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

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF 
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1996
OR

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

For the transition period from ________ to ________


Commission file number 0-28450

FARALLON COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)


Delaware,                                                 94-3033136
(State or other jurisdiction of       (I.R.S. Employer Identification Number)
incorporation or organization)


2470 Mariner Square Loop
Alameda, California  94501
(Address of principal executive offices, including Zip Code)
                                         

(510) 814-5100
(Registrant's telephone number, including area code)

                                         

Indicate by check  X whether the registrant (1) has filed all reports required 
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 
during the preceding 12 months (or for such shorter period that the registrant 
was required to file such reports), and (2) has been subject to such filing
 requirements for the past 90 days

Yes	x		No	

As of February 1, 1997 there were 11,329,289 shares of the
 Registrant's common stock outstanding.




FARALLON COMMUNICATIONS, INC.

FORM 10-Q

INDEX



PART I.	FINANCIAL INFORMATION	                           PAGE
Item 1.	Condensed Financial Statements
		
Condensed Condolidated Balance Sheets                      3
At September 30, 1996 and December 31, 1996		
Condensed Consolidated Statements of Earnings 
For the three months ended December 31, 1995 and 1996      4		
Condensed Consolidated Statements of Cash Flows 
For the three months ended December 31, 1995 and 1996      5	
Notes to Condensed Consolidated Financial Statements       6	

Item 2.	Management's Discussion and Analysis of 
Financial Condition and Results of Operations              7

PART II.	OTHER INFORMATION
Item 6.	Exhibits and Reports on Form 8-K                  21
SIGNATURE                                                 22
INDEX TO EXHIBITS                                         23




PART I.  FINANCIAL INFORMATION
Item 1.  Financial Statements
<TABLE>
<CAPTION>
FARALLON COMMUNICATIONS, INC. AND SUBSIDIARY
 CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
                                  September 30, 1996         December 31,1996
                                                               (unaudited)
<S>                                      <C>                       <C>
ASSETS 
Current assets:
Cash and cash equivalents     $        19,910           $         16,423
Short-term investments	                17,235                     21,202
Trade accounts receivable, net of 
allowances of $1,328 and $1,450 at 
September 30, 1996 and December 31, 
1996, respectively.                    11,172                      9,347
Inventories, net	                       6,295                      6,770
Deferred tax assets                     1,829                      1,829
Prepaid expenses and other current 
assets                                  1,457                      1,364
Total current assets                   57,898                     56,935
Furniture, fixtures, and equipment, net 2,935                      2,811
Deposits and other assets                 785                        819
Total assets	                 $        61,618           $         60,565

                     LIABILITIES AND STOCKHOLDERS' EQUITY 
Current liabilities:
Accounts payable              $         4,979           $          3,694
Accrued compensation                    2,023                      1,943
Accrued liabilities                       470                        723
Deferred revenue                          787                        755
Other current liabilities                 170                        172
Total current liabilities               8,429                      7,287
Other long-term liabilities                46                          3  
Total liabilities                       8,475                      7,290
Commitments and contingencies

Stockholders' equity:

Preferred stock: $0.001 par value, 
5,000,000 shares authorized; none outstanding

Common stock:  $0.001 par value, 25,000,000
shares authorized; 11,119,961 and 11,134,652
shares issued and outstanding at September 30,
1996 and December 31, 1996, respectively.   12                         12

Additional paid-in capital              49,232                     49,242
Deferred compensation                      (81)                       (77)
Retained earnings                        3,980                      4,098
Total stockholders' equity              53,143                     53,275
Total liabilities and stockholders'
equity                         $        61,618           $         60,565

</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.

<TABLE>
<CAPTION>
FARALLON COMMUNICATIONS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMEN1 OF EARNINGS
(in thousands, except per share data; unaudited)
                                       Three Months Ended
                                           December  31                  
                                   1995                     1996 
<S>                                 <C>                      <C>
Revenues:
Internet/Intranet products $       2,809             $      4,805 
LAN products                      11,302                    8,658 
Total revenues                    14,111                   13,463 
Cost of revenues:
Internet/Intranet products           458                    1,554 
LAN products                       6,827                    5,310
Total cost of revenues             7,285                    6,864
Gross profit                       6,826                    6,599
Operating expenses:
Research and development           2,016                    2,167 
Selling and marketing              3,787                    3,801
General and administrative           789                      837
Total operating expenses           6,592                    6,805
Operating income (loss)	             234                     (206)
Other income, net                    227                      388
Income before income taxes           461                      182 
Income tax provision                 162                       64
Net income                   $       299              $       118 
Net income per share         $      0.03              $      0.01 
Shares used in per share 
calculation                        9,857                    12,447 
</TABLE>

See accompanying notes to Condensed Consolidated Financial Statements.
<TABLE>
<CAPTION>
FARALLON COMMUNICATIONS, INC. AND SUBSIDIARY
 CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands; unaudited)
                                                  Three Months Ended         
                                      December 31, 1995     December 31, 1996
<S>                                       <C>                        <C> 
Cash flows from 
operating activities:
Net income                      $         299                $         118
Adjustments to reconcile net 
income to net cash provided by
operating activities:
Depreciation and amortization             376                          474
Amortization of deferred  compensation      -                            4
Changes in assets and liabilities:
Accounts receivable                       (105)                      1,825
Inventories                               (505)                       (475)
Prepaid expenses and other assets         (589)                         40
Accounts payable                        (1,041)                     (1,285)
Accrued expenses and other liabilities      96                         132
Deferred revenue                           201                         (32)
Net cash provided by (used in) 
operating activities                    (1,268)                         801
Cash flows from investing activities:
Purchase of short-term investments     (23,438)                     (29,011)
Proceeds from the sale of short-term 
investments	                            24,541                       25,044 
Acquisition of furniture, fixture and 
equipment                                 (358)                        (331)
Net cash provided by (used in) 
investing activities                       745                       (4,298)
Cash flows from financing activities: 
Proceeds from issuance of common stock, net 56                           10
Net cash provided by financing activities   56                           10
Net decrease in cash and cash equivalents (467)                      (3,487)
Cash and cash equivalents, beginning 
of period                                13,963                      19,910
Cash and cash equivalents, 
end of period	                        $  13,496                  $   16,423
Supplemental disclosures of cash 
flow information:
Interest paid                         $       1                  $        1
Income taxes paid                     $       6                  $        1
</TABLE>


See accompanying notes to Condensed Consolidated Financial Statements.











FARALLON COMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation
The unaudited condensed consolidated financial statements included herein 
reflect all adjustments, consisting only of normal recurring adjustments which 
in the opinion of management are necessary to fairly present the Company's
consolidated financial position, results of operations, and cash flows for the
periods presented. These consolidated financial statements should be read in 
conjunction with the Company's consolidated financial statements as included 
in the Company's Annual Report on Form 10-K and other filings with the 
United States Securities and Exchange Commission.  The consolidated 
results of operations for the period ended December 31, 1996 are not 
necessarily indicative of the results to be expected for any subsequent 
quarter or for the entire fiscal year ending September 30, 1997.

2. Inventories 
<TABLE>
<CAPTION>
Inventories are stated at the lower of cost or market. Cost is determined
by the first-in, first-out (FIFO) method.  Inventory consisted of the 
following (in thousands, net):
                                  September 30, 1996        December 31, 1996
<S>                                        <C>                      <C>         
Raw materials and work in process     $   2,477             $      2,618
Finished goods	                           3,818                    4,152
                                      $   6,295             $      6,770
</TABLE>
<TABLE>
<CAPTION>
3. Furniture, Fixtures and Equipment, net (in thousands):

                                   September 30, 1996     December 31, 1996
<S>                                          <C>                  <C>
Furniture, fixtures and equipment      $   11,993        $       12,325
Accumulated depreciation and amortization  (9,058)               (9,514)
                                       $    2,935        $        2,811
</TABLE>

4. Net Income Per Share

     Net income per share is based on the weighted average 
number of shares of common stock and  dilutive common equivalent share 
from options outstanding during the period using the treasury stock method, 
and for the three months ended December 31, 1995, common equivalent 
shares from the convertible preferred stock using the ''as-converted'' method. 

     For the three month period ended December 31, 1995 
pursuant to certain SEC Staff Accounting Bulletins, common stock issued 
for consideration below the IPO price and stock options granted with 
exercise prices below the IPO price during the 12-month period prior to 
the date of the initial filing of the registration statement, even when 
antidilutive, have been included in the calculation of net income per 
share, using the treasury stock method based on the IPO filing price, 
as if they were outstanding for the entire period. 





Item 2.	Management's Discussion and Analysis of Financial Condition 
and Results of Operations.

The discussion in this Report contains forward-looking statements that 
involve risks and uncertainties.  The statements contained in this Report 
that are not purely historical are forward-looking statements within the 
meaning of Section 27A of the Securities Exchange Act of 1933, as 
amended, including statements regarding the Company's expectations, 
beliefs, intentions or strategies regarding the future. All forward-
looking statements included in this document are based on information 
available to the Company on the date hereof, and the Company 
assumes no obligation to update any such forward-looking statement. 
The Company's actual results could differ materially from those 
discussed herein.  Factors that could cause or contribute to such 
differences include, but are not limited to, those discussed in 
"Other Risk Factors That May Affect Future Operating Results" 
as well as those discussed in this section and elsewhere in this 
Report, and the risks discussed in the Company's other United 
States Securities and Exchange Commission Filings.


RESULTS OF OPERATIONS
Three Months Ended December 31, 1995 and 1996

     Revenues.  The Company's total revenues are derived from the sale of 
Internet/Intranet and local area networking ("LAN") connectivity products. 
Internet/Intranet product revenues include license revenues for the Company's 
Timbuktu Pro software, sales of the Netopia family of products and fees for 
related services. LAN products revenue is derived primarily from the sale 
of EtherWave, Fast Ethernet, Ethernet and LocalTalk compatible products 
which include the PhoneNET system network connectivity products, of 
which a substantial majority have been sold to Macintosh operating 
system ("MacOS") customers. Revenue relating to the sale and licensing
of hardware and software products is recognized upon shipment of the 
products by the Company and service revenues are recognized ratably 
over the term of the contract. Certain of the Company's sales are made 
to customers under agreements permitting limited rights of return for 
stock balancing. Revenue is recorded net of an estimated allowance for 
returns. Any product returns or price decreases in the future that exceed 
the Company's allowances will adversely affect the Company's 
business, operating results and financial condition. 
 
     The Company's total revenues decreased 4.6% from $14.1 
million to $13.5 million for the three months ended December 31, 
1995 and 1996, respectively. Internet/Intranet products revenue 
increased 71.1% from $2.8 million to $4.8 million for the three 
months ended December 31, 1995 and 1996, respectively.  The 
increase in Internet/Intranet revenue was primarily due to increased 
sales of  Netopia Internet connectivity solutions as well as increased 
volume licensing of the Windows version of Timbuktu Pro collaboration 
software, particularly in corporate Intranets. Netopia products revenue 
increased primarily due to increased international shipments of the 
Netopia ISDN router, the introduction of the "So-Smart" Netopia 
router in December, 1996, as well as a greater number of regional 
U.S. Internet Service Providers ("ISPs") selling Netopia Internet 
connectivity products. Netopia products were first shipped in 
December, 1995.  LAN products revenue decreased 23.4% from 
$11.3 million to $8.7 million for the three months ended December 31,
1995 and 1996, respectively, primarily due to declining volume and 
average selling prices of EtherWave and LocalTalk products, partially 
offset by increased sales of certain of the Company's Fast Ethernet 
products as well as sales of certain Ethernet products that were 
not available during the three months ended December 31, 1995. 
The Company believes LAN products revenue was adversely 
affected by Apple Computer's ("Apple") delayed shipment of 
Powerbooks, Performa technical problems and confusion surrounding Apple 
and the MacOS. LAN products revenue accounted for 80.1% and 64.3% of 
the Company's total revenues for the three months ended December 31, 
1995 and 1996, respectively, while Internet/Intranet products revenue 
accounted for 19.9% and 35.7% of the Company's total revenues for the 
three months ended December 31, 1995 and 1996, respectively. 
     
     As the Company continues to focus on the development of its 
Internet/Intranet business, and as a result of price competition related
to the Company's LAN products, declining sales of MacOS computers 
and competitive factors, the Company expects that LAN products
revenue may decline and may account for a decreasing percentage 
of total revenues in future periods to the extent that Internet/Intranet
product revenues increase. As a result, the Company's future operating 
results are dependent upon continued market acceptance of its Internet
/Intranet products and enhancements thereto. However, the Company 
is dependent upon sales of its LAN products for the foreseeable future, 
and to the extent that any decline in revenues from LAN products is not 
offset by increases in revenue from other sources, such as sales of the
Company's Internet/Intranet products, then the Company's business, 
operating results and financial condition will be materially and adversely 
affected.

     Farallon sells its Internet/Intranet and LAN products and 
related maintenance, support and other services primarily through 
distributors, while certain products are also sold directly through 
Value Added Resellers ("VARs") and ISPs or directly by the 
Company to corporate accounts and higher education institutions.
Revenues from distributors accounted for 67% and 54% of total 
revenues for the three months ended December 31, 1995 and 1996, 
respectively. The decrease in the percentage of revenues from 
distributors is primarily due to the increasing percentage of sales 
of the Company's Internet/Intranet products, which are primarily 
sold direct by the Company and through ISPs. Revenues from 
Ingram Micro (''Ingram'') accounted for 20% of total revenues for 
each of the three months ended December 31, 1995 and 1996, 
and revenues from MicroWarehouse accounted for 11% and 10% 
of total revenues for the three months ended December 31, 1995 
and 1996, respectively. No other customers have accounted for 10%
or more of the Company's total revenues during the three months 
ended December 31, 1995 and 1996. The Company intends to continue to 
use its existing distributors, VARs and ISPs to sell the Company's Internet/
Intranet products, to recruit additional VARs and ISPs, and pursue other 
marketing channels in the future. There can be no assurance that the 
Company's current distributors, VARs and ISPs will choose to or be able
to market the Company's products effectively, that economic conditions 
or industry demand will not adversely affect these or other distribution 
channels, or that these distributors, VARs and ISPs will not devote greater
resources to marketing products of other companies. The loss of, or a 
significant reduction in revenue from, one of the Company's distributors
could have a material adverse effect on the Company's business, operating 
results and financial condition.

      International revenues accounted for 33% and 28% of total 
revenues for the three months ended December 31, 1995 and 1996, 
respectively. The Company believes international revenues, particularly
in the Pacific Rim, were adversely affected by Apple's delayed 
shipment of Powerbooks, Performa technical problems and confusion 
surrounding Apple and the MacOS, partially offset by increased
international sales of Netopia ISDN routers. To the extent that 
the Company continues to experience weakened international 
demand for its products such as its Timbuktu Pro and Ethernet 
products, the Company's business, operating results and financial 
condition would be materially adversely affected. The Company's 
international revenues are currently denominated in United States 
dollars, and revenues generated by the Company's distributors 
currently are paid to the Company in United States dollars. The results 
of the Company's international operations may fluctuate from period
to period based on global economic factors including, but not limited
to, movements in currency exchange rates. Historically, movements 
in exchange rates have not materially affected the Company's total 
revenues. However, there can be no assurance that movements in 
currency exchange rates will not have a material adverse effect on 
the Company's revenues in the future.

     Gross Margin.  The Company's gross margin for Internet/
Intranet and LAN products is affected by many factors, including 
pricing strategies, royalties paid to third parties, new versions of existing
 products and product mix. The Company's total gross margin 
remained relatively constant, increasing from 48.4% to 49.0% for the three 
months ended December 31, 1995 and 1996, respectively. The Company's 
gross margin for Internet/Intranet products decreased from 83.7% to 67.7% 
for the three months ended December 31, 1995 and 1996, respectively, 
primarily due to increased sales of the Netopia router and modem which
have lower gross margins than the Company's Internet/Intranet software
products. The Company also reduced the average selling prices of 
Netopia routers due to price competition which contributed to declining 
Internet/Intranet margins. The Company's gross margin for LAN products 
decreased from 39.6% to 38.7% for the three months ended December 31, 
1995 and 1996, respectively, primarily due to declining sales and average 
selling prices as a result of increased price competition. The Company 
expects gross margins for Internet/Intranet products to decrease in future 
periods reflecting increased sales of hardware products that carry lower 
gross margins than software products. In addition, the Company expects 
gross margins for LAN products to decrease in future periods primarily 
due to lower sales volumes and declining average selling prices. The 
Company's gross margin has varied significantly in the past and will 
likely vary significantly in the future depending primarily on the mix 
of products sold by the Company and external market factors including 
but not limited to price competition.  The Company's Internet/Intranet 
software products have a higher average gross margin than the balance 
of the Company's products. Accordingly, to the extent the product mix 
for any particular quarter includes a substantial proportion of lower 
margin products, there will be a material adverse effect on the Company's 
business, operating results and financial condition. 
 
     Research and Development. Research and development 
expenses increased 7.5% from $2.0 million to $2.2 million for the 
three months ended December 31, 1995 and 1996, respectively, 
primarily due to increased headcount related to the development 
of new Internet/Intranet products, particularly for the Netopia family 
of Internet connectivity solutions and new Internet/Intranet collaboration 
software products. Research and development expenses represented 14.3% 
and 16.1% of total revenues for the three months ended December 31, 1995 
and 1996, respectively. The Company believes that it will continue to devote 
substantial resources to product development and that research and 
development expenses will increase in absolute dollars for the remainder 
of fiscal 1997. The Company believes its process for developing software 
is essentially completed concurrent with the establishment of technological 
feasibility, and no software costs have been capitalized to date. The 
Company may enter into future development agreements in which the 
Company may be required to capitalize the cost of software development.

     Selling and Marketing. Selling and marketing expenses were 
$3.8 million for each of the three months ended December 31, 1995 
and 1996.  Although total selling and marketing expenses were 
unchanged year over year, increased headcount and other employee 
related expenses as well as increased electronic marketing costs were 
offset by declining print advertising and promotional expenses. Such 
expenses represented 26.8% and 28.2% of total revenues for the three 
months ended December 31, 1995 and 1996, respectively. The 
Company believes that selling and marketing expenses will increase 
in absolute dollars for the remainder of fiscal 1997 primarily due to 
personnel related expenses and increased advertising and promotional activities.

     General and Administrative. General and administrative 
expenses increased 6.1% from $789,000 to $837,000 for the three months 
ended December 31, 1995 and 1996, respectively, primarily due to increased 
expenses related to directors' and officers' insurance and increased personnel
costs primarily related to the Company's initial public offering in June, 
1996. Such expenses represented 5.6% and 6.2% of total revenues for the 
three months ended December 31, 1995 and 1996, respectively. The 
Company believes that general and administrative expenses will increase 
in absolute dollars for the remainder of fiscal 1997 as the Company adds 
infrastructure, such as expenses to maintain and support the Company's 
web related activities and incurs additional costs related to being a public 
company, such as expenses related to investor relations programs and 
increased professional fees.

    Other Income, net.  Other income, net, primarily represents 
interest earned by the Company on its cash, cash equivalents and short-term 
investments.

     Provision for Income Taxes.  The effective tax rate was 35%
for the each of three months ended December 31, 1995 and 1996. 
This rate differs from the statutory rate primarily due to state income 
taxes, investment income from tax advantaged investments and the 
utilization of research and tax credits. 


OTHER RISK FACTORS THAT MAY AFFECT FUTURE OPERATING 
RESULTS

     The Company operates in a rapidly changing environment that 
involves a number of risks, some of which are beyond the Company's control.  
The following discussion highlights some of these risks. The Company's 
actual results could differ materially from those discussed herein.  
Factors that could cause or contribute to such differences include, but 
are not limited to, those discussed in this section and elsewhere in this 
Report, and the risks discussed in the Company's other United States 
Securities and Exchange Commission Filings.

     Fluctuations in Quarterly Results; Future Operating Results 
Uncertain. The Company's quarterly operating results have varied 
significantly in the past and are likely to vary significantly in the future, 
depending on factors such as changes in networking and communications
technologies, price and product competition, usage of the Internet and 
developments and changes in the Internet market, the demand for the 
Company's products, demand for Apple's products, changes in pricing 
policies by the Company or its competitors, including the grant of
price protection terms and discounts by the Company, changes in 
the mix of products sold by the Company and the resulting change 
in total gross margin, changes in the mix of channels through which 
the Company's products are offered, product enhancements and new
product announcements by the Company and its competitors, market 
acceptance of new products of the Company or its competitors, raw 
material costs, write-offs of obsolete inventory, the size and timing of 
distributor and end user orders and purchasing cycles, customer order 
deferrals in anticipation of enhancements to the Company's or 
competitors' products, customer order deferrals in anticipation of new 
MacOS product offerings and a new operating system for the Macintosh 
by Apple, manufacturing delays, disruptions in sources of supply, product 
life cycles, product quality problems, personnel changes, changes in the 
Company's strategy, changes in the level of operating expenses, the timing 
of research and development expenditures, the level of the Company's 
international revenues, fluctuations in foreign currency exchange rates,
general economic conditions, both in the United States and abroad, and 
economic conditions specific to the industries in which the Company 
competes, among others. The Company's limited Internet/Intranet operating 
history makes the prediction of future Internet/Intranet operating results 
difficult, if not impossible. Sales orders are typically shipped shortly after 
receipt and, consequently, order backlog at the beginning of any quarter has 
in the past represented only a small portion of that quarter's revenues. 
Accordingly, the Company's net revenues in any quarter are substantially 
dependent on orders booked and shipped during that quarter. Historically,
the Company has often recognized a significant portion of its revenues in
the last weeks, or even days, of a quarter. As a result, the magnitude of 
quarterly fluctuations may not become evident until late in, or after the 
close of, a particular quarter. In addition, the Company recognizes 
revenue on products sold through distributors upon shipment to the 
distributor. Although the Company maintains reserves for projected 
returns and price decreases, there can be no assurance that such reserves
will be adequate. The Company's business also has experienced 
seasonality in the past, largely due to customer buying patterns such 
as budgeting cycles of educational institutions that purchase the Company's 
products. There can be no assurance that the Company's operating results 
will not be affected by seasonality in the future or that such  will occur in 
a manner consistent with prior periods. 

     The Company's expense levels are based in large part on 
expectations as to future revenues and as a result are relatively fixed in the 
short term. If revenues are below expectations in any given quarter, net 
income is likely to be disproportionately affected. Due to all of the foregoing 
factors, and other factors discussed herein, revenues and net income 
for any future period are not predictable with any significant degree of 
certainty. Accordingly, the Company believes that period-to-period 
comparisons of its results of operations are not necessarily meaningful 
and should not be relied upon as indications of future performance. There
can be no assurance that the Company's business strategies will be 
successful or that the Company will be able to sustain profitability on a 
quarterly or annual basis in the future. It is likely that in some future 
quarter the Company's operating results will be below the expectations 
of public market analysts and investors. In such event, the price of the 
Company's Common Stock would likely be materially and adversely affected.  

     Dependence on Internet/Intranet Products. The Company's 
business is substantially dependent upon continued growth in the sale 
of its Internet/Intranet products. Rapid growth in the use of the Internet 
and Intranets is a recent phenomenon. There can be no assurance that 
communication or commerce over the Internet will become widespread. In 
addition, to the extent that the Internet continues to experience significant 
growth in the number of users and level of use, there can be no assurance 
that the Internet infrastructure will continue to be able to support the 
demands placed upon it by such potential growth, or will not otherwise lose 
its utility due to delays in the development or adoption of new standards and 
protocols required to handle increased levels of activity, or due to increased 
government regulation. Although the Company has experienced significant 
percentage growth rates of Internet/Intranet revenues, the Company does not 
believe prior percentage growth rates are sustainable or indicative of future 
operating results for these products and services. The Company's limited 
Internet/Intranet operating history makes the prediction of future 
Internet/Intranet operating results difficult, if not impossible. There can 
be no assurance that the Company will continue to increase sales of its 
Internet/Intranet products, that the Company's existing distribution channels 
are appropriate for the sale of its Internet/Intranet products or that sales 
of such products will reach levels significant enough to offset expected 
declines in sales, average selling prices and gross margins of the Company's 
LAN products. Accordingly, the failure of the Company's Internet/Intranet
products to gain market acceptance or to achieve significant sales would 
materially and adversely affect the Company's business, operating results
and financial condition. The markets in which the Company competes 
currently are subject to intense price competition and the Company expects 
additional price and product competition as other established and emerging 
companies enter these markets and new products and technologies are
introduced. Increased competition may result in further price reductions, 
reduced gross margins and loss of market share, any of which could 
materially adversely affect the Company's business, operating results 
and financial condition. 

     Dependence on LAN Products; Declining LAN Business. To 
date, the Company has derived a substantial majority of its revenue from 
LAN products, which represented 91%, 89%, 73% and 64% of total 
revenues for fiscal years 1994, 1995, 1996 and the three months ended
December 31, 1996, respectively. These products have experienced 
variable average selling prices and gross margins, and declining sales 
volumes. The Company anticipates that the average selling prices and gross
margins of its existing LAN products will continue to decline. Accordingly, 
to the extent the product mix for any particular period includes a substantial 
proportion of LAN products, the Company's total gross margin will be 
adversely affected. To date, the Company has been able to partially reduce 
the decline in total gross margin by reducing the manufacturing cost of 
products and by introducing new products with higher margins. There can 
be no assurance that the Company will achieve any such reductions in 
the future or that new products will achieve market acceptance. Although
the Company's Internet/Intranet products currently carry a higher 
average gross margin than its LAN products, the Company anticipates
that competitive pressures in its Internet/Intranet business may result
in declining average selling prices and gross margins in this business
as well. Historically, a substantial majority of the Company's LAN
products revenue have been derived from sales of products designed 
for Apple MacOS and compatible computers. Net revenues from the 
Company's LAN products fluctuated on a quarterly basis during fiscal
1996 and the three months ended December 31, 1996, and the
Company expects that net revenues from LAN products may decline
in the future as a result of declining sales and average selling prices 
of the Company's LAN products, Apple's incorporation of built-in Ethernet
connectivity into certain of its computers, declining sales of MacOS
computers and competition in the LAN products market. Additionally, 
sales related to certain of the Company's MacOS products are driven in
part by sales of the Apple PowerBooks which have experienced 
delays, technical difficulties and interrupted supply. As a result of 
technical characteristics in the MacOS environment, Fast Ethernet products, in 
general, have not delivered expected performance levels. If these technical 
characteristics are not addressed in the future, then Fast Ethernet product 
sales in the MacOS market segment will be below the Company's 
expectations, and operating results may be materially and adversely 
affected. The Company is dependent upon sales and profitability of its 
LAN products for the foreseeable future, and to the extent that any decline 
in revenues and gross margins from LAN products is not offset by increases
 in revenues from other sources, such as sales of the Company's 
Internet/Intranet products, then the Company's business, operating 
results and financial condition will be materially and adversely affected.  

     Dependence on Apple; Competition with Apple Products. To 
date, the Company has derived approximately 85% to 90% of its LAN 
products revenue from products designed for networking the Apple 
MacOS family of personal computers. Accordingly, the Company is 
substantially dependent on the market for MacOS computers and the 
development and sale of new Apple computers, particularly sales of 
such computers into business environments. There can be no assurance
that competitive personal computers will not displace the MacOS 
products or reduce sales of MacOS products. In addition, sales of the
Company's products in the past have been adversely affected by the 
announcement by Apple of new products with the potential to replace 
existing products. The inability of Apple to successfully develop, 
manufacture, market or sell new products, and any decrease in the sales 
or market acceptance of the MacOS family of computers, would have a 
material adverse effect on the Company's business, operating results and 
financial condition.  For example, in the three months ended December 31, 
1996, the Company believes LAN products revenue was adversely affected 
by Apple's delayed shipment of Powerbooks, Performa technical problems
and confusion surrounding Apple and the MacOS

     The Company relies on an informal working relationship with 
Apple in connection with the Company's LAN product development efforts. 
Although the Company and Apple have maintained a cooperative 
working relationship since the Company's founding, Apple is under no 
obligation to continue to share product information or otherwise cooperate 
with the Company. In addition, there can be no assurance that Apple will 
continue to work cooperatively with the Company in connection with the 
Company's product development efforts. The absence of such cooperation 
in the future, as a result of the current restructuring in process at Apple, 
including but not limited to the acquisition of Next Inc., or any other 
factors, 
could have a material adverse effect on the Company's business, operating 
results and financial condition. Apple currently offers products that compete 
directly with certain of the Company's products. The Company anticipates 
that Apple will continue to incorporate additional connectivity technologies 
into more of its products in the future, which will adversely affect sales of
the Company's LAN products. Since Apple has substantially greater financial, 
technical, sales, marketing and other resources than the Company, as well 
as greater name recognition and a significantly larger customer base, Apple
may be able to respond more quickly to new or emerging technologies and 
changes in customer requirements or to devote greater resources to the 
development, promotion and sales of its products. The Company believes 
that it is likely that Apple will in the future sell separately or bundle with 
its computers certain Internet access products, such as ISDN terminal 
adapters similar to the Company's Netopia ISDN Modem. Any such 
additional bundling or enhancement by Apple could have a material 
adverse effect on the Company's business, operating results and financial 
condition.   

     Competition. The markets for the Company's products and 
services are intensely competitive, highly fragmented and characterized 
by rapidly changing technology, evolving industry standards, price 
competition and frequent new product introductions. A number of companies 
offer products that compete with one or more of the Company's products.
The Company's current and prospective competitors include original 
equipment manufacturer (''OEM'') product manufacturers of Internet 
access and remote LAN access equipment, manufacturers of remote
control and screen sharing software and manufacturers of LAN client 
access and network systems products. In the Internet access and remote 
LAN access equipment market, the Company competes primarily with 
Ascend, Cisco, Motorola, 3Com, U.S. Robotics, Gandalf and several 
other companies. In the remote control and screen sharing software 
market, the Company competes primarily with Symantec, Microsoft, 
Tivoli, Microcom, Traveling Software, Stac Electronics and several 
other companies. In the LAN client access and network systems 
product market, the Company competes primarily with Apple, 
Asante, Dayna, Global Village and several other companies. The 
Company has experienced and expects to continue to experience 
increased competition from current and potential competitors, 
many of whom have substantially greater financial, technical, sales, 
marketing and other resources, as well as greater name recognition 
and a larger customer base, than the Company. Accordingly, such 
competitors or future competitors may be able to respond more quickly 
to new or emerging technologies and changes in customer requirements
or devote greater resources to the development, promotion and sales of 
their products than the Company. In particular, established companies 
in the personal computer industry may seek to expand their product 
offerings by designing and selling products using competitive technology 
that could render the Company's products obsolete or have a material 
adverse effect on the Company's sales. For example, Microsoft has 
available for free, via download on the Internet, communications and 
collaboration software compatible with the Microsoft Internet Explorer. 
This software product, which enables real-time communication within 
a workgroup, as well as similar future product offerings from Microsoft, 
could undermine the Company's ability to market its Timbuktu Pro 
and/or Netopia Virtual Office collaboration software. In addition, 
Netscape also offers software that enables dispersed work groups to 
collaborate in the work environment. Accordingly, there can be no 
assurance that the Company can continue to market its collaboration 
software, which would have a material and adverse effect on the 
Company's business, operating results and financial condition. In 
addition, several of the Company's current competitors recently have 
introduced free and/or paid guaranteed service and support programs 
that appear to be similar to the Company's Up & Running, Guaranteed! 
program. As a result, there can be no assurance that the Company can 
continue to charge a fee for this support program, which could have a 
material and adverse effect upon the Company's business, operating 
results and financial condition. The markets in which the Company 
competes currently are subject to intense price competition and the 
Company expects additional price and product competition as other 
established and emerging companies enter these markets and new 
products and technologies are introduced. Increased competition 
may result in further price reductions, reduced gross margins and 
loss of market share, any of which could materially and adversely 
affect the Company's business, operating results and financial 
condition. There can be no assurance that the Company will be 
able to compete successfully against current and future 
competitors, or that competitive factors faced by the Company 
will not have a material adverse effect on the Company's business, 
operating results and financial condition.  

     New Product Development and Rapid Technological 
Change; Dependence on ISDN Technology. The personal 
computer industry is characterized by rapidly changing technologies, 
evolving industry standards, frequent new product introductions, 
short product life cycles and rapidly changing customer requirements. 
The introduction of products embodying new technologies and the 
emergence of new industry standards can render existing products obsolete 
and unmarketable. The Company's future success will depend on its 
ability to enhance its existing products and to introduce new products 
to meet changing customer requirements and emerging technologies. 
For example, the Company's Netopia products currently operate only 
over ISDN telecommunication service. As other communications 
technologies such as 56K analog modems, Frame Relay, Asynchronous 
Transfer Mode (''ATM''), Asymmetric Digital Subscriber Line (''ADSL'') 
and communication over cable or wireless networks, are developed or 
gain market acceptance, the Company will be required to enhance its 
Internet connectivity products to support such technologies, which 
will be costly and time consuming. If the Company is unable to modify 
its products to support new Internet access technologies, or if ISDN 
does not achieve widespread customer acceptance as a result of the 
adoption of alternative technologies or as result of deemphasis of ISDN 
by telecommunications service providers, the Company's business, 
operating results and financial condition would be materially and 
adversely affected. In addition, the Company has historically derived 
a substantial majority of its revenues from the sale of Ethernet 
connectivity products. In the event that current Ethernet network 
technology is modified or replaced and the Company is unable to 
modify its products to support new Ethernet technologies or 
alternative technologies, the Company's business, operating results 
and financial condition could be materially and adversely affected. 
The Company has in the past and may in the future experience 
delays in new product development. There can be no assurance that 
the Company will be successful in developing and marketing product 
enhancements or new products that respond to technological change, 
evolving industry standards and changing customer requirements, 
that the Company will not experience difficulties that could delay 
or prevent the successful development, introduction and marketing 
of these products or product enhancements, or that its new products 
and product enhancements will adequately meet the requirements 
of the marketplace and achieve any significant degree of market 
acceptance. Failure of the Company, for technological or other reasons, 
to develop and introduce new products and product enhancements in a 
timely and cost-effective manner would have a material adverse effect 
on the Company's business, operating results and financial condition. 
In addition, the future introduction or even announcement of products 
by the Company or one or more of its competitors embodying new 
technologies or changes in industry standards or customer requirements 
could render the Company's then existing products obsolete or unmarketable. 
There can be no assurance that the introduction or announcement of new 
product offerings by the Company or one or more of its competitors will
not cause customers to defer purchase of existing Company products. 
Any such deferral of purchases could have a material adverse effect on the 
Company's business, operating results or financial condition. 

     Complex products such as those offered by the Company may 
contain undetected or unresolved defects when first introduced or as new 
versions are released. There can be no assurance that, despite testing by 
the Company, defects will not be found in new products or new versions 
of products following commercial release, resulting in loss of market share, 
delay in or loss of market acceptance or product recall. Any such 
occurrence could have a material adverse effect upon the Company's 
business, operating results or financial condition.  
		
     As of December 31, 1996, Farallon's research and development 
staff consisted of 62 employees. Of these employees 53 were focused 
primarily on Internet/Intranet product development and 9 were 
focused primarily on LAN product development. The Company believes that 
its future success will depend in large part upon its ability to attract and
retain highly-skilled engineering personnel. Competition for such personnel 
is intense, and there can be no assurance that the Company will be successful
in attracting and retaining such personnel, the failure of which could have 
a material adverse effect on the Company's business, operating results and 
financial condition.
	
      Management of Changing Business. The Company has shifted its 
business strategy from providing only LAN products to reducing its reliance 
on LAN products and focusing development and management efforts on its
Internet/Intranet business. This transition represents a significant challenge 
for the Company and its administrative, operational and financial resources 
and places increased demands on its systems and controls. The Company's 
ability to manage the continuing development of its Internet/Intranet business 
will require the Company to continue to change, expand and improve its 
operational, management and financial systems and controls and to expand 
its manufacturing capacity. This transition has resulted in a continuing 
increase in the level of responsibility for both existing and new management 
personnel. The Company anticipates that any growth in its Internet/Intranet 
business will require it to recruit and hire a substantial number of new 
engineering, sales and marketing, customer service, administrative and 
managerial personnel. There can be no assurance that the Company will 
be successful in hiring or retaining these personnel, if needed. If the 
Company is unable to manage the transition effectively, the Company's 
business, operating results and financial condition will be materially and 
adversely affected.  

     Dependence on Distributors. The Company relies primarily on 
distributors for the sale of its Internet/Intranet and LAN products. 
Revenues from distributors accounted for 76%, 73%, 60% and 54% 
of the Company's total revenues in fiscal 1994, 1995, 1996 and the
three months ended December 31, 1996, respectively. A substantial amount 
of the Company's revenues result from a limited number of these 
distributors. The Company's three largest distributors accounted for 45%, 
43%, 35% and 35% of the Company's total revenues in fiscal 1994, 1995, 
1996 and the three months ended December 31, 1996, respectively. 
During fiscal 1994, 1995, 1996 and the three months ended December 31, 
1996, revenue from Ingram accounted for 24%, 22%, 18% and 20% of 
the Company's total revenues, and revenue from MicroWarehouse 
accounted for 12%, 13%, 11% and 10% of the Company's total revenues, 
respectively. No other customers have accounted for 10% or more of the 
Company's total revenues during fiscal 1994, 1995, 1996 or the three 
months ended December 31, 1996. The distribution of LAN products 
such as those offered by the Company has been characterized by rapid 
change, including industry consolidations, financial difficulties of 
distributors and the emergence of alternative distribution channels. 
There can be no assurance that Ingram and MicroWarehouse will 
continue to serve as distributors for the Company since the Company 
does not currently have a written agreement regarding price or 
quantity commitments with these or other distributors and operates 
with these and other distributors on a purchase order basis. The 
Company's distributors generally offer products of several different 
companies, including products that are competitive with the Company's 
products. There can be no assurance that future sales by the Company's 
distributors will continue at current levels, that the Company will be able 
to retain its current distributors in the future on terms which are 
acceptable to the Company, that the Company's current distributors will 
choose to or be able to market the Company's products effectively, that 
economic conditions or industry demand will not adversely affect these 
or other distributors, or that these distributors will not devote greater 
resources to marketing products of other companies. Accordingly, the 
loss of, or a significant reduction in revenue from, one of the Company's 
distributors, could have a material adverse effect on the Company's 
business, operating results and financial condition. 

     The Company grants to its distributors limited rights to return
unsold inventories of the Company's products in exchange for new 
purchases and provides price protection to its distributors. Although
the Company provides allowances for projected returns and price 
decreases, any product returns or price decreases in the future that 
exceed the Company's allowances will materially and adversely 
affect the Company's business, operating results and financial 
condition. The Company also provides end users with a lifetime 
warranty on certain products and permits end users to return any 
product for its full purchase price if the product does not perform 
as warranted. To date, the Company has not encountered material 
warranty claims. Nevertheless, if future warranty claims exceed the 
Company's reserves, the Company's business, operating results and 
financial condition could be materially and adversely affected. In 
addition, the Company attempts to further limit its liability to end 
users through disclaimers of special, consequential and indirect dam
ages and similar provisions in its end user warranty. However, no 
assurance can be given that such limitations of liability will be legally 
enforceable.
  
     International Operations. International revenues accounted 
for 25%, 29%, 29% and 28% of the Company's total revenues in
 fiscal 1994, 1995, 1996 and the three months ended December 31, 1996, 
respectively. The Company expects that international revenues will 
continue to represent a significant portion of its total revenues. 
Any significant decline in international demand for the Company's 
products would have a material adverse effect on the Company's 
business, operating results and financial condition. The Company 
believes that in order to increase sales opportunities and profitability 
it will be required to expand its international operations. The 
Company has committed and continues to commit significant 
management attention and financial resources to developing international 
sales and support channels. There can be no assurance that the Company 
will be able to maintain or increase international market demand for its 
products. In addition, the Company is dependent upon the international 
demand for Apple products. To the extent that the Company is unable to 
maintain or increase international demand for its products, or that 
international demand for Apple products does not meet the Company's 
expectations, the Company's international sales will be limited, and the 
Company's business, operating results and financial condition would be 
materially and adversely affected. 

     The Company's international business is subject to inherent risks, 
including but not limited to the impact of possible recessionary environments 
in economies outside the United States, costs of localizing products for 
foreign countries, longer receivable collection periods and greater difficulty 
in accounts receivable collection, unexpected changes in regulatory 
requirements, difficulties and costs of staffing and managing foreign 
operations, reduced protection for intellectual property rights in some 
countries, particularly in developing countries, potentially adverse tax 
consequences and political and economic instability. There can be no 
assurance that the Company will be able to sustain or increase international 
revenues, or that the foregoing factors will not have a material adverse 
effect on the Company's future international revenues and its business, 
operating results and financial condition. The Company's international
 revenues are currently denominated in United States dollars, and revenues 
generated by the Company's distributors currently are paid to the 
Company in United States dollars. If, in the future, international 
revenues are denominated in local currencies, foreign currency 
translations may contribute to significant fluctuations in, and could 
have a material adverse effect on, the Company's business, operating
results and financial condition. In addition, the Company has a
substantial portion of its products and components manufactured by foreign 
suppliers. The Company's operating results are subject to the risks inherent 
in international purchases, including, but not limited to, various regulatory
 requirements, political and economic changes and disruptions
transportation delays, export/import controls, tariff regulations, 
higher freight rates and potentially adverse tax consequences. Duty, 
tariff and freight costs can materially increase the cost of crucial 
components for the Company's products. 

	Dependence on Strategic Alliances; Dependence on Contract 
Manufacturers and Limited Source Suppliers.  The Company relies 
on a number of strategic relationships to help achieve market 
acceptance of the Company's products and to leverage the Company's 
development, sales and marketing resources. Although the Company 
views these relationships as important factors in the development and
marketing of the Company's products and services, a majority of the 
Company's agreements with its strategic partners or customers do not 
require future minimum commitments to purchase the Company's 
products, are not exclusive and generally may be terminated at the 
convenience of either party. There can be no assurance that the Company's 
strategic partners regard their relationship with the Company as strategic to 
their own respective businesses and operations, that they will not reassess 
their commitment to the Company or its products at any time in the future, 
or that they will not develop and/or market their own competitive technology. 

	The Company does not manufacture any of the components used in 
its products and performs only limited assembly on some products. The 
Company relies on independent contractors to manufacture to specification 
the Company's components, subassemblies, systems and products. The 
Company also relies upon limited source suppliers for a number of 
components used in the Company's products, including certain key 
microprocessors and integrated circuits. There can be no assurance 
that these independent contractors and suppliers will be able to timely 
meet the Company's future requirements for manufactured products, 
components and subassemblies. The Company generally purchases 
limited source components pursuant to purchase orders and has no 
guaranteed supply arrangements with these suppliers. The Company 
has maintained relationships with certain of its domestic manufacturing 
suppliers whereby the Company will purchase components used in 
certain of its products for resale to its manufacturing suppliers when 
the Company can secure more favorable terms for the purchase of 
such components.  As a result of the Company moving certain of its 
production offshore and terminating relationships with certain of its 
previous manufacturing suppliers, the Company may be required to 
repurchase certain of these component parts that the previous 
manufacturing suppliers are unable to resell to the Company's new 
manufacturing suppliers.  The Company currently believes that the 
component parts can be sold to its new manufacturing suppliers and 
does not anticipate having to repurchase any of these components, 
although there can be no assurance that such repurchases will not be 
required.  In addition, the availability of many of these components 
to the Company is dependent in part on the Company's ability to 
provide its suppliers with accurate forecasts of its future requirements. 
However, any extended interruption in the supply of any of the key 
components currently obtained from a limited source would disrupt 
its operations and have a material adverse effect on the Company's
business, operating results and financial condition. In addition, the 
Company anticipates that it will be necessary to establish additional 
strategic relationships in the future, in particular with additional national
ISPs, and there can be no assurance that the Company will be able to 
establish such alliances or that such alliances will result in increased 
revenues.  

     Dependence on Proprietary Rights and Technology. The 
Company's ability to compete is dependent in part on its proprietary 
rights and technology. The Company relies primarily on a combination
of patent, copyright and trademark laws, trade secrets, confidentiality 
procedures and contractual provisions to protect its proprietary rights. 
The Company generally enters into confidentiality or license agreements 
with its employees, resellers, distributors, customers and potential 
customers and limits access to the distribution of its software, hardware 
designs, documentation and other proprietary information. There can be 
no assurance that the steps taken by the Company in this regard will be 
adequate to prevent misappropriation of its technology. The Company 
currently has ten issued United States patents, and one pending application 
for patent in each of Australia and the European Patent Office. There can 
be no assurance that the Company's patents will not be invalidated, 
circumvented or challenged, that the rights granted thereunder will provide 
competitive advantages to the Company or that any of the Company's 
pending or future patent applications, whether or not being currently 
challenged by applicable governmental patent examiners, will be issued 
with the scope of the claims sought by the Company, if at all. Furthermore, 
there can be no assurance that others will not develop technologies that 
are similar or superior to the Company's technology or design around the 
patents owned by the Company. Despite the Company's efforts to protect 
its proprietary rights, unauthorized parties may attempt to copy aspects 
of the Company's products or to obtain and use information that the 
Company regards as proprietary. Policing unauthorized use of the Company's 
products is difficult, and while the Company is unable to determine the 
extent to which piracy of its software products exists, software piracy is 
expected to be a persistent problem. In selling its software products, the 
Company relies primarily on ''shrink wrap'' licenses that are not signed 
by licensees and, therefore, it is possible that such licenses may be 
unenforceable under the laws of certain jurisdictions. In addition, the 
laws of some foreign countries, particularly developing countries, do 
not protect the Company's proprietary rights as fully as do the laws of 
the United States. There can be no assurance that the Company's means 
of protecting its proprietary rights in the United States or abroad will 
be adequate or that competing companies will not independently develop 
similar technology. 

     The Company relies upon certain software, firmware and hardware 
designs that it licenses from third parties, including firmware that 
integrated with the Company's internally developed firmware and used 
in the Company's products to perform key functions. There can be no 
assurance that these third-party licenses will continue to be available to 
the Company on commercially reasonable terms. The loss of, or inability 
to maintain, such licenses could result in shipment delays or reductions 
until equivalent firmware could be developed, identified, licensed and 
integrated which would materially and adversely affect the Company's 
business, operating results and financial condition. 

     Litigation. From time to time, the Company has received claims 
of infringement of other parties' proprietary rights. Although the Company 
believes that all such claims received to date are immaterial, there can 
be no assurance that third parties will not assert infringement claims 
in the future with respect to the Company's current or future products. 
The Company expects that it will increasingly be subject to 
infringement claims as the number of products and competitors in 
the Company's industry segments grow and the functionality of products 
in different industry segments overlaps. Any such claims, with or without 
merit, could be time consuming to defend, result in costly litigation, 
divert management's attention and resources, cause product shipment 
delays or require the Company to enter into royalty or licensing agreements.
Such royalty or licensing agreements, if required, may not be available on 
terms acceptable to the Company, if at all. In the event of a successful claim 
of product infringement against the Company and failure or inability of the 
Company to license the infringed or similar technology, the Company's 
business, operating results and financial condition would be materially 
and adversely affected. 

     From time to time, the Company may be involved in litigation 
or administrative claims arising out of its operations in the normal course 
of business. For example, in 1995 the Company terminated negotiations 
with a manufacturer of router products regarding a potential acquisition. 
Shortly thereafter, the Company received correspondence from such 
manufacturer's counsel asserting that the Company's termination of 
negotiations was improper and demanding that Farallon either 
consummate an acquisition for cash and stock or license from such 
manufacturer certain technology. The Company believes that any 
potential claim by such manufacturer, if brought, would be entirely 
without merit and the Company is prepared to vigorously defend 
any such claim.  

     Lengthy Sales Cycle and Lengthy Partnership Development. 
The Company's Internet/Intranet software products are often licensed 
to customers on a volume license basis for use on private wide area 
network (''WAN'') Intranets involving thousands of nodes. These 
licenses often involve significant license and maintenance fees. As 
a result, the license of the Company's Internet/Intranet software 
products often involves a significant commitment of management 
attention and resources by prospective customers. Accordingly, the 
Company's sales process for these products is often subject to delays 
associated with long approval processes that typically accompany 
significant capital expenditures. For these and other reasons, the sales 
cycle associated with the license of the Internet/Intranet software products
 is often lengthy and subject to a number of significant delays over which 
the Company has little or no control. There can be no assurance that the 
Company will not experience these and additional delays in the future on 
Internet/Intranet software or other products.   

      The Company's Netopia products are often distributed through 
partnerships with ISPs.  These partnerships often involve lengthy testing 
and certification studies as well as detailed agreements. As a result, 
partnerships with ISPs to distribute Netopia products involve a significant 
commitment of management attention and resources by prospective partners. 
Accordingly, the Company's business development process for these 
distribution channels is often subject to delays associated with long 
approval processes that typically accompany significant partnership 
development and capital expenditures. For these and other reasons, the 
business development process associated with the partnerships are often 
lengthy and subject to a number of significant delays over which the 
Company has little or no control. There can be no assurance that the 
Company will not experience these and additional delays in the future 
on partnership development.

     Tariff and Regulatory Matters. The Company is not currently 
subject to direct regulation by any government agency, other than 
regulations applicable to businesses generally. However, rates for 
telecommunications services are governed by tariffs of licensed carriers 
that are subject to regulatory approval. Future changes in these tariffs 
could have a material adverse effect on the Company's business, operating 
results and financial condition. For example, if tariffs for public switched 
digital services increase in the future relative to tariffs for private leased 
services, then the cost-effectiveness of the Company's products would be 
reduced, and its business, operating results and financial condition would 
be materially and adversely affected. In addition, the Company's 
telecommunications products must meet standards and receive 
certification for connection to public telecommunications networks 
prior to their sale. In the United States, such products must comply 
with Part 15(a) (industrial equipment), Part 15(b) (residential equipment) 
and Part 68 (analog lines) of the Federal Communications Commission 
regulations. The Company's telecommunications products also must be 
certified by domestic telecommunications carriers. In foreign countries, 
such products are subject to a wide variety of governmental review and 
certification requirements. While certain foreign countries and the 
European Economic Community regulate the importation and certification 
of the Company's products, most foreign customers typically require that 
the Company's products receive certification from their country's primary 
telecommunication carriers. Any future inability to obtain on a timely basis 
or retain domestic certification or foreign regulatory approvals could have a 
material adverse effect on the Company's business, operating results and 
financial condition. 

     Dependence on Key Personnel. The Company's business and
 prospects depend to a significant degree upon the continuing 
contributions of its key management, sales, marketing, product 
development and administrative personnel. The Company does not 
have employment contracts with its key personnel and does not 
maintain any key person life insurance policies. The loss of key 
management or technical personnel could materially and adversely 
affect the Company's business, operating results and financial 
condition. The Company believes that its prospects depend in large 
part upon its ability to attract and retain highly-skilled engineering, 
managerial, sales and marketing, and administrative personnel. 
Competition for such personnel is intense, and there can be no assurance 
that the Company will be successful in attracting and retaining such 
personnel. Failure to attract and retain key personnel could have a material 
adverse effect on the Company's business, operating results and financial 
condition.  

     Volatility of Stock Price. The market price of the shares of the 
Company's Common Stock is highly volatile and may be significantly 
affected by factors such as actual or anticipated fluctuations in the 
Company's results of operations, announcements of technological 
innovations, introduction of new products by the Company or its 
competitors, developments with respect to patents, copyrights or proprietary 
rights, conditions and trends in the networking and other technology
industries, changes in or failure by the Company to meet securities 
analysts' expectations, general market conditions and other factors. In 
addition, the stock market has from time to time experienced significant
price and volume fluctuations that have particularly affected the market
prices for the common stocks of technology companies. These broad market 
fluctuations may adversely affect the market price of the Company's Common 
Stock. In the past, following periods of volatility in the market price of a 
particular company's securities, securities class action litigation has often 
been brought against that company. There can be no assurance that such
litigation will not occur in the future with respect to the Company. Such 
litigation could result in substantial costs and a diversion of management's 
attention and resources, which could have a material adverse effect upon 
the Company's business, operating results and financial condition.  

     California Headquarters . The Company's corporate 
headquarters and a large portion of its research and development 
facilities as well as other critical business operations are located in 
California, near major earthquake faults.  The Company's business, 
financial condition and operating results could be materially adversely
affected in the event of a major earthquake.

LIQUIDITY AND CAPITAL RESOURCES
 
     The Company has funded its operations to date primarily 
through cash flow from operations, the private sale of equity securities 
and the Initial Public Offering ("IPO") of the Company's Common Stock. 
Since inception, the Company has raised $19.4 million from the private 
sale of equity securities and approximately $24.8 million of cash, net 
of offering expenses, from the Company's IPO completed in June, 1996
As of December 31, 1996, the Company had cash, cash equivalents and 
short-term investments of $37.6 million (representing 62% of total assets) 
and had working capital of $49.6 million. 

    The Company generated cash from operating activities of 
$801,000 for the three months ended December 31, 1996. The cash 
generated from operations was primarily due to the collection of 
accounts receivable of $1.8 million, partially offset by reductions of 
accounts payable of $1.3 million. Total inventory increased 7% from 
$6.3 million as of September 30, 1996 to $6.8 million as of December 31, 
1996.  Netopia and Fast Ethernet products represented 12% and 23% of total 
gross inventory as of September 30, 1996, respectively, and represented 11% 
and 19% of total gross inventory as of December 31, 1996, respectively.

      The Company's investing activities have consisted primarily of 
purchases of short-term investments and capital equipment.  Expenditures
for capital equipment totaled $331,000 for the three months ended 
December 31, 1996, representing acquisitions of computer equipment
used predominantly in product development as well as tooling and test 
fixtures for new products. The Company expects that its capital 
expenditures will increase in future periods to support new product 
development and production. The Company's principal commitments 
consist primarily of leases on its headquarters facilities and certain 
operating equipment. 

      As of December 31, 1996, the Company had a $5.0 
million credit facility, which expires on February 28, 1997. There 
were no borrowings under the credit facility as of December 31, 
1996. The Company does not anticipate renewing this credit facility.   
	
     The Company believes that its existing cash, cash 
equivalents and short-term investments will be adequate to meet
its cash needs for working capital and capital expenditures for at least
the next 12 months. Thereafter, if cash generated from operations is 
insufficient to satisfy the Company's liquidity requirements, the Company 
may seek to sell additional equity or convertible debt securities or obtain 
additional credit facilities. The sale of additional equity or convertible 
debt securities could result in additional dilution to the Company's 
stockholders. A portion of the Company's cash may be used to acquire 
or invest in complementary businesses or products or to obtain the right 
to use complementary technologies. From time to time, in the ordinary 
course of business, the Company evaluates potential acquisitions of such 
businesses, products or technologies. The Company has no agreements 
or commitments, and is not currently engaged in any negotiations with 
respect to any such transaction. 



PART II.  OTHER INFORMATION

Item 6.	Exhibits and Reports on Form 8-K

(a) 	Exhibits
	
11.1  Statement of Computation of Per Share Earnings
 
27.1  Financial Data Schedule


(b)	Reports on Form 8-K
	No Reports on Form 8-K were filed during the quarter ended 
              December 31, 1996.








SIGNATURE

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

Date:  February 13, 1997		FARALLON COMMUNICATIONS, INC.
						(Registrant)


				By:  /s/ James A. Clark                                       
	                  			James A. Clark
				Vice President and Chief Financial Officer
 			(Duly Authorized Officer and Principal	Financial Officer)





INDEX TO EXHIBITS

Exhibit		Description 

11.1	 	Statement of Computation of Per Share Earnings