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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
 
                             WASHINGTON, D.C. 20549
 
                            ------------------------
 
                                   FORM 10-K
 
           [X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934
 
                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
 
                                       OR
 
         [ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934
 
                 FOR THE TRANSITION PERIOD FROM       TO
 
                        COMMISSION FILE NUMBER: 1-12491
                             ---------------------
 
                              LARSCOM INCORPORATED
             (Exact name of registrant as specified in its charter)
 
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<S>                                  <C>
             DELAWARE                     94-2362692
  (State or other jurisdiction of       (I.R.S Employer
  incorporation or organization)      Identification No.)
 
       1845 MCCANDLESS DRIVE                 95035
       MILPITAS, CALIFORNIA               (ZIP Code)
  (Address of principal executive
             offices)
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                                 (408) 941-4000
 
              (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:
                      Class A 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 [X]    No [  ]
 
    Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
 
    The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 11, 1999, was approximately $16,606,000.
 
    The number of the registrant's shares outstanding as of March 11, 1999, was
8,313,000 of Class A Common Stock and 10,000,000 of Class B Common Stock.
 
                      DOCUMENTS INCORPORATED BY REFERENCE:
 
    Portions of the Proxy Statement for the Registrant's 1999 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
 
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PART I       ............................................................................................           3
 
ITEM 1.      BUSINESS....................................................................................           3
 
ITEM 2.      PROPERTIES..................................................................................          14
 
ITEM 3.      LEGAL PROCEEDINGS...........................................................................          14
 
ITEM 4.      SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.........................................          14
 
PART II      ............................................................................................          15
 
ITEM 5.      MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.......................          15
 
ITEM 6.      SELECTED CONSOLIDATED FINANCIAL DATA........................................................          16
 
ITEM 7.      MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.......          17
 
ITEM 7A      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..................................          28
 
ITEM 8.      FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................................................          29
 
ITEM 9.      CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE........          52
 
PART III     ............................................................................................          52
 
ITEM 10.     DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..........................................          52
 
ITEM 11.     EXECUTIVE COMPENSATION......................................................................          52
 
ITEM 12.     SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..............................          52
 
ITEM 13.     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..............................................          52
 
PART IV      ............................................................................................          53
 
ITEM 14.     EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K............................          53
</TABLE>
 
                                       2
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PART I
 
ITEM 1. BUSINESS
 
    EXCEPT FOR THE HISTORICAL STATEMENTS CONTAINED HEREIN, 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 THE COMPANY ACHIEVES MAY DIFFER
MATERIALLY FROM THOSE INDICATED IN ANY FORWARD LOOKING STATEMENTS DUE TO THE
RISKS AND UNCERTAINTIES SET FORTH UNDER "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS," "CERTAIN FACTORS AFFECTING
FUTURE OPERATING RESULTS" AND ELSEWHERE IN THIS FORM 10-K. THE COMPANY
UNDERTAKES 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 THE COMPANY IN THIS REPORT AND IN THE COMPANY'S REPORTS FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION THAT ATTEMPT TO ADVISE INTERESTED PARTIES ON
THE RISKS AND FACTORS THAT MAY AFFECT THE COMPANY'S BUSINESS.
 
OVERVIEW
 
    Larscom Incorporated (the "Company" or "Larscom") develops, manufactures and
markets a broad range of high speed global internetworking products for network
service providers ("NSPs"), Internet Service Providers ("ISPs") and corporate
users. Product offerings range from full and fractional T1/E1, inverse
multiplexed T1/E1 and T3 to frame relay, asynchronous transfer mode ("ATM"),
inverse multiplexing for ATM ("IMA") and transparent local area network ("LAN")
services.
 
    Prior to the Company's initial public offering ("IPO") in December 1996, the
Company was a wholly owned subsidiary of Axel Johnson Inc. ("Axel Johnson").
Upon consummation of the IPO Axel Johnson owned 55% of the Class A and B Common
Stock of the Company and controlled 83% of the voting interest. These ownership
and control percentages currently remain approximately the same.
 
INDUSTRY OVERVIEW
 
    The proliferation of personal computers and the continuing need of users to
disseminate and share information have driven the Internet to become the
quintessential communications system. With both residential and business usage
expanding at phenomenal rates, the Internet is used not only as a means of
obtaining information, but also as the "virtual private network" of many
enterprises. Traditional local area networks which connect computing resources
within an enterprise are now routinely interconnected across wide geographic
areas via wide area networks ("WANs"). As networks extend and reach around the
world, demand for increased WAN capacity and higher speed WAN access has grown
dramatically. More recently, this demand has been further fueled by more
bandwidth intensive applications (video, imaging, etc.) and increasingly
creative ways of combining multiple types of information (voice, data, etc.)
into a single high speed connection.
 
    The increased demand for greater WAN speed and capacity has been accompanied
by increased complexity in available network services. In addition to dedicated
56/64 kbps and T1/FT1 services, private and public frame relay, digital
subscriber loop ("DSL") and ATM are available. This large variety of services
has also been coupled with an escalation in the variety and complexity of LAN
technology (10 Mbps, 100 Mbps, switched and Gigabit Ethernet and Fiber
Distributed Data Interface ("FDDI")). ATM, a highly scalable, cell-based
technology defined specifically to carry data, voice and video simultaneously,
has begun to migrate outward from its traditional position as a service
provider's core network backbone. NSPs and ISPs have begun offering a variety of
services such as Internet access and Transparent LAN service at a variety of
network speeds, ranging from 1.5 Mbps to the newly standardized NxT1 Inverse
Multiplexing for ATM ("IMA") specification to 155 Mbps.
 
    As a result of both the increased demand for greater WAN capacity and the
complexity and continuing evolution of service offerings, businesses have been
transitioning from the use of private WANs
 
                                       3
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dedicated to individual businesses to greater use of public WANs (often Internet
based) maintained by NSPs and ISPs. As this transition occurs, NSPs and ISPs are
being asked to provide an increasing variety of transmission and network
management services. In addition, corporate users in many cases are requiring
NSPs to assume full responsibility for operating and monitoring the network and
to guarantee certain levels of service.
 
    NSPs, ISPs and corporate users require equipment that can help them keep
pace with their ever changing bandwidth requirements. In addition, these
customers increasingly are seeking solutions that operate on a global basis with
networks that cross international boundaries. NSPs, ISPs and corporate users
require the ability to add more services and high speed applications in a rapid
and affordable manner. Accordingly, NSPs, ISPs and corporate users require
telecommunications equipment that supports a broad range of services and operate
reliably, flexibly and consistently in all the required countries. The
complexity and variety of services and products have prompted NSPs, ISPs and
corporate users alike to consolidate their purchasing activity by using fewer
vendors who offer reliable and affordable equipment throughout the world.
 
THE LARSCOM SOLUTION
 
    The Company's broad range of product offerings provides access to both ATM
and time division multiplexing ("TDM") services across a variety of
international standards at speeds ranging from 56 kbps to 155 Mbps. The
Company's products have modular architectures that simplify the provisioning of
new services by NSPs and ISPs and lower the cost of obtaining additional
bandwidth for large corporate users.
 
    PROVIDING MULTI-SERVICES/MULTI-CUSTOMER SOLUTIONS.  Although ATM equipment
has seen success in the carrier infrastructure, ATM service to end users has
only just become available. ATM as an access technology is beginning to gain
acceptance, becoming the technology of choice for many NSPs to offer multiple
services--cell, frame, circuit, Internet, intranet, extranet, transparent LAN or
virtual private networks. ATM's greatest benefit is its ability to transport a
variety of media types seamlessly across the network, as it is already doing in
many of the backbone infrastructures of carriers today. Larscom's EDGE family of
ATM edge access products provides multi-service solutions to NSPs and ISPs, and
addresses the need to service multiple clients through a common, secure
platform.
 
    BRIDGING THE BANDWIDTH GAP.  Through its Mega-T, Mega-E and Orion 4000
products, Larscom pioneered the use of T1 and E1 inverse multiplexing, which
enables users to achieve higher bandwidth capacity than offered by a single
T1/E1 line, thereby bridging the bandwidth gap between T1/E1 and T3/E3.
Fractional T3/E3 service, provided in this manner, allows NSPs to leverage the
existing T1 based infrastructure and provides corporate users with ready access
to affordable and ubiquitous high speed bandwidth. Larscom's new Orion 2000
extends Larscom's inverse multiplexing experience to the ATM environment.
 
    SCALABILITY AND MODULARITY.  The Company incorporates flexibility and
modularity into its products as network complexity and bandwidth increase, as
industry standards evolve and as NSPs, ISPs and corporate users seek to meet
multiple needs. The Company's upgradeable software and plug-in modules allow
services to be added rapidly and cost effectively as demand changes and industry
standards evolve.
 
    RELIABILITY AND QUALITY.  The Company has earned a strong reputation for the
quality of its products, as well as its responsive service. The Company's
products are manufactured to meet the highest standards of reliability and
quality, including intensive system level testing in development and
manufacturing. Larscom has responded to its customers' needs by providing
telecommunications equipment that operates reliably and consistently across the
globe. The Orion 4000, Orion 2000, WANmaker, Mega-E and EDGE product families
are designed, tested and certified for use in major international markets. The
WANmaker product, in particular, is designed for easy installation and use.
 
                                       4
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    CUSTOMER SERVICE AND SUPPORT.  The Company offers real-time service and
support through various stages of the customer relationship. The Company's
service and support function begins by working closely with customers at the
product definition and design stage. To meet its customers' unpredictable
purchasing patterns, the Company's sales and operations departments are
organized to respond quickly to short lead-time orders. Finally, Larscom
provides post-sale service and support of its products through technical
consulting, installation assistance and maintenance.
 
PRODUCTS
 
    The Company's products are divided into two groups based upon bandwidth
capabilities. The Network Systems Group is responsible for the broadband
products which are defined as products that support bandwidth greater than 2
Mbps and the Digital Access Group is responsible for products that support
bandwidth less than 2 Mbps.
 
NETWORK SYSTEMS GROUP
 
    Larscom entered the broadband market in 1991 with the acquisition of T3
Technologies, Inc. Larscom's broadband product line consists of a range of
products that include the Orion 4000 broadband access multiplexer, a family of
inverse multiplexers, a single function T3 Digital Service Unit ("DSU") and most
recently, the EDGE Series ATM edge access products. List prices of network
systems group products range from $3,700 to $120,000. Network Systems Group
products accounted for 50%, 40% and 31% of total revenues in 1998, 1997 and
1996, respectively.
 
    ORION 4000.  The Orion 4000 is a highly versatile broadband access
multiplexer with a unique architecture that handles both ATM and TDM traffic
using a dual, redundant 155 Mbps bus structure. The Orion 4000 accommodates data
applications operating at speeds from 1.5 Mbps up to 155 Mbps, as well as
network connections that range from T1 or E1 to T3. The Orion 4000 is designed
to enable functionality to be added in a modular and cost effective fashion. It
is available in both 5 slot and 12 slot shelf configurations, both of which have
met the requirements of CE (European Union Certification) for international
markets. The Orion 4000 is distinctive in the role that it can play in hybrid
networks (TDM networks with ATM applications) and in providing an economical
migration path from low to high bandwidth, thereby ensuring legacy equipment
investment protection.
 
    The Orion 4000 is able to support full and fractional T3 networks. Its T1
and E1 inverse multiplexing modules, introduced in 1994 and 1995, respectively,
provide transparent channels for applications such as LAN interconnection or
video transmission. The T3mux and Tmux modules, introduced in 1995, provide
greater 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 crossconnect, and combine T1 traffic from a digital Private
Branch Exchange ("PBX") or a T1 multiplexer with inverse multiplexed data. The
T3Clear module for the Orion 4000 was introduced in early 1997 and a second
double density version of T3Clear was introduced in 1998. T3Clear application
modules provide clear channel 45 Mbps transmission and are fully interoperable
with the Access-T45, Larscom's standalone T3 DSU.
 
    ORION 2000.  The Orion 2000 ATM inverse multiplexer, introduced in May 1998,
is designed to be used by NSPs who wish to provide either native ATM services or
ATM extensions at economical prices. It is fully conformant with the ATM Forum
IMA specification and can interface directly with an OC3 ATM user-to-network
interface or network-to-network interface on any ATM device. The Orion 2000
offers ATM connectivity up to 12 Mbps (8 X T1) or up to 16 Mbps (8 X E1), as
well as extremely low cell delay variation, a requirement for delay-sensitive
traffic such as video. The unit has sophisticated ASCII terminal and simple
network management protocol ("SNMP") interfaces that allow local or remote
configuration, performance monitoring, alarm notification and diagnostic
testing. In addition, an optional LarsView 2000 graphical user interface offers
graphical, point-and-click monitoring and control.
 
                                       5
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    EDGE SERIES PRODUCTS.  The EDGE family of products consists of the EDGE 40,
65, 70 and 85, which were developed to fulfill NSP and ISP needs for
service-enabling intelligence at the edge of their networks. A single EDGE
multiservice system installed in an office building, office park or other
carrier point of presence can aggregate and concentrate Ethernet, Fast Ethernet,
FDDI and Token Ring LAN traffic from multiple customers to a high speed ATM link
operating at speeds up to 155 Mbps. Each customer can have its own secure,
private virtual network operating at the same native speed as its LAN. With the
EDGE product family, network service providers can maximize service revenue from
an ATM link and end users can subscribe to a number of tailored, flexible
services. In late 1997, circuit-based service support was added to the EDGE
family.
 
    OTHER BROADBAND PRODUCTS.  The Mega-T, introduced in 1992, was the first
inverse multiplexer to bridge the bandwidth gap between T1 and T3. It provides
economic access to greater than T1 bandwidth for high speed applications,
deriving a data channel of up to 6 Mbps from four T1 circuits. An E1 version of
the product, the Mega-E, was introduced in 1998. Larscom's patented inverse
multiplexing algorithm, used for both the Mega-T/E and Orion 4000, handles
alignment of the individual T1s or E1s and allows for differential delay between
individual T1s. This algorithm also allows the data transmission rate to be
lowered automatically in the event that individual T1 circuits fail and to be
raised automatically when the circuits are restored. The Mega-T/E shares with
the Orion 4000 the unique ability to identify individual T1/E1 circuits, thereby
simplifying trouble shooting. The Mega-T/E is primarily used for high speed LAN
internetworking, as well as frame relay network access above T1 or E1 speeds and
broadcast quality digital video.
 
    The Access-T45, introduced in 1992, is a single or dual port, 45 Mbps DSU
that provides a clear channel T3 network interface. The Access-T45 is used for
very high speed LAN internetworking, for Internet access and backbones and for
channel extension. The Access-T45 allocates bandwidth in increments of 3 Mbps, a
functionality that has been used by some ISPs to control bandwidth assignment
for their customers.
 
    EtherSpan, introduced in 1996, is an advanced Ethernet bridge that can
handle a sustained data rate of 10 Mbps. It offers cost effective, high speed
WAN connectivity for Ethernet LANs, with one 10Base-T Ethernet LAN port and a
single WAN port that utilizes either HSD or HSSI standards. When combined with
Larscom's Mega-T or Mega-E inverse multiplexers, the resulting MegaSpan
offerings provide a cost-effective Ethernet-to-NxT1/E1 WAN connection.
 
DIGITAL ACCESS GROUP
 
    Larscom entered the digital access market in 1986 with emphasis on
performance monitoring of T1 lines. Larscom's pioneering efforts to deliver an
advanced network diagnostic system within a Channel Service Unit ("CSU")
resulted in its TNDS (T1 Network Diagnostic System) product line. The advanced
performance monitoring capabilities, which were featured in the first TNDS and
enhanced and complemented in subsequent CSU and CSU/DSU products, continue to be
a hallmark of Larscom throughout its product lines. List prices of digital
access group products range from $845 to $6,595. Digital Access Group products
accounted for 45%, 56% and 68% of total revenues in 1998, 1997 and 1996,
respectively.
 
    ACCESS-T AND SPLIT-T PRODUCTS.  The Access-T family, introduced in 1991, is
a series of T1/FT1 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 Split-T, introduced in 1990, is a stand alone
T1/FT1 CSU/DSU. It has a front panel that incorporates a LCD user interface for
local configuration and is primarily used for LAN interconnection and digital
PBX traffic. In 1996, the Access-T 100S, a low cost, smaller version of a single
port Access-T, was introduced, allowing the Company to respond to downward price
pressure in the digital access market.
 
                                       6
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    WANMAKER PRODUCT FAMILY.  The first product in the WANmaker product family,
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. Introduced in 1998 the TerraUno
is as easy to install and use as a plug-and-play analog modem.
 
    OTHER DIGITAL ACCESS PRODUCTS.  The Access-T 1500, introduced in 1992, is a
shelf based version of the Access-T that utilizes a hub and spoke architecture
which allows centralized network nodes to serve units at dispersed sites and to
concentrate traffic in a single location where network hubs are constrained for
space.
 
    The Orion 200 family, introduced in 1994, is an advanced T1 and E1 access
multiplexer that can accommodate from two to eight data ports and two network
ports. Its primary application is LAN interconnection, often coupled with
digital PBX traffic, as well as videoconferencing. The Orion 200 family can
operate in both T1 and E1 networks, and can also perform conversion between T1
and E1 standards.
 
    The FramePath 64 and 100 are frame-aware CSU/DSUs for a frame relay network.
Larscom purchases these products from an original equipment manufacturer.
 
    In addition, Larscom offers a family of T1 CSU products, introduced in 1986,
centered on the TNDS family of fully featured T1 CSUs. These products provide a
T1 network interface with advanced performance monitoring and diagnostic
capabilities.
 
CUSTOMERS
 
    The Company's customers principally consist of NSPs, ISPs, systems
integrators, value added resellers ("VARs"), federal, state and local government
agencies and end-user corporations.
 
    The Company believes that its relationships with large customers,
particularly the NSPs and ISPs, will be critical to its future success. These
customers prefer to purchase the majority of their network access solutions from
a single vendor, which may benefit the Company as it broadens and enhances its
product line. In 1998, 1997 and 1996, NSPs and ISPs represented 61%, 63% and
62%, respectively, of total revenues. The following table summarizes the
percentage of total revenues for customers accounting for more than 10% of the
Company's revenues:
 
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                                                                 YEARS ENDED
                                                                 DECEMBER 31,
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                                                              1998   1997   1996
                                                              ----   ----   ----
MCIWorldCom (*).............................................   32%    36%    34%
IBM Global Network (**).....................................   10%    14%    13%
</TABLE>
 
------------------------
 
*    In September 1998, MCI and WorldCom completed their merger and now operate
    under the name MCIWorldCom. Percentages of total revenue have been restated
    for 1998 and prior years as if the merger had been in effect for all periods
    presented. Separately, MCI would have accounted for 16%, 25% and 21% of
    total revenues during 1998, 1997 and 1996, respectively.
 
**   In December 1998, AT&T announced its agreement to purchase the IBM Global
    Network from IBM. This acquisition is expected to be consummated in 1999.
    Had this acquisition been in effect for all periods presented, AT&T would
    have accounted for 12%, 19% and 20% of total revenues in 1998, 1997 and
    1996, respectively.
 
    None of the Company's customers is contractually obliged 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 the Company's current customers will continue to place
orders with the Company, that orders from existing customers will continue at
the levels of previous periods or that the Company will be able to obtain orders
from new customers. Loss of, or a material
 
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reduction in orders by, one or more of the Company's major customers could have
a material adverse effect on the Company's business and operating results.
 
BACKLOG
 
    The Company's backlog at any point in time is typically limited.
Accordingly, sales in any quarter are largely dependent on orders received
during that quarter. Furthermore, the Company's agreements with its customers
typically provide that they may change delivery schedules and cancel orders
within specified time frames, typically up to 30 days prior to the scheduled
shipment date, without penalty. The Company's customers have in the past built,
and may in the future build, significant inventory in order to facilitate more
rapid deployment of anticipated major projects or for other reasons. Decisions
by such customers to reduce their inventory levels could lead to reductions in
purchases from the Company. Therefore, customer decisions to delay delivery,
cancel orders or reduce purchases could have a material adverse effect on the
Company's business and operating results.
 
MARKETING AND SALES
 
    The Company sells its products in the U.S. primarily through its direct
sales organization, and to a lesser extent through OEMs, VARs and systems
integrators. The Company is currently seeking to develop an indirect
distribution channel for sales to domestic customers. This channel will consist
primarily of a small group of master distributors, such as Tech Data, and a
number of authorized resellers. Sales through this channel will consist
primarily of digital access products, particularly the WANmaker product, and to
a lesser extent network systems group products. Sales to large NSPs and ISPs
will continue to be handled by the Company's direct sales force. As part of this
strategy the Company has appointed certain sales people to sign up resellers and
assist them in their sales efforts. There are a number of risks associated with
the development of an indirect distribution channel. These include a reduction
in the Company's ability to forecast sales, reduced average selling prices,
management's inexperience in establishing and managing a distribution channel,
potential reductions in customer satisfaction, loss of contact with users of the
Company's products and new methods of advertising and promoting the products
which will result in additional expenses. These, and other factors, could cause
results of operations and financial condition to be materially adversely
affected.
 
    The Company markets its products internationally through non-exclusive
distribution agreements with VARs and systems integrators. To date the use of a
distribution channel outside the US has not been particularly successful. To
focus on sales to Europe, the Middle East and Africa, the Company has created a
regional sales and service team, headquartered in the United Kingdom. The United
Kingdom team focuses on direct sales to large NSPs while also supporting its
distributors for sales to smaller customers.
 
    NSPs require that products undergo extensive lab testing and field trials
prior to their deployment in the network. Accordingly, the Company is
continually submitting successive generations of its current products as well as
new products to its customers for evaluation and approval. Additionally,
international NSPs 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
the customer and regulatory issues.
 
CUSTOMER SERVICE AND SUPPORT
 
    The Company's products are required to meet rigorous standards imposed by
both customers and internal product quality assurance testing procedures. The
Company has service contracts with most of its major customers, and provides on
site service via arrangements with a number of service partners worldwide such
as Milgo Services and Netcom Solutions in the U.S., Data General in Europe and
Datacraft in the Pacific Rim. These contracts typically establish response time
and level of service
 
                                       8
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commitments, with penalties for non-performance. Larscom maintains a 24 hour, 7
day a week technical assistance support center, and provides on site support
with contracted response times, plus a wide range of repair programs. The
Company also provides technical applications assistance, as well as customer and
distributor product maintenance, installation services and training.
 
    Prior to January 1997, all of the Company's products carried a two-year
warranty, which generally covered defects in materials and workmanship. In
January 1997, the Company changed the warranty period for most of its products
to three years. In the past, the Company's warranty expenses have been
relatively insignificant.
 
RESEARCH AND DEVELOPMENT
 
    Larscom believes that its future success depends on its ability to maintain
technological leadership through timely enhancements of existing products and
development of new products that meet customer needs. During 1998, 1997 and
1996, total research and development expenses were $11,463,000, $30,063,000
(including an acquisition related in-process research and development charge of
$20,120,000) and $8,123,000, respectively. The Company believes that a continued
commitment to research and development, particularly related to emerging
technologies, will be required to remain competitive.
 
    The Orion 4000 product family was designed specifically to meet the demands
of the Company's larger customers. Relationships with these customers provide
the Company with advanced insight into the evolving needs of customers and allow
the Company to anticipate new technology requirements. Enhancements to these
product families are being developed by including major customers in the product
definition and review process. Timely customer feedback is important to the
Company in making modifications to existing products and designing new products.
 
    The rapid development of new technologies increases the risk that current or
new competitors could develop products that would reduce the competitiveness of
the Company's products. The Company's success will depend to a substantial
degree upon its 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. 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 DSL, ATM, SONET and Synchronous Digital Hierarchy ("SDH").
Further, the telecommunications industry is characterized by the need to design
products that meet industry standards for safety, immunity, emissions and
network connection. Such industry standards are often changing or incomplete as
new and emerging technologies and service offerings are introduced by NSPs. 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 the Company manage transitions from older products
in order 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 the Company 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. The Company's business and
operating results could be materially adversely affected if the Company were to
be unsuccessful, or to incur significant delays, in developing and introducing
such new products or enhancements.
 
MANUFACTURING AND QUALITY ASSURANCE
 
    The Company's manufacturing operations consist of materials procurement,
third party assembly of final product based on printed circuit boards, product
testing and inspection and system configuration for shipment. The Company has
maintained a long term relationship with its principal third party printed
circuit board assembler which has allowed the Company to implement total quality
control in the entire
 
                                       9
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manufacturing process, including statistically monitored process control
programs. The Company utilizes traditional procurement methods with its
suppliers, using standard purchase orders for all scheduling and commitments.
Most purchase order payment terms are standard with payment due in 30 days, with
some orders negotiated to net 45 days payment. The Company uses automated
functional product testing to remain flexible to customers' needs while
maintaining control of the quality of the manufacturing process.
 
    During 1998, the Company outsourced the manufacturing of the Orion 4000
chassis and the main printed circuit board assemblies for its Access-T and
Split-T product lines. In the future the Company may outsource other products.
The Company has outsourced completely the manufacturing of the WANmaker product
since its introduction. Complete outsourcing is also known as turnkey
manufacturing. In turnkey manufacturing, unlike manufacturing on consignment,
the vendor 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. The Company will be required to commit
to purchase certain volumes within various time frames. Although management
believes that the benefits of turnkey manufacturing outweigh the risks, it is
possible that the transition to turnkey manufacturing will impact the Company's
ability to alter the manufacturing schedule rapidly enough to satisfy changes in
customer demand. The Company continues to perform final assembly and testing of
finished products.
 
    On time delivery of the Company's products is dependent upon the
availability of components used in its products. The Company purchases parts and
components for assembly from a variety of pre-approved suppliers through a
worldwide procurement-sourcing program. The Company attempts to manage risks by
developing alternate sources and by maintaining quality relationships with its
suppliers. To date, the Company has been able to obtain adequate supplies of
required components in a timely manner from existing sources or, when necessary,
from alternate sources. The Company does acquire certain components from sole
sources, either to achieve economies of scale or because of proprietary
technical features designed into the Company's products. A substantial portion
of the Company's shipments in any fiscal period relates to orders received in
that period. To meet this demand, the Company maintains a supply of finished
goods inventories at its manufacturing facility and safety stock of critical
components at the suppliers' stocking location. In addition, a significant
percentage of the Company's orders are shipped within three business days of
receiving the order. There can be no assurance that interrupted or delayed
supplies of key components will not occur which could have a material adverse
effect on the Company's business and operating results.
 
    The Company maintains a comprehensive quality control program. However,
complex products such as those offered by the Company might contain undetected
errors or failures when first introduced or as new versions are released.
Despite testing by the Company and its customers, there can be no assurance that
existing or future products based upon the Orion 4000 or EDGE architectures or
other technologies will not contain undetected errors or failures when first
introduced or as new versions are released. Although the Company believes that
its reserves for estimated future warranty costs are adequate, the Company's
estimates, particularly those related to products which have been recently
introduced such as the Orion 2000 may not be adequate. Warranty claims in excess
of those expected by the Company could have a material adverse effect on the
Company's business and operating results.
 
    At the end of 1998, vendors of three integrated circuits ("ICs") notified
the Company regarding their intent to cease production. As a result of
anticipated continued usage of these ICs, Larscom entered into purchase
commitments of approximately $1,250,000 in the aggregate, representing between
one and two years expected demand for these components. The Company will
consider redesigning its products to replace those ICs. The Company has
attempted to take into account factors such as the ability to replace the
particular IC with a similar part and the estimated life of the Company's
products in determining the quantities to purchase. Although the Company
believes that it will use all of the quantities it has agreed to purchase, there
can be no assurance that its estimates are correct. If the Company's estimates
are not
 
                                       10
<PAGE>
correct and requirements for these ICs are less than anticipated, it could have
a material adverse effect on the Company's business and results of operations.
 
COMPETITION
 
    The markets for the Company's products are intensely competitive and the
Company expects competition to increase in the future. The Company's network
systems group products compete primarily with Digital Link, Verilink, ADC
Kentrox, Cisco Systems, 3Com Corporation, Xylan, ADTRAN and Sonoma. The
Company's digital access group products compete against traditional CSU/DSU
vendors, such as ADC Kentrox, Verilink, Digital Link, ADTRAN, Paradyne and
Visual Networks. The Company competes to a lesser extent with other
telecommunications equipment companies. The Company believes that its 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, experienced sales, marketing and service
organizations and evolving industry standards. The Company believes that despite
increased competition, it generally competes favorably in these areas. However,
certain competitors have more broadly developed distribution channels and have
made greater advances than the Company in certain emerging technologies. There
can be no assurance that the Company will be able to continue to compete
successfully with existing or new competitors.
 
    The Company's products could also be materially adversely affected by the
integration of CSU/DSU functionality into switches and routers (as evidenced by
the introduction in 1998 of the Cisco POET card), by the entry of LAN equipment
vendors into the Company's markets or by the requirement for alternative methods
of performance monitoring for services such as frame relay. In the digital
access market, new technologies could displace some parts of the T1/E1 CSU/DSU
product line. For example, Asymmetrical, Symmetrical and High-Speed Digital
Subscriber Line ("ADSL", "SDSL" and "HDSL") are subscriber loop technologies
that enable service providers to deploy high bandwidth services which could
replace more traditional T1/FT1 services, upon which most of the Company's
products are based.
 
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. From time to time, third parties may assert exclusive
patent, copyright, trademark and other intellectual property rights to
technologies that are important to the Company. The Company has not conducted a
formal patent search relating to the technology used in its 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 the Company
which could relate to the Company's products. Software comprises a substantial
portion of the technology in the Company's 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 the Company if
the Company discovers third party patents related to its software products or if
such patents are asserted against the Company in the future. The Company may
receive communications from third parties in the future asserting that the
Company's products infringe or may infringe on the proprietary rights of such
third parties. In its distribution agreements, the Company typically agrees to
indemnify its 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 the Company, could result in
significant expense to the Company and divert the efforts of the Company's
technical and management personnel. In the event of an adverse ruling in such
litigation, the Company might be required to discontinue the use and sale of
infringing products, 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 the Company and the failure of the Company to develop
or license a substitute technology could have a
 
                                       11
<PAGE>
material adverse effect on the Company's business and operating results. In
addition, the laws of certain foreign countries in which the Company's products
are or may be developed, manufactured or sold may not protect the Company's
products or intellectual property rights to the same extent as do the laws of
the U.S. and thus make the possibility of misappropriation of the Company's
technology and products more likely.
 
EMPLOYEES
 
    As of December 31, 1998, the Company had 233 full time employees of whom 65
were primarily engaged in research and development, 39 in manufacturing and
quality control, 66 in marketing and sales, 27 in customer service and 36 in
administration and finance. The Company has never experienced any work stoppage
and none of the Company's employees is represented by a collective bargaining
unit. The Company believes its relationship with its employees is good.
 
MANAGEMENT
 
    The executive officers and directors of the Company are as follows:
 
<TABLE>
<CAPTION>
NAME                                                       AGE                            POSITION
-----------------------------------------------------      ---      -----------------------------------------------------
<S>                                                    <C>          <C>
George M. Donohoe....................................          61   Acting Chief Executive Officer
Bruce D. Horn........................................          47   Vice President, Finance and
                                                                    Chief Financial Officer
Rebecca C. Horn......................................          45   Vice President and General
                                                                    Manager, Network Systems Group
Amin Pessah..........................................          49   Vice President and General
                                                                    Manager, Digital Access Group
Jeffrey W. Reedy.....................................          40   Vice President, Engineering
Paul E. Graf.........................................          55   Chairman of the Board (2)
Donald Green.........................................          67   Director (1)
Donald G. Heitt......................................          63   Director (2)
Lawrence D. Milligan.................................          62   Director (2)
Harvey L. Poppel.....................................          61   Director (1)(2)
Joseph F. Smorada....................................          52   Director (1)
</TABLE>
 
------------------------
 
(1) Member of Audit Committee.
 
(2) Member of Compensation Committee.
 
    George M. Donohoe has served as Acting Chief Executive Officer since October
1998 and as Executive Vice President responsible for the Network Systems Group
since January 1998. Previously he served as Vice President of Sales from August
1994 to December 1997, as Director of Telco Sales from April 1994 to August 1994
and as Western Region Sales Manager from November 1993 to March 1994. Prior to
joining the Company, Mr. Donohoe was Director of LAN Product Sales at Teleglobe
from February 1993 to October 1993, and Vice President of Sales at Halley
Systems from December 1989 to January 1993. Prior to that Mr. Donohoe served in
senior sales and sales management positions at Infinet, Honeywell Information
Systems and IBM. Mr. Donohoe earned a BS in Industrial Engineering and
Management Sciences from the University of South Dakota.
 
    Bruce D. Horn has served as Vice President of Finance and Chief Financial
Officer of the Company since January 1993. Previously, he served as Director of
Finance and Chief Financial Officer from March 1991 to December 1992. Prior to
joining the Company, Mr. Horn was Director of Finance at Insystems, Inc. and
Corporate Controller at Anicon, Inc. Mr. Horn earned a BA in Accounting from the
University of Northern Iowa and an MBA in Finance from California State
University, Hayward.
 
                                       12
<PAGE>
    Rebecca C. Horn has served as Vice President and General Manager, Network
Systems Group, since she joined the Company in October 1998. Prior to that she
served as Vice President, Assistant General Manager from April 1998 to September
1998 and as Vice President, Marketing and Business Development from October 1993
to April 1998 at Fujitsu Network Communications. Prior to that Ms. Horn held
senior management positions at DSC Communications, Northern Telecom, ITT Telecom
and GTE. Ms. Horn earned a BS in Business Administration from Western Carolina
University and an MA in Economics from North Carolina State University.
 
    Amin Pessah has served as Vice President and General Manager, Digital Access
Group, since January 1998. Prior to that he served in senior sales management
positions, most recently as Assistant Vice President of North American Sales,
since joining the Company in October 1988. Prior to that Mr. Pessah served in
senior sales and sales management positions at Memotec, General DataComm,
Timeplex and Memorex. Mr. Pessah earned a BS in Electrical Engineering and
Computer Sciences from the University of California, Berkeley.
 
    Jeffrey W. Reedy has served as Vice President of Engineering of the Company
since August 1994. Previously, he served as Vice President/Division Manager from
January 1993 to August 1994 and Director of Engineering from November 1991 to
January 1993. Prior to November 1991, Mr. Reedy was the co-founder and Vice
President of Engineering at T3 Technologies, Inc. (which was acquired by the
Company in 1991). Mr. Reedy earned a BS in Electrical Engineering and Computer
Science from Duke University and an MSEE from Stanford University.
 
    Paul E. Graf has served as Chairman of the Board of Directors of the Company
since June 1990. Mr. Graf has served as President, Chief Executive Officer and
director of Axel Johnson since 1989. Prior to joining Axel Johnson, Mr. Graf
held various senior executive positions with Schroders, a venture capital
company, Conrac Corporation and Texas Instruments. Mr. Graf earned a BS in
Electrical Engineering from Rensselear Polytechnic Institute and an MBA from
Boston University.
 
    Donald Green has served as a director of the Company since August 1998. He
is a co-founder of Advanced Fibre Communications, Inc. ("AFC") and has served as
Chairman of the Board since May 1992. Mr. Green has also served as Chief
Executive Officer of AFC from June 1998 to the present and from May 1992 to June
1997. Prior to AFC, Mr. Green founded Optilink Corporation in 1987 and served as
its Chief Executive Officer until the company was acquired in 1990 by DSC
Communications Corporation, when he became Vice President and General Manager of
the renamed DSC Optilink Access Products division. Prior to his founding
Optilink Corporation, Mr. Green founded Digital Telephone Systems in 1969. Mr.
Green is also a director of TCSI Corporation, two private organizations, and a
private non-profit foundation. Mr. Green earned a BS from London University.
 
    Donald G. Heitt has served as a director of the Company since November 1996.
He served as Chairman of the Board of Voysys Corporation from December 1995
until his retirement in May 1998. From April 1990 to January 1996, Mr. Heitt was
the President and Chief Executive Officer of Voysys Corporation. Prior to 1990,
Mr. Heitt served as Senior Vice President of Telebit Corporation, Vice President
of Sales and Marketing and President of the computer division of General
Automation, Inc., and Vice President of Honeywell Information Systems, Inc. Mr.
Heitt earned a BBA from the University of Iowa.
 
    Lawrence D. Milligan has served as a director of the Company since November
1998. Mr. Milligan held several senior management positions over the course of
38 years with Procter & Gamble Co. Prior to retiring from Procter & Gamble in
1998, he was the Senior Vice President responsible for worldwide sales and
customer development, a position he held for eight years. Mr. Milligan is Vice
Chairman of the Board of Directors of Axel Johnson and is a member of the Board
of Directors of U.S. Playing Card Company and Portman Equipment Company. He
serves on the Dean's Advisory Councils of Goizueta Business School at Emory
University and the University of Texas at Austin. He graduated from Williams
College and served in the United States Marine Corp.
 
                                       13
<PAGE>
    Harvey L. Poppel has served as a director of the Company since November
1996. He served as Managing Director at Broadview International from January
1985 until his retirement in December 1996 and as President of Poptech, Inc.
since 1984. Previously, he was Senior Vice President, Board Member and Managing
Officer of the Information Industry Practice at Booz, Allen & Hamilton and
managed communications software development at both Western Union and
Westinghouse Electric. He also is a director of Cotelligent, Inc., a
professional services firm. Mr. Poppel holds a BS and an MS from Rensselear
Polytechnic Institute.
 
    Joseph F. Smorada has served as a director of the Company since June 1992.
Mr. Smorada has served as Senior Vice President and Chief Financial Officer of
Axel Johnson since April 1992. Prior to joining Axel Johnson, Mr. Smorada was
Senior Vice President and Chief Financial Officer for Lone Star Industries, Inc.
from September 1988 to April 1992. Prior to 1988, Mr. Smorada held senior
executive positions with Conrac Corporation and Continental Group, Inc. Mr.
Smorada earned a BA in Economics from California University of Pennsylvania.
 
    There is no family relationship among any directors or executive officers of
the Company.
 
ITEM 2. PROPERTIES
 
    The Company currently leases a 119,000 square foot facility located in
Milpitas, California and two facilities of 16,000 and 40,000 square feet in
Research Triangle Park ("RTP"), North Carolina. The 16,000 square foot facility
in RTP is completely sublet and 39,000 square feet of the Milpitas facility is
sublet. Most of the Company's manufacturing, sales and administration and
marketing, customer service and research and development for the Digital Access
Group are performed at the Company's Milpitas facility. The RTP facility is home
to the marketing, customer service and research and development activities of
the Network Systems Group. The Company also occupies various small offices
throughout the US which support sales activities and one in the UK which
supports sales and service activities. The Company believes that its existing
facilities are adequate for its current needs.
 
ITEM 3. LEGAL PROCEEDINGS
 
    The Company is 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, 1998.
 
                                       14
<PAGE>
PART II
 
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
 
    The Company made its initial public offering of Class A Common Stock on
December 18, 1996, at $12.00 per share, and the Class A Common Stock of the
Company began trading in the over-the-counter market on the NASDAQ National
Market on December 19, 1996, under the symbol "LARS." The following table sets
forth the high and low sales prices for the Company's Class A Common Stock as
reported on the NASDAQ National Market from January 1, 1997 through December 31,
1998. These prices reflect inter-dealer prices, without retail markup, markdown
or commission, and may not necessarily represent actual transactions.
 
<TABLE>
<CAPTION>
                                                1998              1997
                                          ----------------   --------------
                                           HIGH      LOW      HIGH     LOW
                                          ------   -------   ------   -----
<S>                                       <C>      <C>       <C>      <C>
First quarter...........................  $101/4   $71/2     $153/8   $81/8
Second quarter..........................  $121/8   $55/16    $133/8   $6
Third Quarter...........................  $ 71/4   $2        $113/8   $71/16
Fourth Quarter..........................  $ 25/8   $ 15/16   $133/8   $71/2
</TABLE>
 
    As of March 11, 1999, there were 61 holders of record of the Company's Class
A Common Stock and 1 holder of record of the Company's Class B Common Stock. The
Company had an estimated 3,334 beneficial holders of its Class A Common Stock as
of March 11, 1999.
 
    The Company currently intends to retain any future earnings for use in its
business and does not anticipate paying any cash dividends in the foreseeable
future.
 
                                       15
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
 
<TABLE>
<CAPTION>
                                                               YEARS ENDED DECEMBER 31,
                                                 -----------------------------------------------------
                                                   1998       1997       1996       1995       1994
                                                 ---------  ---------  ---------  ---------  ---------
                                                         (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                              <C>        <C>        <C>        <C>        <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues.......................................  $  72,733  $  75,955  $  66,444  $  48,663  $  36,550
Cost of revenues...............................     40,917     32,718     29,949     21,147     15,037
                                                 ---------  ---------  ---------  ---------  ---------
    Gross profit...............................     31,816     43,237     36,495     27,516     21,513
                                                 ---------  ---------  ---------  ---------  ---------
Operating expenses:
  Research and development.....................     11,463      9,943      8,123      7,143      6,703
  Selling, general and administrative..........     25,833     21,145     19,408     15,762     13,385
  Restructuring................................      1,214         --         --         --         --
  Other nonrecurring charges...................      7,915         --         --         --         --
  In-process research and development charge
    related to acquisition.....................         --     20,120         --         --         --
                                                 ---------  ---------  ---------  ---------  ---------
    Total operating expenses...................     46,425     51,208     27,531     22,905     20,088
                                                 ---------  ---------  ---------  ---------  ---------
Income (loss) from operations..................    (14,609)    (7,971)     8,964      4,611      1,425
Other income (expense), net....................      2,085      1,726       (597)         3          9
                                                 ---------  ---------  ---------  ---------  ---------
Income (loss) before income taxes..............    (12,524)    (6,245)     8,367      4,614      1,434
Income tax provision (benefit).................     (5,436)    (2,486)     3,437      2,085        773
                                                 ---------  ---------  ---------  ---------  ---------
Net income (loss)..............................  $  (7,088) $  (3,759) $   4,930  $   2,529  $     661
                                                 ---------  ---------  ---------  ---------  ---------
                                                 ---------  ---------  ---------  ---------  ---------
Basic and diluted earnings (loss) per share....  $   (0.39) $   (0.21) $    0.41  $    0.21  $    0.06
                                                 ---------  ---------  ---------  ---------  ---------
                                                 ---------  ---------  ---------  ---------  ---------
Basic and diluted weighted average shares......     18,216     18,078     12,170     11,900     11,900
                                                 ---------  ---------  ---------  ---------  ---------
                                                 ---------  ---------  ---------  ---------  ---------
Cash dividends per share.......................  $      --  $      --  $    2.10  $      --  $      --
                                                 ---------  ---------  ---------  ---------  ---------
                                                 ---------  ---------  ---------  ---------  ---------
Shares used to compute cash dividends per
  share........................................         --         --     11,900         --         --
                                                 ---------  ---------  ---------  ---------  ---------
                                                 ---------  ---------  ---------  ---------  ---------
</TABLE>
 
<TABLE>
<CAPTION>
                                                                     DECEMBER 31,
                                                 -----------------------------------------------------
                                                   1998       1997       1996       1995       1994
                                                 ---------  ---------  ---------  ---------  ---------
                                                                    (IN THOUSANDS)
<S>                                              <C>        <C>        <C>        <C>        <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital................................  $  37,140  $  33,911  $  55,944  $   8,605  $   7,520
Total assets...................................     68,103     87,910     73,043     25,739     21,772
Total stockholders' equity.....................     55,851     62,227     61,445     18,236     15,707
</TABLE>
 
                                       16
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS
 
    EXCEPT FOR THE HISTORICAL STATEMENTS CONTAINED HEREIN, 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 THE COMPANY ACHIEVES MAY DIFFER
MATERIALLY FROM THOSE INDICATED IN ANY FORWARD LOOKING STATEMENTS DUE TO THE
RISKS AND UNCERTAINTIES SET FORTH UNDER "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS," "CERTAIN FACTORS AFFECTING
FUTURE OPERATING RESULTS" AND ELSEWHERE IN THIS FORM 10-K. THE COMPANY
UNDERTAKES 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 THE COMPANY IN THIS REPORT AND IN THE COMPANY'S REPORTS FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION THAT ATTEMPT TO ADVISE INTERESTED PARTIES ON
THE RISKS AND FACTORS THAT MAY AFFECT THE COMPANY'S BUSINESS.
 
    Over the past several years, Larscom has expanded its business from the
supply of single purpose T1 and FT1 wide area network customer premises
equipment ("CPE") to Fortune 500 corporations, to providing high speed network
access platform solutions predominantly to NSPs. From 1986 through 1991, Larscom
was engaged primarily in the development, marketing and support of T1 CSU/DSUs
and T1 diagnostic equipment. In October 1991, the Company acquired T3
Technologies Inc. ("T3T"), a broadband products company. The first broadband
products developed by Larscom after the acquisition of T3T were the Access-T45,
one of the first T3 DSUs, and the Mega-T, the first multiple T1 inverse
multiplexer. Since then, the Company has invested significant resources in
developing a suite of broadband capabilities for the Orion 4000 platform. In
December 1997, the Company completed the acquisition of NetEdge Systems Inc.
("NetEdge"), further expanding its broadband product line. Sales related to the
Company's network systems products--Access T45, EDGE, Mega-T and Orion
4000--represented 50%, 40% and 31% of total revenues in 1998, 1997 and 1996,
respectively.
 
    A small number of customers, consisting of NSPs and resellers, have
accounted for a majority of the Company's revenues in each of the past several
years. Sales to the Company's top two customers (MCIWorldCom and IBM) accounted
for 42%, 50%, and 47% of revenues in 1998, 1997 and 1996, respectively. Sales to
NSPs as a group represented 61%, 63% and 62% of revenues in 1998, 1997 and 1996,
respectively.
 
    Sales to NSPs and resellers are often difficult to forecast due to a
relatively long sales cycle for new accounts and frequent acceleration or delays
in order schedules, often with limited notice, from existing accounts. The
Company has experienced fluctuations in both annual and quarterly revenues due
to the timing of receipt of customer orders as well as decisions from time to
time by major customers to cease marketing, purchasing and reselling the
Company's products. Since the Company continues to have significant sales to a
small number of customers, similar fluctuations in annual and quarterly revenues
may occur in the future.
 
    Since most of the Company's sales are in the form of large orders with short
delivery times to a limited number of customers, the Company's ability to
predict revenues is limited. In addition, introductions or announcements by the
Company or its competitors of new products and technologies can cause customers
to defer purchases of the Company's existing products. In the event that
anticipated orders from major customers fail to materialize, or delivery
schedules are deferred or canceled as a result of the above factors or other
unanticipated factors, the Company's business and operating results could be
materially adversely affected. For example, in 1998, the Company's operating
results were materially adversely affected by reductions in orders from some of
its largest customers.
 
    The Company establishes its expenditure levels for product development and
other operating expenses based on projected revenues and margins, but expenses
are relatively fixed in the short term. Accordingly, if revenues are below
expectations in any given period, the Company's inability to adjust spending in
the short term may exacerbate the adverse impact of a revenue shortfall on the
Company's
 
                                       17
<PAGE>
operating results. Moreover, even though the Company may experience revenue
shortfalls in two or three consecutive quarters, it may decide not to reduce its
expenses if it believes the shortfall is a temporary phenomenon.
 
    On October 15, 1998, Larscom announced a corporate restructuring plan
designed to better align its expenses with anticipated revenues. The
restructuring included a workforce reduction of approximately 16%. Expenses of
$1,214,000 related to the restructuring were recorded in the fourth quarter of
1998. The Company expects to experience losses in the first two quarters of
1999. If the Company is not successful in achieving its revenue expectations, or
if expenses are higher than expected, losses could continue beyond such periods.
 
    On December 2, 1997, Larscom entered into an Agreement and Plan of
Reorganization ("the Agreement"). The Agreement provided for the merger of a
wholly-owned subsidiary of the Company with and into NetEdge Systems Inc. a
privately-held designer and manufacturer of ATM edge access equipment,
headquartered in Research Triangle Park, North Carolina. The merger was
consummated on December 31, 1997. The total merger consideration paid by Larscom
consisted of $25,793,000 in cash, acquisition costs of $1,182,000 and the
assumption of liabilities of $9,782,000. The transaction was accounted for as a
purchase and, on this basis, the excess purchase price over the estimated fair
value of the tangible assets acquired and liabilities assumed has been allocated
to various intangible assets, primarily consisting of in-process research and
development, current technology, trademarks and goodwill based on an independent
third-party valuation. The Company recorded a charge to earnings during 1997 of
$20,120,000 for acquired in-process research and development related to NetEdge.
 
    The Company sells its products primarily through a direct sales force and to
a lesser extent through a variety of resellers, including OEMs, VARs, systems
integrators and distributors. The Company is seeking to develop alternative
distribution channels, particularly for the digital access group products, but
sales to distributors have been fairly limited to date. Sales outside the U.S.
have not been significant to date.
 
RESULTS OF OPERATIONS
 
    The following table sets forth the percentage of revenues represented by
certain items in the Company's consolidated statements of operations for the
periods indicated:
 
<TABLE>
<CAPTION>
                                                                 YEARS ENDED
                                                                 DECEMBER 31,
                                                              ------------------
                                                              1998   1997   1996
                                                              ----   ----   ----
<S>                                                           <C>    <C>    <C>
Revenues....................................................  100%   100%   100%
Cost of revenues............................................   56     43     45
                                                              ----   ----   ----
    Gross profit............................................   44     57     55
                                                              ----   ----   ----
Operating expenses:
  Research and development..................................   16     13     12
  Selling, general and administrative.......................   35     28     29
  Restructuring.............................................    2     --     --
  Other nonrecurring charges................................   11     --     --
  In-process research and development charge related to
    acquisition.............................................   --     26     --
                                                              ----   ----   ----
    Total operating expenses................................   64     67     41
                                                              ----   ----   ----
Income (loss) from operations...............................  (20)   (10)    14
Other income (expense), net.................................    3      2     (1)
                                                              ----   ----   ----
Income (loss) before income taxes...........................  (17)    (8)    13
Income tax provision (benefit)..............................   (7)    (3)     6
                                                              ----   ----   ----
Net income (loss)...........................................  (10)%   (5)%    7%
                                                              ----   ----   ----
                                                              ----   ----   ----
</TABLE>
 
                                       18
<PAGE>
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
 
    REVENUES.  Revenues decreased 4% to $72,733,000 in 1998 from $75,955,000 in
1997. The primary cause of this decrease was a reduction in sales of digital
access products to $32,933,000 in 1998 from $42,863,000 in 1997 as a result of
lower demand from certain of the Company's largest customers. Network systems
sales increased to $36,083,000 in 1998 from $30,349,000 in 1997 primarily due to
sales of the EDGE product line which were not included in the 1997 period. The
proportion of total revenue from sales of network systems group products could
decline slightly in 1999 as compared to 1998.
 
    GROSS PROFIT.  As a percentage of revenues, gross profit decreased to 44% in
1998 from 57% in 1997. The primary reason for this decrease was the
establishment of significant additional inventory reserves, mainly for the EDGE
product line. Other factors impacting gross profit included amortization of
intangible assets, lower production volumes and higher manufacturing costs
during 1998. Additionally, average selling prices of network systems and digital
access group products decreased relative to the prior year. The decrease was
offset somewhat by a greater proportion of revenue coming from sales of network
systems group products, which typically have higher gross margins than digital
access group products. While gross profit margins in 1999 are expected to be
higher than in 1998, particularly due to the one-time impact in 1998 of
additional inventory reserves, gross margins are not expected to reach the
levels achieved prior to 1998. This is due to lower average selling prices on
the Company's principal products as they continue to age. In addition, the
Company is currently seeking to develop an indirect distribution channel which
typically yields lower margins on sales than direct sales. A number of
additional factors could cause gross profits to fluctuate as a percentage of
revenue, including changes in product mix, price discounts given and changes in
production volume.
 
    RESEARCH AND DEVELOPMENT.  Research and development expenses increased 15%
to $11,463,000 in 1998 from $9,943,000 in 1997. As a percentage of revenues,
research and development expenses increased to 16% in 1998 from 13% in 1997. The
increase in research and development expenses was due to significantly higher
expenses, as compared with 1997, associated primarily with increased headcount
due to the NetEdge acquisition. The Company believes that a continued commitment
to research and development, particularly related to broadband products and
emerging technologies will be required to respond to customer demand and to
remain competitive.
 
    SELLING, GENERAL AND ADMINISTRATIVE.  Selling, general and administrative
expenses increased 22% to $25,833,000 in 1998 from $21,145,000 in 1997. As a
percentage of revenues, selling, general and administrative expenses increased
to 35% in 1998 from 28% in 1997. The increase in expenses in absolute dollars
was due primarily to additional personnel and related costs due to the NetEdge
acquisition, amortization of goodwill (prior to the write-down) and an increase
in the reserve for doubtful accounts. This was offset by lower commissions,
associated with reduced revenues, and the release, during the second quarter of
1998, of the unused reserve of $532,000 that had been established for potential
claims related to two General Services Administration contracts. See Note 8 of
the Notes to Consolidated Financial Statements for additional information.
Selling, general and administrative expenses include charges from Axel Johnson
for legal, accounting, tax, treasury and administrative services of $425,000 and
$622,000 in 1998 and 1997, respectively.
 
    RESTRUCTURING.  In October 1998, Larscom announced a corporate restructuring
designed to better align its expenses with anticipated revenues and to allow the
Company to focus on opportunities that offer the greatest potential for
long-term growth. The restructuring included a workforce reduction of
approximately 16%. Total expenses related to the restructuring were $1,214,000,
of which $876,000 was related to employee severance costs. At December 31, 1998,
$541,000 was accrued and unpaid, primarily related to severance payments that
are conditional.
 
    OTHER NONRECURRING CHARGES.  As a result of the review and refocus of the
Company's EDGE product family in October 1998, the Company reviewed the
intangible assets associated with the NetEdge
 
                                       19
<PAGE>
acquisition for impairment in accordance with SFAS 121. The review and refocus
was precipitated by lower than anticipated revenues from the EDGE product
family. The Company determined that the sum of the estimated future cash flows
related to the EDGE products were less than the carrying amount of the purchased
intangible assets. The fair value of these intangible assets was determined by
calculating the present value of estimated future cash flows of those assets.
The Company recognized an impairment loss of $7,915,000 to write down these
intangible assets to fair value.
 
    IN-PROCESS RESEARCH AND DEVELOPMENT.  During 1997, the Company incurred a
charge of $20,120,000 for in-process research and development as a result of the
Company's acquisition of NetEdge in December 1997.
 
    Research and development projects underway at the date of the acquisition of
NetEdge were classified into two different categories--enhancements to the
existing EDGE hardware platform and development of a new hardware platform. The
values of the in-process research and development were determined based on the
expected net discounted cash flows to be generated from the products under
development at the date of acquisition. A discount rate of 35% was used to
calculate discounted future cash flows which reflects the inherent risks of the
research and development efforts. The values attributed to the enhancements to
the existing EDGE hardware platform and the development of a new hardware
platform were $6,070,000 and $14,050,000, respectively, as of December 31, 1997.
The most sensitive factor in determining the expected net discounted cash flows
from these projects was revenues.
 
    OTHER INCOME (EXPENSE), NET.  Other income of $2,085,000 during 1998
includes $1,329,000 from the sale of the Company's former headquarters by a
partnership in which the Company held a one-third interest. The remainder is
primarily federal-income-tax-exempt interest from the Company's cash equivalents
and short-term investments. Net non-operating income of $1,726,000 during 1997
principally represented federal-income-tax-exempt interest from the Company's
cash equivalents and short-term investments.
 
    INCOME TAXES PROVISION (BENEFIT).  The effective tax benefit rate of 43% and
40% for 1998 and 1997, respectively, differs from the federal statutory rate of
35% primarily as a result of state taxes which is partially offset by
federal-tax-exempt-interest income.
 
    At December 31, 1998, the Company had recorded deferred tax assets of
$16,093,000, primarily relating to the future tax benefits of amortization of
intangible assets and an in-process research and development charge which are
deductible ratably over the next 14 years. The remaining tax benefit relates to
inventory reserves and accrued expenses. In accordance with Statement of
Financial Accounting Standard No. 109 ("SFAS 109"), "Accounting for Income
Taxes", the Company has not recorded any valuation allowance against those
assets because management has determined that it is more likely than not that
all of these assets will be realized. Realization of these assets is primarily
dependent on the ability of the Company to generate taxable income in the
future. Some of the factors that the Company used to make this determination
are: the Company has a strong earnings history; a significant portion of the
deferred tax assets are deductible over fourteen years; tax losses can be
carried forward for twenty years; a portion of the losses can be carried back to
prior years and the Company can switch its investments to taxable securities
from non-taxable securities. The amount of the deferred tax assets considered
realizable could be reduced in the near term if the Company's estimates of
future taxable income are reduced. This could have a material adverse effect on
the Company's results of operations and financial condition.
 
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
 
    REVENUES.  Revenues increased 14% to $75,955,000 in 1997 from $66,444,000 in
1996. The growth in revenues reflected increased sales of the Company's
broadband products, particularly the Orion 4000, which were partially offset by
a small decrease in sales of digital access products.
 
                                       20
<PAGE>
    GROSS PROFIT.  As a percentage of revenues, gross profit increased to 57% in
1997 from 55% in 1996. This increase was primarily a result of changes in
revenue mix to higher margin broadband products and to a lesser extent lower per
unit material costs, offset by declining prices of digital access products.
 
    RESEARCH AND DEVELOPMENT.  Research and development expenses increased 22%
to $9,943,000 in 1997 from $8,123,000 in 1996. As a percentage of revenues,
research and development expenses increased to 13% in 1997 from 12% in 1996
primarily due to increased headcount working on both the broadband and digital
access product lines.
 
    SELLING, GENERAL AND ADMINISTRATIVE.  Selling, general and administrative
expenses increased 9% to $21,145,000 in 1997 from $19,408,000 in 1996. As a
percentage of revenues, selling, general and administrative expenses declined to
28% in 1997 from 29% in 1996. The increase in absolute dollars was due primarily
to additional personnel costs in the sales, marketing and administrative
functions. This was offset by lower commissions and amortization expense.
Selling, general and administrative expenses also include a charge from Axel
Johnson for legal, accounting, tax, treasury and administrative services. For
1997 and 1996, these charges were approximately $622,000 and $527,000,
respectively.
 
    IN-PROCESS RESEARCH AND DEVELOPMENT.  In-process research and development
represents charges incurred as a result of the Company's acquisition of NetEdge
in December 1997. See Footnote 9 of the Notes to the Consolidated Financial
Statements for additional information.
 
    OTHER INCOME (EXPENSE), NET.  Net non-operating income of $1,726,000 during
1997 principally represents federal-income-tax-exempt interest from the
Company's cash equivalents and short-term investments. The expense during 1996
of $597,000 primarily represents interest charged on the $25,000,000 note
payable to Axel Johnson, which was paid with the proceeds of the initial public
offering.
 
    INCOME TAXES PROVISION (BENEFIT).  The effective tax benefit rate for 1997
of 40% differs from the federal statutory rate of 34% primarily as a result of
state taxes. The effective tax rate of 41% for 1996, differed from the federal
statutory rate as a result of non-deductible goodwill amortization and state
taxes.
 
LIQUIDITY AND CAPITAL RESOURCES
 
    Since its acquisition by Axel Johnson in 1987 and until its initial public
offering in December 1996, the Company met its operating and capital
requirements primarily from cash flows from operations and advances from Axel
Johnson. On December 18, 1996, the Company sold 5,800,000 shares of Class A
Common Stock at a price per share of $12 in its initial public offering raising
net proceeds of $63,279,000. In January 1997, the underwriters exercised their
option to purchase an additional 350,000 shares and the Company received
additional net proceeds of $3,827,000.
 
    The Company's operating activities generated $1,835,000 in cash in 1998. The
Company's net loss and an increase in deferred tax assets were offset by
non-cash items such as depreciation, amortization and intangible asset
write-downs, as well as a net decrease in working capital.
 
    Capital expenditures in 1998 were $1,795,000. Such expenditures consisted
principally of the purchase of computers, software and test equipment. The
Company expects capital expenditures to increase in 1999.
 
    The Company has a revolving line of credit of $15,000,000 under a credit
agreement with Axel Johnson ("the Credit Agreement"). The Credit Agreement
expires in December 2000. The Credit Agreement contains various representations,
covenants and events of default typical for financing a business of a similar
size and nature. Upon an event of default any borrowings under the line of
credit shall become payable in full. To date the Company has not found it
necessary to utilize this line of credit. In addition to such Credit Agreement,
the Company and Axel Johnson entered into an administrative service agreement
and a tax sharing agreement for the purposes of defining the on-going
relationship between them. See Footnotes 1 and 3 of the Notes to the
Consolidated Financial Statements for more details.
 
                                       21
<PAGE>
    At December 31, 1998, the Company had cash and cash equivalents of
$10,265,000 and short term investments of $13,902,000. The Company believes that
working capital, together with the Company's line of credit and funds generated
from operations, will provide adequate liquidity to meet the Company's operating
and capital requirements at least through 1999. There can, however, be no
assurance that future events, such as the potential use of cash to fund any
significant losses that the Company might incur or acquisitions the Company
might undertake, will not require the Company to seek additional capital and, if
so required, that adequate capital will be available on terms acceptable to the
Company, or at all.
 
    The effects of inflation on the Company's revenues and operating income have
not been material to date.
 
               CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS
 
    EXCEPT FOR THE HISTORICAL STATEMENTS CONTAINED HEREIN, 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 THE COMPANY ACHIEVES MAY DIFFER
MATERIALLY FROM THOSE INDICATED IN ANY FORWARD LOOKING STATEMENTS DUE TO THE
RISKS AND UNCERTAINTIES SET FORTH UNDER "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS," "CERTAIN FACTORS AFFECTING
FUTURE OPERATING RESULTS" AND ELSEWHERE IN THIS FORM 10-K. THE COMPANY
UNDERTAKES 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 THE COMPANY IN THIS REPORT AND IN THE COMPANY'S REPORTS FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION THAT ATTEMPT TO ADVISE INTERESTED PARTIES ON
THE RISKS AND FACTORS THAT MAY AFFECT THE COMPANY'S BUSINESS.
 
    CUSTOMER CONCENTRATION.  The Company believes that its relationships with
large customers, particularly NSPs and ISPs, will be critical to its future
success. A small number of customers have accounted for a majority of the
Company's revenues in each of the past several years. During 1998, 1997 and
1996, two customers, MCIWorldCom and its subsidiaries and IBM Global Network,
together accounted for 42%, 50% and 47% of the Company's revenues, respectively.
In December 1998, AT&T announced its agreement to purchase the IBM Global
Network from IBM. This acquisition is expected to be consummated in the middle
of 1999. Had this purchase been in effect since January 1996, sales to two
customers, MCIWorldCom and its subsidiaries and AT&T would have accounted for
44%, 55% and 54% of revenue in 1998, 1997 and 1996, respectively. Accordingly,
the Company's revenue is currently highly dependent on continued orders from two
large customers.
 
    None of the Company's customers is 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 the Company's current customers will continue to place
orders with the Company, that orders from existing customers will continue at
the levels of previous periods or that the Company will be able to obtain orders
from new customers. Loss of, or a material reduction in, orders from one or more
of the Company's major customers could have a material adverse effect on the
Company's business and operating results.
 
    FLUCTUATIONS IN QUARTERLY OPERATING RESULTS; ABSENCE OF SIGNIFICANT
BACKLOG.  The Company's 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 the Company's control. A small
number of customers have accounted for a significant percentage of the Company's
sales. Therefore, sales for a given quarter generally depend to a significant
degree upon 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 are
subject to change on limited notice. The Company has experienced both
acceleration and slowdown 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 1994, sales to MCIWorldCom and its subsidiaries, IBM, AT&T and
other current customers have
 
                                       22
<PAGE>
occasionally varied by up to $4.4 million from quarter to quarter. Reductions in
orders from certain large customers contributed significantly to the Company's
lower revenues in the second, third and fourth quarters of 1998 as compared to
the corresponding quarters of 1997. Since most of the Company's sales are in the
form of large orders with short delivery times to a limited number of customers,
the Company's backlog and consequent ability to predict revenues will continue
to be limited. In addition, announcements by the Company or its competitors of
new products and technologies could cause customers to defer, limit, or end
purchases of the Company's existing products. In the event that the Company were
to lose one or more large customers, anticipated orders from major customers
were to fail to materialize, or delivery schedules were to be deferred or
canceled as a result of the above factors or other unanticipated factors, the
Company's business and operating results would be materially adversely affected.
As a result, the Company believes that period-to-period comparisons of its
operating results are not necessarily meaningful and should not be relied upon
as indicative of future performance.
 
    While gross profit margins in 1999 are expected to be higher than in 1998,
particularly due to the one-time impact in 1998 of additional inventory
reserves, gross margins are not expected to reach the levels achieved prior to
1998. This is due to lower average selling prices on the Company's principal
products as they continue to age. In addition the Company is currently seeking
to develop an indirect distribution channel which typically yields lower margins
on sales than direct sales. A number of additional factors could cause gross
profits to fluctuate as a percentage of revenue, including changes in product
mix, price discounts given, costs of components, manufacturing costs and
production volume.
 
    The Company establishes its expenditure 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, if sales are below
expectations in any given period, the Company's inability to adjust spending in
the short term may exacerbate the adverse impact of a revenue shortfall on the
Company's operating results. Moreover, even though the Company may experience
revenue shortfalls in two or three consecutive quarters, it may decide not to
reduce its expenses if it believes the shortfall is a temporary phenomenon. The
Company expects to experience losses in the first two quarters of 1999. If the
Company is not successful in achieving its revenue expectations, or if expenses
are higher than expected, losses could continue beyond such periods.
 
    Results in any period could also be affected by changes in market demand,
competitive market conditions, market acceptance of new or existing products,
increasing sales channel development costs, the cost and availability of
components, the mix of the Company's customer base and sales channels, the mix
of products sold, sales promotion activities by the Company, the Company's
ability to expand its sales and marketing organization effectively, the
Company's ability to attract and retain key technical and managerial employees
and general economic conditions. Because of all of the foregoing factors, the
Company's operating results in one or more future periods may be subject to
significant fluctuations. In the event these factors result in the Company's
financial performance being below the expectations of public market analysts and
investors, the price of the Company's Class A Common Stock could be materially
adversely affected.
 
    RESTRUCTURING.  Revenues in 1998 were much lower than expected. On October
15, 1998, Larscom announced a corporate restructuring plan designed to better
align its expenses with anticipated revenues and to allow the Company to focus
on opportunities that offer the greatest potential for long-term growth. The
restructuring included a workforce reduction of approximately 16%. Expenses of
$1,214,000 related to the restructuring were recorded in the fourth quarter of
1998. The Company expects to experience losses in the first two quarters of
1999. If the Company is not successful in achieving its revenue expectations, or
if expenses are higher than expected, losses could continue beyond such periods.
 
    The Company is conducting a search for a new Chief Executive Officer. If the
search cannot be completed within a relatively short period of time the
Company's business could be materially adversely affected.
 
                                       23
<PAGE>
    DEVELOPMENT OF ALTERNATIVE DISTRIBUTION CHANNELS.  The Company is currently
seeking to develop an indirect distribution channel for sales to domestic
customers. This channel will consist primarily of a small group of master
distributors, such as Tech Data, and a number of authorized resellers. Sales
through this channel will consist primarily of digital access products,
particularly the WANmaker product, and to a lesser extent network systems group
products. Sales to large NSPs and ISPs will continue to be handled by the
Company's direct sales force. As part of this strategy the Company has appointed
certain sales people to sign up resellers and assist them in their sales
efforts. There are a number of risks associated with the development of an
indirect distribution channel. These include a reduction in the Company's
ability to forecast sales, reduced average selling prices, management's
inexperience in establishing and managing a distribution channel, potential
reductions in customer satisfaction, loss of contact with users of the Company's
products and new methods of advertising and promoting the products which will
result in additional expenses. These, and other factors, could cause results of
operations and financial condition to be materially adversely affected.
 
    The Company markets its products internationally through non-exclusive
distribution agreements with VARs and systems integrators. To date the use of a
distribution channel outside the US has not been particularly successful. To
focus on sales to Europe, the Middle East and Africa, the Company has created a
regional sales and service team, headquartered in the United Kingdom. The United
Kingdom team focuses on direct sales to large NSPs while also supporting its
distributors for sales to smaller customers.
 
    DEPENDENCE ON RECENTLY INTRODUCED PRODUCTS AND PRODUCTS UNDER
DEVELOPMENT.  The Company's future operating results are highly dependent on
continuing market acceptance of the Company's newest products. Network systems
product sales represented 50% and 40% of revenues during 1998 and 1997,
respectively. While the proportion of network systems product sales to total
revenues may vary from quarter to quarter it is expected to decline slightly
during the whole of 1999, as compared to 1998, but increase in the longer term.
The Company's future success will be largely dependent on the market success of
recently introduced products and products that may be introduced in the future.
These include, for example, the WANmaker line of digital access products and the
Orion 2000 product line which have only recently been introduced. There can be
no assurance that such products will achieve widespread market acceptance. In
addition, the Company has in the past experienced delays in the development of
new products and the enhancement of existing products, and such delays may occur
in the future. The Company's potential inability to develop and introduce new
products or versions in a timely manner, due to resource constraints or
technological or other reasons, or to achieve timely and widespread market
acceptance of its new products or releases could have a material adverse effect
on the Company's business and operating results.
 
    YEAR 2000.  As the year 2000 approaches, the challenges associated with
moving into a new millennium have become a critical business concern around the
world. Larscom recognizes the importance of addressing this situation in a
timely, proactive manner. In early 1998, the Company established a Year 2000
Compliance Program to ensure that the Company's products and internal systems
currently in use continue to function properly into the next century. As such,
the Company has placed a high level of emphasis on preserving the integrity and
continuity of the business processes and activities that are vitally necessary
for the business to continue. The Company initially focused its compliance
efforts on the evaluation of products sold to customers. The Company has
committed the necessary resources to make the Company's current product
offerings Year 2000 compliant and has completed the testing and remediation
phases. All of the Company's current product offerings are Year 2000 compliant.
In those cases where products not currently offered were found not to be in
compliance, the information was communicated to the Company's customers via
written notification. In most cases, an upgrade path has been provided to these
customers so that compliance is attained.
 
    Larscom is in the process of reviewing and obtaining the required resources
to move into the implementation phase for its internal infrastructure. The
Company is in the process of upgrading its primary business system for Year 2000
compliance. Larscom anticipates the implementation phase to be
 
                                       24
<PAGE>
completed by June 1999. Additionally, the Company is assessing and implementing
necessary changes for all areas of the Company's business which could be
impacted; these include manufacturing plant floor equipment, system test
laboratories, engineering laboratories and the building infrastructure.
 
    Based on assessments completed to date and compliance plans in process,
Larscom does not expect that the Year 2000 issue, including the cost of making
its products and critical systems compliant, will have a material effect on its
business operations or cash flow. Direct costs related to all Year 2000
compliance testing and remediation are estimated to be approximately $360,000
over a two year period of which approximately $250,000 had been incurred at
December 31, 1998.
 
    Larscom is engaged in the process of evaluating the Year 2000 readiness of
suppliers. If Larscom determines that critical suppliers are not Year 2000
ready, Larscom will monitor their progress and take appropriate actions. Based
on current progress and future plans, Larscom believes that the Year 2000 date
change will not significantly affect Larscom's ability to deliver products and
services to its customers on a timely basis. However there can be no assurances
that the Year 2000 date change will not have a material adverse affect on the
Company's results of operations or financial condition.
 
    The Company is in the process of creating contingency plans to safeguard
against failures of the Company's own products, suppliers and vendors and
internal information systems related to the Year 2000 issue.
 
    DEPENDENCE ON COMPONENT AVAILABILITY AND KEY SUPPLIERS.  On-time delivery of
the Company's products depends upon the availability of components and
subsystems used in its products. The Company depends upon its suppliers to
manufacture, assemble and deliver components in a timely and satisfactory
manner. The Company obtains components and licenses certain embedded software
from numerous single sources. The Company does not believe it would be able to
develop alternative sources for certain key components used in its products. In
addition, while the Company believes it would be able to develop alternative
sources for most of the other components and software used in its products
without incurring substantial additional costs, there can be no assurance that
the Company would be able to do so, if required. Any inability by the Company's
suppliers to meet the Company's demand or any prolonged interruption in supply
or a significant price increase of one or more components or software would
likely have a material adverse effect on the Company's business and operating
results. The Company generally does not have any long-term contracts with such
suppliers. There can be no assurance that these suppliers will continue to be
able and willing to meet the Company's requirements.
 
    At the end of 1998, vendors of three integrated circuits ("ICs") notified
the Company regarding their intent to cease production. Larscom anticipates that
it will continue to use these ICs and therefore entered into purchase
commitments of approximately $1,250,000 in the aggregate, representing between
one and two years expected demand for these components. The Company will
consider redesigning its products to replace those ICs. The Company has
attempted to take into account factors such as the ability to replace the
particular IC with a similar part and the estimated life of the Company's
products in determining the quantities to purchase. While the Company believes
that it will use all of the quantities it has agreed to purchase, there can be
no assurance that its estimates are correct. If the Company's estimates are not
correct and requirements for these ICs are less than anticipated, it could have
a material adverse effect on the Company's business and results of operations.
 
    RAPID TECHNOLOGICAL CHANGE.  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 the Company's products. The Company's success will depend to
a substantial degree upon its 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 the Company 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
 
                                       25
<PAGE>
gain market acceptance. If the Company were to be unsuccessful or to incur
significant delays in developing and introducing such new products or
enhancements, the Company's business and operating results could be materially
adversely affected. For example, the Company is aware of a competing technology
with network monitoring capabilities that can be used instead of the Split-T
product that the Company sells primarily to MCIWorldCom. If MCIWorldCom's
customers were to opt for the alternative technology as part of their services,
the Company's business and operating results would be materially adversely
affected.
 
    SOURCES OF ADDITIONAL FINANCE.  The Company has access, subject to certain
conditions, to a $15,000,000 credit facility provided by Axel Johnson. In
December 1998, this agreement was amended and the termination date of the
facility was extended until December 2000. There can be no assurance that
alternative sources of financing will be available upon the expiration of such
facility in December 2000, or that additional sources of funding will be
available on terms favorable to the Company if the Company's borrowing
requirements exceed the amount of the facility.
 
    MANAGEMENT OF OPERATIONS.  The recent downturn in the Company's business and
related restructuring have placed a significant strain on the Company's
personnel, management and other resources. The Company's future success depends
on its ability to recruit and retain employees following the recent
restructuring and the Company's recent financial performance shortfalls. To grow
its business, the Company must continue to attract, train, motivate and manage
new employees successfully, integrate new management and employees into its
overall operations and continue to improve its operational, financial and
management systems. Availability of qualified sales and technical personnel is
limited, and competition for experienced sales and technical personnel in the
telecommunications equipment industry is intense. The Company's failure to
manage any expansion effectively could have a material adverse effect on the
Company's business and operating results.
 
    CONTROL BY AXEL JOHNSON.  Holders of Class A Common Stock are entitled to
one vote per share and holders of Class B Common Stock are entitled to four
votes per share, subject to adjustment, to preserve the initial voting ratio.
Axel Johnson is the sole holder of the Class B Common Stock. As a result, Axel
Johnson has sufficient voting power to control the direction and policies of the
Company, including mergers, the payment of dividends, consolidations, the sale
of all or substantially all of the assets of the Company and the election of the
Board of Directors of the Company, and to prevent or cause a change in control
of the Company. In addition, the authorized but unissued capital stock of the
Company includes 5,000,000 shares of preferred stock (the "Preferred Stock").
The Board of Directors is authorized to provide for the issuance of Preferred
Stock in one or more series and to fix the designations, preferences, powers and
relative, participating, optional or other rights and restrictions thereof.
Accordingly, the Company may issue a series of Preferred Stock in the future
that will have preference over both classes of the Company's Common Stock with
respect to the payment of dividends and upon liquidation, dissolution or winding
up. The issuance of Preferred Stock could adversely affect holders of the Common
Stock or discourage or make difficult any attempt to obtain control of the
Company. Such control may have the effect of discouraging certain types of
transactions involving an actual or potential change of control of the Company,
including transactions in which the holders of Class A Common Stock might
otherwise receive a premium for their shares over the then current market price.
 
    RISKS ASSOCIATED WITH ENTRY INTO INTERNATIONAL MARKETS.  The Company has had
minimal sales to international customers to date, and has little experience in
international markets. Although the acquisition of NetEdge increased the
exposure of the Company to international markets to some extent, sales outside
the U.S. continue to account for less than 10% of the Company's revenues. The
conduct of business outside the U.S. is subject to certain customary risks,
including unexpected changes in regulatory requirements and tariffs,
difficulties in staffing and managing foreign operations, longer payment cycles,
greater difficulty in accounts receivable collection, currency fluctuations,
expropriation and potentially adverse tax consequences. In addition, to sell its
products internationally, the Company must meet
 
                                       26
<PAGE>
standards established by telecommunications authorities in various countries, as
well as recommendations of the International Telecommunications Union. A delay
in obtaining, or the failure to obtain, certification of its products in
countries outside the U.S. could deny or preclude the Company's marketing and
sales efforts in such countries, which could have a material adverse effect on
the Company's business and operating results.
 
    COMPLIANCE WITH REGULATIONS AND EVOLVING INDUSTRY STANDARDS.  The market for
the Company's 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., the Company's 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 ATM evolve, the Company may be required to modify its existing products or
develop and support new versions of its products. The failure of the Company's
products to comply, or delays in compliance, with the various existing and
evolving industry standards could delay introduction of the Company's products,
which in turn could have a material adverse effect on the Company's business and
operating results.
 
    RISKS ASSOCIATED WITH POTENTIAL ACQUISITIONS.  As part of its efforts to
grow its business, the Company reviews acquisition prospects that would
potentially complement its existing product offerings, augment its market
coverage, enhance its technological capabilities or offer growth opportunities.
The Company acquired NetEdge in December 1997; however, this acquisition has not
been a success. See RESTRUCTURING above for details. Any future acquisitions by
the Company could result in potentially dilutive issuances of equity securities
and/or the incurrence of debt and the assumption of contingent liabilities, any
of which could have a material adverse effect on the Company's business and
operating results and/or the price of the Company's Class A Common Stock. In
this regard, as a result of the ownership interest of Axel Johnson in the
Company, the Company will not be able to use pooling of interests accounting for
any future acquisition. Accordingly, such acquisitions could result in
amortization of goodwill and other charges (including the immediate write-off of
purchased in-process research and development) typically associated with
purchase accounting. Acquisitions entail numerous risks, including difficulties
in the assimilation of acquired operations, technologies and products, diversion
of management's attention from other business concerns, risks of entering
markets in which the Company has limited or no prior experience and potential
loss of key employees of acquired organizations. No assurance can be given as to
the ability of the Company to successfully integrate any businesses, products,
technologies or personnel that might be acquired in the future, and the failure
of the Company to do so could have a material adverse effect on the Company's
business and operating results.
 
    LIMITED PROTECTION OF INTELLECTUAL PROPERTY; PROPRIETARY INFORMATION.  The
Company relies upon a combination of trade secrets, contractual restrictions,
copyrights, trademark laws and patents to establish and protect proprietary
rights in its products and technologies. Although the Company has been issued
only one U.S. patent to date, it believes that the success of its business
depends primarily on its proprietary technology, information and processes and
know-how, rather than patents. Much of the Company's proprietary information and
technology is not patented and may not be patentable. There can be no assurance
that the Company will be able to protect its technology or that competitors will
not be able to develop similar technology independently. The Company has entered
into confidentiality and invention assignment agreements with all of its
employees, and enters into non-disclosure agreements with its suppliers,
distributors and appropriate customers so as to limit access to and disclosure
of its proprietary information. There can be no assurance that these statutory
and contractual arrangements will deter misappropriation of the Company's
technologies or discourage independent third-party development of similar
technologies. In the event such arrangements are insufficient, the Company's
business and operating results could be materially adversely affected.
 
                                       27
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
    INTEREST RATE RISK.  The Company does not use derivative financial
instruments in its investment portfolio. The Company's investment portfolio has
been generally comprised of municipal government securities that mature within
one year and are classified as available for sale in accordance with SFAS 115.
The Company places investments in instruments that meet high credit quality
standards. These securities are subject to interest rate risk, and could decline
in value if interest rates increase. Because of the short duration and
conservative nature of the Company's investment portfolio, the Company does not
expect any material loss with respect to its investment portfolio.
 
    FOREIGN CURRENCY EXCHANGE RATE RISK.  Certain of the Company's sales and
marketing expenses are incurred in local currencies. As a result, the Company's
international results of operations are subject to foreign exchange rate
fluctuations. The Company does not currently hedge against foreign currency rate
fluctuations. Gains and losses from such fluctuations have not been material to
the Company's consolidated results of operations.
 
                                       28
<PAGE>
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
REPORT OF INDEPENDENT ACCOUNTANTS
 
To the Board of Directors and Stockholders of Larscom Incorporated
 
    In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of cash flows and of stockholders' equity
present fairly, in all material respects, the financial position of Larscom
Incorporated and its subsidiaries at December 31, 1998 and 1997, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
 
/s/PricewaterhouseCoopers LLP
---------------------------
PricewaterhouseCoopers LLP
 
San Jose, California
 
January 20, 1999
 
                                       29
<PAGE>
                              LARSCOM INCORPORATED
 
                          CONSOLIDATED BALANCE SHEETS
 
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
<TABLE>
<CAPTION>
                                                                                DECEMBER 31,
                                                                            --------------------
                                                                              1998       1997
                                                                            ---------  ---------
<S>                                                                         <C>        <C>
                                             ASSETS
Current assets:
  Cash and cash equivalents...............................................  $  10,265  $   8,254
  Short-term investments..................................................     13,902     16,598
  Accounts receivable, net................................................      7,539     17,070
  Inventories.............................................................      8,613     13,328
  Deferred income taxes...................................................      4,607      2,741
  Income taxes receivable.................................................      2,508         --
  Prepaid expenses and other current assets...............................      1,542      1,285
                                                                            ---------  ---------
    Total current assets..................................................     48,976     59,276
Property and equipment, net...............................................      6,920      9,703
Intangible assets, net....................................................        687     10,658
Deferred income taxes.....................................................     11,486      8,062
Other non-current assets..................................................         34        211
                                                                            ---------  ---------
    Total assets..........................................................  $  68,103  $  87,910
                                                                            ---------  ---------
                                                                            ---------  ---------
 
                              LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Current portion of long-term debt.......................................  $     194  $     341
  Accounts payable........................................................      3,705      8,219
  Accrued expenses and other current liabilities..........................      7,390     13,562
  Due to Axel Johnson.....................................................        547      3,243
                                                                            ---------  ---------
    Total current liabilities.............................................     11,836     25,365
                                                                            ---------  ---------
Other non-current liabilities.............................................        416        318
                                                                            ---------  ---------
Commitments and contingencies (Notes 7 and 8)
Stockholders' equity:
  Preferred Stock, $0.01 par value; 5,000 shares authorized; no shares
    issued or outstanding.................................................         --         --
  Class A Common Stock, $0.01 par value; 100,000 shares authorized; 8,266
    and 8,137 shares issued and outstanding, respectively.................         83         81
  Class B Common Stock, $0.01 par value; 11,900 shares authorized; 10,000
    and 10,000 issued and outstanding, respectively.......................        100        100
  Additional paid-in capital..............................................     81,637     80,929
  Accumulated other comprehensive income..................................          2         --
  Accumulated deficit.....................................................    (25,971)   (18,883)
                                                                            ---------  ---------
    Total stockholders' equity............................................     55,851     62,227
                                                                            ---------  ---------
    Total liabilities and stockholders' equity............................  $  68,103  $  87,910
                                                                            ---------  ---------
                                                                            ---------  ---------
</TABLE>
 
   THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
 
                                       30
<PAGE>
                              LARSCOM INCORPORATED
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
 
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
<TABLE>
<CAPTION>
                                                                      YEARS ENDED DECEMBER 31,
                                                                   -------------------------------
                                                                     1998       1997       1996
                                                                   ---------  ---------  ---------
<S>                                                                <C>        <C>        <C>
Revenues.........................................................  $  72,733  $  75,955  $  66,444
Cost of revenues.................................................     40,917     32,718     29,949
                                                                   ---------  ---------  ---------
  Gross profit...................................................     31,816     43,237     36,495
                                                                   ---------  ---------  ---------
Operating expenses:
  Research and development.......................................     11,463      9,943      8,123
  Selling, general and administrative............................     25,833     21,145     19,408
  Restructuring..................................................      1,214         --         --
  Other nonrecurring charges.....................................      7,915         --         --
  In-process research and development charge related to
    acquisition..................................................         --     20,120         --
                                                                   ---------  ---------  ---------
    Total operating expenses.....................................     46,425     51,208     27,531
                                                                   ---------  ---------  ---------
Income (loss) from operations....................................    (14,609)    (7,971)     8,964
Interest expense charged by Axel Johnson.........................         --         --       (630)
Interest and other income........................................      2,085      1,726         33
                                                                   ---------  ---------  ---------
Income (loss) before income taxes................................    (12,524)    (6,245)     8,367
Income tax provision (benefit)...................................     (5,436)    (2,486)     3,437
                                                                   ---------  ---------  ---------
Net income (loss)................................................  $  (7,088) $  (3,759) $   4,930
                                                                   ---------  ---------  ---------
                                                                   ---------  ---------  ---------
Basic and diluted earnings (loss) per share......................  $   (0.39) $   (0.21) $    0.41
Basic and diluted weighted average shares........................     18,216     18,078     12,107
</TABLE>
 
   THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
 
                                       31
<PAGE>
                              LARSCOM INCORPORATED
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                          YEARS ENDED DECEMBER 31,
                                                                       -------------------------------
                                                                         1998       1997       1996
                                                                       ---------  ---------  ---------
<S>                                                                    <C>        <C>        <C>
Cash flows from operating activities:
  Net income (loss)..................................................  $  (7,088) $  (3,759) $   4,930
  Adjustments to reconcile net income to net cash provided by
    operating activities:
    Depreciation.....................................................      3,983      2,431      1,959
    Amortization.....................................................      1,707         77        434
    Gain from sale of building.......................................     (1,329)        --         --
    Intangible asset write-down......................................      7,915         --         --
    Deferred income taxes............................................     (5,290)    (9,036)      (929)
    In-process research and development charge.......................         --     20,120         --
    Other noncash items..............................................        303        207         --
    Changes in assets and liabilities, net of acquisition effects:
      Accounts receivable............................................      9,972     (5,555)    (3,054)
      Inventories....................................................      4,714     (3,120)    (1,404)
      Prepaid expenses and other assets..............................       (251)      (489)      (310)
      Accounts payable...............................................     (4,384)     2,545        153
      Income taxes receivable/payable................................     (3,617)        62         --
      Accrued expenses and other current liabilities.................     (4,800)       346      2,931
                                                                       ---------  ---------  ---------
Net cash provided by operating activities............................      1,835      3,829      4,710
                                                                       ---------  ---------  ---------
Cash flows from investing activities:
  Purchases of short-term investments................................   (107,806)  (223,285)        --
  Sales of short-term investments....................................     59,788    148,360         --
  Maturities of short-term investments...............................     50,714     58,327         --
  Purchase of property and equipment.................................     (1,795)    (4,645)    (3,131)
  Proceeds from sale of building.....................................      1,700         --         --
  Purchase of NetEdge Systems, Inc., net of cash acquired............         --    (26,884)        --
                                                                       ---------  ---------  ---------
Net cash provided (used) by investing activities.....................      2,601    (48,127)    (3,131)
                                                                       ---------  ---------  ---------
Cash flows from financing activities:
  Net proceeds from Common Stock offering and sales under the
    Employee Stock Purchase Plan.....................................        710      4,235     63,279
  Repayment of long-term debt........................................       (437)        --         --
  Payment of dividend to Axel Johnson................................         --         --    (25,000)
  Advances from (repayments to) Axel Johnson.........................     (2,698)     1,914      6,515
                                                                       ---------  ---------  ---------
Net cash (used) provided by financing activities.....................     (2,425)     6,149     44,794
                                                                       ---------  ---------  ---------
Increase (decrease) in cash and cash equivalents.....................      2,011    (38,149)    46,373
Cash and cash equivalents at beginning of period.....................      8,254     46,403         30
                                                                       ---------  ---------  ---------
Cash and cash equivalents at end of period...........................  $  10,265  $   8,254  $  46,403
                                                                       ---------  ---------  ---------
                                                                       ---------  ---------  ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid........................................................  $      34  $      --  $     630
                                                                       ---------  ---------  ---------
Income taxes paid....................................................  $   3,914  $   5,799  $   4,366
                                                                       ---------  ---------  ---------
</TABLE>
 
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES:
 
    In December 1997, the Company purchased all of the capital stock of NetEdge
Systems, Inc. for $26,975,000, including acquisition expenses of $1,182,000. See
Note 9 regarding acquisition of NetEdge Systems, Inc.
 
   THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
 
                                       32
<PAGE>
                              LARSCOM INCORPORATED
 
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
 
                                 (IN THOUSANDS)
<TABLE>
<CAPTION>
                                               CLASS A                  CLASS B                          ACCUMULATED
                                             COMMON STOCK             COMMON STOCK       ADDITIONAL         OTHER
                                       ------------------------  ----------------------    PAID-IN      COMPREHENSIVE
                                         SHARES       AMOUNT      SHARES      AMOUNT       CAPITAL         INCOME
                                       -----------  -----------  ---------  -----------  -----------  -----------------
<S>                                    <C>          <C>          <C>        <C>          <C>          <C>
Balance at December 31, 1995.........          --           --      11,900         119       13,171              --
Conversion of Class B Common Stock to
  Class A Common Stock...............       1,200           12      (1,200)        (12)          --              --
Sale of Class A Common Stock, net....       5,800           58          --          --       63,221              --
Dividend paid........................          --           --          --          --           --              --
Net income...........................          --           --          --          --           --              --
                                            -----          ---   ---------       -----   -----------            ---
Balance at December 31, 1996.........       7,000           70      10,700         107       76,392              --
Conversion of Class B Common Stock to
  Class A Common Stock...............         700            7        (700)         (7)          --              --
Sale of Class A Common Stock, net....         350            3          --          --        3,824              --
Issuance under stock plans and other
  issuances..........................          87            1          --          --          713              --
Net loss.............................          --           --          --          --           --              --
                                            -----          ---   ---------       -----   -----------            ---
Balance at December 31, 1997.........       8,137           81      10,000         100       80,929              --
Foreign currency translation
  adjustment.........................          --           --          --          --           --               2
Issuance under stock plans...........         129            2          --          --          708              --
Net loss.............................          --           --          --          --           --              --
                                            -----          ---   ---------       -----   -----------            ---
Balance at December 31, 1998.........       8,266    $      83      10,000   $     100    $  81,637       $       2
                                            -----          ---   ---------       -----   -----------            ---
                                            -----          ---   ---------       -----   -----------            ---
 
<CAPTION>
                                         RETAINED      TOTAL
                                        EARNINGS/     STOCK-
                                       (ACCUMULATED  HOLDERS'
                                         DEFICIT)     EQUITY
                                       ------------  ---------
<S>                                    <C>           <C>
Balance at December 31, 1995.........        4,946      18,236
Conversion of Class B Common Stock to
  Class A Common Stock...............           --          --
Sale of Class A Common Stock, net....           --      63,279
Dividend paid........................      (25,000)    (25,000)
Net income...........................        4,930       4,930
                                       ------------  ---------
Balance at December 31, 1996.........      (15,124)     61,445
Conversion of Class B Common Stock to
  Class A Common Stock...............           --          --
Sale of Class A Common Stock, net....           --       3,827
Issuance under stock plans and other
  issuances..........................           --         714
Net loss.............................       (3,759)     (3,759)
                                       ------------  ---------
Balance at December 31, 1997.........      (18,883)     62,227
Foreign currency translation
  adjustment.........................           --           2
Issuance under stock plans...........           --         710
Net loss.............................       (7,088)     (7,088)
                                       ------------  ---------
Balance at December 31, 1998.........   $  (25,971)  $  55,851
                                       ------------  ---------
                                       ------------  ---------
</TABLE>
 
   THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
 
                                       33
<PAGE>
                              LARSCOM INCORPORATED
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 1--THE COMPANY AND A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
 
    Larscom Incorporated (the "Company"), a majority owned subsidiary of Axel
Johnson Inc. ("Axel Johnson"), develops, manufactures and markets a broad range
of high speed, global internetworking products for network service providers and
corporate users.
 
PRINCIPLES OF CONSOLIDATION
 
    The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All material intercompany transactions and
balances have been eliminated on consolidation. The Company's investment in a
less than 50% owned entity was accounted for using the equity method.
 
CONCENTRATIONS OF CREDIT RISK AND CUSTOMER CONCENTRATION
 
    Financial instruments, which subject the Company to concentrations of credit
risk, consist primarily of investments in certain debt securities and accounts
receivable. The Company primarily invests its excess cash in municipal bonds
rated AA or better. The Company is 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. The Company's accounts receivable are derived
from sales to customers primarily in the United States. The Company performs
ongoing credit evaluations of its customers, and generally requires no
collateral from its customers. The Company maintains reserves for potential
credit losses, and to date has not experienced any material losses. Receivables
from two customers represented 10% and 21%, and 13% and 31% of accounts
receivable at December 31, 1998 and 1997, respectively. During 1998, two of the
Company's significant customers consummated a merger. Prior year percentages
have been restated as if the merger had been in effect for all periods
presented.
 
    The following table summarizes the percentage of total revenues for
customers accounting for more than 10% of the Company's revenues:
 
<TABLE>
<CAPTION>
                                             YEARS ENDED
                                             DECEMBER 31,
                                          ------------------
                                          1998   1997   1996
                                          ----   ----   ----
<S>                                       <C>    <C>    <C>
MCIWorldCom (*).........................   32%    36%    34%
IBM Global Network (**).................   10%    14%    13%
</TABLE>
 
------------------------
 
*   In September 1998, MCI and WorldCom completed their merger and now operate
    under the name MCIWorldCom. Percentages of total revenue have been restated
    for 1998 and prior years as if the merger had been in effect for all periods
    presented. Separately, MCI would have accounted for 16%, 25% and 21% of
    total revenues during 1998, 1997 and 1996, respectively.
 
**  In December 1998, AT&T announced its agreement to purchase the IBM Global
    Network from IBM. This acquisition is expected to be consummated in 1999.
    Had this acquisition been in effect for all periods presented, AT&T would
    have accounted for 12%, 19% and 20% of total revenues in 1998, 1997 and
    1996, respectively.
 
OPERATING SEGMENTS
 
    The Company believes that its two business units, the Network Systems Group
and the Digital Access Group, are operating segments as defined in Statement of
Financial Accounting Standard No. 131, "Disclosure About Segments of an
Enterprise and Related Information" ("SFAS 131"). However, the
 
                                       34
<PAGE>
                              LARSCOM INCORPORATED
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 1--THE COMPANY AND A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(CONTINUED)
similarity of the economic characteristics of the two segments is such that the
Company believes that aggregation is appropriate in accordance with SFAS 131.
Changes in these economic characteristics may require disclosure of segment
information in the future.
 
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 at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period.
 
CASH AND CASH EQUIVALENTS
 
    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 maturity of those
investments and the financial stability of the issuers.
 
    The Company participates in Axel Johnson's centralized cash management
system. In general, the cash funding requirements of the Company have been met
by, and substantially all cash generated by the Company has been transferred to,
Axel Johnson.
 
SHORT-TERM INVESTMENTS
 
    The Company accounts for its short-term investments in accordance with
Statement of Financial Accounting Standard No. 115 "Accounting for Certain
Investments in Debt and Equity Securities". Accordingly, the Company determines
the appropriate classification of its investments in debt and equity securities
at the time of purchase and reevaluates such determinations at each balance
sheet date. All of the securities owned by the Company at December 31, 1998 and
1997 consisted of fixed and variable rate municipal debt securities with
contractual maturity dates of less than one year and have been classified as
available-for-sale. Gains and losses on sales of available-for-sale securities
have been immaterial. The cost of securities sold is based on the specific
identification method.
 
INVENTORIES
 
    Inventories are stated at the lower of standard cost or market. Standard
cost approximates actual average cost.
 
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 range from three to five years. Leasehold improvements are depreciated
using the straight-line method over the shorter of the estimated useful lives or
the lease term of the respective assets.
 
INTANGIBLE ASSETS
 
    Goodwill resulting from the NetEdge acquisition is amortized over its
estimated remaining useful life of three years. At each balance sheet date, a
review is performed by management to ascertain whether
 
                                       35
<PAGE>
                              LARSCOM INCORPORATED
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 1--THE COMPANY AND A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(CONTINUED)
intangible assets have been impaired by comparing carrying value with estimated
future undiscounted cash flows and records impairment of the carrying value, if
any, based on estimated future discounted cash flows.
 
WARRANTY
 
    The Company provides a three-year warranty for most of its products. A
provision for the estimated cost of warranty, which includes material, labor and
overhead, is recorded at the time revenue is recognized. While the Company
believes that its 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.
 
REVENUE RECOGNITION
 
    Revenue from product sales is recognized upon shipment of the product. The
Company, in general, does not grant a right of return to its customers.
 
RESEARCH AND DEVELOPMENT
 
    Research and development costs, including software development costs
discussed below, are charged to expense as incurred.
 
SOFTWARE DEVELOPMENT COSTS
 
    Software development costs incurred prior to establishment of technological
feasibility are expensed as research and development costs. Costs incurred
subsequent to the establishment of technological feasibility, and prior to the
general release of the product to the public, were not significant for all
periods presented and accordingly have been expensed.
 
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. Prior to the
Company's initial public offering ("IPO"), current tax expense was determined as
if the Company was a separate taxpayer. In December 1996, the Company entered
into an income tax sharing agreement with Axel Johnson pursuant to which the
Company made a payment to Axel Johnson of an amount in respect of income taxes
attributable to the Company for the period from January 1, 1996 to December 18,
1996, the date of the Company's IPO, when the Company ceased to be a member of
the Axel Johnson consolidated group.
 
EARNINGS (LOSS) PER SHARE
 
    Basic earnings per share excludes any dilutive effects of options, warrants
and convertible securities. Basic earnings per share is computed using the
weighted-average number of common shares outstanding during the period. Diluted
earnings per share is computed using the weighted-average number of common and
common stock equivalent shares outstanding during the period. Common equivalent
shares are excluded from the computation if their effect is antidilutive.
 
                                       36
<PAGE>
                              LARSCOM INCORPORATED
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 1--THE COMPANY AND A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(CONTINUED)
    The following table sets forth the computation of basic and diluted earnings
(loss) per share:
 
<TABLE>
<CAPTION>
                                                                  YEARS ENDED DECEMBER 31,
                                                               -------------------------------
                                                                 1998       1997       1996
                                                               ---------  ---------  ---------
                                                               (IN THOUSANDS, EXCEPT PER SHARE
                                                                            DATA)
<S>                                                            <C>        <C>        <C>
Net income (loss)............................................  $  (7,088) $  (3,759) $   4,930
Weighted average Class A and B Common Stock outstanding......     18,216     18,078     12,107
Basic and diluted earnings (loss) per share..................  $   (0.39) $   (0.21) $    0.41
</TABLE>
 
    The effects of outstanding stock options are not included in diluted
earnings(loss) per share because to do so would have been antidilutive. These
stock options could be dilutive in the future. See Note 6 for details of options
issued.
 
STOCK-BASED COMPENSATION
 
    As permitted under Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), the Company is
continuing to measure compensation cost for stock-based compensation plans using
the intrinsic value method prescribed by 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, are presented in Note 6.
 
FAIR VALUE OF FINANCIAL INSTRUMENTS
 
    For all financial instruments, including short-term investments, accounts
receivable, accounts payable, accrued expenses and other liabilities, the
carrying value is considered to approximate fair value due to the relatively
short maturities of the respective instruments.
 
COMPREHENSIVE INCOME
 
    The Company adopted under Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("SFAS 130"), in 1998. Comprehensive
income, as defined, includes all changes in equity during a period from
non-owner sources. The only item of other comprehensive income for all periods
presented relates to foreign currency translation adjustments.
 
                                       37
<PAGE>
                              LARSCOM INCORPORATED
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 2--BALANCE SHEET COMPONENTS
 
<TABLE>
<CAPTION>
                                                                               DECEMBER 31,
                                                                           --------------------
                                                                             1998       1997
                                                                           ---------  ---------
                                                                              (IN THOUSANDS)
<S>                                                                        <C>        <C>
Accounts receivable:
  Gross accounts receivable..............................................  $   8,252  $  17,201
  Less: Allowance for doubtful accounts..................................       (713)      (131)
                                                                           ---------  ---------
                                                                           $   7,539  $  17,070
                                                                           ---------  ---------
                                                                           ---------  ---------
Inventories:
  Raw materials..........................................................  $   3,021  $   4,266
  Work in process........................................................      1,053      3,047
  Finished goods.........................................................      4,539      6,015
                                                                           ---------  ---------
                                                                           $   8,613  $  13,328
                                                                           ---------  ---------
                                                                           ---------  ---------
Property and equipment:
  Machinery and equipment................................................  $   8,353  $   8,444
  Computers and software.................................................      7,867      7,289
  Leasehold improvements.................................................      2,230      2,244
  Furniture and fixtures.................................................      1,338      1,341
                                                                           ---------  ---------
                                                                              19,788     19,318
  Less: Accumulated depreciation.........................................    (12,868)    (9,615)
                                                                           ---------  ---------
                                                                           $   6,920  $   9,703
                                                                           ---------  ---------
                                                                           ---------  ---------
Intangible assets:
  Goodwill...............................................................  $     854  $   1,493
  Other intangible assets................................................      2,192      9,816
                                                                           ---------  ---------
                                                                               3,046     11,309
  Less: Accumulated amortization.........................................     (2,359)      (651)
                                                                           ---------  ---------
                                                                           $     687  $  10,658
                                                                           ---------  ---------
                                                                           ---------  ---------
Accrued expenses and other current liabilities:
  Accrued compensation...................................................  $   2,175  $   7,006
  Accrued warranty.......................................................      2,222      1,643
  Income taxes payable...................................................         36      1,318
  Other current liabilities..............................................      2,957      3,595
                                                                           ---------  ---------
                                                                           $   7,390  $  13,562
                                                                           ---------  ---------
                                                                           ---------  ---------
</TABLE>
 
                                       38
<PAGE>
                              LARSCOM INCORPORATED
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 3--RELATED PARTY TRANSACTIONS:
 
TRANSACTIONS WITH AXEL JOHNSON
 
    Related party transactions with Axel Johnson not disclosed elsewhere in the
consolidated financial statements are as follows:
 
DUE FROM/(TO) AXEL JOHNSON
 
    Amounts due from/(to) Axel Johnson consist of cash remittances made by the
Company to Axel Johnson from its operating bank accounts offset by cash advances
to the Company from Axel Johnson for purchases of property and equipment and
fluctuating working capital needs. Neither Axel Johnson nor the Company has
charged interest on the balances due. However, the Company did pay interest of
$630,000 during 1996 on a Note Payable to Axel Johnson. The following is an
analysis of the balance due from/(to) Axel Johnson:
 
<TABLE>
<CAPTION>
                                                                             DECEMBER 31,
                                                                    -------------------------------
                                                                      1998       1997       1996
                                                                    ---------  ---------  ---------
                                                                            (IN THOUSANDS)
<S>                                                                 <C>        <C>        <C>
Balance at beginning of the period................................  $  (3,243) $  (1,329) $   5,186
Cash remittances to Axel Johnson, net of cash advances............      7,305      2,618      1,818
Charges to (from) Axel Johnson for:
  Income taxes....................................................        367     (1,021)    (4,366)
  Pension and thrift plan.........................................     (2,563)    (1,371)    (1,028)
  Health insurance and workers' compensation......................       (828)      (488)      (512)
  Administrative services.........................................       (425)      (622)      (527)
  Interest on note payable........................................         --         --       (630)
  Property, liability and general insurance.......................       (857)      (596)      (633)
  IPO related costs...............................................         --       (134)      (401)
  Line of credit fees.............................................        (75)       (75)        --
  Other charges...................................................       (228)      (225)      (236)
                                                                    ---------  ---------  ---------
Balance at the end of the period..................................  $    (547) $  (3,243) $  (1,329)
                                                                    ---------  ---------  ---------
                                                                    ---------  ---------  ---------
</TABLE>
 
NOTE PAYABLE TO AXEL JOHNSON
 
    In August 1996, the Company declared a dividend of $25,000,000, evidenced by
a note payable to Axel Johnson, bearing interest at a rate of 7.5% per annum.
The principal was paid out of the proceeds of the Company's IPO on December 24,
1996.
 
EMPLOYEE HEALTH AND WELFARE PROGRAMS
 
    The Company participates in various employee benefit programs which are
sponsored by Axel Johnson. These programs include medical, dental and life
insurance and workers' compensation. In general, the Company reimburses Axel
Johnson for its proportionate cost of these programs based on historical
experience and relative headcount. The costs reimbursed to Axel Johnson include
costs for reported claims, as well as changes in reserves for incurred but not
reported claims. The Company recorded expenses related to the reimbursement of
these costs of approximately $828,000, $488,000 and $512,000 in 1998, 1997 and
1996, respectively. The Company believes the allocation by Axel Johnson of the
 
                                       39
<PAGE>
                              LARSCOM INCORPORATED
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 3--RELATED PARTY TRANSACTIONS: (CONTINUED)
proportionate cost is reasonable but is not necessarily indicative of the costs
that would have been incurred had the Company maintained its own benefit plans.
 
ADMINISTRATIVE SERVICES
 
    Axel Johnson provides limited services to the Company, including certain
treasury, accounting, tax, internal audit, legal and human resources functions.
The costs of these functions have been allocated to the Company based on
estimates of actual costs incurred. Management believes that such allocations
are reasonable. Such charges and allocations are not necessarily indicative of
the costs that would have been incurred if the Company had been a separate
entity. The allocated costs of these services amounting to $425,000, $622,000
and $527,000 in 1998, 1997 and 1996, respectively, have been included in
selling, general and administrative expenses in the consolidated statements of
operations.
 
CREDIT AGREEMENT
 
    The Company and Axel Johnson entered into a credit agreement, pursuant to
which Axel Johnson has agreed to provide a revolving credit/working capital
facility (the "Credit Agreement") to the Company in an aggregate amount of
$15,000,000. The Credit Agreement expires in December 2000. Any loans under the
Credit Agreement bear interest during each calendar quarter at a rate per annum
equal to the sum of the three month London Interbank Offered Rate (LIBOR), plus
2.0%, initially on the date when the loan is made and adjusted thereafter on the
first business day of each calendar quarter. Additionally, the Company is
required to pay a commitment fee of 0.5% per annum on the unused portion of the
Credit Agreement. The Company is required to maintain compliance with certain
covenants under the Credit Agreement. As of December 31, 1998, $15,000,000 was
available, and during 1998 and 1997, no borrowings were made under the Credit
Agreement.
 
LARVAN LEASE
 
    Prior to September 1997, the Company leased its principal facility from
Larvan Properties ("Larvan"), a general partnership in which the Company owned a
one third interest. The Company paid $278,000 and $278,000 in rent expense to
Larvan and earned partnership income of $21,000 and $36,000 in 1997 and 1996,
respectively. In September 1997, the Company moved to a new facility, which is
leased from a third party. In March 1998, the Company recorded, as other income
in accordance with the equity method, a one-time, pre-tax gain of $1,329,000
from the sale of its former headquarters by Larvan. In December 1998, the Larvan
partnership was dissolved.
 
NOTE 4--CAPITAL STOCK:
 
    In October 1996, the Company's Board of Directors approved a plan to
recapitalize the Company by authorizing (i) Class A Common Stock consisting of
100,000,000 shares, (ii) Class B Common Stock consisting of 11,900,000 shares
and (iii) 5,000,000 shares of undesignated Preferred Stock. Additionally, the
Company's existing Common Stock was reclassified as Class B Common Stock and a
1,190 to one stock split of the Class B Common Stock was effected. Such
recapitalization was effected on December 11, 1996. These consolidated financial
statements have been restated to reflect the recapitalization and the stock
split in all periods presented.
 
    The rights, preferences and privileges of each class of Common Stock are
identical except for voting rights. Each share of Class A Common Stock entitles
its holder to one vote and each share of Class B
 
                                       40
<PAGE>
                              LARSCOM INCORPORATED
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 4--CAPITAL STOCK: (CONTINUED)
Common Stock entitles 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
is convertible into Class A Common Stock on a share-for-share basis, subject to
adjustment for dividends, stock splits, subdivisions or combinations.
 
    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.
 
    In December 1996, the Company completed an initial public offering of
7,000,000 shares of Class A Common Stock at a price of $12 per share of which
5,800,000 were sold by the Company and 1,200,000 shares were sold by Axel
Johnson. The Company received net proceeds of $63,279,000 in December 1996. In
January 1997, the underwriters exercised their over-allotment option to sell
additional shares and sold an additional 1,050,000 shares of which 350,000 were
sold by the Company and 700,000 were sold by Axel Johnson. Net proceeds to the
Company in January 1997 were $3,827,000. Axel Johnson owns all the of the
Company's issued and outstanding Class B Common Stock.
 
    In March 1997, 25,518 shares of Class A Common Stock were issued to certain
employees at a cost of $12 per share in connection with the cancellation of the
Company's Long-Term Incentive Plan. In August 1997, an additional 61,769 shares
of Class A Common Stock were issued for consideration of $408,000 under the
Company's Employee Stock Purchase Plan.
 
    In 1998, the Company issued 129,000 shares of Class A Common Stock for
consideration of $710,000 under the Company's Employee Stock Purchase Plan.
 
NOTE 5--INCOME TAXES:
 
    The provision for income taxes consists of the following:
 
<TABLE>
<CAPTION>
                                                                       YEARS ENDED DECEMBER 31,
                                                                    -------------------------------
                                                                      1998       1997       1996
                                                                    ---------  ---------  ---------
                                                                            (IN THOUSANDS)
<S>                                                                 <C>        <C>        <C>
Current:
  Federal.........................................................  $    (158) $   5,261  $   3,481
  State...........................................................        (32)     1,203        885
  Foreign.........................................................         44         --         --
                                                                    ---------  ---------  ---------
                                                                         (146)     6,464      4,366
                                                                    ---------  ---------  ---------
Deferred:
  Federal.........................................................     (4,299)    (7,028)      (731)
  State...........................................................       (991)    (1,922)      (198)
  Foreign.........................................................         --         --         --
                                                                    ---------  ---------  ---------
                                                                       (5,290)    (8,950)      (929)
                                                                    ---------  ---------  ---------
Income tax provision/(benefit)....................................  $  (5,436) $  (2,486) $   3,437
                                                                    ---------  ---------  ---------
                                                                    ---------  ---------  ---------
</TABLE>
 
                                       41
<PAGE>
                              LARSCOM INCORPORATED
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 5--INCOME TAXES: (CONTINUED)
 
    The following is a reconciliation of the U.S. federal income tax rate to the
Company's effective income tax rate:
 
<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                              ------------------
                                                              1998   1997   1996
                                                              ----   ----   ----
<S>                                                           <C>    <C>    <C>
Provision at statutory rate.................................  (35)%  (34)%   34%
Federal tax exempt interest income..........................   (2)    (6)    --
State income taxes, net of federal tax benefits.............   (5)    (6)     5
Research and development credits............................   (1)    --     (1)
Non-deductible goodwill amortization........................   --     --      2
Other.......................................................   --      6      1
                                                              ----   ----   ----
Effective rate..............................................  (43)%  (40)%   41%
                                                              ----   ----   ----
                                                              ----   ----   ----
</TABLE>
 
    Deferred tax assets/liabilities are comprised of the following:
 
<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                                            --------------------
                                                              1998       1997
                                                            ---------  ---------
                                                               (IN THOUSANDS)
<S>                                                         <C>        <C>
Deferred tax assets:
  Inventory...............................................  $   2,356  $   1,354
  Accrued expenses........................................      2,262      1,628
  Reserves................................................        640        748
  In-process research and development.....................      7,573      7,480
  Depreciation and amortization...........................      3,262         --
                                                            ---------  ---------
                                                               16,093     11,210
                                                            ---------  ---------
Deferred tax liabilities:
  Depreciation and amortization...........................         --        390
  Other...................................................         --         17
                                                            ---------  ---------
                                                                   --        407
                                                            ---------  ---------
Net deferred tax asset....................................  $  16,093  $  10,803
                                                            ---------  ---------
                                                            ---------  ---------
</TABLE>
 
    At December 31, 1998 the Company had recorded deferred tax assets of
$16,093,000, primarily relating to the future tax benefits of amortization of
intangible assets and an in-process research and development charge which are
deductible ratably over the next 14 years. The remaining tax benefit relates to
inventory reserves and accrued expenses. In accordance with Statement of
Financial Accounting Standard No. 109 ("SFAS 109"), "Accounting for Income
Taxes", the Company has not recorded any valuation allowance against those
assets because management has determined that it is more likely than not that
all of these assets will be realized. Realization of these assets is primarily
dependent on the ability of the Company to generate taxable income in the
future. Some of the factors that the Company used to make this determination
are: the Company has a strong earnings history; a significant portion of the
deferred tax assets are deductible over fourteen years; tax losses can be
carried forward for twenty years; a portion of the losses can be carried back to
prior years and the Company can switch its investments to taxable securities
from non-taxable securities. The amount of the deferred tax assets considered
realizable
 
                                       42
<PAGE>
                              LARSCOM INCORPORATED
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 5--INCOME TAXES: (CONTINUED)
could be reduced in the near term if the Company's estimates of future taxable
income are reduced. This could result in a charge to net income.
 
NOTE 6--EMPLOYEE BENEFIT PLANS:
 
THRIFT PLAN
 
    The Company participates in the Axel Johnson Thrift Plan (the "Thrift Plan")
qualified under Section 401(k) of the Internal Revenue Code. The Thrift Plan
allows employees to defer up to 21% of their compensation not to exceed the
amount allowed by the applicable Internal Revenue Service guidelines. The
Company matches 60% of employee contributions made on a pre-tax basis and 30% of
employee contributions made on a after-tax basis, subject to a maximum of 6% of
total eligible employee compensation. Company contributions vest ratably over
five years of service or two years of plan participation, whichever occurs
first. Contributions by the Company under the Thrift Plan amounted to $640,000,
$503,000 and $379,000 in 1998, 1997 and 1996, respectively.
 
PENSION PLAN
 
    Effective March 31, 1998, the Company's 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 proscribed by the plan. Company 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.
 
                                       43
<PAGE>
                              LARSCOM INCORPORATED
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 6--EMPLOYEE BENEFIT PLANS: (CONTINUED)
    The following sets forth the Company's benefit obligation and the net
periodic pension costs for both plans as required by Statement of Financial
Accounting Standard No. 132, "Employers Disclosures about Pensions and Other
Postretirement Benefits":
 
<TABLE>
<CAPTION>
                                                                1998       1997
                                                              ---------  ---------
                                                                 (IN THOUSANDS)
<S>                                                           <C>        <C>
Reconciliation of Projected Benefit Obligations
  Projected benefit obligation at January 1,................  $   4,016  $   4,189
  Service cost..............................................        144        873
  Interest cost.............................................        270        349
  Actuarial (gain) loss.....................................        (29)       635
  Plan amendments...........................................         --     (1,991)
  Benefits paid.............................................        (62)       (39)
                                                              ---------  ---------
  Projected benefit obligation at December 31,..............  $   4,339  $   4,016
                                                              ---------  ---------
                                                              ---------  ---------
Weighted-average Assumptions as of December 31,
  Discount rate.............................................       7.00%      7.25%
  Expected return on plan assets............................       9.50%      9.50%
  Rate of compensation increase.............................       4.25%      4.50%
 
Components of Net Periodic Benefit Cost
  Service cost..............................................  $     144  $     873
  Interest cost.............................................        270        349
  Expected return on assets.................................       (284)      (355)
  Net amortization..........................................         (7)         1
                                                              ---------  ---------
  Net periodic benefit cost.................................  $     123  $     868
                                                              ---------  ---------
                                                              ---------  ---------
</TABLE>
 
    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 the Company to the total PBO of the defined benefit
pension plan. The projected benefit obligation for Company employees with
accrued benefits in the unfunded Retirement Restoration Plan is $323,000 and
$338,000 as of December 31, 1998 and 1997, respectively.
 
EMPLOYEE STOCK PURCHASE PLAN
 
    Effective October 1996, the Company's Board of Directors adopted an Employee
Stock Purchase Plan (the "Purchase Plan"), for which 685,000 shares of Class A
Common Stock have been reserved for issuance. The Purchase Plan permits eligible
employees to purchase Class A Common Stock at the beginning or at the end of
each six-month offering period subject to various limitations. The offering
periods commence each February and August. Eligible employees may designate not
more than 10% of their cash compensation to be deducted each pay period for the
purchase of common stock under the Purchase Plan, and participants may purchase
not more than $25,000 of common stock in any one calendar year, or 1,000 shares
in each offering period. A total of 129,000 and 62,000 shares of Class A Common
Stock were issued under the Purchase Plan in 1998 and 1997, respectively.
 
                                       44
<PAGE>
                              LARSCOM INCORPORATED
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 6--EMPLOYEE BENEFIT PLANS: (CONTINUED)
STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS
 
    In October 1996, the Company adopted a Stock Option Plan for Non-Employee
Directors (the "Directors' Plan") and reserved a total of 205,000 shares of the
Company's Class A Common Stock for issuance thereunder. The Directors' Plan
provides for the grant of stock options pursuant to an automatic grant mechanism
to members of the Board of Directors who are not employees of the Company or of
Axel Johnson. Each non-employee director will receive an initial grant, upon
first becoming a director to purchase a total of 18,000 shares of Class A Common
Stock, and each year thereafter will receive an option to purchase a total of
6,000 shares of Class A Common Stock. Each option is granted at an exercise
price equal to fair market value on date of grant. Each initial grant vests in
three equal annual occurrences, 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.
 
    STOCK INCENTIVE PLAN
 
    In October 1996, the Company's Board of Directors approved a Stock Incentive
Plan (the "Incentive Plan") for which 3,985,000 shares of Class A Common Stock
have been reserved for issuance thereunder. The Incentive Plan provides for the
grant of incentive stock options, non-qualified stock options, stock
appreciation rights and stock bonus awards to employees and eligible
consultants. The Incentive Plan is administered by the Compensation Committee of
the Board of Directors (the "Administrator"). With respect to any participant
who owns stock possessing more than ten percent of the voting power of all
classes of the Company's outstanding capital stock (a 10% stockholder), the
exercise price of any incentive stock option granted must equal 110% of the fair
market value on the grant date. The exercise price of incentive stock options
for all other employees shall be no less than 100% of the fair market value per
share on the date of the grant. 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% stockholder). Options
generally vest over a four year period from the date of grant.
 
                                       45
<PAGE>
                              LARSCOM INCORPORATED
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 6--EMPLOYEE BENEFIT PLANS: (CONTINUED)
    The following table summarizes activity under the Directors' and the
Incentive Plans:
 
<TABLE>
<CAPTION>
                                                                               OPTIONS OUTSTANDING
                                                              -----------------------------------------------------
                                                                   DIRECTORS' PLAN             INCENTIVE PLAN
                                                              -------------------------   -------------------------
                                                                               WEIGHTED                    WEIGHTED
                                                                  NUMBER       AVERAGE        NUMBER       AVERAGE
                                                                    OF         EXERCISE         OF         EXERCISE
                                                                  SHARES        PRICE         SHARES        PRICE
                                                              --------------   --------   --------------   --------
                                                              (IN THOUSANDS)              (IN THOUSANDS)
<S>                                                           <C>              <C>        <C>              <C>
December 31, 1995...........................................        --          $   --            --        $   --
Granted.....................................................        54           12.00         1,298         12.00
Exercised...................................................        --              --            --            --
Canceled....................................................        --              --            --            --
                                                                   ---                        ------
December 31, 1996...........................................        54           12.00         1,298         12.00
Granted.....................................................        18           11.00           468         11.00
Exercised...................................................        --              --            --            --
Canceled....................................................        --              --          (147)        11.85
                                                                   ---                        ------
December 31, 1997...........................................        72           11.75         1,619         11.72
Granted.....................................................        30            6.85         2,266          3.09
Exercised...................................................        --              --            --            --
Canceled....................................................       (18)          11.67        (1,982)        10.43
                                                                   ---                        ------
December 31, 1998...........................................        84           10.02         1,903          2.79
                                                                   ---                        ------
                                                                   ---                        ------
Options exercisable at December 31, 1998....................        30          $12.00            87        $11.89
</TABLE>
 
    On November 16, 1998, the Company canceled options to purchase 1,387,000
shares of Class A Common Stock with exercise prices ranging from $2.38 to $12.00
previously granted to employees, and issued replacement options at an exercise
price of $1.75, the market price of the Company's stock on November 16, 1998.
The reissued options vest over four years from the date of reissuance.
 
    The following table summarizes information about stock options outstanding
at December 31, 1998, under both the Directors' Plan, and the Incentive Plan
(number of options in thousands):
 
<TABLE>
<CAPTION>
                                                      OUTSTANDING        AVERAGE       WEIGHTED      EXERCISABLE     WEIGHTED
                                                          AT            REMAINING       AVERAGE          AT           AVERAGE
                                                     DECEMBER 31,      CONTRACTUAL     EXERCISE     DECEMBER 31,     EXERCISE
RANGE OF EXERCISE PRICES                                 1998             LIFE           PRICE          1998           PRICE
--------------------------------------------------  ---------------  ---------------  -----------  ---------------  -----------
<S>                                                 <C>              <C>              <C>          <C>              <C>
$1.01 - $3.00.....................................         1,705              9.9      $    1.75             --      $      --
$3.01 - $5.00.....................................            18              9.6      $    4.75             --      $      --
$7.01 - $9.00.....................................             2              9.1      $    8.18             --      $      --
$9.01 - $11.00....................................            26              8.9      $   10.53              1      $   11.00
$11.01 - $12.00...................................           236              8.1      $   11.85            116      $   11.93
                                                           -----              ---     -----------         -----     -----------
                                                           1,987              9.6      $    3.10            117      $   11.92
                                                           -----              ---     -----------         -----     -----------
                                                           -----              ---     -----------         -----     -----------
</TABLE>
 
                                       46
<PAGE>
                              LARSCOM INCORPORATED
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 6--EMPLOYEE BENEFIT PLANS: (CONTINUED)
PRO FORMA INFORMATION
 
    As permitted under SFAS 123, the Company is 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 income (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 a
Black-Scholes option-pricing model with the following weighted-average
assumptions:
 
<TABLE>
<CAPTION>
                                                                                    EMPLOYEE STOCK
                                                   DIRECTORS' AND INCENTIVE
                                                                                    PURCHASE PLAN
                                                      STOCK OPTION PLANS
                                                -------------------------------  --------------------
                                                  1998       1997       1996       1998       1997
                                                ---------  ---------  ---------  ---------  ---------
<S>                                             <C>        <C>        <C>        <C>        <C>
Risk-free interest rate.......................       4.54%      5.85%      6.00%      5.30%      5.30%
Expected volatility...........................         70%        60%        47%        66%        60%
Expected dividend yield.......................          0%         0%         0%         0%         0%
Expected life.................................       3.61       4.04       4.04       0.50       0.50
</TABLE>
 
    The weighted average estimated fair value of options granted under the
Directors' Plan, the Incentive Plan and the Purchase Plan were as follows:
 
<TABLE>
<CAPTION>
                                                         DIRECTORS'    INCENTIVE    EMPLOYEE STOCK
                                                            PLAN         PLAN        PURCHASE PLAN
                                                         -----------  -----------  -----------------
<S>                                                      <C>          <C>          <C>
1996 grants............................................   $    5.76    $    5.15             N/A
1997 grants............................................   $    6.36    $    5.54       $    3.05
1998 grants............................................   $    4.27    $    1.64       $    2.65
</TABLE>
 
    For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the vesting period of the respective
options. The Company's pro forma information for the years ended December 31 is
as follows (in thousands, except per share information):
 
<TABLE>
<CAPTION>
                                                                   1998       1997       1996
                                                                 ---------  ---------  ---------
<S>                                                              <C>        <C>        <C>
Net income (loss)--as reported.................................  $  (7,088) $  (3,759) $   4,930
Net income (loss)--pro forma...................................  $  (9,174) $  (6,822) $   4,930
 
Basic and diluted earnings (loss) per share--as reported.......  $   (0.39) $   (0.21) $    0.41
Basic and diluted earnings (loss) per share--pro forma.........  $   (0.51) $   (0.38) $    0.41
</TABLE>
 
NOTE 7--LEASES:
 
    Operating lease commitments are related primarily to the Company's buildings
in Milpitas, California and Research Triangle Park, North Carolina and have
terms which expire in 2004 and 2010, respectively. Total rent expense in 1998,
1997 and 1996, was $2,607,000, $1,404,000, and $552,000, respectively. Sublease
 
                                       47
<PAGE>
                              LARSCOM INCORPORATED
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 7--LEASES: (CONTINUED)
rental income was $786,000 and $83,000 in 1998 and 1997, respectively. Future
annual minimum lease payments under all noncancelable operating leases as of
December 31, 1998 are as follows (in thousands):
 
<TABLE>
<S>                                                                  <C>
Years ending December 31,
1999...............................................................  $   2,307
2000...............................................................      2,385
2001...............................................................      2,388
2002...............................................................      2,383
2003 and thereafter................................................      6,746
                                                                     ---------
                                                                     $  16,209
                                                                     ---------
                                                                     ---------
</TABLE>
 
    Commitments under capital leases are $204,000 and $59,000 for 1999 and 2000,
respectively. These amounts include interest of $10,000.
 
    Total minimum rental income to be received in the future under noncancelable
subleases was $216,000 as of December 31, 1998.
 
NOTE 8--COMMITMENTS AND CONTINGENCIES:
 
    In April 1998, the Company received notification from the General Services
Administration ("GSA") that it had completed its audit of the Company's two
product supply contracts, which were subject to GSA regulations. At December 31,
1997, the Company had a reserve of $532,000 to cover potential pricing
deficiencies, associated audit and legal costs and penalties under these
contracts. As a result of the notification by GSA, the Company released the
reserve of $532,000 in the second quarter of 1998, which resulted in a reduction
in selling, general, and administrative expenses for the year. The Company
believes that no additional liabilities will result from this matter.
 
    At the end of 1998, vendors of three integrated circuits ("ICs") notified
the Company regarding their intent to cease production. As a result of
anticipated continued usage of these ICs, Larscom entered into purchase
commitments of approximately $1,250,000 in aggregate, representing between one
and two years expected demand for these components. While the Company believes
that it will use all of the quantities it has agreed to purchase, there can be
no assurance that its estimates are correct. This could result in a charge to
net income.
 
    In its distribution agreements, the Company typically agrees to indemnify
its customers for any expenses or liabilities resulting from claimed
infringements of patents, trademarks or copyrights of third parties.
 
NOTE 9--ACQUISITION:
 
    On December 31, 1997, the Company completed a merger with NetEdge Systems
Inc. ("NetEdge"). The transaction was accounted for as a purchase and, on this
basis, the excess purchase price over the estimated fair value of the tangible
assets acquired and liabilities assumed has been allocated to various intangible
assets, primarily consisting of in-process research and development, current
technology, trademarks and goodwill based on an independent third-party
valuation. At that time, the Company estimated that the useful economic lives of
the current technology, trademarks and goodwill were five, seven and six
 
                                       48
<PAGE>
                              LARSCOM INCORPORATED
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 9--ACQUISITION: (CONTINUED)
years respectively. The Company determined that no alternative future use
existed for the in-process research and development and therefore recorded a
charge to earnings of $20,120,000.
 
    Research and development projects underway at the date of the acquisition of
NetEdge were classified into two different categories--enhancements to the
existing EDGE hardware platform and development of a new hardware platform. The
values of the in process research and development were determined based on the
expected net discounted cash flows to be generated from the products under
development at the date of acquisition. A discount rate of 35% was used to
calculate discounted future cash flows which reflects the inherent risks of the
research and development efforts. The values attributed to the enhancements to
the existing EDGE hardware platform and the development of a new hardware
platform were $6,070,000 and $14,050,000, respectively, as of December 31, 1997.
The most sensitive factor in determining the expected net discounted cash flows
from these projects was revenues.
 
    Of the total purchase consideration, $6,300,000 was placed into escrow
pending resolution of certain matters including purchase price adjustments and
other representations and warranties. In September 1998, $600,000 of the escrow
amount was released to the Company and $400,000 was released to the shareholders
of NetEdge. There remained $5,300,000 in escrow at December 31, 1998, portions
of which will be released over a three year period from the date of the
acquisition. The release of an additional $647,000 to the shareholders of
NetEdge was authorized by the Company in December 1998. The consideration and
fair values of assets acquired are as follows (in thousands):
 
<TABLE>
<S>                                                                  <C>
Cash consideration.................................................  $  25,793
Acquisition costs..................................................      1,182
                                                                     ---------
                                                                     $  26,975
                                                                     ---------
                                                                     ---------
Fair value of assets acquired
  Tangible assets..................................................  $   5,994
  Current technology...............................................      8,590
  Trademarks.......................................................        560
  Goodwill.........................................................      1,493
  In-process research and development..............................     20,120
  Liabilities assumed..............................................     (9,782)
                                                                     ---------
                                                                     $  26,975
                                                                     ---------
                                                                     ---------
</TABLE>
 
    As a result of the review and refocus of the Company's business in October
1998, the Company reviewed the intangible assets associated with the NetEdge
acquisition for impairment in accordance with Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" ("SFAS 121"). The review and refocus was
precipitated by successively lower quarterly revenues during the year for the
Company as a whole and by worse than anticipated revenues from the NetEdge
product family. The Company determined that the sum of the estimated future cash
flows related to the EDGE products were less than the carrying amount of the
purchased intangible assets. The fair value of these intangible assets was
determined by calculating the present value of estimated future cash flows of
those assets. As a result of this review, the Company recognized an impairment
loss of $7,915,000, principally related to the current technology.
 
                                       49
<PAGE>
                              LARSCOM INCORPORATED
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 9--ACQUISITION: (CONTINUED)
    As a result of adjustments to the purchase price made in 1998, goodwill,
which was originally recorded at $1,493,000 was adjusted down to $1,145,000. In
addition, goodwill was further written down as a result of the impairment
analysis and is now being amortized over its revised remaining estimated useful
economic life of three years. At December 31, 1998 the net book value of
goodwill was $673,000.
 
    The unaudited consolidated results of operations on a pro forma basis for
the years ended December 31, 1997 and 1996, as if Larscom had acquired NetEdge
at the beginning of 1997 and 1996, are as follows (in thousands, except per
share amounts):
 
<TABLE>
<CAPTION>
                                                            YEARS ENDED DECEMBER
                                                                    31,
                                                            --------------------
                                                              1997       1996
                                                            ---------  ---------
                                                               (IN THOUSANDS)
<S>                                                         <C>        <C>
Revenues..................................................  $  86,916  $  83,754
Net income (loss).........................................        908     (3,306)
Earnings (loss) per share.................................       0.05      (0.27)
</TABLE>
 
    The proforma results for the year ended December 31, 1997 exclude the
non-recurring charge for in-process research and development related to the
acquisition.
 
NOTE 10--RESTRUCTURING:
 
    In October 1998, Larscom announced a corporate restructuring designed to
better align its expenses with anticipated revenues and to tighten its focus on
opportunities that offer the best long-term growth potential. The restructuring
included a workforce reduction of approximately 16%. Details of the
restructuring expense are as follows:
 
<TABLE>
<CAPTION>
                                                                               ASSET
                                                                EMPLOYEE       WRITE
                                                                SEVERANCE      DOWNS        OTHER       TOTAL
                                                               -----------  -----------  -----------  ---------
                                                                                (IN THOUSANDS)
<S>                                                            <C>          <C>          <C>          <C>
Included in 1998 expenses....................................   $     876    $      89    $     249   $   1,214
Paid in 1998.................................................         575           89            9         673
                                                                    -----          ---        -----   ---------
Balance at December 31, 1998.................................   $     301    $      --    $     240   $     541
                                                                    -----          ---        -----   ---------
                                                                    -----          ---        -----   ---------
</TABLE>
 
NOTE 11--UNAUDITED QUARTERLY CONSOLIDATED FINANCIAL DATA:
 
<TABLE>
<CAPTION>
                                                                        QUARTERS ENDED
                                                         --------------------------------------------
                                                          MARCH 31,   JUNE 30,   SEPT. 30,  DEC. 31,
                                                            1998        1998       1998       1998
                                                         -----------  ---------  ---------  ---------
                                                            (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                      <C>          <C>        <C>        <C>
Sales..................................................   $  22,330   $  18,639  $  18,212  $  13,552
Gross profit...........................................   $  12,169   $   8,440  $   5,309  $   5,898
Net income (loss)(1)...................................   $   1,704   $    (341) $  (2,287) $  (6,164)
Basic and diluted earnings (loss) per share(1).........   $    0.09   $   (0.02) $   (0.13) $   (0.34)
</TABLE>
 
                                       50
<PAGE>
                              LARSCOM INCORPORATED
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 11--UNAUDITED QUARTERLY CONSOLIDATED FINANCIAL DATA: (CONTINUED)
 
<TABLE>
<CAPTION>
                                                                        QUARTERS ENDED
                                                         --------------------------------------------
                                                          MARCH 31,   JUNE 30,   SEPT. 30,  DEC. 31,
                                                            1997        1997       1997       1997
                                                         -----------  ---------  ---------  ---------
                                                            (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                      <C>          <C>        <C>        <C>
Sales..................................................   $  16,410   $  19,148  $  19,336  $  21,061
Gross profit...........................................   $   9,016   $  10,962  $  11,102  $  12,157
Net income (loss)(2)...................................   $   1,334   $   2,541  $   2,457  $ (10,091)
Basic and diluted earnings (loss) per share(2).........   $    0.07   $    0.14  $    0.14  $   (0.56)
</TABLE>
 
------------------------
 
(1) The quarter ended December 31, 1998, includes restructuring expense and
    intangible asset write-downs of $9,129,000 and related tax effects. See Note
    9 for more details.
 
(2) The quarter ended December 31, 1997, includes acquired in-process research
    and development charge of $20,120,000 and related tax affects. See Note 9
    for more details.
 
                                       51
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE
 
    There were no disagreements with accountants on accounting and financial
disclosure.
 
PART III
 
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
    The information required by this Item is incorporated by reference to the
Company's Proxy Statement.
 
ITEM 11. EXECUTIVE COMPENSATION
 
    The information required by this Item is incorporated by reference to the
Company's Proxy Statement.
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
    The information required by this Item is incorporated by reference to the
Company's Proxy Statement.
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
    The information required by this Item is incorporated by reference to the
Company's Proxy Statement.
 
                                       52
<PAGE>
PART IV
 
ITEM 14. 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.  Exhibits
 
<TABLE>
<CAPTION>
  EXHIBIT
  NUMBER
-----------
<C>          <S>
       2.1(3) Agreement and Plan or Reorganization, dated as of December 2, 1997, among Larscom Incorporated, a
               Delaware corporation, LPH Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of
               Larscom, and NetEdge Systems, Inc., a Delaware corporation.
 
       3.1(1) Certificate of Incorporation of the Registrant
 
       3.2(1) Amended and Restated Certificate of Incorporation of the Registrant as filed in the State of Delaware
               on December 11, 1996
 
       3.3(1) By-laws of the Registrant
 
       3.4(1) Form of Amended By-laws of the Registrant
 
      10.1(1) Form of Larscom Incorporated Stock Option Plan For Non-Employee Directors
 
      10.2(1) Form of Larscom Incorporated Stock Incentive Plan
 
      10.3(1) Form of Larscom Incorporated Stock Purchase Plan
 
      10.4(1) Lease Agreement between Larvan Properties and the Company
 
      10.5(1) Partnership Agreement among Vanderson Construction, Donn H. Byrne, John D. Brady, Thomas J. Cunningham,
               Jr. and the Company
 
      10.6(1) Form of Services Agreement between Axel Johnson and the Company
 
      10.7(1) Form of Credit Agreement between Axel Johnson and the Company
 
      10.8(1) Form of Tax Sharing Agreement between Axel Johnson and the Company
 
      10.9(1) Note between Axel Johnson and the Company dated August 23, 1996
 
      10.10(1) Form of Registration Rights Agreement between Axel Johnson and the Company
 
      10.11(2) Lease Agreement between Berg & Berg Enterprises Inc. and the Company
 
      10.12(4) Amendment No. 1 to Credit Agreement between Axel Johnson and the Company
 
      11.1(4) Statement re computation of per share earnings
 
      21.1(4) Subsidiaries of the Registrant
 
      23.1(4) Consent of Independent Accountants
 
      24  (4) Power of Attorney
 
      27  (4) Financial Data Schedule
</TABLE>
 
------------------------
 
(1) Incorporated by reference to identically numbered Exhibit to the Company's
    Registration Statement on Form S-1 (Commission File No. 333-14001), which
    became effective on December 18, 1996.
 
(2) Incorporated by reference to identically numbered exhibits filed in response
    to Item 14(a), "Exhibits," of the Registrant's Report on Form 10-K for the
    fiscal year ended December 31, 1996.
 
                                       53
<PAGE>
(3) Incorporated by reference to identically numbered exhibits filed in response
    to Item 2 of the Registrant's Report on Form 8-K filed with the Commission
    on January 2, 1998.
 
(4) Filed herewith
 
    b)  Reports on Form 8-K
       No reports of Form 8-K were filed during the quarter.
 
    c)  Exhibits
       See Item 14(a) 2 above.
 
    d)  Exhibits
 
                                       54
<PAGE>
    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.
 
<TABLE>
<S>                             <C>  <C>
                                LARSCOM INCORPORATED
 
                                By             /s/ GEORGE M. DONOHOE
                                     -----------------------------------------
                                                 George M. Donohoe
                                           ACTING CHIEF EXECUTIVE OFFICER
</TABLE>
 
                                       55