Exhibit 10.40
Third Modification Agreement, Dated August 18, 1998,
  With Sumitomo Bank of California


                          THIRD MODIFICATION AGREERMENT

         This Third Modification  Agreement ("Third Modification") is made as of
August 18, 1998, by and among NETWORK  PERIPHERALS  INC. a Delaware  corporation
("Borrower"),  having its chief  executive  office at 1371  McCarthy  Boulevard,
Milpitas,  California 95035,  SUMITOMO BANK OF CALIFORNIA,  a California banking
corporation  ("Sumitomo"),  having its head office at 320 California Street, San
Francisco,  California,  and each other lender which may  hereafter  execute and
deliver an  instrument  of  assignment  with respect to the  Agreement  (defined
below) (individually,  the "Bank," and collectively,  the "Banks") and Sumitomo,
as Agent.


                                    RECITALS

         A. Pursuant to a Credit Agreement,  dated October 2, 1996,  executed by
Borrower  and Sumitomo  ("Agreement")  , Sumitomo  extended a revolving  line of
credit  to  Borrower  of  up  to  $10,000,000.00   ("Line  of  Credit")  with  a
$5,000,000.00 letter of credit subline.  Borrower's obligation to repay advances
on the Line of Credit was evidenced by a Promissory Note, dated the same date as
the Agreement,  executed by Borrower,  in the principal amount of $10,000,000.00
("Note").  To secure the indebtedness of Borrower under the Credit Agreement and
Note,  Borrower  executed  a  Security  Agreement,  dated as of  October 2, 1996
("Security Agreement").

         B. Pursuant to a Modification  Agreement  ("Modification") dated August
29, 1997, by and among  Borrower and Sumitomo,  on behalf of itself and as Agent
for the Banks, the Agreement was modified on the terms contained therein.

         C. Pursuant to a Second Modification Agreement ("Second  Modification")
dated November 17, 1997, by and among Borrower and Sumitomo, on behalf of itself
and as Agent for the Banks,  the  Agreement  was  further  modified on the terms
contained therein.

         D. As used  herein,  the term  "Loan  Documents"  means  all  documents
described in these Recitals and those documents  executed pursuant thereto or in
conjunction therewith.

         E.  Borrower  seeks a further  modification  of the  Agreement and Loan
Documents and Sumitomo is agreeable on the terms set forth below.



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                                      TERMS

         NOW, THEREFORE, Borrower and Sumitomo agree as follows:

         1.  Capitalized  Terms.  Unless otherwise  defined herein,  capitalized
terms shall have the meanings set forth in the Agreement.

         2. Adoption of Recitals.  Borrower hereby  represents and warrants that
each of the Recitals set forth above are true, accurate and complete.

         3.  Acknowledgement  of Debt.  Borrower  acknowledges that there are no
claims,  demands,  offsets or defenses at law or in equity that would  defeat or
diminish Sumitomo's right to collect the indebtedness  evidenced by the Note and
Agreement  and to proceed  to enforce  the  rights  and  remedies  available  to
Sumitomo as provided in the Loan Documents or by law.

         4.  Modification  of Loan  Documents.  The Loan  Documents  are  hereby
supplemented,  amended and modified as follows,  which terms shall supersede and
prevail over any existing and conflicting provisions thereof:

                  (a) The terms "Commitment Amount",  "Letter of Credit Maturity
Date",  "Letter of Credit  Sublimit" and  "Maturity  Date" in Section 1.1 of the
Agreement are hereby deleted and replaced with the following:

                           Commitment  Amount.  $5,000,000 in the aggregate,  or
                  any  lesser   amount,   including   zero,   resulting  from  a
                  termination  or  reduction of such amount in  accordance  with
                  Section 2.5 or Section 7.2.

                           Letter of Credit  Maturity  Date.  Means November 30,
                  1998.

                           Letter  of  Credit   Sublimit.   $2,500,000   in  the
                  aggregate,  or any lesser amount,  including  zero,  resulting
                  from a  termination  or reduction of such amount in accordance
                  with Section 2.5 or Section 7.2.

                           Maturity Date. Means July 31, 1999.

                  (b) Section 3.2(f) of the Agreement, as modified by the Second
Modification, is deleted and replaced with the following:

                           (f)  Borrower   shall   deposit  with  Sumitomo  cash
                  collateral,  acceptable  to Sumitomo  in its sole  discretion,

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                  equal to or  greater  than the amount of the Loan or Letter of
                  Credit  requested  by  Borrower.  Such cash  collateral  shall
                  remain on deposit with Sumitomo until such time as the Loan or
                  Letter of Credit is repaid in full by Borrower.

                  (c) Section 5.7 (b) of the  Agreement  is deleted and replaced
with the following:

                           (b) Profitability. Borrower shall be profitable on an
                  annual  basis and shall not have a net loss on a  consolidated
                  basis in any fiscal  quarter as  measured  quarterly  for that
                  fiscal quarter; provided, however, that for the fiscal quarter
                  ending  September 30, 1998,  Borrower may have a net loss on a
                  consolidated  basis of not more than  $1,500,000.00;  and that
                  for the fiscal quarter ending December 31, 1998,  Borrower may
                  have a net  loss on a  consolidated  basis  of not  more  than
                  $1,000,000.00.

                  (d) Section  5.7(d) of the  Agreement  is deleted and replaced
with the following:

                           (d) Consolidated  Tangible Net Worth.  Borrower shall
                  maintain   Consolidated   Tangible   Net  Worth  of  at  least
                  $30,000,000.00.

                  (e)  The  following  new  Section   5.7(f)  is  added  to  the
Agreement:

                           (f)  Cash   Position.   Borrower   shall  maintain  a
                  consolidated  cash  position on its balance  sheet of at least
                  $20,000,000.00.

                  (f)  The  Loan  Documents   which  recite  they  are  security
instruments shall secure, in addition to any other obligations  secured thereby,
the payment and performance by Borrower of all obligations  under the Agreement,
the Note and the other Loan  Documents,  as amended by this Third  Modification,
and any amendments, modifications,  extensions or renewals of the same which are
hereafter agreed to in writing by the parties.

         5.  Conditions  Precedent.  Sumitomo's  obligation  to extend credit to
Borrower  pursuant  to this  Third  Modification  is  subject  to the  condition
precedent that Borrower  strictly  complies with the  requirement  that Borrower
deliver  to  Sumitomo,  in form and  substance  satisfactory  to  Sumitomo,  the
following documents and other things by Borrower or as specified below:

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                  (a) This Agreement.

                  (b) Such other evidence as Sumitomo may require,  to establish
the  consummation of the  transactions  contemplated  hereby,  the taking of all
proceedings in connection therewith and compliance with the conditions set forth
in this Third Modification.

         6.  Representations and Warranties.  Except as previously  disclosed to
Sumitomo,  Borrower  hereby  represents  and warrants that no default,  Event of
Default,  breach or failure of condition has occurred or exists,  or would exist
with notice or lapse of time, or both, under any of the Loan Documents. Borrower
agrees that all  representations and warranties of Borrower in the Agreement and
the other  Loan  Documents  are true and  correct  as of the date of this  Third
Modification, and shall survive the execution of this Third Modification.

         7.  Governing  of Law.  This  Third  Modification  shall be  construed,
governed and enforced in accordance with the laws of the State of California.

         8.  Interpretation.  No provision of this Third  Modification  is to be
interpreted  for or against either  Borrower or Sumitomo  because that party, or
that party's representative, drafted such provision.

         9. Full Force and Effect.  Except as set forth herein,  all other terms
and  conditions  of the Loan  Documents  shall  remain in full force and effect,
including  provisions  on  prepayment,   late  charges,   default  interest  and
attorneys' fees.

         10. Reaffirmation. Borrower hereby acknowledges, reaffirms and confirms
its obligations under the Loan Documents,  as amended and modified by this Third
Modification.

         11. Entire Agreement. This Third Modification (and all documents herein
mentioned) and the Loan Documents constitute the entire,  complete and exclusive
understanding  between  the  parties  regarding  the  Line  of  Credit  and  the
Collateral and may not be modified,  amended,  or terminated except by a written
agreement  signed  by  the  party  against  whom   enforcement  is  sought.   No
modification,   change  or  supplement  of  the  Loan   Documents,   this  Third
Modification  or  related  agreements  shall be binding  on  Sumitomo  unless in
writing signed by a Corporate Officer and Manager of Sumitomo.  No waiver or any
event of default shall be construed to be a waiver, acquiescence,  or consent to
any preceding or subsequent event of default.

         12.  Documentation.  In  addition  to  the  instruments  and  documents
mentioned  or referred to herein,  Borrower  will,  at its own cost and expense,
supply Sumitomo with such other instruments,  documents, information and data as
are

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reasonably  necessary for the purposes hereof, all of which shall be in form and
content as reasonably required by Sumitomo.

         13.  Counterparts  This Third  Modification may be executed in multiple
counterparts,  each of which shall be deemed an original  but all of which shall
constitute one and the same instrument.

         IN WITNESS WHEREOF,  the parties have executed this Third  Modification
as of the day and year first above written.


SUMITOMO:

SUMITOMO BANK OF CALIFORNIA,
a California banking corporation


By: \s\ Arne F. Olson
    -----------------------------
        ARNE F. OLSON,
        Vice President


AGENT:

SUMITOMO BANK OF CALIFORNA,
a California banking corporation

By: \s\ Arne F. Olson
    -----------------------------
        ARNE F. OLSON,
        Vice President


BORROWER:

NETWORK PERIPHERALS INC.,
a Delaware corporation

By: \s\ Robert Hersh
    -----------------------------
        ROBERT HERSH,
        Vice President and Chief Financial Officer

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