentially lucrative market. The Company will continue its
commitment to support its existing base of resellers and seek new  opportunities
in its reseller channels.


RESEARCH AND DEVELOPMENT

The information in this section contains  forward-looking  statements describing
the Company's  product  development  plans for 1999 and beyond.  The  successful
development  and  introduction  of  new  products  is  subject  to a  number  of
uncertainties,  including the ability of the organization to recruit,  train and
retain  adequate  numbers  of  professional  engineers,   successful  design  of
proprietary  application  specific  integrated  circuits and computer  software,
design,  development and verification  testing to confirm that the products meet
the  Company's   standards  for  quality,   reliability  and   interoperability,
availability of components,  pricing  actions by competitors  that may render it
unprofitable  to introduce the products,  unanticipated  technical  obstacles or
delays,  and the  emergence or wide  acceptance of new  technologies  that could
render the products obsolete.

                                       5

<PAGE>


The Company has  developed  certain  core  competencies  applicable  to multiple
network  technologies such as FDDI and Ethernet,  ASIC design, and client/server
operating system drivers and software modules. The Company believes its focus on
core competencies such as these has been, and will continue to be, a significant
factor in its  competitive  ability to bring emerging  network  solutions to the
market in a timely manner.

Network  Bandwidth  Switching.  The  majority  of  the  Company's  research  and
development  efforts has been and will continue to be on  developing  its NuWave
family of products.  The Company is designing a range of high-density ASICs that
provide the Company's  NuWave  architectural  platform with a 64 Gbps  switching
fabric for gigabit and stackable  Layer 2 and 3 10/100/1000  Ethernet  switches.
Through its  acquisition  of NetVision  Corporation  in April 1997,  the Company
obtained a team of  technologists  experienced in very high bandwidth  switching
architecture, specifically in Layer 3 gigabit Ethernet switching technology. The
Company has also implemented its Distributed  Memory Switching  Architecture and
ASIC expertise in products  based on both FDDI and Fast Ethernet.  Semiconductor
foundries,  such as NEC,  UMC, MMC and ATMEL,  manufacture  the  Company's  ASIC
components.

System  Architecture  Interfaces  and  Network  Protocol  Software.  Through the
development  of its  collection  of 100 Mbps network  adapters,  the Company has
gained  expertise in hardware and software support for a variety of standard and
proprietary system bus architectures and network operating systems.

Server Bandwidth  Optimization.  The Company has designed its network  operating
system software to address the specific  characteristics of each type of adapter
and server architecture.  This design provides optimal network bandwidth to high
power servers. As new versions of network operating systems are introduced,  the
Company plans to devote development  efforts not only to maintain  compatibility
with  existing  versions  but also to take  advantage  of enhanced  features and
performance improvements.

As of December  31,  1998,  the Company  employed 38  personnel  in research and
development.  The Company has developed products designed for integration in the
proprietary  systems of major networking  companies  including Sun Microsystems,
Newbridge  Networks,  Network Associates,  NetFRAME,  NCR, and 3Com. The Company
believes that its relationships  with these network technology leaders establish
credibility  with  end-user  customers  who  demand  interoperability  of  their
networking  devices.  The  Company  has active  development  relationships  with
Novell,  Microsoft  and Sun  Microsystems  for  advanced  products  for NetWare,
Windows NT and Solaris, respectively.


MANUFACTURING

Throughout  1998 and in the early stages of 1999, the Company  partnered with an
established  turnkey  manufacturer in the Silicon Valley to produce and ship the
Company's FDDI products.  The Company also has an in-house manufacturing team in
Taiwan with recently purchased  state-of-the-art  manufacturing equipment, which
produced its Ethernet  products.  In the first half of 1999, the Company intends
to transition  its entire  manufacturing  operations  to Taiwan.  The team of 51
full-time  personnel in this  manufacturing  facility is highly  experienced  in
advanced  manufacturing  and test  engineering  in  ongoing  reliability/quality
assurance. The manufacturing operation is ISO certified.  Dependent upon volumes
in 1999, the Company expects to reduce the cost of products  substantially  as a
direct result of this transition.

Certain  key  components   used  in  the  Company's   products  such  as  ASICs,
microprocessors  and  controller  chips,  media  interface  components and power
supplies  are  currently  available  only from  single or limited  sources.  The
Company also has developed  proprietary  ASICs used in existing  products and in
the NuWave Architecture,  which will be sourced from a single foundry. While the
Company  believes  it  would  be  able to  obtain  alternative  sources  for key
components and for the ASICs,  difficulty in obtaining these supplies could have
a material adverse effect on the Company's results of operations.


COMPETITION

The Company  believes that the principal  competitive  factors in the networking
market include the completeness of product offerings, product quality, price and
performance,  adherence to industry  standards,  the degree of  interoperability
with other networking equipment and time to market for new products.

The computer networking  industry is intensely  competitive and is significantly
affected   by  product   introductions   and  market   activities   of  industry
participants.  A number of competitors  offer  products  which compete,  both in
price and functionality,  favorably with one or more of the Company's  products.
Many of the  Company's  current and  potential  competitors  have  significantly
broader product  offerings,  greater financial,  technical,  marketing and other
resources,  and   larger   installed   bases   than   the   Company.   Increased
competition   could   result   in  price  reductions,  reduced  margins and loss

                                       6

<PAGE>


of market share,  all of which would  materially  adversely affect the Company's
business,  operating results and financial condition. In a declining market, the
Company's  FDDI  network  adapters  compete on a  product-by-product  basis with
products offered  primarily from Interphase,  SysKonnect and 3Com. In a maturing
market,  the Company's Layer 2 Fast Ethernet  switching  solutions  compete with
products  offered by Cisco,  3Com,  Nortel,  Cabletron  and others.  A number of
companies  developing  similar  technologies have been acquired by the Company's
larger  competitors.  These  acquisitions  are  likely to permit  the  Company's
competitors to devote  significantly  greater  resources to the  development and
marketing of new competitive  products and the marketing of existing products to
their installed  bases.  The Company expects that competition will increase as a
result  of  these  and  other  industry  consolidations  and  alliances.   These
competitive   pressures  could  adversely  affect  the  Company's  business  and
operating  results.  The Layer 3 Fast Ethernet and gigabit switching markets are
in the early stages of development with competition for these market coming from
relatively new market entrants such as Extreme Networks and Foundry Networks, as
well as from the more established  companies such as Nortel, Cisco and 3Com. The
Company  believes  that this  market  will  consolidate  over time and that this
consolidation   could  adversely   effect  the  Company's   ability  to  compete
effectively with its larger competitors.


PROPRIETARY RIGHTS

The Company's success is dependent upon its proprietary technology. To date, the
Company has relied principally upon patent,  copyright, and trade secret laws to
protect  its  proprietary   technology.   The  Company   generally  enters  into
confidentiality  or  license   agreements  with  its  employees,   distributors,
customers and potential customers and limits access to, and distribution of, the
source code to its software and other proprietary  information.  The Company has
been  issued  one  U.S.  patent  and has  filed  three  additional  U.S.  patent
applications  covering  certain  aspects  of  its  technology.  The  process  of
obtaining  patents  can be  expensive,  and there can be no  assurance  that the
patent  application  will result in the  issuance  of  patents,  that any issued
patents will provide the Company with meaningful competitive advantages, or that
challenges  will not be issued  against the  validity or  enforceability  of any
patent issued to the Company.

The Company  has entered  into  patent  license  agreements  relating to certain
technologies used in FDDI networks.  The Company believes that the terms of such
licenses  are  comparable  to those made  available  to other  companies  in the
networking  industry.  In addition,  certain  technology  used in the  Company's
products is licensed from third  parties,  generally on a  non-exclusive  basis.
These  licenses  generally  require the Company to pay  royalties and to fulfill
confidentiality obligations. Termination of such licenses could adversely affect
the Company's business and operating results.

The Company has agreed in certain cases to indemnify its customers for liability
incurred in connection  with the  infringement  of a third party's  intellectual
property  rights.  Although the Company has not received  notice from any of its
customers  advising the Company of any alleged  infringement  of a third party's
intellectual   property   rights,   there   can  be  no   assurance   that  such
indemnification  of alleged  liability  will not be required from the Company in
the future.

                                       7

<PAGE>


EXECUTIVE OFFICERS *

The executive officers of the Company and their ages are as follows:

Name                           Age     Position
--------------------------------------------------------------------------------

William Rosenberger            49      President,  Chief Executive Officer, and
                                         Director
Wilson Cheung                  35      Vice President - Finance and Chief
                                         Financial Officer
Jerry McDowell                 53      Vice President - Marketing
James Sullivan                 46      Vice President - Sales
Robert Zecha                   41      Vice President - Research and Development


Mr.  Rosenberger  has served as the  President,  Chief  Executive  Officer and a
director of the Company  since July 1998.  From January  1996 to June 1998,  Mr.
Rosenberger was President and Chief Executive Office of NetAccess,  Inc., a wide
area networking equipment manufacturer.  From October 1995 to December 1995, Mr.
Rosenberger  was Vice President of sales and business  development for NetVision
Corporation,  an Ethernet switching  company.  From March 1993 to June 1995, Mr.
Rosenberger  was  General  Manager  of  ACSYS,  Inc.,  a  networking   equipment
manufacturer.  Prior to March 1993,  Mr.  Rosenberger  was  President  and Chief
Executive  Officer  of  Netronix,  Inc.,  a  networking  hardware  designer  and
manufacturer.

Mr. Cheung has served as an executive officer since October 1998.  Preceding the
appointment to this office, Mr. Cheung held various  management  positions since
joining the Company in July 1995. Prior to joining the Company, Mr. Cheung was a
financial  analyst at Sybase Inc.  from July 1994 through  June 1995.  From 1992
through June 1994, Mr. Cheung held various senior financial analyst positions at
Raychem Corp. Mr. Cheung was also a senior auditor at Coopers & Lybrand.

Mr.  McDowell has served in  executive  positions  and Boards of  Directors  for
several data  communications  research and manufacturing  firms prior to joining
the Company in November,  1998.  He was a  co-founder,  President  and Executive
Director of Research of The Robert  Frances  Group,  Vice President of Marketing
and Business Development at Objective Systems Integrators and Senior Director of
Marketing and Business Development at Boole & Babbage. Prior to those positions,
Mr. McDowell served in executive and management positions at Dataquest, The Meta
Group, Wang Laboratories Paradyne and others.

Mr.  Sullivan has served as an executive  officer  since  joining the Company in
July 1997. Prior to joining the Company, he was with Novell, Inc. from July 1995
to July 1997 where he held several sales  management  positions,  including Vice
President of Worldwide OEM Sales and Senior  Director of North American  Channel
Sales.  Prior to joining  Novell,  he held various  sales  positions  with Arrow
Electronics, Canon and Lanier Business Products.

Mr. Zecha has served as Vice President of Research and  Development  since April
1997.  From January 1997 to April 1997,  Mr. Zecha served as President and Chief
Technology Officer of NetVision Corporation, an Ethernet switching company. From
November  1993 to  January  1997,  Mr.  Zecha  was a Vice  President  and  Chief
Technology  Officer of NetVision  Corporation.  Mr. Zecha  co-founded and held a
Board of Director position with NetVision Corporation from November 1993 through
April 1997.  Prior to  November  1993,  Mr.  Zecha held  engineering  management
positions at Standard Microsystems Corporation, a networking company.


*  As of December 31, 1998

                                       8

<PAGE>


EMPLOYEES

As of December  31,  1998 the  Company  employed  133  persons  including  38 in
research and development  activities,  51 in  manufacturing  and support,  24 in
sales,  marketing and technical support,  and 20 in finance and  administration.
Approximately  70  employees  were  in  international  locations.  None  of  the
Company's  employees are  currently  represented  by a labor union.  The Company
considers its relations with its employees to be good.  The Company  attempts to
maintain  competitive  compensation  benefits,  equity  participation  and  work
environment  policies to assist in attracting and retaining qualified personnel.
Competition  for employees in the Company's  industry and  geographical  area is
intense and there can be no  assurance  that the Company will be  successful  in
attracting and retaining such personnel.


ITEM 2. PROPERTIES

The Company's  principal  executive offices are located in Milpitas,  California
and consist of approximately  18,000 square feet under lease that will expire in
October 2000. Additionally,  the Company has research and development facilities
in Taiwan and Long Island, New York. The Company has international sales offices
in the  Netherlands,  Singapore,  and  Taiwan.  The  Company  believes  that its
existing  facilities and equipment are generally  adequate to meet its immediate
and foreseeable needs.


ITEM 3. LEGAL PROCEEDINGS

There are no material pending legal proceedings.


ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No  matters  were  submitted  to a vote of  security  holders  during the fourth
quarter of the year ended December 31, 1998.

                                       9

<PAGE>


                                     PART II


ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

The  Company's  Common  Stock is  traded in the  over-the-counter  market on the
Nasdaq National  Market.  As of March 5, 1999,  there were  approximately  4,000
stockholders of record.  The following table sets forth,  for the fiscal periods
indicated, the high and low closing prices for the Common Stock, all as reported
by Nasdaq.


        1996                                      High            Low
       ----------------------------------------------------------------
        First Quarter                           $ 14.75        $ 10.25
        Second Quarter                            18.63          13.00
        Third Quarter                             16.63          12.25
        Fourth Quarter                            17.75          14.63


        1997
       ----------------------------------------------------------------
        First Quarter                           $ 20.88        $  8.63
        Second Quarter                            10.94           6.50
        Third Quarter                              7.94           5.38
        Fourth Quarter                             7.25           4.94


        1998
       ----------------------------------------------------------------
        First Quarter                           $  8.69        $  6.25
        Second Quarter                             6.94           3.75
        Third Quarter                              4.88           3.00
        Fourth Quarter                             4.88           2.31


The  Company has never paid or declared  any cash  dividends.  It is the present
policy of the Company to retain  earnings to finance the growth and  development
of the business  and,  therefore,  the Company does not  anticipate  paying cash
dividends on its Common Stock in the foreseeable future.

                                       10

<PAGE>


<TABLE>
ITEM 6. SELECTED FINANCIAL DATA

<CAPTION>
                                                                                    Years Ended December 31,
                                                               1998            1997            1996            1995           1994
------------------------------------------------------------------------------------------------------------------------------------
                                                                             (in thousands, except per share amounts)
<S>                                                          <C>             <C>             <C>             <C>            <C>     
Statement of Operations Data:
Net sales                                                    $ 28,585        $ 34,798        $ 53,080        $ 47,144       $ 33,463
Cost of sales                                                  17,250          25,341          28,590          24,690         17,507
                                                             -----------------------------------------------------------------------
     Gross profit                                              11,335           9,457          24,490          22,454         15,956
                                                             -----------------------------------------------------------------------
Operating expenses:
     Research and development                                  11,485           9,757           8,570           4,811          3,473
     Marketing and selling                                      6,010          13,242          11,849           7,319          4,361
     General and administrative                                 3,234           3,982           3,378           2,226          1,618
     Acquired research and development in
      process and product integration costs                      --             6,462          13,732            --             --
     Restructuring expense                                       --             3,662            --              --             --
                                                             -----------------------------------------------------------------------
       Total operating expenses                                20,729          37,105          37,529          14,356          9,452
                                                             -----------------------------------------------------------------------
Income (loss) from operations                                  (9,394)        (27,648)        (13,039)          8,098          6,504
Interest income, net                                            1,505           1,680           1,745           2,236            577
                                                             -----------------------------------------------------------------------
Income (loss) before income taxes                              (7,889)        (25,968)        (11,294)         10,334          7,081
Provision for (benefit from) income taxes                        --            (3,526)            608           3,617          1,416
                                                             -----------------------------------------------------------------------
Net income (loss)                                            $ (7,889)       $(22,442)       $(11,902)       $  6,717       $  5,665
                                                             =======================================================================

Net income (loss) per share:
    Basic                                                    $  (0.64)       $  (1.85)       $  (1.01)       $   0.60       $   1.72
                                                             =======================================================================
    Diluted                                                  $  (0.64)       $  (1.85)       $  (1.01)       $   0.57       $   0.64
                                                             =======================================================================

Weighted average common shares:
    Basic                                                      12,281          12,154          11,760          11,147          3,302
                                                             =======================================================================
    Diluted                                                    12,281          12,154          11,760          11,736          8,906
                                                             =======================================================================
</TABLE>


                                                 December 31,
                                  1998       1997      1996      1995     1994
--------------------------------------------------------------------------------
                                                (in thousands)
Balance Sheet Data:
  Working capital                $26,070   $34,439   $54,997   $63,269   $55,720
  Total assets                    35,549    45,889    71,434    70,111    65,209
  Stockholders' equity            30,972    38,679    59,857    65,709    57,758

                                       11

<PAGE>


ITEM 7. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The  following  forward-looking  statements  are made in reliance  upon the safe
harbor provisions of the Private  Securities  Litigation Reform Act of 1995. The
future events  described in such  statements  involve  risks and  uncertainties,
including:

o    the timely development and market acceptance of new products;
o    the  market  demand  by  customers  for the  Company's  existing  products,
     including demand by OEM customers for custom products;
o    competitive actions,  including pricing actions and the introduction of new
     competitive products,  that may affect the volume of sales of the Company's
     products;
o    uninterrupted supply of key components, including semiconductor devices and
     other materials, some of which may be sourced from a single supplier;
o    uninterrupted service by subcontractors;
o    the  ability of the  Company to  recruit,  train and retain key  personnel,
     including engineers and other technical professionals;
o    the development of new  technologies  rendering  existing  technologies and
     products obsolete;
o    the economies of countries  where the Company's  products are  distributed;
     and
o    general market conditions.

In evaluating these  forward-looking  statements,  consideration  should also be
given to the Business  Risks  discussed  in a subsequent  section of this annual
report.


RESULTS OF OPERATIONS

Net Sales

Net  sales  were  $28.6,  $34.8  and  $53.1  million  in 1998,  1997  and  1996,
respectively.  The sequential  decrease in sales from 1996 to 1998 was primarily
attributed to decreased shipments of products based on the FDDI technology.  Net
sales of FDDI products totaled $17.5 million in 1998,  compared to $22.9 million
in 1997.  Net sales of Fast  Ethernet  switching  products  remained  relatively
consistent:  net sales  totaled $11.1 million in 1998 and $11.9 million in 1997.
Unit shipments of Fast Ethernet  switching  products  increased slightly in 1998
primarily due to the introduction of the Fast Ethernet  commodity-like  products
in 1998.  However,  the increase was offset by the declining  average unit sales
price due to price competition in the commodity-like products market.

Sales to OEM customers  were $19.4,  $22.0 and $30.5  million in 1998,  1997 and
1996,  respectively.  As a percentage  of net sales,  shipments to OEM customers
represented 68%, 63% and 57% in 1998, 1997 and 1996,  respectively.  The balance
of sales was made to distribution channels.  Distribution sales were $9.2, $12.8
and $22.6 million in 1998,  1997 and 1996,  respectively.  Sales to customers in
North  America  were  $19.7,  $25.8 and $42.0  million  in 1998,  1997 and 1996,
respectively. The balance of sales to customers in Asia and Europe totaled $8.9,
$9.0 and $11.1 million in 1998, 1997 and 1996, respectively.

The decrease in sales to OEM  customers  and  customers in North America in 1998
and 1997 reflected  decreased shipments of FDDI products as discussed above. The
decrease in  distribution  sales as well as  international  sales was  primarily
attributed  to  the   Company's   refocusing   its  effort  to  strengthen   OEM
relationships,  weakness  in the Asian  economies  and the  maturity of the Fast
Ethernet products in general.

As the factors  attributable  to the  decrease in sales  continue to exist,  the
Company does not expect  noticeable growth in sales until the volume shipment of
the  next  generation  Layer 3  gigabit-class  switches,  NuWave,  commences  in
mid-1999.  The  majority of the NuWave  products  are expected to be sold to OEM
customers.

Gross Profit/Margin

The gross  margin in 1998 was 40%,  compared to gross  margins of 27% and 46% in
1997 and 1996, respectively.  The gross margin in 1998 improved from 1997 due to
the absence of significant inventory charges recorded in 1997. However, the 1998
gross  margin was below the  historical  level  (prior to 1997) due to decreased
sales of higher-margin FDDI products,  competitive  pricing on the Fast Ethernet
switching   products,   and   the   introduction   of  the   lower-priced   Fast
Ethernet   commodity-like   products  in  1998.   The  gross  margin   in   1997
was   exceptionally   low,    which    reflected   a    write-off    of    slow-

                                       12

<PAGE>


moving and obsolete  inventories  totaling  $5.1  million and  one-time  charges
associated  with  the  transfer  of  production  of  FDDI  products  to  turnkey
manufacturers.

The Company  expects that,  prior to the  introduction of the NuWave products in
mid-1999,  the gross margin may decrease  slightly from the 1998 level primarily
due to the declining sales of FDDI products and continued price competition.  To
reduce  manufacturing  costs,  the  Company  intends to  terminate  its  turnkey
manufacturing model in the U.S. and relocate all manufacturing operations to its
facilities  in  Taiwan  during  the  first  half of 1999.  This  transition,  in
conjunction  with potentially  higher margins of the NuWave products  commencing
shipment in mid-year, is expected to yield a higher gross margin in 1999.

Research and Development

Research and development  expenses were $11.5,  $9.8 and $8.6 million,  in 1998,
1997 and 1996,  respectively.  As a  percentage  of the  respective  net  sales,
expenses  were 40%, 28% and 16%.  Expenses in 1997 and 1996 were net of contract
funding of $217,000 and $556,000, respectively. No contract funding was received
in 1998.  The increase in expenses in 1998 and 1997 was primarily  attributed to
increased resources expended in the development of the Company's next generation
Layer 3 gigabit-class  switches,  NuWave.  Significant  expenditures,  including
outside consultant fees and non-recurring  engineering charges, were incurred to
develop  the  NuWave  ASICs  (Application-Specific   Integration  Circuits).  In
addition,  the Company incurred a one-time charge of  approximately  $500,000 in
the  third  quarter  of 1998 in  connection  with  the  elimination  of  certain
non-critical  personnel  in research  and  development,  in an effort to further
streamline operations.

The  Company  continues  to  invest a  substantial  amount of its  resources  in
developing the NuWave products.  However,  the Company expects that the research
and development expenses will gradually decline from the current level after the
development  of the ASICs is  completed  and the volume  shipment  of the NuWave
products commences in mid-1999.

Marketing and Selling

Marketing and selling  expenses were $6.0, $13.2 and $11.8 million in 1998, 1997
and 1996,  respectively.  As a percentage of the respective net sales,  expenses
were 21%, 38% and 22%. The  decrease in expenses in 1998 was  attributed  to the
reduction in staff and closure of regional sales offices in conjunction with the
Company's restructuring of its business in 1997. The restructuring effort was in
alliance  with the  Company's  strategy  to focus on the  broadening  of its OEM
customer base, which required less sales and marketing  resources.  The increase
in  expenses  in 1997  primarily  reflected  an overall  increase in payroll and
overhead costs as a result of the  acquisition of NuCom and an escalated  effort
to expand the existing distribution channel through mid-1997.

The Company expects to increase spending in marketing and selling  activities in
1999 in order to launch the NuWave  product  line and to  establish a leadership
presence  within the industry  through  various  advertising  campaigns,  direct
mailings and trade show exhibitions.

General and Administrative

General and  administrative  expenses were $3.2,  $4.0 and $3.4 million in 1998,
1997 and 1996, respectively. As a percentage of net sales, expenses were 11% for
both 1998 and 1997 and 6% for 1996. The decrease in expenses in 1998 reflected a
reduction  in  payroll  costs as a  result  of the  restructuring  in 1997 and a
diminished utilization of outside consultants.  The increase in expenses in 1997
from 1996 reflected  additional payroll and other overhead costs associated with
the  acquisition  of NuCom.  The  Company  expects  general  and  administrative
expenses in 1999 to remain relatively consistent with 1998.

Acquired Research and Development In Process and Product Integration Costs

In  April  1997,  the  Company  acquired   NetVision   Corporation,   a  company
specializing  in LAN switching and gigabit  Ethernet  technologies.  The Company
expensed  $6.5  million of acquired  research  and  development  in process as a
result of the  acquisition.  In March 1996, the Company  acquired NuCom Systems,
Inc., a Taiwan-based  company  developing Fast Ethernet LAN switching  products.
The Company  expensed  $13.7  million of acquired  research and  development  in
process and product integration costs as a result of the acquisition. See Note 8
of Notes to  Consolidated  Financial  Statements  for more details in connection
with the acquisitions discussed above.

                                       13

<PAGE>


Restructuring

In the third quarter of 1997, the Company  incurred a charge of $3.7 million for
the  restructuring of its business.  The  restructuring  included a reduction in
work force, closure of certain sales and manufacturing facilities, retirement of
impaired  assets and write-off of goodwill  associated  with the  acquisition of
NuCom.  The Company  completed the  restructuring in the second quarter of 1998.
See Note 9 of Notes to Consolidated Financial Statements.

Interest Income

Interest  income was $1.5 million in 1998,  compared to $1.7 million in 1997 and
1996. The decrease was primarily due to a lower aggregate  balance of cash, cash
equivalents  and  short-term  investments  in 1998.  The  Company  maintained  a
comparable  return on  investment  of $1.7  million  in 1997  compared  to 1996,
despite a lower  invested  fund  balance  in 1997.  This  higher  rate of return
reflected  a shift from  short-term  investments  in  tax-exempt  securities  to
taxable corporate securities in mid-1997.

Income Taxes

The Company did not record a tax benefit  associated  with the net loss incurred
in 1998, as the realization of deferred tax assets is deemed  uncertain based on
evidence currently  available and,  accordingly,  a full valuation allowance has
been  provided.  During  1998,  the Company  received an income tax refund of $4
million as a result of the  carryback  claim of the 1997 net  operating  loss to
offset net income recognized in 1995 and 1994. The related tax benefit was fully
recognized in 1997.

The Company's  effective tax rate for 1997 and 1996 was a benefit of 13.6% and a
provision of 5.4%, respectively. The effective tax rate for 1997 reflected a net
loss and was reduced by a full valuation allowance provided against deferred tax
assets.  The  effective  tax rates for 1997 and 1996  excluded  the  charges  of
acquired  research and  development  in process,  which are  non-deductible  for
income tax purposes.

Euro Conversion

The Company has a wholly owned  subsidiary in the  Netherlands,  which is one of
the 11 European  countries  participating  in the adoption of a common currency,
the Euro, on January 1, 1999. Following the introduction of the Euro, the legacy
currency in each participating  country remains as legal tender until January 1,
2002. During the transition  period,  either the Euro or the legacy currency may
be used to pay for goods and services.  Beginning January 1, 2002, participating
countries  will  issue new  Euro-denominated  bills and  coins,  and the  legacy
currency will no longer be the legal tender for any  transactions  after July 1,
2002.

The  Company's  subsidiary in the  Netherlands  is a sales office for the entire
European  region.  Sales made to all European  countries are  denominated  in US
dollars.  Expenses  incurred by this  subsidiary are currently paid in guilders,
the legacy currency.  In 1998, sales to all European customers accounted for 10%
of the Company's total sales,  and 6% of the Company's total operating  expenses
were  attributable  to  this  subsidiary.   Due  to  the  immateriality  of  the
Netherlands  subsidiary  relative to the Company's  operations  as a whole,  the
Company believes the Euro conversion will not have any significant impact to the
Company's results of operations during and after the transition period.

Year 2000 Compliance

Many computer  systems were designed using two digits rather than four digits to
define  a  specific  year.  Thus  as the  Year  2000  approaches,  the  improper
identification  of the  year  could  result  in  system  failures  or  erroneous
calculations.  To address this issue,  the Company is  conducting a program (the
Program) to assess and address  Year 2000 issues for its  products,  information
systems, operational infrastructure, and suppliers.

The Company has completed an  assessment  of its current and  installed  base of
products.  The Company believes that substantially all products  manufactured on
or after August 1, 1997 are Year 2000 compliant,  with the exception of the EIFO
family  of  switches,  which  sold  minimally  in 1997 and  1998.  For the older
products and the EIFO products, which are deemed not in compliance,  the Company
believes  they will  continue to perform all  essential  and material  functions
after the year 2000; but in limited circumstances,  they may incorrectly display
or report  the date  within  the  network  management  software.  Given that the
installed base of non-compliant products has diminished as time elapsed and that
the non-compliant  products will perform their standard  functions,  the Company
expects most of its end-users will not have issue with the Company's products in
the year 2000.

                                       14

<PAGE>

The Company has  substantially  completed its assessment and  remediation of its
information  systems.  With  the  recent  implementation  of an ERP  (enterprise
resource planning) and  standardization of its network and desktop  applications
completed  in  1998,  the  Company  believes  its  information  systems  in  its
headquarters are in compliance with year 2000.  Similarly,  the Company's remote
locations,  in New York and in the Netherlands,  have completed an update of its
information  systems and are also  believed to be in  compliance.  The Company's
manufacturing  facility  in  Taiwan  is in its final  stages  of  upgrading  its
information systems,  including ERP, and is expected to be in compliance by June
1999.

In 1998,  the Company  purchased and put into operation a new SMT (surface mount
technology) line in its  manufacturing  facility where  substantially all of its
manufacturing  will be  performed  in 2000 and  beyond.  Certification  from the
manufacturer  of the equipment has not yet been  received.  However,  due to the
newness of the  equipment,  the Company  believes  that  embedded  chips in this
equipment are likely to be year 2000 compliant. The Company's  telecommunication
systems,  security  system,  electrical  power system and other mission critical
systems in its operational  infrastructure  in all locations are currently being
assessed for compliance.  Completion of this phase of the Program is expected in
June 1999.

The Company is  conducting a survey of all its  suppliers  and third parties for
their year 2000  readiness and is expected to complete  this  assessment by June
1999.  The Company is currently  developing a plan to address  circumstances  of
non-compliance of a supplier or third party.

A contingency plan is being  established and is expected to be completed by June
1999. As the Company's Program is substantially  complete,  the incremental cost
to fully complete the Program in 1999 is expected to be less than $100,000.

Despite the  Company's  efforts (1) to identify the Year 2000  compliance of its
products  and the  effects of any  non-compliance,  (2) to assess  and  mitigate
non-compliance  of its information  systems and its operational  infrastructure,
and (3) to address suppliers  readiness,  the Company cannot be certain that all
areas  have  been  identified  or that  the  solutions  implemented  to  address
non-compliance  will be  successful.  There remains a risk that the failures and
difficulties  encounter in the Program may disrupt operations and cause material
adverse effects on the Company's result of operations and financial condition.


LIQUIDITY AND CAPITAL RESOURCES

The  Company's  working  capital was $26.1 million and $34.4 million at December
31, 1998 and December 31, 1997,  respectively,  and the current  ratio (ratio of
current assets to current  liabilities) was 6.7 to 1 and 5.8 to 1, respectively.
The aggregate  balance of cash,  cash  equivalents  and short-term  investments,
which  decreased  to $23.4  million at December  31, 1998 from $30.5  million at
December 31, 1997,  was used  primarily to finance the Company's  operations and
capital  expenditures.  In 1998, net cash used in operating  activities was $4.2
million,  which was principally  attributed to the net loss for the year of $7.9
million,  partially  offset by an income tax refund of $4 million.  In 1997, net
cash used in operating activities was $6.9 million,  which was attributed to the
net loss for the year of $22.4 million,  partially offset by non-cash charges of
$12.1  million in total and a  decrease  in  inventories  of $6.8  million.  The
Company  expects the  deficiency in cash flow from  operations to continue until
after the volume  shipment of the NuWave products starts in mid-1999 and overall
sales begin to improve.

The Company's capital expenditures totaled $2.6 million and $2.3 million in 1998
and 1997,  respectively,  and were related to  purchases  of  equipment  used in
production and development  activities and other computer software and equipment
for the upgrade and enhancement of the information systems. In 1999, the Company
plans to incur capital expenditures of approximately $1.3 million.

The Company's  principal sources of liquidity are its cash, cash equivalents and
short-term  investments.  The  Company  also  has a  revolving  line  of  credit
agreement,  which  provides for  borrowings up to $5 million,  none of which has
been drawn down.  The Company was in  compliance  with all  financial  covenants
under the  line-of-credit  agreement.  The  Company  believes  that its  current
balance of cash, cash equivalents,  and short-term investments and its borrowing
capacity are  sufficient  to satisfy the Company's  working  capital and capital
expenditure requirements for the next 12 months.

BUSINESS RISKS

In  addition  to the  factors  addressed  in  the  preceding  sections,  certain
characteristics  and  dynamics  of  the  Company's  markets,   technologies  and
operations  create risks to the Company's  long-term  success and to predictable
quarterly results. These risks will also affect the Company's ability to achieve
the  results   anticipated   by  the   forward-looking   statements    contained
in   this   report.    The   Company's   quarterly   results    have   in    the
past    varied    and     are     expected    in    the     future    to    vary

                                       15

<PAGE>


significantly  as a  result  of  factors  such as the  timing  and  shipment  of
significant orders, new product  introductions or technological  advances by the
Company and its competitors,  market  acceptance of new or enhanced  versions of
the  Company's  products,  changes in pricing  policies  by the  Company and its
competitors,  the mix of  distribution  channels  through  which  the  Company's
products are sold,  the mix of products  sold,  the accuracy of  resellers'  and
OEM's  forecast  of  end-user  demand,  the  ability  of the  Company  to obtain
sufficient  supplies  of sole or limited  source  components  for the  Company's
products, the ability of turnkey manufacturers to meet the Company's demand, and
general economic conditions. In response to competitive pressures or new product
introductions,  the Company may take certain  pricing or marketing  actions that
could materially and adversely affect the Company's  operating  results.  In the
event of a reduction in the prices of its products, the Company has committed to
providing retroactive price adjustments on inventories held by its distributors,
which  could have the effect of  reducing  margins  and  operating  results.  In
addition,  changes  in the mix of  products  sold  and  the mix of  distribution
channels through which the Company's products are sold may cause fluctuations in
the Company's gross margins. The Company's expense levels are based, in part, on
its  expectations  of its future  revenue and, as a result,  net income would be
disproportionately  affected by a reduction  in  revenue.  Due to the  potential
quarterly   fluctuation  in  operating   results,   the  Company  believes  that
quarter-to-quarter  comparisons of its results of operations are not necessarily
meaningful and should not be relied upon as indicators of future performance.

The markets for the Company's  products are  characterized  by rapidly  changing
technology,  evolving industry standards, frequent new product introductions and
short product life cycles.  These changes can adversely  affect the business and
operating  results of industry  participants.  The Company's success will depend
upon its ability to enhance its existing  products and to develop and introduce,
on a  timely  and  cost-effective  basis,  new  products  that  keep  pace  with
technological   developments  and  emerging   industry   standards  and  address
increasingly  sophisticated customer requirements.  The inability to develop and
manufacture  new products in a timely  manner,  the  existence  of  reliability,
quality or  availability  problems  in the  products or their  component  parts,
failure by its foundry to fabricate and supply proprietary ASICs, the failure to
obtain  reliable  subcontractors  for volume  production  and  testing of mature
products,  or the  failure to achieve  market  acceptance  would have a material
adverse effect on the Company's business and operating results.

The  markets in which the Company  competes  are also  characterized  by intense
competition.  Several of the Company's  competitors have  significantly  broader
product  offerings  and  greater  financial,   technical,  marketing  and  other
resources  and  finished   installed  bases  than  the  Company.   These  larger
competitors  may also be able to obtain higher  priority for their products from
distributors and other resellers that carry products of many companies. A number
of the Company's  competitors were recently acquired,  which is likely to permit
these competitors to devote  significantly  greater resources to the development
and  marketing  of  competitive  products.  These  competitive  pressures  could
adversely affect the Company's business and operating results.


ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company's cash equivalents and short-term  investments  ("investments")  are
exposed to  financial  market  risk due to  fluctuation  in  interest  rates and
foreign exchange rates, which may affect its interest income and the fair values
of its investments. The Company manages the exposure to financial market risk by
performing  ongoing  evaluation  of its  investment  portfolio  and investing in
short-term investment grade corporate  securities,  which mature within the next
12 months.  In  addition,  the Company does not use  investments  for trading or
other speculative purposes.  The effect of fluctuation in foreign exchange rates
is  immaterial  as  the  majority  of  the  investments   held  by  its  foreign
subsidiaries  are  denominated  in US dollars.  For the year ended  December 31,
1998, the average rate of return on the  investments was  approximately  5.5%. A
hypothetical  10%  fluctuation  in interest rate in 1999 may change the interest
income  by  approximately   $130,000.   Due  to  the  short  maturities  of  its
investments,  the carrying value  approximates the fair value, and the impact of
the fluctuation in interest rate to the carrying value is deemed immaterial.

                                       16

<PAGE>


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Financial Statements:                                                       Page

    Report of Independent Accountants....................................... 18
    Consolidated Balance Sheets at December 31, 1998 and 1997............... 19
    Consolidated Statements of Operations for the Years Ended December 31,
       1998, 1997 and 1996.................................................. 20
    Consolidated Statements of Stockholders' Equity for the Years Ended
       December 31, 1998, 1997 and 1996..................................... 21
    Consolidated Statements of Cash Flows for the Years Ended December 31,
       1998, 1997 and 1996.................................................. 22
    Notes to Consolidated Financial Statements.............................. 23


Financial Statement Schedule:

    For the three years ended December 31, 1998, 1997 and 1996
       Schedule II - Valuation and Qualifying Accounts...................... 38


Schedules  other than those listed above have been omitted since either they are
not required or the information is included in the financial statements included
herewith.

                                       17

<PAGE>


REPORT OF INDEPENDENT ACCOUNTANTS


To the Board of Directors and Stockholders of Network Peripherals Inc.

In our  opinion,  the  financial  statements  listed in the  accompanying  index
present fairly, in all material respects, the consolidated financial position of
Network  Peripherals Inc. and its subsidiaries at December 31, 1998 and 1997 and
the results of their operations and their cash flows for each of the three years
in the period ended  December 31, 1998, in conformity  with  generally  accepted
accounting principles.  These financial statements are the responsibility of the
Company's  management;  our  responsibility  is to  express  an opinion on these
financial  statements  based on our  audits.  We  conducted  our audits of these
statements  in accordance  with  generally  accepted  auditing  standards  which
require that we plan and perform the audit to obtain reasonable  assurance about
whether the financial  statements  are free of material  misstatement.  An audit
includes  examining,  on a test  basis,  evidence  supporting  the  amounts  and
disclosures in the financial  statements,  assessing the  accounting  principles
used and  significant  estimates made by management,  and evaluating the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for the opinion expressed above.


PricewaterhouseCoopers LLP
San Jose, California
January 25, 1999

                                       18

<PAGE>


<TABLE>
                                                      NETWORK PERIPHERALS INC.

                                                     CONSOLIDATED BALANCE SHEETS

                                                  (in thousands, except share data)

<CAPTION>
                                                                                                               December 31,
                                                                                                         1998                1997
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                                    <C>                 <C>     
ASSETS

Current assets:
     Cash and cash equivalents                                                                         $  5,537            $ 16,094
     Short-term investments                                                                              17,814              14,371
     Accounts receivable, net of allowance for doubtful accounts and
        returns; 1998, $523, and 1997, $1,184                                                             3,430               5,170
     Inventories                                                                                          3,124               1,417
     Income tax refund receivable                                                                          --                 3,983
     Prepaid expenses and other current assets                                                              742                 614
                                                                                                       ----------------------------
              Total current assets                                                                       30,647              41,649
Property and equipment, net                                                                               4,560               3,876
Other assets                                                                                                342                 364
                                                                                                       ----------------------------
                                                                                                       $ 35,549            $ 45,889
                                                                                                       ============================


LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
     Accounts payable                                                                                  $  2,450            $  1,671
     Accrued liabilities                                                                                  2,127               5,539
                                                                                                       ----------------------------
              Total current liabilities                                                                   4,577               7,210
                                                                                                       ----------------------------

Commitments (Note 5)

Stockholders' equity:
     Preferred Stock, $0.001 par value, 2,000,000 shares authorized;
        no shares issued or outstanding                                                                    --                  --
     Common Stock, $0.001 par value, 20,000,000 shares authorized;
        1998, 12,292,000, and 1997, 12,252,000 shares issued and outstanding                                 12                  12
     Additional paid-in capital                                                                          64,060              63,878
     Accumulated deficit                                                                                (33,100)            (25,211)
                                                                                                       ----------------------------
              Total stockholders' equity                                                                 30,972              38,679
                                                                                                       ----------------------------
                                                                                                       $ 35,549            $ 45,889
                                                                                                       ============================

<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>

                                                                 19

<PAGE>


<TABLE>
                                                      NETWORK PERIPHERALS INC.

                                                CONSOLIDATED STATEMENTS OF OPERATIONS

                                                (in thousands, except per share data)

<CAPTION>
                                                                                              Years Ended December 31,
                                                                                       1998               1997               1996
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                  <C>                <C>                <C>     
Net sales                                                                            $ 28,585           $ 34,798           $ 53,080
Cost of sales                                                                          17,250             25,341             28,590
                                                                                     ----------------------------------------------
     Gross profit                                                                      11,335              9,457             24,490
                                                                                     ----------------------------------------------
Operating expenses:
     Research and development                                                          11,485              9,757              8,570
     Marketing and selling                                                              6,010             13,242             11,849
     General and administrative                                                         3,234              3,982              3,378
     Acquired research and development in process and
        product integration costs                                                        --                6,462             13,732
     Restructuring expense                                                               --                3,662               --
                                                                                     ----------------------------------------------
         Total operating expenses                                                      20,729             37,105             37,529
                                                                                     ----------------------------------------------
Loss from operations                                                                   (9,394)           (27,648)           (13,039)
Interest income                                                                         1,505              1,680              1,745
                                                                                     ----------------------------------------------
Loss before income taxes                                                               (7,889)           (25,968)           (11,294)
Provision for (benefit from) income taxes                                                --               (3,526)               608
                                                                                     ----------------------------------------------
Net loss                                                                             $ (7,889)          $(22,442)          $(11,902)
                                                                                     ==============================================


Net loss per share:
    Basic                                                                            $  (0.64)          $  (1.85)          $  (1.01)
                                                                                     ==============================================
    Diluted                                                                          $  (0.64)          $  (1.85)          $  (1.01)
                                                                                     ==============================================

Weighted average common shares:
    Basic                                                                              12,281             12,154             11,760
                                                                                     ==============================================
    Diluted                                                                            12,281             12,154             11,760
                                                                                     ==============================================

<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>

                                                                 20

<PAGE>


<TABLE>
                                                      NETWORK PERIPHERALS INC.

                                           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                                                           (in thousands)

<CAPTION>
                                                                                                             Retained
                                                                             Additional                      Earnings
                                                       Common Stock             Paid-In          Notes   (Accumulated
                                                    Shares       Amount         Capital     Receivable       Deficit)       Total
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                  <C>         <C>           <C>           <C>            <C>            <C>     
Balance at December 31, 1995                         11,268      $     11      $ 56,579      $    (14)      $  9,133       $ 65,709
Repayment of stockholders' notes
     receivable                                        --            --            --              14           --               14
Issuance of Common Stock upon
     exercise of stock options                          200          --             228          --             --              228
Issuance of Common Stock under
     employee stock purchase plan                        45          --             385          --             --              385
Income tax benefit associated with
     nonqualified stock options                        --            --              28          --             --               28
Issuance of Common Stock for
     acquisition of NuCom Systems                       441             1         5,341          --             --            5,342
Foreign currency translation                           --            --              53          --             --               53
     adjustment
Net loss                                               --            --            --            --          (11,902)       (11,902)
                                                   --------------------------------------------------------------------------------

Balance at December 31,1996                          11,954            12        62,614          --           (2,769)        59,857
Issuance of Common Stock upon
     exercise of stock options                          224          --             410          --             --              410
Issuance of Common Stock under
     employee stock purchase plan                        74          --             451          --             --              451
Income tax benefit associated with
     nonqualified stock options                        --            --             403          --             --              403
Net loss                                               --            --            --            --          (22,442)       (22,442)
                                                   --------------------------------------------------------------------------------

Balance at December 31, 1997                         12,252            12        63,878          --          (25,211)        38,679
Issuance of Common Stock upon
     exercise of stock options                            8          --              38          --             --               38
Issuance of Common Stock under
     employee stock purchase plan                        32          --             144          --             --              144
Net loss                                               --            --            --            --           (7,889)        (7,889)
                                                   --------------------------------------------------------------------------------

Balance at December 31, 1998                         12,292      $     12      $ 64,060      $   --         $(33,100)      $ 30,972
                                                   ================================================================================

<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>

                                                                 21

<PAGE>


<TABLE>
                                                      NETWORK PERIPHERALS INC.

                                                CONSOLIDATED STATEMENTS OF CASH FLOWS

                                          Increase (Decrease) in Cash and Cash Equivalents
                                                           (in thousands)

<CAPTION>
                                                                                                Years Ended December 31,
                                                                                         1998              1997              1996
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                    <C>               <C>               <C>      
Cash flows from operating activities:
    Net loss                                                                           $ (7,889)         $(22,442)         $(11,902)
    Adjustments to reconcile net loss to net cash provided by
       (used in) operating activities:
       Depreciation and amortization                                                      1,960             1,969             2,111
       Amortization of goodwill                                                              40             1,350               665
       Acquired research and development in process                                        --               6,462            13,032
       Deferred income taxes                                                               --               2,289               (56)
       Changes in assets and liabilities:
         Accounts receivable                                                              1,740             3,189            (1,845)
         Inventories                                                                     (1,707)            6,811              (664)
         Income tax refund receivable                                                     3,983            (3,580)             --
         Prepaid expenses and other assets                                                 (146)            1,026               862
         Accounts payable                                                                   779            (1,321)            1,439
         Accrued liabilities                                                             (2,956)           (2,644)            1,623
                                                                                       --------------------------------------------
             Net cash provided by (used in) operating activities                         (4,196)           (6,891)            5,265
                                                                                       --------------------------------------------

Cash flows from investing activities:
    Purchases of property and equipment                                                  (2,644)           (2,270)           (2,927)
    Purchases of short-term investments                                                  (3,443)             --                --
    Proceeds from sales or maturity of short-term investments                              --               7,979             2,581
    Cash paid for acquisition, net of cash acquired                                        --              (6,449)          (10,401)
    Holdback amount from acquisition                                                       (456)             (659)            1,115
                                                                                       --------------------------------------------
             Net cash used in investing activities                                       (6,543)           (1,399)           (9,632)
                                                                                       --------------------------------------------

Cash flows from financing activities:
    Proceeds from issuance of Common Stock                                                  182               861               613
    Repayment of stockholders' notes receivable                                            --                --                  14
                                                                                       --------------------------------------------
             Net cash provided by financing activities                                      182               861               627
                                                                                       --------------------------------------------

Effect of exchange rate changes on cash                                                    --                --                  53
                                                                                       --------------------------------------------

Net decrease in cash and cash equivalents                                               (10,557)           (7,429)           (3,687)
Cash and cash equivalents, beginning of year                                             16,094            23,523            27,210
                                                                                       --------------------------------------------

Cash and cash equivalents, end of year                                                 $  5,537          $ 16,094          $ 23,523
                                                                                       ============================================

Supplemental disclosure of cash flow information
    Cash paid during the year for:
       Income taxes                                                                    $     67          $    158          $    245
    Non-cash transactions:
       Income tax benefit associated with nonqualified stock                           $   --            $    403          $     28
         options
       Common Stock issued for acquisition of NuCom                                    $   --            $   --            $  5,342

<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>

                                                                 22

<PAGE>


                            NETWORK PERIPHERALS INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1 - THE COMPANY

Network  Peripherals  Inc., a Delaware  corporation  (the  "Company"),  designs,
develops,  and manufactures  high  performance  networking  solutions,  which it
markets primarily to original equipment manufacturers, distributors, value-added
resellers and system  integrators.  The Company's solutions are designed for use
in workgroups, wiring closets and backbones.


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The consolidated  financial  statements  include the accounts of the Company and
its  wholly  owned  subsidiaries.  All  significant  intercompany  accounts  and
transactions have been eliminated.

Use of Estimates

The preparation of financial  statements in accordance  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect the  reported  amounts  of assets  and  liabilities  and  disclosures  of
contingent  assets and  liabilities at the date of the financial  statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.

Cash, Cash Equivalents and Short-Term Investments

The Company considers all highly liquid  investments  purchased with an original
maturity of 90 days or less to be cash  equivalents.  The  Company's  short-term
investments,  which consist of debt securities  with maturities  greater than 90
days and less than one year, have been classified as available-for-sale. For the
years ended December 31, 1998 and 1997, there were no material  unrealized gains
or losses.  Substantially  all short-term  investments are held in the Company's
name by major financial institutions.

Revenue Recognition

Revenue from product sales is recognized upon product shipment, provided that no
significant  obligations  remain and  collectability  is  probable.  The Company
provides to certain  distributors  limited rights of return and price protection
on unsold  inventory when specific  conditions  exist.  Provisions for estimated
costs of  warranty  repairs,  returns  and  allowances,  and  retroactive  price
adjustments  are recorded at the time  products are shipped (see Sales  Reserves
below).

Funding  under  certain  development  contracts  is  recognized  based  upon the
achievement of specified  contract  milestones.  Such funding is recognized as a
reduction of the related  development costs and totaled  approximately  $217,000
and $556,000 in 1997 and 1996,  respectively.  No such funding was recognized in
1998.

Sales Reserves

The Company provides  allowances for accounts  receivables deemed  uncollectible
and for sales returns and other credits, including credits for retroactive price
adjustments on sales  transacted  within 90 days prior to the period-end.  As of
December 31, 1998 and 1997, the Company's  allowances for such potential  events
totaled approximately $523,000 and $1,184,000,  respectively. As a percentage of
sales  transacted  within 90 days  prior to  December  31,  1998 and  1997,  the
allowances for sales returns and other credits were 8% and 18%, respectively.

                                       23

<PAGE>


                            NETWORK PERIPHERALS INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


Concentration of Credit Risk

Financial  instruments,  which potentially subject the Company to concentrations
of credit  risk,  consist  principally  of cash,  cash  equivalents,  short-term
investments and trade receivables.  The Company's cash investment policies limit
investments to those that are short-term and low risk.  Concentration  of credit
risk with respect to trade  receivables  is  generally  limited due to the large
number of customers  comprising the Company's  customer base,  their  dispersion
across many  different  geographies,  the Company's  on-going  evaluation of its
customers' credit worthiness,  and the established  long-term  relationship with
certain customers.

Inventories

Inventories  are  stated at the lower of cost,  using  the  first-in,  first-out
method, or market.

Property and Equipment

Property and equipment are stated at cost.  Depreciation  is computed  using the
straight-line  method over the  estimated  useful  life of the asset,  typically
three years.  Depreciation  of the Enterprise  Resource  Planning  systems,  the
information systems infrastructure, and certain manufacturing equipment is based
on an estimated useful life of five years.

Goodwill

Goodwill  represents the excess of the purchase price over the fair value of the
identifiable net assets acquired and is amortized on a straight-line  basis over
the expected period of benefit, generally five years. Periodically,  the Company
evaluates the goodwill for impairment and estimates the future undiscounted cash
flows of the acquired  business to ensure that the  carrying  value has not been
impaired.  As of  December  31,  1998 and  1997,  goodwill,  net of  accumulated
amortization, was $133,000 and $173,000, respectively, and was included in other
assets.

Software Development Costs

The Company's  software  products are integrated into its hardware  products and
are typically  available for general  release to customers  within 30 days after
technological feasibility has been achieved.  Accordingly,  the production costs
incurred after the establishment of technological feasibility and before general
release to customers are  immaterial,  thus the Company does not  capitalize any
software development costs.

Income Taxes

The  Company  accounts  for  income  taxes  under the  liability  method,  which
recognizes deferred tax assets and liabilities for the expected tax consequences
of temporary  differences  between the tax basis of assets and  liabilities  and
their financial statement reported amounts.

Foreign Currency Translation

The  functional  currency  of the  Company's  subsidiaries  in  Taiwan  and  the
Netherlands is the U.S.  dollar.  Accordingly,  gains or losses arising from the
translation  of foreign  currency  financial  statements  and  transactions  are
included in determining consolidated results of operations.

Employee Benefit Plans

The Company has stock option plans and offers a 401(k) plan  covering all of its
U.S. employees.  The 401(k) plan provides for matching contributions  determined
at the Company's discretion.  No such matching  contributions were made in 1998,
1997 and  1996.  The  Company  does not have  postretirement  or  postemployment
benefit plans; therefore,  Statements of Financial Accounting Standards ("SFAS")
No. 87, 106 and 112 regarding pension,  other  postretirement and postemployment
benefit plans do not affect the Company's financial statements.

                                       24

<PAGE>


                            NETWORK PERIPHERALS INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


Stock-based Compensation

The Company  accounts for  stock-based  awards to employees  using the intrinsic
value method in  accordance  with  Accounting  Principles  Board Opinion No. 25,
"Accounting  for Stock Issued to Employees"  ("APB 25"), as permitted  under the
provisions of SFAS No. 123,  "Accounting  for Stock-Based  Compensation"  ("SFAS
123").  Under APB 25, if the  exercise  price of the  Company's  employee  stock
options equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.

Net Income Per Share

Basic  earnings per share  ("EPS") are  computed as net earnings  divided by the
weighted-average number of common shares outstanding for the period. Diluted EPS
reflects the potential  dilution  that could occur from common  shares  issuable
through  stock-based  compensation  including  stock options,  restricted  stock
awards,  warrants,  and other  convertible  securities  using the treasury stock
method.

At December  31, 1998,  options to purchase  2,798,603  shares of the  Company's
common stock were  outstanding.  During 1998, the Company incurred losses,  such
that the inclusion of potential  common  shares would result in an  antidilutive
per share  amount.  As such, no adjustment is made to the basic EPS to arrive at
the diluted EPS.

Recently Issued Accounting Standards

In June 1997,  the FASB issued SFAS No. 131,  "Disclosures  about Segments of an
Enterprise  and  Related  Information"  ("SFAS  131"),  which is  effective  for
financial  statements issued for periods beginning after December 15, 1997. SFAS
131  establishes  standards  for public  companies to report  information  about
operating  segments in annual  financial  statements  and requires  reporting of
selected  information about operating  segments in interim financial  statements
issued to the public.  It also establishes  standards for disclosures  regarding
products and services,  geographic areas and major customers. In accordance with
the provisions of SFAS 131, the Company operated in one business segment in 1998
and 1997.

Reclassifications

Certain reclassifications have been made to the prior years' amounts in order to
conform to the current year's presentation.

                                       25

<PAGE>


                            NETWORK PERIPHERALS INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


NOTE 3 - BALANCE SHEET COMPONENTS (in thousands)

                                                               December 31,
                                                             1998        1997
--------------------------------------------------------------------------------
Cash, cash equivalents, and short-term investments:
     Cash and cash equivalents
         Cash and money market accounts                    $  2,508    $  2,532
         Corporate debt securities                            3,029      13,562
                                                           --------------------
                                                              5,537      16,094
     Short-term investments
         Corporate debt securities                           17,814      14,371
                                                           --------------------
                                                           $ 23,351    $ 30,465
                                                           ====================

Inventories:
     Raw materials                                         $    882    $    158
     Work-in-process                                            572         898
     Finished goods                                           1,670         361
                                                           --------------------
                                                           $  3,124    $  1,417
                                                           ====================

Property and equipment:
     Computer and equipment                                $  8,267    $  6,918
     Furniture and fixtures                                     920         895
     Leasehold improvements                                     306         303
                                                           --------------------
                                                              9,493       8,116
     Accumulated depreciation                                (4,933)     (4,240)
                                                           --------------------
                                                           $  4,560    $  3,876
                                                           ====================

Accrued liabilities:
     Salaries and benefits                                 $    973    $  1,750
     Warranty                                                   450         513
     Co-op advertising and market development funds             386         298
     Royalty                                                    250         746
     Reserve for contract settlements                          --         1,000
     Restructuring expense                                     --           597
     Holdback amount from acquisition                          --           456
     Other                                                       68         179
                                                           --------------------
                                                           $  2,127    $  5,539
                                                           ====================

                                       26

<PAGE>


                            NETWORK PERIPHERALS INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


NOTE 4 - LINE OF CREDIT

The Company  currently  has a $5 million  revolving  bank line of credit,  which
expires on July 31, 1999.  Borrowings  under the line of credit bear interest at
the lower of the bank's  prime rate or the London  Interbank  Offered  Rate plus
2.5% and are secured by the Company's receivables, inventory, and other tangible
assets.  There were no borrowings  under the line of credit in 1998 and 1997. As
of December 31, 1998, the Company was in compliance with the financial covenants
required by the line of credit agreement.


NOTE 5 - COMMITMENTS

The Company  leases its  corporate  headquarters  under an operating  lease that
expires  in  October  2000.  The  Company  also  has  research  and  development
facilities  in New York and  manufacturing  facilities  in Taiwan under  various
operating  leases  expiring  in  August  2002 and May 2001,  respectively.  Rent
expense for all Company facilities was $764,000, $931,000, and $868,000 in 1998,
1997, and 1996, respectively.

Future  minimum  lease  payments  as of  December  31,  1998 are as follows  (in
thousands):

          Years ending December 31,
                   1999                     $ 754
                   2000                       689
                   2001                       250
                   2002                        67
                                          -------
                                          $ 1,760
                                          =======


The Company  maintains  letter-of-credit  facilities of $3 million in total with
two  financial  institutions.  Approximately  $60,000  of  letters of credit was
issued and outstanding at December 31, 1998.

The Company has entered  into  licensing  agreements  with third  parties to use
certain  technologies in the Company's products.  Under the terms of the license
agreements,  the Company  pays a royalty  based upon a  percentage  of the sales
price or units shipped.  Royalty expenses  incurred are charged to cost of sales
in the period of the related sales and are payable in quarterly installments.


NOTE 6 - CAPITAL STOCK

Employee Stock Purchase Plan

Effective May 1998, the Company terminated the Employee Stock Purchase Plan (the
"Plan"), which allowed eligible employees to purchase the Company's Common Stock
at a discount through payroll deductions.  Prior to the termination of the Plan,
the Company reserved 250,000 shares of Common Stock for issuance under the Plan,
and the  Company  has issued  223,606  shares of Common  Stock for an  aggregate
purchase price of $1,434,000.

Stock Option Plans

The Company's  1997 Stock Plan, as amended,  (the "1997 Plan")  provides for the
granting of incentive and nonstatutory stock options and restricted stock awards
to eligible  employees,  directors  and  consultants.  The Company has  reserved
2,500,000 shares of the Company's Common Stock for issuance under the 1997 Plan.
Pursuant to the 1997 Plan,  the exercise price per share of each stock option is
determined by the Company's  Board of Directors,  provided that (i) the exercise
price for an incentive  stock option is not less than the fair market value of a
share of Common Stock on the date of the grant and (ii) the exercise price for a
nonstatutory  stock  option is not less than 85% of the fair  market  value of a
share of Common Stock on the date of the grant. Options under the 1997 Plan vest
over a period  determined  by the Board of  Directors,  which is generally  four
years. As of December 31, 1998,  options to purchase  1,795,093 shares of Common
Stock were  outstanding;  704,907 shares were  available for future grants;  and
2,500,000 shares were authorized but unissued.

                                       27

<PAGE>


                            NETWORK PERIPHERALS INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


Upon adoption of the 1997 Plan in April 1997,  the Company  terminated  the 1993
Stock Option Plan (the "1993 Plan") and the 1996 Nonstatutory  Stock Option Plan
(the "1996 Plan"). No further stock options were granted under the 1993 Plan and
the 1996 Plan.  Outstanding  options  and shares  issued  upon the  exercise  of
options  granted  continue  to be governed  by the terms and  conditions  of the
respective  plans.  As of  December  31,  1998,  options to  purchase a total of
958,510  shares  of  Common  Stock  under  the 1993  Plan and the 1996 Plan were
outstanding.

The 1994  Outside  Directors  Stock Option Plan (the "1994  Plan"),  as amended,
which  provides for the  automatic  granting of  nonqualified  stock  options to
directors of the Company  ("Outside  Director"),  has a total of 150,000  shares
reserved for issuance. Pursuant to the 1994 Plan, the Company grants to each new
Outside Director an option to purchase 15,000 shares of Common Stock and to each
Outside  Director an option to purchase 5,000 shares of Common Stock on the date
of each annual meeting of stockholders.  The exercise price of the stock options
will be the fair  market  value of the  Common  Stock on the date of grant,  and
options  vest over a period of four years.  At  December  31,  1998,  options to
purchase  45,000 shares of Common Stock were  outstanding;  105,000  shares were
available for future grants;  and 150,000 shares of Common Stock were authorized
but unissued under the 1994 Plan.

The  Company has  elected to  continue  to follow APB 25 in  accounting  for its
employee stock options and adopted the disclosure-only requirements of SFAS 123.
SFAS 123 requires the  disclosure of pro forma net income and earnings per share
as if the Company had  accounted  for its employee  stock options under the fair
value method in  accordance  with SFAS 123.  The fair value of these  options is
estimated on the date of grant using the Black-Scholes option-pricing model with
the  following  weighted-average  assumptions:  zero  dividend  yield;  expected
volatility  of 82.35% in 1998,  77.24% in 1997,  and  69.36% in 1996;  risk-free
interest rate of 4.64% in 1998, 5.36% in 1997 and 5.48% in 1996; and all options
are exercised at vesting.

Had  compensation  cost  for  the  Company's  employee  stock-based  plans  been
determined based on the fair value at the grant date for awards  consistent with
the  provisions of SFAS 123, the Company's net loss and net loss per share would
have been as follows (in thousands, except per share amount):


                                        1998            1997            1996
--------------------------------------------------------------------------------
Net loss - as reported               $   (7,889)     $  (22,442)     $  (11,902)
Net loss - pro forma                    (11,368)        (28,003)        (14,782)

Net loss per share:
   Basic - as reported                    (0.64)          (1.85)          (1.01)
   Basic - pro forma                      (0.93)          (2.30)          (1.26)

   Diluted - as reported                  (0.64)          (1.85)          (1.01)
   Diluted - pro forma                    (0.93)          (2.30)          (1.26)


Due to the broad  decline  in the market  price of the  Company's  Common  Stock
during 1997, a substantial  amount of stock options  granted had exercise prices
above the current market price.  On July 25, 1997 and  subsequently  October 31,
1997, the Company  offered stock option plan  participants  the right to replace
any  remaining  unexercised  stock options with an equal number of options at an
exercise price equal to the closing market price on such dates.

                                       28

<PAGE>


                            NETWORK PERIPHERALS INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


<TABLE>
The following table summarizes  information  about stock options  outstanding at
December 31, 1998:

<CAPTION>
                                             Outstanding                          Exercisable
                           --------------------------------------------    ------------------------
                                     Weighted Average        Weighted                  Weighted
     Range of                      Remaining Contractual     Average                    Average
  Exercise Prices          Shares     Life (in years)    Exercise Price    Shares    Exercise Price
  ---------------          --------------------------------------------    ------------------------
<S>                      <C>                <C>             <C>           <C>            <C>    
  $ 0.30 - $ 3.00          453,950          8.89            $  2.36        74,900        $  0.35
    3.88 -   4.94        2,121,133          8.48               4.68       775,642           4.85
    5.00 -   7.50          149,077          8.97               5.95        36,647           5.86
    7.63 -   9.13           48,443          8.86               8.05        10,051           8.17
   11.63 -  15.00           26,000          7.51              13.69        16,082          13.51
                         ---------                                        -------
                         2,798,603          8.57               4.52       913,322           4.71
                         =========                                        =======
</TABLE>


Stock options generally expire in 10 years from the date they are granted.

<TABLE>
The following table summarizes stock option  activities for all of the Company's
stock option plans:

<CAPTION>
                                                         Options       Weighted Average
                                                       Outstanding      Exercise Price
---------------------------------------------------------------------------------------
<S>                                                     <C>              <C>      
Balance at December 31, 1995                            1,120,126        $   10.19
Granted                                                 2,905,155            14.72
Exercised                                                (199,698)            1.14
Canceled                                                 (995,216)           15.76
                                                       ----------
Balance at December 31, 1996 (555,417 shares
  exercisable at a weighted average price
  of $8.47 per share)                                   2,830,367            13.52
Granted                                                 1,592,700             7.31
Exercised                                                (224,160)            1.89
Canceled                                               (1,602,345)           11.83
                                                       ----------
Balance at December 31, 1997 (312,413 shares
  exercisable at a weighted average price
  of $5.31 per share)                                   2,596,562             5.41
Granted                                                 1,298,150             4.11
Exercised                                                  (8,747)            4.23
Canceled                                               (1,087,362)            6.17
                                                       ----------
Balance at  December 31, 1998 (913,322 shares
  exercisable at weighted average price
  of $4.71 per share)                                   2,798,603             4.52
                                                       ==========
</TABLE>


The weighted  average  estimated  grant date fair value, as defined by SFAS 123,
for options granted under the stock option plans during 1998, 1997 and 1996 were
$1.98, $3.29 and $5.66, respectively.  The weighted average estimated grant date
fair  value,  as defined by SFAS 123,  for  purchase  rights  granted  under the
employee  stock purchase plan during 1998,  1997 and 1996 were $1.96,  $1.43 and
$2.89, respectively.

                                       29

<PAGE>


                            NETWORK PERIPHERALS INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


NOTE 7 - INCOME TAXES

The following is a  geographical  breakdown of  consolidated  loss before income
taxes (in thousands):

                                            Years ended December 31,
                                     1998              1997              1996
--------------------------------------------------------------------------------
Domestic                           $ (7,302)         $(21,761)         $ (1,626)
Foreign                                (587)           (4,207)           (9,668)
                                   -------------------------------------------- 
                                   $ (7,889)         $(25,968)         $(11,294)
                                   ============================================


Provision  for  (benefit  from)  income  taxes  consists  of the  following  (in
thousands):


                                             Years ended December 31,
                                       1998             1997             1996
--------------------------------------------------------------------------------
  Current:
   Federal                            $  --            $(5,815)         $   174
   State                                 --               --                 54
    Foreign                              --               --                436
                                      -----------------------------------------
                                         --             (5,815)             664
                                      -----------------------------------------
Deferred:
   Federal                               --              1,993              (46)
   State                                 --                296              (10)
                                      -----------------------------------------
                                         --              2,289              (56)
                                      -----------------------------------------
                                      $  --            $(3,526)         $   608
                                      =========================================


<TABLE>
The provision for income taxes differs from the amount of income tax  determined
by applying the  applicable  U.S.  statutory  income tax rate to pre-tax loss as
follows:

<CAPTION>
                                                                            Years ended December 31,
                                                                      1998            1997          1996
----------------------------------------------------------------------------------------------------------
<S>                                                                  <C>             <C>           <C>    
  Federal statutory rate                                             (35.0%)         (35.0%)       (35.0%)
  State tax, net of federal impact                                     --             (6.0)          0.3
  Research and development tax credits                                 --             (0.8)         (1.1)
  Tax-exempt interest income                                           --             (1.0)         (4.5)
  Provision for valuation allowance on deferred tax assets            35.0            22.1            --
  Nondeductible acquisition costs                                      --              8.6          45.6
  Other                                                                --             (1.5)          0.1
                                                                     -------------------------------------
                                                                       --            (13.6%)         5.4%
                                                                     =====================================
</TABLE>


Deferred tax assets consist of the following (in thousands):

                                                                December 31,
                                                             1998         1997
--------------------------------------------------------------------------------
Net operating loss and credits carryforwards               $ 3,920      $ 1,575
Reserves and accruals not currently deductible               1,104        1,947
Inventory                                                    1,437        1,789
Other                                                          275          432
                                                           --------------------
    Gross deferred tax assets                                6,736        5,743
      Valuation allowance                                   (6,736)      (5,743)
                                                           --------------------
    Net deferred tax assets                                $  --        $  --
                                                           ====================

                                       30

<PAGE>


                            NETWORK PERIPHERALS INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


Management  believes that,  based on a number of factors,  it is not more likely
than not  that the  deferred  tax  assets  will be  utilized,  such  that a full
valuation allowance has been recorded.

As  of  December  31,  1998,   the  Company  has  Federal  net  operating   loss
carryforwards of approximately $8.5 million which will expire beginning in 2013.
For state tax purposes,  the Company has net  operating  loss  carryforwards  of
approximately $8.5 million which will expire beginning in 2002.


NOTE 8 - ACQUISITIONS

Effective   April  29,  1997,  the  Company   acquired   NetVision   Corporation
("NetVision"),  a privately held company engaged in the development of very high
bandwidth  LAN switching and gigabit  Ethernet  technologies,  at a cost of $6.5
million, including payments to NetVision stockholders, the assumption of certain
liabilities,  and  transaction  expenses.  Effective March 21, 1996, the Company
completed its  acquisition  of NuCom  Systems,  Inc.  ("NuCom"),  a Taiwan-based
company, by purchasing all the outstanding shares of NuCom in exchange for $11.2
million in cash,  440,748  shares of the  Company's  Common Stock valued at $5.3
million, plus product integration costs for an aggregate purchase price of $17.1
million.  These  transactions were accounted for using the purchase method,  and
the purchase price was allocated to the assets acquired and liabilities  assumed
based on the estimated  fair market values at the date of  acquisition.  In each
transaction,  the research and development in process  represented the estimated
current  fair  market  value of  specified  technologies  which had not  reached
technological  feasibility and had no future uses. The results of the operations
acquired were  included with those of the Company from the date of  acquisition.
The allocation of the purchase price was as follows (in thousands):

Acquisition of NetVision:
  Research and development, in process                                 $  6,462
  Goodwill                                                                  200
  Assets                                                                     44
  Liabilities assumed                                                      (257)
                                                                       --------
      Total                                                            $  6,449
                                                                       ========

Acquisition of NuCom:
  Research and development, in process                                 $ 13,032
  Other intangible assets                                                 1,716
  Cash and cash equivalents                                               1,357
  Current assets                                                          3,138
  Non-current assets                                                        613
  Property and equipment                                                    479
  Current liabilities assumed                                            (3,235)
                                                                       --------
      Total                                                            $ 17,100
                                                                       ========

  The total purchase price is as follows:
  Cash payment                                                         $ 11,158
  Issuance of common stock                                                5,342
  Other expenses                                                            600
                                                                       --------
      Total                                                            $ 17,100
                                                                       ========

                                       31

<PAGE>


                            NETWORK PERIPHERALS INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


The pro forma combined results of operations of the Company, NetVision and NuCom
for the years ended  December  31,  1997 and 1996,  as if the  acquisitions  had
occurred at the  beginning  of the  respective  years,  after  giving  effect to
certain pro forma  adjustments,  are as follows (in thousands,  except per share
amount):

                                                       1997              1996
--------------------------------------------------------------------------------
Net sales                                           $  34,798         $   53,080
                                                    ============================

Net income (loss)                                   $ (15,214)        $    1,884
                                                    ============================

Net income (loss) per share:
    Basic                                           $   (1.29)        $     0.17
                                                    ============================
    Diluted                                         $   (1.29)        $     0.16
                                                    ============================


The  foregoing  pro forma results of  operations  excluded the  amortization  of
goodwill and the  write-off  of acquired  research  and  development  in process
resulting from the acquisitions.


NOTE 9 - RESTRUCTURING

<TABLE>
In the third  quarter of 1997,  the Company  announced  and began to implement a
restructuring  plan aimed at reducing costs and restoring  profitability  to the
Company's  operations.  The  restructuring  plan was  necessitated  by decreased
demand for the Company's  products and the Company's adoption of a new strategic
direction.  These actions resulted in a net charge of approximately $3.7 million
to the consolidated  statement of operations in 1997. The restructuring  actions
principally  consisted of termination of approximately 70 employees,  closure of
certain sales and manufacturing facilities,  cancellation of the related leases,
and  write-off  of excess  manufacturing  equipment  and  goodwill.  The Company
completed the  restructuring  in the second quarter of 1998. The following table
lists the  restructuring  accrual  activities  from July 1, 1997 to December 31,
1998 (in thousands):

<CAPTION>
                                                                 Reduction                   Write-off
                                                 Write-off of      in Work     Closure of    Of Excess
                                                     Goodwill        Force     Facilities       Assets         Other         Total
                                                 ----------------------------------------------------------------------------------
<S>                                                   <C>           <C>           <C>           <C>           <C>           <C>    
Reserve provided                                      $   962       $   500       $   200       $ 1,500       $   500       $ 3,662
  Reserve utilized in third quarter                      (962)         --            (100)         --            --          (1,062)
  Reserve utilized in fourth quarter                     --            (373)           (8)       (1,122)         (500)       (2,003)
                                                 ----------------------------------------------------------------------------------
Balance at December 31, 1997                             --             127            92           378          --             597
  Reserve utilized in first quarter                      --            (354)          (22)         --            --            (376)
  Reserve utilized in second quarter                     --            (221)         --            --            --            (221)
                                                 ----------------------------------------------------------------------------------
Balance at December 31, 1998                          $  --         $  (448)      $    70       $   378       $  --         $  --
                                                 ==================================================================================
</TABLE>


NOTE 10 - SALES BY GEOGRAPHY

Export sales to customers outside of North America represented 31%, 26%, and 21%
of the  Company 's net sales for the years ended  December  31,  1998,  1997 and
1996,  respectively.  As a percentage  of net sales,  export sales to Europe and
Asia for  1998,  1997 and 1996  were 10% and 21%;  11% and 15%;  and 8% and 13%,
respectively.  Sales to Taiwan  accounted  for 17% of the Company's net sales in
1998.  No one foreign  country  accounted for more than 10% of the Company's net
sales in 1997 and 1996.

                                       32

<PAGE>


                            NETWORK PERIPHERALS INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


NOTE 11 - CONCENTRATIONS

In 1998,  the  Company  purchased  more than $7  million  of its  finished  good
inventories  from  a  turnkey  manufacturer.  In the  event  that  this  turnkey
manufacturer fails to deliver the required volumes or decides to discontinue its
production for the Company, management believes that other subcontractors or the
Company's manufacturing facility in Taiwan can provide for comparable production
capacities. However, an abrupt change in turnkey manufacturer may cause delay in
production  and  possibly  loss in  sales,  which  could  adversely  impact  the
Company's operating results. The Company's chairman of the Board of Directors is
a director of this turnkey manufacturer.

The following table  summarizes the percentage of net sales accounted for by the
Company's significant customers with sales of 10% or more:

                                            Years ended December 31,
                                       1998          1997           1996
                ---------------------------------------------------------
                Customer A             35%            39%            26%
                Customer B             11%            --             --
                Customer C             --             --             15%
                Customer D             --             --             12%


ITEM  9.  CHANGES  IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
FINANCIAL DISCLOSURE

There is no reportable information under this item.

                                       33

<PAGE>


                                    PART III


ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The  information  required by this item  regarding  directors is included  under
"Election of  Directors" in the  Company's  Proxy  Statement for the 1999 Annual
Meeting.


ITEM 11. EXECUTIVE COMPENSATION

The  information  required  by this  item is  included  under  "Compensation  of
Executive  Officers"  and "Report of the  Compensation  Committee  on  Executive
Compensation" in the Company's Proxy Statement for the 1999 Annual Meeting.


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The  information  required by this item is included  under  "Share  Ownership by
Principal  Stockholders  and  Management"  and  "Election of  Directors"  in the
Company's Proxy Statement for the 1999 Annual Meeting.


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is included under "Compensation  Committee
Interlocks and Insider Participation Decisions" in the Company's Proxy Statement
for the 1999 Annual Meeting.

                                       34

<PAGE>


                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

The information  required by subsections (a)1 and (a)2 of this item are included
in the response to Item 8 of Part II of this Annual Report on Form 10-K.

(a)      Exhibits
         --------
          3.1(1)        Amended and Restated Certificate of Incorporation.
          3.2(1)        By-Laws.
          4.1(1)        Fourth Amended and Restated  Investor  Rights  Agreement
                        dated July 15, 1993.
         10.1(1)        Form of Indemnity Agreement for directors and officers.
         10.2(1)        Amended and Restated 1993 Stock Option Plan and forms of
                        agreement thereunder.
         10.4(1)        1994  Outside  Directors  Stock  Option Plan and form of
                        agreement thereunder.
         10.9(1)        Facilities   Lease  dated   August  8,  1991  with  John
                        Arrillaga,  Trustee,  or his Trustee,  or his  Successor
                        Trustee UTA dated  7/20/77,  as amended,  and Richard T.
                        Peery,  Trustee,  or his  Successor  Trustee  UTA  dated
                        7/20/77, as amended.
         10.12(1)(2)    OEM Purchase Agreement with Network General  Corporation
                        dated March 4, 1991.
         10.14(3)       Amendment No. 1, dated June 1, 1994, to Facilities Lease
                        with John Arrillaga,  Trustee,  or his Successor Trustee
                        UTA dated  7/20/77,  as  amended,  and Richard T. Peery,
                        Trustee,  or his Successor Trustee UTA dated 7/20/77, as
                        amended.
         10.18(4)       Purchase  Agreement  among  Network   Peripherals  Inc.,
                        Network Peripherals,  Ltd., NuCom Systems, Inc., and the
                        shareholders of NuCom, dated January 31, 1996.
         10.22(5)       Line  of  Credit  Agreement  with  Sumitomo  Bank  dated
                        October 2, 1996.
         10.23(5)       Agreement with Glenn Penisten dated May 15, 1996.
         10.26(7)       Purchase  Agreement  among  Network   Peripherals  Inc.,
                        NetVision   Corporation,   and   the   shareholders   of
                        NetVision, dated April 29, 1997.
         10.28(6)       Amended 1994 Outside Directors Option Plan.
         10.29(8)       Development    and   Purchase    Agreement    with   Sun
                        Microsystems, Inc., dated February 25, 1994.
         10.30(8)       Corporate Supply Agreement with Sun Microsystems,  Inc.,
                        dated March 31, 1997.
         10.31(9)       Modification Agreement,  dated August 29, 1997, to amend
                        certain  terms  of the  Line of  Credit  Agreement  with
                        Sumitomo Bank of California.
         10.32(9)       Second Modification Agreement,  dated November 17, 1997,
                        to amend certain  terms of the Line of Credit  Agreement
                        with Sumitomo Bank of California.
         10.33(9)       Amended and Restated Salary Continuation  Agreement with
                        Pauline Lo Alker dated October 31, 1997.
         10.35(9)       Salary Continuation  Agreement with Glenn Penisten dated
                        October 31, 1997.
         10.37(9)       Salary Continuation  Agreement with James Sullivan dated
                        October 31, 1997.
         10.39          Amended 1997 Stock Plan.
         10.40          Third Modification Agreement,  dated August 18, 1998, to
                        amend certain terms of the Line of Credit Agreement with
                        Sumitomo Bank of California.
         10.41          Employment Agreement with William Rosenberger dated June
                        11, 1998,  and  subsequent  amendment  dated October 19,
                        1998.
         10.42          Salary Continuation  Agreement with Jerry McDowell dated
                        October 19, 1998.
         10.43          Salary  Continuation  Agreement with Wilson Cheung dated
                        January 13, 1999.
         10.44          Salary  Continuation  Agreement  with Robert Zecha dated
                        January 13, 1999.
         21             Subsidiaries of the Registrant.
         23.1(9)        Consent of Independent Accountants dated March 27, 1998.
         23.2           Consent of Independent Accountants dated March 22, 1999.
         27             Financial Data Schedule.

                                       35

<PAGE>


(b)      Reports on Form 8-K
         None


         (1)      Incorporated  by  reference  to  the   corresponding   Exhibit
                  previously   filed   as  an   Exhibit   to  the   Registrant's
                  Registration Statement on Form S-1 (File No. 33-78350).
         (2)      Confidential  treatment  has been  granted  as to part of this
                  Exhibit.
         (3)      Incorporated  by  reference  to  the   corresponding   Exhibit
                  previously filed as an Exhibit to the  Registrant's  Quarterly
                  Report on Form 10-Q for the period  ended June 30,  1994 (File
                  No. 0-23970).
         (4)      Incorporated by reference to the  Registrant's  report on Form
                  8-K filed on March 31, 1996 (File No. 0-23970).
         (5)      Incorporated by reference to the corresponding  exhibit in the
                  Registrant's  Annual  Report on Form  10-K for the year  ended
                  December 31, 1996 (File No. 0-23970).
         (6)      Incorporated by reference to the corresponding  exhibit in the
                  Registrant's  Quarterly  Report  on Form  10-Q for the  period
                  ended June 30, 1997 (File No. 0-23970).
         (7)      Incorporated by reference to the  Registrant's  report on Form
                  8-K filed on May 14, 1997 (File No. 0-23970).
         (8)      The  Registrant   has  filed  portions  of  these   agreements
                  separately  with the  Commission  and has requested that those
                  portions be afforded confidential treatment.
         (9)      Filed with the Registrant's Annual Report on Form 10-K for the
                  year ended December 31, 1997.

                                       36

<PAGE>


                                   SIGNATURES

Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities  and
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.


                                               NETWORK PERIPHERALS INC.

                                               By: \s\  WILSON CHEUNG
                                                   -----------------------------
                                                   Wilson Cheung
                                                   Vice President of Finance and
                                                   Chief Financial Officer
                                                   (Authorized Officer)


Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following  persons on behalf of the  registrant and
in the capacities and on the dates indicated.


               Signature                      Title

               \s\  WILLIAM ROSENBERGER       President, Chief Executive Officer
               --------------------------      and Director (Principal Executive
               William Rosenberger             Officer)


               \s\  WILSON CHEUNG             Vice President of Finance and
               --------------------------      Chief Financial Officer
               Wilson Cheung                   (Principal Financial and
                                               Accounting Officer)


               \s\  STEVE BELL                Director
               --------------------------
               Steve Bell


               \s\  MICHAEL GARDNER           Director
               --------------------------
               Michael Gardner


               \s\  CHARLES HART              Director
               --------------------------
               Charles Hart


               \s\  GLENN PENISTEN            Chairman of the Board
               --------------------------
               Glenn Penisten

                                       37

<PAGE>


                            NETWORK PERIPHERALS INC.

                        VALUATION AND QUALIFYING ACCOUNTS

                                 (in thousands)

<TABLE>
SCHEDULE II

<CAPTION>
                                                                                      Additions
                                                                             -------------------------
                                                                Balance at   Charged to     Charged to                    Balance at
                                                                 Beginning    Costs and          Other                           End
                                                                   of Year     Expenses       Accounts    Deductions         of Year
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                               <C>            <C>          <C>            <C>             <C>    
Year ended December 31, 1996
    Allowance for doubtful accounts                               $   200        $--          $    21        $   (12)        $   209
    Allowance for sales returns and other
    credits                                                           538         --            6,743         (6,336)            945
                                                                  ------------------------------------------------------------------
     Total allowances for doubtful accounts and
     sales returns                                                    738         --            6,764         (6,348)          1,154

Year ended December 31, 1997
    Allowance for doubtful accounts                                   209         --              138            (49)            298
    Allowance for sales returns and other credits                     945         --            3,593         (3,652)            886
                                                                  ------------------------------------------------------------------
     Total allowances for doubtful accounts and
     sales returns                                                  1,154         --            3,731         (3,701)          1,184

Year ended December 31, 1998
    Allowance for doubtful accounts                                   298         --               49           (264)             83
    Allowance for sales returns and other credits                     886         --              187           (633)            440
                                                                  ------------------------------------------------------------------
     Total allowances for doubtful accounts and
     sales returns                                                $ 1,184        $--          $   236        $  (897)        $   523
                                                                  ==================================================================
</TABLE>

                                                                 38