##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549


Form 10-K

|                                                |  |                                                                                             
|----------------------------------------------- |  | --------------------------------------------------------------------------------------------
|þ                                               |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d) OF
    THE SECURITIES EXCHANGE ACT OF 1934
|For the fiscal year ended December 31,
    2003
|                                               
|or                                             
|                                               
|o                                               |  | TRANSITION REPORT PURSUANT TO SECTION 13
    OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|For the transition period
    from           to

Commission file number: 1-12491

Larscom Incorporated

(Exact name of registrant as specified in its
charter)


|                                             |  |                    
|-------------------------------------------- |  | -------------------
|Delaware                                     |  | 94-2362692         
|(State or other jurisdiction of              |  | (I.R.S. Employer   
|incorporation or organization)               |  | Identification No.)
|                                            
|39745 Eureka Drive                           |  | 94560              
|Newark, California                           |  | (ZIP Code)         
|(Address of principal executive
    offices) |  |                    

(510) 492-0800

(Registrants telephone number, including
area code)


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

None


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

Common Stock, $.01 par value


(Title of class)


Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the
past
90 days.     Yes þ          No o

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

Indicate by check mark whether the registrant is
an accelerated filer (as defined in Exchange Act
Rules 12b-2.     Yes o          No þ

The aggregate market value of the voting stock
held by non-affiliates of the registrant as of June 30,
2003, was approximately $10,518,000.

The number of the registrants shares
outstanding as of March 8, 2004, was 5,100,255 shares
of Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the to-be-filed Proxy Statement for
the Registrants 2003 Annual Meeting of Stockholders (the
Proxy Statement) are incorporated by reference in
Part III of this Annual Report on Form 10-K.



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TABLE OF CONTENTS

|              |  |                                                                                                        |    |      |    | 
|------------- |  | ------------------------------------------------------------------------------------------------------ | -- | ---- | -- | 
|              |  |                                                                                                        |    | Page
|              |  |                                                                                                        |    |     
|PART I        |  |                                                                                                        |    |      | 1  | 
|Item 1.       |  | BUSINESS                                                                                               |    |      | 1  | 
|Item 2.       |  | PROPERTIES                                                                                             |    |      | 12 | 
|Item 3.       |  | LEGAL PROCEEDINGS                                                                                      |    |      | 12 | 
|Item 4.       |  | SUBMISSION OF MATTERS TO A
    VOTE OF SECURITY HOLDERS                                                |    |      | 12 | 
|             
|PART II       |  |                                                                                                        |    |      | 12 | 
|Item 5.       |  | MARKET FOR REGISTRANTS
    COMMON EQUITY AND RELATED SHAREHOLDER MATTERS                              |    |      | 12 | 
|Item 6.       |  | SELECTED CONSOLIDATED
    FINANCIAL DATA                                                               |    |      | 14 | 
|Item 7.       |  | MANAGEMENTS DISCUSSION
    AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS              |    |      | 14 | 
|Item 7A.      |  | QUANTITATIVE AND QUALITATIVE
    DISCLOSURES ABOUT MARKET RISK                                         |    |      | 30 | 
|Item 8.       |  | FINANCIAL STATEMENTS AND
    SUPPLEMENTARY DATA                                                        |    |      | 31 | 
|Item 9.       |  | CHANGES IN AND DISAGREEMENTS
    WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE               |    |      | 61 | 
|Item 9A.      |  | CONTROLS AND PROCEDURES                                                                                |    |      | 61 | 
|             
|PART III      |  |                                                                                                        |    |      | 61 | 
|Item 10.      |  | DIRECTORS AND EXECUTIVE
    OFFICERS OF THE REGISTRANT                                                 |    |      | 61 | 
|Item 11.      |  | EXECUTIVE COMPENSATION                                                                                 |    |      | 61 | 
|Item 12.      |  | SECURITY OWNERSHIP OF
    CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
    MATTERS |    |      | 61 | 
|Item 13.      |  | CERTAIN RELATIONSHIPS AND
    RELATED TRANSACTIONS                                                     |    |      | 61 | 
|Item 14.      |  | PRINCIPAL ACCOUNTANT FEES
    AND SERVICES                                                             |    |      | 62 | 
|             
|PART IV       |  |                                                                                                        |    |      | 62 | 
|Item 15.      |  | EXHIBITS, FINANCIAL
    STATEMENT SCHEDULES AND REPORTS ON FORM 8-K                                    |    |      | 62 | 
|Signatures    |  |                                                                                                        | 65 |     
|EXHIBIT 3.2  
|EXHIBIT 10.16
|EXHIBIT 10.17
|EXHIBIT 10.18
|EXHIBIT 10.19
|EXHIBIT 23.1 
|EXHIBIT 31.1 
|EXHIBIT 31.2 
|EXHIBIT 32.1 






PART I






|        |         
|------- | --------
|Item 1. | Business

This Annual Report on Form 10-K contains
certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. The
actual results that we achieve may differ materially from those
indicated in any forward-looking statements due to the risks and
uncertainties set forth under the Certain Factors
Affecting Future Operating Results section (in
Part II, Item 7) and elsewhere in this
Form 10-K. We undertake no obligation to revise any
forward-looking statements in order to reflect events or
circumstances that may arise after the date of this report.
Readers are urged to carefully review and consider the various
disclosures made by us in this report, and in our other reports
filed with the Securities and Exchange Commission (the
SEC), that attempt to advise interested parties on
the risks and factors that may affect our business.

You are advised to read this Form 10-K in
conjunction with other reports and documents that we file from
time-to-time with the SEC. In particular, please read our
Quarterly Reports on Form 10-Q and any Current Reports on
Form 8-K that we may file from time-to-time. You may obtain
copies of these reports directly from us or from the SEC at the
SECs Public Reference Room at 450 Fifth Street, N.W.
Washington, D.C. 20549, and you may obtain information
about obtaining access to the Reading Room by calling the SEC
at

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1-800-SEC-0330. In addition, the SEC maintains
information for electronic filers (including us) at its web site
www.sec.gov. We make available free of charge on or through our
Internet website our SEC filings on Form 10-K, 10-Q and
8-Ks and amendments thereto as soon as reasonably practicable
after electronic filing with the SEC.


Orion 5000, Orion 5001, Orion 5003, Orion 7400,
eLink-300, Integrator-300, MX-600, Mega-T/ E,
Orion 2000, Orion 4000, Larscom 6000, TerraMux, TerraUno,
TerraBoss, Orion 200, Access-T, Business OfficeXchange,
LineLearn and Access-T 1500 are U.S. registered trademarks
of Larscom Incorporated.

Overview

Larscom Incorporated manufactures and markets
high-speed network-access products for telecommunication service
providers (SPs), and corporate enterprise users. Our
product offerings support bandwidth requirements ranging from
full and fractional T1/ E1 to OC-3 (1.5 Mbps to
155 Mbps). Additionally, our solutions support a number of
networking protocols such as frame relay, asynchronous transfer
mode (ATM), inverse multiplexing over ATM
(IMA), Ethernet and the Internet Protocol
(IP).

Prior to Larscoms initial public offering
in December 1996, Larscom was a wholly-owned subsidiary of Axel
Johnson, Inc. (Axel Johnson). Upon consummation
of that offering Axel Johnson owned 55% of the Class A and
B Common Stock of Larscom and controlled 83% of the voting
interest. On June 5, 2003, we completed an acquisition in
which we acquired VINA Technologies, Inc.
(VINA) in a stock-for-stock transaction. VINA was
acquired pursuant to an Agreement and Plan of Merger, dated as
of March 17, 2003 (the Merger Agreement), by
and among Larscom, VINA and London Acquisition Corp., a wholly
owned subsidiary of Larscom (Merger Sub). Pursuant
to the Merger Agreement, Merger Sub was merged with and into
VINA, with VINA being the surviving corporation (the
Merger). As a result of the Merger, VINA became a
wholly owned subsidiary of Larscom. In connection with the
Merger: (a) each outstanding share of VINA common stock was
exchanged for 0.2659 shares of Larscom common stock,
resulting in the issuance of an aggregate of
2,393,624 shares of Larscom common stock for all
outstanding shares of VINA common stock (after giving effect to
a 1-for-7 reverse stock split implemented immediately prior to
the merger) and (b) all options and warrants to purchase
shares of VINA common stock outstanding immediately prior to the
consummation of the Merger were converted into options and
warrants to purchase shares of Larscoms common stock.
Additionally, prior to the merger, and at the election of Axel
Johnson, their Class B Common Stock with special voting
rights was converted into Common Stock with each share holding a
single voting right. Therefore, Axel Johnson controlled
approximately 28% of the voting interest as of December 31,
2003.

Industry Overview

As corporate users continue to seek out new and
innovative ways to reduce their expenses and improve their
productivity through networking solutions, SPs and carriers
continue to expand their service portfolios to meet growing
customer demands. Local area networks (LANs) in
todays enterprises are a necessity for connecting
in-building PCs, servers, and voice applications. However, it is
less and less often the case that the information and tools
required by the business all reside within a single building or
campus. This, coupled with the increasingly global nature of
business and the need to move information quickly, has led to a
greater reliance and need for strong corporate wide area
networks (WANs).

The increased demand for greater WAN speed and
capacity has been accompanied by increased demand for reliable,
high-speed network-access solutions. In addition to dedicated
56/64 Kbps and T1/ E1 services, enterprise customers are
now using private and public frame relay, ATM, digital
subscriber line (DSL), cable, wireless and optical
services, all to enhance the productivity of their employees.
Because of the general availability of excess capacity and high
speeds in LAN networks and in core telecommunications networks,
there is increased pressure on technologies currently used to
deliver service between these two networks, the portion of
SPs networks often referred to as the last
mile. At present, these services are often delivered at
T1/ E1 (1.5 to 2.0 Mbps) or E3/ T3 (34-45 Mbps or
less), speeds generally much slower than either the LANs or core
telecommunications networks they connect. Higher speed
connections for the last mile are often uneconomical
or unavailable outside of core metropolitan areas.

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As a result of the increased demand for greater
WAN capacity and the complexity and continuing evolution of
service offerings, businesses have been transitioning from the
use of traditional T1/ E1 services to T3/ E3 services as well as
newer optical services delivered over SONET/ SDH networks. SPs
and corporate users want the ability to rapidly and efficiently
make more services and bandwidth available as needs increase.
Accordingly, SPs and corporate users require telecommunications
equipment, which supports a broad range of higher-speed services
as well as traditional legacy services and that operates
reliably, economically, flexibly and consistently, on a global
basis.

2001, 2002 and 2003 were difficult years for many
SPs. As a result, the overall capital spending for wire-line
infrastructure significantly declined. However, with the recent
increase in economic activity, principally in the U.S, industry
analysts are projecting modest increases to SPs capital
spending. We expect capital spending to increase in at least two
markets that we serve:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | High speed applications using optical
    networks  as most business users continue to increase
    their adoption of bandwidth-intensive applications such as
    enterprise requirement planning systems (ERP),
    partner extranets, eCommerce, international communications with
    subsidiaries or branch offices, and other productivity enhancing
    applications, we expect significant growth to occur for
    high-speed services provided by optical technologies like
    synchronous optical network (SONET) and synchronous
    digital hierarchy (SDH). Providers are now starting
    to investigate a new standard called Ethernet over SONET
    (EoS) for offering greater-than-T1 bandwidth
    services in incremental levels based on the Ethernet protocol.
    However, we dont believe carriers are ready to abandon
    prior technologies based on time-division multiplexing
    (TDM) services and are seeking single-platform
    solutions that can accommodate both Ethernet and TDM.
|
| |  | Simple integrated voice and data transmission
    solutions  The small and medium business users
    (SMBs) segment of the market appears to be focused
    on simple solutions that offer integrated voice and data
    services across a single network connection rather than separate
    solutions for voice and data transmission needs. We expect SPs
    to increase their use of integrated access devices
    (IADs) to solve the needs of this market segment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

Products

We help make our customers successful in their
business through the use of reliable products that are backed by
our service and support organization. The following describes
the applications for each of our five product groups:

|                                          |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|----------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|EoS and TDM Edge Access
    Multiplexers: |  | Products that enable several data-streams to be
    sent over a single physical line and be converted back to the
    individual data-streams at the receiving end. Multiplexers help
    to provide more efficient utilization of network resources by
    allowing multiple data sources to share a single connection to
    the WAN. Larscom provides both optical (SONET, SDH, EoS) and
    copper-based (TDM) multiplexers as well as a single platform
    that can provide both solutions (the Orion 7400 family).
    Multiplexers represented 5% of our total revenues for 2003.                   
|Integrated Access Devices
    (IADs):   |  | Products that enable SPs with small and medium
    business customers (SMBs) to efficiently integrate
    voice, data, and Internet access in a single system across a
    single line connection. IADs eliminate the need for multiple
    devices at the customer premise by combining a channel bank and
    advanced call handling for voice connections, a CSU/ DSU for
    line termination, a DHCP server for IP address management, a
    firewall for LAN security, and an IP router in a single, compact
    unit. Integrated Access Devices represented 22% of our total
    revenues for 2003.

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|                      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|--------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Inverse Multiplexers: |  | Products that enable a single data-stream to be
    sent over several physical lines and converted back to a single
    data-stream at the receiving end. Larscom pioneered developments
    in inverse multiplexing to help customers bridge the
    bandwidth gap between T1/ E1 and T3/ E3. Fractional T3/ E3
    service, provided in this manner, allows SPs and corporate users
    to leverage the existing T1/ E1-based infrastructure to provide
    affordable and readily-available high-speed services with an
    increased degree of fault tolerance. Inverse Multiplexers
    represented 19% of our total revenues for 2003.
|CSU/ DSUs:            |  | Products that provide an interface between user
    data communications equipment and SPs. They perform framing,
    line-conditioning and equalization functions. Channel service
    units/data service units (CSU/ DSUs) provide
    interconnection between the LAN and the WAN. CSU/ DSUs
    represented 31% of our total revenues for 2003.                                                                                                                                                                                                                                                                                          
|Service:              |  | Repair, maintenance, installation and training.
    Service represented 23% of our total revenues for 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

Specific products that fall under each product
grouping are discussed below:



| |              
| | -------------
| | Multiplexers:

Orion 5000.The
Orion 5000 multiplexer is designed for high-density,
optical-friendly traffic aggregation. With direct interface to
both TDM and SONET/ SDH network architectures, the Orion 5000 is
designed to enable the migration to fiber-based transports. Able
to house up to seven redundant programmable M13 multiplexers
(aggregating up to 196 T1 lines or 147 E1 lines) in a compact
two rack unit 23-inch chassis, the Orion 5000 is one of the
highest density M13 multiplexers on the market. The M13
multiplexer also has a programmable capability for either DS3
(45 Mbps) or STS-1 (51.84 Mbps) traffic. Taking T1/ E1
traffic aggregation to the next evolutionary step, direct
optical access is provided by the Orion 5000s OC-3/ STM-1
interface. The Orion 5000 consolidates up to three DS3s into an
OC-3/ STM-1 connection.

Orion 5001.The
Orion 5001 provides M13 multiplexing in a compact, efficient
form factor. Designed specifically to deliver a cost-effective
solution with carrier-class reliability, the Orion 5001
multiplexes 28 T1s into a single T3. The compact Orion 5001 fits
well as a replacement for traditional bulky M13 multiplexers
wherever rack space is at a premium. While SPs backhaul traffic
between central offices on a T3, the Orion 5001 allows the
enterprise to seamlessly distribute T1 service across its
campus. Where mission critical applications require an always-on
connection, the twin M13 modules provide 1:1 redundancy. Rapid,
configurable switching between modules minimizes frame loss. We
believe that the Orion 5001 M13 multiplexer is among the most
power-efficient products in its class. The
carrier-class Orion 5001 is NEBS level 3 compliant;
making it well-suited for both co-location and carrier
deployments.

Orion 5003.A
natural extension to the Orion 5000 family of optical
multiplexers, the Orion 5003 provides, optical-friendly DS3 or
STS-1 traffic aggregation. With direct interfaces to both TDM
and SONET/ SDH network architectures, the Orion 5003 is designed
to enable the migration to fiber-based transport. This OC-3/
STM-1 multiplexer provides programmable support for DS3 or STS-1
traffic, allowing support of redundant automatic protection
switching (APS) optical pairs and multi-node
Unidirectional Path-Switching Ring (UPSR)
applications. The Orion 5003 multiplexes up to three DS3/ STS-1
(channelized or clear channel) data streams. With built-in OC-3/
STM-1 module redundancy, a SONET GR-253 standard interface, and
NEBS compliance, the Orion 5003 provides carrier-class DS3
traffic aggregation in a compact, one-RU, 19-inch chassis,
making it well-suited for deployment at the
customers premise or for co-location and
carrier deployments.

Orion 7400.The new
Orion 7400 family of next generation SONET multi-service access
platforms is designed to allow service providers to capitalize
on an increasing corporate demand for services based on the
Ethernet protocol. The Orion 7400 enables service providers to
deliver both Ethernet and TDM services across an existing SONET
infrastructure. Standards-based Ethernet over SONET
(EoS) achieves high bandwidth efficiency and enables
remote provisioning of bandwidth on demand in
increments as small as

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1.5 Mbps. The Orion 7400 family can deliver
10/100 Ethernet, Gigabit Ethernet, T1, and T3 services in a
compact, one rack unit package. It provides connections to the
SPs network using OC-3 (a 155 Mbps service) or STS-1
(a 51.84 Mbps service), and offers the reliability of
redundant APS. The Orion 7400 features operation,
administration, maintenance and provisioning
(OAM&P) through the data communications channel
(DCC) using industry communications standards
including TL-1, SNMP, and HTTP (Internet browsers).




| |                           
| | --------------------------
| | Integrated Access Devices:

eLink-300.The
eLink-300 provides an easy-to-use solution for delivering
integrated voice, data, and Internet services across a single T1
WAN connection to SMBs. The eLink-300 eliminates the need
for multiple devices at the customer premise by
combining a channel bank and advanced call handling for voice
connections, a CSU/ DSU for line termination, a DHCP server for
dynamic IP address management, a firewall for LAN security, and
an IP router in a single, compact unit. The eLink-300
delivers full line-rate T1 performance and advanced call
handling, including caller ID pass-through, distinctive ringing,
and support for multi-line phones. The eLink-300 protects
the customers capital investment with the ability to
upgrade the service delivered (voice-only, data-only, integrated
voice and data) as well as providing scalable voice capacity by
activating ports. With ePorts, the customer buys only the
ports they need now and can later activate additional ports
on demand (up to 24) as the business grows. A unique
automatic installation, configuration, and provisioning feature
called AutoCAP has the potential to eliminate
truck rolls by the service provider when signing up
new customers. The AutoCAP feature automatically detects and
sets all system parameters, significantly cutting typical set-up
and installation time.

Integrator-300.The
Integrator-300 IAD provides easy and cost-effective integration
of any type of voice and data services on a single,
T1 network connection. The Integrator-300 eliminates the
need for multiple devices at the customer premise by combining a
channel bank and advanced call handling for voice connections, a
CSU/ DSU for line termination, a DHCP server for IP address
management, a firewall for LAN security, and an IP router in a
single, compact unit. It provides up to 24 analog voice
interfaces with as many as three 4- or 8-port FXS or FXO cards.
Customers can start with 4 or 8 ports and easily grow capacity
as the business grows. Business OfficeXchangeTM
(BOX) software allows flexible call management with
local call routing (LCR) and ensures performance
with service level agreement software.

MX-600.The MX-600
is a modular, high-density solution for delivering integrated
voice, data, and Internet access services to SMBs via a single
or dual T1 WAN connection. This flexible, chassis-based IAD
simplifies network architecture and lowers operating expenses by
combining a sophisticated telephony terminal, an IP router, a
CSU/ DSU, a DHCP server, and a firewall in a single unit. The
MX-600 provides up to 48 analog voice interfaces, plus an option
for connecting to private branch exchange (PBX) or
Key Systems via an FT1/ DSX-1 port. Three slots support any
combination of 8-port FXS or FXO or 16-port FXS cards. It also
includes two network T1 ports, a V.35 port, and a 10/100 Base-T
LAN port. BOX software allows flexible call management with
Local Call Routing (LCR) and ensures performance
with service level agreement software.



| |                      
| | ---------------------
| | Inverse Multiplexers:

Mega-T/ E.Larscom
pioneered inverse-multiplexing solutions with the Mega-T, the
first inverse multiplexer to bridge the bandwidth gap between T1
and T3. It provides economical access to greater-than-T1
bandwidth for high-speed applications, delivering a data channel
of up to 6 Mbps from four T1 circuits. We also manufacture
and market an E1 version of the product, the Mega-E, to bridge
the bandwidth gap between E1 and E3. Our patented
inverse-multiplexing algorithm used for the Mega-T/ E handles
alignment of the individual T1s or E1s and allows for
differential delay between individual T1s or E1s. This algorithm
also allows the data transmission rate to be lowered
automatically in the event that individual T1/ EI circuits fail
and to be raised automatically when the circuits are restored.
The Mega-T/ E has the ability to identify individual T1/ E1
circuits, thereby simplifying troubleshooting. The Mega-T/ E is
primarily used for transport for high-speed LAN Internetworking,
as well as frame-relay network-access above T1 or E1 speeds and
real-time compressed voice traffic. The Mega-T241 transports an
E1 signal over two T1 lines to connect local E1 voice and data
applications directly to public or private T1 networks or
to extend an E1 circuit across a T1 network.

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Orion 2000.The
Orion 2000 ATM inverse multiplexer (IMA) is designed
for SPs wishing to provide either native ATM services or ATM
extensions at economical prices. It is compliant with the ATM
Forum IMA specification and can interface directly with an OC-3
or DS3 ATM user-to-network interface or network-to-network
interface on any ATM device. The Orion 2000 offers ATM
connectivity at speeds up to 12 Mbps (8 x T1) or up to
16 Mbps (8 x E1), with data packets having extremely low
cell-delay variation, which is a requirement for delay-sensitive
traffic such as video. The unit has ASCII terminal and SNMP
interfaces that enable local or remote configuration,
performance monitoring, alarm notification and diagnostic
testing. In addition, an optional graphical user interface
offers point-and-click monitoring and control.

The Orion 4000is
able to support full and fractional T3 networks. Its T1 and
E1 inverse multiplexing modules provide transparent channels for
applications such as LAN interconnection or video transmission.
The T3 Mux and T1 Mux modules provide flexibility in
transporting T1 circuits across the network. They can be used to
consolidate several fractional T3 applications onto a single T3
circuit, to act as a DS3 cross connect, to combine T1 traffic
from a digital private branch exchange (PBX) or to
serve as a T1 multiplexer with inverse multiplexed data. The T3
Clear single-density and double-density modules provide clear
channel 45 Mbps transmission. The T2E844 module provides a
leading high-density solution for delivering E1 services over T1
facilities for up to 32 E1s in a 12-slot chassis.

Larscom 6000.The
Larscom 6000 is an intelligent access device using the
Frame-Relay Forums standards for multilink frame relay
(MFR) to provide inverse multiplexing benefits to
frame-relay customers. The Larscom 6000 assists SPs in offering
advanced services at a low total cost of operation. The Larscom
6000 also provides integrated service level agreement management
without any additional hardware or monitoring/reporting systems,
allowing customers to monitor performance statistics and to
deliver them in a standardized format directly to a variety of
core-management systems. SNMP management and web-based device
monitoring allows users to view the status of the Larscom 6000
from any web-enabled computer.



| |          
| | ---------
| | CSU/ DSU:

TerraMux.The
TerraMux drop-and-insert multiplexing DSU is designed for
businesses needing both voice and data services. By multiplexing
two data ports and a voice port onto one full or fractional T1
or E1 line, TerraMux simplifies the network and reduces access
costs. With its unique LineLearn capability that
automatically discerns how many and what types of lines are
connected to a device, TerraMux automatically configures the
network and drop-and-insert ports and sets the speed of the
primary data port to make network access simple and efficient.
Management options include a built-in graphical test set, email
alerts for trouble-ticketing, web browser, Telnet access and
simple network management protocol (SNMP). The
TerraMux can be used to manage up to nine TerraUnos or
TerraMuxes.

TerraUno.The
TerraUno T1/ E1 DSU is a network-access device optimized for
connecting routers, bridges and other high-speed devices to E1
or T1 public network services such as the Internet and frame
relay. The TerraUno is easy to install with its plug-and-play
LineLearn capability.

TerraBoss.The
TerraBoss has the same functionality as the TerraUno, plus
extensive management features including SNMP, Telnet and web
browsing with email alerts. The TerraBoss can be used to manage
up to nine TerraUno systems.

Orion 4500.Linking
one or two high-speed applications across a DS3 or E3 line, the
Orion 4500 T3/ E3 CSU/ DSU Access Multiplexer serves a wide
range of broadband applications. It is optimized for Internet
backbones, scalable, fractional DS3/ E3 Internet access
services, and corporate and public organizations needing the
broad bandwidth of DS3 or E3 for WAN connections. The Orion 4500
splits the DS3 or E3 bandwidth between two high-speed serial
ports. Each port can be configured in multiples of
3.158 Mbps (DS3 compatibility), 3.759 Mbps (E3 G.751
standard), or 3.072 Mbps (E3 G.832 standard), or one port
can be used in clear-channel or unframed mode for full
payload-line bandwidth. In addition, the Orion 4500 can
automatically reconfigure bandwidth allocation for peak and
non-peak usage. The flexibility of the Orion 4500 extends to its
management options, which includes an integral SNMP agent plus a
menu-driven terminal interface with an ASCII graphical test set.
The Orion 4500 also provides detailed 24-hour performance
histories, alarm logging and dial-out, and extensive loop-back
and test pattern options.

6



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##### Table of Contents



Orion 200.The Orion
200 combines the features of a multiplexer, a multi-port DSU,
and a performance monitor with support for full and fractional
E1 and T1 services. This product is designed to provide global
network access. The Orion 200 multiplexes two high-speed serial
applications at multiples of 56 or 64 Kbps, using standard
interfaces. Any combination of E1 or T1 network ports can
be installed  including E1-to-T1 or T1-to-E1
conversions. Its primary application is LAN interconnection,
often coupled with digital PBX traffic as well as
videoconferencing.

Access-T and Access-T
1500.The Access-T family is a series
of T1/ FT1 multiplexing CSU/ DSUs. The primary use of the
Access-T family is for LAN interconnection, often coupled with
the multiplexing of digital PBX traffic onto a single T1/ FT1
circuit. The Access-T 1500 is a shelf-based version of the
Access-T that utilizes a hub and spoke architecture, allowing
centralized network nodes to serve units at dispersed sites and
to concentrate traffic in a single location where network hubs
are constrained by lack of space. Network management is
simplified with centralized configuration, performance
monitoring, and diagnostics. Management options include integral
SNMP, Telnet, and a terminal interface. Up to 30 units can
be chained together with Access-T 1500 units. Designed to
cut maintenance costs and maximize uptime, the Access-T family
allows customers to make efficient use of existing bandwidth
without increasing the network infrastructure.

Customers

Our primary customers are SPs, distributors,
systems integrators, value-added resellers (VARs),
federal, state and local government agencies and end-user
corporations.

We believe that our relationship with large
customers, particularly the SPs, will be critical to our future
success. Our customers prefer to purchase the majority of their
network access solutions from a single vendor, which might
benefit us if we broaden and enhance our product line. In 2003,
2002 and 2001 SPs represented 53%, 42% and 51%, respectively, of
our total revenues. The following table summarizes the
percentage of total revenues for customers accounting for more
than 10% of our revenues:

|            |  |              |    |      |  |      |    |   |  |  |    |  
|----------- |  | ------------ | -- | ---- |  | ---- | -- | - |  |  | -- | -
|            |  |             
|            |  | Year Ended  
|            |  | December 31,
|            |  |             
|            |  | 2003         |    | 2002 |  | 2001
|            |  |              |    |      |  |     
|MCI         |  |              | 17 | %    |  |      | 20 | % |  |  | 38 | %
|Lucent      |  |              | 16 | %    |  |      | *  |   |  |  | *  |  
|LTI Datacom |  |              | 11 | %    |  |      | 7  | % |  |  | 3  | %
|AT&T        |  |              | 7  | %    |  |      | 14 | % |  |  | 9  | %



---



|  |              
|- | -------------
|* | Less than 1%.

Our revenues from Lucent increased due to the
addition of our IAD product line, acquired in our merger with
VINA in June 2003. None of our customers are contractually
obligated to purchase any quantity of products in any particular
period, and product sales to major customers have varied widely
from quarter-to-quarter and year-to-year. There can be no
assurance that our current customers will continue to place
orders with us, that orders from existing customers will
continue at the levels of previous periods or that we will be
able to obtain orders from new customers. Loss of, or a material
reduction in, orders by one or more of our major customers could
have a material adverse effect on our business and operating
results.

Backlog

Our backlog at any point in time is usually
small. Accordingly, sales in any quarter are largely dependent
on orders received during that quarter. Furthermore, agreements
with our customers typically provide that they can change
delivery schedules and cancel orders within specified time
frames, typically up to 30 days before the scheduled
shipment date, without penalty. Our customers have in the past
built, and may in the future build, significant inventory to
facilitate more rapid deployment of anticipated major projects
or for other reasons (including misjudgments about levels of
future demand for their own services). Decisions by such
customers to reduce their inventory levels could lead to
reductions in purchases from us. Customer decisions to delay
delivery, cancel orders or reduce purchases could have a
material adverse effect on our business and operating results.

7



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Marketing and Sales

We sell our products in the U.S. primarily
through our direct sales organization and to a lesser extent
through distributors, VARs and systems integrators. Sales to
large SPs are handled by our direct sales force. We continue to
develop an indirect distribution channel for sales to domestic
customers. This channel consists primarily of a small group of
master distributors, such as Tech Data, and a number of
authorized resellers. There are a number of risks associated
with the reliance upon an indirect distribution channel. These
include a reduction in our ability to forecast sales, potential
reductions in customer satisfaction, loss of contact with users
of our products and methods of advertising and promoting the
products, which will result in additional expenses. These, and
other factors, could adversely impact our business.

We market our products internationally through
non-exclusive international distributors and systems
integrators. We rely on a small portion of our U.S. sales
force to maintain these relationships.

SPs require that products undergo extensive lab
testing and field trials prior to their deployment in the
network. Accordingly, we continually submit successive
generations of our current products as well as new products to
our customers for evaluation and approval. Additionally, sales
to international customers require products that meet
country-specific certification standards for safety, emissions
and network connectivity. The length of the various approval
processes is affected by a number of factors, including the
complexity of the product involved, the priorities and budgetary
constraints of customers and regulatory issues.

Customer Service and Support

Our products are required to meet rigorous
standards imposed by both customers and internal product quality
assurance testing procedures. The warranty period for most of
our products is three to five years. We have service contracts
with many of our major customers, and provide rapid-response
service via arrangements with our service partner worldwide,
NextiraOne Solutions. These contracts typically establish
response time and level of service commitments, without
penalties for non-performance. We maintain a 24-hour, 7-day a
week technical assistance support center, and provide rapid
response with contracted response times, plus a wide range of
repair programs. We also provide technical applications
assistance, installation services and training.

Research and Development

We believe that our future success depends on our
ability to achieve technological leadership through timely
enhancements of existing products and development of new
products that meet customer needs. Our continued commitment to
research and development, particularly related to emerging
technologies, will be required for us to remain competitive.

Our product families are designed specifically to
meet the demands of our larger customers. Relationships with
these customers provides us with insight into their evolving
needs and allows us to anticipate new technology requirements.
Enhancements to our product families are developed by including
our major customers responses to our interview questions
in the product definition and review process. Timely customer
feedback is important to us in making modifications to existing
products and designing new products.

The development of new, technologically-advanced
products is a complex and uncertain process, requiring high
levels of innovation. Expertise is required in the general areas
of telephony, data networking and network management, as well as
specific technologies such as Ethernet, DSL, ATM, SONET and SDH.
Further, the telecommunications industry is characterized by the
need to design products that meet industry standards. Such
industry standards are often changing or incomplete as new and
emerging technologies and service offerings are introduced by
SPs. As a result, there is a potential for delays in product
development due to the need to comply with new or modified
standards. The introduction of new and enhanced products also
requires that we manage the transitions from older products so
as to minimize disruptions in customer orders, avoid excess
inventory of old products and ensure that adequate supplies of
new products can be delivered to meet customer orders. There can
be no assurance that we will be successful in developing,
introducing or managing the transition to new or enhanced
products or that any such products will be responsive to
technological changes or will gain acceptance in the market
place.

8



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##### Table of Contents



Manufacturing and Quality Assurance

Our manufacturing operations consist of materials
procurement, third-party assembly of printed circuit boards and
chassis, product testing and inspection and system configuration
for shipment. We have recently consolidated our third-party
manufacturing primarily with one local source and have been able
to implement quality control systems through the entire
manufacturing process, including statistically monitored process
control programs. We utilize traditional procurement methods
with our suppliers, using standard purchase orders and blanket
orders for scheduling and commitments. Most purchase-order
payment terms are standard, with payment due in 30 days and
with some orders negotiated to net 45 days payment terms.
We use automated functional product testing to remain flexible
to customers needs while maintaining control of the
quality of the manufacturing process.

Turnkey-based manufacturing is utilized primarily
for our higher-volume, repetitive production assemblies. In
turnkey manufacturing, unlike manufacturing on consignment, the
contract manufacturer is responsible for procuring the
components utilized in the manufacturing process. This approach
transfers some of the economic risks of material cost
fluctuation, excess inventory, scrap, inventory obsolescence and
working capital management to the vendor. Consigned kits may be
utilized on lower-volume assemblies. We are, in most cases,
required to commit to purchase certain volumes within various
time frames. Although we believe that the benefits of turnkey
manufacturing outweigh the risks, it is possible that our
dependence on turnkey manufacturing will impact our ability to
alter the manufacturing schedule rapidly enough to satisfy
changes in customer demand, especially in an environment of
increasing component lead times. We continue to perform final
assembly and testing of non-turnkey finished products.

On-time delivery of our products is dependent
upon the availability of components used in our products. We
purchase parts and components for assembly from a variety of
pre-approved suppliers through a worldwide procurement-sourcing
program. We attempt to manage risks by developing alternate
sources and by maintaining long-term relationships with our
suppliers. We acquire certain components from sole sources,
either to achieve economies of scale or because of proprietary
technical features designed into our products. To date, we have
been able to obtain adequate supplies of required components in
a timely manner from existing sources or, when necessary, from
alternate sources. A substantial portion of our shipments in any
fiscal period relate to orders received in that period. In
addition, a significant percentage of our orders are shipped
within three business days of receiving the order. To meet this
demand, we maintain a supply of finished goods inventories at
our manufacturing facility. There can be no assurance that
interruptions or delays in supplies of key components will not
occur. Any interruptions or delays in supplies of key components
could have an adverse impact on our business and operating
results.

We have achieved and maintain ISO 9001:2000
quality certification and employ a comprehensive quality control
program. However, complex products such as ours might contain
undetected errors or failures when first introduced or as new
versions are released. Despite testing by our customers and us,
there can be no assurance that existing or future products will
not contain undetected errors or failures when first introduced
or as new versions are released. We provide a three-year or
five-year warranty for most of our products.

Competition

The markets for our products are intensely
competitive and we expect competition to intensify in the
future. Our products compete primarily with Quick Eagle
Networks, Verilink, Kentrox, Cisco Systems, Alcatel, ADTRAN,
RAD, Telco Systems, Carrier Access and Paradyne. We compete to a
lesser extent with other telecommunications equipment companies.
We believe that our ability to compete successfully depends upon
a number of factors, including timely development of new
products and features, product quality and performance, price,
announcements by competitors, product line breadth, experienced
sales, marketing and service organizations and evolving industry
standards. Certain competitors have more broadly developed
distribution channels and have made greater advances than we
have in certain emerging technologies. Cisco Systems and Alcatel
are two of the largest telecommunications equipment companies in
the world. There can be no assurance that we will be able to
continue to compete successfully with existing or new
competitors.

Our business is being materially adversely
affected by the integration of CSU/ DSU and inverse multiplexing
functionality into switches and routers. New technologies could
further displace some parts of the T1/ E1 CSU/ DSU product line.
For example, symmetrical and high bit rate digital subscriber
line (SDSL

9



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and HDSL) are subscriber loop
technologies that enable service providers to deploy
high-bandwidth services that could replace more traditional T1/
FT1 services, upon which many of our products are based. In
addition, the intelligent access device (IAD)
business is characterized by intense price competition.


Proprietary Rights

The telecommunications equipment industry is
characterized by the existence of a large number of patents and
frequent litigation based on allegations of patent infringement.
We rely upon a combination of trade secrets, contractual
restrictions, copyrights, trademark laws and patents to
establish and protect proprietary rights in our products and
technologies. We have been issued two U.S. patents to date
and have four patents pending. We believe that the success of
our business depends primarily on our proprietary technology,
information, processes and expertise, rather than patents. From
time to time, third parties may assert exclusive patent,
copyright, trademark and other intellectual property rights to
technologies that are important to us. We have not conducted a
formal patent search relating to the technology used in our
products, due in part to the high cost and limited benefits of a
formal search. In addition, since patent applications in the
U.S. are not publicly disclosed until the patent is issued,
applications may have been filed by competitors of ours that
could relate to our products. The scope of protection accorded
to patents covering software-related inventions is evolving and
is subject to uncertainty, which may increase the risk and cost
to us if we discover third-party patents related to our software
products or if such patents are asserted against us in the
future. In our distribution agreements, we typically agree to
indemnify our customers for any expenses or liability resulting
from claimed infringements of patents, trademarks or copyrights
of third parties. In the event of litigation to determine the
validity of any third-party claims, such litigation, whether or
not determined in favor of us, could result in significant
expense to us and divert the efforts of our technical and
management personnel. In the event of an adverse ruling in such
litigation, we might be required to pay damages, discontinue the
use and sale of infringing products, and expend significant
resources to develop non-infringing technology or obtain
licenses from third parties. There can be no assurance that
licenses from third parties would be available on acceptable
terms, if at all. A successful claim against us and our failure
to develop or license a substitute technology could have an
adverse impact on our business and operating results.

The laws of certain foreign countries in which
our products are or may be developed, manufactured or sold may
not protect our products or intellectual property rights as
effectively as the laws of the U.S., thus making the possibility
of misappropriation of our technology and products more likely.

Employees

As of December 31, 2003, we had
85 full-time employees compared to 94 full-time
employees on December 31, 2002. We have never experienced
any work stoppage and none of our employees are represented by a
labor union. We believe our relationship with our employees is
good.

Available Information

Larscom Incorporated maintains a site on the web
at www.larscom.com; however, information found on the
Companys web site is not incorporated by reference into
this report. The Company makes available free of charge on or
through the web site the Companys annual report on form
10K, quarterly reports on form 10Q, current reports on form 8K
and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended, as soon as reasonably practicable after the
Company electronically files such material with, or furnishes it
to, the Securities and Exchange Commission.

10



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Management

The executive officers of Larscom Incorporated
are as follows:

|                  |  |     |    |          |  |                                                        
|----------------- |  | --- | -- | -------- |  | -------------------------------------------------------
|Name              |  | Age |    | Position
|                  |  |     |    |         
|Daniel L. Scharre |  |     | 53 |          |  | President, Chief Executive Officer and Director        
|Gurdip Jande      |  |     | 42 |          |  | Vice President, Marketing                              
|Donald W. Morgan  |  |     | 58 |          |  | Vice President, Finance and Chief Financial
    Officer
|Peter L. Moulds   |  |     | 48 |          |  | Vice President, Worldwide Sales                        
|Adam Opoczynski   |  |     | 57 |          |  | Vice President, Engineering                            

Daniel L. Scharre has served as president, chief
executive officer and a member of the Board since November 2001.
Prior to joining us, Mr. Scharre served as chairman,
president and chief executive officer of Adaptive Broadband
Corp., a provider of high-speed, wireless last-mile access
equipment, from April 2001 to October 2001, as president and
chief executive officer from January 2001 to April 2001, as
president and chief operating officer from July 2000 to January
2001, as executive vice president from April 1998 to June 2000
and as vice president and chief technology officer from
September 1997 to April 1998. Adaptive Broadband Corporation
filed for bankruptcy in July of 2001. Prior to his four-year
tenure at Adaptive Broadband, Mr. Scharre held executive
positions at ComStream Inc., Ilex Systems, and Loral
Western Development Labs, all providers of digital
telecommunications equipment and systems. Mr. Scharre holds
a BS in physics from the California Institute of Technology, a
Ph.D. in physics from the University of California, Berkeley,
and an MBA from Santa Clara University. He previously
served on the faculty at Stanford University.

Gurdip Jande joined us as vice president of
marketing in February 2002. Prior to joining us, Mr. Jande
served in various positions at Nortel Networks, a voice and date
communications equipment manufacturing company, including as
vice president, corporate strategic business development from
January 2000 to December 2001, vice president marketing,
emerging service providers from October 1999 to December 1999,
vice president, market development from March 1998 to September
1999, and as director, business development from January 1997 to
February 1998. Mr. Jande earned a BS in electrical
engineering from the University of Ottawa, Canada, and an MBA
from the University of Miami.

Donald W. Morgan has served as vice president of
finance and chief financial officer of Larscom since October
1999. Prior to joining us, Mr. Morgan was an independent
tax and financial consultant to several small-business and
start-up technology firms from December 1997 to September 1999.
He served as vice president of finance and administration for
Inrange Technologies Corporation, a data communications
equipment manufacturing company from July 1991 to November 1997.
Prior to that, Mr. Morgan served in a number of senior
financial positions with UNISYS Corporation.
Mr. Morgan earned a BS degree in business administration
from Northeastern University and an MS degree in finance from
the University of Illinois.

Peter Moulds joined us as vice president of
worldwide sales in September 2003. Prior to joining us,
Mr. Moulds was a venture partner with Lightspeed Venture
Partners, an information technology focused venture capital firm
from January 2001 until March 2003. From April 1997 to January
1999, he served at the vice president of sales for FreeGate
Corporation, which was subsequently acquired by Tut Systems.
Prior to that, Mr. Moulds served in a number of senior
sales management positions including vice president of sales for
Ascend Communications, a provider of wide area network
technologies, which later merged with Lucent. Mr. Moulds
earned a BS degree in electrical engineering and computer
science from the University of California at Berkeley.

Adam Opoczynski joined Larscom as vice president
of engineering in December 2002. Prior to joining Larscom,
Mr. Opoczynski served in several senior management
positions at ECI Telecom, Inc. a wholly-owned
U.S. subsidiary of ECI Limited that is a provider of
transmission and voice compression equipment. From January 2001
to January 2002 Mr. Opoczynski served as a vice president
of research and development for the North American Transmission
Division of ECI, a developer of cross-connect and data
aggregation systems. From April 1999 to January 2001 he served
as vice president of R&D for the Data Division of ECI, a
developer of carrier class frame relay and ATM switching
systems. From December 1997 to April 1999 he served as director
of engineering for the Access Business Unit of ECI, a developer
of low capacity DLC and

11



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##### Table of Contents



ADSL systems. Prior to his tenure at ECI,
Mr. Opoczynski held various senior management positions
with Fujitsu Network Communications, Inc., ADC
Telecommunications, Inc. and Siemens Communication
Systems, Inc., all of which were manufacturers of
telecommunications equipment. Mr. Opoczynski holds a BS in
electronics and telecommunications from Warsaw University of
Technology, Warsaw, Poland.


There is no family relationship among any
directors or executive officers of Larscom Incorporated.






|        |           
|------- | ----------
|Item 2. | Properties

We currently lease a 40,500 square-foot
facility located in Newark, California, a
119,000 square-foot facility located in Milpitas,
California and a 27,000 square-foot facility in Durham,
North Carolina. At the Milpitas facility, 39,000 square
feet are sublet. We abandoned the remainder of the Milpitas
facility at the end of September 2003 as a result of our merger
with VINA and the decision to consolidate our headquarters in
Newark, California. The entire Durham, North Carolina facility
of 27,000 square-feet was sublet effective
February 15, 2002. All of our manufacturing, sales,
administration, customer service, marketing and research and
development are performed at our Newark facility. We believe
that our existing facilities are more than adequate for our
current needs and we expect to discontinue the Milpitas and
Durham leases at the end of their respective lease terms.






|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings

We are not a party to any material legal
proceedings.






|        |                                                        
|------- | -------------------------------------------------------
|Item 4. | Submission of Matters to a Vote of Security
    Holders

No matters were submitted to a vote of
stockholders during the quarter ended December 31, 2003.




PART II






|        |                                                                          
|------- | -------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity
    and Related Shareholder Matters

The following table sets forth the high and low
bid prices for our Common Stock as reported on the Nasdaq
National Market from January 1, 2002 through
October 22, 2002 and on the Nasdaq SmallCap Market from
October 23, 2002 through December 31, 2003. These
prices reflect inter-dealer prices, without retail markup,
markdown or commission, and may not necessarily represent actual
transactions.

|               |  |            |        |      |  |      |        |     |  |   |         |  |  |   |        | 
|-------------- |  | ---------- | ------ | ---- |  | ---- | ------ | --- |  | - | ------- |  |  | - | ------ | 
|               |  |            |        |     
|               |  | 2003       |        | 2002
|               |  |            |        |     
|               |  |           
|               |  | Bid Prices
|               |  |           
|               |  | High       |        | Low  |  | High |        | Low
|               |  |            |        |      |  |      |        |    
|First quarter  |  | $          | 3.1500 |      |  | $    | 1.7500 |     |  | $ | 12.5300 |  |  | $ | 7.0000 | 
|Second quarter |  | $          | 7.2500 |      |  | $    | 1.7500 |     |  | $ | 9.5200  |  |  | $ | 4.6900 | 
|Third quarter  |  | $          | 5.3600 |      |  | $    | 2.4000 |     |  | $ | 4.9000  |  |  | $ | 2.0300 | 
|Fourth quarter |  | $          | 5.7500 |      |  | $    | 3.3500 |     |  | $ | 3.5000  |  |  | $ | 1.6100 | 

As of March 8, 2004, there were 166 holders
of record of our Common Stock. We had an estimated 5,223
beneficial holders of our Common Stock, held in street name, as
of March 8, 2004.

We currently intend to retain any future earnings
for use in our business and do not anticipate paying any cash
dividends in the foreseeable future.

Please see Item 12 for additional
information required by this item.



| |                                                           
| | ----------------------------------------------------------
| | Reclassification of Class A and
    Class B Common Shares:

On June 3, 2003, our stockholders approved a
proposal to reclassify its Class A and Class B Common
Stock into a single class of Common Stock. The old Class A
shares had rights of one vote per share. The old Class B
Common Stock had rights of four votes per share and was owned by
one stockholder, Axel Johnson. These additional voting rights
gave Axel Johnson control of 82% of the voting interest prior to
the merger with VINA. After issuance of 2,393,894 shares in
connection with the VINA merger, and the reclassification of the

12



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##### Table of Contents



Class B Common Stock into Common Stock with
one vote per share, Axel Johnsons control of the voting
interest was reduced to 28%. Additionally, as a result of the
shares issued to VINA shareholders, entities affiliated with
Sierra Ventures V. L.P. received shares having 28% of our voting
interest.




| |                                            
| | -------------------------------------------
| | Reverse Split of Class A Common
    Shares:

On June 3, 2003 our shareholders approved a
proposal to amend our certificate of incorporation to effect a
reverse split of our Common Stock in a ratio to be determined by
the Board of Directors. The Board subsequently voted on
June 5, 2003 to effect a reverse split with a 7-for-1 ratio
with effect from June 6, 2003. All share and per share data
has been retroactively restated for the reverse stock split.



| |                       
| | ----------------------
| | Larscom Stock Options:

As part of the merger with VINA, the existing
VINA stock options and warrants were replaced with Larscom stock
options and warrants, containing the exact terms, price and
earned vesting percentages, as those held immediately prior to
the merger (after the post-merger, post-split exchange ratio of
0.03799 shares of Larscom common stock for each share of
VINA common stock). The assumption of the VINA options and
warrants resulted in the issuance of 454,752 Larscom options and
warrants. Additionally, as a result of the change of control
resulting from the reclassification of shares previously
discussed, and the VINA merger, a large part of the outstanding
stock options previously issued by Larscom became fully vested
due to a change-in-control provision contained in most of the
outstanding option agreements. This acceleration caused 61,818
additional shares to become vested and exercisable on
June 5, 2003 with an average exercise price of
approximately $19.72.

13



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##### Table of Contents








|        |                                         
|------- | ----------------------------------------
|Item 6. | Selected Consolidated Financial
    Data

|                                               |                                         |                                       |         |        |        |      |        |        |        |      |         |        |        |   |        |        |        |   |        |        |        |  
|---------------------------------------------- | --------------------------------------- | ------------------------------------- | ------- | ------ | ------ | ---- | ------ | ------ | ------ | ---- | ------- | ------ | ------ | - | ------ | ------ | ------ | - | ------ | ------ | ------ | -
|                                               |                                         |                                      
|                                               |                                         | Years Ended December 31,             
|                                               |                                         |                                      
|                                               |                                         | 2003                                  |         | 2002   |        | 2001 |        | 2000   |        | 1999
|                                               |                                         |                                       |         |        |        |      |        |        |        |     
|                                               |                                         |                                      
|                                               |                                         | (In thousands, except per share data)
|Consolidated Statement of Operations
    Data: |                                         |                                       |         |        |        |      |        |        |        |      |         |        |        |   |        |        |        |   |        |       
|Product revenues                               |                                         | $                                     | 16,904  |        |        | $    | 17,977 |        |        | $    | 36,150  |        |        | $ | 49,136 |        |        | $ | 48,274 |       
|Service revenues                               |                                         |                                       | 5,022   |        |        |      | 5,510  |        |        |      | 5,721   |        |        |   | 5,528  |        |        |   | 4,565  |       
|                                               |                                         |                                       |         |        |        |      |        |        |        |      |         |        |        |   |        |        |        |   |        |       
|                                               |                                         | Total revenues                        |         |        | 21,926 |      |        |        | 23,487 |      |         |        | 41,871 |   |        |        | 54,664 |   |        |        | 52,839 |  
|                                               |                                         |                                       |         |        |        |      |        |        |        |      |         |        |        |   |        |        |        |   |        |       
|Product cost of revenues                       |                                         |                                       | 11,995  |        |        |      | 9,276  |        |        |      | 23,419  |        |        |   | 23,519 |        |        |   | 24,298 |       
|Service cost of revenues                       |                                         |                                       | 912     |        |        |      | 1,071  |        |        |      | 1,432   |        |        |   | 2,423  |        |        |   | 2,125  |       
|                                               |                                         |                                       |         |        |        |      |        |        |        |      |         |        |        |   |        |        |        |   |        |       
|                                               |                                         | Total cost of revenues                |         |        | 12,907 |      |        |        | 10,347 |      |         |        | 24,851 |   |        |        | 25,942 |   |        |        | 26,423 |  
|                                               |                                         |                                       |         |        |        |      |        |        |        |      |         |        |        |   |        |        |        |   |        |       
|                                               |                                         | Gross profit                          |         |        | 9,019  |      |        |        | 13,140 |      |         |        | 17,020 |   |        |        | 28,722 |   |        |        | 26,416 |  
|                                               |                                         |                                       |         |        |        |      |        |        |        |      |         |        |        |   |        |        |        |   |        |       
|Operating expenses:                            |                                         |                                       |         |        |        |      |        |        |        |      |         |        |        |   |        |        |        |   |        |       
|                                               | Research and development                |                                       |         | 4,845  |        |      |        | 4,199  |        |      |         | 6,779  |        |   |        | 9,900  |        |   |        | 8,049  |       
|                                               | Selling, general and administrative     |                                       |         | 14,418 |        |      |        | 16,051 |        |      |         | 20,680 |        |   |        | 24,116 |        |   |        | 21,570 |       
|                                               | Amortization of acquisition intangibles |                                       |         | 385    |        |      |        |       |        |      |         |       |        |   |        |       |        |   |        |       |       
|                                               | Restructuring                           |                                       |         | 2,458  |        |      |        | 254    |        |      |         | 5,772  |        |   |        |       |        |   |        |       |       
|                                               | Impairment of assets                    |                                       |         | 364    |        |      |        |       |        |      |         |       |        |   |        |       |        |   |        |       |       
|                                               | In-process research & development       |                                       |         | 155    |        |      |        |       |        |      |         |       |        |   |        |       |        |   |        |       |       
|                                               |                                         |                                       |         |        |        |      |        |        |        |      |         |        |        |   |        |        |        |   |        |       
|                                               |                                         | Total operating expenses              |         |        | 22,625 |      |        |        | 20,504 |      |         |        | 33,231 |   |        |        | 34,016 |   |        |        | 29,619 |  
|                                               |                                         |                                       |         |        |        |      |        |        |        |      |         |        |        |   |        |        |        |   |        |       
|Loss from operations                           |                                         |                                       | (13,606 | )      |        |      | (7,364 | )      |        |      | (16,211 | )      |        |   | (5,294 | )      |        |   | (3,203 | )     
|                                               |                                         | Other income, net                     |         |        | 381    |      |        |        | 356    |      |         |        | 1,198  |   |        |        | 1,760  |   |        |        | 1,247  |  
|                                               |                                         |                                       |         |        |        |      |        |        |        |      |         |        |        |   |        |        |        |   |        |       
|Loss before income taxes                       |                                         |                                       | (13,225 | )      |        |      | (7,008 | )      |        |      | (15,013 | )      |        |   | (3,534 | )      |        |   | (1,956 | )     
|                                               |                                         | Income tax provision (benefit)        |         |        | 37     |      |        |        | (2,113 | )    |         |        | 15,866 |   |        |        | (1,035 | ) |        |        | (684   | )
|                                               |                                         |                                       |         |        |        |      |        |        |        |      |         |        |        |   |        |        |        |   |        |       
|Net Loss                                       |                                         | $                                     | (13,262 | )      |        | $    | (4,895 | )      |        | $    | (30,879 | )      |        | $ | (2,499 | )      |        | $ | (1,272 | )     
|                                               |                                         |                                       |         |        |        |      |        |        |        |      |         |        |        |   |        |        |        |   |        |       
|Basic and diluted loss per share               |                                         | $                                     | (3.26   | )      |        | $    | (1.82  | )      |        | $    | (11.49  | )      |        | $ | (0.94  | )      |        | $ | (0.49  | )     
|                                               |                                         |                                       |         |        |        |      |        |        |        |      |         |        |        |   |        |        |        |   |        |       
|Basic and diluted weighted average shares      |                                         |                                       | 4,073   |        |        |      | 2,693  |        |        |      | 2,687   |        |        |   | 2,656  |        |        |   | 2,619  |       
|                                               |                                         |                                       |         |        |        |      |        |        |        |      |         |        |        |   |        |        |        |   |        |       

|                                 |  |                |        |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |        | 
|-------------------------------- |  | -------------- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ------ |  |  | - | ------ | 
|                                 |  |               
|                                 |  | December 31,  
|                                 |  |               
|                                 |  | 2003           |        | 2002 |  | 2001 |        | 2000 |  | 1999
|                                 |  |                |        |      |  |      |        |      |  |     
|                                 |  |               
|                                 |  | (In thousands)
|Consolidated Balance Sheet Data: |  |                |        |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |        | 
|Working capital                  |  | $              | 8,371  |      |  | $    | 17,399 |      |  | $    | 21,803 |  |  | $ | 37,395 |  |  | $ | 38,647 | 
|Total assets                     |  |                | 23,700 |      |  |      | 28,060 |      |  |      | 34,173 |  |  |   | 66,320 |  |  |   | 66,862 | 
|Total stockholders equity       |  |                | 10,806 |      |  |      | 17,907 |      |  |      | 22,776 |  |  |   | 53,042 |  |  |   | 54,795 | 
|Other non-current liabilities    |  |                | 1,640  |      |  |      | 1,618  |      |  |      | 2,162  |  |  |   | 448    |  |  |   | 534    | 






|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations

We manufacture and market high-speed
network-access products for telecommunication service providers
(SPs), and corporate enterprise users. Our product
offerings support bandwidth requirements ranging from full and
fractional T1/E1 to OC-3 (1.5 Mbps to 155 Mbps).
Additionally, our solutions support a number of networking
protocols such as frame relay, asynchronous transfer mode
(ATM), inverse multiplexing over ATM
(IMA), Ethernet and the Internet Protocol.

Prior to our initial public offering in December
1996, we were a wholly-owned subsidiary of Axel Johnson. Upon
consummation of that offering Axel Johnson owned 55% of our
Class A and B Common Stock and controlled 83% of the voting
interest. On June 5, 2003, we completed an acquisition in
which we acquired

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##### Table of Contents



VINA in a stock-for-stock transaction. VINA was
acquired pursuant to the Merger Agreement, dated as of
March 17, 2003, by and among Larscom, VINA and Merger Sub,
a wholly owned subsidiary of Larscom. Pursuant to the Merger
Agreement, Merger Sub was merged with and into VINA, with VINA
being the surviving corporation. As a result of the Merger, VINA
became a wholly owned subsidiary of Larscom. In connection with
the Merger: (a) each outstanding share of VINA common stock
was exchanged for 0.2659 shares of Larscom common stock,
resulting in the issuance of an aggregate of
2,393,624 shares of Larscom common stock for all
outstanding shares of VINA common stock (after giving effect to
a 1-for-7 reverse stock split implemented immediately prior to
the merger) and (b) all options and warrants to purchase
shares of VINA common stock outstanding immediately prior to the
consummation of the Merger were converted into options and
warrants to purchase shares of Larscoms common stock.
Additionally, prior to the merger, and at the election of Axel
Johnson, their Class B Common Stock with special voting
rights was converted into Common Stock with each share holding a
single voting right. Therefore, Axel Johnson controlled
approximately 28% of the voting interest as of December 31,
2003.


The accompanying financial statements have been
prepared on a going concern basis which contemplates continuity
of operations, realization of assets and liquidation of
liabilities in the ordinary course of business and do not
reflect adjustments that might result if we were not to continue
as a going concern. The auditors report on our financial
statements as of December 31, 2003 contains an explanatory
paragraph, which refers to our recurring operating losses and
net capital deficiency and notes that these matters raise
substantial doubt about our ability to continue as a going
concern.

We believe that our cash and cash equivalents and
cash flow from operations will be sufficient to fund our
operations through 2004. We will need to raise additional
capital to fund our operations and capital spending before we
become profitable. If cash flows from operations are lower than
expected, including as a result of customer reaction to the
going concern explanatory paragraph in our auditors
report, if we incur unanticipated expenses or if we are unable
to effectively manage our inventory level, we may need to obtain
additional capital sooner than expected. We are currently
exploring opportunities to raise additional capital through
various financial vehicles, but sufficient funds may not be
available to us on terms that we deem acceptable or at all.

Summary of Critical Accounting
Policies

Our discussion and analysis of our financial
condition and results of operations is based upon our
consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements
requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses,
and related disclosure of contingent assets and liabilities. On
an on-going basis, we evaluate our estimates, including those
related to uncollectible receivables, investment values, income
taxes, restructuring and contingencies. We base our estimates on
historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying
values of assets and liabilities. Actual results may differ from
these estimates under different assumptions or conditions.

We believe the following critical accounting
policies affect our more significant judgments and estimates
used in the preparation of our consolidated financial statements:



| |                                             
| | --------------------------------------------
| | Revenue Recognition and Deferred
    Revenue

Revenue from product sales is generally
recognized upon delivery to our customers when there is
persuasive evidence of an arrangement, the fee is fixed and
determinable and collection of the receivable is reasonably
assured. However, some of our distributors, who maintain
significant inventories of our products, have a right to return
products that remain unsold. In the case where the distributor
has a right to return products, we do not recognize revenue
until the distributor notifies us that the products have been
shipped to the end user. Service revenue earned from providing
maintenance, installation, training or other miscellaneous
services is recognized when those services are provided to the
customer, if there is persuasive evidence of an arrangement, the
fee is fixed and determinable and collection of the receivable
is reasonably assured. If we believe that collection is not
probable at the time of shipment, we defer the revenue until the
cash is collected.

15



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##### Table of Contents





| |                            
| | ---------------------------
| | Accounting for Acquisitions

On June 5, 2003, we completed the
acquisition of VINA. The consideration consisted of
approximately 2,393,894 shares of our common stock, 454,752
warrants and options to purchase common stock and the assumption
of the liabilities and obligations of VINA. We accounted for the
VINA acquisition as a purchase in accordance with the provisions
of Financial Accounting Standards Board (FASB),
Statement of Financial Accounting Standards (SFAS)
No. 141, Business Combinations. As such, we
have reported all the acquired tangible and intangible assets
and liabilities of VINA at fair value. We are recognizing the
fair value of the purchased intangibles related to developed
technology as a cost of product revenue over an estimated useful
life of six years. We are recognizing the fair value of the
other purchased intangibles as operating expenses over the
estimated useful life of each separate intangible. We have
recognized the fair value associated with the in-process
technology as an operating expense during 2003, when the merger
was consummated. We have valued employee stock options as part
of the acquisition using the Black-Scholes valuation model. The
value of all vested options and the value of unvested options in
excess of the intrinsic value of such unvested options are
included as part of the purchase price consideration. We are
reporting the intrinsic value of the unvested options as
deferred compensation and recording it as an operating expense
over the remaining vesting period of the option. We have valued
our stock issued as part of the consideration using the 5-day
average price surrounding the date the acquisition was announced.



| |                                                
| | -----------------------------------------------
| | Impairment or Disposal of Long-Lived
    Assets

In accordance with SFAS No. 144,
Accounting for the impairment or Disposal of Long-Lived
Assets, we evaluate the accounting and reporting for the
impairment of long-lived assets and for long-lived assets to be
disposed. SFAS 144 requires recognition of impairment of
long-lived assets if the net book value of such assets exceeds
the estimated future cash flows attributable to such assets. If
the carrying value of a long lived asset is considered impaired,
a loss is recognized based on the amount by which the carrying
value exceeds the fair value of the long-lived assets to be held
and used, or by the amount by which the carrying value exceeds
the fair value less the cost to dispose of assets to be
disposed. Fair value is determined primarily by using the
anticipated cash flows discounted at a rate commensurate with
the risk involved. During the third quarter of 2003, we
determined that the MBX technology and related assets acquired
as part of the merger with VINA in June 2003 had become
impaired. The impairment was based on a projected discounted
cash flow model using a discount rate commensurate with the risk
inherent in our current business model. As a result, we recorded
a loss of $1,956,000 to write-off the MBX technology and other
related assets.



| |              
| | -------------
| | Restructuring

In accordance with SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal
Activities, beginning in 2003, we establish a liability
for the estimated fair value of an exit or disposal activity in
the period in which the liability is incurred. We use our
judgment and information available to us at the date of the
financial statements to reevaluate our initial estimates of the
exit costs. If we believe that our previous estimates of exit
costs or timing of payments are no longer accurate in light of
current conditions, we adjust the liability with a corresponding
increase or decrease to current period earnings. Any adjustments
to estimates of our exit costs under restructuring plans are
reflected on the same line item in the statement of operations
as the initial charge to establish the restructuring liability.
Remaining liabilities for restructuring costs related to June
2001 restructuring continues to be accounted for in accordance
with the provisions of EITF No. 94-3.



| |                                                               
| | --------------------------------------------------------------
| | Investments, Accounts Receivable Risk and
    Accounts payable

We invest cash in excess of our daily needs in
financial instruments issued by banks, government agencies or
large corporations. Our policy is to invest these funds in
financial instruments that are rated by Standard and Poors (or
other rating agency equivalents) as A- or better in the case of
general debt instruments or A-1 in the case of commercial paper.
Our policy restricts us from investing more than $5 million
or 20% of our total investments in any one institution or from
investing in financial instruments that mature in more than
1 year. While we believe, in our judgment, these policies
are protective of our funds; a default of any one institution
would lead to our incurring a significant loss of cash.

16



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##### Table of Contents



Our accounts receivable are largely trade
receivables from customers in the United States. We perform
ongoing credit evaluations of our customers, and generally
require no collateral from our customers. We maintain reserves
for potential credit losses based on our evaluation of the
customers financial condition, industry conditions and
general economic conditions. While our reserves have
historically been within our expectations, we cannot guarantee
that our evaluation of the credit risk of our customers will be
correct. In addition, since our accounts receivable are
concentrated in a relatively few number of customers a
significant change in the financial position of any one of these
customers could have a material impact on the collectibility of
our accounts receivable. To date, we have reserves for $616,000
in receivables associated with the 2002 bankruptcy filing of
MCI. Receivables from our two largest customers (Lucent and MCI
in 2003; AT&T and MCI in 2002) represented 36% and 38% of
net accounts receivable at December 31, 2003 and 2002,
respectively. Our accounts payable are comprised of trade
payables.



| |            
| | -----------
| | Inventories

Inventories are stated at the lower of standard
cost or market. Write-downs of inventory are generally taken,
when in our estimate, future demand will not consume existing
inventories over the next twelve months. If actual future demand
or market conditions are less favorable than those projected by
management, additional inventory write-downs may be required.



| |                         
| | ------------------------
| | Stock-Based Compensation

We account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board
(APB) Opinion No. 25, Accounting for
Stock Issues to Employees, and related Interpretations.
Under APB 25, compensation cost is measured as the excess,
if any, of the closing market price of our stock at the date of
grant over the exercise price of the option granted. We
recognize compensation cost for stock options, if any, ratably
over the vesting period. Generally, we grant options with an
exercise price equal to the closing market price of our stock on
the grant date. During the year, we have recognized as
compensation expense $12,000 related to the intrinsic value of
options granted in connection with the VINA merger. We provide
additional pro forma disclosures as required under
SFAS 123, Accounting for Stock-Based
Compensation as amended by SFAS No. 148,
Accounting for Stock-Based Compensation 
Transition and Disclosure, an amendment of FASB Statement
No. 123.



| |         
| | --------
| | Warranty

We provide a three-year or five-year warranty for
most of our products. We provide for the estimated cost of
warranty at the time we record revenue for a product based on
our historical costs, which includes material, labor and
overhead. While we believe that our reserves for estimated
future warranty costs are adequate, there are inherent risks
associated with these estimates, especially for those estimates
related to products that have been recently introduced.



| |                       
| | ----------------------
| | Sales Return Allowance

We provide a sales return allowance for possible
customer returns, based on historical information. These returns
may occur due to changes in customer circumstances or a
misjudgment of either party in assessing the customers
needs.



| |             
| | ------------
| | Income Taxes

Deferred tax assets and liabilities are
recognized for the temporary timing differences between the tax
bases of assets and liabilities and the amounts reported in
financial statements. A valuation allowance is provided against
deferred tax assets if, in managements judgment, it is
more likely than not that the potential future benefits of these
assets will not be realized.

Results of Operations

As corporate users continue to seek out new and
innovative ways to reduce their expenses and improve their
productivity through networking solutions, SPs and carriers
continue to expand their service portfolios to meet growing
customer demands. Local area networks (LANs) in
todays enterprises are a necessity for

17



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##### Table of Contents



connecting in-building PCs, servers, and voice
applications. However, it is less and less often the case that
the information and tools required by the business all reside
within a single building or campus. This, coupled with the
increasingly global nature of business and the need to move
information quickly, has led to a greater reliance and need for
strong corporate WANs.


2001, 2002 and 2003 were difficult years for many
SPs. As a result, the overall capital spending for wire-line
infrastructure significantly declined. However, with the recent
increase in economic activity, principally in the U.S., industry
analysts are projecting modest increases to SPs capital
spending.

The following table sets forth the percentage of
revenues represented by certain items in our consolidated
statements of operations for the periods indicated:

|                         |                                         |                                |     |      |     |      |     |    |     |   |     |    |     | 
|------------------------ | --------------------------------------- | ------------------------------ | --- | ---- | --- | ---- | --- | -- | --- | - | --- | -- | --- | 
|                         |                                         |                               
|                         |                                         | Years Ended                   
|                         |                                         | December 31,                  
|                         |                                         |                               
|                         |                                         | 2003                           |     | 2002 |     | 2001
|                         |                                         |                                |     |      |     |     
|Product revenues         |                                         |                                | 77  | %    |     |      | 77  | %  |     |   | 86  | % 
|Service revenues         |                                         |                                | 23  |      |     |      | 23  |    |     |   | 14  |   
|                         |                                         |                                |     |      |     |      |     |    |     |   |     |   
|                         |                                         | Total revenues                 |     |      | 100 |      |     |    | 100 |   |     |    | 100 | 
|                         |                                         |                                |     |      |     |      |     |    |     |   |     |   
|Product cost of revenues |                                         |                                | 55  |      |     |      | 39  |    |     |   | 56  |   
|Service cost of revenues |                                         |                                | 4   |      |     |      | 5   |    |     |   | 3   |   
|                         |                                         |                                |     |      |     |      |     |    |     |   |     |   
|                         |                                         | Total cost of revenues         |     |      | 59  |      |     |    | 44  |   |     |    | 59  | 
|                         |                                         |                                |     |      |     |      |     |    |     |   |     |   
|                         |                                         | Gross profit                   |     |      | 41  |      |     |    | 56  |   |     |    | 41  | 
|                         |                                         |                                |     |      |     |      |     |    |     |   |     |   
|Operating expenses:      |                                         |                                |     |      |     |      |     |    |     |   |     |   
|                         | Research and development                |                                |     | 22   |     |      |     | 18 |     |   |     | 16 |    
|                         | Selling, general and administrative     |                                |     | 66   |     |      |     | 68 |     |   |     | 49 |    
|                         | Amortization of acquisition intangibles |                                |     | 2    |     |      |     |   |     |   |     |   |    
|                         | Restructuring                           |                                |     | 11   |     |      |     | 1  |     |   |     | 14 |    
|                         | Impairment of assets                    |                                |     | 1    |     |      |     |   |     |   |     |   |    
|                         | In-process research & development       |                                |     | 1    |     |      |     |   |     |   |     |   |    
|                         |                                         |                                |     |      |     |      |     |    |     |   |     |   
|                         |                                         | Total operating expenses       |     |      | 103 |      |     |    | 87  |   |     |    | 79  | 
|                         |                                         |                                |     |      |     |      |     |    |     |   |     |   
|Loss from operations     |                                         |                                | (62 | )    |     |      | (31 | )  |     |   | (38 | ) 
|                         |                                         | Other income, net              |     |      | 2   |      |     |    | 1   |   |     |    | 3   | 
|                         |                                         |                                |     |      |     |      |     |    |     |   |     |   
|Loss before income taxes |                                         |                                | (60 | )    |     |      | (30 | )  |     |   | (35 | ) 
|                         |                                         | Income tax provision (benefit) |     |      |    |      |     |    | (9  | ) |     |    | 39  | 
|                         |                                         |                                |     |      |     |      |     |    |     |   |     |   
|Net Loss                 |                                         |                                | (60 | )%   |     |      | (21 | )% |     |   | (74 | )%
|                         |                                         |                                |     |      |     |      |     |    |     |   |     |   

Year Ended December 31, 2003 Compared to
Year Ended December 31, 2002

Revenues.Our total
revenues of $21,926,000 for the year ended December 31,
2003 decreased $1,561,000 or 6.6% from 2002s total
revenues of $23,487,000. Revenues from our legacy product lines
(Multiplexer and Inverse Multiplexer; CSU/ DSU; ATM access) and
services recorded a combined decrease of $6,645,000 from 2002.
We believe that increased price competition mainly in legacy
markets as well as reduced capital spending from most
telecommunications customers in general, including some of our
largest customers, contributed to this decrease. This decrease
was partially offset by sales of $4,835,000 from our new IAD
product line, which was acquired in the merger with VINA in June
2003.

By channel of distribution, the revenue reduction
for 2003 versus the comparable period of 2002 reflected lower
sales to end-users, partially offset by increases from resellers
and domestic distributors. Shipments to international locations
represented 11% of total revenues during 2003 compared to 18% of
total revenues during 2002.

18



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##### Table of Contents



The combined revenues from MCI, Lucent, and LTI
Datacom, our three largest customers for 2003, accounted for 44%
of the total revenues for 2003 versus 27% for 2002, when there
was a small amount of revenue from Lucent. Our revenues from
Lucent have increased due to the addition of our IAD product
line, acquired in our merger with VINA. The financial
difficulties at MCI, including its bankruptcy filing, had, and
we expect it to continue to have, a major adverse impact on our
revenues. The following table is the percentage of total
revenues for our customers who accounted for 10% or more of our
revenues:

|            |  |              |    |      |  |  |    |  
|----------- |  | ------------ | -- | ---- |  |  | -- | -
|            |  |             
|            |  | Years Ended 
|            |  | December 31,
|            |  |             
|            |  | 2003         |    | 2002
|            |  |              |    |     
|MCI         |  |              | 17 | %    |  |  | 20 | %
|Lucent      |  |              | 16 | %    |  |  | *  |  
|LTI Datacom |  |              | 11 | %    |  |  | 7  | %
|AT&T        |  |              | 7  | %    |  |  | 14 | %



---



|  |              
|- | -------------
|* | Less than 1%.

Gross Profit.Our
total gross profit dollars for 2003 were $9,019,000 versus
$13,140,000 for 2002. The reduction in gross profit dollars for
the 2003 period versus the 2002 period was mainly due to the
impairment charge of $1,592,000 included in cost of revenues
from the write-off of assets related to the MBX product line,
acquired as part of the merger with VINA, which had become
impaired. The reduction in gross profit dollars was also due to
lower gross profit on our IAD products, lower total revenues and
a write-off of $176,000 for certain demo equipment that had
become impaired. Our gross profit percentage in 2003 was 41% or
15 percentage points lower than last years result of
56 percent. The 15 percentage point decline from 2002
to 2003 was principally due to MBX and demonstration equipment
impairment charges, lower gross margins earned on IAD products
and amortization expense from intangible assets acquired in the
VINA merger.

Research and
Development.Research and development
expenses totaled $4,845,000 for 2003, which was $646,000 or 15%
higher than 2002s expenses of $4,199,000. The increase was
primarily due to higher headcount related expenses and outside
contractors costs as a result of our increased investment
in new products. We had 20 research and development employees at
the end of the 2003 compared to 19 at the end of 2002.

Selling, General and
Administrative.Selling, general and
administrative expenses decreased 10% to $14,418,000 during
2003, as compared to $16,051,000 for 2002. The lower expenses
were due primarily to reductions in: employee related expenses
($1,100,000); commission expense ($333,000); bad debt expense
($315,000); facility costs ($263,000); and depreciation expense
($208,000), resulting from the 2003 and 2002 restructurings and
reductions-in-force programs, as well as a reduction in
administrative charges from Axel Johnson ($314,000). These
reductions were partially offset by an increase of $1,205,000 in
insurance costs related to the VINA merger.

Selling, general and administrative expenses
included some contractual charges from Axel Johnson for
providing certain services to us related to treasury,
accounting, tax, internal audit, legal and human resources.
These charges ended June 5, 2003, the date of the VINA
merger. The costs of these services were allocated to us based
on estimates by Axel Johnson of actual costs incurred. We
believe that such allocations were reasonable. Such charges and
allocations are not necessarily indicative of the costs that
would have been incurred if we had internally provided such
services. The allocated costs of these services amounted to
$151,000 for the period January 1, 2003 through
June 5, 2003, and $465,000 for calendar year 2002.

Restructuring.In
connection with the VINA merger on June 5, 2003, we
announced additional corporate restructurings because of synergy
plans developed as a result of the merger of the two companies.
We incurred restructuring costs of $2,458,000 during the year,
consisting of $1,535,000 in facility consolidation costs
associated principally with moving its headquarters from
Milpitas, CA to Newark, CA partially offset by $249,000 of rent
collected from Silicon Wireless Corporation; $425,000 in
impairment charges related to fixed assets and leasehold
improvements at the Milpitas location and $747,000 from
reductions-in-force. That compares to net restructuring charges
of $254,000 for 2002.

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The following table provides details on the staff
reductions for our restructuring and reduction in force programs
in 2003 and 2002:

|                        |  |               |   |             |  |                |    |       |  |  |    |  |  |  |    | 
|----------------------- |  | ------------- | - | ----------- |  | -------------- | -- | ----- |  |  | -- |  |  |  | -- | 
|                        |  |               |   |             |  | Selling,       |    |      
|                        |  |               |   | Research &  |  | General &      |    |      
|                        |  | Manufacturing |   | Development |  | Administration |    | Total
|                        |  |               |   |             |  |                |    |      
|May of 2002             |  |               | 4 |             |  |                | 4  |       |  |  | 8  |  |  |  | 16 | 
|October of 2002         |  |               |  |             |  |                | 6  |       |  |  | 8  |  |  |  | 14 | 
|June of 2003            |  |               | 4 |             |  |                | 5  |       |  |  | 10 |  |  |  | 19 | 
|July/ September of 2003 |  |               | 1 |             |  |                | 2  |       |  |  | 17 |  |  |  | 20 | 
|December of 2003        |  |               |  |             |  |                | 7  |       |  |  | 1  |  |  |  | 8  | 
|                        |  |               |   |             |  |                |    |       |  |  |    |  |  |  |    | 
|Total                   |  |               | 9 |             |  |                | 24 |       |  |  | 44 |  |  |  | 77 | 
|                        |  |               |   |             |  |                |    |       |  |  |    |  |  |  |    | 

Interest and Other
Income.Interest and other income
amounted to $381,000 for 2003 as compared to $356,000 for 2002.
Interest income was $160,000 for 2003, versus $408,000 for 2002.
Other income and expense for 2003 was $221,000 in income as
compared to $52,000 in expenses for 2002. The $273,000
improvement in other income and expense in 2003 was primarily
due to $232,000 in other income recognized from the expiration
of an unused customer credit in 2003. The lower interest income
for the current year was attributed to lower cash, cash
equivalent and short-term investment balances as well as lower
interest rates earned on our cash and cash equivalents. The
average cash, restricted cash, cash equivalent and short-term
investment balances for 2003 was $13,999,000 versus $20,421,000
for 2002. The average interest rates earned on cash, restricted
cash and cash equivalent balances was approximately 1% in 2003
as compared to 2% in 2002 earned on cash, cash equivalent and
short-term investment balances. Our investment portfolio
generally is comprised of commercial paper rated A1/P1 as well
as bank certificates of deposit, corporate medium-term notes and
bonds rated A- or better.

Provision for Income
Taxes.The tax provision for 2003 was
$37,000. The tax benefit of $2,113,000 for 2002 is comprised
largely of an income tax refund of $1,894,000 for taxes paid in
1996, 1997 and 1998, as a result of a 2002 change in the federal
income tax code and $262,000 for the release of an accrual
related to prior years closed audits. The tax code change
allowed corporations with certain tax losses to file for refunds
of taxes paid in previous years.

Net loss.The net
loss for 2003 was $13,262,000, as compared to a net loss of
$4,895,000 for the same period of 2002. The increased net loss
of $8,367,000 was principally due to lower revenues and gross
margins for the year ended December 31, 2003, of
$2,190,000, net restructuring and impairment charges in 2003 of
$2,204,000 and $2,132,000, respectively, the effects of the tax
benefit due to income tax refunds of $2,150,000 realized in
2002, and amortization and in-process R&D charges in 2003 of
$551,000 and $155,000, respectively, partially offset by lower
operating expenses in 2003 of $1,011,000.

Year Ended December 31, 2002 Compared to
Year Ended December 31, 2001

Revenues.Our
consolidated revenues of $23,487,000 for the year ended
December 31, 2002 were 44% lower than 2001s annual
revenues of $41,871,000. The primary reason was the
industry-wide slowdown. Our Multiplexer and Inverse Multiplexer
product lines accounted for the major portion of the decrease
from 2001 with a combined revenue reduction of $17,609,000 or
96% of the total revenue reduction.

By channel of distribution, the majority of the
revenue reduction for 2002 versus the comparable period of 2001
was attributable to lower direct sales to SPs and domestic
distributors. Shipments to international locations represented
18% of total revenues during 2002 compared to 16% of total
revenues during 2001. On a twelve-month comparative basis, 2002
international revenues were 40% less than 2001 international
revenues.

The combined revenues from MCI and AT&T, our
two largest customers during 2002 and 2001, accounted for 34% of
the total revenues for 2002 versus 47% for 2001. The financial
difficulties at MCI, including its bankruptcy filing, had, and
we expect it to continue to have, a major adverse impact on our

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revenues. The following table is the percentage
of total revenues for our two largest customers in 2002 and 2001:


|     |  |               |    |      |  |  |    |  
|---- |  | ------------- | -- | ---- |  |  | -- | -
|     |  |              
|     |  | Twelve Months
|     |  | Ended        
|     |  | December 31, 
|     |  |              
|     |  | 2002          |    | 2001
|     |  |               |    |     
|MCI  |  |               | 20 | %    |  |  | 38 | %
|AT&T |  |               | 14 | %    |  |  | 9  | %

Gross Profit.Our
total gross profit dollars for 2002 were $13,140,000 versus
$17,020,000 for 2001. The reduction in gross profit dollars for
the 2002 periods versus the 2001 periods was primarily due to
sales volume declines partially offset by improvements to our
gross margin percentage. Our gross profit percentage in 2002 was
56% or 15 percentage points higher than 2001s result
of 41 percent. The 15-percentage point improvement from
2001 to 2002 was primarily due to an asset impairment charge in
2001, higher 2001 excess and obsolete inventory charges as well
as higher 2001 Orion 5000 manufacturing costs and overall
material costs and warranty costs.

Research and
Development.Research and development
expenses totaled $4,199,000 for 2002, which was $2,580,000 or
38% below 2001s expenses of $6,779,000. The reduction was
primarily due to lower employee related expenses of $2,194,000
and lower recruiting and relocation costs of $433,000, all of
which resulted from the restructuring and reduction in force
programs enacted in 2001 and 2002. We had 19 research and
development employees at the end of the 2002 compared to 29 at
the end of 2001.

Selling, General and
Administrative.Selling, general and
administrative expenses decreased 22% to $16,051,000 during
2002, as compared to $20,680,000 for 2001. The lower expenses
were due primarily to reductions in employee related expenses
($2,392,000), commission expense ($1,054,000), outside services
($460,000), travel ($391,000) and communication expenses
($368,000) associated with the 2001 and 2002 restructuring and
reduction in force programs.

Selling, general and administrative expenses
include contractual charges from Axel Johnson for providing
certain services to us related to treasury, accounting, tax,
internal audit, legal and human resources. The costs of these
services were allocated to us based on estimates by Axel Johnson
of actual costs incurred. We believe that such allocations are
reasonable. Such charges and allocations are not necessarily
indicative of the costs that would have been incurred if we had
internally provided such services. The allocated costs of these
services amounted to $465,000 for 2002, which was the same as
2001.

Restructuring.In
May and October of 2002, we announced additional corporate
restructurings as a result of the ongoing stagnation of the
telecom market. Over these two restructurings, 30 positions were
eliminated from our workforce with a charge to operating results
of $570,000. Partially offsetting this charge was a $194,000
reduction to the prior restructuring reserves primarily for
outplacement services, which were not fully utilized by some of
the laid-off employees and $122,000 in rent collected under the
sublease agreement with Silicon Wireless Corporation. That
compares to a $5,772,000 restructuring charge for 2001 when we
reduced our workforce by 88 people, closed our leased facility
in Durham, North Carolina and wrote-off assets associated with
the closing.

The following table provides details on the staff
reductions for our restructuring and reduction in force programs
in 2002 and 2001:

|                |  |               |    |             |  |                |    |       |  |  |    |  |  |  |     | 
|--------------- |  | ------------- | -- | ----------- |  | -------------- | -- | ----- |  |  | -- |  |  |  | --- | 
|                |  |               |    |             |  | Selling,       |    |      
|                |  |               |    | Research &  |  | General &      |    |      
|                |  | Manufacturing |    | Development |  | Administration |    | Total
|                |  |               |    |             |  |                |    |      
|June of 2001    |  |               | 3  |             |  |                | 24 |       |  |  | 26 |  |  |  | 53  | 
|October of 2001 |  |               | 12 |             |  |                | 5  |       |  |  | 18 |  |  |  | 35  | 
|May of 2002     |  |               | 4  |             |  |                | 4  |       |  |  | 8  |  |  |  | 16  | 
|October of 2002 |  |               |   |             |  |                | 6  |       |  |  | 8  |  |  |  | 14  | 
|                |  |               |    |             |  |                |    |       |  |  |    |  |  |  |     | 
|Total           |  |               | 19 |             |  |                | 39 |       |  |  | 60 |  |  |  | 118 | 
|                |  |               |    |             |  |                |    |       |  |  |    |  |  |  |     | 

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Interest and Other
Income.Interest and other income
amounted to $356,000 for 2002 as compared to $1,198,000 for
2002. Interest income, which is the major component of Interest
and Other Income, was $408,000 for 2002, versus $1,243,000 for
2001. The lower interest income for the current year was
attributed to lower interest rates as well as lower cash and
short-term investment balances. The average interest rate for
2002 was 2% versus an average interest rate in 2001 of 5%, for a
3-percentage point decline. Average interest bearing cash and
short-term balances declined by 17% to $20,421,000 from
$24,749,000. Our investment portfolio generally is comprised of
commercial paper rated A1/P1; bank certificates of deposit rated
A- or better and corporate medium-term notes and bonds rated A-
or better.

Provision for Income
Taxes.The tax benefit of $2,113,000
for 2002 is comprised primarily of an income tax refund of
$1,894,000 for taxes paid in 1996, 1997 and 1998, as a result of
a 2002 change in the federal income tax code and $262,000 for
the release of an accrual related to prior years closed audits.
The tax code change allowed corporations with certain tax losses
to file for refunds for taxes paid in previous years. The tax
provision for 2001 was $15,866,000.

Net loss.The net
loss for 2002 was $4,895,000, as compared to a net loss of
$30,879,000 for the same period of 2001. The lower net loss for
2002 versus 2001 was primarily due to the booking in 2001 of an
valuation allowance charge against the deferred tax assets
($15,981,000), restructuring costs ($5,772,000), asset
impairment charges ($1,911,000), excess and obsolete inventory
write-downs ($1,891,000) and higher manufacturing costs for the
Orion 5000 M13 multiplexer product family ($1,000,000).

Liquidity and Capital Resources

At December 31, 2003, we had cash and cash
equivalents of $8,952,000. Cash, cash equivalents and short-term
investments declined by approximately 49% from $17,657,000 on
December 31, 2002. The $8,705,000 decrease in cash, cash
equivalents and short-term investments in 2003 is primarily
attributable to the net loss, and the cash outlays required in
the merger with VINA in June 2003, partially offset by non-cash
charges of $4,385,000 from depreciation and amortization,
impairment of fixed assets, and impairment of intangibles. In
addition, at year-end 2003, we had restricted cash of $333,000
consisting of a deposit with our bank for an irrevocable letter
of credit for a like amount that is used as collateral for the
lease on the Newark, California facility.

Capital expenditures for 2003 were $346,000.
These expenditures consisted principally of the purchase of
computers, software and test equipment. We anticipate capital
expenditures to total approximately $500,000 for 2004.

The accompanying financial statements have been
prepared on a going concern basis which contemplates continuity
of operations, realization of assets and liquidation of
liabilities in the ordinary course of business and do not
reflect adjustments that might result if we were not to continue
as a going concern. The auditors report on our financial
statements as of December 31, 2003 contains an explanatory
paragraph, which refers to our recurring operating losses and
net capital deficiency and notes that these matters raise
substantial doubt about our ability to continue as a going
concern.

We believe that our cash and cash equivalents and
cash flow from operations will be sufficient to fund our
operations through 2004. We will need to raise additional
capital to fund our operations and capital spending before we
become profitable. If cash flows from operations are lower than
expected, including as a result of customer reaction to the
going concern explanatory paragraph in our auditors
report, if we incur unanticipated expenses or if we are unable
to effectively manage our inventory level, we may need to obtain
additional capital sooner than expected. We are currently
exploring opportunities to raise additional capital through
various financial vehicles, but sufficient funds may not be
available to us on terms that we deem acceptable or at all.

Operating lease commitments are related
principally to our buildings in Newark, California; Milpitas,
California and Durham, North Carolina and have terms that expire
in 2008, 2004 and 2007, respectively. Total rent expense in
2003, 2002 and 2001, was $2,042,000, $2,265,000 and $2,217,000,
respectively. Sublease rental income was $709,000, $922,000 and
$1,041,000 in 2003, 2002 and 2001, respectively. Future annual
minimum

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lease payments under all non-cancelable operating
leases as of December 31, 2003 are as follows (in
thousands):


|                                                  |  |           |       |           |  |           |       |         |  |   |     |  |  |   |   | 
|------------------------------------------------- |  | --------- | ----- | --------- |  | --------- | ----- | ------- |  | - | --- |  |  | - | - | 
|                                                  |  | Less Than |       |           |  |           |       | After  
|                                                  |  | 1 Year    |       | 1-3 Years |  | 4-5 Years |       | 5 Years
|                                                  |  |           |       |           |  |           |       |        
|Operating lease obligations                       |  | $         | 1,968 |           |  | $         | 1,469 |         |  | $ | 771 |  |  | $ |  | 
|Manufacturing services agreements                 |  |           | 1,445 |           |  |           |      |         |  |   |    |  |  |   |  | 
|Non-cancelable and non-returnable purchase orders |  |           | 156   |           |  |           |      |         |  |   |    |  |  |   |  | 
|Contingent payment for licensed technology        |  |           | 100   |           |  |           |      |         |  |   |    |  |  |   |  | 
|                                                  |  |           |       |           |  |           |       |         |  |   |     |  |  |   |   | 
|                                                  |  | $         | 3,669 |           |  | $         | 1,469 |         |  | $ | 771 |  |  | $ |  | 
|                                                  |  |           |       |           |  |           |       |         |  |   |     |  |  |   |   | 

The effects of inflation on our revenues and
operating income have not been material to date.

Related Party Transactions

As of December 31, 2002, Axel Johnson owned
53% of Class A and B Common Stock of Larscom and controlled
82% of the voting interest. In connection with the June 5,
2003 merger with VINA, Axel Johnson converted their Class B
Common Stock to Common Stock with a single vote per share. As of
December 31, 2003 Axel Johnson owned approximately 28% of
the Common Stock and voting interest of Larscom. See
Note 6  Related Party Transactions to the
Consolidated Financial Statements. Related party transactions
with Axel Johnson disclosed in the consolidated financial
statements are as follows:



| |                                         
| | ----------------------------------------
| | Employee Health and Welfare
    Programs

We participated in various employee benefits
programs sponsored by Axel Johnson until June 5, 2003, when
we established our own programs for most benefits. Axel Johnson
continued to administer a portion of our 401K program until
January 6, 2004 and retained responsibility for the Axel
Johnson Retirement Plan and the Axel Johnson, Inc.
Retirement Restoration Program. Larscom had discontinued active
participation in both Axel Johnson, Inc. Retirement Plans
as of March 31, 1998. Axel Johnson retains full
responsibility for funding and administration of the Axel
Johnson Retirement Plans. Prior to June 5, 2003, the Axel
Johnson programs we participated in included medical, dental,
life insurance and workers compensation. In general, we
reimbursed Axel Johnson for our proportionate cost of these
programs based on historical experience and relative headcount.
The costs reimbursed to Axel Johnson included costs for reported
claims as well as changes in reserves for incurred but not
reported claims. We recorded expenses related to the
reimbursement of these costs of approximately $664,000, $663,000
and $737,000 in 2003, 2002 and 2001, respectively. We believe
the allocation by Axel Johnson of the proportionate cost was
reasonable, but not necessarily indicative of the costs that
would have been incurred had we maintained our own benefit plans
during that time.



| |                        
| | -----------------------
| | Administrative Services

Axel Johnson provided certain functional services
to us, including certain treasury, accounting, tax, internal
audit, legal and human resources, most of which were
discontinued as of the June 5, 2003 merger with VINA. The
costs of these services were allocated to us based on estimates
by Axel Johnson of actual costs incurred. We believe that such
allocations were reasonable. Such charges and allocations are
not necessarily indicative of the costs that would have been
incurred if we had been a separate entity. The allocated costs
of these services amounting to $151,000, $465,000 and $465,000
in 2003, 2002 and 2001, respectively, have been included in
selling, general and administrative expenses in the consolidated
statements of operations.



| |                 
| | ----------------
| | Credit Agreement

We and Axel Johnson had entered into a Credit
Agreement, pursuant to which Axel Johnson agreed to provide a
revolving credit/working capital facility to us in an aggregate
amount of $15,000,000. The Credit Agreement was discontinued as
of June 5, 2003, coincident with the merger with VINA.
Under terms of the Credit Agreement we were required to pay a
commitment fee of 0.5% per annum on the unused portion of
the Credit Agreement. No borrowings were made under the Credit
Agreement.

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Recent Accounting Pronouncements

In December 2003, the Securities and Exchange
Commission released Staff Accounting Bulletin (SAB)
104, Revenue Recognition. SAB 104 revises or
rescinds portions of the interpretative guidance related to
revenue recognition included in Topic 13 of the codification of
the staff accounting bulletins. We have assessed the impact of
SAB 104 and concluded that the adoption of SAB 104 by
us did not have a material impact on our financial statements.

In December 2003, the FASB issued additional
guidance in FASB Interpretation No. (FIN) 46-R
clarifying the provisions of FIN 46, Consolidation of
Variable Interest Entities, an interpretation of ARB
No. 51. FIN 46-R provides a deferral of
FIN 46 for certain entities until March 15, 2004.
FIN 46 requires certain variable interest entities to be
consolidated by the primary beneficiary of the entity if the
equity investors in the entity do not have the characteristics
of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. We
believe that the adoption of this standard will not have a
material impact on our financial statements.

In May 2003, the FASB issued SFAS 150,
Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity.
SFAS 150 establishes standards for how an issuer classifies
and measures certain financial instruments with characteristics
of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a
liability (or an asset in some circumstances). SFAS 150 is
effective for financial instruments entered into or modified
after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after
June 15, 2003. It is to be implemented by reporting the
cumulative effect of a change in an accounting principle for
financial instruments created before the issuance date of the
Statement and still existing at the beginning of the interim
period of adoption. Restatement is not permitted. We have no
financial instruments within the scope of this pronouncement.

In April 2003, the FASB issued SFAS 149,
Amendment of Statement 133 on Derivative Instruments and
Hedging Activities, which amends SFAS 133 for certain
decisions made by the FASB Derivatives Implementation Group. In
particular, SFAS 149 (1) clarifies under what
circumstances a contract with an initial net investment meets
the characteristic of a derivative, (2) clarifies when a
derivative contains a financing component, (3) amends the
definition of an underlying to conform it to
language used in FIN 45, Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, and (4) amends
certain other existing pronouncements. SFAS 149 is
effective for contracts entered into or modified after
June 30, 2003, and for hedging relationships designated
after June 30, 2003. In addition, most provisions of
SFAS 149 are to be applied prospectively. We have no
financial instruments within the scope of this pronouncement.

In November 2002, the FASB issued FIN 45,
Guarantors Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of
Indebtedness of Others. FIN 45 requires that a
liability be recorded in the guarantors balance sheet upon
issuance of a guarantee. In addition, FIN 45 requires
disclosures about the guarantees that an entity has issued,
including a reconciliation of changes in the entitys
product warranty liabilities. The initial recognition and
initial measurement provisions of FIN 45 are applicable on
a prospective basis to guarantees issued or modified after
December 31, 2002, irrespective of the guarantors
fiscal year-end. The disclosure requirements of FIN 45 are
effective for financial statements of interim or annual periods
ending after December 15, 2002, and have been implemented
in our financial statements in Note 12.

In July 2002, the FASB issued SFAS 146,
Accounting for Costs Associated with Exit or Disposal
Activities. SFAS 146 addresses financial accounting
and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force
(EITF) Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring). SFAS 146 requires that a liability
for costs associated with an exit or disposal activity be
recognized and measured initially at fair value only when the
liability is incurred. The provisions of SFAS 146 are
effective for exit or disposal activities that are initiated
after December 31, 2002. The adoption of this standard has
not had a material impact upon our financial condition, cash
flows or results of operations.

In November 2002, the Emerging Issues Task Force
reached a consensus on Issue No. 00-21, Revenue
Arrangements with Multiple Deliverables. EITF Issue
No. 00-21 provides guidance on how to account for
arrangements that involve the delivery or performance of
multiple products, services and/or rights to use

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##### Table of Contents



assets. The provisions of EITF Issue
No. 00-21 will apply to revenue arrangements entered into
in fiscal periods beginning after June 15, 2003. The
adoption of this standard has not had a material impact upon our
financial condition, cash flows or results of operations.


In May 2002, the FASB issued
SFAS No. 145, Rescission of SFAS Nos. 4,
44, and 64, Amendment of SFAS No. 13, and Technical
Corrections. Among other things, SFAS 145 rescinds
various pronouncements regarding early extinguishment of debt
and allows extraordinary accounting treatment for early
extinguishment only when the provisions of APB Opinion
No. 30, Reporting the Results of
Operations  Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions are met.
SFAS 145 provisions regarding early extinguishment of debt
are generally effective for fiscal years beginning after
May 15, 2002. The adoption of this standard has not had a
material impact upon our financial condition, cash flows or
results of operations.

Certain Factors Affecting Future Operating
Results

Our Independent accountants report
includes a going concern explanatory paragraph,
which may adversely affect our stock price and our ability to
raise additional capital and may create a concern among
customers and vendors as to whether we will be able to fulfill
our contractual obligations.

We have suffered recurring losses from operations
and negative cash flow from operations, investing and financing.
For the year ended December 31, 2003, we used approximately
$6.7 million of cash to fund our operating, investing and
financing activities. This factor, in combination with reduced
levels of working capital, raise substantial doubt about our
ability to continue as a going concern beyond this calendar year
and a reasonable period thereafter. Our ability to continue as a
going concern is dependent upon our ability to obtain adequate
financing and achieve a level of revenues adequate to support
our capital and operating requirements. PricewaterhouseCoopers
LLP has included in its report on our consolidated financial
statements for the fiscal year ended December 31, 2003, a
going concern explanatory paragraph, which states that the
Company has suffered recurring losses from operations and has a
net capital deficiency that raise substantial doubt about its
ability to continue as a going concern.

We are exploring opportunities to raise
additional capital through various financing vehicles, but
sufficient funds may not be available to us on terms that we
deem acceptable, if they are available at all. In the event we
are unable to continue as a going concern, we may elect or be
required to seek protection from our creditors by filing a
voluntary petition in bankruptcy or may be subject to an
involuntary petition in bankruptcy. The inclusion of the going
concern explanatory paragraph in PricewaterhouseCoopers
LLPs audit report may cause our stock price to fall and
impair our ability to raise additional capital. In addition, the
receipt of a going concern explanatory paragraph may create a
concern among our current and future customers and vendors as to
whether we will be able to fulfill our contractual obligations.
As a result, current and future customers may determine not to
do business with us, which would cause our revenues to decline.
Employee concern about the future of the business and their
continued prospects for employment as a result of the going
concern explanatory paragraph may cause them to seek employment
elsewhere, depriving us of the human capital we need to be
successful.

Our entire industry was in an extended
downturn and recovery may be delayed.The downturn for the United States economy and the rapid and
severe downturn for the domestic telecommunications industry,
beginning in late 2000, negatively affected demand for our
products. In addition to the deteriorating domestic economic
environment, the worldwide telecommunications market also
experienced reduced demand. This decreased demand led to
fluctuating order forecasts from some of our customers. While
recent events have indicated that a general economic recovery is
underway, the difficult financial position of many of our
customers, resulting from the prolonged downturn, may delay the
timing of order increases for our products, if at all. For 2003,
order demand from many of our customers continued to decline as
they experienced the impact of the downturn in the
telecommunications market.

We expect to continue to incur operating
losses and may not be profitable in the
future.We have experienced
substantial net losses, including a net loss of $13,262,000 in
2003 and $4,895,000 in 2002 and had an accumulated deficit of
$78,778,000 as of December 31, 2003. A continued decrease
in revenues could have an adverse impact on our finances. There
can be no assurance as to when or if we will achieve
profitability.

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Our prospects for growth depend on
recently-introduced products and products under
development.We expect revenues from
sales of our established products to decline over time both as a
result of decreased demand and pricing pressure. Therefore, our
future operating results are highly dependent on market
acceptance of our recently-introduced products and products that
may be introduced in the future. These include, for example, the
Orion 7400 and the Orion 5000, 5001 and 5003, all of which have
only recently been introduced. There can be no assurance that
such products will achieve widespread market acceptance, and, in
fact, some other products we introduced in recent years have
failed to meet our sales expectations. The industry-wide
downturn caused sales of new products, such as ours, to be well
below expectations. We have, in the past, experienced delays and
changes in course in the development of new products and the
enhancement of existing products, and such delays and changes in
course may occur in the future. Our inability to develop and
introduce new products or product versions in a timely manner,
due to resource constraints or technological or other reasons,
or to achieve timely and widespread market awareness and
acceptance of our new products or releases, would have a
material adverse effect on our business and operating results.

Rapid technological change could hurt our
ability to compete.The
telecommunications equipment industry is characterized by
rapidly-changing technologies and frequent new product
introductions. The rapid development of new technologies
increases the risk that current or new competitors could develop
products that would reduce the competitiveness of our products.
Our success will depend to a substantial degree upon our ability
to respond to changes in technology and customer requirements.
This will require the timely development and marketing of new
products and enhancements on a cost-effective basis. There can
be no assurance that we will be successful in developing,
introducing or managing the transition to new or enhanced
products such as the Orion 7400 or that any such products will
be responsive to technological changes or will gain market
acceptance. In the past, some of the products we have planned
and introduced have not met our sales expectations.

Our business could be materially and adversely
affected by shifts in the use of technology common throughout
the industry today. Three shifts affecting our products and
industry are: the integration of CSU/ DSU technology into
routers and switches, a move from T1/ E1 services to more
Ethernet-based services and the increase in demand for more
managed, customer-premise-based services. The failure to
accommodate these shifts in technology could impact sales of our
products and have a material adverse affect on our business and
operating results.

To develop new products and product
enhancements, we will need to continue to invest in research and
development, which could adversely affect our business and
operating results.As our revenue
growth is dependent upon the success and development of our
recently introduced products and products under development and
as we must continue to modify our products to incorporate new
technologies and meet new standards, we will be required to
continue to devote time and resources to our research and
development efforts. While our research and development expenses
were $4.2 million in 2002 and $4.8 million in 2003, we
may not have sufficient resources allocated to the development
of new and enhanced products to remain competitive.

Our recent merger with VINA may not lead to
the synergies expected.While we have
largely completed the plan for the integration of VINA and
Larscom from the June 5, 2003 merger of the two companies,
there can be no assurance that the merged Company can retain or
attract sufficient new customers or reduce expenses enough to
achieve profitability in the near term or at all.

We conducted seven rounds of
restructuring/layoffs in the past thirty-one
months.Since mid-2001, we have
conducted seven rounds of layoffs for an aggregate reduction in
workforce of 165 people. Although the restructuring actions
taken have lowered our expense base, we expect operating losses
to continue into 2004. Therefore, there can be no assurance that
another material restructuring and/or workforce reduction will
not be required. In addition, our workforce reductions may
deprive us of the human capital we would need to take full
advantage of the recent upturn in the business cycle in our
industry. There can be no assurance that we will not lose
employees in the future as a result of the
restructuring/layoffs, or that we will be able to recruit
suitable replacements.

The absence of long-term backlog makes us
vulnerable in periods of weak demand.None of our customers are contractually obligated to purchase
any quantity of products in any particular period, and product
sales to major customers have varied widely from
quarter-to-quarter and from year-to-year. Our

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current customers might not continue to place
orders with us, orders from existing customers might not
continue at the levels of previous periods and we might not be
able to obtain orders from new customers. Over the last several
years, there has been a reduction of equipment demand throughout
the telecommunications industry. Because of our limited backlog,
this tends to have an immediate negative effect on our
operations, which we cannot fully offset on a timely basis by
implementing reductions in expenses.


We depend upon a small number of customers
some of whom have been experiencing financial
difficulties.A small number of
customers have accounted for a significant percentage of our
sales. Therefore, sales for a given quarter generally depend on
orders received from, and product shipments to, a limited number
of customers. Sales to individual large customers are often
related to the customers specific equipment deployment
projects, the timing of which is subject to change on limited
notice, in addition to the ebbs and flows in our customers
business conditions and the effect of competitors product
offerings. We have in the past experienced both accelerations
and slowdowns in orders related to such projects, causing
changes in the sales level of a given quarter relative to both
the preceding and subsequent quarters. Since most of our sales
are in the form of large orders with short delivery times to a
limited number of customers, our backlog and consequently our
ability to predict revenues will continue to be limited. In
addition, announcements by us or our competitors of new products
and technologies could cause customers to defer, limit or end
purchases of our existing products. In the event that we lose
one or more large customers, anticipated orders from major
customers fail to materialize, or delivery schedules are
deferred or canceled as a result of the above, or other
unanticipated factors, our business and operating results would
be materially adversely affected. As a result of the downturn in
the telecommunications industry, many of our customers have
experienced financial difficulties and have reduced their
expenditures on capital equipment. The continued financial
difficulties or failure of any of our major customers would have
a material adverse effect on our business and operating results.
One of our largest customers, MCI, filed for bankruptcy in 2002
and has not yet emerged from court protection, which could lead
to a substantial loss in their customer base or further
reorganizations, all of which could influence their order levels
to us. In 2003 revenue from sales to MCI decreased 19% from
sales to MCI in 2002.

Our operating results have fluctuated
significantly in the past and may fluctuate in the future on a
quarterly and annual basis as a result of a number of factors,
many of which are beyond our control.Consequently, we believe that period-to-period comparisons of
our operating results are not necessarily meaningful and should
not be relied upon as indicative of future performance.

Results in any period could also be affected by
changes in:



| |   |                                                                                         
| | - | ----------------------------------------------------------------------------------------
| |  | market demand,                                                                          
|
| |  | competitive market conditions,                                                          
|
| |  | market acceptance of new or existing products,                                          
|
| |  | sales channel development costs,                                                        
|
| |  | the cost and availability of components,                                                
|
| |  | the mix of our customer base and sales channels,                                        
|
| |  | the mix of products sold,                                                               
|
| |  | our sales promotion activities,                                                         
|
| |  | our ability to expand or contract our sales and
    marketing organizations effectively,
|
| |  | our ability to attract and retain key technical
    and managerial employees,           
|
| |  | conditions affecting the telecommunications
    industry and                            
|
| |  | general economic conditions.                                                            

We established our expense levels for product
development and other operating expenses based on projected
sales levels and margins, but expenses are relatively fixed in
the short term. Accordingly, when sales are below expectations
in any given period, our inability to adjust spending
proportionally in the short term may exacerbate the adverse
impact of a revenue shortfall on our operating results.

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Because of all of the foregoing factors, our
operating results in one or more future periods may be subject
to significant fluctuations. In the event these factors result
in financial performance below the expectations of public market
analysts and investors, the price of our Common Stock could be
materially adversely affected.

Since the sales cycles for our products are
typically long and unpredictable, we have difficulty predicting
future revenue and our operating results may fluctuate
significantly.A customers
decision to purchase our products often involves a significant
commitment of its resources and a lengthy evaluation and product
qualification process. Our sales cycles vary from a few months
to over a year. As a result, we may incur substantial sales and
marketing expenses and expend significant management effort
without any assurance of a sale. A long sales cycle also
subjects us to other risks, including customers budgetary
constraints, internal acceptance review and order reductions and
cancellations. Even after deciding to purchase our products, our
customers often deploy our products slowly.

We depend heavily on component availability
and key suppliers.On-time delivery of
our products depends upon the availability of components and
subsystems used in our products. We depend upon our suppliers to
manufacture, assemble and deliver components in a timely and
satisfactory manner. We obtain components and license certain
embedded software from several single sources. We do not believe
we would be able to develop alternative sources for certain
essential components used in our products without incurring
significant costs. In addition, while we believe we would be
able to develop alternative sources for most of the other
components and software used in our products there can be no
assurance that we would be able to do so, in a timely manner
without incurring substantial additional costs, if required. Any
inability by our suppliers to meet our demand or any prolonged
interruption in supply, or a significant increase in the price
of one or more components or in the price of software, would
likely have an adverse impact on our business and operating
results. We generally do not have any long-term contracts with
our suppliers and, in fact, as a result of our merger with VINA,
we have made a recent decision to place a majority of our
business with a single contract manufacturer. It is possible
that our new major contract supplier and other suppliers will
not continue to be able and willing to meet our future
requirements.

The market for our products is intensely
competitive, and our failure to compete effectively could reduce
our revenues and margins.Competition
in the market place for high-speed network-access products is
intense. Our products compete primarily with Quick Eagle
Networks, Verilink, Kentrox, Cisco Systems, Alcatel, ADTRAN,
RAD, Telco Systems, Carrier Access and Paradyne. We compete to a
lesser extent with other telecommunications equipment companies.
Many of our competitors have more broadly developed distribution
channels and have made greater advances than we have in emerging
technologies. Cisco Systems and Atcatel are two of the largest
communications equipment companies in the world. There can be no
assurance that we will be able to continue to compete
successfully with existing or new competitors.

We are controlled by Axel Johnson, Inc.
and Sierra Ventures V LP.Axel
Johnson, Inc. and Sierra Ventures V LP each control
approximately 28% of the common Stock of Larscom. As a result,
Axel Johnson, Inc. and Sierra Ventures V LP combined have
sufficient combined voting power to control the direction and
policies of Larscom, including mergers, the payment of
dividends, consolidations, the sale of all or substantially all
of the assets of Larscom and the election of the Board of
Directors of Larscom, and to prevent or cause a change in
control of Larscom. There can be no assurance that Axel
Johnson, Inc. and Sierra Ventures V LP will not act in
concert and affect our corporate actions in a manner that
conflicts with the interest of our other stockholders.

We have recently reorganized our sales
force.Our sales force until January
of 2004 was organized by type of account: major accounts,
carrier accounts, US indirect channels (distributors and
resellers) and enterprise customers and overseas accounts. As
part of our VINA post-merger plans we have reorganized our sales
people along geographic areas. Certain of our sales people have
been assigned new customers and others will call on different
types of customers. There is a risk that the new relationships
with customers resulting from the reorganization might not be as
productive as the prior organization in the near term or at all.
Failure of the new organization to achieve sales productivity
goals could have an adverse impact on our business and operating
results.

We rely on an indirect distribution channel
for sales to many of our domestic and international
customers.This channel consists
primarily of a small group of master distributors, such as Tech
Data, and a number of authorized resellers. There are a number
of risks associated with an indirect distribution channel.

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The risks include a reduction in our ability to
forecast sales, reduced average selling prices, potential
reductions in customer satisfaction, loss of contact with users
of our products, a potential build-up of inventories at
resellers and methods of advertising and promoting products that
result in additional expenses. All of these risk factors could
have an adverse impact on our business and operating results.


In addition, most of our existing distributors
also distribute products of our competitors. As a result, our
distributors may not recommend or continue to use and offer our
products, or our distributors may not devote sufficient
resources to market and provide the necessary customer support
for our products. Our distributors may terminate their
agreements with us or significantly reduce or delay the amount
of products that they order from us at any time. Any such
termination, reduction or delay in orders could have an adverse
impact on our business and operating results

We must comply with regulations and evolving
industry standards.The market for our
products is characterized by the need to comply with a
significant number of communications regulations and standards,
some of which are evolving as new technologies are deployed. In
the U.S., our products must comply with various regulations
defined by the Federal Communications Commission and standards
established by Underwriters Laboratories, as well as industry
standards established by various organizations. As standards for
services such as Asynchronous Transfer Mode, Frame
Relay, Internet Protocol, Ethernet and Synchronous Optical
Network/ Synchronous Digital Hierarchy evolve, we may be
required to modify our existing products or develop and support
new versions of our products. The failure of our products to
comply, or delays in compliance, with the various existing and
evolving industry standards could delay introduction of or
affect the marketability of our products, which in turn could
have an adverse impact on our business and operating results.

We may not be able to protect our intellectual
property and proprietary information.We rely upon a combination of trade secrets, contractual
restrictions, copyrights, trademark laws and patents to
establish and protect proprietary rights in our products and
technologies. We believe that the success of our business
depends primarily on our proprietary technology, information,
processes and expertise, rather than patents. Much of our
proprietary information and technology is not patented and may
not be patentable. We have been issued only two
U.S. patents to date and have four patents pending. There
can be no assurance that we will be able to protect our
technology or that competitors will not be able to develop
similar technology independently. We have entered into
confidentiality and invention assignment agreements with
employees, and into non-disclosure agreements with suppliers,
distributors and appropriate customers so as to limit access to
and disclosure of our proprietary information. There can be no
assurance that these statutory and contractual arrangements will
deter misappropriation of our technologies or discourage
independent third-party development of similar technologies. In
the event such arrangements are insufficient, our business and
operating results could be adversely impacted.

We have not conducted a formal patent search
relating to the technology used in our
products.From time to time, third
parties may assert exclusive patent, copyright, trademark and
other intellectual property rights to technologies that are
important to us. Since patent applications in the U.S. are
not publicly disclosed immediately, applications that we do not
know about may have been filed by competitors of ours, which
could relate to our products. The scope of protection accorded
to patents covering software-related inventions is evolving and
is subject to uncertainty, which may increase the risk and cost
to us if we discover third-party patents related to our software
products or if such patents are asserted against us in the
future. In the event of litigation to determine the validity of
any third-party claims, such litigation, whether or not
determined in favor of us, could result in significant expense
to us and divert the efforts of our technical and management
personnel. In the event of an adverse ruling in such litigation,
we might be required to pay damages, discontinue the use and
sale of infringing products, and expend significant resources to
develop non-infringing technology or obtain licenses from third
parties. There can be no assurance that licenses from third
parties would be available on acceptable terms, if at all. A
successful claim against us and our failure to develop or
license a substitute technology could have an adverse impact on
our business and operating results.

Our products may suffer from defects or errors
that may subject us to product warranty and product liability
claims, which could adversely affect our business and results of
operations.Complex products such as
ours might contain undetected errors or failures when first
introduced or as new versions are released. If such errors or
failures occur, we may be subject to delays in or losses of
market acceptance and sales, product

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returns, diversion of development resources
resulting in new product development delay, injury to our
reputation or increased service and warranty costs. Although we
believe that our reserves for estimated future warranty costs
are adequate, our estimates, particularly those related to
products that have been recently introduced, might not be
correct. Warranty claims in excess of those expected could have
an adverse impact on our business and operating results. Our
agreements with our distributors and customers typically contain
provisions designed to limit our exposure to potential product
liability claims. However, it is possible that the limitation of
liability provisions contained in our agreements may not be
effective or adequate under the laws of certain jurisdictions.
In addition, our errors and omissions insurance may be
inadequate to cover any potential product liability claim.
Although we have not experienced any product liability claims to
date, it is possible that we will be subject to such claims in
the future. Such claims could have an adverse impact on our
business and results or operations.


Our key personnel are critical to our
business, and any failure to retain these employees could
adversely affect our ability to manage our
operations.Our success depends upon
the continued contributions of our key management, sales and
engineering personnel, many of whom would be difficult to
replace. We believe that our future success will depend in large
part upon our ability to attract and retain qualified
management, sales and technical personnel. Our failure to
attract or retain any such key employees could have a material
adverse effect on our business and operating results.

As part of the strategy for growth and
expansion of our business, we may make acquisitions that could
disrupt our business or harm our financial
condition.As part of our business
strategy, we may invest in or acquire other businesses,
technologies or assets, or enter into strategic relationships
with third parties. For such acquisitions, we may issue
additional stock, incur debt, assume liabilities, incur
impairment charges related to goodwill and other intangible
assets or incur other large and immediate write-offs. Our
operation of any acquired business would involve numerous risks
including:



| |   |                                                                                              
| | - | ---------------------------------------------------------------------------------------------
| |  | problems integrating any acquired operations with
    our own,                               
|
| |  | unanticipated costs,                                                                         
|
| |  | diversion of managements attention from our
    core business,                              
|
| |  | adverse effects on existing business
    relationships with customers,                       
|
| |  | risks associated with entering markets in which
    we have no or limited experience,        
|
| |  | the potential loss of key employees, particularly
    those of the purchased organization and
|
| |  | a decrease in our cash position.                                                             






|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures
    About Market Risk

Interest Rate Risk.We do not use derivative financial instruments in our investment
portfolio. Our investment portfolio generally has been comprised
of commercial paper rated A1/P1, bank certificates of deposit
rated A- or better and corporate medium-term notes and bonds
rated A- or better. These securities mature within one year and
are classified as available for sale in accordance with
SFAS No. 115, Accounting for Certain Investments
in Debt and Equity Securities.

Due to our investments in commercial paper, an
immediate, hypothetical 10% decrease in interest rates would not
have a material effect on our current year financial condition
or results of operations. Because the instruments are so short
in duration, their principal value would not be materially
affected. If a 10% reduction in interest rates on our
investments occurred on January 1, 2004 and remained in
effect throughout 2004, the effect would be immaterial. We do
not hold any long-term fixed instruments.

Foreign Currency Exchange Rate
Risk.Our international sales are
typically made in U.S. dollars and are generally not
subjected to foreign currency exchange rate risk. We do not
currently hedge against foreign currency rate fluctuations.
Gains and losses from such fluctuations have not been material
to our consolidated results. The effect of an immediate,
hypothetical 10% change in exchange rate for any foreign
currency would not be material to us.

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|        |                                                
|------- | -----------------------------------------------
|Item 8. | Financial Statements and Supplementary
    Data

LARSCOM INCORPORATED

INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS


Consolidated Financial Statements:

|                                                                                                                                             |  |      |    | 
|-------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                                                                                             |  | Page
|                                                                                                                                             |  |     
|Report of Independent Auditors                                                                                                               |  |      | 32 | 
|Consolidated Balance Sheets as of
    December 31, 2003 and 2002                                                                             |  |      | 33 | 
|Consolidated Statements of Operations for the
    years ended December 31, 2003, 2002 and 2001                                               |  |      | 34 | 
|Consolidated Statements of Stockholders
    Equity and Comprehensive Income (Loss) for the years ended
    December 31, 2003, 2002 and 2001 |  |      | 35 | 
|Consolidated Statements of Cash Flows for the
    years ended December 31, 2003, 2002 and 2001                                               |  |      | 36 | 
|Notes to Consolidated Financial Statements                                                                                                   |  |      | 37 | 

Financial Statement Schedules:

All schedules, with the exception of
Schedule II Valuation and Qualifying Accounts (see
Part IV Item 14), are omitted because they are not
applicable or the required information is shown in the
Consolidated Financial Statements or Notes thereto.

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REPORT OF INDEPENDENT AUDITORS

To the board of directors and stockholders of
Larscom Incorporated

In our opinion, the consolidated financial
statements listed in the accompanying index present fairly, in
all material respects, the financial position of Larscom
Incorporated and its subsidiaries at December 31, 2003 and
2002, and the results of their operations and their cash flows
for each of the three years in the period ended
December 31, 2003 in conformity with accounting principles
generally accepted in the United States of America. In addition,
in our opinion, the financial statement schedule listed in the
accompanying index presents fairly, in all material respects,
the information set forth therein when read in conjunction with
the related consolidated financial statements. These financial
statements and financial statement schedule are the
responsibility of the Larscom Incorporated management; our
responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits.
We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.

The accompanying financial statements have been
prepared assuming that the Company will continue as a going
concern. As discussed in Note 1 to the financial
statements, the Company has suffered recurring losses from
operations and has a net capital deficiency that raise
substantial doubt about its ability to continue as a going
concern. Managements plans in regard to these matters are
also described in Note 1. The financial statements do not
include any adjustments that might result from the outcome of
this uncertainty.

/s/ PRICEWATERHOUSECOOPERS LLP

San Jose, California

March 12, 2004


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LARSCOM INCORPORATED

CONSOLIDATED BALANCE SHEETS

|                                                |                                                                                                                                                             |                                            |       |         |        |  |       |         |        | 
|----------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ----- | ------- | ------ |  | ----- | ------- | ------ | 
|                                                |                                                                                                                                                             |                                           
|                                                |                                                                                                                                                             | December 31,                              
|                                                |                                                                                                                                                             |                                           
|                                                |                                                                                                                                                             | 2003                                       |       | 2002   
|                                                |                                                                                                                                                             |                                            |       |        
|                                                |                                                                                                                                                             |                                           
|                                                |                                                                                                                                                             | (In thousands, except per                 
|                                                |                                                                                                                                                             | share data)                               
|ASSETS                                         
|Current assets:                                 |                                                                                                                                                             |                                            |       |         |        |  |       |        
|                                                | Cash and cash equivalents                                                                                                                                   |                                            | $     | 8,952   |        |  | $     | 15,643  |       
|                                                | Restricted cash                                                                                                                                             |                                            |       | 333     |        |  |       |        |       
|                                                | Short-term investments                                                                                                                                      |                                            |       |        |        |  |       | 2,014   |       
|                                                | Accounts receivable, net                                                                                                                                    |                                            |       | 3,633   |        |  |       | 3,079   |       
|                                                | Inventories                                                                                                                                                 |                                            |       | 5,503   |        |  |       | 3,816   |       
|                                                | Income taxes receivable                                                                                                                                     |                                            |       | 44      |        |  |       | 60      |       
|                                                | Prepaid expenses and other current assets                                                                                                                   |                                            |       | 1,160   |        |  |       | 1,322   |       
|                                                |                                                                                                                                                             |                                            |       |         |        |  |       |        
|                                                |                                                                                                                                                             | Total current assets                       |       |         | 19,625 |  |       |         | 25,934 | 
|Property and equipment, net                     |                                                                                                                                                             |                                            | 1,294 |         |        |  | 1,918 |        
|Intangible assets, net                          |                                                                                                                                                             |                                            | 2,275 |         |        |  |      |        
|Other non-current assets, net                   |                                                                                                                                                             |                                            | 506   |         |        |  | 208   |        
|                                                |                                                                                                                                                             |                                            |       |         |        |  |       |        
|                                                |                                                                                                                                                             | Total assets                               |       | $       | 23,700 |  |       | $       | 28,060 | 
|                                                |                                                                                                                                                             |                                            |       |         |        |  |       |        
|LIABILITIES AND STOCKHOLDERS
    EQUITY       
|Current liabilities:                            |                                                                                                                                                             |                                            |       |         |        |  |       |        
|                                                | Accounts payable                                                                                                                                            |                                            | $     | 4,370   |        |  | $     | 1,898   |       
|                                                | Accrued expenses and other current liabilities                                                                                                              |                                            |       | 5,411   |        |  |       | 4,510   |       
|                                                | Deferred Revenue                                                                                                                                            |                                            |       | 1,283   |        |  |       | 2,102   |       
|                                                | Due to Axel Johnson                                                                                                                                         |                                            |       | 190     |        |  |       | 25      |       
|                                                |                                                                                                                                                             |                                            |       |         |        |  |       |        
|                                                |                                                                                                                                                             | Total current liabilities                  |       |         | 11,254 |  |       |         | 8,535  | 
|Other non-current liabilities                   |                                                                                                                                                             |                                            | 1,640 |         |        |  | 1,618 |        
|                                                |                                                                                                                                                             |                                            |       |         |        |  |       |        
|                                                |                                                                                                                                                             | Total liabilities                          |       |         | 12,894 |  |       |         | 10,153 | 
|                                                |                                                                                                                                                             |                                            |       |         |        |  |       |        
|                                               
|Commitments and contingencies (see
    Note 10) |                                                                                                                                                             |                                            |       |         |        |  |       |        
|                                               
|Stockholders equity:                           |                                                                                                                                                             |                                            |       |         |        |  |       |        
|                                                | Preferred Stock, $0.01 par value;
    5,000 shares authorized; no shares issued or outstanding                                                              |                                            |       |        |        |  |       |        |       
|                                                | Common Stock, $0.01 par value;
    100,000 shares authorized; 5,099 shares and
    1,266 shares issued and outstanding for 2003 and 2002,
    respectively  |                                            |       | 51      |        |  |       | 13      |       
|                                                | Class B Common Stock, $0.01 par value;
    11,900 shares authorized; -0- shares and 1,429 shares
    issued and outstanding for 2003 and 2002, respectively |                                            |       |        |        |  |       | 14      |       
|                                                | Additional paid-in capital                                                                                                                                  |                                            |       | 89,558  |        |  |       | 83,393  |       
|                                                | Deferred compensation                                                                                                                                       |                                            |       | (21     | )      |  |       |        |       
|                                                | Accumulated other comprehensive loss                                                                                                                        |                                            |       | (4      | )      |  |       | (1      | )     
|                                                | Unrealized investment gain                                                                                                                                  |                                            |       |        |        |  |       | 4       |       
|                                                | Accumulated deficit                                                                                                                                         |                                            |       | (78,778 | )      |  |       | (65,516 | )     
|                                                |                                                                                                                                                             |                                            |       |         |        |  |       |        
|                                                |                                                                                                                                                             | Total stockholders equity                 |       |         | 10,806 |  |       |         | 17,907 | 
|                                                |                                                                                                                                                             |                                            |       |         |        |  |       |        
|                                                |                                                                                                                                                             | Total liabilities and stockholders equity |       | $       | 23,700 |  |       | $       | 28,060 | 
|                                                |                                                                                                                                                             |                                            |       |         |        |  |       |        

The accompanying notes are an integral part of
these financial statements.

33



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##### Table of Contents



LARSCOM INCORPORATED

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                          |                                         |                                       |         |        |        |      |        |        |        |   |         |        |        | 
|----------------------------------------- | --------------------------------------- | ------------------------------------- | ------- | ------ | ------ | ---- | ------ | ------ | ------ | - | ------- | ------ | ------ | 
|                                          |                                         |                                      
|                                          |                                         | Years Ended December 31,             
|                                          |                                         |                                      
|                                          |                                         | 2003                                  |         | 2002   |        | 2001
|                                          |                                         |                                       |         |        |        |     
|                                          |                                         |                                      
|                                          |                                         | (In thousands, except per share data)
|Product revenues                          |                                         | $                                     | 16,904  |        |        | $    | 17,977 |        |        | $ | 36,150  |       
|Service revenues                          |                                         |                                       | 5,022   |        |        |      | 5,510  |        |        |   | 5,721   |       
|                                          |                                         |                                       |         |        |        |      |        |        |        |   |         |       
|                                          |                                         | Total revenues                        |         |        | 21,926 |      |        |        | 23,487 |   |         |        | 41,871 | 
|                                          |                                         |                                       |         |        |        |      |        |        |        |   |         |       
|Product cost of revenues                  |                                         |                                       | 11,995  |        |        |      | 9,276  |        |        |   | 23,419  |       
|Service cost of revenues                  |                                         |                                       | 912     |        |        |      | 1,071  |        |        |   | 1,432   |       
|                                          |                                         |                                       |         |        |        |      |        |        |        |   |         |       
|                                          |                                         | Total cost of revenues                |         |        | 12,907 |      |        |        | 10,347 |   |         |        | 24,851 | 
|                                          |                                         |                                       |         |        |        |      |        |        |        |   |         |       
|                                          |                                         | Gross profit                          |         |        | 9,019  |      |        |        | 13,140 |   |         |        | 17,020 | 
|                                          |                                         |                                       |         |        |        |      |        |        |        |   |         |       
|Operating expenses:                       |                                         |                                       |         |        |        |      |        |        |        |   |         |       
|                                          | Research and development                |                                       |         | 4,845  |        |      |        | 4,199  |        |   |         | 6,779  |       
|                                          | Selling, general and administrative     |                                       |         | 14,418 |        |      |        | 16,051 |        |   |         | 20,680 |       
|                                          | Amortization of acquisition intangibles |                                       |         | 385    |        |      |        |       |        |   |         |       |       
|                                          | Restructuring                           |                                       |         | 2,458  |        |      |        | 254    |        |   |         | 5,772  |       
|                                          | Impairment of assets                    |                                       |         | 364    |        |      |        |       |        |   |         |       |       
|                                          | In-process research & development       |                                       |         | 155    |        |      |        |       |        |   |         |       |       
|                                          |                                         |                                       |         |        |        |      |        |        |        |   |         |       
|                                          |                                         | Total operating expenses              |         |        | 22,625 |      |        |        | 20,504 |   |         |        | 33,231 | 
|                                          |                                         |                                       |         |        |        |      |        |        |        |   |         |       
|Loss from operations                      |                                         |                                       | (13,606 | )      |        |      | (7,364 | )      |        |   | (16,211 | )     
|                                          |                                         | other income, net                     |         |        | 381    |      |        |        | 356    |   |         |        | 1,198  | 
|                                          |                                         |                                       |         |        |        |      |        |        |        |   |         |       
|Loss before income taxes                  |                                         |                                       | (13,225 | )      |        |      | (7,008 | )      |        |   | (15,013 | )     
|                                          |                                         | Income tax provision (benefit)        |         |        | 37     |      |        |        | (2,113 | ) |         |        | 15,866 | 
|                                          |                                         |                                       |         |        |        |      |        |        |        |   |         |       
|Net loss                                  |                                         | $                                     | (13,262 | )      |        | $    | (4,895 | )      |        | $ | (30,879 | )     
|                                          |                                         |                                       |         |        |        |      |        |        |        |   |         |       
|Basic and diluted net loss per share      |                                         | $                                     | (3.26   | )      |        | $    | (1.82  | )      |        | $ | (11.49  | )     
|Basic and diluted weighted average shares |                                         |                                       | 4,073   |        |        |      | 2,693  |        |        |   | 2,687   |       

The accompanying notes are an integral part of
these financial statements.

34



---



##### Table of Contents



LARSCOM INCORPORATED

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY

AND COMPREHENSIVE INCOME (LOSS)


|                             |                                                    |                    |       |              |  |            |    |          |  |               |       |              |   |          |    |               |   |        |        |        |   |   |     |     |   |   |    |    |   |   |         |         |   |   |        |         |   |  |   |         |         |  
|---------------------------- | -------------------------------------------------- | ------------------ | ----- | ------------ |  | ---------- | -- | -------- |  | ------------- | ----- | ------------ | - | -------- | -- | ------------- | - | ------ | ------ | ------ | - | - | --- | --- | - | - | -- | -- | - | - | ------- | ------- | - | - | ------ | ------- | - |  | - | ------- | ------- | -
|                             |                                                    |                    |       |              |  |            |    |          |  | Accumulated   |       |              |   |          |    |              
|                             |                                                    | Class A            |       | Class B      |  |            |    |          |  | Other         |       |              |   | Total    |    |              
|                             |                                                    | Common Stock       |       | Common Stock |  | Additional |    |          |  | Comprehensive |       |              |   | Stock-   |    | Comprehensive
|                             |                                                    |                    |       |              |  | Paid-In    |    | Deferred |  | Income        |       | Accumulated  |   | holders |    | Income       
|                             |                                                    | Shares             |       | Amount       |  | Shares     |    | Amount   |  | Capital       |       | Compensation |   | (Loss)   |    | Deficit       |   | Equity |        | (Loss)
|                             |                                                    |                    |       |              |  |            |    |          |  |               |       |              |   |          |    |               |   |        |        |       
|                             |                                                    |                   
|                             |                                                    | (In thousands)    
|Balance at December 31, 2000 |                                                    |                    | 1,245 |              |  |            | 13 |          |  |               | 1,429 |              |   |          | 14 |               |   |        | 82,760 |        |   |   |    |     |   |   | (1 | )  |   |   | (29,742 | )       |   |   | 53,044 |         |   |  |   |        
|Comprehensive income (loss): |                                                    |                    |       |              |  |            |    |          |  |               |       |              |   |          |    |               |   |        |        |        |   |   |     |     |   |   |    |    |   |   |         |         |   |   |        |         |   |  |   |        
|                             | Net loss                                           |                    |       |             |  |            |    |         |  |               |       |             |   |          |    |              |   |        |        |       |   |   |     |    |   |   |    |    |   |   |         | (30,879 | ) |   |        | (30,879 | ) |  | $ | (30,879 | )      
|                             |                                                    |                    |       |              |  |            |    |          |  |               |       |              |   |          |    |               |   |        |        |        |   |   |     |     |   |   |    |    |   |   |         |         |   |   |        |         |   |  |   |        
|                             |                                                    | Comprehensive loss |       |              |  |            |    |          |  |               |       |              |   |          |    |               |   |        |        |        |   |   |     |     |   |   |    |    |   |   |         |         |   |   |        |         |   |  |   | $       | (30,879 | )
|                             |                                                    |                    |       |              |  |            |    |          |  |               |       |              |   |          |    |               |   |        |        |        |   |   |     |     |   |   |    |    |   |   |         |         |   |   |        |         |   |  |   |        
|Issuance under stock plans   |                                                    |                    | 17    |              |  |            |   |          |  |               |      |              |   |          |   |               |   |        | 612    |        |   |   |    |     |   |   |    |    |   |   |        |         |   |   | 612    |         |   |  |   |        
|                             |                                                    |                    |       |              |  |            |    |          |  |               |       |              |   |          |    |               |   |        |        |        |   |   |     |     |   |   |    |    |   |   |         |         |   |   |        |         |   |  |   |        
|Balance at December 31, 2001 |                                                    |                    | 1,262 |              |  | $          | 13 |          |  |               | 1,429 |              |   | $        | 14 |               |   | $      | 83,372 |        |   | $ |    |     |   | $ | (1 | )  |   | $ | (60,621 | )       |   | $ | 22,777 |         |   |  |   |        
|Comprehensive income (loss): |                                                    |                    |       |              |  |            |    |          |  |               |       |              |   |          |    |               |   |        |        |        |   |   |     |     |   |   |    |    |   |   |         |         |   |   |        |         |   |  |   |        
|                             | Net loss                                           |                    |       |             |  |            |    |         |  |               |       |             |   |          |    |              |   |        |        |       |   |   |     |    |   |   |    |    |   |   |         | (4,895  | ) |   |        | (4,895  | ) |  | $ | (4,895  | )      
|                             | Unrealized investment gain adjustment              |                    |       |              |  |            |    |          |  |               |       |              |   |          |    |               |   |        |        |        |   |   |     |    |   |   |    | 4  |   |   |         |         |   |   |        | 4       |   |  |   |         |        
|                             |                                                    |                    |       |              |  |            |    |          |  |               |       |              |   |          |    |               |   |        |        |        |   |   |     |     |   |   |    |    |   |   |         |         |   |   |        |         |   |  |   |        
|                             |                                                    | Comprehensive loss |       |              |  |            |    |          |  |               |       |              |   |          |    |               |   |        |        |        |   |   |     |     |   |   |    |    |   |   |         |         |   |   |        |         |   |  |   | $       | (4,895  | )
|                             |                                                    |                    |       |              |  |            |    |          |  |               |       |              |   |          |    |               |   |        |        |        |   |   |     |     |   |   |    |    |   |   |         |         |   |   |        |         |   |  |   |        
|Issuance under stock plans   |                                                    |                    | 4     |              |  |            |   |          |  |               |      |              |   |          |   |               |   |        | 21     |        |   |   |    |     |   |   |    |    |   |   |        |         |   |   | 21     |         |   |  |   |        
|                             |                                                    |                    |       |              |  |            |    |          |  |               |       |              |   |          |    |               |   |        |        |        |   |   |     |     |   |   |    |    |   |   |         |         |   |   |        |         |   |  |   |        
|Balance at December 31, 2002 |                                                    |                    | 1,266 |              |  | $          | 13 |          |  |               | 1,429 |              |   | $        | 14 |               |   | $      | 83,393 |        |   | $ |    |     |   | $ | 3  |    |   | $ | (65,516 | )       |   | $ | 17,907 |         |   |  |   |        
|Comprehensive income (loss): |                                                    |                    |       |              |  |            |    |          |  |               |       |              |   |          |    |               |   |        |        |        |   |   |     |     |   |   |    |    |   |   |         |         |   |   |        |         |   |  |   |        
|                             | Net loss                                           |                    |       |             |  |            |    |         |  |               |       |             |   |          |    |              |   |        |        |       |   |   |     |    |   |   |    |    |   |   |         | (13,262 | ) |   |        | (13,262 | ) |  | $ | (13,262 | )      
|                             | Foreign currency translation adjustment            |                    |       |             |  |            |    |         |  |               |       |             |   |          |    |              |   |        |        |       |   |   |     |    |   |   |    | (3 | ) |   |         |        |   |   |        | (3      | ) |  | $ | (3      | )      
|                             | Unrealized investment gain adjustment              |                    |       |             |  |            |    |         |  |               |       |             |   |          |    |              |   |        |        |       |   |   |     |    |   |   |    | (4 | ) |   |         |        |   |   |        | (4      | ) |  |   | (4      | )      
|                             |                                                    |                    |       |              |  |            |    |          |  |               |       |              |   |          |    |               |   |        |        |        |   |   |     |     |   |   |    |    |   |   |         |         |   |   |        |         |   |  |   |        
|                             |                                                    | Comprehensive loss |       |              |  |            |    |          |  |               |       |              |   |          |    |               |   |        |        |        |   |   |     |     |   |   |    |    |   |   |         |         |   |   |        |         |   |  |   | $       | (13,269 | )
|                             |                                                    |                    |       |              |  |            |    |          |  |               |       |              |   |          |    |               |   |        |        |        |   |   |     |     |   |   |    |    |   |   |         |         |   |   |        |         |   |  |   |        
|                             | Shares issues in connection with VINA merger       |                    |       | 2,394        |  |            |    | 24       |  |               |       |              |   |          |    |               |   |        |        | 6,188  |   |   |     | (87 | ) |   |    |   |   |   |         |         |   |   |        | 6,125   |   |  |   |         |        
|                             | Amortization of deferred compensation              |                    |       |             |  |            |    |          |  |               |       |              |   |          |    |               |   |        |        |        |   |   |     | 12  |   |   |    |   |   |   |         |         |   |   |        | 12      |   |  |   |         |        
|                             | Reclassification of Class B shares                 |                    |       | 1,429        |  |            |    | 14       |  |               |       | (1,429       | ) |          |    | (14           | ) |        |        |        |   |   |     |     |   |   |    |    |   |   |         |         |   |   |        |         |   |  |   |         |        
|                             | Departure of employees with unvested stock options |                    |       |              |  |            |    |          |  |               |       |              |   |          |    |               |   |        |        | (54    | ) |   |     | 54  |   |   |    |   |   |   |         |         |   |   |        |        |   |  |   |         |        
|Issuance under stock plans   |                                                    |                    | 10    |              |  |            |   |          |  |               |      |              |   |          |   |               |   |        | 31     |        |   |   |    |     |   |   |    |    |   |   |        |         |   |   | 31     |         |   |  |   |        
|                             |                                                    |                    |       |              |  |            |    |          |  |               |       |              |   |          |    |               |   |        |        |        |   |   |     |     |   |   |    |    |   |   |         |         |   |   |        |         |   |  |   |        
|Balance at December 31, 2003 |                                                    |                    | 5,099 |              |  | $          | 51 |          |  |               | (0    | )            |   | $        | 0  |               |   | $      | 89,558 |        |   | $ | (21 | )   |   | $ | (4 | )  |   | $ | (78,778 | )       |   | $ | 10,806 |         |   |  |   |        
|                             |                                                    |                    |       |              |  |            |    |          |  |               |       |              |   |          |    |               |   |        |        |        |   |   |     |     |   |   |    |    |   |   |         |         |   |   |        |         |   |  |   |        

The accompanying notes are an integral part of
these financial statements.

35



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##### Table of Contents



LARSCOM INCORPORATED

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                            |                                                                        |                                                                      |                                                |         |       |        |        |        |       |        |        |         |        |        |  
|--------------------------------------------------------------------------- | ---------------------------------------------------------------------- | -------------------------------------------------------------------- | ---------------------------------------------- | ------- | ----- | ------ | ------ | ------ | ----- | ------ | ------ | ------- | ------ | ------ | -
|                                                                            |                                                                        |                                                                     
|                                                                            |                                                                        | Years Ended December 31,                                            
|                                                                            |                                                                        |                                                                     
|                                                                            |                                                                        | 2003                                                                 |                                                | 2002    |       | 2001  
|                                                                            |                                                                        |                                                                      |                                                |         |       |       
|                                                                            |                                                                        |                                                                     
|                                                                            |                                                                        | (In thousands)                                                      
|Cash flows from operating activities:                                       |                                                                        |                                                                      |                                                |         |       |        |        |        |       |        |        |        
|                                                                            | Net loss                                                               |                                                                      | $                                              | (13,262 | )     |        | $      | (4,895 | )     |        | $      | (30,879 | )     
|                                                                            | Adjustments to reconcile net loss to net cash
    used in operations:  |                                                                      |                                                |         |       |        |        |        |       |        |        |         |       
|                                                                            |                                                                        | Depreciation & amortization                                          |                                                |         | 2,148 |        |        |        | 1,530 |        |        |         | 2,067  |       
|                                                                            |                                                                        | Impairment of fixed assets                                           |                                                |         | 789   |        |        |        |      |        |        |         |       |       
|                                                                            |                                                                        | Impairment of intangibles                                            |                                                |         | 1,448 |        |        |        |      |        |        |         |       |       
|                                                                            |                                                                        | Write-down of inventory                                              |                                                |         | 1,248 |        |        |        | 827   |        |        |         | 1,486  |       
|                                                                            |                                                                        | Non-cash restructuring and cost of revenue charges                   |                                                |         |      |        |        |        |      |        |        |         | 2,279  |       
|                                                                            |                                                                        | Deferred income taxes                                                |                                                |         |      |        |        |        |      |        |        |         | 15,790 |       
|                                                                            |                                                                        | Allowance for doubtful accounts                                      |                                                |         | (232  | )      |        |        | 72    |        |        |         | 227    |       
|                                                                            |                                                                        | Other noncash items                                                  |                                                |         |      |        |        |        | (70   | )      |        |         | (147   | )     
|                                                                            |                                                                        | Changes in assets and liabilities, net of effect
    of acquisition: |                                                |         |       |        |        |        |       |        |        |         |        |       
|                                                                            |                                                                        |                                                                      | Accounts receivable                            |         |       | 967    |        |        |       | 1,076  |        |         |        | 2,590  |  
|                                                                            |                                                                        |                                                                      | Inventories                                    |         |       | (217   | )      |        |       | (1,068 | )      |         |        | 1,755  |  
|                                                                            |                                                                        |                                                                      | Income taxes receivable                        |         |       | 16     |        |        |       |       |        |         |        | 133    |  
|                                                                            |                                                                        |                                                                      | Prepaid expenses and other assets              |         |       | 1,292  |        |        |       | 443    |        |         |        | 574    |  
|                                                                            |                                                                        |                                                                      | Accounts payable                               |         |       | 868    |        |        |       | (216   | )      |         |        | (2,368 | )
|                                                                            |                                                                        |                                                                      | Accrued expenses and other current liabilities |         |       | (1,923 | )      |        |       | (1,702 | )      |         |        | (909   | )
|                                                                            |                                                                        |                                                                      | Deferred Revenue                               |         |       | (1,139 | )      |        |       | 1,194  |        |         |        | (330   | )
|                                                                            |                                                                        |                                                                      | Liabilities long-term                          |         |       | (43    | )      |        |       | (443   | )      |         |        | 1,885  |  
|                                                                            |                                                                        |                                                                      |                                                |         |       |        |        |        |       |        |        |        
|Net cash used in operating activities                                       |                                                                        |                                                                      | (8,040                                         | )       |       |        | (3,252 | )      |       |        | (5,847 | )      
|                                                                            |                                                                        |                                                                      |                                                |         |       |        |        |        |       |        |        |        
|Cash flows from investing activities:                                       |                                                                        |                                                                      |                                                |         |       |        |        |        |       |        |        |        
|                                                                            | Purchases of short-term investments                                    |                                                                      |                                                |        |       |        |        | (9,248 | )     |        |        | (19,112 | )     
|                                                                            | Sales and maturities of short-term investments                         |                                                                      |                                                | 2,014   |       |        |        | 18,449 |       |        |        | 28,135  |       
|                                                                            | Acquisition of business, net of cash and cash
    equivalents acquired |                                                                      |                                                | (507    | )     |        |        |       |       |        |        |        |       
|                                                                            | Purchase of property and equipment                                     |                                                                      |                                                | (346    | )     |        |        | (220   | )     |        |        | (1,238  | )     
|                                                                            | Purchase of software licenses                                          |                                                                      |                                                |        |       |        |        | (500   | )     |        |        |        |       
|                                                                            |                                                                        |                                                                      |                                                |         |       |        |        |        |       |        |        |        
|Net cash provided by investing activities                                   |                                                                        |                                                                      | 1,161                                          |         |       |        | 8,481  |        |       |        | 7,785  |        
|                                                                            |                                                                        |                                                                      |                                                |         |       |        |        |        |       |        |        |        
|Cash flows from financing activities:                                       |                                                                        |                                                                      |                                                |         |       |        |        |        |       |        |        |        
|                                                                            | Net proceeds from sales of Common Stock                                |                                                                      |                                                | 31      |       |        |        | 22     |       |        |        | 612     |       
|                                                                            | Payments from (to) Axel Johnson                                        |                                                                      |                                                | 165     |       |        |        | 599    |       |        |        | (502    | )     
|                                                                            |                                                                        |                                                                      |                                                |         |       |        |        |        |       |        |        |        
|Net cash provided by financing activities                                   |                                                                        |                                                                      | 196                                            |         |       |        | 621    |        |       |        | 110    |        
|                                                                            |                                                                        |                                                                      |                                                |         |       |        |        |        |       |        |        |        
|Effect of unrealized investment gain and foreign
    exchange rates on cash |                                                                        |                                                                      | (8                                             | )       |       |        | 4      |        |       |        |       |        
|                                                                            |                                                                        |                                                                      |                                                |         |       |        |        |        |       |        |        |        
|(Decrease) Increase in cash and cash equivalents                            |                                                                        |                                                                      | (6,691                                         | )       |       |        | 5,854  |        |       |        | 2,048  |        
|Cash and cash equivalents at beginning of year                              |                                                                        |                                                                      | 15,643                                         |         |       |        | 9,789  |        |       |        | 7,741  |        
|                                                                            |                                                                        |                                                                      |                                                |         |       |        |        |        |       |        |        |        
|Cash and cash equivalents at end of year                                    |                                                                        | $                                                                    | 8,952                                          |         |       | $      | 15,643 |        |       | $      | 9,789  |        
|                                                                            |                                                                        |                                                                      |                                                |         |       |        |        |        |       |        |        |        
|Supplemental disclosure of cash flow
    information:                       |                                                                        |                                                                      |                                                |         |       |        |        |        |       |        |        |        
|Interest paid                                                               |                                                                        | $                                                                    | 3                                              |         |       | $      | 3      |        |       | $      | 3      |        
|                                                                            |                                                                        |                                                                      |                                                |         |       |        |        |        |       |        |        |        
|Income taxes paid                                                           |                                                                        | $                                                                    | 38                                             |         |       | $      | 40     |        |       | $      | 71     |        
|                                                                            |                                                                        |                                                                      |                                                |         |       |        |        |        |       |        |        |        
|Interest received                                                           |                                                                        | $                                                                    | 160                                            |         |       | $      | 408    |        |       | $      | 1,243  |        
|                                                                            |                                                                        |                                                                      |                                                |         |       |        |        |        |       |        |        |        
|Income tax refunds received                                                 |                                                                        | $                                                                    | 55                                             |         |       | $      | 1,894  |        |       | $      | 759    |        
|                                                                            |                                                                        |                                                                      |                                                |         |       |        |        |        |       |        |        |        
|Deferred compensation from VINA acquisition                                 |                                                                        | $                                                                    | 87                                             |         |       |        |        |        |       |        |        |        
|                                                                            |                                                                        |                                                                      |                                                |         |       |        |        |        |       |        |        |        
|Common Stock, options and warrants issued in VINA
    acquisition           |                                                                        | $                                                                    | 6,212                                          |         |       |        |        |        |       |        |        |        
|                                                                            |                                                                        |                                                                      |                                                |         |       |        |        |        |       |        |        |        

The accompanying notes are an integral part of
these financial statements.

36



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##### Table of Contents



LARSCOM INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

Note 1  The Company and a
Summary of Significant Accounting Policies:

Larscom Incorporated (Larscom or the
Company) develops, manufactures and markets a broad
range of high-speed, internetworking products for SPs, ISPs
and corporate users. We operate in one industry segment.

The accompanying financial statements have been
prepared on a going concern basis which contemplates continuity
of operations, realization of assets and liquidation of
liabilities in the ordinary course of business and do not
reflect adjustments that might result if we were not to continue
as a going concern. The auditors report on our financial
statements as of December 31, 2003 contains an explanatory
paragraph, which refers to our recurring operating losses and
net capital deficiency and notes that these matters raise
substantial doubt about our ability to continue as a going
concern.

We believe that our cash and cash equivalents and
cash flow from operations will be sufficient to fund our
operations through 2004. We will need to raise additional
capital to fund our operations and capital spending before we
become profitable. If cash flows from operations are lower than
expected, including as a result of customer reaction to the
going concern explanatory paragraph in our auditors
report, if we incur unanticipated expenses or if we are unable
to effectively manage our inventory level, we may need to obtain
additional capital sooner than expected. We are currently
exploring opportunities to raise additional capital through
various financial vehicles, but sufficient funds may not be
available to us on terms that we deem acceptable or at all.



| |                            
| | ---------------------------
| | Principles of Consolidation

The consolidated financial statements include the
accounts of Larscom Incorporated and our wholly-owned
subsidiary. All material intercompany transactions and account
balances have been eliminated in consolidation.



| |                                                             
| | ------------------------------------------------------------
| | Concentrations of Credit Risk and Customer
    Concentration

Financial instruments, which subject us to
concentrations of credit risk, consist primarily of investments
in certain debt securities and accounts receivable. We are
exposed to credit risks in the event of default by the financial
institutions or issuers of investments to the extent recorded on
the balance sheet. Our accounts receivable are largely trade
receivables from customers in the United States. We perform
ongoing credit evaluations of our customers, and generally
require no collateral from our customers. We maintain reserves
for potential credit losses, and to date have not experienced
any material losses. However, during 2002, as a result of MCI
filing for bankruptcy, we established reserves of $616,000 for
accounts receivable owed to us by MCI prior to their bankruptcy
filing. While we have filed our claim with the bankruptcy court
for the total amount reserved, we expect to receive
substantially less than the full amount owed to us. Net
receivables from the two largest customers represented 36% and
38% of net accounts receivable at December 31, 2003 and
2002, respectively.

37



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##### Table of Contents



LARSCOM INCORPORATED


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The following table summarizes the percentage of
total revenues for customers accounting for more than 10% of our
revenues:

|            |  |              |     |      |  |      |     |  |  |  |     | 
|----------- |  | ------------ | --- | ---- |  | ---- | --- |  |  |  | --- | 
|            |  |             
|            |  | Years Ended 
|            |  | December 31,
|            |  |             
|            |  | 2003         |     | 2002 |  | 2001
|            |  |              |     |      |  |     
|MCI         |  |              | 17% |      |  |      | 20% |  |  |  | 38% | 
|Lucent      |  |              | 16% |      |  |      | *   |  |  |  | *   | 
|LTI Datacom |  |              | 11% |      |  |      | 7%  |  |  |  | 3%  | 
|AT&T        |  |              | 7%  |      |  |      | 14% |  |  |  | 9%  | 



---



|  |             
|- | ------------
|* | Less than 1%



| |                                               
| | ----------------------------------------------
| | Cash and Cash Equivalents, Restricted
    Cash

Cash and cash equivalents include all cash and
highly liquid investments with original maturities of ninety
days or less. The carrying amount of cash and cash equivalents
approximates fair value because of the short-term maturity of
those investments and the financial stability of the issuers.
Restricted cash of $333,000 consists of a deposit with our bank
for an irrevocable letter of credit for a like amount that is
used as collateral for the lease on the Newark, California
facility.

We participated in Axel Johnsons
centralized cash management system until June 5, 2003, when
we established a separate system managed solely by us.



| |                                         
| | ----------------------------------------
| | Management Estimates and
    Assumptions

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



| |                         
| | ------------------------
| | Research and Development

Research and development costs are charged to
expense as incurred.



| |            
| | -----------
| | Inventories

Inventories are stated at the lower of standard
cost or market. Standard cost approximates actual average cost.
Write-downs of inventory are generally taken, when in our
estimate, future demand will not consume existing inventories
over the next twelve months. If actual future demand or market
conditions are less favorable than those projected by
management, additional inventory write-downs may be required.



| |                  
| | -----------------
| | Prepaid Royalties

The net book value of prepaid royalties (which
are included in Prepaid expenses and other current assets on the
Consolidated Balance Sheet) was $75,000 and $100,000 at
December 31, 2003 and 2002, respectively. Prepaid royalties
are amortized over the shorter of the anticipated useful life of
the technology or the contractual royalty period.



| |                       
| | ----------------------
| | Property and Equipment

Property and equipment are recorded at cost.
Depreciation is computed using the straight-line method based
upon the estimated useful lives of the assets, which is three
years for Computers and Software and five

38



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##### Table of Contents



LARSCOM INCORPORATED


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

years for Machinery and Equipment and Furniture
and Fixtures. Leasehold improvements are amortized using the
straight-line method over the shorter of the estimated useful
lives or the lease term of the respective assets. When property
and equipment are retired or otherwise disposed of, the cost and
related accumulated depreciation are removed from the accounts
and the resulting gain or loss is included in the results of the
current operations. Costs of repairs and maintenance are
expensed as incurred. The Company periodically evaluates the
recoverability of its long-lived assets based on the expected,
undiscounted cash flows and the market valuation approach.



| |                    
| | -------------------
| | Restructuring Costs

Following our adoption of SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal
Activities, we establish a liability for the estimated
fair value of an exit or disposal activity in the period in
which the liability is incurred. At that time, and thereafter
until the plan activities are complete, the actual costs or
timing of payments associated with the plan may differ from our
estimates. We use our judgment and information available to us
at the date of the financial statements to reevaluate our
initial estimates of the exit costs. If we believe that our
previous estimates of exit costs or timing of payments are no
longer accurate in light of current conditions, we adjust the
liability with a corresponding increase or decrease to current
period earnings. Any adjustments to estimates of our exit costs
under restructuring plans are reflected on the same line item in
the statement of operations as the initial charge to establish
the restructuring liability.

Accrued restructuring costs at December 31,
2003 for the 2003 restructurings, reflect our estimate of the
fair value of future rental obligations and other costs
associated with the Milpitas office space that we do not plan to
use in our operations as a result of the restructuring plans,
along with estimated remaining payments related to employee
termination costs. The determination of fair value is based on
the remaining lease payments, which end in August of 2004. We do
not expect any sublease rental income given the current market
conditions for leased property in Northern California and the
relatively short period remaining on the lease. Remaining
liabilities for restructuring costs related to the June 2001
restructuring continues to be accounted for in accordance with
the provisions of EITF No. 94-3.



| |                  
| | -----------------
| | Intangible Assets

At each balance sheet date, or upon the
occurrence of a triggering event, an evaluation is performed by
management to ascertain whether the intangible assets were
impaired by comparing the carrying value with the estimated
future cash flows. We record impairment of the carrying value,
if any, based on the difference between the carrying value and
the fair market value of the intangible assets, less the cost to
dispose of assets to be disposed. Fair value is determined
primarily by using the anticipated cash flows discounted at a
rate commensurate with the risk involved. During the third
quarter of 2003, we determined that the MBX technology and
related assets acquired as part of the merger with VINA in June
2003 had incurred a triggering event due to changes in the
market for the MBX technology and had therefore become impaired.
The impairment was based on a projected discounted cash flow
model using a discount rate commensurate with the risk inherent
in our current business model. As a result, we recorded a loss
of $1,956,000 to write-off the MBX technology and other related
assets.



| |         
| | --------
| | Warranty

We provide a three-year or five-year warranty for
most of our products. A provision for the estimated cost of
warranty, which is based on our historical costs and includes
material, labor and overhead, is recorded at the time revenue is
recognized. While we believe that our reserves for estimated
future warranty costs are adequate, there are inherent risks
associated with these estimates, particularly for those
estimates related to products that have been recently introduced.

39



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##### Table of Contents



LARSCOM INCORPORATED


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



| |                                             
| | --------------------------------------------
| | Revenue Recognition and Deferred
    Revenue

Revenue from product sales is generally
recognized upon delivery to our customers when there is
persuasive evidence of an arrangement, the fee is fixed and
determinable and collection of the receivable is reasonably
assured. However, some of our distributors, who maintain
significant inventories of our products, have a right to return
products that remain unsold. In the case where the distributor
has a right to return products, we do not recognize revenue
until the distributor notifies us that the products have been
shipped to the end user. Service revenue earned from providing
maintenance, installation, training or other miscellaneous
services is recognized when those services are provided to the
customer, if there is persuasive evidence of an arrangement, the
fee is fixed and determinable and collection of the receivable
is reasonably assured. If we believe that collection is not
probable at the time of shipment, we defer the revenue until the
cash is collected.



| |             
| | ------------
| | Income Taxes

Deferred tax assets and liabilities are
recognized for the expected tax consequences of temporary
differences between the tax bases of assets and liabilities and
their financial statement reported amounts. A valuation
allowance is provided against deferred tax assets if it is more
likely than not that they will not be realized. On June 5,
2003, as a result of the merger with VINA, Axel Johnsons
ownership interest in the company dropped below 50%. As a
result, we will no longer file as part of the combined group,
for the purposes of filing a California franchise tax return
after that date.



| |               
| | --------------
| | Loss Per Share

Basic loss per share excludes any dilutive
effects of options, warrants and convertible securities. Basic
loss per share is computed using the weighted-average number of
common shares outstanding during the period. Diluted loss per
share is computed using the weighted-average number of common
and potential common shares outstanding during the period.
Potential common shares consist of the incremental common shares
issuable upon the exercise of stock options (using the Treasury
Stock Method). Potential common shares are excluded from the
computation if their effect is antidilutive.

The following table sets forth the computation of
basic and diluted loss per share:

|                                          |  |                                       |         |         |  |         |        |   |  |   |         |  
|----------------------------------------- |  | ------------------------------------- | ------- | ------- |  | ------- | ------ | - |  | - | ------- | -
|                                          |  |                                      
|                                          |  | Years Ended December 31,             
|                                          |  |                                      
|                                          |  | 2003                                  |         | 2002(1) |  | 2001(1)
|                                          |  |                                       |         |         |  |        
|                                          |  |                                      
|                                          |  | (In thousands, except per share data)
|Net loss                                  |  | $                                     | (13,262 | )       |  | $       | (4,895 | ) |  | $ | (30,879 | )
|Weighted average Common Stock outstanding |  |                                       | 4,073   |         |  |         | 2,693  |   |  |   | 2,687   |  
|Basic and diluted loss per share          |  | $                                     | (3.26   | )       |  | $       | (1.82  | ) |  | $ | (11.49  | )



---



|    |                                              
|--- | ---------------------------------------------
|(1) | includes Class A and Class B common
    stock

Outstanding stock options are not included in
diluted loss per share because their effect would have been
antidilutive for all periods presented. These stock options
could be dilutive in the future. See Note 9 for details of
options issued.



| |                         
| | ------------------------
| | Stock-Based Compensation

As permitted under SFAS 123,
Accounting for Stock-Based Compensation, we are
continuing to measure compensation costs for stock-based
compensation plans using the intrinsic value method prescribed
by Accounting Principles Board (APB) Opinion
No. 25 Accounting for Stock Issued to
Employees. The pro forma disclosures of the difference
between compensation cost included in net income and the related
cost measured by the fair value method, as required by
SFAS 123 as amended by FASB 148, Accounting for

40



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##### Table of Contents



LARSCOM INCORPORATED


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Stock-Based Compensation  Transition
and Disclosure  an amendment of FASB Statement
No. 123,are presented here.

For purposes of pro forma disclosures, the
estimated fair value of the options under the Stock Incentive
Plan is amortized to expense over the vesting period of the
respective options. Our pro forma information for the years
ended December 31 is as follows (in thousands, except per
share information):

|                                                             |  |      |         |      |  |      |        |   |  |   |         |  
|------------------------------------------------------------ |  | ---- | ------- | ---- |  | ---- | ------ | - |  | - | ------- | -
|                                                             |  | 2003 |         | 2002 |  | 2001
|                                                             |  |      |         |      |  |     
|Net loss  as reported                                       |  | $    | (13,262 | )    |  | $    | (4,895 | ) |  | $ | (30,879 | )
|Less: employee compensation expense as reported              |  |      | 12      |      |  | $    |       |   |  | $ |        |  
|Plus: employee compensation expense on a pro
    forma basis |  | $    | (453    | )    |  | $    | (656   | ) |  | $ | (879    | )
|Net loss  pro forma                                         |  | $    | (13,703 | )    |  | $    | (5,551 | ) |  | $ | (31,758 | )
|Basic and diluted net loss per share 
    as reported       |  | $    | (3.26   | )    |  | $    | (1.82  | ) |  | $ | (11.49  | )
|Basic and diluted net loss per share 
    pro forma         |  | $    | (3.36   | )    |  | $    | (2.06  | ) |  | $ | (11.82  | )



| |                                        
| | ---------------------------------------
| | Fair Value of Financial
    Instruments

For all financial instruments, including
short-term investments, accounts receivable, accounts payable
and accrued liabilities the carrying value is considered to
approximate fair value due to the relatively short- term
maturities of the respective instruments.



| |                             
| | ----------------------------
| | Foreign Currency Translation

Assets and liabilities of our foreign subsidiary
are translated from its functional currency at exchange rates in
effect at the balance sheet date and revenues and expenses are
translated at average exchange rates prevailing during the year.
Because the functional currency is the local currency, the
resulting translation adjustments are reflected as a separate
component of stockholders equity.



| |             
| | ------------
| | Common Stock

On June 3, 2003 Larscoms shareholders
approved a proposal to amend Larscoms certificate of
incorporation to effect a reverse split of Larscoms Common
Stock in a ratio to be determined by the Board of Directors. The
Board subsequently voted on June 5, 2003 to effect a
reverse split with a 7-for-1 ratio with effect from June 6,
2003. All share and per share data has been retroactively
restated for the 7-for-1 reverse stock split. On June 3,
2003, our stockholders also approved a proposal to reclassify
our Class A and Class B Common Stock into a single
class of Common Stock. The old Class A shares had rights of
one vote per share. The old Class B Common Stock had rights
of four votes per share and was owned by one stockholder, Axel
Johnson.



| |                                     
| | ------------------------------------
| | Recent Accounting
    Pronouncements

In December 2003, the Securities and Exchange
Commission released SAB 104, Revenue
Recognition. SAB 104 revises or rescinds portions of
the interpretative guidance related to revenue recognition
included in Topic 13 of the codification of the staff
accounting bulletins. The Company has assessed the impact of
SAB 104 and concluded that the adoption of SAB 104 by
the Company did not have a material impact on its financial
statements.

In December 2003, the FASB issued additional
guidance (FIN 46-R) clarifying the provisions
of FIN 46, Consolidation of Variable Interest
Entities, an Interpretation of ARB No. 51.
FIN 46-R provides a deferral of FIN 46 for certain
entities until March 15, 2004. FIN 46 requires certain
variable interest entities to be consolidated by the primary
beneficiary of the entity if the equity investors in the entity
do not have the characteristics of a controlling financial
interest or do not have sufficient equity at risk for the entity
to finance

41



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##### Table of Contents



LARSCOM INCORPORATED


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

its activities without additional subordinated
financial support from other parties. The Company believes that
the adoption of this standard will not have a material impact on
its financial statements.

In May 2003, the FASB issued SFAS 150,
Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity.
SFAS 150 establishes standards for how an issuer classifies
and measures certain financial instruments with characteristics
of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a
liability (or an asset in some circumstances). SFAS 150 is
effective for financial instruments entered into or modified
after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after
June 15, 2003. It is to be implemented by reporting the
cumulative effect of a change in an accounting principle for
financial instruments created before the issuance date of the
Statement and still existing at the beginning of the interim
period of adoption. Restatement is not permitted. We have no
financial instruments within the scope of this pronouncement.

In April 2003, the FASB issued SFAS 149,
Amendment of Statement 133 on Derivative Instruments
and Hedging Activities, which amends SFAS 133 for
certain decisions made by the FASB Derivatives Implementation
Group. In particular, SFAS 149 (1) clarifies under
what circumstances a contract with an initial net investment
meets the characteristic of a derivative, (2) clarifies
when a derivative contains a financing component,
(3) amends the definition of an underlying to
conform it to language used in FIN 45, Guarantors
Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness
of Others, and (4) amends certain other existing
pronouncements. SFAS 149 is effective for contracts entered
into or modified after June 30, 2003, and for hedging
relationships designated after June 30, 2003. In addition,
most provisions of SFAS 149 are to be applied
prospectively. We have no financial instruments within the scope
of this pronouncement.

In November 2002, the FASB issued FIN 45,
Guarantors Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of
Indebtedness of Others. FIN 45 requires that a
liability be recorded in the guarantors balance sheet upon
issuance of a guarantee. In addition, FIN 45 requires
disclosures about the guarantees that an entity has issued,
including a reconciliation of changes in the entitys
product warranty liabilities. The initial recognition and
initial measurement provisions of FIN 45 are applicable on
a prospective basis to guarantees issued or modified after
December 31, 2002, irrespective of the guarantors
fiscal year-end. The disclosure requirements of FIN 45 are
effective for financial statements of interim or annual periods
ending after December 15, 2002, and have been implemented
in our financial statements in Note 12.

In July 2002, the FASB issued SFAS 146,
Accounting for Costs Associated with Exit or Disposal
Activities. SFAS 146 addresses financial accounting
and reporting for costs associated with exit or disposal
activities and nullifies EITF Issue No. 94-3,
Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring). SFAS 146 requires
that a liability for costs associated with an exit or disposal
activity be recognized and measured initially at fair value only
when the liability is incurred. The provisions of SFAS 146
are effective for exit or disposal activities that are initiated
after December 31, 2002. The adoption of this standard has
not had a material impact upon our financial condition, cash
flows or results of operations.

In November 2002, the EITF reached a consensus on
Issue No. 00-21, Revenue Arrangements with Multiple
Deliverables. EITF Issue No. 00-21 provides guidance
on how to account for arrangements that involve the delivery or
performance of multiple products, services and/or rights to use
assets. The provisions of EITF Issue No. 00-21 will apply
to revenue arrangements entered into in fiscal periods beginning
after June 15, 2003. The adoption of this standard has not
had a material impact upon our financial condition, cash flows
or results of operations.

In May 2002, the FASB issued SFAS 145,
Rescission of SFAS Nos. 4, 44, and 64, Amendment of
SFAS 13, and Technical Corrections. Among other
things, SFAS 145 rescinds various pronouncements

42



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##### Table of Contents



LARSCOM INCORPORATED


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

regarding early extinguishment of debt and allows
extraordinary accounting treatment for early extinguishment only
when the provisions of APB Opinion No. 30, Reporting
the Results of Operations  Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions are
met. SFAS 145 provisions regarding early extinguishment of
debt are generally effective for fiscal years beginning after
May 15, 2002. The adoption of this standard has not had a
material impact upon our financial condition, cash flows or
results of operations.



|         |                                
|-------- | -------------------------------
|Note 2  | Liquidity and Capital Resources

At December 31, 2003, we had cash,
restricted cash and cash equivalents of $9,285,000. Restricted
cash was $333,000 of that total. Cash, cash equivalents and
short-term investments declined by approximately 47% from
$17,657,000 on December 31, 2002. The $8,372,000 decrease
in cash, restricted cash, cash equivalents and short-term
investments in 2003 is primarily attributable to the net loss,
and the cash outlays required in the merger with VINA in June,
2003.

The accompanying financial statements have been
prepared on a going concern basis which contemplates continuity
of operations, realization of assets and liquidation of
liabilities in the ordinary course of business and do not
reflect adjustments that might result if we were not to continue
as a going concern. The auditors report on our financial
statements as of December 31, 2003 contains an explanatory
paragraph, which refers to our recurring operating losses and
net capital deficiency and notes that these matters raise
substantial doubt about our ability to continue as a going
concern.

We believe that our cash and cash equivalents and
cash flow from operations will be sufficient to fund our
operations through 2004. We will need to raise additional
capital to fund our operations and capital spending before we
become profitable. If cash flows from operations are lower than
expected, including as a result of customer reaction to the
going concern explanatory paragraph in our auditors
report, if we incur unanticipated expenses or if we are unable
to effectively manage our inventory level, we may need to obtain
additional capital sooner than expected. We are currently
exploring opportunities to raise additional capital through
various financial vehicles, but sufficient funds may not be
available to us on terms that we deem acceptable or at all.

Note 3  Acquisitions

On June 5, 2003, we completed the
acquisition of VINA Technologies, Inc. The consideration
consisted of approximately 2,393,894 shares of Larscom
common stock, 454,752 warrants and options to purchase common
stock and the assumption of the liabilities and obligations of
VINA.

VINA was a developer of multi-service broadband
access communications equipment that enables communications
service providers to deliver bundled voice and data services.
VINAs products integrate various broadband access
technologies, including existing circuit-based and emerging
packet-based networks, onto a single platform to alleviate
capacity constraints in communications networks.

43



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##### Table of Contents



LARSCOM INCORPORATED


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The total purchase price we recorded was
$7,041,000 consisting of (a) a total of approximately
2,393,894 shares of Larscom common stock issued upon
consummation and valued at approximately $5,329,000, using a
fair value per share of $2.23, (b) approximately $883,000
of consideration for options and warrants to purchase
approximately 454,752 equivalent shares of Larscom common stock
assumed as part of the merger, and (c) direct transaction
costs of approximately $829,000. The fair value of
Larscoms common stock issued was determined using the
5-day average price surrounding the date the acquisition was
announced. The fair value of the options assumed in the
transaction was determined using the Black-Scholes
option-pricing model and the following assumptions: expected
life of 4.92 years, risk-free interest rate of 2.20%,
expected volatility of 90% and no expected dividend yield. The
following assumptions were used to perform the calculations for
the warrants assumed: remaining contractual life of
1.63 years, risk-free interest rate of 1.30% and expected
volatility of 90%. This acquisition was accounted for as a
purchase. The purchase price of the VINA merger is as follows
(in thousands):

|                                     |                      |   |       |       | 
|------------------------------------ | -------------------- | - | ----- | ----- | 
|Value of Larscom Stock issued        |                      | $ | 5,329 |      
|Value of options and warrants issued |                      |   | 883   |      
|Direct transaction costs             |                      |   | 829   |      
|                                     |                      |   |       |      
|                                     | Total purchase price |   | $     | 7,041 | 
|                                     |                      |   |       |      

Under the purchase method of accounting, the
total purchase price is allocated to VINAs net tangible
and intangible assets based upon their fair value as of the date
of completion of the merger. Based upon managements
estimate of fair value, which was based upon an independent
valuation, the purchase price allocation, which is subject to
change based on Larscoms final analysis, is as follows (in
thousands):

|                                    |                       |   |        |        | 
|----------------------------------- | --------------------- | - | ------ | ------ | 
|Tangible assets acquired            |                       | $ | 6,750  |       
|Amortizable intangible assets:      |                       |   |        |       
|Developed technology                |                       |   | 2,590  |       
|Trade names/trademarks              |                       |   | 152    |       
|Customer contracts/relationships    |                       |   | 1,523  |       
|Order backlog                       |                       |   | 78     |       
|                                    |                       |   |        |       
|                                    | Total assets acquired |   |        | 11,093 | 
|In-process research and development |                       |   | 155    |       
|Liabilities assumed                 |                       |   | (3,718 | )     
|Deferred compensation               |                       |   | 87     |       
|Insurance premium liability assumed |                       |   | (576   | )     
|                                    |                       |   |        |       
|                                    | Net assets acquired   |   | $      | 7,041  | 
|                                    |                       |   |        |       

Of the purchase price of VINA, $155,000
represented acquired in-process research and development
(IPRD), which had not yet reached technological
feasibility and had no alternative future use as of the date of
acquisition. Accordingly, this amount was immediately charged to
expense upon consummation of the acquisition. The estimate of
IPRD costs involved one project, which was 87% complete and a
discount rate of 30% was used to value the project. Subsequent
to the acquisition of VINA, there have been no significant
developments related to the current status of the acquired IPRD
project that would result in material changes to the assumptions.

A value of $4,343,000 has been allocated to
amortizable intangible assets with useful lives ranging from
6 months to 6 years as follows: Developed
technology  5 to 6 years; Trade name/
trademarks  3 years; Customer contracts/
relationships  3 to 5 years; and Order
backlog  6 months.

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LARSCOM INCORPORATED


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

An independent valuation of the purchased assets
was performed to assist in determining the fair value of each
identifiable tangible and intangible asset and in allocating the
purchase price among the acquired assets including the portion
of the purchase price attributed to acquired IPRD projects.
Standard valuation procedures and techniques were utilized in
determining the fair value.

Developed technology and in-process technology
were identified and valued through analysis of VINAs
current development projects, their respective stages of
development, the time and resources needed to complete them,
their expected income-generating ability, their target markets
and the associated risks.

The income approach, which includes an analysis
of the markets, cash flows and risks associated with achieving
such cash flows, was the methodology utilized in valuing IPRD,
developed technology and trade names/trademarks. Each intangible
asset is valued based upon the estimated impact on our expected
future after-tax cash flows. The net changes in our expected
future after-tax cash flows generated by the respective IPRD,
developed technology and trade names/trademarks were then
discounted to present value. The discount was based on an
analysis of the weighted-average cost of capital for the
industry.

Customer contracts/relationships and order
backlog were valued using the cost method. The cost to develop
the customer contracts and relationships and to earn the order
backlog were estimated and valued on an after-tax basis.

Supplemental pro forma information reflecting the
acquisition of VINA as if it occurred on January 1, 2003
for the year ended December 31, 2003 and as if it had
occurred on January 1, 2002 for the year ended
December 31, 2002 is as follows (in thousands, except per
share data):

|                   |  |              |         |      |  |   |         |  
|------------------ |  | ------------ | ------- | ---- |  | - | ------- | -
|                   |  |             
|                   |  | (Unaudited) 
|                   |  | December 31,
|                   |  |             
|                   |  | 2003         |         | 2002
|                   |  |              |         |     
|Total net revenues |  | $            | 25,243  |      |  | $ | 48,630  |  
|Net loss           |  | $            | (20,755 | )    |  | $ | (29,661 | )
|Net loss per share |  | $            | (5.10   | )    |  | $ | (11.01  | )

Such information is not necessarily
representative of the actual results that would have occurred
for those periods.

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LARSCOM INCORPORATED


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Note 4  Balance Sheet
Components

|                                                                                                                                             |                                           |                |        |         |   |   |        |         |  
|-------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------- | -------------- | ------ | ------- | - | - | ------ | ------- | -
|                                                                                                                                             |                                           |               
|                                                                                                                                             |                                           | December 31,  
|                                                                                                                                             |                                           |               
|                                                                                                                                             |                                           | 2003           |        | 2002   
|                                                                                                                                             |                                           |                |        |        
|                                                                                                                                             |                                           |               
|                                                                                                                                             |                                           | (In thousands)
|Accounts receivable:                                                                                                                         |                                           |                |        |         |   |   |        |        
|                                                                                                                                             | Gross accounts receivable                 |                | $      | 4,702   |   |   | $      | 4,390   |  
|                                                                                                                                             | Less: Allowance for doubtful accounts     |                |        | (1,069  | ) |   |        | (1,311  | )
|                                                                                                                                             |                                           |                |        |         |   |   |        |        
|                                                                                                                                             |                                           | $              | 3,633  |         |   | $ | 3,079  |        
|                                                                                                                                             |                                           |                |        |         |   |   |        |        
|Inventories, net:                                                                                                                            |                                           |                |        |         |   |   |        |        
|                                                                                                                                             | Raw materials                             |                | $      | 1,688   |   |   | $      | 916     |  
|                                                                                                                                             | Work in process                           |                |        | 497     |   |   |        | 521     |  
|                                                                                                                                             | Finished goods                            |                |        | 3,318   |   |   |        | 2,379   |  
|                                                                                                                                             |                                           |                |        |         |   |   |        |        
|                                                                                                                                             |                                           | $              | 5,503  |         |   | $ | 3,816  |        
|                                                                                                                                             |                                           |                |        |         |   |   |        |        
|Property and equipment:                                                                                                                      |                                           |                |        |         |   |   |        |        
|                                                                                                                                             | Machinery and equipment                   |                | $      | 8,668   |   |   | $      | 8,965   |  
|                                                                                                                                             | Computers and software                    |                |        | 7,787   |   |   |        | 8,040   |  
|                                                                                                                                             | Leasehold improvements                    |                |        | 328     |   |   |        | 2,194   |  
|                                                                                                                                             | Furniture and fixtures                    |                |        | 1,554   |   |   |        | 1,305   |  
|                                                                                                                                             |                                           |                |        |         |   |   |        |        
|                                                                                                                                             |                                           |                | 18,337 |         |   |   | 20,504 |        
|                                                                                                                                             | Less: Accumulated depreciation            |                |        | (17,043 | ) |   |        | (18,586 | )
|                                                                                                                                             |                                           |                |        |         |   |   |        |        
|                                                                                                                                             |                                           | $              | 1,294  |         |   | $ | 1,918  |        
|                                                                                                                                             |                                           |                |        |         |   |   |        |        
|The depreciation charge for the years ending
    December 31, 2003, 2002 and 2001 was $1,263,000, $1,405,000
    and $1,843,000 respectively |                                           |                |        |         |   |   |        |        
|Other non-current assets, net:                                                                                                               |                                           |                |        |         |   |   |        |        
|                                                                                                                                             | Rent Deposit                              |                | $      | 41      |   |   | $      |        |  
|                                                                                                                                             | Product licenses                          |                |        | 41      |   |   |        | 208     |  
|                                                                                                                                             | Prepaid insurance                         |                |        | 424     |   |   |        |        |  
|                                                                                                                                             |                                           |                |        |         |   |   |        |        
|                                                                                                                                             |                                           | $              | 506    |         |   | $ | 208    |        
|                                                                                                                                             |                                           |                |        |         |   |   |        |        
|Accrued expenses and other current liabilities:                                                                                              |                                           |                |        |         |   |   |        |        
|                                                                                                                                             | Accrued compensation and related expenses |                | $      | 1,133   |   |   | $      | 1,305   |  
|                                                                                                                                             | Accrued warranty                          |                |        | 932     |   |   |        | 732     |  
|                                                                                                                                             | Restructuring                             |                |        | 1,479   |   |   |        | 419     |  
|                                                                                                                                             | Other current liabilities                 |                |        | 1,867   |   |   |        | 2,054   |  
|                                                                                                                                             |                                           |                |        |         |   |   |        |        
|                                                                                                                                             |                                           | $              | 5,411  |         |   | $ | 4,510  |        
|                                                                                                                                             |                                           |                |        |         |   |   |        |        

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LARSCOM INCORPORATED


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Intangible assets consist of the following (in
thousands):

|                                 |  |                   |       |              |  |             |       |  |  |   |       | 
|-------------------------------- |  | ----------------- | ----- | ------------ |  | ----------- | ----- |  |  | - | ----- | 
|                                 |  |                  
|                                 |  | December 31, 2003
|                                 |  |                  
|                                 |  | Gross             |       |             
|                                 |  | Carrying          |       | Accumulated  |  | Net        
|                                 |  | Amount            |       | Amortization |  | Intangibles
|                                 |  |                   |       |              |  |            
|Developed technology             |  | $                 | 1,041 |              |  | $           | 103   |  |  | $ | 938   | 
|Tradenames/trademarks            |  |                   | 147   |              |  |             | 30    |  |  |   | 117   | 
|Customer contracts/relationships |  |                   | 1,457 |              |  |             | 237   |  |  |   | 1,220 | 
|Goodwill                         |  |                   | 854   |              |  |             | 854   |  |  |   |      | 
|Other intangible assets          |  |                   | 2,192 |              |  |             | 2,192 |  |  |   |      | 
|Order backlog                    |  |                   | 78    |              |  |             | 78    |  |  |   |      | 
|                                 |  |                   |       |              |  |             |       |  |  |   |       | 
|                                 |  | $                 | 5,769 |              |  | $           | 3,494 |  |  | $ | 2,275 | 
|                                 |  |                   |       |              |  |             |       |  |  |   |       | 

|                        |  |                   |       |              |  |             |       |  |  |   |   | 
|----------------------- |  | ----------------- | ----- | ------------ |  | ----------- | ----- |  |  | - | - | 
|                        |  |                  
|                        |  | December 31, 2002
|                        |  |                  
|                        |  | Gross             |       |             
|                        |  | Carrying          |       | Accumulated  |  | Net        
|                        |  | Amount            |       | Amortization |  | Intangibles
|                        |  |                   |       |              |  |            
|Goodwill                |  | $                 | 854   |              |  | $           | 854   |  |  | $ |  | 
|Other intangible assets |  |                   | 2,192 |              |  |             | 2,192 |  |  |   |  | 
|                        |  |                   |       |              |  |             |       |  |  |   |   | 
|                        |  | $                 | 3,046 |              |  | $           | 3,046 |  |  | $ |  | 
|                        |  |                   |       |              |  |             |       |  |  |   |   | 

The aggregate amortization expense for the year
ended December 31, 2003 and December 31, 2002 was
$718,000 and $125,000, respectively. Amortization of the costs
associated with developed technology are being charged to cost
of revenues, while amortization of the costs associated with
tradenames/trademarks, customer contracts/relationships and
order backlog are being charged to operating expenses. The
amortization expense related to cost of revenues and operating
expense totaled $166,000 and $385,000 respectively for 2003.

Minimum future amortization expense at
December 31, 2003 is as follows (in thousands):

|                  |  |   |       | 
|----------------- |  | - | ----- | 
|2004              |  | $ | 617   | 
|2005              |  |   | 617   | 
|2006              |  |   | 440   | 
|2007              |  |   | 312   | 
|2008 & Thereafter |  |   | 289   | 
|                  |  |   |       | 
|                  |  | $ | 2,275 | 
|                  |  |   |       | 

During the third quarter of 2003, the company
determined that the MBX technology and related assets acquired
as part of the merger with VINA in June 2003 had become
impaired. The impairment was based on a projected discounted
cash flow model using a discount rate commensurate with the risk
inherent in our current business model. As a result, we recorded
a loss of $1,956,000 to write-off the MBX technology and other
related assets. The components of the impairment were as follows
(in thousands):

|                           |                              |   |       |       | 
|-------------------------- | ---------------------------- | - | ----- | ----- | 
|Impaired intangible assets |                              | $ | 1,448 |      
|Impaired fixed assets      |                              |   | 364   |      
|Impaired prepaid expenses  |                              |   | 15    |      
|Impaired inventories       |                              |   | 129   |      
|                           |                              |   |       |      
|                           | Total MBX impairment charges |   | $     | 1,956 | 
|                           |                              |   |       |      

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##### Table of Contents



LARSCOM INCORPORATED


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The impairment charges were classified in the
financial statements for 2003 as follows (in thousands):

|                               |                              |   |       |       | 
|------------------------------ | ---------------------------- | - | ----- | ----- | 
|Included in cost of revenues   |                              | $ | 1,592 |      
|Included in operating expenses |                              |   | 364   |      
|                               |                              |   |       |      
|                               | Total MBX impairment charges |   | $     | 1,956 | 
|                               |                              |   |       |      

Note 5  Restructuring and Cost of
Revenues Charges:

During 2001 we announced two corporate
restructuring programs in response to our own reduced revenues,
negative macro-economic conditions and declining demand in our
markets. These initiatives were focused on improving operating
performance by reducing expenses. The restructuring programs
included workforce reductions of approximately 42% (88 people),
the closing of our facility in Durham, North Carolina and the
write-off of fixed assets due primarily to the workforce
reduction and facility closing. Implementing these programs led
to charges to results in the second and fourth quarters of 2001
totaling $5,772,000. In May and October of 2002, we announced
additional corporate restructuring as a result of the ongoing
stagnation of the telecom market. Consequently, 30 positions
were eliminated from our workforce with a charge to operating
results of $570,000. Partially offsetting this charge was a
$194,000 reduction to the prior restructuring reserves primarily
for outplacement services, which were not fully utilized by some
of the laid-off employees and $122,000 in rent collected under
the sublease agreement with Silicon Wireless Corporation.

After the VINA merger, on June 5, 2003, a
restructuring was effected which resulted in restructuring costs
of $2,458,000 during the year, consisting of $1,535,000 in
facility consolidation costs associated principally with moving
our headquarters from Milpitas, CA, to Newark, CA, partially
offset by $249,000 of rent collected from Silicon Wireless
Corporation as discussed below; $425,000 in impairment charges
related to fixed assets and leasehold improvements at the
Milpitas location and $747,000 from reductions in force.

In connection with the closing of our facility in
Durham, North Carolina, we remain responsible for the existing
lease. The reserve for this lease is reduced as we make monthly
payments. We entered into a sublease agreement with Silicon
Wireless Corporation, a start-up company, that had a
commencement date of February 15, 2002 and is for the
entire 27,000 square-foot facility in Durham, North
Carolina. Due to the uncertainty of the receipt of income under
the sublease, we reduce restructuring expenses as the sublease
income is received. During 2003, our restructuring expenses were
reduced by $249,000 as a result of rent collected from Silicon
Wireless Corporation. We expect the remaining real estate lease
obligation, which comprises the remainder of the June, 2001
reserve balance, will be paid-out by January 2007. We do not
expect there to be any additional costs related to the North
Carolina restructuring.

We have abandoned our lease at the former Larscom
headquarters in Milpitas, CA as of September, 2003 and remain
responsible for the balance of the lease which expires in August
of 2004. While this property is available for lease, we do not
expect to be able to find a tenant given the current market
conditions for leased property in Northern California and the
relatively short period remaining on the lease. We expect that
the remaining reserve balance for the 2003 restructurings, which
consist principally of the remaining lease payments on our
former Milpitas facility, will be paid out by the end of 2004.

During 2003 we incurred non-cash charges of
$415,000 and cash outlays of $1,607,000 related to our
restructurings.

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LARSCOM INCORPORATED


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The following table provides details on the
activity and remaining balances of the 2001, 2002 and 2003
restructuring charges as of December 31, 2003:

|                           |  |                |       |            |  |             |        |              |  |   |      |   |  |   |       | 
|-------------------------- |  | -------------- | ----- | ---------- |  | ----------- | ------ | ------------ |  | - | ---- | - |  | - | ----- | 
|                           |  |                |       |            |  | Cumulative  |        |             
|                           |  |                |       | Cumulative |  | Non-Cash    |        | Reserve     
|                           |  | Total          |       | Cash       |  | Charges &   |        | December 31,
|June 2001 Restructuring    |  | Charges        |       | Charges    |  | Adjustments |        | 2003        
|                           |  |                |       |            |  |             |        |             
|                           |  |               
|                           |  | (In thousands)
|Employee termination costs |  | $              | 2,293 |            |  | $           | (1,782 | )            |  | $ | (511 | ) |  | $ |      | 
|Real estate lease          |  |                | 2,080 |            |  |             | (991   | )            |  |   | 407  |   |  |   | 1,496 | 
|Fixed asset write-down     |  |                | 388   |            |  |             |       |              |  |   | (388 | ) |  |   |      | 
|                           |  |                |       |            |  |             |        |              |  |   |      |   |  |   |       | 
|Total                      |  | $              | 4,761 |            |  | $           | (2,773 | )            |  | $ | (492 | ) |  | $ | 1,496 | 
|                           |  |                |       |            |  |             |        |              |  |   |      |   |  |   |       | 

|                           |  |                |       |            |  |             |      |              |  |   |     |   |  |   |   | 
|-------------------------- |  | -------------- | ----- | ---------- |  | ----------- | ---- | ------------ |  | - | --- | - |  | - | - | 
|                           |  |                |       |            |  | Cumulative  |      |             
|                           |  |                |       | Cumulative |  | Non-Cash    |      | Reserve     
|                           |  | Total          |       | Cash       |  | Charges &   |      | December 31,
|October 2001 Restructuring |  | Charges        |       | Charges    |  | Adjustments |      | 2003        
|                           |  |                |       |            |  |             |      |             
|                           |  |               
|                           |  | (In thousands)
|Employee termination costs |  | $              | 966   |            |  | $           | (892 | )            |  | $ | (74 | ) |  | $ |  | 
|Real estate lease          |  |                | 45    |            |  |             | (45  | )            |  |   |    |   |  |   |  | 
|Fixed asset write-down     |  |                |      |            |  |             |     |              |  |   |    |   |  |   |  | 
|                           |  |                |       |            |  |             |      |              |  |   |     |   |  |   |   | 
|Total                      |  | $              | 1,011 |            |  | $           | (937 | )            |  | $ | (74 | ) |  | $ |  | 
|                           |  |                |       |            |  |             |      |              |  |   |     |   |  |   |   | 

|                           |  |                |     |            |  |             |      |              |  |   |     |   |  |   |   | 
|-------------------------- |  | -------------- | --- | ---------- |  | ----------- | ---- | ------------ |  | - | --- | - |  | - | - | 
|                           |  |                |     |            |  | Cumulative  |      |             
|                           |  |                |     | Cumulative |  | Non-Cash    |      | Reserve     
|                           |  | Total          |     | Cash       |  | Charges &   |      | December 31,
|May 2002 Restructuring     |  | Charges        |     | Charges    |  | Adjustments |      | 2003        
|                           |  |                |     |            |  |             |      |             
|                           |  |               
|                           |  | (In thousands)
|Employee termination costs |  | $              | 394 |            |  | $           | (358 | )            |  | $ | (36 | ) |  | $ |  | 
|Real estate lease          |  |                |    |            |  |             |     |              |  |   |    |   |  |   |  | 
|Fixed asset write-down     |  |                |    |            |  |             |     |              |  |   |    |   |  |   |  | 
|                           |  |                |     |            |  |             |      |              |  |   |     |   |  |   |   | 
|Total                      |  | $              | 394 |            |  | $           | (358 | )            |  | $ | (36 | ) |  | $ |  | 
|                           |  |                |     |            |  |             |      |              |  |   |     |   |  |   |   | 

|                           |  |                |     |            |  |             |      |              |  |   |     |   |  |   |   | 
|-------------------------- |  | -------------- | --- | ---------- |  | ----------- | ---- | ------------ |  | - | --- | - |  | - | - | 
|                           |  |                |     |            |  | Cumulative  |      |             
|                           |  |                |     | Cumulative |  | Non-Cash    |      | Reserve     
|                           |  | Total          |     | Cash       |  | Charges &   |      | December 31,
|October 2002 Restructuring |  | Charges        |     | Charges    |  | Adjustments |      | 2003        
|                           |  |                |     |            |  |             |      |             
|                           |  |               
|                           |  | (In thousands)
|Employee termination costs |  | $              | 176 |            |  | $           | (163 | )            |  | $ | (13 | ) |  | $ |  | 
|Real estate lease          |  |                |    |            |  |             |     |              |  |   |    |   |  |   |  | 
|Fixed asset write-down     |  |                |    |            |  |             |     |              |  |   |    |   |  |   |  | 
|                           |  |                |     |            |  |             |      |              |  |   |     |   |  |   |   | 
|Total                      |  | $              | 176 |            |  | $           | (163 | )            |  | $ | (13 | ) |  | $ |  | 
|                           |  |                |     |            |  |             |      |              |  |   |     |   |  |   |   | 

|                           |  |                |     |            |  |             |      |              |  |   |    |  |  |   |   | 
|-------------------------- |  | -------------- | --- | ---------- |  | ----------- | ---- | ------------ |  | - | -- |  |  | - | - | 
|                           |  |                |     |            |  | Cumulative  |      |             
|                           |  |                |     | Cumulative |  | Non-Cash    |      | Reserve     
|                           |  | Total          |     | Cash       |  | Charges &   |      | December 31,
|June 2003 Restructuring    |  | Charges        |     | Charges    |  | Adjustments |      | 2003        
|                           |  |                |     |            |  |             |      |             
|                           |  |               
|                           |  | (In thousands)
|Employee termination costs |  | $              | 212 |            |  | $           | (239 | )            |  | $ | 27 |  |  | $ |  | 
|                           |  |                |     |            |  |             |      |              |  |   |    |  |  |   |   | 

49



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##### Table of Contents



LARSCOM INCORPORATED


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

|                                  |  |                |       |            |  |             |      |              |  |   |      |   |  |   |       | 
|--------------------------------- |  | -------------- | ----- | ---------- |  | ----------- | ---- | ------------ |  | - | ---- | - |  | - | ----- | 
|                                  |  |                |       |            |  | Cumulative  |      |             
|                                  |  |                |       | Cumulative |  | Non-Cash    |      | Reserve     
|                                  |  | Total          |       | Cash       |  | Charges &   |      | December 31,
|July/September 2003 Restructuring |  | Charges        |       | Charges    |  | Adjustments |      | 2003        
|                                  |  |                |       |            |  |             |      |             
|                                  |  |               
|                                  |  | (In thousands)
|Employee termination costs        |  | $              | 427   |            |  | $           | (412 | )            |  | $ | (4   | ) |  | $ | 11    | 
|Real estate lease                 |  |                | 1,535 |            |  |             | (503 | )            |  |   |     |   |  |   | 1,032 | 
|Fixed asset write-down            |  |                | 425   |            |  |             |     |              |  |   | (425 | ) |  |   |      | 
|                                  |  |                |       |            |  |             |      |              |  |   |      |   |  |   |       | 
|Total                             |  | $              | 2,387 |            |  | $           | (915 | )            |  | $ | (429 | ) |  | $ | 1,043 | 
|                                  |  |                |       |            |  |             |      |              |  |   |      |   |  |   |       | 

|                            |  |                |     |            |  |             |      |              |  |   |   |  |  |   |    | 
|--------------------------- |  | -------------- | --- | ---------- |  | ----------- | ---- | ------------ |  | - | - |  |  | - | -- | 
|                            |  |                |     |            |  | Cumulative  |      |             
|                            |  |                |     | Cumulative |  | Non-Cash    |      | Reserve     
|                            |  | Total          |     | Cash       |  | Charges &   |      | December 31,
|December 2003 Restructuring |  | Charges        |     | Charges    |  | Adjustments |      | 2003        
|                            |  |                |     |            |  |             |      |             
|                            |  |               
|                            |  | (In thousands)
|Employee termination costs  |  | $              | 127 |            |  | $           | (105 | )            |  | $ |  |  |  | $ | 22 | 
|                            |  |                |     |            |  |             |      |              |  |   |   |  |  |   |    | 

The following table provides details on the staff
reductions for our restructuring and reduction in force programs
in 2003 and 2002:

|                        |  |               |   |             |  |                |    |       |  |  |    |  |  |  |    | 
|----------------------- |  | ------------- | - | ----------- |  | -------------- | -- | ----- |  |  | -- |  |  |  | -- | 
|                        |  |               |   |             |  | Selling,       |    |      
|                        |  |               |   | Research &  |  | General &      |    |      
|                        |  | Manufacturing |   | Development |  | Administration |    | Total
|                        |  |               |   |             |  |                |    |      
|May of 2002             |  |               | 4 |             |  |                | 4  |       |  |  | 8  |  |  |  | 16 | 
|October of 2002         |  |               |  |             |  |                | 6  |       |  |  | 8  |  |  |  | 14 | 
|June of 2003            |  |               | 4 |             |  |                | 5  |       |  |  | 10 |  |  |  | 19 | 
|July/ September of 2003 |  |               | 1 |             |  |                | 2  |       |  |  | 17 |  |  |  | 20 | 
|December of 2003        |  |               |  |             |  |                | 7  |       |  |  | 1  |  |  |  | 8  | 
|                        |  |               |   |             |  |                |    |       |  |  |    |  |  |  |    | 
|Total                   |  |               | 9 |             |  |                | 24 |       |  |  | 44 |  |  |  | 77 | 
|                        |  |               |   |             |  |                |    |       |  |  |    |  |  |  |    | 

Note 6  Related Party
Transactions:

Transactions with Axel Johnson and Sierra
Ventures V LP

On June 3, 2003, our stockholders approved a
proposal to reclassify our Class A and Class B Common
Stock into a single class of common stock. The old Class B
Common Stock had rights of four votes per share and was owned by
one stockholder, Axel Johnson, Inc. These additional voting
rights gave Axel Johnson control of 82% of the voting interest
prior to the merger with VINA. After issuance of
2,393,894 shares in connection with the VINA merger and the
reclassification of the Class B Common Stock into Common
Stock with one vote per share, Axel Johnsons control of
the voting interest was reduced to 28%. As of December 31,
2002, Axel Johnson had owned 53% of the Class A and B
Common Stock of Larscom and controlled 82% of the voting
interest.

Sierra Ventures V LP (Sierra) became
owner of approximately 28% of our Common Stock as a result of
the June 5, 2003 merger with VINA and remained owner of
that same amount as of December 31, 2003.

Our Board includes two members from Axel Johnson
and one member from Sierra. Axel Johnson Board members were not
eligible for compensation prior to the merger. Effective with
the June 5, 2003 merger with VINA, existing Board members
from Axel Johnson and Sierra, as well as existing independent
Board members are given annual compensation of 1,500 Common
Stock option grants and either $16,000 in cash payments or 3,500
Common Stock option grants, at the election of the Board member,
for 12 months of service. New Board members are given an
initial grant of 4,500 Common Stock options.

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LARSCOM INCORPORATED


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



| |                                    
| | -----------------------------------
| | (Due to)/ Due from Axel
    Johnson

Amounts (due to) or due from Axel Johnson consist
of cash remittances made by us to Axel Johnson from our
operating bank accounts offset by cash advances to us from Axel
Johnson for purchases of property and equipment and fluctuating
working capital needs. As of June 5, 2003, we began
operation of our own cash network. Amounts owed to Axel Johnson
at year-end 2003 relate to remaining payments due to Axel
Johnson primarily for employee 401(k) programs and some residual
medical plan payments. Neither Axel Johnson nor Larscom
Incorporated has charged interest on the balances due. The
average month-end balances due from or (due to) Axel Johnson
were as follows: ($571,000) for 2003; $31,000 for 2002 and
($182,000) for 2001. The following is an analysis of the balance
(due to) or due from Axel Johnson:

|                                                           |                                            |                          |       |      |   |      |       |        |   |   |       |        |  
|---------------------------------------------------------- | ------------------------------------------ | ------------------------ | ----- | ---- | - | ---- | ----- | ------ | - | - | ----- | ------ | -
|                                                           |                                            |                         
|                                                           |                                            | Years Ended December 31,
|                                                           |                                            |                         
|                                                           |                                            | 2003                     |       | 2002 |   | 2001
|                                                           |                                            |                          |       |      |   |     
|                                                           |                                            |                         
|                                                           |                                            | (In thousands)          
|Balance at beginning of year                               |                                            | $                        | (25   | )    |   | $    | 574   |        |   | $ | 71    |       
|Cash remittances to Axel Johnson, net of cash
    advances |                                            |                          | 1,521 |      |   |      | 2,707 |        |   |   | 4,598 |       
|Charges(from)/to Axel Johnson for:                         |                                            |                          |       |      |   |      |       |        |   |   |       |       
|                                                           | Pension and thrift plan                    |                          |       | (810 | ) |      |       | (1,299 | ) |   |       | (2,012 | )
|                                                           | Health insurance and workers compensation |                          |       | (664 | ) |      |       | (663   | ) |   |       | (737   | )
|                                                           | Administrative services                    |                          |       | (151 | ) |      |       | (465   | ) |   |       | (465   | )
|                                                           | Property, liability and general insurance  |                          |       | (6   | ) |      |       | (889   | ) |   |       | (716   | )
|                                                           | Line of credit fees                        |                          |       | (31  | ) |      |       | (76    | ) |   |       | (75    | )
|                                                           | Other (charges)/credits                    |                          |       | (24  | ) |      |       | 86     |   |   |       | (90    | )
|                                                           |                                            |                          |       |      |   |      |       |        |   |   |       |       
|Balance at end of year                                     |                                            | $                        | (190  | )    |   | $    | (25   | )      |   | $ | 574   |       
|                                                           |                                            |                          |       |      |   |      |       |        |   |   |       |       

Employee
Health and Welfare Programs

We participated in various employee benefits
programs sponsored by Axel Johnson until June 5, 2003, when
we established our own programs for most benefits. Axel Johnson
continued to administer a portion of our 401K program until
January 6, 2004 and retained responsibility for the Axel
Johnson Retirement Plan and the Axel Johnson, Inc.
Retirement Restoration Program. Larscom had discontinued active
participation in both Axel Johnson, Inc. Retirement Plans
as of March 31, 1998. Axel Johnson retains full
responsibility for funding and administration of the Axel
Johnson Retirement Plans. Prior to June 5, 2003, the Axel
Johnson programs we participated in included medical, dental,
life insurance and workers compensation. In general, we
reimbursed Axel Johnson for our proportionate cost of these
programs based on historical experience and relative headcount.
The costs reimbursed to Axel Johnson included costs for reported
claims as well as changes in reserves for incurred but not
reported claims. We recorded expenses related to the
reimbursement of these costs of approximately $664,000, $663,000
and $737,000 in 2003, 2002 and 2001, respectively. We believe
the allocation by Axel Johnson of the proportionate cost was
reasonable, but not necessarily indicative of the costs that
would have been incurred had we maintained our own benefit plans
during that time.

Administrative
Services

Axel Johnson provided certain functional services
to us, including certain treasury, accounting, tax, internal
audit, legal and human resources, most of which were
discontinued as of the June 5, 2003 merger with VINA. The
costs of these services were allocated to us based on estimates
by Axel Johnson of actual costs incurred. We believe that such
allocations were reasonable. Such charges and allocations are
not necessarily indicative of the costs that would have been
incurred if we had been a separate entity.

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LARSCOM INCORPORATED


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The allocated costs of these services amounting
to $151,000, $465,000 and $465,000 in 2003, 2002 and 2001,
respectively, have been included in selling, general and
administrative expenses in the consolidated statements of
operations.

Pension
Plan

Effective March 31, 1998, our employees
ceased to accrue benefits under the Axel Johnson sponsored
defined benefit pension plan, the Axel Johnson Inc. Retirement
Plan. Accrued liabilities prior to March 31, 1998 will
remain in the Axel Johnson pension plan until benefits are paid
to employees upon termination or retirement in a manner
prescribed by the plan. After March 1998, our employees also
ceased to accrue benefits under Axel Johnsons unfunded
pension plan, the Axel Johnson Inc. Retirement Restoration Plan,
for employees whose benefits under the defined pension plan are
reduced due to limitations under federal tax laws. Effective
June 5, 2003, in connection with the merger with VINA, Axel
Johnson assumed complete responsibility for any further costs or
liability for these plans, therefore, we have made no provision
for these plans as of December 31, 2003 and the following
information pertains to activity in the prior two years.

The following sets forth our benefit obligation
and the net periodic pension costs for both plans as required by
Statement of Financial Accounting Standards No. 132,
Employers Disclosures about Pensions and Other
Post-retirement Benefits:

|                                                    |                                              |                |   |       |  
|--------------------------------------------------- | -------------------------------------------- | -------------- | - | ----- | -
|                                                    |                                              | 2002          
|                                                    |                                              |               
|                                                    |                                              | (In thousands)
|Reconciliation of projected benefit obligation      |                                              |                |   |      
|                                                    | Projected benefit obligation at January 1,   |                | $ | 5,559 |  
|                                                    | Service cost                                 |                |   | 16    |  
|                                                    | Interest cost                                |                |   | 402   |  
|                                                    | Actuarial loss                               |                |   | 677   |  
|                                                    | Benefits paid                                |                |   | (204  | )
|                                                    |                                              |                |   |      
|                                                    | Projected benefit obligation at December 31, |                | $ | 6,450 |  
|                                                    |                                              |                |   |      
|Weighted-average assumptions as of
    December 31, |                                              |                |   |      
|                                                    | Discount rate                                |                |   | 6.75  | %
|                                                    | Expected return on plan assets               |                |   | 8.50  | %
|                                                    | Rate of compensation increase                |                |   | 4.25  | %
|Components of net periodic (benefit) cost           |                                              |                |   |      
|                                                    | Service cost                                 |                | $ | 16    |  
|                                                    | Interest cost                                |                |   | 402   |  
|                                                    | Expected return on assets                    |                |   | (443  | )
|                                                    | Net amortization                             |                |   | 7     |  
|                                                    |                                              |                |   |      
|                                                    | Net periodic benefit                         |                | $ | (18   | )
|                                                    |                                              |                |   |      

Certain elements of pension cost, including
expected return on assets and net amortization, were allocated
based on the relationship of the projected benefit obligation
(PBO) for Larscom Incorporated to the total PBO of
the defined benefit pension plan. Based on this same
relationship, our portion of the unfunded PBO for the Axel
Johnson Inc. Retirement Plan was $1,988,000 and $748,000 as of
December 31, 2002 and 2001, respectively. The PBO for our
employees with accrued benefits in the unfunded Retirement
Restoration Plan was $469,000 and $329,000 as of
December 31, 2002 and 2001, respectively.

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LARSCOM INCORPORATED


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Note 7  Capital
Stock:

Prior to the June 5, 2003 merger with VINA,
there were two classes of Common Stock, Class A and
Class B. The rights, preferences and privileges of each
class of Common Stock were identical except for voting rights.
Each share of the Class A Common Stock entitled its holder
to one vote and each share of Class B Common Stock entitled
its holder to four votes for each share of Class A Common
Stock into which Class B Common Stock is convertible. The
Class B Common Stock was convertible into Class A
Common Stock on a share-for-share basis, subject to adjustment
for dividends, stock splits, subdivisions or combinations. Axel
Johnson owned all of the then issued and outstanding
Class B Common Stock. Effective with the June 5, 2003
merger with VINA, both Class A and Class B Common
Stock was converted into a single class of Common Stock
entitling the holder to one vote per share.

On June 3, 2003 Larscoms shareholders
approved a proposal to amend Larscoms certificate of
incorporation to effect a reverse split of Larscoms Common
Stock in a ratio to be determined by the Board of Directors. The
Board subsequently voted on June 5, 2003 to effect a
reverse split with a 7-for-1 ratio with effect from June 6,
2003. All share and per share data has been retroactively
restated for the reverse stock split.

The Board of Directors has the authority to issue
up to 5,000,000 undesignated shares of Preferred Stock in one or
more series and to fix the rights, preferences, privileges and
restrictions thereof, including dividend rights, conversion
rights, voting rights, terms of redemption, liquidation
preferences, sinking fund terms and the number of shares
constituting any series or the designation of such series,
without any further vote or action by stockholders.

Note 8  Income
Taxes:

The income tax (benefit) provision consists of
the following:

|                               |         |                          |    |      |  |      |        |        |   |   |        |        |  
|------------------------------ | ------- | ------------------------ | -- | ---- |  | ---- | ------ | ------ | - | - | ------ | ------ | -
|                               |         |                         
|                               |         | Years Ended December 31,
|                               |         |                         
|                               |         | 2003                     |    | 2002 |  | 2001
|                               |         |                          |    |      |  |     
|                               |         |                         
|                               |         | (In thousands)          
|Current:                       |         |                          |    |      |  |      |        |        |   |   |        |       
|                               | Federal |                          | $  |     |  |      | $      | (2,156 | ) |   | $      | (224   | )
|                               | State   |                          |    | 37   |  |      |        | 14     |   |   |        | 58     |  
|                               | Foreign |                          |    |     |  |      |        | 29     |   |   |        | 51     |  
|                               |         |                          |    |      |  |      |        |        |   |   |        |       
|                               |         |                          | 37 |      |  |      | (2,113 | )      |   |   | (115   | )     
|                               |         |                          |    |      |  |      |        |        |   |   |        |       
|Deferred:                      |         |                          |    |      |  |      |        |        |   |   |        |       
|                               | Federal |                          |    |     |  |      |        |       |   |   |        | 12,972 |  
|                               | State   |                          |    |     |  |      |        |       |   |   |        | 3,009  |  
|                               |         |                          |    |      |  |      |        |        |   |   |        |       
|                               |         |                          |   |      |  |      |       |        |   |   | 15,981 |       
|                               |         |                          |    |      |  |      |        |        |   |   |        |       
|Income tax (benefit) provision |         | $                        | 37 |      |  | $    | (2,113 | )      |   | $ | 15,866 |       
|                               |         |                          |    |      |  |      |        |        |   |   |        |       

On June 5, 2003, as a result of the merger
with VINA, Axel Johnsons ownership interest in the company
dropped below 50%. As a result, the company will no longer file
as part of a combined group, for the purposes of filing a
California franchise tax return after that date.

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LARSCOM INCORPORATED


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The following is a reconciliation of the
U.S. federal income tax rate to our effective income tax
rate:

|                                                |  |              |     |      |  |      |     |    |  |  |     |   
|----------------------------------------------- |  | ------------ | --- | ---- |  | ---- | --- | -- |  |  | --- | --
|                                                |  |             
|                                                |  | Years Ended 
|                                                |  | December 31,
|                                                |  |             
|                                                |  | 2003         |     | 2002 |  | 2001
|                                                |  |              |     |      |  |     
|Provision at statutory rate                     |  |              | (34 | )%   |  |      | (35 | )% |  |  | (35 | )%
|Research and development credit                 |  |              |    |      |  |      | (15 | )  |  |  |    |   
|State income taxes, net of federal tax benefits |  |              | (3  | )    |  |      | (9  | )  |  |  |    |   
|Valuation allowance deferred tax assets         |  |              | 37  |      |  |      | 26  |    |  |  | 142 |   
|Other                                           |  |              |    |      |  |      | 3   |    |  |  | (1  | ) 
|                                                |  |              |     |      |  |      |     |    |  |  |     |   
|Effective income tax rate                       |  |              |    |      |  |      | (30 | )% |  |  | 106 | % 
|                                                |  |              |     |      |  |      |     |    |  |  |     |   

The tax rate for 2002 included a benefit of
$2,113,000 comprised primarily of an income tax refund of
$1,894,000 for taxes paid in 1996, 1997 and 1998, as a result of
a 2002 change in the federal income tax code and $262,000 for
the release of an accrual related to prior years closed audits.

Deferred income taxes reflect the temporary
differences between the carrying value of assets and liabilities
for financial reporting purposes and the amounts used for income
tax purposes. The components of the deferred tax assets are as
follows:

|                       |                                   |                |   |         |   |   |   |         |  
|---------------------- | --------------------------------- | -------------- | - | ------- | - | - | - | ------- | -
|                       |                                   |               
|                       |                                   | December 31,  
|                       |                                   |               
|                       |                                   | 2003           |   | 2002   
|                       |                                   |                |   |        
|                       |                                   |               
|                       |                                   | (In thousands)
|Deferred tax assets:   |                                   |                |   |         |   |   |   |        
|                       | Inventory                         |                | $ | 3,091   |   |   | $ | 2,696   |  
|                       | Accrued expenses                  |                |   | 2,076   |   |   |   | 1,779   |  
|                       | Reserves                          |                |   | 1,983   |   |   |   | 1,201   |  
|                       | Intangible assets                 |                |   | 4,732   |   |   |   | 5,428   |  
|                       | Depreciation and amortization     |                |   | 2,502   |   |   |   | 3,438   |  
|                       | NOL and tax credit carry-forwards |                |   | 17,607  |   |   |   | 8,640   |  
|                       | Valuation allowance               |                |   | (31,991 | ) |   |   | (23,182 | )
|                       |                                   |                |   |         |   |   |   |        
|Net deferred tax asset |                                   | $              |  |         |   | $ |  |        
|                       |                                   |                |   |         |   |   |   |        

At December 31, 2003, we had total deferred
tax assets of $31,991,000, as compared to $23,182,000 at
December 31, 2002. These assets include temporary
differences related to intangible assets associated with the
acquisition of VINA Technologies, Inc. in June, 2003 and
the acquisition of NetEdge Systems Inc. in 1997, inventory
write-downs, accrued expenses and net operating losses that
carry forward. In the second quarter ended June 30, 2001,
we concluded that a deferred tax asset valuation allowance
should be established due to the uncertainty of realizing the
tax loss carry-forwards and other deferred tax assets in
accordance with SFAS No. 109, Accounting for
Income Taxes. Our assessment was based principally on the
historical losses experienced by the Company in the U.S. and
uncertainty of future taxable income, unfavorable macro-economic
conditions and capital expenditure reductions announced by
several SPs.

SFAS 109 requires the establishment of a
valuation allowance for deferred tax assets when it is more
likely than not that these assets will not be realized. The
deferred tax assets will be recognized in future periods to the
extent that we can reasonably expect such assets to be realized.
We will evaluate the probability of realizing our deferred tax
assets on a quarterly basis. If we determine that a portion or
all of the deferred tax assets are realizable, we will reduce
the income tax valuation allowance accordingly. During 2003 we
increased the valuation allowance by the increase in the
deferred tax assets. The deferred tax assets increased during

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LARSCOM INCORPORATED


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

2003 by $8,809,000. The increase was principally
due to the net operating losses generated from operations, as
well as unused tax credits and net operating loss carryforwards
acquired from the VINA merger (as limited by section 382 of
the Internal Revenue Code of 1986, as amended).

As of December 31, 2003, the Companys
federal and state net operating loss carry-forwards for income
tax purposes were approximately $35,853,000 and $31,033,000
respectively. If not utilized, the federal and state net
operating loss carry-forwards will begin to expire in 2016 and
2006 respectively. The Companys federal research tax
credit carry-forwards for income tax purposes are approximately
$3,803,000. If not utilized, the federal tax credit
carry-forwards will begin to expire in 2016. The Company has a
full valuation allowance for all our deferred tax assets because
of uncertainty regarding their realization.

Note 9  Employee Benefit
Plans:

We participated in various employee benefits
programs sponsored by Axel Johnson until June 5, 2003, when
we established our own programs for most benefits. Axel Johnson
continued to administer a portion of our 401K program until
January 6, 2004 and retained responsibility for the Axel
Johnson Retirement Plan and the Axel Johnson, Inc.
Retirement Restoration Program. Larscom had discontinued active
participation in both Axel Johnson, Inc. Retirement Plans
as of March 31, 1998. Axel Johnson retains full
responsibility for funding and administration of the Axel
Johnson Retirement Plans. Prior to June 5, 2003, the Axel
Johnson programs we participated in included medical, dental,
life insurance and workers compensation. In general, we
reimbursed Axel Johnson for our proportionate cost of these
programs based on historical experience and relative headcount.
The costs reimbursed to Axel Johnson included costs for reported
claims as well as changes in reserves for incurred but not
reported claims. We recorded expenses related to the
reimbursement of these costs of approximately $664,000, $663,000
and $737,000 in 2003, 2002 and 2001, respectively. We believe
the allocation by Axel Johnson of the proportionate cost was
reasonable, but not necessarily indicative of the costs that
would have been incurred had we maintained our own benefit plans
during that time.

Stock Option
Plan for Non-Employee Directors

On October 11, 1996 we adopted and the Board
of Directors and Stockholders approved a Stock Option Plan for
Non-Employee Directors (the Directors Plan)
and reserved a total of 29,285 shares of Common Stock for
issuance thereunder. The Board of Directors and stockholders
approved an additional 14,285-share allotment for the
Directors Plan in 2000. The Directors Plan provided
for the grant of stock options, pursuant to an automatic grant
mechanism, to members of the Board of Directors who were not
employees of Larscom or of Axel Johnson with regard to their
service as directors. Each non-employee director received an
initial grant, upon first becoming a director, to purchase a
total of 2,571 shares of Common Stock, and each year
thereafter, received an option to purchase a total of
857 shares of Common Stock. Each option was granted at an
exercise price equal to fair market value on date of grant. Each
initial grant vests in three equal annual installments and each
annual grant vests in full in the third year following the date
of grant. Options expire one year after termination of Board
service or ten years after the date of grant. In June 2003, the
Stockholders approved the amendment of the Stock Incentive Plan
(below) to allow for grants to Non-Employee Directors.
Therefore, the Directors Plan has been terminated. Options
issued under this plan will continue with their same terms and
conditions. There were approximately 17,000 options outstanding
on December 31, 2003 under this plan.

Stock
Incentive Plan

On October 11, 1996 we adopted and the Board
of Directors and Stockholders approved a Stock Incentive Plan
(the Incentive Plan) under which 569,285 shares
of Common Stock have been reserved for issuance. The Board of
Directors and stockholders approved an additional 400,000-share
allotment for the Incentive Plan in 2000. The Incentive Plan
provides for the grant of incentive stock options, non-qualified

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LARSCOM INCORPORATED


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

stock options, stock appreciation rights and
stock bonus awards to employees and eligible consultants. The
Compensation Committee of the Board of Directors administers the
Incentive Plan. The maximum term of an option granted under the
Incentive Plan may not exceed ten years from the date of grant
(five years in the case of an incentive stock option granted to
a 10% or more stockholder). Options granted prior to May 2000
generally vest over a four-year period from the date of grant.
Options granted in May 2000 and thereafter generally vest over a
three-year period. In June 2003, the stockholders approved an
amendment to the Incentive Plan to allow for grants of stock
awards under the Incentive Plan to non-employee directors. There
were approximately 348,000 options outstanding on
December 31, 2003 under this plan.

The following table summarizes activity under the
Directors and Incentive Plans:

|                                         |  |                     |    |                |  |                |       |          |  |  |      |   |  |   |       | 
|---------------------------------------- |  | ------------------- | -- | -------------- |  | -------------- | ----- | -------- |  |  | ---- | - |  | - | ----- | 
|                                         |  |                    
|                                         |  | Options Outstanding
|                                         |  |                    
|                                         |  |                     |    |               
|                                         |  | Directors Plan     |    | Incentive Plan
|                                         |  |                     |    |               
|                                         |  |                     |    | Weighted       |  |                |       | Weighted
|                                         |  |                     |    | Average        |  |                |       | Average 
|                                         |  | Number of           |    | Exercise       |  | Number of      |       | Exercise
|                                         |  | Shares              |    | Price          |  | Shares         |       | Price   
|                                         |  |                     |    |                |  |                |       |         
|                                         |  | (In thousands)      |    |                |  | (In thousands) |       |         
|December 31, 2000                        |  |                     | 15 |                |  |                | 59.08 |          |  |  | 460  |   |  |   | 25.55 | 
|Granted                                  |  |                     | 3  |                |  |                | 16.59 |          |  |  | 110  |   |  |   | 11.20 | 
|Exercised                                |  |                     |   |                |  |                |      |          |  |  | (8   | ) |  |   | 15.33 | 
|Canceled                                 |  |                     |   |                |  |                |      |          |  |  | (197 | ) |  |   | 25.55 | 
|                                         |  |                     |    |                |  |                |       |          |  |  |      |   |  |   |       | 
|December 31, 2001                        |  |                     | 17 |                |  |                | 52.71 |          |  |  | 365  |   |  |   | 21.56 | 
|Granted                                  |  |                     | 2  |                |  |                | 7.21  |          |  |  | 100  |   |  |   | 8.19  | 
|Exercised                                |  |                     |   |                |  |                |      |          |  |  |     |   |  |   |      | 
|Canceled                                 |  |                     |   |                |  |                |      |          |  |  | (178 | ) |  |   | 22.40 | 
|                                         |  |                     |    |                |  |                |       |          |  |  |      |   |  |   |       | 
|December 31, 2002                        |  |                     | 19 |                |  |                | 48.58 |          |  |  | 287  |   |  |   | 16.31 | 
|Granted                                  |  |                     | 5  |                |  |                | 5.29  |          |  |  | 98   |   |  |   | 2.60  | 
|Granted as part of VINA merger           |  |                     |   |                |  |                |      |          |  |  | 185  |   |  |   | 24.29 | 
|Exercised                                |  |                     |   |                |  |                |      |          |  |  | (9   | ) |  |   | 3.51  | 
|Canceled                                 |  |                     | (7 | )              |  |                | 58.55 |          |  |  | (213 | ) |  |   | 19.50 | 
|                                         |  |                     |    |                |  |                |       |          |  |  |      |   |  |   |       | 
|December 31, 2003                        |  |                     | 17 |                |  |                | 31.16 |          |  |  | 348  |   |  |   | 14.67 | 
|                                         |  |                     |    |                |  |                |       |          |  |  |      |   |  |   |       | 
|Options exercisable at December 31, 2003 |  |                     | 13 |                |  | $              | 39.60 |          |  |  | 258  |   |  | $ | 18.34 | 

56



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##### Table of Contents



LARSCOM INCORPORATED


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The following table summarizes information about
stock options outstanding at December 31, 2003, under the
Directors Plan and the Incentive Plan (number of options
in thousands) combined:

|                         |               |                     |     |                     |  |          |      |                |  |          |       |       |  |  |    |     |  |   |       |       | 
|------------------------ | ------------- | ------------------- | --- | ------------------- |  | -------- | ---- | -------------- |  | -------- | ----- | ----- |  |  | -- | --- |  | - | ----- | ----- | 
|                         |               |                     |     |                    
|                         |               | Options Outstanding |     | Options Exercisable
|                         |               |                     |     |                    
|                         |               |                     |     | Weighted            |  |          |      |               
|                         |               | Number              |     | Average             |  | Weighted |      | Number         |  | Weighted
|                         |               | Outstanding at      |     | Remaining           |  | Average  |      | Exercisable at |  | Average 
|                         |               | December 31,        |     | Contractual         |  | Exercise |      | December 31,   |  | Exercise
|Range of Exercise Prices |               | 2003                |     | Life (years)        |  | Price    |      | 2003           |  | Price   
|                         |               |                     |     |                     |  |          |      |                |  |         
|$1.93 - $3.00            |               |                     | 64  |                     |  |          | 9.14 |                |  | $        | 2.00  |       |  |  | 20 |     |  | $ | 2.08  |      
|$3.01 - $6.00            |               |                     | 47  |                     |  |          | 8.62 |                |  | $        | 4.40  |       |  |  | 17 |     |  | $ | 4.17  |      
|$6.01 - $9.00            |               |                     | 112 |                     |  |          | 8.02 |                |  | $        | 8.69  |       |  |  | 92 |     |  | $ | 8.73  |      
|$9.01 - $15.00           |               |                     | 41  |                     |  |          | 6.15 |                |  | $        | 11.49 |       |  |  | 41 |     |  | $ | 11.49 |      
|$15.01 - $30.00          |               |                     | 68  |                     |  |          | 6.48 |                |  | $        | 26.72 |       |  |  | 68 |     |  | $ | 26.72 |      
|$31.01 - $172.00         |               |                     | 33  |                     |  |          | 6.23 |                |  | $        | 61.24 |       |  |  | 33 |     |  | $ | 61.24 |      
|                         |               |                     |     |                     |  |          |      |                |  |          |       |       |  |  |    |     |  |   |       |      
|                         | Total/Average |                     |     | 365                 |  |          |      | 7.64           |  |          | $     | 15.46 |  |  |    | 271 |  |   | $     | 19.37 | 
|                         |               |                     |     |                     |  |          |      |                |  |          |       |       |  |  |    |     |  |   |       |      

Pro Forma
Information

As permitted under SFAS 123, we are
continuing to measure compensation cost for stock-based
compensation plans using the intrinsic value method prescribed
by APB 25. The pro forma disclosures of the difference
between compensation cost included in net loss and the related
cost measured by the fair value method are described below.

The fair value of these options was estimated at
the date of grant using the Black-Scholes option-pricing model
with the following weighted-average assumptions:

|                        |  |                          |      |                |  |      |      |      |  |      |      |      |  |  |      |   |  |  |      |   |  |  |      |  
|----------------------- |  | ------------------------ | ---- | -------------- |  | ---- | ---- | ---- |  | ---- | ---- | ---- |  |  | ---- | - |  |  | ---- | - |  |  | ---- | -
|                        |  |                          |      |               
|                        |  | Directors and Incentive |      | Employee Stock
|                        |  | Stock Option Plans       |      | Purchase Plan 
|                        |  |                          |      |               
|                        |  | 2003                     |      | 2002           |  | 2001 |      | 2003 |  | 2002 |      | 2001
|                        |  |                          |      |                |  |      |      |      |  |      |      |     
|Risk-free interest rate |  |                          | 1.66 | %              |  |      | 4.28 | %    |  |      | 3.94 | %    |  |  | 1.19 | % |  |  | 1.86 | % |  |  | 3.62 | %
|Expected volatility     |  |                          | 90   | %              |  |      | 90   | %    |  |      | 88   | %    |  |  | 90   | % |  |  | 88   | % |  |  | 88   | %
|Expected dividend yield |  |                          | 0    | %              |  |      | 0    | %    |  |      | 0    | %    |  |  | 0    | % |  |  | 0    | % |  |  | 0    | %
|Expected life           |  |                          | 4.88 |                |  |      | 4.92 |      |  |      | 2.76 |      |  |  | 0.50 |   |  |  | 0.50 |   |  |  | 0.50 |  

The weighted average estimated fair value of
options granted under the Directors Plan, the Incentive
Plan and the Purchase Plan were as follows:

|            |  |            |      |           |  |                |      |  |  |   |      | 
|----------- |  | ---------- | ---- | --------- |  | -------------- | ---- |  |  | - | ---- | 
|            |  | Directors |      | Incentive |  | Employee Stock
|            |  | Plan       |      | Plan      |  | Purchase Plan 
|            |  |            |      |           |  |               
|2001 grants |  | $          | 1.69 |           |  | $              | 0.80 |  |  | $ | 1.87 | 
|2002 grants |  | $          | 0.61 |           |  | $              | 0.83 |  |  | $ | 0.72 | 
|2003 grants |  | $          | 3.62 |           |  | $              | 2.96 |  |  | $ | 0.16 | 

Note 10  Commitments and
Contingencies:

Commitments:

Operating lease commitments are related
principally to our buildings in Newark, California; Milpitas,
California and Durham, North Carolina and have terms that expire
in 2008, 2004 and 2007, respectively. Total rent expense in
2003, 2002 and 2001, was $2,042,000, $2,265,000 and $2,217,000,
respectively. Sublease rental income was $709,000, $922,000 and
$1,041,000 in 2003, 2002 and 2001, respectively. Future annual
minimum

57



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LARSCOM INCORPORATED


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

lease payments under all non-cancelable operating
leases and sublease rental income as of December 31, 2003
are as follows (in thousands):

|                          |  |          |       |          |  |   |       | 
|------------------------- |  | -------- | ----- | -------- |  | - | ----- | 
|                          |  |          |       | Sublease
|                          |  | Lease    |       | Rental  
|Years ending December 31, |  | Payments |       | Income  
|                          |  |          |       |         
|2004                      |  | $        | 1,968 |          |  | $ | 639   | 
|2005                      |  |          | 713   |          |  |   | 264   | 
|2006                      |  |          | 756   |          |  |   | 272   | 
|2007                      |  |          | 487   |          |  |   | 23    | 
|2008 and thereafter       |  |          | 284   |          |  |   |      | 
|                          |  |          |       |          |  |   |       | 
|                          |  | $        | 4,208 |          |  | $ | 1,198 | 
|                          |  |          |       |          |  |   |       | 



| |               
| | --------------
| | Contingencies:

In our distribution agreements, we typically
agree to indemnify our customers for any expenses or liabilities
resulting from claimed infringements of patents, trademarks or
copyrights of third parties. There have been no material
payments made under our customer indemnification for the years
2003, 2002 and 2001.



|          |                        
|--------- | -----------------------
|Note 11  | Geographic Information:

Revenue and long-lived assets related to
operations in the United States and other countries for the
three years ended December 31, 2003 and as of
December 31, 2003, and 2002 are as follows (in thousands):

|                |  |                          |        |                   |  |      |        |      |  |      |        |  |  |   |       |  |  |   |       | 
|--------------- |  | ------------------------ | ------ | ----------------- |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ----- |  |  | - | ----- | 
|                |  |                          |        |                   |  |      |        |     
|                |  |                          |        | Long-lived Assets
|                |  | Revenues(a) December 31, |        | December 31,     
|                |  |                          |        |                  
|                |  | 2003                     |        | 2002              |  | 2001 |        | 2003 |  | 2002
|                |  |                          |        |                   |  |      |        |      |  |     
|United States   |  | $                        | 19,527 |                   |  | $    | 19,356 |      |  | $    | 34,986 |  |  | $ | 4,075 |  |  | $ | 2,121 | 
|Other countries |  |                          | 2,399  |                   |  |      | 4,131  |      |  |      | 6,885  |  |  |   |      |  |  |   | 5     | 
|                |  |                          |        |                   |  |      |        |      |  |      |        |  |  |   |       |  |  |   |       | 
|Total           |  | $                        | 21,926 |                   |  | $    | 23,487 |      |  | $    | 41,871 |  |  | $ | 4,075 |  |  | $ | 2,126 | 
|                |  |                          |        |                   |  |      |        |      |  |      |        |  |  |   |       |  |  |   |       | 



---



|    |  |                                                                                                                                                             
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | Revenues are reported by shipment to the final
    destination as determined by records required to comply with
    U.S. Department of Commerce regulations.

Note 12  Guarantees:

We, as the guarantor, enter into one category of
guarantee, namely performance guarantees. Performance guarantees
include contracts that contingently require us to make payments
to the beneficiary of the guarantee based on our failure to
perform under an obligating agreement. These obligating
agreements consist primarily of manufacturing services
agreements, non-cancelable and non-returnable purchase orders
and technology acquisition agreements.

The term of the guarantees is less than one year.
We have not recorded any liabilities for these potential future
payments either because they are not probable or we have yet to
incur the expense. The guarantees do not have a third party
recourse provision.

58



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LARSCOM INCORPORATED


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The following table discloses our obligations
under guarantees as of December 31, 2003 (in thousands):

|                                                  |  |                    |       | 
|------------------------------------------------- |  | ------------------ | ----- | 
|                                                  |  | Maximum           
|                                                  |  | Potential Amount  
|                                                  |  | of Future Payments
|                                                  |  |                   
|Manufacturing services agreements                 |  | $                  | 1,445 | 
|Non-cancelable and non-returnable purchase orders |  |                    | 156   | 
|Contingent payment for licensed technology        |  |                    | 100   | 
|                                                  |  |                    |       | 
|Total                                             |  | $                  | 1,701 | 
|                                                  |  |                    |       | 

The following table depicts product warranty
during the fiscal year ended December 31, 2003 (in
thousands):

|                                                                                 |  |                |      |  
|-------------------------------------------------------------------------------- |  | -------------- | ---- | -
|                                                                                 |  | Dollar Amount 
|                                                                                 |  | of Liability  
|                                                                                 |  | Debit/(credit)
|                                                                                 |  |               
|Balance at December 31, 2002                                                     |  | $              | 732  |  
|Accrual for new warranties                                                       |  |                | 186  |  
|Accruals related to pre-existing warranties
    (including changes in estimates) |  |                | (276 | )
|Addition of VINA warranty reserves at fair value                                 |  |                | 385  |  
|Settlements made in cash or in kind during the
    period                        |  |                | (95  | )
|                                                                                 |  |                |      |  
|Balance at December 31, 2003                                                     |  | $              | 932  |  
|                                                                                 |  |                |      |  

We also, as permitted under Delaware law and in
accordance with our Bylaws, indemnify our officers and directors
for certain events or occurrences, subject to certain limits,
while the officer is or was serving at our request in such
capacity. The term of the indemnification period is for the
officers or directors lifetime. The maximum amount
of potential future indemnification is unlimited; however, we
have a Director and Officer Insurance Policy that limits our
exposure and enables us to recover a portion of any future
amounts paid. As a result of our insurance policy coverage we
believe the fair value of these indemnification agreements is
minimal.

In our sales agreements, we typically agree to
indemnify our customers for any expenses or liability resulting
from claimed infringements of patents, trademarks or copyrights
of third parties. The terms of these indemnification agreements
is generally perpetual any time after execution of the
agreement. The maximum amount of potential future
indemnification is unlimited. To date we have not paid any
amounts to settle claims or defend lawsuits.

Note 13  Unaudited Quarterly
Consolidated Financial Data:

|                                 |  |                                       |        |          |  |           |        |          |  |   |        |   |  |   |       |  
|-------------------------------- |  | ------------------------------------- | ------ | -------- |  | --------- | ------ | -------- |  | - | ------ | - |  | - | ----- | -
|                                 |  |                                      
|                                 |  | Quarters Ended                       
|                                 |  |                                      
|                                 |  | March 31,                             |        | June 30, |  | Sept. 30, |        | Dec. 31,
|                                 |  | 2003                                  |        | 2003     |  | 2003      |        | 2003    
|                                 |  |                                       |        |          |  |           |        |         
|                                 |  |                                      
|                                 |  | (In thousands, except per share data)
|Revenues                         |  | $                                     | 4,225  |          |  | $         | 5,270  |          |  | $ | 6,249  |   |  | $ | 6,182 |  
|Gross profit                     |  | $                                     | 2,251  |          |  | $         | 2,574  |          |  | $ | 1,050  |   |  | $ | 3,144 |  
|Net loss                         |  | $                                     | (2,183 | )        |  | $         | (3,207 | )        |  | $ | (6,883 | ) |  | $ | (989  | )
|Basic and diluted loss per share |  | $                                     | (0.81  | )        |  | $         | (0.95  | )        |  | $ | (1.35  | ) |  | $ | (0.19 | )

59



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LARSCOM INCORPORATED


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

|                                 |  |                                       |       |          |  |           |        |          |  |   |        |   |  |   |        |  
|-------------------------------- |  | ------------------------------------- | ----- | -------- |  | --------- | ------ | -------- |  | - | ------ | - |  | - | ------ | -
|                                 |  |                                      
|                                 |  | Quarters Ended                       
|                                 |  |                                      
|                                 |  | March 31,                             |       | June 30, |  | Sept. 30, |        | Dec. 31,
|                                 |  | 2002                                  |       | 2002     |  | 2002      |        | 2002    
|                                 |  |                                       |       |          |  |           |        |         
|                                 |  |                                      
|                                 |  | (In thousands, except per share data)
|Revenues                         |  | $                                     | 7,716 |          |  | $         | 5,829  |          |  | $ | 5,342  |   |  | $ | 4,600  |  
|Gross profit                     |  | $                                     | 4,669 |          |  | $         | 2,957  |          |  | $ | 3,214  |   |  | $ | 2,300  |  
|Net loss                         |  | $                                     | 1,363 |          |  | $         | (2,499 | )        |  | $ | (1,520 | ) |  | $ | (2,239 | )
|Basic and diluted loss per share |  | $                                     | 0.49  |          |  | $         | (0.91  | )        |  | $ | (0.56  | ) |  | $ | (0.84  | )

60



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|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure

Not applicable.






|         |                         
|-------- | ------------------------
|Item 9A. | Controls and Procedures:

Evaluation of Disclosure Controls and
Procedures.

Our chief executive officer and chief financial
officer are responsible for establishing and maintaining
disclosure controls and procedures (as defined in
rules promulgated under the Securities Exchange Act of 1934, as
amended) for Larscom Incorporated. Based on their evaluation of
our disclosure controls and procedures as of December 31,
2003, our chief executive officer and chief financial officer
have concluded that the Companys controls and procedures
were effective as of December 31, 2003.

Changes in Controls and Procedures.

There were no significant changes in the
Companys internal control over financial reporting during
the period covered by this report that have materially affected,
or are reasonably likely to materially affect, the
Companys internal control over financial reporting.

Limitations on the Effectiveness of
Controls.

A control system, no matter how well conceived,
can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Because of the
inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that all control issues,
if any, within a company have been detected. The Companys
disclosure controls and procedures are designed to provide
reasonable assurance of achieving their objectives, and the
chief executive officer and chief financial officer have
concluded that these controls and procedures are effective at
the reasonable assurance level.




PART III






|         |                                                       
|-------- | ------------------------------------------------------
|Item 10. | Directors and Executive Officers of the
    Registrant

Other than the information regarding our
executive officers contained in Part I of this
Form 10-K report, the information required by this Item is
incorporated by reference to sections captioned Election
of Directors, Management,
Section 16(a) Beneficial Ownership Reporting and
Compliance and Code of Ethics in the
definitive Larscom Incorporated Proxy Statement for the 2004
Annual Meeting of Stockholders (the Proxy Statement)
to be filed within 120 days after fiscal year end.






|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

The information required by this Item is
incorporated by reference to the section captioned
Executive Compensation in the Proxy Statement.






|         |                                                                                                        
|-------- | -------------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholders
    Matters

The information required by this Item is
incorporated by reference to the sections captioned
Security Ownership of Certain Beneficial Owners and
Management and Equity Compensation Plan
Information in the Proxy Statement.






|         |                                                   
|-------- | --------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions

The information required by this Item is
incorporated by reference to the sections captioned
Certain Transactions in the Proxy Statement.

61



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##### Table of Contents








|         |                                           
|-------- | ------------------------------------------
|Item 14. | Principal Accountant Fees and
    Services

The information required by this Item is
incorporated by reference to the sections captioned
Independent Auditors Fees, Audit Committee
Disclosure and Policy on audit committee
Pre-Approval in the Proxy Statement.




PART IV






|         |                                                                    
|-------- | -------------------------------------------------------------------
|Item 15. | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K

a) The following documents are filed as a
part of this report:



| |                                                         
| | --------------------------------------------------------
| | 1. Financial statements  See
    Item 8 of this report.
|
| | 2. Financial Statement Schedule.                        

SCHEDULE II VALUATION AND QUALIFYING
ACCOUNTS

|                                |                   |              |   |           |  |            |   |             |   |            |   |   |  |  |   |    |  |  |   |       | 
|------------------------------- | ----------------- | ------------ | - | --------- |  | ---------- | - | ----------- | - | ---------- | - | - |  |  | - | -- |  |  | - | ----- | 
|                                |                   | Balance at   |   | Additions |  | Charges to |   | Deductions: |   | Balance at
|                                |                   | Beginning of |   | Cost and  |  | Other      |   | Items       |   | End of    
|Description                     |                   | Period       |   | Expense   |  | Accounts   |   | Written-off |   | Period    
|                                |                   |              |   |           |  |            |   |             |   |           
|Allowance for doubtful accounts |                   |              |   |           |  |            |   |             |   |            |   |   |  |  |   |    |  |  |   |      
|                                | December 31, 2001 |              | $ | 580       |  |            | $ | 252         |   |            | $ |  |  |  | $ | 25 |  |  | $ | 807   | 
|                                | December 31, 2002 |              | $ | 807       |  |            | $ | 548         |   |            | $ |  |  |  | $ | 44 |  |  | $ | 1,311 | 
|                                | December 31, 2003 |              | $ | 1,311     |  |            | $ | (232        | ) |            | $ |  |  |  | $ | 10 |  |  | $ | 1,069 | 



| |            
| | -----------
| | 3. Exhibits

|        |    |             |  |                                                                                                                                                                                                             
|------- | -- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 2  | .1(10)      |  | Agreement and Plan of Merger by and among Larscom
    Incorporated, London Acquisition Corp. and VINA
    Technologies, Inc., dated as of March 17, 2003.                                                   
|        | 3  | .2(*)       |  | Amended and Restated Certificate of Incorporation
    of Larscom Incorporated as filed in the State of Delaware on
    June 5, 2003.                                                                        
|        | 3  | .4(1)       |  | Amended By-laws of Larscom Incorporated.                                                                                                                                                                    
|        | 10 | .1(1)       |  | Form of Larscom Incorporated Stock Option Plan
    For Non-Employee Directors.                                                                                                                              
|        | 10 | .1.1(5)     |  | Certificate of Amendment of Stock Option Plan for
    Non-Employee Directors.                                                                                                                               
|        | 10 | .2(8)       |  | Form of Larscom Incorporated Stock Incentive
    Plan, as amended by the Larscom Incorporated Board of Directors
    on February 26, 2003 and approved by the Registrants
    stockholders on June 3, 2003.
|        | 10 | .2.1(5)     |  | Certificate of Amendment of Stock Incentive Plan.                                                                                                                                                           
|        | 10 | .3(1)       |  | Form of Larscom Incorporated Stock Purchase Plan.                                                                                                                                                           
|        | 10 | .3.1(5)     |  | Certificate of Amendment of Employee Stock
    Purchase Plan.                                                                                                                                               
|        | 10 | .4(6)       |  | Employment Offer Letter Agreement by and between
    Larscom Incorporated and Gurdip Jande dated January 25,
    2002, accepted February 11, 2002.                                                          
|        | 10 | .5(2)       |  | Lease Agreement between Berg & Berg
    Enterprises Inc. and Larscom Incorporated.                                                                                                                          
|        | 10 | .6(3)       |  | Software License Agreement by and between Larscom
    Incorporated and 3NO Systems, Inc. dated September 21,
    2000.                                                                                      
|        | 10 | .7(4)       |  | Lease Agreement between Technology IX, LLC,
    Keystone Corporation and Larscom Incorporated.                                                                                                              
|        | 10 | .8(5)       |  | Sublease Agreement between Silicon Wireless
    Corporation and Larscom Incorporated.                                                                                                                       
|        | 10 | .9(5)       |  | Employment Agreement by and between Larscom
    Incorporated and Daniel L. Scharre dated November 26, 2001.                                                                                                 

62



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|        |    |             |  |                                                                                                                                                                                                             
|------- | -- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 10 | .10(7)      |  | Restructuring Agreement by and between Larscom
    Incorporated and Oasys Telecom, Inc. dated May 13,
    2002.                                                                                             
|        | 10 | .11(7)      |  | Intellectual Property Security Agreement by and
    between Larscom Incorporated and Oasys Telecom, Inc. dated
    May 13, 2002.                                                                            
|        | 10 | .12(7)      |  | License Agreement by and between Larscom
    Incorporated and Oasys Telecom, Inc. dated May 13,
    2002.                                                                                                   
|        | 10 | .13(7)      |  | Letter Agreement by and between Larscom
    Incorporated and Oasys Telecom, Inc. dated April 9,
    2002.                                                                                                   
|        | 10 | .14(9)      |  | Electronic Manufacturing Services Agreement by
    and between Larscom Inc. and Sparqtron Manufacturing Corp. dated
    October 21, 2002.                                                                   
|        | 10 | .15(9)      |  | Consultant Agreement by and between Larscom
    Incorporated and Richard Pospisil dated November 22, 2002.                                                                                                  
|        | 10 | .16(*)      |  | Lease Agreement between Metropolitan Life
    Insurance Company and Larscom Incorporated, dated
    October 28, 2003.                                                                                       
|        | 10 | .17(*)      |  | Executive Change in Control Benefits Agreement by
    and among Larscom Incorporated and Daniel Scharre, dated
    February 10, 2004.                                                                       
|        | 10 | .18(*)      |  | Form of Executive Change in Control Benefits
    Agreement by and among Larscom Incorporated and Donald Morgan,
    Peter Moulds, Gurdip Jande, Adam Opoczynski and Jim Peasley
    dated February 10, 2004.
|        | 10 | .19(*)      |  | Form of registration rights agreement between
    Larscom Incorporated, Axel Johnson, Inc. and the
    stockholders party thereto.                                                                          
|        | 23 | .1(*)       |  | Consent of Independent Accountants.                                                                                                                                                                         
|        | 24 | .1          |  | Power of Attorney (see Signatures
    page 65).                                                                                                                                                           
|        | 31 | .1(*)       |  | Certification of the Larscom Incorporated Chief
    Executive Officer, Daniel L. Scharre, pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002.                                                    
|        | 31 | .2(*)       |  | Certification of the Larscom Incorporated Chief
    Financial Officer, Donald W. Morgan, pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002.                                                     
|        | 32 | .1(*)       |  | Certification of the Larscom Incorporated Chief
    Executive Officer and Chief Financial Officer pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002.                                            



---

(*) Filed herewith.



|    |                                                                                                                                                                                                                                 
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Incorporated by reference to exhibits 3.4,
    10.1 and 10.3, respectively, to Larscom Incorporated
    Registration Statement on Form S-1 (Commission File
    No. 333-14001), which became effective on December 18,
    1996.
|   
|(2) | Incorporated by reference to exhibit 10.11
    in Registrants Form 10-K for the fiscal year ended
    December 31, 1996.                                                                                                       
|   
|(3) | Incorporated by reference to exhibit 10.1 in
    Registrants Form 10-Q for the third quarter ended
    September 30, 2000.                                                                                                     
|   
|(4) | Incorporated by reference to exhibit 10.14
    in Registrants Form 10-K for the fiscal year ended
    December 31, 2000.                                                                                                       
|   
|(5) | Incorporated by reference to
    exhibits 10.1.1, 10.2.1, 10.3.1, 10.17 and 10.20,
    respectively, in Registrants Form 10-K for the fiscal
    year ended December 31, 2001.                                                 
|   
|(6) | Incorporated by reference to exhibit 10.2 in
    Registrants Form 10-Q for the first quarter ended
    March 30, 2002.                                                                                                         
|   
|(7) | Incorporated by reference to exhibits 10.3,
    10.4, 10.5 and 10.8 in Registrants Form 10-Q for the
    second quarter ended June 30, 2002.                                                                                   

63



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##### Table of Contents





|    |                                                                                                                                                    
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------
|(8) | Incorporated by reference to Appendix A to
    the Larscom Incorporated Registration Statement on Form S-4
    (SEC File No. 333-104554).          
|   
|(9) | Incorporated by reference to exhibits 10.29
    and 10.30, respectively, in Registrants form 10-K for the
    fiscal year ended December 31, 2002.

b) Reports on Form 8-K

We furnished the following reports on
Form 8-K during the quarter ending December 31, 2003:

Report on Form 8-K, dated October 27,
2003, relating to our earnings release for the third quarter of
fiscal 2003.

64



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##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13
or 15 (d) 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.



| |                     
| | --------------------
| | LARSCOM INCORPORATED



| |     |                     
| | --- | --------------------
| | By: | /s/ DONALD W. MORGAN

| |                                  
| | ---------------------------------
| |                                  
| | Donald W. Morgan                 
| | Vice President, Finance          
| | and Chief Financial Officer      
| | (Principal Financial Officer     
| | and Principal Accounting Officer)

Date: March 29, 2004

POWER OF ATTORNEY

Know all these persons by these presents, that
each person whose signature appears below continues and appoints
Daniel L. Scharre and Donald W. Morgan and each of them, jointly
and severally, his attorneys-in-fact, each with full power of
substitution, for him in any and all capacities, to sign any and
all amendments to this Form 10-K, and to file the same,
with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each said attorneys-in-fact or
his substitute or substitutes may do or cause to be done by
virtue hereof.

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

|                                       |  |                                                                                                                            |  |                |  | 
|-------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------- |  | -------------- |  | 
|                                       |  |                                                                                                                            |  |               
|Name                                   |  | Title                                                                                                                      |  | Date          
|                                       |  |                                                                                                                            |  |               
|                                      
|/s/ DANIEL L. SCHARREDaniel L. Scharre |  | President and Chief Executive Officer and
    Director (Principal Executive Officer)                                       |  | March 29, 2004
|                                      
|/s/ DONALD W. MORGANDonald W. Morgan   |  | Vice President, Finance and Chief Financial
    Officer (Principal Financial Officer and Principal Accounting
    Officer) |  | March 29, 2004
|                                      
|/s/ ALLEN R. ADAMSAllen R. Adams       |  | Director                                                                                                                   |  | March 29, 2004
|                                      
|Jeffrey M. Drazan                      |  | Director                                                                                                                   |  |               
|                                      
|/s/ DONALD G. HEITTDonald G. Heitt     |  | Director                                                                                                                   |  | March 29, 2004
|                                      
|/s/ JOHN F. MALONEJohn F. Malone       |  | Director                                                                                                                   |  | March 29, 2004

65



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##### Table of Contents



|                                               |  |                       |  |                |  | 
|---------------------------------------------- |  | --------------------- |  | -------------- |  | 
|                                               |  |                       |  |               
|Name                                           |  | Title                 |  | Date          
|                                               |  |                       |  |               
|                                              
|/s/ LAWRENCE D. MILLIGANLawrence D. Milligan   |  | Chairman of the Board |  | March 29, 2004
|                                              
|/s/ PHILIP J. QUIGLEYPhilip J. Quigley         |  | Director              |  | March 29, 2004
|                                              
|W. Michael West                                |  | Director              |  |               
|                                              
|/s/ DESMOND P. WILSON IIIDesmond P. Wilson III |  | Director              |  | March 29, 2004

66



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##### Table of Contents



EXHIBIT INDEX

|        |    |             |  |                                                                                                                                                                                                             
|------- | -- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 2  | .1(10)      |  | Agreement and Plan of Merger by and among Larscom
    Incorporated, London Acquisition Corp. and VINA
    Technologies, Inc., dated as of March 17, 2003.                                                   
|        | 3  | .2(*)       |  | Amended and Restated Certificate of Incorporation
    of Larscom Incorporated as filed in the State of Delaware on
    June 5, 2003.                                                                        
|        | 3  | .4(1)       |  | Amended By-laws of Larscom Incorporated.                                                                                                                                                                    
|        | 10 | .1(1)       |  | Form of Larscom Incorporated Stock Option Plan
    For Non-Employee Directors.                                                                                                                              
|        | 10 | .1.1(5)     |  | Certificate of Amendment of Stock Option Plan for
    Non-Employee Directors.                                                                                                                               
|        | 10 | .2(8)       |  | Form of Larscom Incorporated Stock Incentive
    Plan, as amended by the Larscom Incorporated Board of Directors
    on February 26, 2003 and approved by the Registrants
    stockholders on June 3, 2003.
|        | 10 | .2.1(5)     |  | Certificate of Amendment of Stock Incentive Plan.                                                                                                                                                           
|        | 10 | .3(1)       |  | Form of Larscom Incorporated Stock Purchase Plan.                                                                                                                                                           
|        | 10 | .3.1(5)     |  | Certificate of Amendment of Employee Stock
    Purchase Plan.                                                                                                                                               
|        | 10 | .4(6)       |  | Employment Offer Letter Agreement by and between
    Larscom Incorporated and Gurdip Jande dated January 25,
    2002, accepted February 11, 2002.                                                          
|        | 10 | .5(2)       |  | Lease Agreement between Berg & Berg
    Enterprises Inc. and Larscom Incorporated.                                                                                                                          
|        | 10 | .6(3)       |  | Software License Agreement by and between Larscom
    Incorporated and 3NO Systems, Inc. dated September 21,
    2000.                                                                                      
|        | 10 | .7(4)       |  | Lease Agreement between Technology IX, LLC,
    Keystone Corporation and Larscom Incorporated.                                                                                                              
|        | 10 | .8(5)       |  | Sublease Agreement between Silicon Wireless
    Corporation and Larscom Incorporated.                                                                                                                       
|        | 10 | .9(5)       |  | Employment Agreement by and between Larscom
    Incorporated and Daniel L. Scharre dated November 26, 2001.                                                                                                 
|        | 10 | .10(7)      |  | Restructuring Agreement by and between Larscom
    Incorporated and Oasys Telecom, Inc. dated May 13,
    2002.                                                                                             
|        | 10 | .11(7)      |  | Intellectual Property Security Agreement by and
    between Larscom Incorporated and Oasys Telecom, Inc. dated
    May 13, 2002.                                                                            
|        | 10 | .12(7)      |  | License Agreement by and between Larscom
    Incorporated and Oasys Telecom, Inc. dated May 13,
    2002.                                                                                                   
|        | 10 | .13(7)      |  | Letter Agreement by and between Larscom
    Incorporated and Oasys Telecom, Inc. dated April 9,
    2002.                                                                                                   
|        | 10 | .14(9)      |  | Electronic Manufacturing Services Agreement by
    and between Larscom Inc. and Sparqtron Manufacturing Corp. dated
    October 21, 2002.                                                                   
|        | 10 | .15(9)      |  | Consultant Agreement by and between Larscom
    Incorporated and Richard Pospisil dated November 22, 2002.                                                                                                  
|        | 10 | .16(*)      |  | Lease Agreement between Metropolitan Life
    Insurance Company and Larscom Incorporated, dated
    October 28, 2003.                                                                                       
|        | 10 | .17(*)      |  | Executive Change in Control Benefits Agreement by
    and among Larscom Incorporated and Daniel Scharre, dated
    February 10, 2004.                                                                       
|        | 10 | .18(*)      |  | Form of Executive Change in Control Benefits
    Agreement by and among Larscom Incorporated and Donald Morgan,
    Peter Moulds, Gurdip Jande, Adam Opoczynski and Jim Peasley
    dated February 10, 2004.
|        | 10 | .19(*)      |  | Form of registration rights agreement between
    Larscom Incorporated, Axel Johnson, Inc. and the
    stockholders party thereto.                                                                          
|        | 23 | .1(*)       |  | Consent of Independent Accountants.                                                                                                                                                                         
|        | 24 | .1          |  | Power of Attorney (see Signatures
    page 65).                                                                                                                                                           



---



##### Table of Contents



|        |    |             |  |                                                                                                                                                                 
|------- | -- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 31 | .1(*)       |  | Certification of the Larscom Incorporated Chief
    Executive Officer, Daniel L. Scharre, pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002.        
|        | 31 | .2(*)       |  | Certification of the Larscom Incorporated Chief
    Financial Officer, Donald W. Morgan, pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002.         
|        | 32 | .1(*)       |  | Certification of the Larscom Incorporated Chief
    Executive Officer and Chief Financial Officer pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002.



---

(*) Filed herewith.



|    |                                                                                                                                                                                                                                 
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Incorporated by reference to exhibits 3.4,
    10.1 and 10.3, respectively, to Larscom Incorporated
    Registration Statement on Form S-1 (Commission File
    No. 333-14001), which became effective on December 18,
    1996.
|   
|(2) | Incorporated by reference to exhibit 10.11
    in Registrants Form 10-K for the fiscal year ended
    December 31, 1996.                                                                                                       
|   
|(3) | Incorporated by reference to exhibit 10.1 in
    Registrants Form 10-Q for the third quarter ended
    September 30, 2000.                                                                                                     
|   
|(4) | Incorporated by reference to exhibit 10.14
    in Registrants Form 10-K for the fiscal year ended
    December 31, 2000.                                                                                                       
|   
|(5) | Incorporated by reference to
    exhibits 10.1.1, 10.2.1, 10.3.1, 10.17 and 10.20,
    respectively, in Registrants Form 10-K for the fiscal
    year ended December 31, 2001.                                                 
|   
|(6) | Incorporated by reference to exhibit 10.2 in
    Registrants Form 10-Q for the first quarter ended
    March 30, 2002.                                                                                                         
|   
|(7) | Incorporated by reference to exhibits 10.3,
    10.4, 10.5 and 10.8 in Registrants Form 10-Q for the
    second quarter ended June 30, 2002.                                                                                   
|   
|(8) | Incorporated by reference to Appendix A to
    the Larscom Incorporated Registration Statement on Form S-4
    (SEC File No. 333-104554).                                                                                       
|   
|(9) | Incorporated by reference to exhibits 10.29
    and 10.30, respectively, in Registrants form 10-K for the
    fiscal year ended December 31, 2002.