EXHIBIT 10.40

                          SALARY CONTINUATION AGREEMENT

         This  Salary  Continuation  Agreement  (the  "Agreement")  is made  and
entered  into as of October  31,  1997 (the  "Effective  Date"),  by and between
Network  Peripherals  Inc., a Delaware  corporation (the  "Company"),  and James
Sullivan ("Employee").

                                    Recitals

         The Company  recognizes  that the possibility of a Change in Control or
other event may occur which may change the nature and  structure  of the Company
and that  uncertainty  regarding the  consequences  of such events may adversely
affect the  Company's  ability to retain its key  employees.  The  Company  also
recognizes  that the Employee  possesses an intimate and essential  knowledge of
the Company  upon which the Company  may need to draw for  objective  advice and
continued  services in connection  with any  acquisition of the Company or other
Change  in  Control  that  is   potentially   advantageous   to  the   Company's
stockholders.  The Company  believes that the existence of this  Agreement  will
serve as an  incentive  to  Employee  to remain in the employ of the Company and
will  enhance  its ability to call on and rely upon the  Employee in  connection
with a Change in Control.

         The Company and the  Employee  desire to enter into this  Agreement  in
order to  provide  additional  compensation  and  benefits  to the  Employee  in
recognition of past services and to encourage Employee to continue to devote his
full attention and dedication to the Company and to continue his employment with
the Company.

         1. Definitions.  As used in this Agreement, unless the context requires
a different  meaning,  the  following  terms shall have the  meanings  set forth
herein:

                  (a) "Cause" means:

                           (i) theft, a material act of dishonesty,  fraud,  the
falsification  of any  employment  or Company  records or the  commission of any
criminal act which impairs  Employee's  ability to perform his duties under this
Agreement;

                           (ii)    improper    disclosure   of   the   Company's
confidential, business or proprietary information by the Employee;

                           (iii) any  action  by  Employee  which the  Company's
Board of  Directors  (the  "Board")  reasonably  believes has had or will have a
material detrimental effect on the Company's reputation or business; or

                           (iv)  persistent  failure of the  Employee to perform
the lawful  duties and  responsibilities  assigned by the  Company  which is not
cured within a  reasonable  time  following  the  Employee's  receipt of written
notice of such failure from the Company.

                  (b) "Change in Control " means an  Ownership  Change Event (as
defined below) or a series of related Ownership Change Events (collectively, the
"Transaction")  wherein

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the stockholders of the Company immediately before the Transaction do not retain
immediately  after the  Transaction,  in  substantially  the same proportions as
their ownership of shares of the Company's voting stock  immediately  before the
Transaction,  direct or indirect beneficial ownership of more than fifty percent
(50%) of the total combined voting power of the outstanding  voting stock of the
Company or the  corporation or  corporations  to which the assets of the Company
were  transferred  (the  "Transferee  Corporation(s)"),  as the case may be. For
purposes of the preceding sentence, indirect beneficial ownership shall include,
without limitation,  an interest resulting from ownership of the voting stock of
one or more corporations which, as a result of the Transaction,  own the Company
or the Transferee Corporation(s), as the case may be, either directly or through
one or more subsidiary corporations. The Board shall have the right to determine
whether  multiple  sales or  exchanges  of the  voting  stock of the  Company or
multiple  Ownership Change Events are related,  and its  determination  shall be
final, binding and conclusive.

         For  purposes of this  Agreement,  "Ownership  Change  Event" means the
occurrence of any of the following  with respect to the Company:  (i) the direct
or indirect  sale or exchange in a single or series of related  transactions  by
the  stockholders  of the Company of more than fifty percent (50%) of the voting
stock of the Company;  (ii) a merger or  consolidation in which the Company is a
party; (iii) the sale, exchange,  or transfer of all or substantially all of the
assets of the Company; or (iv) a liquidation or dissolution of the Company.

                  (c)  "Constructive  Termination"  means  one  or  more  of the
following  events that occurs  within one (1) year after the  occurrence  of any
Change in Control:

                           (i) without the Employee's  express written  consent,
the  assignment  to  the  Employee  of any  duties,  or  any  limitation  of the
Employee's  responsibilities,  substantially  inconsistent  with the  Employee's
positions,  duties,  responsibilities  and status with the  Company  immediately
prior to the date of the Change in Control;

                           (ii) without the Employee's  express written consent,
the removal of the Employee  from the  Employee's  position  with the Company as
held by the  Employee  immediately  prior to the Change in Control  (including a
termination  of employment  as a result of the death or Permanent  Disability of
the Employee),  except in connection  with the  termination of the employment of
the Employee by the Company for Cause;

                           (iii) without the Employee's express written consent,
the relocation of the principal place of the Employee's employment to a location
that is more than  fifty  (50)  miles  from the  Employee's  principal  place of
employment  immediately  prior  to the date of the  Change  in  Control,  or the
imposition of travel  requirements  on the Employee  substantially  inconsistent
with such  travel  requirements  existing  immediately  prior to the date of the
Change in Control;

                           (iv)  any  failure  by the  Company  to  pay,  or any
reduction by the Company of (1) the Employee's base salary in effect immediately
prior to the date of the  Change in Control  (unless  reductions  comparable  in
amount and duration are concurrently made for all other employees of the Company
with  responsibilities,   organizational  level  and  title  comparable  to  the
Employee),  or (2) the Employee's bonus compensation in effect immediately prior
to the  date  of the  Change  in  Control  (subject  to  applicable  performance
requirements with respect to the

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actual  amount  of bonus  compensation  earned  by the  Employee  and all  other
participants in the bonus program);

                           (v) any  failure by the  Company to (1)  continue  to
provide the  Employee  with the  opportunity  to  participate,  on terms no less
favorable than those in effect for the benefit of any  executive,  management or
administrative  group which customarily includes a person holding the employment
position or a comparable  position  with the Company then held by the  Employee,
any benefit or compensation plans and programs,  including,  but not limited to,
the  Company's  life,  disability,  health,  dental,  medical,  savings,  profit
sharing,  stock  purchase  and  retirement  plans  in  which  the  Employee  was
participating  immediately prior to the date of the Change in Control,  or their
equivalent (provided,  that any changes or terminations of such existing benefit
or compensation plans or programs shall not be a Constructive Termination if the
changed plan or program or a replacement plan or program provides  equivalent or
more favorable  benefits or  compensation  to the Employee),  or (2) provide the
Employee with all other fringe benefits (or their  equivalent) from time to time
in effect for the benefit of any executive,  management or administrative  group
which  customarily  includes  a person  holding  the  employment  position  or a
comparable position with the Company then held by the Employee; or

                           (vi) any failure or refusal of a successor company to
assume the Company's obligations under this Agreement as required by Section 13;

provided,  however,  that the  Employee's  resignation as a result of any of the
foregoing  events  shall  be a  voluntary  resignation,  and  not a  resignation
following Constructive Termination,  unless the Employee gives written notice of
any such  event(s)  to the Board and allows  the  Company at least ten (10) days
thereafter to correct such condition(s).

                  (d)  "Effective  Date"  means the day and year first set forth
above.

                  (e)      "Permanent Disability" means that:

                           (i) the  Employee  has been  incapacitated  by bodily
injury or disease so as to be prevented thereby from engaging in the performance
of the Employee's  duties following  reasonable  accommodations on behalf of the
Company;

                           (ii) such total incapacity shall have continued for a
period of six (6) consecutive months; and

                           (iii)  such  incapacity  will,  in the  opinion  of a
qualified  physician,  be permanent and  continuous  during the remainder of the
Employee's life.

                  (f) "Termination  Upon Change in Control" means any one of the
following:

                           (i) any termination of the employment of the Employee
by the Company  without  Cause within one (1) year after the  occurrence  of any
Change in Control;

                           (ii)  any   termination  of  the  employment  of  the
Employee by the Company without Cause during the period  commencing  thirty (30)
days  prior to the date of the  Company's  first  public  announcement  that the
Company has entered  into a  definitive  agreement to

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effect a Change in  Control  (even  though  still  subject  to  approval  by the
Company's stockholders and other conditions and contingencies) and ending on the
date of the Change in Control; or

                           (iii)  any  resignation  by  the  Employee  from  all
capacities in which the Employee is then rendering service to the Company within
a  reasonable  period  of time  following  the event  constituting  Constructive
Termination  (with the  termination of employment  following  death or Permanent
Disability being deemed a resignation);

provided,  however,  that "Termination Upon Change in Control" shall not include
any  termination of the employment of the Employee (1) by the Company for Cause;
or (2) as a result of the  voluntary  termination  of employment by the Employee
that is not deemed a Constructive Termination under Subsection 1(c) above.

         2.  Position  and  Duties.  Until a Change in Control,  Employee  shall
continue  to be an at-will  employee  of the  Company  employed  in his  current
position at his then current salary rate,  subject to revision from time to time
by the  Board of  Directors  or a  committee  thereof.  Employee  shall  also be
entitled to continue to participate in and to receive benefits on the same basis
as other  executive or senior staff members under any of the Company's  employee
benefit  plans as in effect from time to time.  In addition,  Employee  shall be
entitled to the benefits  afforded to other employees  similarly  situated under
the Company's vacation,  holiday and business expense reimbursement policies, as
amended from time to time.  Employee  agrees to devote his full  business  time,
energy and skill to his duties at the Company.  These duties shall include,  but
not be limited to, any duties consistent with his position which may be assigned
to Employee from time to time.

         3. Benefits Upon Voluntary Termination,  Permanent Disability or Death.
In the event that Employee  voluntarily  terminates his employment  relationship
with the Company at any time and such  termination  is not deemed a Constructive
Termination  as  described  in  Subsection  1(c)  above,  or in the  event  that
Employee's  employment  terminates  as  a  result  of  his  death  or  Permanent
Disability  prior to a Change  in  Control,  Employee  shall be  entitled  to no
compensation  or benefits from the Company other than those earned under Section
2 above through the date of his termination of employment.

         4.       Termination Upon Change in Control.

                  (a) In the event of the Employee's  Termination Upon Change in
Control, Employee shall be entitled to the following separation benefits:

                           (i) those benefits earned under Section 2 (other than
any unpaid incentive bonus) through the date of Employee's termination;

                           (ii)  Employee's  employment  as an  officer  of  the
Company  shall  terminate  immediately;  however,  the  Company  shall  continue
Employee's  employment as a non-officer  employee of the Company for a period of
four (4) months following the date of the Employee's termination (the "Severance
Period").  During such period,  Employee shall be entitled to the greater of (1)
Employee's  then  current  salary at the time of the Change in  Control,  or (2)
Employee's  salary and bonus over the preceding four (4) months,  in either case
less applicable  withholding,  payable in accordance  with the Company's  normal
payroll practices;


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                           (iii)  within ten (10) days of  submission  of proper
expense  reports by the Employee,  the Company shall  reimburse the Employee for
all expenses  reasonably and necessarily  incurred by the Employee in connection
with the business of the Company prior to his termination of employment;

                           (iv)  continued  provision of the Company's  standard
employee medical  insurance  coverages  through the end of the Severance Period;
thereafter,  Employee  shall be entitled to elect  continued  medical  insurance
coverage in accordance  with the  applicable  provisions of federal law (COBRA);
provided,  however,  that in the event  Employee  becomes  covered under another
employer's group health plan during the period provided for herein,  the Company
shall cease provision of continued group health insurance for Employee; and

                           (v)  notwithstanding  any  provisions to the contrary
contained in any stock option  agreement  between the Company and the  Employee,
upon a Termination Upon Change in Control,

                                    (1) all stock options granted by the Company
to the  Employee  prior to the  Change in  Control,  which  are not  accelerated
pursuant to the  provisions of Section 5, shall become  immediately  exercisable
and vested in full as of the time of such  Termination  Upon  Change in Control;
and

                                    (2) all  such  stock  options  shall  remain
exercisable for a period of at least one (1) year, subject to any longer periods
for exercise of such options set forth in the particular option agreements.

This Subsection 4(a)(v) shall apply to all such stock option agreements, whether
heretofore or hereafter entered into between the Company and the Employee.

                  (b) The Employee's entitlement to any benefits under Section 4
is conditioned upon the Employee's  execution and delivery to the Company of (i)
a general  release of claims in a form  satisfactory  to the  Company and (ii) a
resignation  from  all of  Employee's  positions  with  the  Company  (with  the
exception  of any  continued  employment  for the  purposes set forth in Section
4(a)) in a form satisfactory to the Company.

                  (c) In the event that  Employee  accepts  employment  with, or
provides any services to (whether as a partner,  consultant,  joint  venturer or
otherwise),  any person or entity  which  offers  products or services  that are
competitive  with any  products or  services  offered by the Company or with any
products  or  services  that  Employee  is aware the  Company  intends to offer,
Employee shall be deemed to have resigned from his  employment  with the Company
effective  immediately  upon such  acceptance  of  employment  or  provision  of
services.  Upon such resignation,  Employee shall not be entitled to any further
payments or benefits as provided under this Section 4.

                  (d) In the event that  Employee  accepts  employment  with, or
provides any services to (whether as a partner,  consultant,  joint  venturer or
otherwise),  any  person or entity  while  Employee  continues  to  receive  any
separation  benefits  pursuant to this  Section 4,  Employee  shall  immediately
notify the Company of such  acceptance  and  provide to the Company

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information  with respect to such person or entity as the Company may reasonably
request in order to determine if that person's or entity's  products or services
are competitive with the Company's.

         5.  Acceleration  of  Exercisability  and Vesting of Stock Options Upon
Change  in  Control.  In the  event of a Change in  Control,  all stock  options
granted to the Employee  prior to the Change in Control  (whether  heretofore or
hereafter  granted)  shall  become  immediately  exercisable  and vested in full
effective  as of the date  thirty  (30)  days  before  the  consummation  of the
transaction constituting such Change in Control.

         6.  Parachute  Payments.  In the  event  that any  payment  or  benefit
received or to be received by Employee  pursuant to this  Agreement or otherwise
(collectively,  the  "Payments")  would  result  in  a  "parachute  payment"  as
described  in section 280G of the  Internal  Revenue  Code of 1986,  as amended,
notwithstanding  the other  provisions  of this  Agreement,  the  amount of such
Payments  will not exceed the  amount  which  produces  the  greatest  after-tax
benefit to Employee.  For  purposes of the  foregoing,  the  greatest  after-tax
benefit will be  determined  within  thirty (30) days of the  occurrence of such
payment to Employee,  in  Employee's  sole and absolute  discretion.  If no such
determination  is made by Employee  within thirty (30) days of the occurrence of
such payment,  the Company will promptly make such  determination  in a fair and
equitable manner.

         7.  Exclusive  Remedy.  Under any claim for breach of this Agreement or
wrongful termination,  the payments and benefits provided for in Section 4 shall
constitute  the Employee's  sole and exclusive  remedy for any alleged injury or
other  damages  arising  out of the  cessation  of the  employment  relationship
between the  Employee  and the Company in the event of  Employee's  termination.
Except as expressly set forth herein, the Employee shall be entitled to no other
compensation,  benefits,  or other  payments from the Company as a result of any
termination  of employment  with respect to which the payments  and/or  benefits
described in Section 4 have been provided to the Employee.

         8.  Proprietary and  Confidential  Information.  The Employee agrees to
continue to abide by the terms and  conditions of the Company's  confidentiality
and/or proprietary rights agreement between the Employee and the Company.

         9. Conflict of Interest.  Employee  agrees that for a period of one (1)
year after termination of his employment with the Company, he will not, directly
or indirectly, solicit the services of or in any other manner persuade employees
or  customers  of  the  Company  to   discontinue   that  person's  or  entity's
relationship with or to the Company as an employee or customer,  as the case may
be.

         10. Arbitration.  Any claim, dispute or controversy arising out of this
Agreement,  the interpretation,  validity or enforceability of this Agreement or
the  alleged  breach  thereof  shall be  submitted  by the  parties  to  binding
arbitration  by the  American  Arbitration  Association  in Santa Clara  County,
California;  provided,  however,  that  this  arbitration  provision  shall  not
preclude  the Company  from  seeking  injunctive  relief  from any court  having
jurisdiction  with respect to any disputes or claims  relating to or arising out
of the misuse or misappropriation of the Company's trade secrets or confidential
and  proprietary   information.   All  costs  and  expenses  of  arbitration  or
litigation,  including  but not  limited  to  attorneys  fees  and  other  costs
reasonably  incurred by the prevailing  party, as determined by such arbitration
or litigation,  shall be paid by the other party. Judgment may be entered on the
award of the arbitration in any court having jurisdiction.

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         11. Interpretation.  Employee and the Company agree that this Agreement
shall be interpreted in accordance with and governed by the laws of the State of
California.

         12.  Conflict in Benefits.  This  Agreement  shall  supersede all prior
arrangements,  whether written or oral, and understandings regarding the subject
matter of this Agreement; provided, however, that this Agreement is not intended
to and  shall  not  affect,  limit or  terminate  (i) any  plans,  programs,  or
arrangements  of the  Company  that are  either in  writing  or  regularly  made
available  to a  significant  number  of  employees  of the  Company,  (ii)  any
agreement or arrangement  with the Employee that has been reduced to writing and
which does not relate to the subject matter  hereof,  or (iii) any agreements or
arrangements  hereafter  entered  into by the  parties  in  writing,  except  as
otherwise expressly provided herein.

         13.      Successors and Assigns.

                  (a)  Successors  of the Company.  The Company will require any
successor  or  assign  (whether  direct  or  indirect,   by  purchase,   merger,
consolidation or otherwise) to all or  substantially  all of the business and/or
assets of the Company,  expressly,  absolutely and unconditionally to assume and
agree to perform  this  Agreement in the same manner and to the same extent that
the Company would be required to perform it if no such  succession or assignment
had taken place.  Failure of the Company to obtain such  agreement  prior to the
effectiveness  of any such  succession  transaction  shall  be a breach  of this
Agreement and shall entitle the Employee to terminate  his  employment  with the
Company within three (3) months  thereafter and to receive the benefits provided
under  Section 4 of this  Agreement in the event of  Termination  Upon Change in
Control. As used in this Agreement,  "Company" shall mean the Company as defined
above and any  successor  or assign to its business  and/or  assets as aforesaid
which  executes and delivers  the  agreement  provided for in this Section 13 or
which otherwise  becomes bound by all the terms and provisions of this Agreement
by operation of law.

                  (b)  Heirs of  Employee.  This  Agreement  shall  inure to the
benefit  of  and  be   enforceable   by  the   Employee's   personal  and  legal
representatives,  executors,  administrators,  successors,  heirs, distributees,
devises and legatees. If the Employee should die after the conditions to payment
of benefits set forth herein have been met and any amounts are still  payable to
his hereunder, all such amounts, unless otherwise provided herein, shall be paid
in accordance  with the terms of this Agreement to the  Employee's  beneficiary,
successor,  devisee, legatee or other designee or, if there be no such designee,
to the Employee's estate.  Until a contrary  designation is made to the Company,
the Employee  hereby  designates  as his  beneficiary  under this  Agreement the
person whose name appears below his signature on this Agreement.

         14.  Notices.  For  purposes of this  Agreement,  notices and all other
communications  provided for in the  Agreement  shall be in writing and shall be
deemed  to have been  duly  given  when  delivered  or  mailed by United  States
registered mail, return receipt requested, postage prepaid, as follows:

                  if to the Company:                   Network Peripherals Inc.
                                                       1371 McCarthy Boulevard
                                                       Milpitas, CA  95035
                                                       Attn:  President


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and if to the Employee at the address  specified  at the end of this  Agreement.
Notice  may  also be  given at such  other  address  as  either  party  may have
furnished to the other in writing in accordance herewith, except that notices of
change of address shall be effective only upon receipt.

         15. No  Representations.  Employee  acknowledges that he is not relying
and has not relied on any promise,  representation  or  statement  made by or on
behalf of the Company which is not set forth in this Agreement.

         16.  Validity.  If any  one or  more of the  provisions  (or  any  part
thereof) of this Agreement shall be held invalid,  illegal or  unenforceable  in
any  respect,  the  validity,  legality  and  enforceability  of  the  remaining
provisions  (or any part  thereof)  shall not in any way be affected or impaired
thereby.

         17.  Modification.  This Agreement may only be modified or amended by a
supplemental written agreement signed by Employee and the Company.

         IN WITNESS WHEREOF,  the parties have executed this Agreement as of the
date and year written below.

                                          Network Peripherals Inc.


Date: _________________________           By: __________________________________
                                                    Signature

                                          Title: _______________________________


Date: _________________________           ______________________________________
                                          Employee's Signature

                                          Address for Notice to Employee:

                                          ______________________________________

                                          ______________________________________


Name of Designated Beneficiary:           Address of Designated Beneficiary:

_____________________________             ______________________________________

                                          ______________________________________

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