<PAGE>
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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------

                                   FORM 10-K

<TABLE>
<C>        <S>
   /X/     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
           SECURITIES EXCHANGE ACT OF 1934
</TABLE>

                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999

                                       OR

<TABLE>
<C>        <S>
   / /     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
           SECURITIES EXCHANGE ACT OF 1934
</TABLE>

        FOR THE TRANSITION PERIOD FROM ______________ TO ______________

                        COMMISSION FILE NUMBER: 1-12491
                            ------------------------

                              LARSCOM INCORPORATED
             (Exact name of registrant as specified in its charter)

<TABLE>
<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)
</TABLE>

                                 (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. /X/

    The aggregate market value of the voting stock held by non-affiliates of the
registrant as of February 28, 2000, was approximately $76,423,000.

    The number of the registrant's shares outstanding as of February 28, 2000,
was 8,491,415 of Class A Common Stock and 10,000,000 of Class B Common Stock.

                      DOCUMENTS INCORPORATED BY REFERENCE:

    Portions of the to-be filed Proxy Statement for the Registrant's 2000 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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<PAGE>
                               TABLE OF CONTENTS

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<CAPTION>
                                                                                        PAGE
                                                                                      --------
<S>                     <C>                                                           <C>
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......................................................     26

ITEM 8.                 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................     27

ITEM 9.                 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
                          AND FINANCIAL DISCLOSURE..................................     48

PART III............................................................................     49

ITEM 10.                DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..........     49

ITEM 11.                EXECUTIVE COMPENSATION......................................     49

ITEM 12.                SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                          MANAGEMENT................................................     49

ITEM 13.                CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..............     49

PART IV.............................................................................     50

ITEM 14.                EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
                          FORM 8-K..................................................     50
</TABLE>

                                       2
<PAGE>
                                     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") manufactures and markets high speed
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 in December 1996, the Company
was a wholly owned subsidiary of Axel Johnson Inc. ("Axel Johnson"). Upon
consummation of that offering Axel Johnson owned 55% of the Class A and B Common
Stock of the Company and controlled 83% of the voting interest. These ownership
and control percentages remain approximately the same.

INDUSTRY OVERVIEW

    Many enterprises now use the Internet not only as a means of obtaining
information, but also as a "virtual private network." 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 more 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/E1 services, private and public frame relay, digital
subscriber loop ("DSL") and ATM services 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 155Mbps including the standardized NxT1
IMA specification.

    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 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

                                       3
<PAGE>
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 respond
to their business conditions. 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 operates 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 products provide access to both ATM and time division
multiplexing ("TDM") networks 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 corporate users.

    PROVIDING MULTI-SERVICES/MULTI-CUSTOMER SOLUTIONS.  ATM is becoming the
access technology of choice for many NSPs enabling them 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. Our 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 our Mega-T, Mega-E and Orion 4000
products, the Company has 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/E1 based infrastructure and provides corporate users ready access to
affordable and ubiquitous high speed bandwidth. The Company's Orion 2000 and new
EDGE IMA module extends its inverse multiplexing experience to the
standard-based 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 provides upgradeable software and plug-in modules
that allow services to be added rapidly and cost effectively as demand changes
and industry standards evolve.

    RELIABILITY AND QUALITY.  The Company believes it has earned a strong
reputation for the quality of its products, as well as for responsive service.
Its products are manufactured to meet high standards of reliability and quality,
including intensive system level testing in development and manufacturing. The
Company 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.

    CUSTOMER SERVICE AND SUPPORT.  The Company offers rapid response service and
support through various stages of the customer relationship. Its 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

                                       4
<PAGE>
to short lead-time orders. Finally, the Company provides post-sale service and
support of its products through technical consulting, installation assistance
and maintenance.

PRODUCTS

    During the third quarter of 1999, the Company changed the way that it looked
at its products. Previously the Company split its products into two main
categories based upon the bandwidth of the products supplied:

    - Network systems (broadband)

    - Digital access (narrow band)

    Now the Company views its products based on the application they support.
The following describes the applications for each of the five product groups:

<TABLE>
<S>                    <C>
MULTIPLEXERS:          Products that enable several data streams to be sent over a
                       single physical line and be converted back to the individual
                       data streams at the receiving end.

INVERSE MULTIPLEXERS:  Products that enable a single data stream to be sent over
                       several physical lines and be converted back to the single
                       data stream at the receiving end.

ATM ACCESS:            Products that, via ATM, interface traffic of multiple types
                       between the user data communications equipment and to the
                       service provider.

CSU/DSU:               Products that interface user data communications equipment
                       and a carrier service. They perform framing, certain
                       line-conditioning and equalization functions.

SERVICE:               Repair, maintenance, installation and training.
</TABLE>

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

MULTIPLEXERS:

    ORION 4000.  The Orion 4000, introduced in 1994, is a highly versatile
broadband access multiplexer with 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 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 T1mux 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, to 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.

    ACCESS-T45.  The Access-T45, introduced in 1992, is a single or dual port,
45 Mbps multiplexer that provides a clear channel T3 network interface. It is
used for very high speed LAN internetworking,

                                       5
<PAGE>
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. In 1999, the
asymmetrical Access-T45 was introduced to allow customers to subscribe to
varying amounts of bandwidth for transmit and receive applications where
symmetry of bandwidth is not required.

    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.

    ORION 200.  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.

    ACCESS-T 1500.  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.

INVERSE MULTIPLEXERS:

    MEGA-T/E.  The Mega-T, introduced in 1992, was the first inverse multiplexer
to bridge the bandwidth gap between T1 and T3. It provides economical access to
greater than T1 bandwidth for high-speed applications, 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. The Company's patented inverse multiplexing algorithm
used for the Mega-T/E handles alignment of the individual T1s or E1s and allows
for differential delay between individual T1s. 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 has the ability to identify individual T1/E1 circuits, thereby
simplifying trouble shooting. The Mega-T/E is primarily used for transport for
high speed LAN internetworking, as well as frame relay network access above T1
or E1 speeds and broadcast quality digital video.

    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 enable local or remote
configuration, performance monitoring, alarm notification and diagnostic
testing. In addition, an optional graphical user interface offers graphical,
point-and-click monitoring and control.

ATM ACCESS:

    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

                                       6
<PAGE>
networks. A single EDGE multi-service 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 including circuit emulation for voice applications.
In 1999, IMA was introduced as a module on the EDGE products for NxT1
applications.

CSU/DSU:

    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. Introduced in
1999, the WANmaker Terra Boss has the same functionality as the TerraUno, plus
extensive management features including SNMP, Telnet and web browsing with email
alerts.

CUSTOMERS

    The Company's primary customers 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 relationship with large customers,
particularly the NSPs and ISPs, will be critical to its future success. The
Company's 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 1999, 1998 and 1997, NSPs and ISPs represented
52%, 61% and 63%, 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:

<TABLE>
<CAPTION>
                                                               YEAR ENDED DECEMBER 31,
                                                         ------------------------------------
                                                           1999          1998          1997
                                                         --------      --------      --------
<S>                                                      <C>           <C>           <C>
MCIWorldCom(*).........................................     28%           32%           36%
AT&T(**)...............................................     13%           12%           19%
</TABLE>

------------------------

*   In September 1998, MCI and WorldCom merged. Percent of total revenue
    calculations have been restated for 1998 and 1997, as if the merger had been
    in effect in those years.

**  In May 1999, AT&T purchased the IBM Global Network from IBM. Percent of
    total revenue calculations have been restated for 1999, 1998, 1997, as if
    the acquisition had been in effect in those years.

    None of the Company's customers are 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 our 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, by one or more of our
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 usually small. Accordingly,
sales in any quarter are largely dependent on orders received during that
quarter. Furthermore, agreements with the Company's

                                       7
<PAGE>
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 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 us. 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 US primarily through its direct sales
organization, and to a lesser extent through OEMs, VARs and systems integrators.
The Company continues to develop an indirect distribution channel for sales to
domestic customers. This channel consists primarily of a small group of master
distributors, such as Tech Data, and a number of authorized resellers. 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 its 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 international distributors and systems integrators.
To date the use of this distribution channel outside the US has not been
successful. To focus on sales to Europe, the Middle East and Africa, for the
year 2000, the Company is attempting to recruit two additional sales people for
the regional sales 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. In early 2000 the Company added a
direct sales person headquartered in Hong Kong to focus on the Asian market.

    NSPs require that products undergo extensive lab testing and field trials
prior to their deployment in the network. Accordingly, the Company continually
submits successive generations of its current products as well as new products
to its customers for evaluation and approval. Additionally, sales to
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
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
rapid response service via arrangements with a number of service partners
worldwide such as Milgo Services, Netcom Solutions and Vital Networks in the US,
Vital Networks in Europe and Datacraft and Vital Networks in the Pacific Rim.
These contracts typically establish response time and level of service
commitments, with penalties for non-performance. The Company maintains a
24-hour, 7-day a week technical assistance support center, and provides rapid
response 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.

                                       8
<PAGE>
    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.

RESEARCH AND DEVELOPMENT

    The Company 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 1999,
1998 and 1997, total research and development expenses were $8,049,000,
$11,463,000 and $30,063,000 (including an acquisition related in-process
research and development charge of $20,120,000), respectively. The Company
believes that a continued commitment to research and development, particularly
related to emerging technologies, will be required to remain competitive.

    The Company's product families are designed specifically to meet the demands
of its larger customers. Relationships with these customers provide the Company
with advanced insight into the evolving needs of customers and allow it to
anticipate new technology requirements. Enhancements to the Company's 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 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, virus
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
the transitions from older products 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.

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, Top Line Electronic Corporation, which has allowed it
to implement quality control in the entire manufacturing process, including
statistically monitored process control programs. The Company utilizes
traditional procurement methods with its suppliers, using standard purchase
orders for 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 terms. The Company uses automated functional product testing to remain
flexible to customers' needs while maintaining control of the quality of the
manufacturing process.

                                       9
<PAGE>
    The Company outsources 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
completely outsourced 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 non-turnkey
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 long-term relationships with its
suppliers. The Company acquires certain components from sole sources, either to
achieve economies of scale or because of proprietary technical features designed
into its products. 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. A substantial portion of the Company's
shipments in any fiscal period relates to orders received in that period. In
addition, a significant percentage of the Company's orders are shipped within
three business days of receiving the order. To meet this demand, the Company
maintains a supply of finished goods inventories at its manufacturing facility
and a safety stock of critical components at a supplier's stocking location.
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 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, its
estimates, particularly those related to products that have been recently
introduced, may not be adequate. Warranty claims in excess of those expected
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, the Company entered into purchase
commitments of approximately $1,250,000 in the aggregate, representing between
one- and two-years expected demand for these components. As of December 31, 1999
the Company is obligated to purchase $661,000 of these ICs by 2001. 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 its 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
correct and requirements for these ICs are less or more 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 intensify in the future. The Company's products
compete primarily with New Eagle

                                       10
<PAGE>
Networks, Verilink, ADC Telecommunications, Cisco Systems, 3Com Corporation,
Xylan (now part of Alcaltel), ADTRAN, Paradyne and Sonoma. 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 effectively
in these areas. However, certain competitors have more broadly developed
distribution channels and have made greater advances than the Company has 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 business could also be materially adversely affected by the
integration of CSU/ DSU functionality into switches and routers or by the entry
of LAN equipment vendors into its markets. New technologies could displace some
parts of the T1/E1 CSU/DSU product line. For example, Symmetrical and High Bit
Rate Digital Subscriber Line ("SDSL" and "HDSL") are subscriber loop
technologies that enable service providers to deploy high bandwidth services
that could replace more traditional T1/FT1 services, upon which most of our
products are based. However, the Company's research and development investment
in 1999 and plans for investments in 2000 should enable it to introduce some
products for the DSL market in 2000.

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 us. 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 US are not publicly disclosed until the patent is issued,
applications may have been filed by competitors of the Company that could relate
to its 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 it discovers third-party patents
related to its software products or if such patents are asserted against it in
the future. The Company received a letter on December 3, 1999 from Nortel
Networks, Inc. ("Nortel") indicating that they believe the Company could be
infringing on an inverse multiplexing patent that Nortel owns. Nortel is
offering to license that patent to the Company for an initial fee of $100,000,
plus royalties based on the number of inverse multiplexing " ports shipped." The
Company is in the process of evaluating this claim and is not in a position at
this time to accept or reject Nortel's claim. Nortel's claim could have a
materially adverse effect on the Company's future business and operating
results. The Company may receive additional communications from third parties in
the future asserting that its 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 its technical and management personnel. In the event of an
adverse ruling in such litigation, the Company might be required to pay damages,
discontinue the use and sale of infringing products, and expend significant
resources to develop non-infringing technology or obtain licenses from third
parties. There can be no assurance that licenses from third parties would be
available on acceptable terms, if at all. A successful claim against the Company
and its failure to develop or license a substitute technology could have a
material adverse effect on the Company's business and operating results.

                                       11
<PAGE>
    The laws of certain foreign countries in which the Company's products are or
may be developed, manufactured or sold may not protect its products or
intellectual property rights to the same extent as do the laws of the U. S.;
thus making the possibility of misappropriation of its technology and products
more likely.

EMPLOYEES

    As of December 31, 1999, the Company had 208 full time employees. The
Company has never experienced any work stoppage and none of its employees is
represented by a labor union. 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>
Robert Coackley........................     64      President and Chief Executive Officer

George M. Donohoe......................     62      Executive Vice President

Rebecca C. Horn........................     46      Vice President, Marketing

Donald W. Morgan.......................     54      Vice President, Finance and Chief Financial Officer

Jeffrey W. Reedy.......................     41      Vice President, Engineering

Donald G. Heitt........................     64      Director(2)

Lawrence D. Milligan...................     63      Chairman of the Board(2)

Harvey L. Poppel.......................     62      Director(1)(2)

Richard E. Pospisil....................     68      Director(1)

Joseph F. Smorada......................     53      Director(1)
</TABLE>

------------------------

(1) Member of Audit Committee.

(2) Member of Compensation Committee.

    Robert Coackley has served as Chief Executive Officer, President and a
member of the Board of Directors since May 1999. Prior to joining the Company,
he was President of Inrange Technologies Corporation (formerly General Signal
Networks) from 1991 until 1999. Mr. Coackley has also held a number of executive
positions with LP COM, Hewlett-Packard, British Telecom and Telspec Ltd. Mr.
Coackley is a Fellow of the Institute of Electrical Engineers (U.K.) and is also
a Govenor of the Electronic Industries Alliance and a board member of the
Telecommunications Industry Association. Mr. Coackley holds a B.Sc. Honors
Degree in Electrical Engineering from City University, London, England.

    George M. Donohoe has served as Executive Vice President of Sales since May
1999. Prior to that, he served as Acting Chief Executive Officer from October
1998 until May 1999 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,

                                       12
<PAGE>
Honeywell Information Systems and IBM. Mr. Donohoe earned a BS in Industrial
Engineering and Management Sciences from the University of South Dakota.

    Rebecca C. Horn has served as Vice President Marketing since May 1999. She
had joined the Company as Vice President and General Manager, Network Systems
Group, 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.

    Donald W. Morgan has served as Vice President of Finance and Chief Financial
Officer of the Company since October 1999. Prior to joining the Company, Mr.
Morgan was an independent tax and financial consultant to several small-business
and start-up technology firms from December 1997 to September 1998. He served as
Vice President of Finance and Administration for General Signal Networks from
July 1991 to November 1997. Prior to that, Mr. Morgan served in a number of
senior financial positions with UNISYS Corporation. Mr. Morgan earned a BS in
Business Administration from Northeastern University and an MS in Finance from
the University of Illinois.

    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.

    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 and as Chairman of the Board since June 1999. Mr. Milligan is President,
Chief Executive Officer and a director of Axel Johnson. Prior to that, Mr.
Milligan held a number of senior management positions over the course of 38
years with Procter & Gamble Co. Before 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 a member of the
Board of Directors of Portman Equipment Company. He graduated from Williams
College and served in the United States Marine Corps.

    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 Rensselaer
Polytechnic Institute.

    Richard E. Pospisil has served as a director of the Company since January
2000. Mr. Pospisil is currently a private investor and has been the president of
RP Associates Consulting Services since

                                       13
<PAGE>
1994. Mr. Pospisil was President and CEO at T3Plus Networking (OnStream
Networks) from 1990 until 1994. He was President, CEO and Director of ADA
Incorporated during 1990. Previous to that, he founded both LP COM and
Telecommunications Technology, Incorporated. Mr. Pospisil holds a B S in
Electrical Engineering from Iowa State University.

    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, administration and customer
service and a portion of marketing, and research and development are performed
at its Milpitas facility. The larger RTP facility performs some marketing,
customer service and research and development functions. The Company also
occupies various small offices throughout the US for sales activities, one
office in the UK for sales activities in Europe and an office opened in early
2000 in Hong Kong to for sales activities in Asia. 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, 1999.

                                       14
<PAGE>
                                    PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

    The following table sets forth the high and low sales prices for our Class A
Common Stock as reported on the Nasdaq National Market from January 1, 1998
through December 31, 1999. These prices reflect inter-dealer prices, without
retail markup, markdown or commission, and may not necessarily represent actual
transactions.

<TABLE>
<CAPTION>
                                                            1999                       1998
                                                  ------------------------   ------------------------
                                                     HIGH          LOW          HIGH          LOW
                                                  ----------   -----------   ----------   -----------
<S>                                               <C>          <C>           <C>          <C>
First quarter...................................  $3 1/16      $1 17/32      $10 1/4      $7 1/2
Second quarter..................................  $3 7/16      $1 5/8        $12 1/8      $5 5/16
Third quarter...................................  $3           $1 9/16       $ 7 1/4      $2
Fourth quarter..................................  $8           $1 7/8        $ 2 5/8      $ 15/16
</TABLE>

    As of February 28, 2000, there were 43 holders of record of our Class A
Common Stock and 1 holder of record of our Class B Common Stock. The Company had
an estimated 3,002 beneficial holders of its Class A Common Stock, held in
street names, as of February 28, 2000.

    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,
                                                ----------------------------------------------------
                                                  1999       1998       1997       1996       1995
                                                --------   --------   --------   --------   --------
                                                       (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                             <C>        <C>        <C>        <C>        <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:

Revenues......................................  $52,839    $ 72,733   $75,955    $66,444    $48,663
Cost of revenues..............................   26,423      40,917    32,718     29,949     21,147
                                                -------    --------   -------    -------    -------
    Gross profit..............................   26,416      31,816    43,237     36,495     27,516
                                                -------    --------   -------    -------    -------

Operating expenses:
  Research and development....................    8,049      11,463     9,943      8,123      7,143
  Selling, general and administrative.........   21,570      25,833    21,145     19,408     15,762
  Restructuring...............................       --       1,214        --         --         --
  Other nonrecurring charges..................       --       7,915        --         --         --
  In-process research and development.........       --          --    20,120         --         --
                                                -------    --------   -------    -------    -------
    Total operating expenses..................   29,619      46,425    51,208     27,531     22,905
                                                -------    --------   -------    -------    -------

Income (loss) from operations.................   (3,203)    (14,609)   (7,971)     8,964      4,611
    Other income (expense), net...............    1,247       2,085     1,726       (597)         3
                                                -------    --------   -------    -------    -------
Income (loss) before income taxes.............   (1,956)    (12,524)   (6,245)     8,367      4,614
    Income tax provision (benefit)............     (684)     (5,436)   (2,486)     3,437      2,085
                                                -------    --------   -------    -------    -------
Net income (loss).............................  $(1,272)   $ (7,088)  $(3,759)   $ 4,930    $ 2,529
                                                =======    ========   =======    =======    =======

Basic and diluted earnings (loss) per share...  $ (0.07)   $  (0.39)  $ (0.21)   $  0.41    $  0.21
                                                =======    ========   =======    =======    =======
Basic and diluted weighted average shares.....   18,333      18,216    18,078     12,170     11,900
                                                =======    ========   =======    =======    =======
Cash dividends per share......................  $    --    $     --   $    --    $  2.10    $    --
                                                =======    ========   =======    =======    =======
Shares used to compute cash dividends per
  share.......................................       --          --        --     11,900         --
                                                =======    ========   =======    =======    =======
</TABLE>

<TABLE>
<CAPTION>
                                                                     DECEMBER 31,
                                                 ----------------------------------------------------
                                                   1999       1998       1997       1996       1995
                                                 --------   --------   --------   --------   --------
                                                                    (IN THOUSANDS)
<S>                                              <C>        <C>        <C>        <C>        <C>
CONSOLIDATED BALANCE SHEET DATA:

Working capital................................  $38,647    $37,140    $33,911    $55,944    $ 8,605
Total assets...................................   66,862     68,103     87,910     73,043     25,739
Total stockholders' equity.....................   54,795     55,851     62,227     61,445     18,236
</TABLE>

                                       16
<PAGE>
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

    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 developing alternative distribution
channels, particularly for the CSU/DSU products, but sales to distributors have
been limited to date.

    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 AT&T) accounted
for 41%, 44% and 55%, of revenues in 1999, 1998 and 1997, respectively. Sales to
NSPs as a group represented 52%, 61%, and 63% of revenues in 1999, 1998 and
1997, 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 its
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, its 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 its 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, our
business and operating results could be materially adversely affected. For
example, in 1999, the Company's operating results were materially adversely
affected by reductions in orders from some of its largest customers.

    On December 2, 1997, the Company 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 the
Company consisted of $25,793,000 in cash, acquisition costs of $1,182,000 and
the assumption of liabilities of $9,782,000. The merger 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
was 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.

    On October 15, 1998, the Company 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. As a result of the review and refocus of the Company's business in October
1998, the Company also 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"). As a result of
this review, the Company recognized an impairment loss of $7,915,000 in 1998,
principally related to the current technology. See Footnote 9 of the
Consolidated Financial Statements for additional information. The Company
establishes its expenditure levels for product development and other

                                       17
<PAGE>
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 its
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 the Company believes the shortfall is a temporary phenomenon.

    The Company intends in 2000 to pursue its growth strategy with the
introduction of new products, new product development, strategic alliances and
expansion of its international sales organization. This growth strategy will
require a significant sales, marketing and engineering investment in 2000, which
will have an adverse effect on 2000 earnings. Management believes that required
investment for future growth will result in a net operating loss for the year
ending December 31, 2000.

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,
                                                         ------------------------------------
                                                           1999          1998          1997
                                                         --------      --------      --------
<S>                                                      <C>           <C>           <C>
Revenues...............................................    100%          100%          100%
Cost of revenues.......................................     50            56            43
                                                           ---           ---           ---
    Gross profit.......................................     50            44            57
                                                           ---           ---           ---

Operating expenses:
  Research and development.............................     15            16            13
  Selling, general and administrative..................     41            35            28
  Restructuring........................................     --             2            --
  Other nonrecurring charges...........................     --            11            --
  In-process research and development charge...........     --            --            26
                                                           ---           ---           ---
    Total operating expenses...........................     56            64            67
                                                           ---           ---           ---

Loss from operations...................................     (6)          (20)          (10)
    Other income (expense), net........................      2             3             2
                                                           ---           ---           ---
Loss before income taxes...............................     (4)          (17)           (8)
    Income tax benefit.................................     (2)           (7)           (3)
                                                           ---           ---           ---
Net Loss...............................................     (2)%         (10)%          (5)%
                                                           ===           ===           ===
</TABLE>

YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998

    REVENUES.  Revenues decreased 27% to $52,839,000 in 1999 from $72,733,000 in
1998. The principal reasons for this decrease were the merger related
consolidations of two of our largest customers, (MCI with Worldcom and AT&T with
IBM Global Network) and increased competition from alternative technologies.

    GROSS PROFIT.  As a percentage of revenues, gross profit increased to 50% in
1999 from 44% in 1998. The principal reasons for this increase were the
establishment in 1998 of significant additional inventory reserves, mainly for
the ATM Access product line, amortization of intangible assets associated with
the acquisition of NetEdge and improvements in manufacturing variances in 1999
over 1998. In addition, service revenues gross margins improved as a percentage
of sales primarily from higher volumes in 1999.

                                       18
<PAGE>
    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
increase sales volumes through an indirect distribution channel that typically
yields lower margins than on direct sales. Other factors that could cause gross
profits to fluctuate in the future, as a percentage of revenue, include changes
in product mix, price discounts and fluctuations in production volume.

    RESEARCH AND DEVELOPMENT.  Research and development expenses decreased 30%
to $8,049,000 in 1999 from $11,463,000 in 1998. As a percentage of revenues,
research and development expenses decreased slightly to 15% in 1999 from 16% in
1998. The decrease in research and development expenses was due to scaling back
the ATM Access projects and lower operating expenses in 1999 resulting from the
1998 corporate restructuring. The Company believes that a continued commitment
to research and development, particularly related to intelligent access 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 decreased 17% to $21,570,000 in 1999 from $25,833,000 in 1998. As a
percentage of revenues, selling, general and administrative expenses increased
to 41% in 1999 from 35% in 1998. The decrease in expenses in absolute dollars
was due primarily to savings attributed to the restructuring implemented in the
fourth quarter of 1998 and lower commissions associated with reduced revenues.
Expenses were further reduced by lower depreciation and goodwill amortization
associated with the NetEdge acquisition, and lower bad debt expense. Selling,
general and administrative expenses include charges from Axel Johnson for legal,
accounting, tax, treasury and administrative services of $438,000 and $425,000
in 1999 and 1998, respectively.

    RESTRUCTURING.  In October 1998, the Company announced a corporate
restructuring designed to better align its expenses with anticipated revenues
and to allow the Company to focus on opportunities that offered 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, 1999, all amounts accrued had been paid.

    OTHER NONRECURRING CHARGES.  As a result of the review and refocus of the
EDGE product family in October 1998, the Company reevaluated 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 Long-lived Assets to Be Disposed Of" ("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 was 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 the
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.

    OTHER INCOME (EXPENSE), NEt. Other Income of $1,247,000 in 1999 was $838,000
lower than the $2,085,000 reported in 1998. In 1998 the Company sold its former
headquarters, which it had a one third owner interest in, for a gain to the
Company of $1,325,000. Excluding this one time gain in 1998, other income was
$491,000 higher in 1999 versus 1998 primarily due to higher short-term
investments and cash balances in 1999 and generally higher market rates of
interest paid on those balances.

    INCOME TAXES BENEFIT.  The effective tax benefit rate was 35% and 43% for
1999 and 1998, respectively. The rate of 43% in 1998 differed from the federal
statutory rate of 35% primarily as a result of state taxes and
federal-income-tax-exempt interest.

                                       19
<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 decline in revenues reflected decreased sales of the Company's
multiplexer products, particularly the Access-T and Split-T, offset by sales of
our ATM Access products resulting from the acquisition of NetEdge in December
1997.

    GROSS PROFIT.  As a percentage of revenues, gross profit decreased to 44% in
1998 from 57% in 1997. This decrease was primarily due to of the establishment
of significant inventory reserves, mainly for the ATM Access product line. Other
factors were the amortization of intangibles, lower production volumes and
higher manufacturing overhead in 1998.

    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
primarily due to increased expenses in 1998 as a result of the NetEdge
acquisition.

    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 absolute dollars was due
primarily to additional costs related to the acquisition of NetEdge,
amortization of goodwill and an increase in the reserve for doubtful accounts.
This was offset by lower commissions associated with lower revenues, and the
release of the unused reserve of $532,000 that had been established for
potential claims related to two General Services Administrative contracts.
Selling, general and administrative expenses also include a charge from Axel
Johnson for legal, accounting, tax, treasury and administrative services. For
1998 and 1997, these charges were approximately $425,000 and $622,000,
respectively.

    RESTRUCTURING.  In October 1998, the Company 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 were 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 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 was 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 the
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.  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 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

                                       20
<PAGE>
principally represented federal-income-tax-exempt interest earned 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, differed from the federal statutory rate of
35% primarily as a result of state taxes and federal-income-tax-exempt interest.

LIQUIDITY AND CAPITAL RESOURCES

    Operating activities generated $6,283,000 in cash in 1999. The Company's net
loss was offset by non-cash items such as depreciation and amortization as well
as a net decrease in working capital.

    Capital expenditures in 1999 were $1,066,000. Such expenditures consisted
principally of the purchase of computers, software and test equipment. The
Company anticipates capital expenditures to increase in 2000.

    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 the Credit Agreement,
the Company and Axel Johnson have an administrative service agreement and a tax
sharing agreement for the purposes of defining the on-going relationship between
the two entities. See Footnotes 1 and 3 of the Notes to the Consolidated
Financial Statements for more details.

    At December 31, 1999, the Company had cash and cash equivalents of
$7,009,000, and short term investments of $22,199,000. The Company believes that
working capital, together with its line of credit and funds generated from
operations will provide adequate liquidity to meet its operating and capital
requirements at least through 2000. 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 it 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 our 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" SECTION 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 the Company's
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 1999, 1998 and
1997, two customers, MCIWorldCom and its subsidiaries and AT&T, together
accounted for 41%, 44% and 55% of the Company's revenues, respectively. In
September 1998, MCI

                                       21
<PAGE>
and WorldCom merged and in May 1999 AT&T purchased the IBM Global Network from
IBM. Percent of total revenue calculations have been restated for 1999, 1998 and
1997 as if the acquisitions had been effect in those years. Accordingly, the
Company's revenues are currently highly dependent on continued orders from these
two large customers.

    None of the Company's customers are contractually obligated to purchase any
quantity of products in any particular period, and product sales to major
customers have varied widely from quarter to quarter and year to year. There can
be no assurance that the Company's current customers will continue to place
orders with it, 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 its 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 its control. A small number of
customers have accounted for a significant percentage of its 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, in addition to the effect of competitors' product offerings. 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 most of the Company's sales are in
the form of large orders with short delivery times to a limited number of
customers, its 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, delivery schedules were to be deferred or canceled
as a result of the above factors or other unanticipated factors, then 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.

    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, its 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 its Class A Common Stock could be materially adversely
affected.

    While gross profit margins in 2000 may be higher than in 1999, particularly
due to the impact in 1999 of additional inventory reserves, gross margins are
not expected to reach the levels achieved prior to 1998 due to increased
competition. In addition the Company is currently developing 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.

                                       22
<PAGE>
    The Company established its expense levels for product development and other
operating expenses based on projected sales levels and margins, but expenses are
relatively fixed in the short term. Accordingly, 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 its operating
results. Moreover, the Board of Directors, on November 17,1999, approved funding
for an aggressive program to develop new products and expand into new markets
that is expected to result in operating losses for 2000. If the Company is not
successful in achieving its revenue expectations, or expenses are higher than
expected, losses could continue beyond 2000.

    DEVELOPMENT OF ALTERNATIVE DISTRIBUTION CHANNELS.  The Company is currently
developing 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 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. The risks
would 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 international distributors 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 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. In early
2000 the Company established a direct sales office in Hong Kong to focus on the
Asian market. If these initiatives are not successful, the Company's results
could be materially adversely affected.

    DEPENDENCE ON RECENTLY INTRODUCED PRODUCTS AND PRODUCTS UNDER
DEVELOPMENT.  The Company's future operating results are highly dependent on
market acceptance of the Company's recently introduced products and products
that may be introduced in the future. These include, for example, the WANmaker
line of CSU/DSU products and the Orion 2000 Inverse Mutiplexer 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 product
versions in a timely manner, due to resource constraints or technological or
other reasons, or to achieve timely and widespread market awareness and
acceptance of its new products or releases could have a material adverse effect
on its business and operating results.

    YEAR 2000.  The company instituted a program to test and remediate its
products and certain internally used software to insure appropriate operation in
Year 2000. In addition the Company communicated with its significant third-party
vendors and sought to assess their ability to deliver products and services in
Year 2000. As of March 2000 there were no significant reported Year 2000
problems either in the Company, its principal customers or suppliers. The
Company cannot assert that it, its suppliers or its customers, will not be
affected by undiscovered Year 2000 problems. The Company spent approximately
$462,000 to assess and address the Year 2000 problem. The Company will continue
to monitor its products, internal systems, principal suppliers and customers to
try to ensure no significant compliance problems exist with regards to Year 2000
issues.

                                       23
<PAGE>
    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. The Company anticipated
that it would 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. As of December 31, 1999
the Company is obligated to purchase $661,000 of these ICs by 2001. 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 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 or more 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 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 1999, 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 its borrowing requirements exceed
the amount of the facility.

    MANAGEMENT OF OPERATIONS.  The downturn in the Company's business and
related restructuring has placed a significant strain on the Company's
personnel, management and other resources. The

                                       24
<PAGE>
Company's future success depends on its ability to recruit and retain employees
following the 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 or contraction 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 combined voting power to absolutely 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.

    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
Company's sales to international markets to some extent, sales outside the U.S.
just recently reached approximately 10% of its revenues. The conduct of business
outside the US 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 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 US
could deny or preclude the Company's marketing and sales efforts in such
countries, which could have a material adverse effect on its 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 US, our products must comply with
various regulations defined by the Federal Communications Commission and
standards established by Underwriters Laboratories, as well as industry
standards established by various organizations. As standards for services such
as 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 its products, which in
turn could have a material adverse effect on its 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 Footnote 9 of the Notes to the Consolidated Financial
Statements for additional information. Any future acquisitions by the Company
could result in potentially dilutive issuance's of equity securities and/or the
issuance's 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

                                       25
<PAGE>
future acquisition. Accordingly, such acquisitions could result in amortization
of goodwill and other charges 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 our 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 US 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 entered 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.

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 commercial paper rated A1/P1, bank certificates of
deposit rated AA or better and corporate medium-term notes rated AA or better.
These securities mature within one year and are classified as available for sale
in accordance with SFAS 115, "Accounting for Certain Investments in Debt and
Equity Securities." 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, it 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
its consolidated results.

                                       26
<PAGE>
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                              LARSCOM INCORPORATED
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                PAGE
                                                              --------
<S>                                                           <C>
CONSOLIDATED FINANCIAL STATEMENTS:

    Report of Independent Accountants.......................     28

    Consolidated Balance Sheets as of December 31, 1999 and
     1998...................................................     29

    Consolidated Statements of Operations for the years
     ended December 31, 1999, 1998 and 1997.................     30

    Consolidated Statements of Cash Flows for the years
     ended December 31, 1999, 1998 and 1997.................     31

    Consolidated Statements of Stockholder's Equity for the
     years ended December 31, 1999, 1998 and 1997...........     32

    Notes to the Consolidated Financial Statements..........     33
</TABLE>

FINANCIAL STATEMENT SCHEDULES:

    All schedules are omitted because they are not applicable or the required
information is shown in the Consolidated Financial Statements or Notes thereto.

                                       27
<PAGE>
                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of Larscom Incorporated

    In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Larscom Incorporated and its subsidiaries at December 31, 1999 and
1998, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999 in conformity with accounting
principles generally accepted in the United States. 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 auditing standards
generally accepted in the United States, 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 24, 2000

                                       28
<PAGE>
                              LARSCOM INCORPORATED

                          CONSOLIDATED BALANCE SHEETS

                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                              -------------------
                                                                1999       1998
                                                              --------   --------
<S>                                                           <C>        <C>
                                     ASSETS
Current assets:
  Cash and cash equivalents.................................  $  7,009   $ 10,265
  Short-term investments....................................    22,199     13,902
  Accounts receivable, net..................................     7,769      7,539
  Inventories...............................................     5,821      8,613
  Deferred income taxes.....................................     3,961      4,607
  Income taxes receivable...................................     1,750      2,508
  Prepaid expenses and other current assets.................     1,671      1,542
                                                              --------   --------
    Total current assets....................................    50,180     48,976
Property and equipment, net.................................     4,781      6,920
Deferred income taxes.......................................    11,419     11,486
Other non-current assets, net...............................       482        721
                                                              --------   --------
    Total assets............................................  $ 66,862   $ 68,103
                                                              ========   ========

                      LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable..........................................  $  3,464   $  3,705
  Accrued expenses and other current liabilities............     7,728      7,584
  Due to Axel Johnson.......................................       341        547
                                                              --------   --------
    Total current liabilities...............................    11,533     11,836
Other non-current liabilities...............................       534        416
                                                              --------   --------
    Total liabilities.......................................    12,067     12,252
                                                              --------   --------

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; 8,379 and 8,266 shares issued and
    outstanding, respectively...............................        84         83
  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................................    81,860     81,637
  Accumulated other comprehensive income (loss).............        (6)         2
  Accumulated deficit.......................................   (27,243)   (25,971)
                                                              --------   --------
    Total stockholders' equity..............................    54,795     55,851
                                                              --------   --------
    Total liabilities and stockholders' equity..............  $ 66,862   $ 68,103
                                                              ========   ========
</TABLE>

   THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

                                       29
<PAGE>
                              LARSCOM INCORPORATED

                     CONSOLIDATED STATEMENTS OF OPERATIONS

                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                 YEARS ENDED DECEMBER 31,
                                                              ------------------------------
                                                                1999       1998       1997
                                                              --------   --------   --------
<S>                                                           <C>        <C>        <C>
Revenues....................................................  $52,839    $ 72,733   $75,955
Cost of revenues............................................   26,423      40,917    32,718
                                                              -------    --------   -------
    Gross profit............................................   26,416      31,816    43,237
                                                              -------    --------   -------

Operating expenses:
  Research and development..................................    8,049      11,463     9,943
  Selling, general and administrative.......................   21,570      25,833    21,145
  Restructuring.............................................       --       1,214        --
  Other nonrecurring charges................................       --       7,915        --
  In-process research and development.......................       --          --    20,120
                                                              -------    --------   -------
    Total operating expenses................................   29,619      46,425    51,208
                                                              -------    --------   -------

Loss from operations........................................   (3,203)    (14,609)   (7,971)
    Interest and other income...............................    1,247       2,085     1,726
                                                              -------    --------   -------
Loss before income taxes....................................   (1,956)    (12,524)   (6,245)
    Income tax benefit......................................     (684)     (5,436)   (2,486)
                                                              -------    --------   -------
Net loss....................................................  $(1,272)   $ (7,088)  $(3,759)
                                                              =======    ========   =======

Basic and diluted net loss per share........................  $ (0.07)   $  (0.39)  $ (0.21)
Basic and diluted weighted average shares...................   18,333      18,216    18,078
</TABLE>

   THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

                                       30
<PAGE>
                              LARSCOM INCORPORATED

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                  YEARS ENDED DECEMBER 31,
                                                              --------------------------------
                                                                1999       1998        1997
                                                              --------   ---------   ---------
<S>                                                           <C>        <C>         <C>
Cash flows from operating activities:
  Net loss..................................................  $ (1,272)  $  (7,088)  $  (3,759)
  Adjustments to reconcile net loss to net
    cash provided by operations:
    Depreciation & amortization.............................     3,199       5,690       2,508
    Gain from sale of building..............................        --      (1,329)         --
    Intangible asset write-down.............................        --       7,915          --
    Deferred income taxes...................................       713      (5,290)     (9,036)
    In-process research and development.....................        --          --      20,120
    Other noncash items.....................................       338         303         207
    Changes in assets and liabilities, net of acquisition
      effects:
      Accounts receivable...................................      (230)      9,972      (5,555)
      Inventories...........................................     2,792       4,714      (3,120)
      Prepaid expenses and other assets.....................       129        (251)       (489)
      Accounts payable......................................      (241)     (4,384)      2,545
      Income taxes receivable...............................       758      (3,617)         62
      Accrued expenses and other current liabilities........        97      (4,800)        346
                                                              --------   ---------   ---------
Net cash provided by operating activities...................     6,283       1,835       3,829
                                                              --------   ---------   ---------
Cash flows from investing activities:
  Purchases of short-term investments.......................   (32,116)   (107,806)   (223,285)
  Sales of short-term investments...........................    17,464      59,788     148,360
  Maturities of short-term investments......................     6,355      50,714      58,327
  Purchase of property and equipment........................    (1,066)     (1,795)     (4,645)
  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............    (9,363)      2,601     (48,127)
                                                              --------   ---------   ---------
Cash flows from financing activities:
  Net proceeds from sales of Common Stock...................       224         710       4,235
  Repayment of long-term debt...............................      (194)       (437)         --
  Advances from (repayments to) Axel Johnson................      (206)     (2,698)      1,914
                                                              --------   ---------   ---------
Net cash (used) provided by financing activities............      (176)     (2,425)      6,149
                                                              --------   ---------   ---------
Increase (decrease) in cash and cash equivalents............    (3,256)      2,011     (38,149)
Cash and cash equivalents at beginning of year..............    10,265       8,254      46,403
                                                              --------   ---------   ---------
Cash and cash equivalents at end of year....................  $  7,009   $  10,265   $   8,254
                                                              ========   =========   =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid...............................................  $      8   $      34   $      --
                                                              --------   ---------   ---------
Income taxes paid...........................................  $    144   $   3,914   $   5,799
                                                              --------   ---------   ---------
</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.

                                       31
<PAGE>
                              LARSCOM INCORPORATED

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                                 (IN THOUSANDS)
<TABLE>
<CAPTION>
                                        CLASS A               CLASS B                       ACCUMULATED                     TOTAL
                                     COMMON STOCK          COMMON STOCK       ADDITIONAL       OTHER                        STOCK-
                                  -------------------   -------------------    PAID-IN     COMPREHENSIVE    ACCUMULATED    HOLDERS'
                                   SHARES     AMOUNT     SHARES     AMOUNT     CAPITAL     INCOME (LOSS)      DEFICIT       EQUITY
                                  --------   --------   --------   --------   ----------   --------------   ------------   --------
<S>                               <C>        <C>        <C>        <C>        <C>          <C>              <C>            <C>
Balance at December 31, 1996....   7,000       $70       10,700      $107      $76,392         $   --         $(15,124)    $61,445
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             --               --       3,827
  Net loss......................      --        --           --        --           --             --           (3,759)     (3,759)
Issuance under stock plans and
  other issuances...............      87         1           --        --          713             --               --         714
                                   -----       ---       ------      ----      -------         ------         --------     -------
Balance at December 31, 1997....   8,137        81       10,000       100       80,929             --          (18,883)     62,227
Comprehensive income (loss):
  Net loss......................      --        --           --        --           --             --           (7,088)     (7,088)
  Foreign currency translation
    adjustment..................      --        --           --        --           --              2               --           2
    Comprehensive income
      (loss)....................
Issuance under stock plans......     129         2           --        --          708             --               --         710
                                   -----       ---       ------      ----      -------         ------         --------     -------
Balance at December 31, 1998....   8,266        83       10,000       100       81,637              2          (25,971)     55,851
Comprehensive income (loss):
  Net loss......................      --        --           --        --           --             --           (1,272)     (1,272)
  Foreign currency translation
    adjustment..................      --        --           --        --           --             (8)              --          (8)
    Comprehensive income
      (loss)....................
Issuance under stock plans......     113         1           --        --          223             --               --         224
                                   -----       ---       ------      ----      -------         ------         --------     -------
Balance at December 31, 1999....   8,379       $84       10,000      $100      $81,860         $   (6)        $(27,243)    $54,795
                                   =====       ===       ======      ====      =======         ======         ========     =======

<CAPTION>

                                  COMPREHENSIVE
                                      INCOME
                                      (LOSS)
                                  --------------
<S>                               <C>
Balance at December 31, 1996....
Conversion of Class B Common
  Stock to Class A Common
  Stock.........................
Sale of Class A Common Stock,
  net...........................
  Net loss......................     $(3,759)
                                     =======
Issuance under stock plans and
  other issuances...............
Balance at December 31, 1997....
Comprehensive income (loss):
  Net loss......................     $(7,088)
  Foreign currency translation
    adjustment..................           2
                                     -------
    Comprehensive income
      (loss)....................     $(7,086)
                                     =======
Issuance under stock plans......
Balance at December 31, 1998....
Comprehensive income (loss):
  Net loss......................     $(1,272)
  Foreign currency translation
    adjustment..................          (8)
                                     -------
    Comprehensive income
      (loss)....................     $(1,280)
                                     =======
Issuance under stock plans......
Balance at December 31, 1999....
</TABLE>

   THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS

                                       32
<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, internetworking products for network service providers, Internet
services providers and corporate users. The Company operates in one industry
segment.

PRINCIPLES OF CONSOLIDATION

    The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All material intercompany transactions and
account balances have been eliminated in 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 commercial paper
rated A1/P1, bank certificates of deposit rated AA or better and corporate
medium-term notes 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 28% and 37% of accounts receivable at December
31, 1999 and 1998, respectively. During 1999, one of the Company's significant
customers (AT&T) acquired the data network business of another significant
customer (IBM). Both 1999 and 1998 percentages of total receivables 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,
                                                         ------------------------------------
                                                           1999          1998          1997
                                                         --------      --------      --------
<S>                                                      <C>           <C>           <C>
MCIWorldCom(*).........................................     28%           32%           36%
AT&T(**)...............................................     13%           12%           19%
</TABLE>

------------------------

*   In September 1998, MCI and WorldCom merged. Percent of total revenue
    calculations have been restated for 1998 and 1997, as if the merger had been
    in effect in those years.

**  In May 1999, AT&T purchased the IBM Global Network from IBM. Percent of
    total revenue calculations have been restated for 1999, 1998, 1997, as if
    the acquisition had been in effect in those years.

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

                                       33
<PAGE>
                              LARSCOM INCORPORATED

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 1--THE COMPANY AND A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(CONTINUED)
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-term maturity of
those investments and the financial stability of the issuers.

    The Company participates in Axel Johnson's centralized cash management
system. In general, all of the Company's cash receipt and disbursement
transactions are processed through the Axel Johnson centralized cash management
system.

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, 1999 and
1998 consisted of fixed and variable rate commercial paper rated A1/P1, bank
certificates of deposit rated AA or better and corporate medium-term notes rated
AA or better. These securities have contractual maturity dates of less than one
year and have been classified as available-for-sale. The fair value of the
Company's short-term investments approximate their carrying value due to the
short maturity of those investments. 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 useful life. At each balance sheet date, an evaluation is performed by
management to ascertain whether intangible assets have been impaired by
comparing carrying value with the estimated future non-discounted cash flows and
the Company records impairment of the carrying value, if any, based on the
estimated future value of the discounted cash flows.

                                       34
<PAGE>
                              LARSCOM INCORPORATED

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 1--THE COMPANY AND A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(CONTINUED)
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 generally recognized upon shipment of the
product. The Company does not recognize revenue to distributors when a right of
return exists until the Company is notified by the distributor that the products
have been shipped to the end user. Service revenue is recognized over the
contractual period or as services are rendered and accepted by the customer.

RESEARCH AND DEVELOPMENT

    Research and development costs 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. A valuation
allowance is provided against deferred tax assets if it is more likely than not
it will not be realized.

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.

                                       35
<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 loss per
share:

<TABLE>
<CAPTION>
                                                          YEARS ENDED DECEMBER 31,
                                                   ---------------------------------------
                                                     1999           1998           1997
                                                   ---------      ---------      ---------
                                                    (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                <C>            <C>            <C>
Net loss.....................................       $(1,272)       $(7,088)       $(3,759)
Weighted average Class A and B Common Stock
  outstanding................................        18,333         18,216         18,078
Basic and diluted loss per share.............       $ (0.07)       $ (0.39)       $ (0.21)
</TABLE>

    Outstanding stock options are not included in diluted loss per share because
their effect 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 costs 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- term maturities of the respective instruments.

RECENT ACCOUNTING PRONOUNCEMENTS

    In June 1998, the Financial Accounting Standards Board issued SFAS No. 133 "
Accounting for Derivative Instruments and Hedging Activities." The new standard
requires companies to record derivatives on the balance sheet as assets or
liabilities, measured at fair value. Under SFAS No. 133, gains or losses
resulting from changes in the value of the derivatives are to be reported in the
statement of operations or as a deferred item, depending on the use of the
derivatives and whether they qualify for hedge accounting. The Company is
required to adopt SFAS No. 133 in the first quarter of 2001. To date, the
Company has not engaged in any hedging activity and does not expect adoption of
this new standard to have a significant impact on the Company.

    In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") 101, "Revenue Recognition" which provides
guidence on recognition, presentation, and disclosure of revenue in financial
statements filed with the SEC. SAB 101 outlines the basic criteria that must be
met to recognize revenue and provides guidance for disclosure related to revenue
recognition policies. The Company does not expect SAB 101 to have a material
effect on its financial position or results of operations.

                                       36
<PAGE>
                              LARSCOM INCORPORATED

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 2--BALANCE SHEET COMPONENTS

<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                              -------------------
                                                                1999       1998
                                                              --------   --------
                                                                (IN THOUSANDS)
<S>                                                           <C>        <C>
Accounts receivable, net:
  Gross accounts receivable.................................  $  8,274   $  8,252
  Less: Allowance for doubtful accounts.....................      (505)      (713)
                                                              --------   --------
                                                              $  7,769   $  7,539
                                                              ========   ========

Inventories:
  Raw materials.............................................  $  1,884   $  3,021
  Work in process...........................................     1,847      1,053
  Finished goods............................................     2,090      4,539
                                                              --------   --------
                                                              $  5,821   $  8,613
                                                              ========   ========

Property and equipment, net:
  Machinery and equipment...................................  $  8,229   $  8,353
  Computers and software....................................     7,734      7,867
  Leasehold improvements....................................     2,093      2,230
  Furniture and fixtures....................................     1,203      1,338
                                                              --------   --------
                                                                19,259     19,788
  Less: Accumulated depreciation............................   (14,478)   (12,868)
                                                              --------   --------
                                                              $  4,781   $  6,920
                                                              ========   ========

Other non-current assets, net:
  Goodwill..................................................  $    854   $    854
  Other intangible assets...................................     2,192      2,192
                                                              --------   --------
                                                                 3,046      3,046
  Less: Accumulated amortization............................    (2,598)    (2,359)
  Other.....................................................        34         34
                                                              --------   --------
                                                              $    482   $    721
                                                              ========   ========

Accrued expenses and other current liabilities:
  Accrued compensation......................................  $  2,407   $  2,175
  Accrued warranty..........................................     2,087      2,222
  Other current liabilities.................................     3,234      3,187
                                                              --------   --------
                                                              $  7,728   $  7,584
                                                              ========   ========
</TABLE>

                                       37
<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 TO AXEL JOHNSON

    Amounts due 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. The following is an analysis of the
balance due to Axel Johnson:

<TABLE>
<CAPTION>
                                                       YEARS ENDED DECEMBER 31,
                                                    ------------------------------
                                                      1999       1998       1997
                                                    --------   --------   --------
                                                            (IN THOUSANDS)
<S>                                                 <C>        <C>        <C>
Balance at beginning of year......................  $  (547)   $(3,243)   $(1,329)
Cash remittances to Axel Johnson, net of cash
  advances........................................    3,973      7,305      2,618
Charges to (from) Axel Johnson for:
  Income taxes....................................       40        367     (1,021)
  Pension and thrift plan.........................   (1,994)    (2,563)    (1,371)
  Health insurance and workers' compensation......     (845)      (828)      (488)
  Administrative services.........................     (438)      (425)      (622)
  Property, liability and general insurance.......     (244)      (857)      (596)
  Line of credit fees.............................      (75)       (75)       (75)
  Other charges...................................     (211)      (228)      (359)
                                                    -------    -------    -------
Balance at end of year............................  $  (341)   $  (547)   $(3,243)
                                                    =======    =======    =======
</TABLE>

EMPLOYEE HEALTH AND WELFARE PROGRAMS

    The Company participates in various employee benefits programs 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 $845,000, $828,000 and $488,000 in 1999, 1998 and 1997,
respectively. The Company believes the allocation by Axel Johnson of the
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 certain functional services to the Company, including
certain treasury, accounting, tax, internal audit, legal and human resources.
The costs of these services 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

                                       38
<PAGE>
                              LARSCOM INCORPORATED

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 3--RELATED PARTY TRANSACTIONS: (CONTINUED)
would have been incurred if the Company had been a separate entity. The
allocated costs of these services amounting to $438,000, $425,000 and $622,000
in 1999, 1998 and 1997, respectively, has 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 in compliance with certain covenants under the
Credit Agreement. As of December 31, 1999, $15,000,000 was available, and during
1999 and 1998, 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 in rent expense to Larvan and
earned partnership income of $21,000 in 1997. In September 1997, the Company
moved to a new facility that is leased from a third party. The Company recorded,
as other income in accordance with the equity method, a pre-tax gain of
$1,329,000 in March 1998 from the sale of its former headquarters by Larvan.

NOTE 4--CAPITAL STOCK:

    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 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 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 of the Company's issued and outstanding
Class B Common Stock.

                                       39
<PAGE>
                              LARSCOM INCORPORATED

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 5--INCOME TAXES:

    The income tax benefit consists of the following:

<TABLE>
<CAPTION>
                                                      1999       1998       1997
                                                    --------   --------   --------
                                                            (IN THOUSANDS)
<S>                                                 <C>        <C>        <C>
Current:
  Federal.........................................  $(1,585)   $  (158)   $ 5,261
  State...........................................      152        (32)     1,203
  Foreign.........................................       36         44         --
                                                    -------    -------    -------
                                                     (1,397)      (146)     6,464
                                                    -------    -------    -------

Deferred:
  Federal.........................................      604     (4,299)    (7,028)
  State...........................................      109       (991)    (1,922)
  Foreign.........................................       --         --         --
                                                    -------    -------    -------
                                                        713     (5,290)    (8,950)
                                                    -------    -------    -------
Income tax benefit................................  $  (684)   $(5,436)   $(2,486)
                                                    =======    =======    =======
</TABLE>

    The following is a reconciliation of the US federal income tax rate to the
Company's effective income tax rate:

<TABLE>
<CAPTION>
                                                               YEARS ENDED DECEMBER 31,
                                                         ------------------------------------
                                                           1999          1998          1997
                                                         --------      --------      --------
<S>                                                      <C>           <C>           <C>
Provision at statutory rate............................    (35)%         (35)%         (34)%
Federal tax exempt interest income.....................     (1)           (2)           (6)
State income taxes, net of federal tax benefits........      9            (5)           (6)
Other..................................................     (8)           (1)            6
                                                           ---           ---           ---
Effective income tax rate..............................    (35)%         (43)%         (40)%
                                                           ===           ===           ===
</TABLE>

    Deferred tax assets are comprised of the following:

<TABLE>
<CAPTION>
                                                               DECEMBER 31,
                                                            -------------------
                                                              1999       1998
                                                            --------   --------
                                                              (IN THOUSANDS)
<S>                                                         <C>        <C>
Deferred tax assets:
  Inventory...............................................  $ 1,752    $ 2,356
  Accrued expenses........................................    2,310      2,262
  Reserves................................................      609        640
  Intangible assets.......................................    7,053      7,573
  Depreciation and amortization...........................    3,656      3,262
                                                            -------    -------
Net deferred tax asset....................................  $15,380    $16,093
                                                            =======    =======
</TABLE>

                                       40
<PAGE>
                              LARSCOM INCORPORATED

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 5--INCOME TAXES: (CONTINUED)

    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 deferred tax assets because management has
determined that it is more likely than not that the deferred tax 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's recently improved
operating results; a significant portion of the deferred tax assets is
deductible over fifteen years; tax losses can be carried forward for twenty
years; a portion of the losses can be carried back to prior years. 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
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. Heretofore, the
Thrift Plan allowed employees to defer up to 21% of their compensation not to
exceed the amount allowed by the applicable Internal Revenue Service guidelines.
The Company matched 60% of employee contributions made on a pre-tax basis and
30% of employee contributions made on an after-tax basis, subject to a maximum
of 6% of total eligible employee compensation in 1999. 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 $529,000, $640,000 and $503,000 in 1999, 1998 and 1997,
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 prescribed by the plan. After March
1998, 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.

                                       41
<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
Post-retirement Benefits":

<TABLE>
<CAPTION>
                                                               1999          1998
                                                             --------      --------
                                                                 (IN THOUSANDS)
<S>                                                          <C>           <C>
Reconciliation of projected benefit obligations
  Projected benefit obligation at January 1,...............   $4,339        $4,016
  Service cost.............................................       15           144
  Interest cost............................................      312           270
  Actuarial gain...........................................     (285)          (29)
  Benefits paid............................................     (134)          (62)
                                                              ------        ------
  Projected benefit obligation at December 31,.............   $4,247        $4,339
                                                              ------        ------
Weighted-average assumptions as of December 31,
  Discount rate............................................     7.75%         7.00%
  Expected return on plan assets...........................     9.50%         9.50%
  Rate of compensation increase............................     4.50%         4.25%

Components of net periodic (benefit) cost
  Service cost.............................................   $   15        $  144
  Interest cost............................................      312           270
  Expected return on assets................................     (331)         (284)
  Net amortization.........................................       (5)           (7)
                                                              ------        ------
  Net periodic (benefit) cost..............................   $   (9)       $  123
                                                              ------        ------
</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 PBO for Company employees with accrued benefits in the
unfunded Retirement Restoration Plan is $315,000 and $323,000 as of
December 31, 1999 and 1998, respectively.

    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.

EMPLOYEE STOCK PURCHASE PLAN

    The Company adopted an Employee Stock Purchase Plan (the "Purchase Plan"),
for which 685,000 shares of Class A Common Stock were reserved for issuance. The
Board of Directors approved an additional 100,000 shares allotment for the plan
in 2000 subject to stockholder approval. 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 100,000, 129,000 and 62,000 shares of
Class A Common Stock were issued under the Purchase Plan in 1999, 1998, and
1997, respectively.

                                       42
<PAGE>
                              LARSCOM INCORPORATED

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 6--EMPLOYEE BENEFIT PLANS: (CONTINUED)

STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS

    In 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 Board of Directors approved an
additional 100,000 shares allotment for the plan in 2000 subject to stockholder
approval. 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

    The Company adopted 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 Board of Directors approved an additional 2,800,000 shares
allotment for the plan in 2000 subject to stockholder approval. 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"). 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.

    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, 1996................................        54          $12.00         1,298        $12.00
Granted..........................................        18           11.00           468         11.00
Canceled.........................................        --              --          (147)        11.85
                                                        ---                        ------
December 31, 1997................................        72           11.75         1,619         11.72
Granted..........................................        30            6.85         2,266          3.09
Canceled.........................................       (18)          11.67        (1,982)        10.43
                                                        ---                        ------
December 31, 1998................................        84           10.02         1,903          2.79
Granted..........................................        18            2.75         1,307          3.64
Exercised........................................        --              --           (13)         1.75
Canceled.........................................       (24)           6.06          (457)         5.99
                                                        ---                        ------
December 31, 1999................................        78            9.56         2,740          2.67
                                                        ===                        ======

Options exercisable at December 31, 1999.........        42          $10.96           393        $ 1.83
</TABLE>

                                       43
<PAGE>
                              LARSCOM INCORPORATED

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 6--EMPLOYEE BENEFIT PLANS: (CONTINUED)
    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 re-issuance.

    The following table summarizes information about stock options outstanding
at December 31, 1999, under both the Directors' Plan and the Incentive Plan
(number of options in thousands):

<TABLE>
<CAPTION>
                                                   OPTIONS OUTSTANDING              OPTIONS EXERCISABLE
                                          -------------------------------------   -----------------------
                                             NUMBER       WEIGHTED                   NUMBER
                                          OUTSTANDING      AVERAGE     WEIGHTED   EXERCISABLE    WEIGHTED
                                               AT         REMAINING    AVERAGE         AT        AVERAGE
                                          DECEMBER 31,   CONTRACTUAL   EXERCISE   DECEMBER 31,   EXERCISE
RANGE OF EXERCISE PRICES                      1999       LIFE(YEARS)    PRICE         1999        PRICE
------------------------                  ------------   -----------   --------   ------------   --------
<S>                                       <C>            <C>           <C>        <C>            <C>
$1.01 - $3.00...........................     1,482           8.9        $ 1.78        390         $ 1.75
$3.01 - $5.00...........................     1,271           9.7        $ 3.68          6         $ 4.75
$9.01 - $11.00..........................        24           7.9        $10.50         --         $   --
$11.01 - $12.00.........................        41           7.0        $11.98         39         $11.99
                                             -----                                    ---
  Total/Average.........................     2,818           9.2        $ 2.86        435         $ 2.71
                                             =====                                    ===
</TABLE>

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 loss and the related cost measured by the fair
value method are described below.

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

<TABLE>
<CAPTION>
                                             DIRECTORS' AND INCENTIVE                       EMPLOYEE STOCK
                                                STOCK OPTION PLANS                          PURCHASE PLAN
                                       ------------------------------------      ------------------------------------
                                         1999          1998          1997          1999          1998          1997
                                       --------      --------      --------      --------      --------      --------
<S>                                    <C>           <C>           <C>           <C>           <C>           <C>
Risk-free interest rate..........        5.83%         4.54%         5.85%         5.34%         5.30%         5.30%
Expected volatility..............          70%           70%           60%           70%           70%           60%
Expected dividend yield..........           0%            0%            0%            0%            0%            0%
Expected life....................        3.50          3.61          4.04          0.50          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>
1997 grants.................................     $6.36       $5.54          $3.05
1998 grants.................................     $4.27       $1.64          $2.65
1999 grants.................................     $1.71       $1.92          $0.98
</TABLE>

                                       44
<PAGE>
                              LARSCOM INCORPORATED

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 6--EMPLOYEE BENEFIT PLANS: (CONTINUED)

    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>
                                                      1999       1998       1997
                                                    --------   --------   --------
<S>                                                 <C>        <C>        <C>
Net loss--as reported.............................  $(1,272)   $(7,088)   $(3,759)
Net loss--pro forma...............................  $(3,205)   $(9,174)   $(6,822)

Basic and diluted net loss per share--as
  reported........................................  $ (0.07)   $ (0.39)   $ (0.21)
Basic and diluted net loss per share--pro forma...  $ (0.17)   $ (0.51)   $ (0.38)
</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 that expire in 2004 and 2010, respectively. Total rent expense in 1999,
1998 and 1997, was $2,539,000, $2,607,000, and $1,404,000, respectively.
Sublease rental income was $901,000, $786,000 and $83,000 in 1999, 1998 and 1997
respectively. Future annual minimum lease payments under all noncancelable
operating leases as of December 31, 1999 are as follows (in thousands):

<TABLE>
<S>                                                           <C>
Years ending December 31,
2000........................................................  $ 2,421
2001........................................................    2,413
2002........................................................    2,403
2003........................................................    2,473
2004 and thereafter.........................................    4,284
                                                              -------
                                                              $13,994
                                                              =======
</TABLE>

    Commitments under capital leases are $59,833 for 2000. This amount includes
interest of $1,468.

    Total minimum rental income to be received in the future under
non-cancelable subleases was $149,074 as of December 31, 1999.

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 that 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, the Company

                                       45
<PAGE>
                              LARSCOM INCORPORATED

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 8--COMMITMENTS AND CONTINGENCIES: (CONTINUED)
entered into purchase commitments of approximately $1,250,000 in aggregate,
representing between one and two years expected demand for these components. As
of December 31, 1999, the Company is obligated to purchase $661,000 of these ICs
by 2001.

    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 triangular 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 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 in 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.

    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 1999, $2,147,000 was released to the
shareholders of NetEdge. In 1998, $600,000 of the escrow amount was released to
the Company and $400,000 was released to the shareholders of NetEdge. There
remained $3,589,000 in escrow, representing principal and accrued interest on
December 31, 1999, which is expected to be released by December 31, 2000.

                                       46
<PAGE>
                              LARSCOM INCORPORATED

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 9--ACQUISITION: (CONTINUED)
    The consideration and fair values of the 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 in 1998, principally related to the current technology.

    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 in 1998 to $854,000 as a result of
the impairment analysis and is amortized over its revised estimated useful
economic life of three years. At December 31, 1999, the net book value of the
goodwill was $448,000.

NOTE 10--RESTRUCTURING:

    In October 1998, the Company 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 work force reduction of approximately 16%. The restructuring charge
included $876,000 of employee severance, $89,000 of asset write-downs and
$249,000 of other expenses. As of December 31, 1998, $541,000 remained accrued
which was paid in 1999.

                                       47
<PAGE>
                              LARSCOM INCORPORATED

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 11--UNAUDITED QUARTERLY CONSOLIDATED FINANCIAL DATA:

<TABLE>
<CAPTION>
                                                       QUARTERS ENDED
                                         -------------------------------------------
                                         MARCH 31,   JUNE 30,   SEPT. 30,   DEC. 31,
                                           1999        1999       1999        1999
                                         ---------   --------   ---------   --------
                                            (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                      <C>         <C>        <C>         <C>
Sales..................................   $12,246    $13,198     $13,265    $14,130
Gross profit...........................   $ 5,688    $ 6,121     $ 6,990    $ 7,617
Net income (loss)......................   $(1,019)   $  (702)    $   (28)   $   477
Basic and diluted earnings (loss) per
  share................................   $ (0.06)   $ (0.04)    $    --    $  0.02
</TABLE>

<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................................   $  0.09    $ (0.02)    $ (0.13)   $ (0.34)
</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 and 10 for more details.

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

    There were no disagreements with the outside auditors on accounting and
financial disclosure.

                                       48
<PAGE>
                                    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 to be filed within 120 days after fiscal year end.

ITEM 11.  EXECUTIVE COMPENSATION

    The information required by this Item is incorporated by reference to the
Company's Proxy Statement to be filed within 120 days after fiscal year end.

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 to be filed within 120 days after fiscal year end.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

    The information required by this Item is incorporated by reference to the
Company's Proxy Statement to be filed within 120 days after fiscal year end.

                                       49
<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>                     <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.

         3.2            (1)  Amended and Restated Certificate of Incorporation of the
                               Registrant as filed in the State of Delaware on
                               December 11, 1996.

        10.1            (1)  Larscom Incorporated Stock Option Plan For Non-Employee
                               Directors

        10.2            (1)  Larscom Incorporated Stock Incentive Plan

        10.3            (1)  Larscom Incorporated Employee Stock Purchase Plan

        10.5            (1)  Partnership Agreement among Vanderson Construction, Donn H.
                               Byrne, John D. Brady, Thomas J. Cunningham, Jr. and the
                               Company

        10.6            (1)  Services Agreement between Axel Johnson and the Company

        10.7            (1)  Credit Agreement between Axel Johnson and the Company

        10.8            (1)  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)  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            (5)  Statement re computation of per share earnings

        21.1            (5)  Subsidiaries of the Registrant

        23.1            (5)  Consent of Independent Accountants

        24              (6)  Power of Attorney

        27              (5)  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.

(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.

                                       50
<PAGE>
(4) Incorporated by reference to identically numbered exhibit filed in response
    to item 14a, "exhibits" of the registrant's report on Form 10-K for the
    fiscal year ended December 31, 1998.

(5) Filed herewith.

(6) See page 52.

    b)  Reports on Form 8-K

        The Company filed one report on Form 8-K during the fourth quarter ended
    December 31, 1999. Information regarding the item reported is as follows:
    Date--November 18, 1999, Press release regarding the launch of an aggressive
    expansion plan and the impact of such a program on future financial results
    as well as the resignation of Donald Green from Larscom's Board of
    Directors.

    c)  Exhibits

        See Item 14(a) 2 above.

                                       51
<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.

    KNOW ALL PERSONS BY THESE PRESENTS, that each natural person whose signature
appears below hereby constitutes and appoints Robert Coackley as his
attorney-in-fact, with full power of substitution, for him in any and all
capacities, to sign any and all amendments to this Form 10-K for the year ending
December 31, 1999, and to file the same, exhibits and other documents in
connection therewith, with Securities and Exchange Commission, hereby ratifying
and confirming our signatures as they may be signed by our said attorney to any
and all amendments to said Form 10-K.

<TABLE>
<CAPTION>
                        NAME                                       TITLE                    DATE
                        ----                                       -----                    ----
<C>                                                    <S>                             <C>
                 /s/ ROBERT COACKLEY
     -------------------------------------------       President and Chief Executive   March 24, 2000
                   Robert Coackley                       Officer

                                                       Vice President, Finance and
                /s/ DONALD W. MORGAN                     Chief Financial Officer
     -------------------------------------------         (Chief Financial Officer and  March 24, 2000
                  Donald W. Morgan                       Principal Accounting
                                                         Officer)

                 /s/ DONALD G. HEITT
     -------------------------------------------       Director                        March 24, 2000
                   Donald G. Heitt

              /s/ LAWRENCE D. MILLIGAN
     -------------------------------------------       Director                        March 24, 2000
                Lawrence D. Milligan

                /s/ HARVEY L. POPPEL
     -------------------------------------------       Director                        March 24, 2000
                  Harvey L. Poppel

               /s/ RICHARD E. POSPISIL
     -------------------------------------------       Director                        March 24, 2000
                 Richard E. Pospisil

                /s/ JOSEPH F. SMORADA
     -------------------------------------------       Director                        March 24, 2000
                  Joseph F. Smorada
</TABLE>

                                       52