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

                                   FORM 10-K

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<C>        <S>
   /X/     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
           SECURITIES EXCHANGE ACT OF 1934
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                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000

                                       OR

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

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

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

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<S>                                              <C>
                   DELAWARE                                        94-2362692
        (State or other jurisdiction of                         (I.R.S. Employer
        incorporation or organization)                         Identification No.)

             1845 MCCANDLESS DRIVE
             MILPITAS, CALIFORNIA                                     95035
   (Address of principal executive offices)                        (ZIP Code)
</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, 2001, was approximately $58,736,000.

    The number of the registrant's shares outstanding as of February 28, 2001,
was 8,795,596 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 2001 Annual
Meeting of Stockholders (the "Proxy Statement") are incorporated by reference in
Part III of this Annual Report on Form 10-K.

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                               TABLE OF CONTENTS

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PART I    ............................................................      3

ITEM 1.   BUSINESS....................................................      3

ITEM 2.   PROPERTIES..................................................     14

ITEM 3.   LEGAL PROCEEDINGS...........................................     14

ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.........     14

PART II   ............................................................     15

ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
          SHAREHOLDER MATTERS.........................................     15

ITEM 6.   SELECTED CONSOLIDATED FINANCIAL DATA........................     16

ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
          AND RESULTS OF OPERATIONS...................................     17

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
          RISK........................................................     26

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

ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
          AND FINANCIAL DISCLOSURE....................................     49

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

SIGNATURES............................................................     52
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                                       2
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PART I

ITEM 1.  BUSINESS

    THIS ANNUAL REPORT ON FORM 10-K CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS
WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E
OF THE SECURITIES EXCHANGE ACT OF 1934. THE ACTUAL RESULTS THAT WE ACHIEVE MAY
DIFFER MATERIALLY FROM THOSE INDICATED IN ANY FORWARD-LOOKING STATEMENTS DUE TO
THE RISKS AND UNCERTAINTIES SET FORTH UNDER THE "CERTAIN FACTORS AFFECTING
FUTURE OPERATING RESULTS" SECTION (IN PART I, ITEM 7) AND ELSEWHERE IN THIS FORM
10-K. WE UNDERTAKE NO OBLIGATION TO REVISE ANY FORWARD-LOOKING STATEMENTS IN
ORDER TO REFLECT EVENTS OR CIRCUMSTANCES THAT MAY ARISE AFTER THE DATE OF THIS
REPORT. READERS ARE URGED TO CAREFULLY REVIEW AND CONSIDER THE VARIOUS
DISCLOSURES MADE BY US IN THIS REPORT AND IN OUR OTHER REPORTS FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION THAT ATTEMPT TO ADVISE INTERESTED PARTIES ON
THE RISKS AND FACTORS THAT MAY AFFECT OUR BUSINESS.

OVERVIEW

    Larscom Incorporated manufactures and markets high-speed network-access
products for network service providers ("NSPs"), Internet service providers
("ISPs") and corporate users. Our product offerings support bandwidth
requirements ranging from full and fractional T1/E1 to OC3. Additionally, our
solutions support a number of networking protocols such as frame relay,
asynchronous transfer mode ("ATM"), inverse multiplexing for ATM ("IMA") and the
Internet Protocol ("IP").

    Prior to Larscom's initial public offering in December 1996, Larscom was a
wholly-owned subsidiary of Axel Johnson Inc. ("Axel Johnson"). Upon consummation
of that offering Axel Johnson owned 55% of the Class A and B Common Stock of
Larscom and controlled 83% of the voting interest. As of December 31, 2000, Axel
Johnson owned 53% of the Class A and B Common Stock of Larscom and controlled
82% of the voting interest.

INDUSTRY OVERVIEW

    As corporate users continue to seek out new and innovative ways to reduce
their expenses and improve their productivity through networking solutions,
service providers and carriers continue to expand their service portfolios to
meet growing customer demands. Traditional local area networks ("LANs"), which
connect computing resources within an enterprise, are now routinely
interconnected across wide geographic areas via wide area networks ("WANs").
Increasingly, new network applications are putting significant demands on access
networks, as corporate users expand their service usage beyond simple network
interconnection. The uses of the Internet by business and consumers continue to
increase in both frequency and complexity of applications. These factors all
combine to drive the requirement for greater network bandwidth.

    The increased demand for greater WAN speed and capacity has been accompanied
by increased demand for reliable, high-speed network-access solutions. In
addition to dedicated 56/64 Kbps and T1/E1 services, enterprise customers are
now using private and public frame relay, ATM, digital subscriber line ("DSL"),
cable and wireless services, all to enhance the productivity of their employees.
Increased pressure on service providers to deploy these new services quickly and
efficiently has been a significant catalyst for growth in the market for
advanced subscriber management solutions.

    As a result of the increased demand for greater WAN capacity and the
complexity and continuing evolution of service offerings, businesses have been
transitioning from the use of private lines dedicated to individual businesses
to greater use of public WANs (often Internet or IP based). While reliance on
the public infrastructure can often facilitate both deployment and access, it
requires additional security measures to ensure traffic integrity. As this
transition occurs, NSPs and ISPs are being asked to provide an increasing
variety of transmission and network management services. In addition, corporate
users in

                                       3
<PAGE>
many cases require NSPs to assume full responsibility for the operation and
monitoring of the network and to guarantee certain levels of service.

    NSPs, ISPs and corporate users want 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 on a
global basis.

THE LARSCOM SOLUTION

    We help make our customers successful in their business through the use of
advanced, reliable products that are backed by our service and support
organization.

    RELIABILITY AND QUALITY.  We have earned a strong reputation for the quality
of our products and for responsive service. Our products are manufactured to
meet high standards of reliability and quality, ensured by intensive system
level testing in development and manufacturing.

    CUSTOMER SERVICE AND SUPPORT.  We offer rapid-response service and support
through various stages of the customer relationship. Our service and support
function begins by working closely with customers at the product definition and
design stage. To meet our customers' unpredictable purchasing patterns, our
sales and operations departments are organized to respond quickly to short
lead-time orders. We provide worldwide post-sale service and support of our
products through technical consulting, installation assistance and maintenance.

PRODUCTS

    During 2000, we responded to our customers' needs by enhancing our portfolio
of intelligent access products. These additions to our product line have caused
us to alter our product categories by replacing our "ATM Access" line with a
broader set of "Service-Delivery Platforms." The following describes the
applications for each of our five product groups:

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SERVICE-DELIVERY PLATFORMS:   Products that enable service providers to have enhanced
                              control and flexibility over the services that they provide.
                              Our Service-Delivery Platforms allow NSPs and ISPs to deploy
                              new services such as transparent LAN services, managed
                              frame-relay services, simplified subscriber management and
                              multi-customer services.

INVERSE MULTIPLEXERS:         Products that enable a single data-stream to be sent over
                              several physical lines and converted back to a single
                              data-stream at the receiving end. Larscom pioneered
                              developments in inverse multiplexing to help customers
                              "bridge the bandwidth gap" between T1/E1 and T3/E3.
                              Fractional T3/E3 service, provided in this manner, allows
                              NSPs and corporate users to leverage the existing T1/E1
                              based infrastructure to provide affordable and
                              readily-available high-speed services with an increased
                              degree of fault tolerance.

MULTIPLEXERS:                 Products that enable several data-streams to be sent over a
                              single physical line and be converted back to the individual
                              data-streams at the receiving end. Multiplexers help to
                              provide more efficient utilization of network resources by
                              allowing multiple data-sources to share a single connection
                              to the WAN.
</TABLE>

                                       4
<PAGE>
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CSU/DSUS:                     Products that provide an interface between user data
                              communications equipment and a carrier service. They perform
                              framing, certain line-conditioning and equalization
                              functions. CSU/DSUs provide interconnection between the LAN
                              and the WAN.

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

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

SERVICE-DELIVERY PLATFORMS:

    LARSCOM 3000.  Introduced in 2000, the Larscom 3000 is a full-featured
broadband subscriber management system designed specifically for regional and
mid-tier ISPs, competitive local exchange carriers ("CLECs") and incumbent local
exchange carriers ("ILECs"). The Larscom 3000 helps service providers simplify
the deployment and management of access services using DSL, cable and wireless,
primarily for connecting to the Internet. Advanced features such as the Larscom
3000's unique automatic protocol recognition and configuration capabilities
("AutoProtocol"), as well as dynamic service selection give NSPs and ISPs
flexibility in provisioning, selecting and accessing new services. The Larscom
3000 is fully manageable via simple network management protocol ("SNMP") or a
command line interface.

    LARSCOM 6000.  Also introduced in 2000, the Larscom 6000 (previously called
the iPLEX 6000) is the first in a family of intelligent access devices, using
the Frame-Relay Forum's new standard for multilink frame relay ("MFR") to
provide inverse multiplexing benefits to frame-relay customers. With the
addition of IP-forwarding functions, the Larscom 6000 removes the need for
routers, allowing service providers to offer advanced services at the lowest
total cost of operation. The Larscom 6000 also provides integrated service level
agreement management without any additional hardware or monitoring/reporting
systems, allowing customers to monitor performance statistics and to deliver
them in a standardized format directly to a variety of core-management systems.
Web-based device monitoring allows users to view the status of the Larscom 6000
from any web-enabled computer.

    EDGE SERIES PRODUCTS.  The EDGE family of products consists of the EDGE 40,
65, 70 and 85, which were developed to fulfill NSP and ISP needs for
service-enabling intelligence at the edge of their networks. A single EDGE
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
highly-secure, virtual network operating at the same native speed as their 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.

INVERSE MULTIPLEXERS:

    MEGA-T/E.  We pioneered inverse multiplexing solutions with the Mega-T, the
first inverse multiplexer to bridge the bandwidth gap between T1 and T3. It
provides economical access to greater than T1 bandwidth for high-speed
applications, deriving a data channel of up to 6 Mbps from four T1 circuits. We
also manufacture and market an E1 version of the product, the Mega-E, to bridge
the bandwidth gap between E1 and E3. Our patented inverse multiplexing algorithm
used for the Mega-T/E handles alignment of the individual T1s or E1s and allows
for differential delay between individual T1s. 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 troubleshooting. The Mega-T/E is primarily used for transport for
high-speed LAN internetworking, as well as frame-relay network-access above T1
or E1 speeds and real-time compressed voice traffic.

                                       5
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    ORION 2000.  The Orion 2000 ATM inverse multiplexer is designed to be used
by NSPs wishing to provide either native ATM services or ATM extensions at
economical prices. It is in full conformance with the ATM Forum IMA
specification and can interface directly with an OC3 or DS3 ATM user-to-network
interface or network-to-network interface on any ATM device. The Orion 2000
offers ATM connectivity at speeds up to 12 Mbps (8 x T1) or up to 16 Mbps (8 x
E1), with data packets having extremely low cell-delay variation, which is a
requirement for delay-sensitive traffic such as video. The unit has
sophisticated ASCII terminal and SNMP interfaces that enable local or remote
configuration, performance monitoring, alarm notification and diagnostic
testing. In addition, an optional graphical user interface offers
point-and-click monitoring and control.

MULTIPLEXERS:

    TERRAMUX.  Introduced in 2000, the TerraMux drop-and-insert multiplexing DSU
is designed for businesses needing both voice and data services. By multiplexing
two data ports and a voice port onto one full or fractional T1 or E1 line,
TerraMux reduces access costs by simplifying the network. With its unique
"LineLearn" capability that automatically discerns how many and what types of
lines are connected to a device, TerraMux automatically configures the network
and drop-and-insert ports and sets the speed of the primary data port to make
network access simple and efficient. Management options include a built-in
graphical test set, e-mail alerts for trouble-ticketing, Telnet access and SNMP.

    ORION 4000.  The Orion 4000 is a 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 for both domestic
and 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 protection of a customer's legacy equipment investment.

    The Orion 4000 is able to support full and fractional T3 networks. Its T1
and E1 inverse multiplexing modules provide transparent channels for
applications such as LAN interconnection or video transmission. The T3Mux and
T1Mux modules 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 as a T1 multiplexer with inverse
multiplexed data. The T3Clear single and double-density modules provide clear
channel 45 Mbps transmission and are fully interoperable with the Access-T45.

    ACCESS-T45.  The Access-T45 is a single or dual port 45 Mbps multiplexer
that provides a clear channel T3 network interface. It is used for high-speed
LAN internetworking, for Internet access and backbones and for frame- relay
access. The Access-T45 allocates bandwidth in increments of 3 Mbps, a function
that has been used by ISPs to control bandwidth assignment for their customers.
The asymmetrical Access-T45 allows 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 is a series of T1/FT1
multiplexing CSU/DSUs. The primary use of the Access-T family is for LAN
interconnection, often coupled with the multiplexing of digital PBX traffic onto
a single T1/FT1 circuit. The Access-T 1500 is a shelf-based version of the
Access-T that utilizes a hub and spoke architecture, allowing centralized
network nodes to serve units at dispersed sites and to concentrate traffic in a
single location where network hubs are constrained by lack of space. The Split-T
is a stand-alone T1/FT1 CSU/DSU. It has a front panel that incorporates an LCD
user interface for local configuration and is primarily used for LAN
interconnection and digital PBX traffic.

                                       6
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    ORION 200/400/800.  The Orion 200/400/800 family is a set of advanced T1 and
E1 access multiplexers 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 200/400/800
family can operate in both T1 and E1 networks, and can also perform a conversion
between T1 and E1 standards.

CSU/DSU:

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

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

CUSTOMERS

    Our primary customers are NSPs, ISPs, systems integrators, value-added
resellers ("VARs"), federal, state and local government agencies and end-user
corporations.

    We believe that our relationship with large customers, particularly the NSPs
and ISPs, will be critical to our future success. Our customers prefer to
purchase the majority of their network access solutions from a single vendor,
which might benefit us as we broaden and enhance our product line. In 2000, 1999
and 1998, NSPs and ISPs represented 50%, 52% and 61%, respectively, of total
revenues. The following table summarizes the percentage of total revenues for
customers accounting for more than 10% of our revenues:

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                                                              YEAR ENDED DECEMBER 31,
                                                        ------------------------------------
                                                          2000          1999          1998
                                                        --------      --------      --------
<S>                                                     <C>           <C>           <C>
WorldCom Inc..........................................     28%           28%           32%
AT&T..................................................     11%           13%           12%
</TABLE>

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

BACKLOG

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

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MARKETING AND SALES

    We sell our products in the US primarily through our direct sales
organization and to a lesser extent through VARs, systems integrators and
distributors. We continue to develop an indirect distribution channel for sales
to domestic customers. This channel consists primarily of a small group of
master distributors, such as Tech Data, and a number of authorized resellers.
Sales to large NSPs and ISPs will continue to be handled by our direct sales
force. As part of this strategy we have 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 our ability to forecast sales, potential reductions in
customer satisfaction, loss of contact with users of our 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 our financial condition to be materially adversely affected.

    We market our products internationally through our own direct sales force,
non-exclusive international distributors and systems integrators. To focus on
sales to Europe, the Middle East and Africa, we recruited additional sales
people in 2000 for the regional sales team headquartered in the United Kingdom.
The United Kingdom team focuses on direct sales to large NSPs while also
supporting our distributors for sales to smaller customers. We also added sales
people located in Hong Kong, Singapore and Beijing 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, we continually submit
successive generations of our current products as well as new products to our
customers for evaluation and approval. Additionally, sales to international 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 customers and regulatory
issues.

CUSTOMER SERVICE AND SUPPORT

    Our products are required to meet rigorous standards imposed by both
customers and internal product quality assurance testing procedures. The
warranty period for most of our products is three years. We have service
contracts with most of our major customers, and provide 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. We maintain a 24-hour, 7-day a week technical
assistance support center, and provide rapid response with contracted response
times, plus a wide range of repair programs. We also provide technical
applications assistance, as well as customer and distributor product
maintenance, installation services and training.

RESEARCH AND DEVELOPMENT

    We believe that our future success depends on our ability to maintain
technological leadership through timely enhancements of existing products and
development of new products that meet customer needs. During 2000, 1999 and
1998, total research and development expenses were $9,900,000, $8,049,000 and
$11,463,000, respectively. All of these expenses were funded by us rather than
by any of our customers. We believe that a continued commitment to research and
development, particularly related to emerging technologies, will be required to
remain competitive.

    Our product families are designed specifically to meet the demands of our
larger customers. Relationships with these customers provide us with advanced
insight into their evolving needs and allow us to anticipate new technology
requirements. Enhancements to our product families are being

                                       8
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developed by including major customers in the product definition and review
process. Timely customer feedback is important to us in making modifications to
existing products and designing new products.

    The development of new, technologically advanced products is a complex and
uncertain process, requiring high levels of innovation. Expertise is required in
the general areas of telephony, data networking and network management, as well
as specific technologies such as DSL, ATM, synchronous optical network ("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 we 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 we will be successful in developing,
introducing or managing the transition to new or enhanced products or that any
such products will be responsive to technological changes or will gain
acceptance in the market place.

MANUFACTURING AND QUALITY ASSURANCE

    Our manufacturing operations consist of materials procurement, third-party
assembly of printed circuit boards and chassis assemblies, product testing and
inspection and system configuration for shipment. We have maintained a long-term
relationship with our principal third-party printed circuit board manufacturer,
Via Systems, which has allowed us to implement quality control in the entire
manufacturing process, including statistically monitored process control
programs. We utilize traditional procurement methods with our suppliers, using
standard purchase orders and blanket orders for scheduling and commitments. Most
purchase-order payment terms are standard with payment due in 30 days, with some
orders negotiated to net 45 days payment terms. We use automated functional
product testing to remain flexible to customers' needs while maintaining control
of the quality of the manufacturing process.

    Turnkey-based manufacturing is utilized primarily on all high-volume,
repetitive production assemblies. 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. Consigned kits may be utilized on
lower volume assemblies. We are required to commit to purchase certain volumes
within various time frames. Although we believe that the benefits of turnkey
manufacturing outweigh the risks, it is possible that our dependence on turnkey
manufacturing will impact our ability to alter the manufacturing schedule
rapidly enough to satisfy changes in customer demand. We continue to perform
final assembly and testing of non-turnkey finished products.

    On-time delivery of our products is dependent upon the availability of
components used in our products. We purchase parts and components for assembly
from a variety of pre-approved suppliers through a worldwide
procurement-sourcing program. We attempt to manage risks by developing alternate
sources and by maintaining long-term relationships with our suppliers. We
acquire certain components from sole sources, either to achieve economies of
scale or because of proprietary technical features designed into our products.
To date, we have been able to obtain adequate supplies of required components in
a timely manner from existing sources or, when necessary, from alternate
sources. A substantial portion of our shipments in any fiscal period relates to
orders received in that period. In addition, a significant percentage of our
orders is shipped within three business days of receiving the order. To meet
this demand, we maintain a supply of finished goods inventories at our
manufacturing facility and a safety stock of critical components at a supplier's
stocking location. There

                                       9
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can be no assurance that interrupted or delayed supplies of key components will
not occur. Any interrupted or delayed supplies of key components could have a
material adverse effect on our business and operating results.

    We maintain a comprehensive quality control program. However, complex
products such as ours might contain undetected errors or failures when first
introduced or as new versions are released. Despite testing by our customers and
us, there can be no assurance that existing or future products will not contain
undetected errors or failures when first introduced or as new versions are
released. We provide a three-year warranty for most of our products. Although we
believe that our reserves for estimated future warranty costs are adequate, our
estimates, particularly those related to products that have been recently
introduced, might not be correct. Warranty claims in excess of those expected
could have a material adverse effect on our business and operating results.

    Because of component obsolescence from our manufacturers, we have been
required to place last-time buy purchase orders to cover the expected demand for
these components. These purchase commitments generally cover between one and two
years expected demand for these components. As of December 31, 2000, we were
obligated to purchase $324,000 of these components by the end of 2001. We plan
to redesign some of our products as supplies of obsolete components dwindle and
if customer demand justifies the effort. We took into account factors such as
the ability to replace the particular component with a similar part and the
estimated life of our products in determining the quantities to purchase.
Although we believe that we will use all of the quantities we have agreed to
purchase, there can be no assurance that our estimates are correct. If our
estimates are not correct and requirements for a component are less or more than
anticipated, it could have a material adverse effect on our business and results
of operations.

COMPETITION

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

    Our business could also be materially adversely affected by the integration
of CSU/DSU and inverse multiplexing functionality into switches and routers. 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.

PROPRIETARY RIGHTS

    The telecommunications equipment industry is characterized by the existence
of a large number of patents and frequent litigation based on allegations of
patent infringement. We rely upon a combination of trade secrets, contractual
restrictions, copyrights, trademark laws and patents to establish and protect
proprietary rights in our products and technologies. Although we have been
issued only one U.S. patent to date, we believe that the success of our business
depends primarily on our proprietary technology, information, processes and
expertise, rather than patents. From time to time,

                                       10
<PAGE>
third parties may assert exclusive patent, copyright, trademark and other
intellectual property rights to technologies that are important to us. We have
not conducted a formal patent search relating to the technology used in our
products, due in part to the high cost and limited benefits of a formal search.
In addition, since patent applications in the US are not publicly disclosed
until the patent is issued, applications may have been filed by competitors of
ours that could relate to our products. Software comprises a substantial portion
of the technology in our products. The scope of protection accorded to patents
covering software related inventions is evolving and is subject to uncertainty,
which may increase the risk and cost to us if we discover third-party patents
related to our software products or if such patents are asserted against us in
the future. In our distribution agreements, we typically agree to indemnify our
customers for any expenses or liability resulting from claimed infringements of
patents, trademarks or copyrights of third parties. In the event of litigation
to determine the validity of any third-party claims, such litigation, whether or
not determined in favor of us, could result in significant expense to us and
divert the efforts of our technical and management personnel. In the event of an
adverse ruling in such litigation, we might be required to pay damages,
discontinue the use and sale of infringing products, and expend significant
resources to develop non-infringing technology or obtain licenses from third
parties. There can be no assurance that licenses from third parties would be
available on acceptable terms, if at all. A successful claim against us and our
failure to develop or license a substitute technology could have a material
adverse effect on our business and operating results.

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

EMPLOYEES

    As of December 31, 2000, we had 202 full time employees compared to 208 full
time employees on December 31, 1999. We have never experienced any work
stoppage and none of our employees is represented by a labor union. We believe
our relationship with our employees is good.

MANAGEMENT

    The executive officers and directors of Larscom Incorporated are as follows:

<TABLE>
<CAPTION>
NAME                            AGE                              POSITION
----                          --------   ---------------------------------------------------------
<S>                           <C>        <C>
Robert Coackley.............     65      President and Chief Executive Officer
George M. Donohoe...........     63      Executive Vice President of Sales and Services
Rebecca C. Horn.............     47      Vice President, Marketing
Donald W. Morgan............     55      Vice President, Finance and Chief Financial Officer
Joseph A. Pendergast........     43      Vice President, Operations
Liam McManus................     58      Vice President and Chief Technology Officer
Amin Pessah.................     51      Vice President, International Sales
Donald G. Heitt.............     65      Director(2)(3)
Lawrence D. Milligan........     64      Chairman of the Board(2)(3)
Harvey L. Poppel............     63      Director(1)(2)
Richard E. Pospisil.........     69      Director(1)
Joseph F. Smorada...........     54      Director(1)(3)
</TABLE>

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

(1) Member of Audit Committee.

(2) Member of Compensation Committee.

(3) Member of Executive Committee.

                                       11
<PAGE>
    Robert Coackley has served as President, Chief Executive Officer and a
member of the Board of Directors since May 1999. Prior to joining Larscom
Incorporated, 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 Governor of the Electronic Industries Alliance and a board
member of the Telecommunications Industry Association. Mr. Coackley holds a BS
Honors Degree in Electrical Engineering from City University, London, England.

    George M. Donohoe has served as Executive Vice President of Sales and
Service 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 Larscom Incorporated,
Mr. Donohoe was Director of LAN Product Sales at Teleglobe from February 1993 to
October 1993, and Vice President of Sales at Halley Systems from December 1989
to January 1993. Prior to that, Mr. Donohoe served in senior sales and sales
management positions at Infinet, Honeywell Information Systems and IBM.
Mr. Donohoe earned a BS degree 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 Larscom Incorporated 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 degree in Business Administration from Western Carolina
University and an MA degree in Economics from North Carolina State University.

    Donald W. Morgan has served as Vice President of Finance and Chief Financial
Officer of Larscom Incorporated since October 1999. Prior to joining Larscom
Incorporated, 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 degree in Business Administration from
Northeastern University and an MS degree in Finance from the University of
Illinois.

    Joseph A. Pendergast has served as Vice President, Operations of Larscom
Incorporated since October 2000. Prior to joining Larscom Incorporated,
Mr. Pendergast held several positions at Inrange Technologies Corporation from
1989 to 2000. Those positions included Director of Supply Chain Management,
Director of Manufacturing, and Director of Order Fulfillment. Mr. Pendergast
holds a BS Degree in Operations Management from LaSalle University and is
CPIM-APICS and CIRM-APICS Certified.

    Liam McManus has served as Vice President and Chief Technology Officer of
Larscom Incorporated since December 2000. Prior to joining Larscom Incorporated,
Mr. McManus worked for Inrange Technologies Corporation from 1987 to 2000 as
Vice President of Software Engineering and as Vice President of Datacom/Telecom.
Mr. McManus holds a BS Degree in Electrical Engineering from Loughborough
University in England.

    Amin Pessah has served as Vice President, International Sales since January
2000. Previously he served as Vice President and General Manager, Digital Access
Group from January 1998 to December 1999 and in several senior international
sales management positions from October 1988 until

                                       12
<PAGE>
December 1997. Prior to that Mr. Pessah served in senior sales and sales
management positions at Memotec, General DataComm, Timeplex and Memorex.
Mr. Pessah earned a BS degree in Electrical Engineering and Computer Sciences
from the University of California, Berkeley.

    Donald G. Heitt has served as a director of Larscom Incorporated 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 degree from the University of Iowa.

    Lawrence D. Milligan has served as a director of Larscom Incorporated 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 Larscom Incorporated 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 BS and MS degrees from Rensselaer
Polytechnic Institute.

    Richard E. Pospisil has served as a director of Larscom Incorporated since
January 2000. Mr. Pospisil is currently a private investor and has been the
President of RP Associates Consulting Services since 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 BS degree in Electrical Engineering from Iowa State
University.

    Joseph F. Smorada has served as a director of Larscom Incorporated 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 degree in Economics from California University of
Pennsylvania.

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

                                       13
<PAGE>
ITEM 2.  PROPERTIES

    We currently lease a 119,000 square foot facility located in Milpitas,
California and two facilities in North Carolina, one of 27,000 square feet in
Durham, North Carolina and one of 16,000 square feet in Morrisville, North
Carolina. At the Milpitas facility, 45,000 square feet are sublet and in
Morrisville, North Carolina, we sublet all 16,000 square feet. The Morrisville,
North Carolina lease and sublease expire June 30, 2001. Most of our
manufacturing, sales, administration and customer service and a portion of
marketing, and research and development are performed at our Milpitas facility.
We also perform some marketing, customer service and research and development
functions at the facility in Durham. We also occupy various small offices
throughout the US for sales activities, one office in the UK for sales
activities in Europe and offices in Hong Kong and Singapore for sales activities
in Asia. We believe that our existing facilities are adequate for our current
needs.

ITEM 3.  LEGAL PROCEEDINGS

    We are not a party to any material legal proceedings.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

    No matters were submitted to a vote of stockholders during the quarter ended
December 31, 2000.

                                       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 bid prices for our Class A
Common Stock as reported on the Nasdaq National Market from January 1, 1999
through December 31, 2000. These prices reflect inter-dealer prices, without
retail markup, markdown or commission, and may not necessarily represent actual
transactions.

<TABLE>
<CAPTION>
                                                       2000                  1999
                                                -------------------   -------------------
                                                               BID PRICES
                                                -----------------------------------------
                                                  HIGH       LOW        HIGH       LOW
                                                --------   --------   --------   --------
<S>                                             <C>        <C>        <C>        <C>
First quarter.................................   $11.50     $5.50      $ 3.06     $1.53
Second quarter................................   $ 7.84     $4.06      $ 3.44     $1.63
Third quarter.................................   $10.13     $4.50      $ 3.00     $1.56
Fourth quarter................................   $ 8.27     $1.91      $ 8.00     $1.88
</TABLE>

    As of February 28, 2001, there were 45 holders of record of our Class A
Common Stock and 1 holder of record of our Class B Common Stock. We had an
estimated 3,083 beneficial holders of our Class A Common Stock, held in street
names, as of February 28, 2001.

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

                                       15
<PAGE>
ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                               YEARS ENDED DECEMBER 31,
                                                 ----------------------------------------------------
                                                   2000       1999       1998       1997       1996
                                                 --------   --------   --------   --------   --------
                                                        (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                              <C>        <C>        <C>        <C>        <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:

Revenues.......................................  $54,664    $52,839    $72,733    $75,955    $66,444
Cost of revenues...............................   25,942     26,423     40,917     32,718     29,949
                                                 -------    -------    -------    -------    -------
  Gross profit.................................   28,722     26,416     31,816     43,237     36,495
                                                 -------    -------    -------    -------    -------
Operating expenses:
  Research and development.....................    9,900      8,049     11,463      9,943      8,123
  Selling, general and administrative..........   24,116     21,570     25,833     21,145     19,408
  Restructuring................................       --         --      1,214         --         --
  Other nonrecurring charges...................       --         --      7,915         --         --
  In-process research and development..........       --         --         --     20,120         --
                                                 -------    -------    -------    -------    -------
    Total operating expenses...................   34,016     29,619     46,425     51,208     27,531
                                                 -------    -------    -------    -------    -------
Income (loss) from operations..................   (5,294)    (3,203)   (14,609)    (7,971)     8,964
  Other income (expense), net..................    1,760      1,247      2,085      1,726       (597)
                                                 -------    -------    -------    -------    -------
Income (loss) before income taxes..............   (3,534)    (1,956)   (12,524)    (6,245)     8,367
  Income tax provision (benefit)...............   (1,035)      (684)    (5,436)    (2,486)     3,437
                                                 -------    -------    -------    -------    -------
Net income (loss)..............................  $(2,499)   $(1,272)   $(7,088)   $(3,759)   $ 4,930
                                                 =======    =======    =======    =======    =======

Basic and diluted earnings (loss) per share....  $ (0.13)   $ (0.07)   $ (0.39)   $ (0.21)   $  0.41
                                                 =======    =======    =======    =======    =======
Basic and diluted weighted average shares......   18,591     18,333     18,216     18,078     12,170
                                                 =======    =======    =======    =======    =======
Cash dividends per share.......................  $    --    $    --    $    --    $    --    $  2.10
                                                 =======    =======    =======    =======    =======
Shares used to compute cash dividends per
  share........................................       --         --         --         --     11,900
                                                 =======    =======    =======    =======    =======
</TABLE>

<TABLE>
<CAPTION>
                                                                     DECEMBER 31,
                                                 ----------------------------------------------------
                                                   2000       1999       1998       1997       1996
                                                 --------   --------   --------   --------   --------
                                                                    (IN THOUSANDS)
<S>                                              <C>        <C>        <C>        <C>        <C>
CONSOLIDATED BALANCE SHEET DATA:

Working capital................................  $37,395    $38,647    $37,140    $33,911    $55,944
Total assets...................................   66,320     66,862     68,103     87,910     73,043
Total stockholders' equity.....................   53,042     54,795     55,851     62,227     61,445
</TABLE>

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

    We sell our products primarily through a direct sales force and to a lesser
extent through a variety of resellers, including VARs, systems integrators and
distributors.

    A small number of customers, consisting of NSPs and resellers, have
accounted for a large part of our revenues in each of the past several years.
Sales to our top two customers (WorldCom Inc. and AT&T) accounted for 39%, 41%
and 44%, of revenues in 2000, 1999 and 1998, respectively. Sales to NSPs as a
group represented 50%, 52%, and 61% of revenues in 2000, 1999 and 1998,
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. We have
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 our products. Since we
continue 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 our sales are in the form of large orders with short delivery
times to a limited number of customers, our ability to predict revenues is
limited. In addition, introductions or announcements by us or our competitors of
new products and technologies can cause customers to defer purchases of our
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.

    On October 15, 1998, we announced a corporate restructuring plan designed to
better align our 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 our business in October 1998, we 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, we recognized an impairment loss
of $7,915,000 in 1998, principally related to the current technology. See Note 9
of the Consolidated Financial Statements for additional information. We
established our expenditure levels for product development and other operating
expenses based on projected revenues and margins, but expenses are relatively
fixed in the short term. Accordingly, if revenues are below expectations in any
given period, our inability to adjust spending in the short term may exacerbate
the adverse impact of a revenue shortfall on our operating results. Moreover,
even though we may experience revenue shortfalls in two or three consecutive
quarters, we may decide not to try to reduce our expenses if we believe the
shortfall is temporary.

    In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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. We are required to adopt SFAS No. 133
in the first quarter of 2001. To date, we have not engaged in any hedging
activity and do not believe adoption of this pronouncement will have a material
impact on our financial position or results of operation.

                                       17
<PAGE>
RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
                                                              YEARS ENDED DECEMBER 31,
                                                        ------------------------------------
                                                          2000          1999          1998
                                                        --------      --------      --------
<S>                                                     <C>           <C>           <C>
Revenues..............................................    100 %         100 %         100 %
Cost of revenues......................................     47            50            56
                                                          ---           ---           ---
  Gross profit........................................     53            50            44
                                                          ---           ---           ---
Operating expenses:
  Research and development............................     18            15            16
  Selling, general and administrative.................     44            41            35
  Restructuring.......................................     --            --             2
  Other nonrecurring charges..........................     --            --            11
                                                          ---           ---           ---
    Total operating expenses..........................     62            56            64
                                                          ---           ---           ---
Loss from operations..................................     (9)           (6)          (20)
  Other income (expense), net.........................      3             2             3
                                                          ---           ---           ---
Loss before income taxes..............................     (6)           (4)          (17)
  Income tax benefit..................................     (2)           (2)           (7)
                                                          ---           ---           ---
Net Loss..............................................     (4)%          (2)%         (10)%
                                                          ===           ===           ===
</TABLE>

YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999

    REVENUES.  Revenues of $54,664,000 for 2000 represent a 3% gain over 1999's
revenues of $52,839,000. Sales of the Orion 2000, which is designed for ATM
inverse multiplexing, was a major contributor to the revenue growth over last
year as market demand for fractional T3 applications continued to expand.
Partially offsetting this increase were revenue declines in the Multiplexer,
Service-Delivery Platforms and CSU/DSU product groups.

    The revenue improvement for 2000 versus 1999 came from our domestic
distributor channels, direct sales to network service providers (NSPs) and
shipments to international markets. Shipments to international locations
represented 14% of total revenues during 2000 and were 3% greater than in the
same period of 1999.

    GROSS PROFIT.  As a percentage of revenues, gross profit for 2000 was 53%
versus 50% in 1999. The improvement in gross profit margin from 1999 was
primarily the result of lower expenses related to excess and obsolete inventory,
improved manufacturing variances and lower warranty-related costs.

    RESEARCH AND DEVELOPMENT.  Research and development expenses grew by 23% to
$9,900,000 in 2000, from $8,049,000 in 1999. Higher R&D spending was mainly due
to increased headcount, higher average pay per employee, and an increase in
recruiting and relocation costs. The additional spending reflects our strategic
initiative to grow the business through investment in new product development.
We believe 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 increased 12% to $24,116,000 during 2000, as compared to $21,570,000 in
the same period of 1999. The incremental spending was due primarily to our
investment in our international sales force, additional sales commissions from
higher sales volume, recruiting costs and outside services and consulting fees.
Selling,

                                       18
<PAGE>
general and administrative expenses include charges from our majority
stockholder, Axel Johnson Inc. ("Axel Johnson"), for legal, accounting, tax,
treasury, human resources and administrative services. Charges for these
services were $452,000 for 2000 versus $438,000 in 1999.

    INTEREST AND OTHER INCOME.  Interest and other income was $1,760,000 for
2000 as compared to $1,247,000 for 1999. Interest income, which is the major
component of Interest and Other Income, was $1,842,000 for 2000, as compared to
$1,312,000 for the same period in 1999. The growth in interest income over 1999
was largely due to higher average market interest rates in 2000. Our investment
portfolio is 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.

    PROVISION FOR INCOME TAXES.  The effective tax benefit rate was 29% for
2000. The tax rate differs from the federal statutory rate primarily because of
state income taxes.

    At December 31, 2000, we had deferred tax assets of $15,790,000. These
assets largely relate to future expected tax benefits from the amortization of
intangible assets. The amortization of the intangible assets is deductible for
tax purposes in equal amounts over the next 12 years. The remaining deferred tax
assets relate to inventory reserves and accrued expenses. We have not recorded a
valuation allowance (for financial reporting purposes) against the deferred tax
assets because we believe it is more likely than not that the benefits are
realizable. However, realization of these assets depends on our ability to
generate taxable income in the future. Our belief in the likelihood of being
able to use the deferred tax assets is based on the following factors:

    - A significant portion of the deferred tax assets is deductible over the
      next 12 years.

    - Tax losses can be carried forward for 20 years.

    - A small portion of the losses can be carried back to a prior year.

    If we were to significantly reduce our estimate of future taxable income, we
would have to record an allowance against our deferred tax assets. Such a charge
could have a material adverse effect on our reported results of operations and
financial condition.

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 decline was the merger-related
consolidations of two of our largest customers, (WorldCom with MCI and AT&T with
IBM Global Network) and additional competition from alternative technologies.

    GROSS PROFIT.  As a percentage of revenues, gross profit grew to 50% in 1999
from 44% in 1998. The primary 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.

    RESEARCH AND DEVELOPMENT.  Research and development expenses were reduced by
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 lower research and development expenses were due to scaling back the
ATM Access projects and declines in operating expenses in 1999 resulting from
the 1998 corporate restructuring.

    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 grew to 41%
in 1999 from 35% in 1998. The reduction in expenses in absolute

                                       19
<PAGE>
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, we announced a corporate restructuring
designed to better align our expenses with anticipated revenues and to allow us
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, we reevaluated the intangible assets
associated with the 1997 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. We 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. We 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 we sold our former
headquarters, in which we had a one third ownership interest, for a gain to us
of $1,325,000. Excluding this one-time gain in 1998, other income was $491,000
higher in 1999 versus 1998 mainly 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.

LIQUIDITY AND CAPITAL RESOURCES

    We had a positive cash flow of $732,000 for the year ended December 31, 2000
versus a negative cash flow of ($3,256,000) for the year ended December 31,
1999. Our net loss in 2000 was almost entirely offset by non-cash items
consisting of depreciation and amortization. The major source of cash in 2000
came from our short-term investment activities and the proceeds of employee
stock purchases which more than offset our capital expenditures for 2000.

    Capital expenditures in 2000 were $1,527,000. These expenditures consisted
principally of the purchase of computers, software and test equipment.

    We have a revolving line of credit of $15,000,000 with Axel Johnson (the
"Credit Agreement"), which expires in December 2001. The Credit Agreement
contains various representations, covenants and events of default typical for
financing a business of our size and nature. Upon an event of default, any
borrowings under the line of credit shall become payable in full. To date we
have not found it necessary to use this line of credit. In addition to the
Credit Agreement, we have an administrative service agreement and a tax sharing
agreement with Axel Johnson, which regulates the on-going relationship between
the two entities. See Notes 1 and 3 of the Notes to the Consolidated Financial
Statements for more details.

                                       20
<PAGE>
    At December 31, 2000, we had cash and cash equivalents of $7,741,000 and
short-term investments of $20,238,000. We believe that working capital, together
with our line of credit and funds generated from operations, will provide
adequate liquidity to meet our operating and capital requirements at least
through 2001. Nonetheless, future events, such as the potential use of cash to
fund any significant losses that we might incur or acquisitions we might
undertake, might require us to seek additional capital. In that event, it is
possible we would not be able to obtain adequate capital on terms acceptable to
us, 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

    OUR SALES ARE CONCENTRATED ON A FEW LARGE CUSTOMERS.  We believe that our
relationships with large customers, particularly NSPs and ISPs, will be critical
to our future success. A small number of customers have accounted for a majority
of our revenues in each of the past several years. During 2000, 1999 and 1998,
two customers, WorldCom Inc. and its subsidiaries and AT&T, together accounted
for 39%, 41% and 44% of our revenues, respectively.

    None of our customers are contractually obligated to purchase any quantity
of products in any particular period, and product sales to major customers have
varied widely from quarter-to-quarter and year-to-year. Our current customers
might not continue to place orders with us, orders from existing customers might
not continue at the levels of previous periods and we might not be able to
obtain orders from new customers, including a recent easing of demand by CLECs.
Loss of, or a material reduction in, orders from one or more of our major
customers could have a material adverse effect on our business and operating
results.

    VARIOUS FACTORS CAUSING FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS; WE
DO NOT HAVE A SIGNIFICANT BACKLOG.  Our operating results have fluctuated
significantly in the past and may fluctuate in the future on a quarterly and
annual basis as a result of a number of factors, many of which are beyond our
control. A small number of customers have accounted for a significant percentage
of our 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 is
subject to change on limited notice, in addition to the ebbs and flows in our
customers' business conditions and the effect of competitors' product offerings.
We have experienced both accelerations and slowdowns in orders related to such
projects, causing changes in the sales level of a given quarter relative to both
the preceding and subsequent quarters. Since most of our sales are in the form
of large orders with short delivery times to a limited number of customers, our
backlog and consequent ability to predict revenues will continue to be limited.
In addition, announcements by us or our competitors of new products and
technologies could cause customers to defer, limit, or end purchases of our
existing products. In the event that we lose one or more large customers,
anticipated orders from major customers fail to materialize, or delivery
schedules are deferred or canceled as a result of the above factors or other
unanticipated factors, our business and operating results would be materially
adversely affected. Consequently, we believe that period-to-period comparisons
of our operating results are not necessarily meaningful and should not be relied
upon as indicative of future performance.

    Results in any period could also be affected by changes in market demand,
competitive market conditions, market acceptance of new or existing products,
increasing sales channel development costs, the cost and availability of
components, the mix of our customer base and sales channels, the mix of products
sold, our sales promotion activities, our ability to expand our sales and
marketing organization effectively, our ability to attract and retain key
technical and managerial employees and general economic conditions. We
established our expense levels for product development and other operating
expenses based on projected sales levels and margins, but expenses are
relatively fixed in the short

                                       21
<PAGE>
term. Accordingly, if sales are below expectations in any given period, our
inability to adjust spending proportionally in the short term may exacerbate the
adverse impact of a revenue shortfall on our operating results.

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

    GROSS MARGINS WILL NOT ATTAIN EARLIER LEVELS.  Although our gross profit
margin percentage in 2000 was higher than in 1999, particularly due to the
impact in 1999 of additional expenses related to excess and obsolete inventory,
we do not expect our gross margins percentage to reach the levels achieved
before 1998 primarily due to increased competition. In addition, we are
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.

    GROWTH INITIATIVE RESULTS IN CURRENT LOSSES.  The Board of Directors, on
November 17, 1999, approved funding for an aggressive program to develop new
products and expand into new markets. We reported operating losses for 2000
partly as a result of these strategic initiatives. Our continued emphases on new
product development and expansion into new markets are expected to result in
continued losses for 2001.

    WE DEPEND ON RECENTLY-INTRODUCED PRODUCTS AND PRODUCTS UNDER
DEVELOPMENT.  We expect sales of our established products to decline over time.
Therefore, our future operating results are highly dependent on market
acceptance of our recently-introduced products and products that may be
introduced in the future. These include, for example, the Larscom 3000, Larscom
6000 and the TerraMux, which have only recently been introduced, and our
proposed future "intelligent access" products. There can be no assurance that
such products will achieve widespread market acceptance. In addition, we have,
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.
Inability to develop and introduce new products or product versions in a timely
manner, due to resource constraints or technological or other reasons, or to
achieve timely and widespread market awareness and acceptance of our new
products or releases would have a material adverse effect on our business and
operating results.

    WE DEPEND HEAVILY ON COMPONENT AVAILABILITY AND KEY SUPPLIERS.  On-time
delivery of our products depends upon the availability of components and
subsystems used in our products. We depend upon our suppliers to manufacture,
assemble and deliver components in a timely and satisfactory manner. We obtain
components and license certain embedded software from numerous single sources.
We do not believe we would be able to develop alternative sources for certain
essential components used in our products. In addition, while we believe we
would be able to develop alternative sources for most of the other components
and software used in our products without incurring substantial additional
costs, there can be no assurance that we would be able to do so, if required.
Any inability by our suppliers to meet our 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 our business and operating
results. We generally do not have any long-term contracts with our suppliers. It
is possible that our suppliers will not continue to be able and willing to meet
our future requirements.

    RAPID TECHNOLOGICAL CHANGE COULD HURT OUR ABILITY TO COMPETE.  The
telecommunications equipment industry is characterized by rapidly changing
technologies and frequent new product introductions. The rapid development of
new technologies increases the risk that current or new competitors could
develop products that would reduce the competitiveness of our products. Our
success

                                       22
<PAGE>
will depend to a substantial degree upon our ability to respond to changes in
technology and customer requirements. This will require the timely development
and marketing of new products and enhancements on a cost-effective basis. There
can be no assurance that we will be successful in developing, introducing or
managing the transition to new or enhanced products or that any such products
will be responsive to technological changes or will gain market acceptance. If
we were to be unsuccessful or to incur significant delays in developing and
introducing such new products or enhancements, our business and operating
results could be materially adversely affected. For example, we are aware of a
competing technology with network monitoring capabilities that can be used
instead of the Split-T product that we sell primarily to WorldCom Inc. If
WorldCom Inc. customers were to opt for the alternative technology as part of
their services, our business and operating results would be materially adversely
affected.

    WE ARE CONTROLLED 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 control the direction and
policies of Larscom absolutely, including mergers, the payment of dividends,
consolidations, the sale of all or substantially all of the assets of Larscom
and the election of the Board of Directors of Larscom, and to prevent or cause a
change in control of Larscom.

    OUR ABILITY TO MANAGE OPERATIONS.  To grow our business, we must continue to
attract, train, motivate and manage new employees successfully, integrate new
management and employees into our overall operations and continue to improve our
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. We
have had past difficulty in filling all our hiring requisitions. Our failure to
manage any expansion or contraction effectively could have a material adverse
effect on our business and operating results.

    WE ARE TRYING TO ENTER MORE INTERNATIONAL MARKETS AND INCREASE OUR
ALTERNATIVE DISTRIBUTION CHANNELS.  Sales outside the US approximated 14% of our
revenues for 2000. 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 our products internationally, we 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 our products in countries
outside the US could inhibit or preclude our marketing and sales efforts in such
countries, which could have a material adverse effect on our business and
operating results.

    We have developed 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 continue to be handled by our direct sales force.) As part
of this strategy we have appointed certain sales people to sign up resellers and
assist them in their sales efforts. There are a number of risks associated with
an indirect distribution channel. The risks include a reduction in our 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 our products, a potential
build up of inventories at resellers and new methods of advertising and
promoting products which will result in additional expenses.

    We market our products internationally through non-exclusive distribution
agreements with international distributors and systems integrators. To focus on
sales to Europe, the Middle East and Africa, we have 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

                                       23
<PAGE>
smaller customers. During 2000, we established direct sales offices in Hong Kong
and Singapore to focus on the Asian market. If these initiatives are not
successful, our results could be materially adversely affected.

    WE MUST COMPLY WITH REGULATIONS AND EVOLVING INDUSTRY STANDARDS.  The market
for our products is characterized by the need to comply with a significant
number of communications regulations and standards, some of which are evolving
as new technologies are deployed. In the 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 and DSL evolve, we may be required to modify our existing products or
develop and support new versions of our products. The failure of our products to
comply, or delays in compliance, with the various existing and evolving industry
standards could delay introduction of our products, which in turn could have a
material adverse effect on our business and operating results.

    WE MAY ACQUIRE BUSINESSES OR TECHNOLOGIES THAT ARE DIFFICULT TO
INTEGRATE.  As part of our efforts to grow our business, we review acquisition
and strategic alliance prospects that would potentially complement our existing
product offerings, augment our market coverage, enhance our technological
capabilities or offer growth opportunities. Any future acquisitions by us could
result in potentially dilutive issuances of equity securities and/or the
issuances of debt and the assumption of contingent liabilities, any of which
could have a material adverse effect on our business and operating results and/
or the price of our Class A Common Stock. As a result of the ownership interest
of Axel Johnson in Larscom, we will not be able to use pooling of interests
accounting for any future acquisition. Accordingly, such acquisitions could
result in amortization of goodwill and other charges typically associated with
purchase accounting. Any future strategic alliance may entail illiquid and risky
investments in the equity of private companies, and the payment of substantial
upfront fees to obtain rights to technologies which have not yet been tested in
the marketplace. For example, in 2000 we paid $2,000,000 to privately-held
Issanni Systems, Inc. to license the technology which is the basis for the
Larscom 3000. We also agreed to purchase equity securities in Issanni
Systems, Inc. Acquisitions and strategic alliances 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 we have limited or no prior experience and
potential loss of key employees of acquired organizations. No assurance can be
given as to our ability to integrate any businesses, products, technologies or
personnel that might be acquired or licensed in the future successfully, and our
failure to do so could have a material adverse effect on our business and
operating results.

    WE MAY NOT BE ABLE TO PROTECT OUR INTELLECTUAL PROPERTY AND PROPRIETARY
INFORMATION.  We rely upon a combination of trade secrets, contractual
restrictions, copyrights, trademark laws and patents to establish and protect
proprietary rights in our products and technologies. Although we have been
issued only one US patent to date, we believe that the success of our business
depends primarily on our proprietary technology, information, processes and
expertise, rather than patents. Much of our proprietary information and
technology is not patented and may not be patentable. There can be no assurance
that we will be able to protect our technology or that competitors will not be
able to develop similar technology independently. We have entered into
confidentiality and invention assignment agreements with employees, and entered
into non-disclosure agreements with suppliers, distributors and appropriate
customers so as to limit access to and disclosure of our proprietary
information. There can be no assurance that these statutory and contractual
arrangements will deter misappropriation of our technologies or discourage
independent third-party development of similar technologies. In the event such
arrangements are insufficient, our business and operating results could be
materially adversely affected.

                                       24
<PAGE>
    WE PROVIDE OUR CUSTOMERS A THREE-YEAR PRODUCT WARRANTY.  Complex products
such as ours might contain undetected errors or failures when first introduced
or as new versions are released. Although we believe that our reserves for
estimated future warranty costs are adequate, our estimates, particularly those
related to products that have been recently introduced, might not be correct.
Warranty claims in excess of those expected could have a material adverse effect
on our business and operating results.

    WE HAVE BEEN REQUIRED TO PLACE LAST-TIME BUY PURCHASES TO COVER OBSOLETE
COMPONENTS.  Because of component obsolescence from our manufacturers, we have
been required to place last-time buy purchase orders to cover the expected
demand for these components. These purchase commitments generally cover between
one and two years of expected demand for these components. As of December 31,
2000, we are obligated to purchase $324,000 of these components by the end of
2001. Although we believe that we will use all of the quantities we have agreed
to purchase, there can be no assurance that our estimates are correct. If our
estimates are not correct and requirements for a component are less or more than
anticipated, it could have a material adverse effect on our business and results
of operations.

    OUR BUSINESS COULD BE MATERIALLY AND ADVERSELY AFFECTED BY THE INTEGRATION
AND FUNCTIONALITY OF SWITCHES AND ROUTERS.  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.

    WE HAVE NOT CONDUCTED A FORMAL PATENT SEARCH RELATING TO THE TECHNOLOGY USED
IN OUR PRODUCTS.  We believe that the success of our business depends primarily
on our proprietary technology, information, processes and expertise, rather than
patents. From time to time, third parties may assert exclusive patent,
copyright, trademark and other intellectual property rights to technologies that
are important to us. Since patent applications in the US are not publicly
disclosed until the patent is issued, applications may have been filed by
competitors of ours that could relate to our products. Software comprises a
substantial portion of the technology in our products. The scope of protection
accorded to patents covering software-related inventions is evolving and is
subject to uncertainty, which may increase the risk and cost to us if we
discover third-party patents related to our software products or if such patents
are asserted against us in the future. In the event of litigation to determine
the validity of any third-party claims, such litigation, whether or not
determined in favor of us, could result in significant expense to us and divert
the efforts of our technical and management personnel. In the event of an
adverse ruling in such litigation, we might be required to pay damages,
discontinue the use and sale of infringing products, and expend significant
resources to develop non-infringing technology or obtain licenses from third
parties. There can be no assurance that licenses from third parties would be
available on acceptable terms, if at all. A successful claim against us and our
failure to develop or license a substitute technology could have a material
adverse effect on our business and operating results.

                                       25
<PAGE>
ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

    INTEREST RATE RISK.  We do not use derivative financial instruments in our
investment portfolio. Our investment portfolio 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."
Investments in both fixed-rate and floating-rate interest-earning instruments
carry a degree of interest rate risk. Fixed-rate securities may have their fair
market value adversely impacted due to a rise in interest rates, while
floating-rate securities may produce less income than expected if interest rates
fall. Because of these factors, our future investment income might fall short of
expectations or we might suffer losses in principal if we are forced to sell
securities that have declined in market value.

    FOREIGN CURRENCY EXCHANGE RATE RISK.  Our international sales are typically
made in US dollars and are generally not subjected to foreign currency exchange
rate risk. However, certain of our sales and marketing expenses are incurred in
local currencies. Consequently, our international results of operations are
subject to foreign exchange rate fluctuations. We do not currently hedge against
foreign currency rate fluctuations. Gains and losses from such fluctuations have
not been material to our consolidated results.

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

                              LARSCOM INCORPORATED

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

    Consolidated Balance Sheets as of December 31, 2000 and
     1999...................................................     29

    Consolidated Statements of Operations for the years
     ended December 31, 2000, 1999 and 1998.................     30

    Consolidated Statements of Cash Flows for the years
     ended December 31, 2000, 1999 and 1998.................     31

    Consolidated Statements of Stockholder's Equity for the
     years ended December 31, 2000, 1999 and 1998...........     32

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

FINANCIAL STATEMENT SCHEDULES:

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

                                       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, 2000 and
1999, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2000 in conformity with accounting
principles generally accepted in the United States of America. In addition, in
our opinion, the financial statement schedule listed in the accompanying index
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
These financial statements and financial statement schedule are the
responsibility of the Larscom Incorporated management; our responsibility is to
express an opinion on these financial statements and financial statement
schedule based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

PRICEWATERHOUSECOOPERS LLP
San Jose, California
January 24, 2001

                                       28
<PAGE>
                              LARSCOM INCORPORATED

                          CONSOLIDATED BALANCE SHEETS

                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                              -------------------
                                                                2000       1999
                                                              --------   --------
<S>                                                           <C>        <C>
                                     ASSETS
Current assets:
  Cash and cash equivalents.................................  $  7,741   $  7,009
  Short-term investments....................................    20,238     22,199
  Accounts receivable, net..................................     7,044      7,769
  Inventories, net..........................................     6,816      5,821
  Deferred income taxes.....................................     4,040      3,961
  Income taxes receivable...................................       192      1,750
  Prepaid expenses and other current assets.................     4,154      1,671
                                                              --------   --------
    Total current assets....................................    50,225     50,180
Property and equipment, net.................................     4,111      4,781
Deferred income taxes.......................................    11,750     11,419
Other non-current assets, net...............................       234        482
                                                              --------   --------
    Total assets............................................  $ 66,320   $ 66,862
                                                              ========   ========

                      LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable..........................................  $  4,482   $  3,464
  Accrued expenses and other current liabilities............     8,348      7,728
  Due to Axel Johnson.......................................        --        341
                                                              --------   --------
    Total current liabilities...............................    12,830     11,533
Other non-current liabilities...............................       448        534
                                                              --------   --------
    Total liabilities.......................................    13,278     12,067
                                                              --------   --------
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; 8,716 shares issued and outstanding.........        87         84
  Class B Common Stock, $0.01 par value; 11,900 shares
    authorized; 10,000 issued and outstanding...............       100        100
  Additional paid-in capital................................    82,598     81,860
  Accumulated other comprehensive loss......................        (1)        (6)
  Accumulated deficit.......................................   (29,742)   (27,243)
                                                              --------   --------
    Total stockholders' equity..............................    53,042     54,795
                                                              --------   --------
    Total liabilities and stockholders' equity..............  $ 66,320   $ 66,862
                                                              ========   ========
</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,
                                                              ------------------------------
                                                                2000       1999       1998
                                                              --------   --------   --------
<S>                                                           <C>        <C>        <C>
Revenues....................................................  $54,664    $52,839    $ 72,733
Cost of revenues............................................   25,942     26,423      40,917
                                                              -------    -------    --------
  Gross profit..............................................   28,722     26,416      31,816
                                                              -------    -------    --------
Operating expenses:
  Research and development..................................    9,900      8,049      11,463
  Selling, general and administrative.......................   24,116     21,570      25,833
  Restructuring.............................................       --         --       1,214
  Other nonrecurring charges................................       --         --       7,915
                                                              -------    -------    --------
    Total operating expenses................................   34,016     29,619      46,425
                                                              -------    -------    --------
Loss from operations........................................   (5,294)    (3,203)    (14,609)
  Interest and other income.................................    1,760      1,247       2,085
                                                              -------    -------    --------
Loss before income taxes....................................   (3,534)    (1,956)    (12,524)
  Income tax benefit........................................   (1,035)      (684)     (5,436)
                                                              -------    -------    --------
Net loss....................................................  $(2,499)   $(1,272)   $ (7,088)
                                                              =======    =======    ========

Basic and diluted net loss per share........................  $ (0.13)   $ (0.07)   $  (0.39)
Basic and diluted weighted average shares...................   18,591     18,333      18,216
</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,
                                                              -------------------------------
                                                                2000       1999       1998
                                                              --------   --------   ---------
<S>                                                           <C>        <C>        <C>
Cash flows from operating activities:
  Net loss..................................................  $ (2,499)  $ (1,272)  $  (7,088)
  Adjustments to reconcile net loss to net cash provided by
    operations:
    Depreciation & amortization.............................     2,404      3,199       5,690
    Gain from sale of building..............................        --         --      (1,329)
    Intangible asset write-down.............................        --         --       7,915
    Deferred income taxes...................................      (410)       713      (5,290)
    Other noncash items.....................................       (70)       338         303
    Changes in assets and liabilities, net of acquisition
      effects:
      Accounts receivable...................................       726       (230)      9,972
      Inventories...........................................      (995)     2,792       4,714
      Prepaid expenses and other assets.....................    (2,483)       129        (251)
      Other assets..........................................        24         --          --
      Accounts payable......................................     1,019       (241)     (4,384)
      Income taxes receivable...............................     1,558        758      (3,617)
      Accrued expenses and other current liabilities........       682         97      (4,800)
                                                              --------   --------   ---------
Net cash (used) provided by operating activities............       (44)     6,283       1,835
                                                              --------   --------   ---------

Cash flows from investing activities:
  Purchases of short-term investments.......................   (27,338)   (32,116)   (107,806)
  Sales of short-term investments...........................    25,599     17,464      59,788
  Maturities of short-term investments......................     3,700      6,355      50,714
  Purchase of property and equipment........................    (1,527)    (1,066)     (1,795)
  Proceeds from sale of building............................        --         --       1,700
                                                              --------   --------   ---------
Net cash provided (used) by investing activities............       434     (9,363)      2,601
                                                              --------   --------   ---------

Cash flows from financing activities:
  Net proceeds from sales of Class A Common Stock...........       741        224         710
  Repayment of long-term debt...............................       (58)      (194)       (437)
  Advances from (repayments to) Axel Johnson................      (341)      (206)     (2,698)
                                                              --------   --------   ---------
Net cash (used) provided by financing activities............       342       (176)     (2,425)
                                                              --------   --------   ---------
Increase (decrease) in cash and cash equivalents............       732     (3,256)      2,011
Cash and cash equivalents at beginning of year..............     7,009     10,265       8,254
                                                              --------   --------   ---------
Cash and cash equivalents at end of year....................  $  7,741   $  7,009   $  10,265
                                                              ========   ========   =========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid...............................................  $      4   $      8   $      34
                                                              ========   ========   =========
Income taxes paid...........................................  $     72   $    144   $   3,914
                                                              ========   ========   =========
</TABLE>

   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
                                 COMMON STOCK          COMMON STOCK       ADDITIONAL       OTHER                         TOTAL
                              -------------------   -------------------    PAID-IN     COMPREHENSIVE   ACCUMULATED   STOCKHOLDERS'
                               SHARES     AMOUNT     SHARES     AMOUNT     CAPITAL     INCOME (LOSS)     DEFICIT        EQUITY
                              --------   --------   --------   --------   ----------   -------------   -----------   -------------
<S>                           <C>        <C>        <C>        <C>        <C>          <C>             <C>           <C>
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 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 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
Comprehensive income (loss):
  Net loss..................      --        --           --        --           --           --           (2,499)        (2,499)
  Foreign currency
    translation
    adjustment..............      --        --           --        --           --            5               --              5
    Comprehensive loss......
Issuance under stock
  plans.....................     337         3           --        --          738           --               --            741
                               -----       ---       ------      ----      -------          ---         --------        -------
Balance at December 31,
  2000......................   8,716       $87       10,000      $100      $82,598          $(1)        $(29,742)       $53,042
                               =====       ===       ======      ====      =======          ===         ========        =======

<CAPTION>

                              COMPREHENSIVE
                              INCOME (LOSS)
                              -------------
<S>                           <C>
Balance at December 31,
  1997......................
Comprehensive income (loss):
  Net loss..................     $(7,088)
  Foreign currency
    translation
    adjustment..............           2
                                 -------
    Comprehensive 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 loss......     $(1,280)
                                 =======
Issuance under stock
  plans.....................
Balance at December 31,
  1999......................
Comprehensive income (loss):
  Net loss..................     $(2,499)
  Foreign currency
    translation
    adjustment..............           5
                                 -------
    Comprehensive loss......     $(2,494)
                                 =======
Issuance under stock
  plans.....................
Balance at December 31,
  2000......................
</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, 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. We operate in one industry segment.

PRINCIPLES OF CONSOLIDATION

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

CONCENTRATIONS OF CREDIT RISK AND CUSTOMER CONCENTRATION

    Financial instruments, which subject us to concentrations of credit risk,
consist primarily of investments in certain debt securities and accounts
receivable. We are exposed to credit risks in the event of default by the
financial institutions or issuers of investments to the extent recorded on the
balance sheet. Our accounts receivable are derived from sales to customers
primarily in the United States. We perform ongoing credit evaluations of our
customers, and generally require no collateral from our customers. We maintain
reserves for potential credit losses, and to date have not experienced any
material losses. Receivables from the two largest customers represented 45% and
28% of net accounts receivable at December 31, 2000 and 1999, respectively.

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

<TABLE>
<CAPTION>
                                                              YEARS ENDED DECEMBER 31,
                                                        ------------------------------------
                                                          2000          1999          1998
                                                        --------      --------      --------
<S>                                                     <C>           <C>           <C>
WorldCom Inc..........................................     28%           28%           32%
AT&T..................................................     11%           13%           12%
</TABLE>

MANAGEMENT ESTIMATES AND ASSUMPTIONS

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

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.

    We participate in Axel Johnson's centralized cash management system. In
general, all of our cash receipt and disbursement transactions are processed
through the Axel Johnson centralized cash management system.

                                       33
<PAGE>
                              LARSCOM INCORPORATED

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 1--THE COMPANY AND A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(CONTINUED)
SHORT-TERM INVESTMENTS

    We account for our short-term investments by determining the appropriate
classification of our investments in debt and equity securities at the time of
purchase based on maturity and re-evaluate such determination at each balance
sheet date. All of the securities we owned at December 31, 2000 and 1999
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 our
short-term investments approximates 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 amortized using
the straight-line method over the shorter of the estimated useful lives or the
lease term of the respective assets. When property and equipment are retired or
otherwise disposed of, the cost and related accumulated depreciation are removed
from the accounts and the resulting gain or loss is included in the current
operations. Costs of repairs and maintenance are expensed as incurred.

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
we record impairment of the carrying value, if any, based on the estimated
future value of the discounted cash flows.

WARRANTY

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

REVENUE RECOGNITION

    Revenue from product sales is generally recognized upon shipment of the
product. We do not recognize revenue to distributors when a right of return
exists until we are notified by the distributor

                                       34
<PAGE>
                              LARSCOM INCORPORATED

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 1--THE COMPANY AND A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(CONTINUED)
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.

INCOME TAXES

    Deferred tax assets and liabilities are recognized for the expected tax
consequences of temporary differences between the tax bases of assets and
liabilities and their financial statement reported amounts. A valuation
allowance is provided against deferred tax assets if it is more likely than not
that 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 consist of the incremental common shares issuable upon the exercise of
stock options (using the Treasury Stock Method). Common equivalent shares are
excluded from the computation if their effect is antidilutive. The following
table sets forth the computation of basic and diluted loss per share:

<TABLE>
<CAPTION>
                                                     YEARS ENDED DECEMBER 31,
                                              ---------------------------------------
                                                2000           1999           1998
                                              ---------      ---------      ---------
                                               (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                           <C>            <C>            <C>
Net loss....................................   $(2,499)       $(1,272)       $(7,088)
Weighted average Class A and B Common Stock
  outstanding...............................    18,591         18,333         18,216
Basic and diluted loss per share............   $ (0.13)       $ (0.07)       $ (0.39)
</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"), we are 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.

                                       35
<PAGE>
                              LARSCOM INCORPORATED

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 1--THE COMPANY AND A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(CONTINUED)
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 December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") 101, "Revenue Recognition" which provides
guidance 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 adoption of SAB 101 has not had a material effect on
our financial position or results of operations.

    In March 2000, the FASB issued Interpretation No. 44 ("FIN 44") "Accounting
for Certain Transactions involving Stock Compensation -- an Interpretation of
APB Opinion No. 25." FIN 44 clarifies the application of APB Opinion No. 25
("Opinion 25") for (a) the definition of an employee for purposes of applying
Opinion 25, (b) the criteria for determining whether a plan qualifies as a
noncompensatory plan, (c) the accounting consequence of various modifications to
the terms of a previously fixed stock option or award and (d) the accounting for
an exchange of stock compensation awards in a business combination. FIN 44 was
effective July 1, 2000 but certain conclusions cover specific events that occur
after either December 15, 1998 or January 12, 2000. The adoption of FIN 44 has
not resulted in a material effect on our 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,
                                                           -------------------
                                                             2000       1999
                                                           --------   --------
                                                             (IN THOUSANDS)
<S>                                                        <C>        <C>
Accounts receivable, net:
  Gross accounts receivable..............................  $ 7,624    $  8,274
  Less: Allowance for doubtful accounts..................     (580)       (505)
                                                           -------    --------
                                                           $ 7,044    $  7,769
                                                           =======    ========
Inventories, net:
  Raw materials..........................................  $ 5,067    $  3,203
  Work in process........................................    1,297       2,338
  Finished goods.........................................    4,494       3,842
  Inventory reserves.....................................   (4,042)     (3,562)
                                                           -------    --------
                                                           $ 6,816    $  5,821
                                                           =======    ========
Property and equipment, net:
  Machinery and equipment................................  $ 8,596    $  8,229
  Computers and software.................................    8,486       7,734
  Leasehold improvements.................................    2,094       2,093
  Furniture and fixtures.................................    1,362       1,203
                                                           -------    --------
                                                            20,538      19,259
  Less: Accumulated depreciation.........................  (16,427)    (14,478)
                                                           -------    --------
                                                           $ 4,111    $  4,781
                                                           =======    ========

The depreciation charge for the years ending December 31,
  2000 and 1999 was $2,180,000 and $2,960,000
  respectively.

Other non-current assets, net:
  Goodwill...............................................  $   854    $    854
  Other intangible assets................................    2,192       2,192
                                                           -------    --------
                                                             3,046       3,046
  Less: Accumulated amortization.........................   (2,822)     (2,598)
  Other..................................................       10          34
                                                           -------    --------
                                                           $   234    $    482
                                                           =======    ========
Accrued expenses and other current liabilities:
  Accrued compensation and related expenses..............  $ 3,077    $  2,407
  Accrued warranty.......................................    1,593       2,087
  Other current liabilities..............................    3,678       3,234
                                                           -------    --------
                                                           $ 8,348    $  7,728
                                                           =======    ========
</TABLE>

                                       37
<PAGE>
                              LARSCOM INCORPORATED

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 3--RELATED PARTY TRANSACTIONS:

TRANSACTIONS WITH AXEL JOHNSON

    As of December 31, 2000, Axel Johnson owned 53% of Class A and B Common
Stock of Larscom and controlled 82% of the voting interest. Related party
transactions with Axel Johnson not disclosed elsewhere in the consolidated
financial statements are as follows:

(DUE TO) DUE FROM AXEL JOHNSON

    Amounts (due to) or due from Axel Johnson consist of cash remittances made
by us to Axel Johnson from our operating bank accounts offset by cash advances
to us from Axel Johnson for purchases of property and equipment and fluctuating
working capital needs. Neither Axel Johnson nor Larscom Incorporated has charged
interest on the balances due. The following is an analysis of the balance (due
to) or due from Axel Johnson:

<TABLE>
<CAPTION>
                                                       YEARS ENDED DECEMBER 31,
                                                    ------------------------------
                                                      2000       1999       1998
                                                    --------   --------   --------
                                                            (IN THOUSANDS)
<S>                                                 <C>        <C>        <C>
Balance at beginning of year......................  $  (341)   $  (547)   $(3,243)
Cash remittances to Axel Johnson, net of cash
  advances........................................    4,526      3,973      7,305
Charges to (from) Axel Johnson for:
  Income taxes....................................       --         40        367
  Pension and thrift plan.........................   (2,462)    (1,994)    (2,563)
  Health insurance and workers' compensation......     (728)      (845)      (828)
  Administrative services.........................     (452)      (438)      (425)
  Property, liability and general insurance.......     (302)      (244)      (857)
  Line of credit fees.............................      (76)       (75)       (75)
  Other charges...................................      (94)      (211)      (228)
                                                    -------    -------    -------
  Balance at end of year..........................  $    71    $  (341)   $  (547)
                                                    =======    =======    =======
</TABLE>

    Amounts due from Axel Johnson at December 31, 2000 are included in "Prepaid
expenses and other current assets" on the face of the Consolidated Balance
Sheet.

EMPLOYEE HEALTH AND WELFARE PROGRAMS

    We participate in various employee benefits programs sponsored by Axel
Johnson. These programs include medical, dental and life insurance and workers'
compensation. In general, we reimburse Axel Johnson for our 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. We recorded expenses
related to the reimbursement of these costs of approximately $728,000, $845,000
and $828,000 in 2000, 1999 and 1998, respectively. We believe the allocation by
Axel Johnson of the proportionate cost is not necessarily indicative of the
costs that would have been incurred had we maintained our own benefit plans.

ADMINISTRATIVE SERVICES

    Axel Johnson provides certain functional services to us, including certain
treasury, accounting, tax, internal audit, legal and human resources. The costs
of these services have been allocated to us based

                                       38
<PAGE>
                              LARSCOM INCORPORATED

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 3--RELATED PARTY TRANSACTIONS: (CONTINUED)
on estimates by Axel Johnson of actual costs incurred. We believe that such
allocations are reasonable. Such charges and allocations are not necessarily
indicative of the costs that would have been incurred if we had been a separate
entity. The allocated costs of these services amounting to $452,000, $438,000
and $425,000 in 2000, 1999 and 1998, respectively, has been included in selling,
general and administrative expenses in the consolidated statements of
operations.

CREDIT AGREEMENT

    Larscom Incorporated 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 us in an aggregate amount of
$15,000,000. The Credit Agreement expires in December 2001. 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, we are required to
pay a commitment fee of 0.5% per annum on the unused portion of the Credit
Agreement. We are in compliance with certain covenants under the Credit
Agreement. As of December 31, 2000, $15,000,000 was available, and during 2000
and 1999, no borrowings were made under the Credit Agreement.

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, we 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 us and 1,200,000 shares were sold by Axel Johnson. We 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 us and 700,000 were sold by Axel Johnson. Net
proceeds to us in January 1997 were $3,827,000. Axel Johnson owns all of our
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>
                                                       YEARS ENDED DECEMBER 31,
                                                    ------------------------------
                                                      2000       1999       1998
                                                    --------   --------   --------
                                                            (IN THOUSANDS)
<S>                                                 <C>        <C>        <C>
Current:
  Federal.........................................  $  (770)   $(1,585)   $  (158)
  State...........................................      102        152        (32)
  Foreign.........................................       43         36         44
                                                    -------    -------    -------
                                                       (625)    (1,397)      (146)
                                                    -------    -------    -------
Deferred:
  Federal.........................................     (554)       604     (4,299)
  State...........................................      144        109       (991)
  Foreign.........................................       --         --         --
                                                    -------    -------    -------
                                                       (410)       713     (5,290)
                                                    -------    -------    -------
Income tax benefit................................  $(1,035)   $  (684)   $(5,436)
                                                    =======    =======    =======
</TABLE>

    The following is a reconciliation of the US federal income tax rate to our
effective income tax rate:

<TABLE>
<CAPTION>
                                                              YEARS ENDED DECEMBER 31,
                                                        ------------------------------------
                                                          2000          1999          1998
                                                        --------      --------      --------
<S>                                                     <C>           <C>           <C>
Provision at statutory rate...........................    (35)%         (35)%         (35)%
Federal tax exempt interest income....................     --            (1)           (2)
State income taxes, net of federal tax benefits.......      4             9            (5)
Other.................................................      2            (8)           (1)
                                                          ---           ---           ---
Effective income tax rate.............................    (29)%         (35)%         (43)%
                                                          ===           ===           ===
</TABLE>

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

<TABLE>
<CAPTION>
                                                               DECEMBER 31,
                                                            -------------------
                                                              2000       1999
                                                            --------   --------
                                                              (IN THOUSANDS)
<S>                                                         <C>        <C>
Deferred tax assets:
  Inventory...............................................  $ 1,815    $ 1,752
  Accrued expenses........................................    2,465      2,310
  Reserves................................................      402        609
  Intangible assets.......................................    6,511      7,053
  Depreciation and amortization...........................    3,486      3,656
  NOL carryforward........................................    1,111         --
                                                            -------    -------
Net deferred tax asset....................................  $15,790    $15,380
                                                            =======    =======
</TABLE>

                                       40
<PAGE>
                              LARSCOM INCORPORATED

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 5--INCOME TAXES: (CONTINUED)
    In accordance with Statement of Financial Accounting Standards No. 109
("SFAS 109"), "Accounting for Income Taxes," we have not recorded any valuation
allowance against deferred tax assets because we have determined that it is more
likely than not that the deferred tax assets will be realized. Realization of
these assets is primarily dependent on our ability to generate taxable income in
the future. Some of the factors that we used to make this determination are: a
significant portion of the deferred tax assets is deductible over the next
twelve years; tax losses can be carried forward for twenty years; and a small
portion of the losses can be carried back to a prior year. The amount of the
deferred tax assets considered realizable could be reduced in the near term if
our estimates of future taxable income are reduced. This could result in a
charge to net income.

NOTE 6--EMPLOYEE BENEFIT PLANS:

THRIFT PLAN

    We participate in the Axel Johnson Thrift Plan (the "Thrift Plan") qualified
under Section 401(k) of the Internal Revenue Code. The Thrift Plan allows
employees to defer up to 21% of their compensation not to exceed the amount
allowed by the applicable Internal Revenue Service guidelines. Effective
February 1, 2000 we matched 100% 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 2000. Company
contributions vest ratably over five years of service or two years of plan
participation, whichever occurs first. Contributions by Larscom Incorporated
under the Thrift Plan amounted to $880,000, $529,000 and $640,000 in 2000, 1999
and 1998, respectively.

PENSION PLAN

    Effective March 31, 1998, our employees ceased to accrue benefits under the
Axel Johnson sponsored defined benefit pension plan, the Axel Johnson Inc.
Retirement Plan. Accrued liabilities prior to March 31, 1998 will remain in the
Axel Johnson pension plan until benefits are paid to employees upon termination
or retirement in a manner prescribed by the plan. After March 1998, our
employees also ceased to accrue benefits under Axel Johnson's unfunded pension
plan, the Axel Johnson Inc. Retirement Restoration Plan, for employees whose
benefits under the defined pension plan are reduced due to limitations under
federal tax laws.

                                       41
<PAGE>
                              LARSCOM INCORPORATED

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 6--EMPLOYEE BENEFIT PLANS: (CONTINUED)
    The following sets forth our benefit obligation and the net periodic pension
costs for both plans as required by Statement of Financial Accounting Standards
No. 132, "Employers' Disclosures about Pensions and Other Post-retirement
Benefits":

<TABLE>
<CAPTION>
                                                             2000          1999
                                                           --------      --------
                                                               (IN THOUSANDS)
<S>                                                        <C>           <C>
Reconciliation of projected benefit obligations
  Projected benefit obligation at January 1,.............   $4,247        $4,339
  Service cost...........................................       15            15
  Interest cost..........................................      326           312
  Actuarial (gain)/loss..................................      302          (285)
  Benefits paid..........................................     (201)         (134)
                                                            ------        ------
  Projected benefit obligation at December 31,...........   $4,689        $4,247
                                                            ======        ======

Weighted-average assumptions as of December 31,
  Discount rate..........................................     7.50%         7.75%
  Expected return on plan assets.........................     9.50%         9.50%
  Rate of compensation increase..........................     4.50%         4.50%

Components of net periodic (benefit) cost
  Service cost...........................................   $   15        $   15
  Interest cost..........................................      326           312
  Expected return on assets..............................     (365)         (331)
  Net amortization.......................................       (7)           (5)
                                                            ------        ------
  Net periodic benefit...................................   $  (31)       $   (9)
                                                            ======        ======
</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 Larscom Incorporated to the total PBO of the
defined benefit pension plan. The PBO for our employees with accrued benefits in
the unfunded Retirement Restoration Plan is $311,000 and $315,000 as of
December 31, 2000 and 1999, respectively.

EMPLOYEE STOCK PURCHASE PLAN

    We 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 and stockholders approved an additional 100,000 share allotment for
the Purchase Plan in 2000. 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 Class A Common Stock in any one calendar year, or 1,000 shares
in each offering period. A total of 92,000, 100,000 and 129,000 shares of
Class A Common Stock were issued under the Purchase Plan in 2000, 1999 and 1998,
respectively.

                                       42
<PAGE>
                              LARSCOM INCORPORATED

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 6--EMPLOYEE BENEFIT PLANS: (CONTINUED)
STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS

    We adopted a Stock Option Plan for Non-Employee Directors (the "Directors'
Plan") and reserved a total of 205,000 shares of Class A Common Stock for
issuance thereunder. The Board of Directors and stockholders approved an
additional 100,000 share allotment for the Directors Plan in 2000. 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
Larscom Incorporated or of Axel Johnson with regard to their service as
directors. 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 installment 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

    We 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 and stockholders approved an additional 2,800,000 share
allotment for the Incentive Plan in 2000. 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 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
granted prior to May 2000 generally vest over a four-year period from the date
of grant. Option grants in May 2000 and thereafter generally vest over a
three-year period.

                                       43
<PAGE>
                              LARSCOM INCORPORATED

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 6--EMPLOYEE BENEFIT PLANS: (CONTINUED)
    The following table summarizes activity under the Directors' and the
Incentive Plans:

<TABLE>
<CAPTION>
                                                                OPTIONS OUTSTANDING
                                       ---------------------------------------------------------------------
                                                DIRECTORS' PLAN                     INCENTIVE PLAN
                                       ---------------------------------   ---------------------------------
                                         NUMBER OF      WEIGHTED AVERAGE     NUMBER OF      WEIGHTED AVERAGE
                                           SHARES        EXERCISE PRICE        SHARES        EXERCISE PRICE
                                       --------------   ----------------   --------------   ----------------
                                       (IN THOUSANDS)                      (IN THOUSANDS)
<S>                                    <C>              <C>                <C>              <C>
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
Granted..............................        30                4.80             1,340              4.97
Exercised............................        --                  --              (246)             1.75
Canceled.............................        (6)               4.75              (617)             2.90
                                            ---                                ------
December 31, 2000....................       102                8.44             3,217              3.65
                                            ===                                ======

Options exercisable at December 31,
  2000...............................        48              $11.75               894            $ 2.80
</TABLE>

    On November 16, 1998, we 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 our 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, 2000, under both the Directors' Plan and the Incentive Plan
(number of options in thousands):

<TABLE>
<CAPTION>
                                          OPTIONS OUTSTANDING                         OPTIONS EXERCISABLE
                          ---------------------------------------------------   --------------------------------
                             NUMBER                                                NUMBER
                           OUTSTANDING    WEIGHTED AVERAGE                       EXERCISABLE
                               AT            REMAINING                               AT
                          DECEMBER 31,    CONTRACTUAL LIFE   WEIGHTED AVERAGE   DECEMBER 31,    WEIGHTED AVERAGE
RANGE OF EXERCISE PRICES      2000            (YEARS)         EXERCISE PRICE        2000         EXERCISE PRICE
------------------------  -------------   ----------------   ----------------   -------------   ----------------
<S>                       <C>             <C>                <C>                <C>             <C>
$0.01 - $3.00...........        914             7.87              $1.80              455             $ 1.77
$3.01 - $6.00...........      2,175             9.22              $4.07              435             $ 3.79
$9.01 - $12.00..........        230             8.56              $9.22               52             $11.76
                              -----                                                  ---
  Total/Average.........      3,319             8.80              $3.80              942             $ 3.26
                              =====                                                  ===
</TABLE>

PRO FORMA INFORMATION

    As permitted under SFAS 123, we are continuing to measure compensation cost
for stock-based compensation plans using the intrinsic value method prescribed
by APB 25. The pro forma disclosures

                                       44
<PAGE>
                              LARSCOM INCORPORATED

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 6--EMPLOYEE BENEFIT PLANS: (CONTINUED)
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
                              ------------------------------------      ------------------------------------
                                2000          1999          1998          2000          1999          1998
                              --------      --------      --------      --------      --------      --------
<S>                           <C>           <C>           <C>           <C>           <C>           <C>
Risk-free interest rate.....    6.01%         5.83%         4.54%         5.73%         5.34%         5.30%
Expected volatility.........      77%           70%           70%           73%           70%           70%
Expected dividend yield.....       0%            0%            0%            0%            0%            0%
Expected life...............    3.04          3.50          3.61          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>
1998 grants.................................     $4.27       $1.64          $2.65
1999 grants.................................     $1.71       $1.92          $0.98
2000 grants.................................     $3.21       $2.63          $1.75
</TABLE>

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

<TABLE>
<CAPTION>
                                                      2000       1999       1998
                                                    --------   --------   --------
<S>                                                 <C>        <C>        <C>
Net loss--as reported.............................  $(2,499)   $(1,272)   $(7,088)
Net loss--pro forma...............................  $(4,413)   $(3,205)   $(9,174)

Basic and diluted net loss per share--as
  reported........................................  $ (0.13)   $ (0.07)   $ (0.39)
Basic and diluted net loss per share--pro forma...  $ (0.24)   $ (0.17)   $ (0.51)
</TABLE>

NOTE 7--LEASES:

    Operating lease commitments are related principally to our buildings in
Milpitas, California and Durham, North Carolina and have terms that expire in
2004 and 2006, respectively. Total rent expense in 2000, 1999 and 1998, was
$2,343,000, $2,539,000, and $2,607,000, respectively. Sublease rental income was
$955,000, $901,000 and$786,000 in 2000, 1999 and 1998 respectively. Future
annual minimum lease

                                       45
<PAGE>
                              LARSCOM INCORPORATED

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 7--LEASES: (CONTINUED)
payments under all non-cancelable operating leases as of December 31, 2000 are
as follows(in thousands):

<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
-------------------------
<S>                                                           <C>
2001........................................................  $2,334
2002........................................................   2,269
2003........................................................   2,342
2004........................................................   1,539
2005 and thereafter.........................................     686
                                                              ------
                                                              $9,170
                                                              ======
</TABLE>

    Total minimum rental income to be received during 2001 to 2004 under
non-cancelable subleases was $2,169,000 as of December 31, 2000.

NOTE 8--COMMITMENTS AND CONTINGENCIES:

    On September 21, 2000, we signed a five-year software license agreement with
Issanni Systems, Inc. Under the terms of the agreement, we acquired the
exclusive rights in North America and Western Europe and nonexclusive rights
elsewhere to Broadband Remote Access Server ("B-RAS") technology developed by
Issanni Systems, Inc. We have incorporated this technology in our new Larscom
3000 Subscriber Management System. We have paid an upfront nonrefundable license
fee of $2,000,000. If products shipped utilizing the Issanni System Inc. B-RAS
technology exceed the allocation provided by the upfront fee, a quarterly
payment will be made to Issanni Systems Inc. based on a percentage of net sales
for these products.

    Because of component obsolescence from some of our suppliers, we have been
required to place last-time-buy purchase orders to cover the expected demand for
these components. These purchase commitments generally cover between one and two
years expected demand for these components. As of December 31, 2000, we were
obligated to purchase $324,000 of these components by the end of 2001. We plan
to redesign some of our products, if required by customer demand, as supplies of
obsolete components dwindle.

    On October 12, 2000, we signed a six-year lease agreement with Technology
IX, LLC and Keystone Corporation for 27,234 square feet of office space in
Durham North Carolina. The leased facility will house certain marketing,
customer service and research and development functions. This agreement replaces
the leased property at the Research Triangle Park ("RTP"), North Carolina from
Alexander Real Estate Equities that was terminated in February of 2001.

    In our distribution agreements, we typically agree to indemnify our
customers for any expenses or liabilities resulting from claimed infringements
of patents, trademarks or copyrights of third parties. There have been no
material payments made under our customer indemnification for the years 2000,
1999 and 1998.

NOTE 9--ACQUISITION:

    On December 31, 1997, we completed a triangular merger with NetEdge Systems
Inc. ("NetEdge"). The transaction was accounted for as a purchase and, on this
basis, the excess purchase

                                       46
<PAGE>
                              LARSCOM INCORPORATED

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 9--ACQUISITION: (CONTINUED)
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, we estimated that the useful economic lives of the current technology,
trademarks and goodwill were five, seven and six years, respectively. We
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 $3,153,000 in escrow on December 31, 2000. On January 12, 2001,
$2,829,000 was released to the shareholders of NetEdge and$324,000 remains in
escrow representing an "ERISA" filing claim against the shareholders of NetEdge
submitted by Larscom Incorporated.

    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 our business in October 1998, we
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 were precipitated
by

                                       47
<PAGE>
                              LARSCOM INCORPORATED

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 9--ACQUISITION: (CONTINUED)
successively lower quarterly revenues during the year for us as a whole and by
worse than anticipated revenues from the NetEdge product family. We 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
estimated future cash flows of those assets. As a result of this review, we
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, 2000, the net book value of the
goodwill was $224,000.

NOTE 10--GEOGRAPHIC INFORMATION:

    Revenue and long-lived assets related to operations in the United States and
other countries for the years ended and as of December 31, 2000 and
December 31, 1999 are as follows (in thousands):

<TABLE>
<CAPTION>
                                                REVENUES(A)        LONG-LIVED ASSETS
                                               DECEMBER 31,          DECEMBER 31,
                                            -------------------   -------------------
                                              2000       1999       2000       1999
                                            --------   --------   --------   --------
<S>                                         <C>        <C>        <C>        <C>
United States.............................  $47,303    $45,690     $4,330     $5,249
Other countries...........................    7,361      7,149         14         14
                                            -------    -------     ------     ------
Total.....................................  $54,664    $52,839     $4,344     $5,263
                                            =======    =======     ======     ======
</TABLE>

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

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

NOTE 11--UNAUDITED QUARTERLY CONSOLIDATED FINANCIAL DATA:

<TABLE>
<CAPTION>
                                                         QUARTERS ENDED
                                         -----------------------------------------------
                                         MARCH 31,    JUNE 30,    SEPT. 30,    DEC. 31,
                                            2000        2000         2000        2000
                                         ----------   ---------   ----------   ---------
                                              (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                      <C>          <C>         <C>          <C>
Revenues...............................    $13,036     $14,802      $13,793     $13,033
Gross profit...........................    $ 7,044     $ 7,834      $ 7,197     $ 6,647
Net income (loss)......................    $  (730)    $  (170)     $  (700)    $  (899)
Basic and diluted earnings (loss) per
  share................................    $ (0.04)    $ (0.01)     $ (0.04)    $ (0.05)

<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>
Revenues...............................    $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>

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

    Not applicable.

PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

    The information required by this Item is incorporated by reference to the
Larscom Incorporated 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
Larscom Incorporated 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
Larscom Incorporated 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
Larscom Incorporated 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.  Financial Statement Schedule.

                 SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
                                            BALANCE AT    ADDITIONS   CHARGES TO   DEDUCTIONS:   BALANCE AT
                                           BEGINNING OF   COST AND      OTHER         ITEMS        END OF
DESCRIPTION                                   PERIOD       EXPENSE     ACCOUNTS    WRITTEN-OFF     PERIOD
-----------                                ------------   ---------   ----------   -----------   ----------
<S>                                        <C>            <C>         <C>          <C>           <C>
Allowance for doubtful accounts
  December 31, 1998......................     $  420       $  469        $ --         $  176       $  713
  December 31, 1999......................     $  713       $ (102)       $ --         $  106       $  505
  December 31, 2000......................     $  505       $  102        $ --         $   27       $  580

Allowance for obsolete and slow-moving
  inventory
  December 31, 1998......................     $3,069       $5,133        $ --         $2,064       $6,138
  December 31, 1999......................     $6,138       $1,718        $ --         $4,294       $3,562
  December 31, 2000......................     $3,562       $  499        $ --         $   19       $4,042
</TABLE>

    3.  Exhibits

<TABLE>
<CAPTION>
  EXHIBIT
   NUMBER
------------
<C>      <C>   <S>
 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

10.6     (1)   Services Agreement between Axel Johnson and Larscom
               Incorporated

10.7     (1)   Credit Agreement between Axel Johnson and Larscom
               Incorporated

10.7.1         2000 Amendments to the Credit Agreement between Axel Johnson
               and Larscom Incorporated

10.8     (1)   Tax-Sharing Agreement between Axel Johnson and Larscom
               Incorporated

10.10    (1)   Registration Rights Agreement between Axel Johnson and
               Larscom Incorporated

10.11    (2)   Lease Agreement between Berg & Berg Enterprises Inc. and
               Larscom Incorporated

10.13    (3)   Software License Agreement by and between Larscom
               Incorporated and Issanni Systems, Inc. dated September 21,
               2000

10.14          Lease Agreement between Technology IX, LLC, Keystone
               Corporation and Larscom Incorporated

11.1           Statement re-computation of per share earnings
</TABLE>

                                       50
<PAGE>
<TABLE>
<C>      <C>   <S>
21.1           Subsidiaries of the Registrant

23.1           Consent of Independent Accountants
</TABLE>

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

(1) Incorporated by reference to identically numbered Exhibit to Larscom
    Incorporated Registration Statement on Form S-1 (Commission File
    No.333-14001), which became effective on December 18, 1996.

(2) Incorporated by reference to 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, 1996.

(3) Incorporated by reference to numbered exhibit 10-1 filed in response to item
    6, "Exhibits and Reports" on Form 10-Q for the third quarter ended
    September 30, 2000.

b)  Reports on Form 8-K

    None.

c)  Exhibits

    See Item 14(a) 3 above.

                                       51
<PAGE>
                                   SIGNATURES

    Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

<TABLE>
<C>                                               <S>                                  <C>
                                                  Vice President, Finance and Chief
              /s/ DONALD W. MORGAN                  Financial Officer (Principal
     --------------------------------------         Financial Officer and Principal    March 26, 2001
                Donald W. Morgan                    Accounting Officer)
</TABLE>

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

<TABLE>
<CAPTION>
                      NAME                                       TITLE                      DATE
                      ----                                       -----                      ----
<C>                                               <S>                                  <C>
              /s/ ROBERT COACKLEY                 President and Chief Executive
     --------------------------------------         Officer and Director (Principal    March 26, 2001
                Robert Coackley                     Executive Officer)

                                                  Vice President, Finance and Chief
              /s/ DONALD W. MORGAN                  Financial Officer (Principal
     --------------------------------------         Financial Officer and Principal    March 26, 2001
                Donald W. Morgan                    Accounting Officer)

              /s/ DONALD G. HEITT
     --------------------------------------       Director                             March 26, 2001
                Donald G. Heitt

            /s/ LAWRENCE D. MILLIGAN
     --------------------------------------       Director                             March 26, 2001
              Lawrence D. Milligan

              /s/ HARVEY L. POPPEL
     --------------------------------------       Director                             March 26, 2001
                Harvey L. Poppel

            /s/ RICHARD E. POSPISIL
     --------------------------------------       Director                             March 26, 2001
              Richard E. Pospisil

             /s/ JOSEPH F. SMORADA
     --------------------------------------       Director                             March 26, 2001
               Joseph F. Smorada
</TABLE>

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