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

                                   FORM 10-K

<TABLE>
<S>        <C>
/X/        ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
           1934
                       FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
                                            OR

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

         FOR THE TRANSITION PERIOD FROM            TO

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

                              LARSCOM INCORPORATED

             (Exact name of registrant as specified in its charter)

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

       4600 PATRICK HENRY DRIVE                           95054
       SANTA CLARA, CALIFORNIA                          (ZIP Code)
   (Address of principal executive
               offices)
</TABLE>

                                 (408) 988-6600

              (Registrant's telephone number, including area code)

        Securities registered pursuant to Section 12(b) of the Act: NONE

          Securities registered pursuant to Section 12(g) of the Act:
                      CLASS A COMMON STOCK, $.01 PAR VALUE
                                (TITLE OF CLASS)
                            ------------------------

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

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

    The aggregate market value of the voting stock held by non-affiliates of the
registrant as of February 28, 1997, was approximately $56,416,000.

    The number of the registrant's shares outstanding as of February 28, 1997,
was 8,050,000 of Class A Common Stock and 10,000,000 of Class B Common Stock.

                      DOCUMENTS INCORPORATED BY REFERENCE:

    Portions of the Proxy Statement for the Registrant's 1997 Annual Meeting of
Stockholders (the "Proxy Statement") are incorporated by reference in Part III
of this Annual Report on Form 10-K.

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<PAGE>
                               TABLE OF CONTENTS

<TABLE>
<S>          <C>                                                                         <C>
PART I.................................................................................          3

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

  ITEM 2.    PROPERTIES................................................................         13

  ITEM 3.    LEGAL PROCEEDINGS.........................................................         13

  ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......................         13

PART II................................................................................         14

  ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.....         14

  ITEM 6.    SELECTED CONSOLIDATED FINANCIAL DATA......................................         15

  ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
               OPERATIONS..............................................................         15

  ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...............................         23

  ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
               DISCLOSURE..............................................................         40

PART III...............................................................................         41

  ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........................         41

  ITEM 11.   EXECUTIVE COMPENSATION....................................................         41

  ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............         41

  ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................         41

PART IV................................................................................         42

  ITEM 14.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K..........         42
</TABLE>

                                       2
<PAGE>
                                     PART I

ITEM 1.  BUSINESS

    Except for the historical statements contained herein, this Annual Report on
Form 10-K contains certain forward looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The actual results that the Company achieves may differ
materially from those indicated in any forward looking statements due to the
risks and uncertainties set forth under "Management's Discussion and Analysis of
Financial Condition and Results of Operations", "Certain Risk Factors" and
elsewhere in this Form 10-K. The Company undertakes no obligation to revise any
forward looking statements in order to reflect events or circumstances that may
arise after the date of this report. Readers are urged to carefully review and
consider the various disclosures made by the Company in this report and in the
Company's reports filed with the Securities and Exchange Commission that attempt
to advise interested parties on the risks and factors that may affect the
Company's business.

OVERVIEW

    Larscom Incorporated (the "Company" or "Larscom") develops, manufactures and
markets a broad range of high speed global internetworking solutions for network
service providers ("NSPs") and corporate users. Larscom's products provide
access to fractional T1 ("FT1"), E1, T1/E1, frame relay, fractional T3/E3,
channelized T3 services and Clear Channel ATM ("CCA") inverse multiplexing, with
clear channel T3, Integrated Services Digital Network ("ISDN"), Inverse
Multiplexing for ATM ("IMA") and Asynchronous Transfer Mode ("ATM") under
development. Larscom's newest families of products, the Orion 200 and Orion
4000, were designed with modular hardware and downloadable software to provide
the Company's customers with the flexibility to increase network capacity and
add services in a rapid and cost effective manner.

    Prior to the Company's initial public offering ("IPO") in December 1996, the
Company was a wholly owned subsidiary of Axel Johnson Inc. ("Axel Johnson").
Upon consummation of the IPO Axel Johnson owned 55% of the Class A & B Common
Stock of the Company and controlled 83% of the voting interest.

INDUSTRY OVERVIEW

    The proliferation of personal computers and the continuing need of users to
disseminate and share information, often across an enterprise and from remote
locations, have created increased demand for both local area networks ("LANs")
which connect computing resources within an enterprise and wide area networks
("WANs") which permit interconnection across wide geographic areas. As networks
extend beyond the enterprise and reach around the world, demand for WAN capacity
and higher speed WAN access has grown dramatically. More recently, this demand
has been further fueled by the growth in Internet usage among both individuals
and businesses, as well as the emergence of more bandwidth intensive
applications such as video and imaging.

    The increased demand for WAN speed and capacity has been accompanied by
increased complexity in available network services. In addition to dedicated
56/64 kbps and T1/FT1 services, both private and public frame relay, ISDN basic
rate and primary rate and ATM are available. This large variety of services has
also been coupled with an escalation in the variety and complexity of LAN
technology (10 Mbps Ethernet, 100 Mbps Ethernet, Fiber Distributed Data
Interface ("FDDI"), switched Ethernet and Gigabit Ethernet). ATM, in particular,
adds complexity to network demands. As an alternative to current circuit based
(or Time-Division Multiplexing ("TDM")) services, ATM is a new cell based
service which allows corporate users and NSPs to combine all types of
traffic--data, voice, video and image--across the same network. ATM is expected
to become more widely available as standards evolve. Since it utilizes cell
based technology rather than traditional circuit based TDM technology, ATM poses
significant network hardware and software challenges. To date, ATM has been
deployed in local area and campus network environments, as some corporations
have elected to base their next generation network architecture on ATM. Although
Network Service Providers ("NSPs") have yet to use the technology widely to
transport ATM traffic, they have used ATM as a backbone technology to offer
other services such as frame relay.

                                       3
<PAGE>
    As a result of both the increased demand for WAN capacity and the complexity
and continuing evolution of service offerings, businesses have been
transitioning from the use of private WANs dedicated to individual businesses to
greater use of public WANs maintained by NSPs. As this transition occurs, NSPs
are being asked to provide an increasing variety of transmission services and
network management services. In addition, corporate users in many cases are
requiring NSPs to assume full responsibility for operation and monitoring of the
network and to guarantee certain levels of service.

    NSPs and corporate users require equipment that supports higher bandwidth
than provided by common T1 and E1 services. In addition, NSPs and corporate
users increasingly are seeking a solution that bridges the technology gap by
providing connectivity to both the currently ubiquitous TDM network environment
and the emerging ATM environment without requiring that one technology be
dropped in favor of the other. Moreover, many businesses need to operate on a
global basis with networks that cross international boundaries. Furthermore,
NSPs and corporate users require the ability to add more services and high speed
applications in a rapid and affordable manner. Accordingly, NSPs and corporate
users require telecommunications equipment that supports a broad range of
services and that will operate reliably, flexibly and consistently in all the
required countries. The complexity and variety of services and products have
prompted both NSPs and corporate users alike to consolidate their purchasing
activity by using fewer vendors who offer reliable and affordable equipment
throughout the world.

THE LARSCOM SOLUTION

    The Company's broad range of product offerings provides access to both ATM
and TDM services across a variety of international standards at speeds ranging
from 56 kbps to 155 Mbps. The Company's products have modular architectures that
simplify the provisioning of new services by NSPs and lower the cost for large
corporate users of obtaining additional bandwidth.

    BRIDGING THE TECHNOLOGY GAP.  To address the gap between emerging and
existing technologies, in particular between ATM and TDM, the Company has
developed a broad range of network communications products that provide its
corporate customers with reliable and flexible network access. The Company
offers its NSP customers easily deployable, well managed solutions to provision
new network services quickly. In the broadband market, for example, the Orion
4000 is unique in its ability to accommodate both ATM and TDM network
connectivity within the same multiplexing architecture. The Orion 4000 can also
accommodate bandwidth needs that range from a single T1 or E1 circuit to 155
Mbps.

    BRIDGING THE BANDWIDTH GAP.  Through its Mega-T and Orion 4000 products,
Larscom pioneered the use of multiple T1 and E1 inverse multiplexing, which
enables users to achieve higher bandwidth capacity than offered by a single T1
line, thereby bridging the bandwidth gap between T1 and T3. Fractional T3
service, provided in this manner, allows the NSP to leverage the existing T1
based infrastructure and provides the corporate user with ready access to
affordable and ubiquitous high speed bandwidth.

    SCALEABILITY AND MODULARITY.  The Company has incorporated flexibility and
modularity into its products as network complexity and bandwidth increase, as
industry standards evolve and as NSPs and corporate users seek to meet multiple
needs. The Company's upgradeable software and plug in modules enable NSPs to add
services rapidly and cost effectively as demand changes and industry standards
evolve.

    RELIABILITY AND QUALITY.  The Company has earned a strong reputation for the
quality of its products, as well as its responsive service. The Company's
products are manufactured to meet the highest standards of reliability and
quality, including intensive system level testing in development and
manufacturing. Larscom has responded to its customers' needs by providing
telecommunications equipment that operates reliably and consistently across the
globe. Orion 200 and Orion 4000 platforms are designed, tested and certified for
use in major international markets.

    CUSTOMER SERVICE AND SUPPORT.  The Company offers real-time service and
support through various stages of the customer relationship. The Company's
service and support function begins by working closely with customers at the
product definition and design stage. To meet its customers' unpredictable
purchasing patterns, the Company's sales and operations departments are
organized to respond quickly to short lead-

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

PRODUCTS

    The Company's principal products consist of broadband access solutions such
as the Orion 4000 family of products and digital access solutions such as the
Orion 200 and Access-T families of products. Broadband products address
transmission speeds greater than 2 Mbps and digital access products address
speeds less than 2 Mbps. The Company's principal product platforms feature
modular software and hardware which can be adapted to changing industry
standards and customer needs. The products can be upgraded in the field, for new
features or standards, by downloading new software. In addition, several of the
products are designed to permit ready addition of modules to provide new
functions or interfaces. This provides an NSP or corporate user with the
components necessary to design an entire system to interconnect multiple
locations in a cost effective and manageable network.

BROADBAND PRODUCTS

    Larscom entered the broadband market in 1991 with the acquisition of T3
Technologies, Inc. Larscom's broadband product line consists of a range of
products that include the Orion 4000 broadband access multiplexer, a family of
inverse multiplexers and a single function T3 Digital Service Unit ("DSU").

    ORION 4000.  The Orion 4000 is a highly versatile broadband access
multiplexer with a unique WAN access architecture that handles both ATM and TDM
traffic on a dual, redundant, 155 Mbps bus structure. Prices for the Orion 4000
start at $20,500 for a basic system equipped with a single inverse multiplexing
module. The Orion 4000 accommodates data applications operating at speeds from
1.54 Mbps up to 50 Mbps, as well as network connections that range from T1 or E1
to 155 Mbps. The Orion 4000 is designed to enable different functionality to be
added in a modular and cost effective fashion. It is available in both 5 slot
and 12 slot shelf configurations, both of which have met the requirements of CE
(European Union certification) for international markets. The Orion 4000 is
distinctive in the role that it can play in hybrid networks (TDM networks with
ATM applications) and in providing an economic migration path from TDM to ATM,
thereby ensuring legacy equipment investment protection.

    In a TDM environment, the Orion 4000 is able to support full and fractional
T3 networks. Its T1 and E1 inverse multiplexing modules, introduced in 1994 and
1995, respectively, provide transparent channels for applications such as LAN
interconnection or video transmission. The T3mux and Tmux modules, introduced in
1995, provide greater flexibility in transporting T1 circuits across the
network. They can be used to consolidate several fractional T3 applications onto
a single T3 circuit and combine T1 traffic from a digital PBX or a T1
multiplexer with inverse multiplexed data.

    ORION 4000 MODULES UNDER DEVELOPMENT.  The next step in the evolution of the
Orion 4000's TDM capability is the development of a clear channel T3 module,
which will increase the bandwidth available for applications to 44 Mbps. This
will be a single slot module that, in addition to a clear channel T3 interface,
will offer four Data Terminal Equipment ("DTE") ports supporting High-Speed Data
("HSD") and High-Speed Serial Interface ("HSSI") connections and a combination
of eight T1 ports and four multiplexer channels.

    The Company's CCA inverse multiplexer began volume shipments in early 1997.
The first in a series of modules, it provides a 45 Mbps UNI (User to Network
Interface) connection to up to eight T1 circuits. CCA allows NSPs and corporate
users to pass ATM traffic between local and campus environments using inverse
multiplexing of regular T1 or E1 circuits. The CCA modules provide buffering and
rate adaptation to match application speeds to network facilities. The Company
is also developing ATM modules (network and data interfaces) for the Orion 4000,
which will be able to connect LAN data traffic to public or private ATM
networks.

    OTHER BROADBAND PRODUCTS.  The Mega T, introduced in 1993, is the first
inverse multiplexer to bridge the bandwidth gap between T1 and T3. Priced from
$7,500 it provides affordable access to greater than T1

                                       5
<PAGE>
bandwidth for high speed applications, deriving a data channel of up to 6 Mbps
from four T1 circuits. Larscom's patented inverse multiplexing algorithm, used
for both the Mega-T and Orion 4000, handles alignment of the individual T1s and
allows for differential delay between individual T1s. This algorithm also allows
the data transmission rate to be lowered should individual T1 circuits fail and
to be raised when the circuits are restored. The Mega-T shares with the Orion
4000 the unique ability to identify individual T1 circuits, thereby simplifying
trouble shooting. The Mega-T is primarily used for high speed LAN
internetworking, as well as frame relay network access above T1 speed and
broadcast quality digital video.

    The Access T45, introduced in 1992, is a dual port, 45 Mbps DSU that
provides a clear channel T3 network interface. Priced at $7,500 it is used for
very high speed LAN internetworking, for Internet access and backbones and for
channel extension. The Access T45 allocates bandwidth in increments of 3 Mbps, a
functionality which has been used by some ISPs to control bandwidth assignment
for their customers. In addition, it is capable of scrambling LAN data in a
manner which ensures the successful receipt of transmitted data.

    EtherSpan, introduced in 1996, is an advanced Ethernet bridge that can
handle a sustained data rate of 10 Mbps. It offers cost effective, high speed
WAN connectivity for Ethernet LANs, with one 10Base-T Ethernet LAN port and a
single WAN port that utilizes either HSD or HSSI standards.

DIGITAL ACCESS PRODUCTS

    Larscom entered the digital access market in 1986 with emphasis on
performance monitoring of T1 lines. Larscom's pioneering efforts to deliver an
advanced network diagnostic system within a Channel Service Unit ("CSU")
resulted in its TNDS (T1 Network Diagnostic System) product line. The advanced
performance monitoring capabilities, which were featured in the first TNDS and
enhanced and complemented in subsequent CSU and CSU/DSU products, continue to be
a hallmark of Larscom throughout its product lines.

    ORION 200 FAMILY.  The Orion 200 family, introduced in 1994, is an advanced
T1 and E1 access multiplexer that can accommodate from two to eight data ports
and two network ports. Priced from $4,995 its primary application is for LAN
interconnection, often coupled with digital Private Branch Exchange ("PBX")
traffic, as well as video conferencing. The Orion 200 family can operate in both
T1 and E1 networks, and can also perform conversion between T1 and E1 standards.

    OTHER DIGITAL ACCESS PRODUCTS.  The Access-T family, introduced in 1991, is
a series of T1/FT1 CSU/ DSUs. Pricing starts at $1,595 for a single port DSU.
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, a shelf based version introduced in 1992, utilizes a hub and
spoke architecture that allows centralized network nodes to serve units at
dispersed sites and to concentrate traffic in a single location where network
hubs are constrained for space. In 1996, the Access-T100S, a low cost, smaller
version of a single port Access T, was introduced, allowing the Company to
respond to downward price pressure in the digital access market.

    The Split-T, introduced in 1990, is a stand alone T1/FT1 CSU/DSU, with
prices starting at $3,195. 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.

    In addition, Larscom offers a family of T1 CSU products, introduced in 1986,
centered on the TNDS family of fully featured T1 CSUs. These products offer a T1
network interface with advanced performance monitoring and diagnostic
capabilities.

CUSTOMERS

    The Company's customers principally consist of NSPs, including Internet
Service Providers, Fortune 500 corporations, systems integrators, value added
resellers ("VARs") and federal, state and local government agencies.

                                       6
<PAGE>
    The Company believes that its relationships with large customers,
particularly the NSPs and telecommunications companies, will be critical to its
future success. These customers prefer to purchase the majority of their network
access solutions from a single vendor which may benefit the Company as it
broadens and enhances its product line. In 1996, 1995 and 1994, NSPs represented
62%, 48% and 41%, respectively, of total revenues and the Company's top five
customers accounted for 52%, 48%, and 41% of revenues in 1996, 1995 and 1994,
respectively. The following table summarizes the percentage of total revenues
for customers accounting for more than 10% of the Company's revenues:

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<CAPTION>
                                                                            YEARS ENDED DECEMBER 31,
                                                                      -------------------------------------
                                                                         1996         1995         1994
                                                                         -----        -----     -----------
<S>                                                                   <C>          <C>          <C>
MCI.................................................................         21%          18%          15%
IBM/Advantis........................................................         13%          14%         *10%
</TABLE>

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

BACKLOG

    The Company's backlog at any point in time is typically limited.
Accordingly, sales in any quarter are largely dependent on orders received
during that quarter. Furthermore, the Company's agreements with its customers
typically provide that they may change delivery schedules and cancel orders
within specified timeframes, typically up to 30 days prior to the scheduled
shipment date, without penalty. The Company's customers have in the past built,
and may in the future build, significant inventory in order to facilitate more
rapid deployment of anticipated major projects or for other reasons. Decisions
by such customers to reduce their inventory levels could lead to reductions in
purchases from the Company. Therefore, customer decisions to delay delivery,
cancel orders or reduce purchases could have a material adverse effect on the
Company's business and operating results.

MARKETING AND SALES

    The Company sells its products in the U.S. primarily through its direct
sales organization, with products also being sold through OEMs, VARs and systems
integrators. The Company seeks to continue the expansion of its customer base
through both direct and alternate distribution channels. Developments in
broadband and digital access platforms will continue to be handled by a direct
sales organization experienced in systems level sales. Additionally, the Company
seeks to extend its market reach to the Fortune 2000 corporations in the U.S.
through the development of alternate distribution channels and supporting
services, with the intent to have such channels in operation beginning in 1998.
The Company markets its products internationally through non-exclusive
distribution agreements with VARs and systems integrators. In international
markets, the Company is seeking to develop partnerships with international NSPs
and to develop its own sales and support organization, beginning in 1998, to
complement existing distributor relationships.

    NSPs require that products undergo extensive lab testing and field trials
prior to their deployment in the network. Accordingly, the Company is
continually submitting successive generations of its current products as well as
new products to its customers for evaluation and approval. Additionally,
international NSPs require products to 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 of the customer, budgets and
regulatory issues.

                                       7
<PAGE>
CUSTOMER SERVICE AND SUPPORT

    The Company's products are required to meet rigorous standards imposed by
both customers and internal product quality assurance testing procedures. The
Company has service contracts with most of its major customers, and provides on
site service via arrangements with a number of service partners worldwide such
as Racal Datacom and Netcom Solutions in the U.S. and ND Networks in Europe.
These contracts typically establish response time and level of service
commitments, with penalties for non-performance. Larscom maintains a 24 hours, 7
days a week technical assistance support center, and provides on site support
with contracted response times, plus a wide range of repair programs. The
Company also provides technical applications assistance, as well as customer and
distributor product maintenance and installation training.

    Prior to January 1997 all of the Company's products carried a two year
warranty, which generally covered defects in materials and workmanship. In
January 1997 the Company changed the warranty period for most of its products to
three years. In the past the Company's warranty expenses have been relatively
insignificant and the Company does not expect this to change as a result of the
extension of the warranty period.

RESEARCH AND DEVELOPMENT

    Larscom believes that its future success depends on its ability to maintain
technological leadership through timely enhancements of existing products and
development of new products that meet customer needs. During 1996, 1995 and
1994, total research and development expenses were $8.1 million, $7.1 million
and $6.7 million, respectively. The Company believes that a continued commitment
to research and development, particularly related to broadband products and
emerging technologies in response to customer demands will be required to remain
competitive. Accordingly, the Company is increasing its engineering staff and
anticipates that its research and development expenses will increase in future
periods.

    The Company's research and development programs are focused on its modular
platforms (the Orion 4000 family, the Orion 200 family and the Access-T family),
which allow new technologies to be incorporated and new services supported
through incremental modules. In the short term, the Company will develop new
modules for the Orion 4000 that integrate ATM with inverse multiplexing. In the
future, the Company intends to extend the international capabilities of its
products and to address additional broadband technology such as Synchronous
Optical Network ("SONET") and Synchronous Digital Hierarchy ("SDH").

    The Orion 200 and Orion 4000 product families were designed specifically to
meet the demands of its major customers. These relationships provide the Company
with advanced insight into the evolving needs of customers and allow the Company
to anticipate new technology requirements. Enhancements to these product
families are being developed by including major customers in the product
definition and review process. Timely customer feedback is important to the
Company in making modifications to existing products and designing new products.

    The rapid development of new technologies increases the risk that current or
new competitors could develop products that would reduce the competitiveness of
the Company's products. The Company's success will depend to a substantial
degree upon its ability to respond to changes in technology and customer
requirements. This will require the timely selection, development and marketing
of new products and enhancements on a cost effective basis. The development of
new, technologically advanced products is a complex and uncertain process,
requiring high levels of innovation. For the network access market, expertise is
required in the general areas of telephony, data networking, network management,
as well as specific technologies such as ISDN, ATM and SONET. Further, the
telecommunications industry is characterized by the need to design products
which meet industry standards for safety, immunity, emissions and network
connection. Such industry standards are often changing or incomplete as new and
emerging technologies and service offerings are introduced by NSPs. As a result,
there is a potential for product development delay due to the need for
compliance with new or modified standards. The introduction of

                                       8
<PAGE>
new and enhanced products also requires that the Company manages transitions
from older products in order to minimize disruptions in customer orders, avoid
excess inventory of old products and ensure that adequate supplies of new
products can be delivered to meet customer orders. There can be no assurance
that the Company will be successful in developing, introducing or managing the
transition to new or enhanced products or that any such products will be
responsive to technological changes or will gain acceptance in the market. The
Company's business and operating results could be materially adversely affected
if the Company were to be unsuccessful, or to incur significant delays, in
developing and introducing such new products or enhancements.

MANUFACTURING AND QUALITY ASSURANCE

    The Company's manufacturing operations consist of materials procurement,
third party assembly of final product based on printed circuit boards, product
testing and inspection and system configuration for shipment. The Company has
maintained a long term relationship with its third party printed circuit board
assembler, Top Line Electronics Corporation, which has allowed the Company to
implement total quality control in the entire manufacturing process, including
statistically monitored process control programs. The Company utilizes
traditional procurement methods with its suppliers, using standard purchase
orders for all scheduling and commitments. No contract relationships exist. Most
purchase order payment terms are standard with payment due in 30 days, with some
orders negotiated to net 45 days payment. The Company uses automated functional
product testing to remain flexible to customers' needs while maintaining control
of the quality of the manufacturing process. During 1996, the Company has
increased its emphasis on aggressively monitoring software quality in its
products by implementing automated system test programs that verify product
performance concurrent with product development and prior to product release.

    On time delivery of the Company's products is dependent upon the
availability of quality components used in its products. The Company purchases
parts and components for assembly from a variety of pre-approved suppliers
through a worldwide procurement sourcing program. The Company attempts to manage
risks through developing alternate sources and by maintaining quality
relationships with its suppliers. To date, the Company has been able to obtain
adequate supplies of required components in a timely manner from existing
sources or, when necessary, from alternate sources. The Company does acquire
certain components from sole sources, either to achieve economies of scale or
because of proprietary technical features designed into the Company's products.
Sole sourced components come from suppliers such as Waferscale, Vicor and PMC
Sierra. A substantial portion of the Company's shipments in any fiscal period
relates to orders for certain products received in that period. To meet this
demand, the Company maintains a supply of finished goods inventories at its
manufacturing facility, including safety stocks of critical components. In
addition, a significant percentage of the Company's orders are shipped within
three business days. However, there can be no assurance that interrupted or
delayed supplies of key components will not occur which could have a material
adverse effect on the Company's business and operating results.

    The Company maintains a comprehensive quality control program. However,
complex products such as those offered by the Company may contain undetected
errors or failures when first introduced or as new versions are released.
Despite testing by the Company and its customers, there can be no assurance that
existing or future products based upon the Orion 4000 architecture or other
technologies will not contain undetected errors or failures when first
introduced or as new versions are released. While the Company believes that its
reserves for estimated future warranty costs are adequate there are inherent
risks associated with these estimates particularly for those estimates related
to products which have been recently introduced such as the Orion 4000. Warranty
claims in excess of those expected by the Company could have a material adverse
effect on the Company's business and operating results.

                                       9
<PAGE>
COMPETITION

    The markets for the Company's products are intensely competitive and the
Company expects competition to increase in the future. In the broadband market,
the Company competes primarily with Digital Link, ADC Kentrox, RAD Data
Communications and 3Com's Broadband Division (previously OnStream Networks). In
the digital access market, the Company competes against traditional CSU/DSU
vendors, such as ADC Kentrox, Verilink and Digital Link, and relatively newer
entrants to the market such as ADTRAN and TxPort. The Company competes to a
lesser extent with other telecommunications equipment companies. The Company
believes that its ability to compete successfully depends upon a number of
factors, including timely development of new products and features, product
quality and performance, price, announcements by competitors, experienced sales,
marketing and service organizations and evolving industry standards. The Company
believes that it generally competes favorably in these areas. However, certain
competitors have more broadly developed distribution channels and are further
along in certain emerging technologies, such as ATM and SONET. In addition, the
Company's digital access products could be adversely affected by the integration
of WAN functionality into switches and routers, by the entry of LAN equipment
vendors into the Company's markets, or by the requirement for alternate methods
of performance monitoring for services such as frame relay. There can be no
assurance that the Company will be able to continue to compete successfully with
existing or new competitors.

    The key competitive factors in the Company's market include timely
development of new products and features, product quality and performance,
price, experienced sales, marketing and service organizations and evolving
industry standards.

    In the broadband market, the Company believes that it competes favorably due
to the wide functionality of its products and its superior customer service and
support. In particular, the Orion 4000 platform has a unique WAN access
architecture that accommodates both ATM and TDM technology, providing
flexibility for hybrid networks. Also, the Orion 4000, in conjunction with the
Mega-T and Access T45, provides cost effective and competitively distinctive hub
and spoke concentration. However, sales of the Company's broadband products
could be adversely affected by a significant increase in availability of public
ATM services since some competitors could be better positioned at this time to
support public ATM service. Some of the Company's competitors have developed
partnerships with third parties for joint marketing or development efforts that
could place the Company at a relative disadvantage.

    In the digital access market, the Company believes that it competes
favorably due to its commitment to reliability, service and support. Since price
is increasingly important, the Company will provide competitively priced
products such as the recently announced Access-T100S. However, some of the
Company's competitors are more advanced in developing indirect sales channels
and this may be a disadvantage to the Company's sales of digital access
products. The Company's digital access products could also be materially
adversely affected by the integration of CSU/DSU functionality into switches and
routers, by the entry of LAN equipment vendors into the Company's markets, or by
the requirement for alternative methods of performance monitoring for services
such as frame relay. There is also a risk to the digital access market generally
from new technologies that could displace some parts of the T1/E1 CSU/ DSU
product line. For example, Asymmetric Digital Subscriber Line ("ADSL") and
High-Speed Digital Subscriber Line ("HDSL") are subscriber loop technologies
that can enable service providers to deploy T1/FT1 services. These new
technologies may ultimately enlarge the total addressable market for digital
access products and services.

PROPRIETARY RIGHTS

    The telecommunications equipment industry is characterized by the existence
of a large number of patents and frequent litigation based on allegations of
patent infringement. From time to time, third parties may assert exclusive
patent, copyright, trademark and other intellectual property rights to
technologies that are important to the Company. The Company has not conducted a
formal patent search relating to the technology used in its products, due in
part to the high cost and limited benefits of a formal search. In addition,
since patent applications in the U.S. are not publicly disclosed until the
patent is issued,

                                       10
<PAGE>
applications may have been filed by competitors of the Company which could
relate to the Company's products. Software comprises a substantial portion of
the technology in the Company's products. The scope of protection accorded to
patents covering software related inventions is evolving and is subject to a
degree of uncertainty which may increase the risk and cost to the Company if the
Company discovers third party patents related to its software products or if
such patents are asserted against the Company in the future. The Company may
receive communications from third parties in the future asserting that the
Company's products infringe or may infringe on the proprietary rights of such
third parties. In its distribution agreements, the Company typically agrees to
indemnify its customers for any expenses or liabilities, resulting from claimed
infringements of patents, trademarks or copyrights of third parties. In the
event of litigation to determine the validity of any third party claims, such
litigation, whether or not determined in favor of the Company, could result in
significant expense to the Company and divert the efforts of the Company's
technical and management personnel. In the event of an adverse ruling in such
litigation, the Company might be required to discontinue the use and sale of
infringing products, expend significant resources to develop non infringing
technology or obtain licenses from third parties. There can be no assurance that
licenses from third parties would be available on acceptable terms, if at all. A
successful claim against the Company and the failure of the Company to develop
or license a substitute technology could have a material adverse effect on the
Company's business and operating results. In addition, the laws of certain
foreign countries in which the Company's products are or may be developed,
manufactured or sold may not protect the Company's products or intellectual
property rights to the same extent as do the laws of the U.S. and thus make the
possibility of misappropriation of the Company's technology and products more
likely.

EMPLOYEES

    As of December 31, 1996, the Company had 242 full time employees of whom 71
were primarily engaged in research and development, 55 in manufacturing and
quality control, 62 in marketing and sales, 23 in customer service and 31 in
administration and finance. The Company also employed a total of 9 temporary and
contract personnel. None of the Company's employees is represented by a
collective bargaining unit nor has the Company ever experienced any work
stoppage. The Company believes its relationship with its employees is good.

MANAGEMENT

    The executive officers and directors of the Company are as follows:

<TABLE>
<CAPTION>
NAME                                AGE      POSITION
------------------------------      ---      -------------------------------------------------------
<S>                             <C>          <C>
Deborah M. Soon                         44   President, Chief Executive Officer and Director
Bruce D. Horn                           45   Vice President, Finance and Chief Financial Officer
Jeffrey W. Reedy                        38   Vice President, Engineering
Paul A. Strudwick                       44   Vice President, Marketing
George M. Donohoe                       59   Vice President, Sales
William H. Cory                         43   Vice President, Operations
Paul E. Graf                            52   Chairman of the Board (2)
Donald G. Heitt                         61   Director (2)
Kevin N. Kalkhoven                      51   Director (1)
Harvey L. Poppel                        58   Director (1)(2)
Joseph F. Smorada                       49   Director (1)
</TABLE>

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

(1) Member of Audit Committee.

(2) Member of Compensation Committee.

                                       11
<PAGE>
    Deborah M. Soon has served as President and Chief Executive Officer of the
Company since July 1994. Previously, she served as Vice President of Marketing
and Sales from June 1993 to June 1994, as Vice President of Marketing from from
January 1991 to May 1993, and as Director of Marketing from May 1990 to December
1990. Prior to joining the Company, Ms. Soon held management positions in
engineering, marketing and sales with AT&T, Prime Computers, BBN Communications
Corporation and Data Architects Systems Inc. Ms. Soon earned a B.A. in
Mathematics from the University of California, San Diego and an M.B.A. from the
Harvard Graduate School of Business. She has also completed special
undergraduate studies at Cambridge University in England.

    Bruce D. Horn has served as Vice President of Finance and Chief Financial
Officer of the Company since January 1993. Previously, he served as Director of
Finance and Chief Financial Officer from March 1991 to December 1992. Prior to
joining the Company, Mr. Horn was Director of Finance at Insystems, Inc. and
Corporate Controller at Anicon, Inc. Mr. Horn earned an M.B.A. in Finance from
California State University, Hayward and a B.A. in Accounting from the
University of Northern Iowa.

    Jeffrey W. Reedy has served as Vice President of Engineering of the Company
since August 1994. Previously, he served as Vice President/Division Manager from
January 1993 to August 1994, and Director of Engineering from November 1991 to
January 1993. Prior to November 1991, Mr. Reedy was the Co-founder and Vice
President of Engineering at T3 Technologies, Inc. (which was acquired by the
Company in 1991). Mr. Reedy earned a B.S.E. in Electrical Engineering and
Computer Science from Duke University and an M.S.E.E. from Stanford University.

    Paul A. Strudwick has served as Vice President of Marketing of the Company
since August 1994. Previously, he served as Director of Product Management from
March 1992 to August 1994. Prior to joining the Company, he was Product
Management/Marketing Consultant for PolyCom, Inc. from October 1991 to February
1992. Prior to October 1991, he was Director of Product Line Management with
Northern Telecom, Inc. and held a number of positions with Bell Northern
Research in Canada. Mr. Strudwick earned a B.Sc. from the University of Sussex
in England.

    George M. Donohoe has served as Vice President of Sales of the Company since
August 1994. Previously, he served as Director of Telco Sales from April 1994 to
August 1994 and Western Region Sales Manager from November 1993 to March 1994.
Prior to joining the Company, Mr. Donohoe was Director of LAN Product Sales at
Teleglobe from February 1993 to October 1993, and Vice President of Sales at
Halley Systems from December 1989 to January 1993. Other professional
affiliations include Luxcom, Infinet, Honeywell Information Systems and IBM. Mr.
Donohoe earned a B.S. in Industrial Engineering and Management Sciences from the
University of South Dakota.

    William H. Cory has served as Vice President of Operations of the Company
since February 1990. Prior to joining the Company, Mr. Cory was Director of
Quality Assurance for Verilink, Vice President for Wyken Technology, Director of
Quality Assurance for Compression Labs, Inc. and Manager of Quality Assurance
for Drivetec Inc. Mr. Cory earned a B.S. in Industrial Engineering and
Management Science from Northwestern University.

    Donald G. Heitt has been the Chairman of the Board of Voysys Corporation
since December 1995. 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 B.B.A. from the University of Iowa.

    Kevin N. Kalkhoven has been the President and Chief Executive Officer of
Uniphase since 1992. Mr. Kalkhoven joined Uniphase in January 1992 and has been
a member of its board of directors since February 1992. Prior to joining
Uniphase, Mr. Kalkhoven held executive positions at a variety of software
companies. He served as President and Chief Executive Officer of Demax Software
and as President and Chief Executive Officer of AIDA Corporation. Previously, he
was Vice President of Marketing for the European division of Comshare
Corporation and Group Vice President for its U.S. subsidiary.

                                       12
<PAGE>
    Paul E. Graf has served as Chairman of the Board of Directors of the Company
since June 1990. Mr. Graf has served as President and Chief Executive Officer
for Axel Johnson since 1989. Prior to joining Axel Johnson, Mr. Graf held
various senior executive positions with Schroders, a venture capital company,
Conrac Corporation and Texas Instruments. Mr. Graf earned a B.S. in Electrical
Engineering from Rensselear Polytechnic Institute and an M.B.A. from Boston
University.

    Harvey L. Poppel has served as Managing Director at Broadview Associates
L.L.C. since January 1985, and 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. Mr. Poppel holds an M.S. and a B.S. from Rensselear Polytechnic
Institute.

    Joseph F. Smorada has served as a Director of the Company since June 1992.
Mr. Smorada has served as Senior Vice President and Chief Financial Officer of
Axel Johnson since April 1992. Prior to joining Axel Johnson, Mr. Smorada was
Senior Vice President and Chief Financial Officer for Lone Star Industries from
September 1988 to April 1992. Prior to 1988, Mr. Smorada also held senior
executive positions with Conrac Corporation and Continental Group, Inc. Mr.
Smorada earned a B.A. in Economics from California University of Pennsylvania.

ITEM 2.  PROPERTIES

    The Company leases approximately 50,000 square feet in Santa Clara,
California and 16,000 square feet in Research Triangle Park, North Carolina. All
manufacturing, sales and marketing and some research and development is
performed at the Company's Santa Clara facility. The Research Triangle Park
facility is primarily used for research and development. The Company has a 33.3%
ownership interest in the Santa Clara facility. The lease for the Santa Clara
facility expires in January 1998 and the lease for the Research Triangle Park
facility expires in June 2001. The Company has an option to extend the Research
Triangle Park lease for an additional three years. In March 1997 the Company
signed a lease for an additional 119,000 square feet near its current facility.
The Company intends to sublease a portion of the additional space as it will not
be necessary in the immediate future.

ITEM 3.  LEGAL PROCEEDINGS

    America Online, Inc. ("AOL") has opposed Larscom's application for federal
trademark registration of its logo, alleging that Larscom's design mark is
similar to an AOL mark and that Larscom is attempting to register its mark for
goods and services related to certain AOL goods and services. The Company does
not believe the resolution of this opposition will have a material adverse
effect on the Company's business and operating results. The Company is not
involved in any other proceeding the outcome of which could have a material
adverse effect on its business and operating results.

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

    No matters were submitted to a vote of security holders of the Company
subsequent to the Company's initial public offering.

                                       13
<PAGE>
                                    PART II

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

    The Company made its initial public offering of Class A Common Stock on
December 18, 1996, at $12.00 per share, and the Class A Common Stock of the
Company began trading in the over-the-counter market on the Nasdaq National
Market on December 19, 1996, under the symbol "LARS." The following table sets
forth the high and low closing prices for the Company's Class A Common Stock as
reported on the Nasdaq National Market from December 19, 1996 through December
31, 1996. These prices reflect inter-dealer prices, without retail mark-up,
mark-down or commission, and may not necessarily represent actual transactions.

<TABLE>
<CAPTION>
                                                                                    HIGH         LOW
                                                                                    -----     ----------
<S>                                                                              <C>          <C>
Period from December 19 to December 31, 1996...................................   $      12   $      111/8
</TABLE>

    As of February 28, 1997, there were 18 holders of record of the Company's
Class A Common Stock and 1 holder of record of the Company's Class B Common
Stock.

    In August 1996, the Company declared a dividend of $25,000,000, as evidenced
by a note payable to Axel Johnson, bearing interest at a rate of 7.5% per annum.
The principal was paid out of the proceeds of the Company's initial public
offering on December 24, 1996. The Company currently intends to retain any
future earnings for use in its business and does not anticipate paying any cash
dividends in the foreseeable future.

                                       14
<PAGE>
ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
                                                                           YEARS ENDED DECEMBER 31,
                                                             -----------------------------------------------------
                                                               1996       1995       1994       1993       1992
                                                             ---------  ---------  ---------  ---------  ---------
                                                                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                          <C>        <C>        <C>        <C>        <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues...................................................  $  66,444  $  48,663  $  36,550  $  39,035  $  33,502
Cost of revenues...........................................     29,949     21,147     15,037     14,989     13,654
                                                             ---------  ---------  ---------  ---------  ---------
    Gross profit...........................................     36,495     27,516     21,513     24,046     19,848
                                                             ---------  ---------  ---------  ---------  ---------
Operating expenses:
  Research and development.................................      8,123      7,143      6,703      6,269      5,458
  Selling, general and administrative......................     19,408     15,762     13,385     13,629     11,752
                                                             ---------  ---------  ---------  ---------  ---------
    Total operating expenses...............................     27,531     22,905     20,088     19,898     17,210
                                                             ---------  ---------  ---------  ---------  ---------
Operating income...........................................      8,964      4,611      1,425      4,148      2,638
Non-operating income (expense), net........................       (597)         3          9     --              2
                                                             ---------  ---------  ---------  ---------  ---------
Income before income taxes.................................      8,367      4,614      1,434      4,148      2,640
Provision for income taxes.................................      3,437      2,085        773      1,853      1,260
                                                             ---------  ---------  ---------  ---------  ---------
Net income.................................................  $   4,930  $   2,529  $     661  $   2,295  $   1,380
                                                             ---------  ---------  ---------  ---------  ---------
                                                             ---------  ---------  ---------  ---------  ---------
Supplemental net income per share(1).......................  $    0.37  $    0.18  $  --      $  --      $  --
                                                             ---------  ---------  ---------  ---------  ---------
                                                             ---------  ---------  ---------  ---------  ---------
Shares used to compute supplemental net income per
  share(1).................................................     14,317     14,193     --         --         --
                                                             ---------  ---------  ---------  ---------  ---------
                                                             ---------  ---------  ---------  ---------  ---------
Cash dividends per share...................................  $    2.10  $  --      $  --      $  --      $  --
                                                             ---------  ---------  ---------  ---------  ---------
                                                             ---------  ---------  ---------  ---------  ---------
Shares used to compute cash dividends per share............     11,900     --         --         --         --
                                                             ---------  ---------  ---------  ---------  ---------
                                                             ---------  ---------  ---------  ---------  ---------

<CAPTION>

                                                                                 DECEMBER 31,
                                                             -----------------------------------------------------
                                                               1996       1995       1994       1993       1992
                                                             ---------  ---------  ---------  ---------  ---------
                                                                                (IN THOUSANDS)
<S>                                                          <C>        <C>        <C>        <C>        <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital............................................  $  55,944  $   8,605  $   7,520  $   7,620  $   6,426
Total assets...............................................     73,043     25,739     21,772     19,526     18,670
Total stockholders' equity.................................     61,445     18,236     15,707     15,046     12,757
</TABLE>

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

(1) See Note 1 of Notes to the Consolidated Financial Statements for an
    explanation of the determination of net income and of shares used to compute
    supplemental net income per share.

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

    Over the past several years, Larscom has transitioned its business from
supplying single purpose T1 and FT1 wide area network customer premises
equipment ("CPE") to Fortune 500 corporations, to providing high speed network
access platform solutions predominantly to NSPs. From 1986 through 1991, Larscom
engaged primarily in the development, marketing and support of T1 CSU/DSUs and
T1 diagnostic equipment. In October 1991, the Company acquired T3 Technologies
Inc. ("T3T"), a broadband products company. The first broadband products
developed by Larscom after the acquisition of T3T were the Access T45, one of
the first T3 DSUs, and the Mega T, the first multiple T1 inverse multiplexer.
Since then, the Company has invested significant resources in developing a suite
of broadband capabilities for the Orion 4000 platform. Sales related to the
Company's broadband products--Access T45, EtherSpan, Mega-T and Orion 4000
represented 31% and 12% of total revenues in 1996 and 1995, respectively.

                                       15
<PAGE>
    A small number of customers, consisting of NSPs and resellers, have
accounted for a majority of the Company's revenues in each of the past several
years. Sales to the Company's top five customers accounted for 52%, 48%, and 41%
of revenues in 1996, 1995 and 1994, respectively. Sales to NSPs represented 62%,
48% and 41% in 1996, 1995 and 1994, respectively.

    Sales to NSPs and resellers are often difficult to forecast due to the
relatively long sales cycle and acceleration or delays in the timing of specific
equipment deployment projects for which the NSP or reseller is acquiring
equipment. The Company has experienced fluctuations in both annual and quarterly
revenues due to the timing of receipt of customer orders as well as decisions
from time to time by major customers to cease marketing, purchasing and
reselling the Company's products. Since the Company continues to have
significant sales to a small number of customers, similar sales fluctuations may
occur in the future. In 1995, the Company experienced a shift in the purchasing
behavior of its customers which resulted in higher second and third quarter
sales relative to fourth quarter sales. These purchasing patterns and resulting
cyclicality could continue in the future.

    Since most of the Company's sales are in the form of large orders with short
delivery times to a limited number of customers, the Company's ability to
predict revenues is limited. In addition, announcements by the Company or its
competitors of new products and technologies could cause customers to defer
purchases of the Company's existing products. In the event that anticipated
orders from major customers fail to materialize, or delivery schedules are
deferred or canceled as a result of the above factors or other unanticipated
factors, the Company's business and operating results could be materially
adversely affected.

    The Company establishes its expenditure levels for product development and
other operating expenses based on projected sales levels and margins, however,
expenses are relatively fixed in the short term. Accordingly, if sales are below
expectations in any given period, the adverse impact of the revenue shortfall on
the Company's operating results may be greater due to the Company's inability to
adjust spending in the short term to compensate for the shortfall. As a result,
the Company believes that period-to-period comparisons of its operating results
are not necessarily meaningful and should not be relied upon as indicative of
future performance.

    The Company sells its products primarily through a direct sales force and to
a lesser extent through a variety of resellers, including OEMs, VARs, systems
integrators and distributors. Sales outside the U.S. have not been significant
to date.

                                       16
<PAGE>
RESULTS OF OPERATIONS

    The following table sets forth the percentage of revenues represented by
certain items in the Company's consolidated statement of operations for the
periods indicated:

<TABLE>
<CAPTION>
                                                                           YEARS ENDED DECEMBER 31,
                                                                     -------------------------------------
                                                                        1996         1995         1994
                                                                     -----------  -----------  -----------
<S>                                                                  <C>          <C>          <C>
Revenues...........................................................        100%         100%         100%
Cost of revenues...................................................         45           43           41
                                                                           ---          ---          ---
    Gross profit...................................................         55           57           59
                                                                           ---          ---          ---
Operating expenses:
  Research and development.........................................         12           15           18
  Selling, general and administrative..............................         29           33           37
                                                                           ---          ---          ---
    Total operating expenses.......................................         41           48           55
                                                                           ---          ---          ---
Operating income...................................................         14            9            4
Nonoperating income (expense), net.................................         (1)       --           --
                                                                           ---          ---          ---
Income before income taxes.........................................         13            9            4
Provision for income taxes.........................................          6            4            2
                                                                           ---          ---          ---
Net income.........................................................          7%           5%           2%
                                                                           ---          ---          ---
                                                                           ---          ---          ---
</TABLE>

YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995

    REVENUES.  Revenues increased 37% to $66,444,000 in 1996 from $48,663,000 in
1995. The growth in revenues reflected increased sales across the Company's
product lines, particularly sales of broadband products such as the Access T45
and Orion 4000 to NSPs.

    GROSS PROFIT.  As a percentage of revenues, gross profit declined to 55% in
1996 from 57% in 1995. This decrease was primarily the result of lower average
unit selling prices of digital access products, partially offset by increased
sales of higher margin broadband products. The Company is continuing to seek to
increase broadband product sales and to reduce costs of its broadband products
as well as its digital access products. There can be no assurance that such
efforts will be sufficient to offset the expected continued decline in the
average selling prices of digital access products.

    RESEARCH AND DEVELOPMENT.  Research and development expenses increased 14%
to $8,123,000 in 1996 from $7,143,000 in 1995. As a percentage of revenues,
research and development expenses declined to 12% in 1996 from 15% in 1995 due
to increased revenues which was offset by an increase in research and
development expenses. The increase in research and development expenses in 1996
was due primarily to a 45% increase in headcount during 1996, as well as
increased costs associated with product safety and country specific product
certification. The Company believes that a continued commitment to research and
development, particularly related to broadband products and emerging
technologies in response to customer demands, will be required to remain
competitive. Accordingly, the Company is increasing its engineering staff and
anticipates that its research and development expenses will increase in future
periods in absolute dollars.

    SELLING, GENERAL AND ADMINISTRATIVE.  Selling, general and administrative
expenses increased 23% to $19,408,000 in 1996 from $15,762,000 in 1995. As a
percentage of revenues, selling, general and administrative expenses declined to
29% in 1996 from 33% in 1995. The increase in absolute dollars was due to
additional personnel costs associated with expansion of the Company's sales and
marketing resources, as well as higher selling expenses associated with higher
revenues. Selling, general and administrative expenses included the amortization
of goodwill of approximately $356,000 and $988,000 during 1996 and 1995,
respectively, related to the acquisition of Larscom by Axel Johnson in 1987 and
the acquisition of

                                       17
<PAGE>
T3T by Larscom in 1991. Goodwill relating to these acquisitions has been fully
amortized as of December 31, 1996. Selling, general and administrative expenses
also include a charge from Axel Johnson for legal, accounting, tax, treasury and
administrative services. For 1996 and 1995, these charges were approximately
$527,000 and $549,000, respectively. The Company anticipates that selling,
general and administrative expenses will increase in absolute dollars in the
future as a result of the Company's continued investment in the expansion of its
sales, service and support organizations, the development of its distribution
channels (particularly outside the United States) as well as the legal,
accounting, human resources and administrative expenses associated with being a
public company.

    NON-OPERATING INCOME (EXPENSE), NET.  Net non-operating expense during 1996
of $597,000 primarily represents interest charged on the $25,000,000 note
payable to Axel Johnson, which was paid with the proceeds of the initial public
offering.

    PROVISION FOR INCOME TAXES.  The effective tax rates of 41% and 45% for 1996
and 1995, respectively, differed from the federal statutory rates as a result of
non deductible goodwill amortization and state taxes, offset in part by research
and development tax credits in 1995. The effective tax rate decreased in 1996 as
the non-deductible items constituted a relatively lower percentage of pre-tax
income during that period.

YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994

    REVENUES.  Revenues increased 33% to $48,663,000 in 1995 from $36,550,000 in
1994. This growth was primarily due to an increase in digital access product
unit sales. Broadband product unit sales increased to a lesser extent.

    GROSS PROFIT.  As a percentage of revenues, gross profit declined to 57% in
1995 from 59% in 1994. This decrease was due primarily to price pressures in the
digital access market, partially offset by the increase in sales of higher gross
profit broadband products.

    RESEARCH AND DEVELOPMENT.  Research and development expenses increased to
$7,143,000 in 1995 from $6,703,000 in 1994. The increase was primarily due to
higher costs associated with continued development in 1995 of the broadband
product line and related technologies. As a percentage of revenues, research and
development expenses decreased to 15% in 1995 from 18% in 1994 due to increased
revenues.

    SELLING, GENERAL AND ADMINISTRATIVE.  Selling, general and administrative
expenses increased 18% to $15,762,000 in 1995 from $13,385,000 in 1994. As a
percentage of revenues, selling, general and administrative expenses declined to
33% in 1995 from 37% in 1994. The increase in absolute dollars was due to the
additional personnel and increased incentive compensation costs required to
generate additional sales and support an increased sales force. Selling, general
and administrative expenses during both 1995 and 1994 also included the
amortization of goodwill, related to the acquisition of Larscom by Axel Johnson
in 1987 and the acquisition of T3T by Larscom in 1991, of $988,000. Selling,
general and administrative expenses also included charges by Axel Johnson of
$549,000 and $526,000 in 1995 and 1994, respectively.

    PROVISION FOR INCOME TAXES.  The effective tax rates of 45% in 1995 and 54%
in 1994 differed from the federal statutory rates as a result of non-deductible
goodwill amortization and state taxes, offset in part by research and
development tax credits. The effective tax rate decreased in 1995 as the
non-deductible items constituted a relatively lower percentage of pre-tax income
during that period.

LIQUIDITY AND CAPITAL RESOURCES

    Since its acquisition by Axel Johnson in 1987 and until its initial public
offering in December 1996, the Company met its operating and capital
requirements primarily from cash flow from operations and advances from Axel
Johnson.

    The Company's operating activities generated $4,710,000 in cash in 1996,
primarily as a result of net income and increases in accrued expenses and other
liabilities which were offset by increases in accounts

                                       18
<PAGE>
receivable and inventories. Operating activities generated $4,034,000 in cash in
1995, primarily as a result of net income and an increase in accrued expenses
and accounts payable partially offset by increases in accounts receivable and
inventories.

    On December 18, 1996, the Company sold 5,800,000 shares of Class A Common
Stock at a price per share of $12 in its initial public offering. During 1996,
net proceeds of the offering were $63,279,000 after issuance costs of $1,449,000
and the underwriting discount. In January 1997, the underwriters exercised their
option to sell an additional 350,000 shares and the Company received net
proceeds of $3,906,000.

    In December 1996, the Company entered into a credit agreement with Axel
Johnson ("the Credit Agreement") under which the Company has available a
revolving line of credit of $15,000,000. The Credit Agreement contains various
representations, covenants and events of default typical for financing a
business of a similar size and nature. The events of default under the Credit
Agreement include any failure to pay punctually any principal or interest due
under the Credit Agreement, any act of insolvency of Larscom and any sale by
Larscom of all or substantially all of its assets. Upon an event of default any
borrowings under the line of credit shall become payable in full. In addition to
such Credit Agreement, the Company and Axel Johnson entered into an
administrative services agreement and a tax sharing agreement for the purposes
of defining the on-going relationship between them. See Footnote 1 and 3 of the
Notes to the Consolidated Financial Statements for more details.

    Capital expenditures in 1996 of $3,131,000, were principally for the
purchase of computers, software and test equipment. The Company expects capital
expenditures during 1997 to be approximately $4,000,000.

    On March 20, 1997, the Company entered into an operating lease under which
the Company agreed to pay approximately $155,000 per month for 119,000 square
feet of space located close to the Company's current facilities in Santa Clara,
California. The lease commences in August 1997 and lasts for seven years. The
Company has an option to extend the lease for a period of five years subject to
certain conditions. These facilities are intended to replace the Company's
current facilities.

    The Company believes that working capital together with the Company's line
of credit and funds generated from operations, will provide adequate liquidity
to meet the Company's operating and capital requirements at least through 1997.
However, there can be no assurance that future events, such as the potential use
of cash to fund acquisitions, will not require the Company to seek additional
capital at an earlier date or, if so required, that adequate capital will be
available on terms acceptable to the Company, or at all.

    The effects of inflation on the Company's revenues and operating income have
not been material.

                              CERTAIN RISK FACTORS

    CUSTOMER CONCENTRATION.  The Company believes that its relationships with
large customers, particularly the NSPs and telecommunications companies, will be
critical to its future success. A small number of customers have accounted for a
majority of the Company's revenues in each of the past several years. In 1996,
1995 and 1994, NSPs represented 62%, 48% and 41%, respectively, of total
revenues and the Company's top five customers accounted for 52%, 48%, and 41% of
revenues in 1996, 1995 and 1994, respectively. None of the Company's customers
are contractually obliged to purchase any quantity of products in any particular
period, and product sales to major customers have varied widely from quarter to
quarter and year to year. There can be no assurance that the Company's current
customers will continue to place orders with the Company, that orders from
existing customers will continue at the levels of previous periods or that the
Company will be able to obtain orders from new customers. Loss of, or a material
reduction in orders by, one or more of the Company's major customers could have
a material adverse effect on the Company's business and operating results.

    DEPENDENCE ON RECENTLY INTRODUCED PRODUCTS AND PRODUCTS UNDER
DEVELOPMENT.  The Company's future operating results are highly dependent on
continuing market acceptance of the Company's newest products, particularly in
the broadband area. There can be no assurance that these products or any future

                                       19
<PAGE>
products will continue to achieve widespread market acceptance. In addition, the
Company has in the past experienced delays in the development of new products
and the enhancement of existing products, and such delays may occur in the
future. The Company's potential inability to develop and introduce new products
or versions in a timely manner, due to resource constraints or technological or
other reasons, or to achieve timely and widespread market acceptance of its new
products or releases could have a material adverse effect on the Company's
business and operating results.

    RAPID TECHNOLOGICAL CHANGE.  The telecommunications equipment industry is
characterized by rapidly changing technologies and frequent new product
introductions. The rapid development of new technologies increases the risk that
current or new competitors could develop products that would reduce the
competitiveness of the Company's products. The Company's success will depend to
a substantial degree upon its ability to respond to changes in technology and
customer requirements. This will require the timely selection, development and
marketing of new products and enhancements on a cost effective basis. There can
be no assurance that the Company will be successful in developing, introducing
or managing the transition to new or enhanced products or that any such products
will be responsive to technological changes or will gain market acceptance. If
the Company were to be unsuccessful or to incur significant delays in developing
and introducing such new products or enhancements, the Company's business and
operating results could be materially adversely affected.

    NO RECENT INDEPENDENT OPERATING HISTORY.  The Company has been a wholly
owned subsidiary of Axel Johnson since 1987 until the date of the Company's IPO
and, accordingly, has had no recent independent operating history. The Company
will be required to further develop financial, management, administrative and
other resources previously provided by Axel Johnson which are necessary to
operate successfully as an independent public company. Although the Company and
Axel Johnson have entered into several agreements that are intended to ease the
Company's transition to an independent public company, there can be no assurance
that the Company will be able to manage this transition or to develop these
independent resources successfully. Although the Company will have access,
subject to certain conditions, to a $15.0 million credit facility provided by
Axel Johnson, there can be no assurance that alternative sources of financing
will be available upon the expiration or termination of such facility or that
additional sources of funding will be available on terms favorable to the
Company if the Company's borrowing requirements exceed the amount of the
facility.

    FLUCTUATIONS IN QUARTERLY OPERATING RESULTS; ABSENCE OF SIGNIFICANT
BACKLOG.  The Company's operating results have fluctuated significantly in the
past and may fluctuate in the future on a quarterly and annual basis as a result
of a number of factors, many of which are beyond the Company's control. In 1995,
the Company experienced a shift in the purchasing behavior of its customers
which resulted in higher second and third quarter sales relative to fourth
quarter sales. These purchasing patterns and resulting cyclicality could
continue in the future. Moreover, the Company's sales historically have been
concentrated in a small number of customers. Therefore, sales for a given
quarter may depend to a significant degree upon product shipments to a limited
number of customers. Sales to individual large customers are often related to
the customer's specific equipment deployment projects, the timing of which are
subject to change on limited notice. The Company has experienced both
acceleration and slowdown in orders related to such projects, causing changes in
the sales level of a given quarter relative to both the preceding and subsequent
quarters. For example, since 1994 sales to MCI, IBM/Advantis, AT&T and other
current customers have occasionally varied by $1.0 million or more from quarter
to quarter. Since most of the Company's sales are in the form of large orders
with short delivery times to a limited number of customers, the Company's
ability to predict revenues is limited. In addition, announcements by the
Company or its competitors of new products and technologies could cause
customers to defer purchases of the Company's existing products. In the event
that anticipated orders from major customers fail to materialize, or delivery
schedules are deferred or canceled as a result of the above factors or other
unanticipated factors, the Company's business and operating results could be
materially adversely affected. As a result, the Company believes that period to
period comparisons of its operating results are not necessarily meaningful and
should not be relied upon as indicative of future performance.

                                       20
<PAGE>
    The Company's gross margin is affected by a number of factors, including
product mix, product pricing, cost of components and manufacturing costs. For
example, a price reduction of a particular product in response to competitive
pressure which is not offset by a reduction in production costs or by sales of
other products with higher gross margins would decrease the Company's overall
gross margin and could have a material adverse effect on the Company's business
and operating results. The Company's anticipated increase in overall spending in
future periods in order to pursue new market opportunities may also affect
operating margins. The Company establishes its expenditure levels for product
development and other operating expenses based on projected sales levels and
margins, however, expenses are relatively fixed in the short term. Accordingly,
if sales are below expectations in any given period, the adverse impact of the
revenue shortfall on the Company's operating results may be greater due to the
Company's inability to adjust spending in the short term to compensate for the
shortfall.

    Results in any period could also be affected by changes in market demand,
competitive market conditions, market acceptance of new or existing products,
the cost and availability of components, the mix of the Company's customer base
and sales channels, the mix of products sold, sales promotion activities by the
Company, the Company's ability to expand its sales and marketing organization
effectively, the Company's ability to attract and retain key technical and
managerial employees and general economic conditions. Due to all of the
foregoing factors, the Company's operating results in one or more future periods
may be subject to significant fluctuations. In the event this results in the
Company's financial performance being below the expectations of public market
analysts and investors, the price of the Company's Class A Common Stock could be
materially adversely affected.

    CONTROL BY AXEL JOHNSON.  Holders of Class A Common Stock are entitled to
one vote per share and holders of Class B Common Stock are entitled to four
votes per share, subject to adjustment, to preserve the initial voting ratio. As
a result, Axel Johnson has sufficient voting power to control the direction and
policies of the Company, including mergers, consolidations, the sale of all or
substantially all of the assets of the Company and the election of the Board of
Directors of the Company, and to prevent or cause a change in control of the
Company. In addition, the authorized but unissued capital stock of the Company
includes 5,000,000 shares of preferred stock (the "Preferred Stock"). The Board
of Directors is authorized to provide for the issuance of Preferred Stock in one
or more series and to fix the designations, preferences, powers and relative,
participating, optional or other rights and restrictions thereof. Accordingly,
the Company may issue a series of Preferred Stock in the future that will have
preference over both classes of the Company's Common Stock with respect to the
payment of dividends and upon liquidation, dissolution or winding up or which
could otherwise adversely affect holders of the Common Stock or discourage or
make difficult any attempt to obtain control of the Company. Such control may
have the effect of discouraging certain types of transactions involving an
actual or potential change of control of the Company, including transactions in
which the holders of Class A Common Stock might otherwise receive a premium for
their shares over the then current market price.

    RISKS ASSOCIATED WITH ENTRY INTO INTERNATIONAL MARKETS.  The Company has had
minimal sales to international customers to date, and has had little experience
in international markets. The conduct of business outside the U.S. is subject to
certain 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, in order to sell its products internationally, the Company must meet
standards established by telecommunications authorities in various countries, as
well as recommendations of the International Telecommunications Union. A delay
in obtaining, or the failure to obtain, certification of its products in
countries outside the U.S. could deny or preclude the Company's marketing and
sales efforts in such countries, which could have a material adverse effect on
the Company's business and operating results.

    MANAGEMENT OF EXPANDING OPERATIONS.  The growth in the Company's business
has placed a significant strain on the Company's personnel, management and other
resources, and is expected to continue to do so. In order to manage any future
expansion effectively, the Company must attract, train, motivate and

                                       21
<PAGE>
manage new employees successfully, integrate new management and employees into
its overall operations and continue to improve its operational, financial and
management systems, particularly as the Company transitions from services
provided to date by Axel Johnson. Availability of qualified sales and technical
personnel is limited, and competition for experienced sales and technical
personnel in the telecommunications equipment industry is intense. Moreover, the
Company expects to increase significantly the size of its domestic and
international sales support staff and expand the scope of its sales and
marketing activities. The Company's failure to manage any expansion effectively,
including the above factors, could have a material adverse effect on the
Company's business and operating results.

    COMPLIANCE WITH REGULATIONS AND EVOLVING INDUSTRY STANDARDS.  The market for
the Company's products is characterized by the need to meet a significant number
of communications regulations and standards, some of which are evolving as new
technologies are deployed. In the U.S., the Company's products must comply with
various regulations defined by the Federal Communications Commission and
standards established by Underwriters Laboratories, as well as industry
standards established by various organizations. As standards for new services
such as ATM evolve, the Company may be required to modify its existing products
or develop and support new versions of its products. The failure of the
Company's products to comply, or delays in compliance, with the various existing
and evolving industry standards could delay introduction of the Company's
products, which in turn could have a material adverse effect on the Company's
business and operating results.

    RISKS ASSOCIATED WITH POTENTIAL ACQUISITIONS.  An important element of the
Company's strategy is to review acquisition prospects that would complement its
existing product offerings, augment its market coverage, enhance its
technological capabilities or offer growth opportunities. The Company has no
current agreements or negotiations underway with respect to any such
acquisitions. Future acquisitions by the Company could result in potentially
dilutive issuances of equity securities and/or the incurrence of debt and the
assumption of contingent liabilities, any of which could have a material adverse
effect on the Company's business and operating results and/or the price of the
Company's Class A Common Stock. In this regard, as a result of the ownership
interest of Axel Johnson in the Company, the Company will not be able to use
pooling of interests accounting for any future acquisition. Accordingly, such
acquisitions could result in amortization of goodwill and other charges
(including the immediate write-off of purchased research and development in
process) typically associated with purchase accounting. Acquisitions entail
numerous risks, including difficulties in the assimilation of acquired
operations, technologies and products, diversion of management's attention to
other business concerns, risks of entering markets in which the Company has
limited or no prior experience and potential loss of key employees of acquired
organizations. The Company's management has limited prior experience in
assimilating acquired organizations. No assurance can be given as to the ability
of the Company to successfully integrate any businesses, products, technologies
or personnel that might be acquired in the future, and the failure of the
Company to do so could have a material adverse effect on the Company's business
and operating results.

    LIMITED PROTECTION OF INTELLECTUAL PROPERTY; PROPRIETARY INFORMATION.  The
Company relies upon a combination of trade secrets, contractual restrictions,
copyrights, trademark laws and patents to establish and protect proprietary
rights in its products and technologies. Although the Company has been issued
only one U.S. patent to date, it believes that the success of its business
depends primarily on its proprietary technology, information and processes and
know-how, rather than patents. Much of the Company's proprietary information and
technology is not patented and may not be patentable. There can be no assurance
that the Company will be able to protect its technology or that competitors will
not be able to develop similar technology independently. The Company has entered
into confidentiality and invention assignment agreements with all of its
employees, and enters into non-disclosure agreements with its suppliers,
distributors and appropriate customers so as to limit access to and disclosure
of its proprietary information. There can be no assurance that these statutory
and contractual arrangements will deter misappropriation of the Company's
technologies or discourage independent third-party development of similar
technologies. In the event such arrangements are insufficient, the Company's
business and operating results could be materially adversely affected.

                                       22
<PAGE>
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of
Larscom Incorporated

    In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of cash flows and of stockholders' equity
present fairly, in all material respects, the financial position of Larscom
Incorporated and its subsidiary at December 31, 1996 and 1995, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.

/s/ Price Waterhouse LLP

PRICE WATERHOUSE LLP

San Jose, California
January 17, 1997, except for Note 9
which is as of March 24, 1997.

                                       23
<PAGE>
                              LARSCOM INCORPORATED
                          CONSOLIDATED BALANCE SHEETS
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
                                     ASSETS

<TABLE>
<CAPTION>
                                                                                                  DECEMBER 31,
                                                                                              --------------------
                                                                                                1996       1995
                                                                                              ---------  ---------
<S>                                                                                           <C>        <C>
Current assets:
  Cash and cash equivalents.................................................................  $  46,403  $      30
  Accounts receivable, net..................................................................      9,478      6,424
  Inventories...............................................................................      8,654      7,250
  Deferred income taxes.....................................................................      2,026      1,415
  Prepaid expenses and other current assets.................................................        722        412
                                                                                              ---------  ---------
    Total current assets....................................................................     67,283     15,531
Property and equipment, net.................................................................      5,530      4,358
Due from Axel Johnson.......................................................................     --          5,186
Intangible assets, net......................................................................         92        526
Other assets................................................................................        138        138
                                                                                              ---------  ---------
    Total assets............................................................................  $  73,043  $  25,739
                                                                                              ---------  ---------
                                                                                              ---------  ---------

                                       LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Accounts payable..........................................................................  $   2,569  $   2,416
  Accrued expenses and other current liabilities............................................      7,441      4,510
  Due to Axel Johnson.......................................................................      1,329     --
                                                                                              ---------  ---------
    Total current liabilities...............................................................     11,339      6,926
                                                                                              ---------  ---------
Deferred income taxes.......................................................................        259        577
                                                                                              ---------  ---------
Commitments and contingencies (Notes 7, 8 and 9)............................................
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; 7,000 and 0 shares
    issued and outstanding, respectively....................................................         70     --
  Class B Common Stock, $0.01 par value; 11,900 shares authorized; 10,700 and 11,900 issued
    and outstanding, respectively...........................................................        107        119
  Additional paid-in capital................................................................     76,392     13,171
  Retained earnings (accumulated deficit)...................................................    (15,124)     4,946
                                                                                              ---------  ---------
    Total stockholders' equity..............................................................     61,445     18,236
                                                                                              ---------  ---------
    Total liabilities and stockholders' equity..............................................  $  73,043  $  25,739
                                                                                              ---------  ---------
                                                                                              ---------  ---------
</TABLE>

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

                                       24
<PAGE>
                              LARSCOM INCORPORATED
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                                      YEARS ENDED DECEMBER 31,
                                                                                   -------------------------------
                                                                                     1996       1995       1994
                                                                                   ---------  ---------  ---------
<S>                                                                                <C>        <C>        <C>
Revenues.........................................................................  $  66,444  $  48,663  $  36,550
Cost of revenues.................................................................     29,949     21,147     15,037
                                                                                   ---------  ---------  ---------
    Gross profit.................................................................     36,495     27,516     21,513
                                                                                   ---------  ---------  ---------
Operating expenses:
  Research and development.......................................................      8,123      7,143      6,703
  Selling, general and administrative............................................     19,408     15,762     13,385
                                                                                   ---------  ---------  ---------
    Total operating expenses.....................................................     27,531     22,905     20,088
                                                                                   ---------  ---------  ---------
Income from operations...........................................................      8,964      4,611      1,425
Interest expense charged by Axel Johnson.........................................       (630)    --         --
Interest income..................................................................         33          3          9
                                                                                   ---------  ---------  ---------
Income before income taxes.......................................................      8,367      4,614      1,434
Provision for income taxes.......................................................      3,437      2,085        773
                                                                                   ---------  ---------  ---------
Net income.......................................................................  $   4,930  $   2,529  $     661
                                                                                   ---------  ---------  ---------
                                                                                   ---------  ---------  ---------
Supplemental net income per share(1).............................................  $    0.37  $    0.18
Shares used to compute supplemental net income per share(1)......................     14,317     14,193
</TABLE>

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

(1) See Note 1 of Notes to the Consolidated Financial Statements for an
    explanation of the determination of net income and of shares used to compute
    supplemental net income per share.

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

                                       25
<PAGE>
                              LARSCOM INCORPORATED
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                       YEARS ENDED DECEMBER 31,
                                                                                    -------------------------------
                                                                                      1996       1995       1994
                                                                                    ---------  ---------  ---------
<S>                                                                                 <C>        <C>        <C>
Cash flows from operating activities:
  Net income......................................................................  $   4,930  $   2,529  $     661
  Adjustments to reconcile net income to net cash provided by operating
    activities:
    Depreciation..................................................................      1,959      1,535      1,516
    Amortization..................................................................        434      1,109      1,109
    Deferred income taxes.........................................................       (929)      (132)      (126)
    Changes in assets and liabilities:
      Accounts receivable.........................................................     (3,054)    (1,449)       386
      Inventories.................................................................     (1,404)    (1,063)    (1,078)
      Prepaid expenses and other current assets...................................       (310)        77         82
      Accounts payable............................................................        153        233        983
      Accrued expenses and other current liabilities..............................      2,931      1,195       (594)
                                                                                    ---------  ---------  ---------
Net cash provided by operating activities.........................................      4,710      4,034      2,939
                                                                                    ---------  ---------  ---------
Cash flows from investing activities:
  Purchase of property and equipment..............................................     (3,131)    (2,087)    (1,407)
                                                                                    ---------  ---------  ---------
Net cash used by investing activities.............................................     (3,131)    (2,087)    (1,407)
                                                                                    ---------  ---------  ---------
Cash flows from financing activities:
  Net proceeds from Common Stock offering.........................................     63,279     --         --
  Payment of dividend to Axel Johnson.............................................    (25,000)    --         --
  Advances from (repayments to) Axel Johnson......................................      6,515     (2,011)    (1,721)
                                                                                    ---------  ---------  ---------
Net cash provided (used) by financing activities..................................     44,794     (2,011)    (1,721)
                                                                                    ---------  ---------  ---------
Increase (decrease) in cash and cash equivalents..................................     46,373        (64)      (189)
Cash and cash equivalents at beginning of period..................................         30         94        283
                                                                                    ---------  ---------  ---------
Cash and cash equivalents at end of period........................................  $  46,403  $      30  $      94
                                                                                    ---------  ---------  ---------
                                                                                    ---------  ---------  ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid.....................................................................  $     630  $  --      $  --
                                                                                    ---------  ---------  ---------
Income taxes paid.................................................................  $   4,366  $   2,217  $     899
                                                                                    ---------  ---------  ---------
</TABLE>

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

                                       26
<PAGE>
                              LARSCOM INCORPORATED
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                 (IN THOUSANDS)
<TABLE>
<CAPTION>
                                                        CLASS A                  CLASS B                         RETAINED
                                                      COMMON STOCK             COMMON STOCK       ADDITIONAL    EARNINGS/
                                                ------------------------  ----------------------    PAID-IN    (ACCUMULATED
                                                  SHARES       AMOUNT      SHARES      AMOUNT       CAPITAL      DEFICIT)
                                                -----------  -----------  ---------  -----------  -----------  ------------
<S>                                             <C>          <C>          <C>        <C>          <C>          <C>
Balance at December 31, 1993..................      --        $  --          11,900   $     119    $  13,171    $    1,756
Net income....................................      --           --          --          --           --               661
                                                     -----        -----   ---------       -----   -----------  ------------
Balance at December 31, 1994..................      --           --          11,900         119       13,171         2,417
Net income....................................      --           --          --          --           --             2,529
                                                     -----        -----   ---------       -----   -----------  ------------
Balance at December 31, 1995..................      --           --          11,900         119       13,171         4,946
Conversion of Class B Common Stock to Class A
  Common Stock................................       1,200           12      (1,200)        (12)      --            --
Sale of Class A Common Stock, net.............       5,800           58      --          --           63,221        --
Dividend paid.................................                                                                     (25,000)
Net income....................................      --           --          --          --           --             4,930
                                                     -----        -----   ---------       -----   -----------  ------------
Balance at December 31, 1996..................       7,000    $      70      10,700   $     107    $  76,392    $  (15,124)
                                                     -----        -----   ---------       -----   -----------  ------------
                                                     -----        -----   ---------       -----   -----------  ------------

<CAPTION>

                                                    TOTAL
                                                STOCKHOLDERS'
                                                   EQUITY
                                                -------------
<S>                                             <C>
Balance at December 31, 1993..................   $    15,046
Net income....................................           661
                                                -------------
Balance at December 31, 1994..................        15,707
Net income....................................         2,529
                                                -------------
Balance at December 31, 1995..................        18,236
Conversion of Class B Common Stock to Class A
  Common Stock................................       --
Sale of Class A Common Stock, net.............        63,279
Dividend paid.................................       (25,000)
Net income....................................         4,930
                                                -------------
Balance at December 31, 1996..................   $    61,445
                                                -------------
                                                -------------
</TABLE>

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

                                       27
<PAGE>
                              LARSCOM INCORPORATED

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1-- THE COMPANY AND A SUMMARY OF SIGNIFICANT ACCOUNTING
       POLICIES:

    Larscom Incorporated (the "Company") , a majority owned subsidiary of Axel
Johnson, develops, manufactures and markets a broad range of high speed, global
internetworking solutions for network service providers and corporate users. The
Company operates in one industry segment.

PRINCIPLES OF CONSOLIDATION

    The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary. All material intercompany transactions and
balances have been eliminated in consolidation. The Company's investment in a
less than 50% owned entity is accounted for using the equity method.

CONCENTRATIONS OF CREDIT RISK

    Financial instruments which subject the Company to concentrations of credit
risk consist primarily of accounts receivable. The Company's accounts receivable
is derived from sales to customers primarily in the United States. The Company
performs ongoing credit evaluations of its customers, and generally requires no
collateral from its customers. The Company maintains reserves for potential
credit losses, and to date has not experienced any material losses. At December
31, 1996 and 1995, receivables from two customers represented 18% and 11%, and
23% and 12%, respectively, of gross accounts receivable.

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 those
estimates.

CASH AND CASH EQUIVALENTS

    Cash and cash equivalents include all cash and highly liquid investments
with original maturities of three months or less. The carrying amount of cash
and cash equivalents approximates fair value because of the short maturity of
those investments and the financial stability of the issuers.

    The Company participates in Axel Johnson's centralized cash management
system. In general, the cash funding requirements of the Company have been met
by, and substantially all cash generated by the Company has been transferred to,
Axel Johnson. Average daily net balances owed to Axel Johnson will incur
interest at the same rate as set forth in the Credit Agreement (See Note 3 for
details). Average daily net balances due from Axel Johnson will earn interest at
the average rate earned by Axel Johnson on its investments.

INVENTORIES

    Inventories are stated at the lower of cost, determined using the first-in
first-out method, or market.

PROPERTY AND EQUIPMENT

    Property and equipment are recorded at cost. Depreciation and amortization
are 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.

                                       28
<PAGE>
                              LARSCOM INCORPORATED

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

    Purchased identifiable intangible assets are amortized using the straight
line method over their estimated useful lives of five to ten years. Goodwill,
representing the excess of purchase price over the fair value of net assets
acquired has been amortized over periods ranging from five to eight years on a
straight line basis. At each balance sheet date, a review is performed by
management to ascertain whether intangibles have been impaired based on several
criteria, including, but not limited to, revenue trends, undiscounted operating
cash flows and other operating factors.

LONG-LIVED ASSETS

    On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to be Disposed Of." This statement established accounting
standards for the impairment of long-lived assets, certain identifiable
intangibles and goodwill. The adoption of this statement had no effect on the
Company's financial position or results of operations.

WARRANTY

    The Company provides a two year warranty for its products. Effective January
1, 1997, certain of the Company's products were sold with warranty periods of
three years. A provision for the estimated cost of warranty, which includes
material, labor and overhead, is recorded at the time revenue is recognized.
While the Company believes that its reserves for estimated future warranty costs
are adequate there are inherent risks associated with these estimates
particularly for those estimates related to products which have been recently
introduced.

PENSIONS

    Axel Johnson has a noncontributory funded defined benefit pension plan and
an unfunded retirement restoration plan covering substantially all the Company's
employees. In general the cost of these plans has been allocated to the Company
based on the compensation of the Company's employees. Amounts so allocated are
not necessarily indicative of the pension cost that would have been incurred if
the Company maintained its own benefit plans. See Note 6 for details.

    Pension cost allocated to the Company is recorded in the "Due from/(to) Axel
Johnson" balance. The Company's exposure to retirement benefits is limited to
the cost so allocated.

REVENUE RECOGNITION

    Revenue from product sales is recognized upon shipment of the product. The
Company, in general, does not grant a right of return to its customers.

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

<TABLE>
<CAPTION>
                                                                                          YEARS ENDED
                                                                                         DECEMBER 31,
                                                                                -------------------------------
                                                                                  1996       1995       1994
                                                                                ---------  ---------  ---------
<S>                                                                             <C>        <C>        <C>
MCI...........................................................................        21%        18%        15%
IBM/Advantis..................................................................        13%        14%       *10%
</TABLE>

                                       29
<PAGE>
                              LARSCOM INCORPORATED

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

    All research and development costs, including the software development costs
discussed below, are charged to expense as incurred.

SOFTWARE DEVELOPMENT COSTS

    Software development costs incurred prior to establishment of technological
feasibility are expensed as research and development costs. Costs incurred
subsequent to the establishment of technological feasibility, and prior to the
general release of the product to the public, were not significant for all
periods presented and accordingly have been expensed.

INCOME TAXES

    Deferred tax assets and liabilities are recognized for the expected tax
consequences of temporary differences between the tax bases of assets and
liabilities and their financial statement reported amounts. Current tax expense
has been determined as if the Company was a separate taxpayer. Income taxes
currently payable are deemed to have been remitted by the Company to Axel
Johnson in the period that the liability arose. Income taxes currently
receivable are deemed to have been received by the Company from Axel Johnson in
the period that a refund could have been recognized by the Company had the
Company been a separate taxpayer. In December 1996, the Company entered into an
income tax sharing agreement with Axel Johnson, pursuant to which the Company
made a payment to Axel Johnson, of an amount in respect of income taxes
attributable to the Company for the period from January 1, 1996 to December 18,
1996, the date of the Company's IPO, when the Company ceased to be a member of
the Axel Johnson consolidated group.

SUPPLEMENTAL NET INCOME PER SHARE

    Supplemental net income per share is computed using the weighted average
number of shares of common stock outstanding during the period. The weighted
average number of shares of common stock also includes a number of common
shares, calculated using the net proceeds per share of common stock in the
offering, which would be required to pay the $25,000,000 dividend to Axel
Johnson. Net income for the year ended December 31, 1996, has been increased by
interest expense, net of income taxes, of approximately $371,000 on the note
payable to Axel Johnson. Net income per share for periods prior to 1995 has not
been presented as such presentation is not meaningful.

STOCK-BASED COMPENSATION

    As permitted under Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123), the Company is continuing
to measure compensation cost for stock-based compensation plans using the
intrinsic value method prescribed by APB Opinion No. 25 "Accounting for Stock
Issued to Employees." SFAS 123 defines a "fair value" method of accounting for
an employee stock option or similar equity instrument and encourages, but does
not require, entities to adopt that method of accounting for their employee
stock compensation plans. The pro forma disclosures of the difference between
compensation cost included in net income and the related cost measured by the
fair value method are presented in Note 6.

                                       30
<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 accounts receivable, accounts
payable, accrued expenses and other liabilities, the carrying value is
considered to approximate fair value due to the relatively short maturities of
the respective instruments.

NOTE 2--BALANCE SHEET COMPONENTS

<TABLE>
<CAPTION>
                                                                                                  DECEMBER 31,
                                                                                              --------------------
                                                                                                1996       1995
                                                                                              ---------  ---------
                                                                                                 (IN THOUSANDS)
<S>                                                                                           <C>        <C>
Accounts receivable:
  Gross accounts receivable.................................................................  $   9,603  $   6,514
  Less: Allowance for doubtful accounts.....................................................       (125)       (90)
                                                                                              ---------  ---------
                                                                                              $   9,478  $   6,424
                                                                                              ---------  ---------
                                                                                              ---------  ---------
Inventories:
  Raw materials.............................................................................  $   1,508  $   1,338
  Work in process...........................................................................      1,823      3,834
  Finished goods............................................................................      5,323      2,078
                                                                                              ---------  ---------
                                                                                              $   8,654  $   7,250
                                                                                              ---------  ---------
                                                                                              ---------  ---------
Property and equipment:
  Machinery and equipment...................................................................  $   6,751  $   5,848
  Computers and software....................................................................      5,136      3,486
  Leasehold improvements....................................................................      1,069        979
  Furniture and fixtures....................................................................        742        647
                                                                                              ---------  ---------
                                                                                                 13,698     10,960
  Less: Accumulated depreciation............................................................     (8,168)    (6,602)
                                                                                              ---------  ---------
                                                                                              $   5,530  $   4,358
                                                                                              ---------  ---------
                                                                                              ---------  ---------
Intangible assets:
  Goodwill..................................................................................  $   2,375  $   2,375
  Other intangible assets...................................................................      1,013      1,013
                                                                                              ---------  ---------
                                                                                                  3,388      3,388
  Less: Accumulated amortization............................................................     (3,296)    (2,862)
                                                                                              ---------  ---------
                                                                                              $      92  $     526
                                                                                              ---------  ---------
                                                                                              ---------  ---------
Accrued expenses and other current liabilities:
  Accrued compensation......................................................................  $   4,807  $   2,687
  Accrual for contractual matters (See Note 8)..............................................        532        757
  Other current liabilities.................................................................      2,102      1,066
                                                                                              ---------  ---------
                                                                                              $   7,441  $   4,510
                                                                                              ---------  ---------
                                                                                              ---------  ---------
</TABLE>

                                       31
<PAGE>
                              LARSCOM INCORPORATED

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 3--RELATED PARTY TRANSACTIONS:

TRANSACTIONS WITH AXEL JOHNSON

    Related party transactions with Axel Johnson not disclosed elsewhere in the
consolidated financial statements are as follows:

    DUE FROM/(TO) AXEL JOHNSON

    Amounts due from/(to) Axel Johnson consist of cash remittances made by the
Company to Axel Johnson from its operating bank accounts offset by cash advances
to the Company from Axel Johnson for purchases of property and equipment,
acquisitions, current income tax liabilities and fluctuating working capital
needs. Neither Axel Johnson nor the Company has charged interest on the balances
due.

    The following is an analysis of the balance due from/(to) Axel Johnson:

<TABLE>
<CAPTION>
                                                                                   DECEMBER 31,
                                                                          -------------------------------
                                                                            1996       1995       1994
                                                                          ---------  ---------  ---------
                                                                                  (IN THOUSANDS)
<S>                                                                       <C>        <C>        <C>
Balance at beginning of the period......................................  $   5,186  $   3,175  $   1,454
Cash remittances to Axel Johnson, net of cash advances..................      1,818      6,563      4,929
Charges from Axel Johnson for:
  Income taxes..........................................................     (4,366)    (2,217)      (899)
  Pension and thrift plan...............................................     (1,028)      (898)      (850)
  Insurance and workers' compensation...................................       (512)      (534)      (652)
  Administrative services...............................................       (527)      (549)      (526)
  Interest on note payable..............................................       (630)    --         --
  Property, liability and general insurance.............................       (633)      (193)      (180)
  IPO related costs.....................................................       (401)    --         --
  Other charges.........................................................       (236)      (161)      (101)
                                                                          ---------  ---------  ---------
Balance at the end of the period........................................  $  (1,329) $   5,186  $   3,175
                                                                          ---------  ---------  ---------
                                                                          ---------  ---------  ---------
</TABLE>

    NOTE PAYABLE TO AXEL JOHNSON

    In August 1996, the Company declared a dividend of $25,000,000, evidenced by
a note payable to Axel Johnson, bearing interest at a rate of 7.5% per annum.
The principal was paid out of the proceeds of the Company's initial public
offering on December 24, 1996.

    EMPLOYEE BENEFIT PROGRAMS

    The Company participates in various employee benefit programs which are
sponsored by Axel Johnson. These programs include medical, dental and life
insurance and workers' compensation. In general the Company reimburses Axel
Johnson for its proportionate cost of these programs based on historical
experience and relative headcount. The costs reimbursed to Axel Johnson include
costs for reported claims, as well as incurred but not reported claims. The
Company recorded expense related to the reimbursement of these costs of
approximately $512,000, $534,000 and $652,000 in 1996, 1995 and 1994,
respectively. The costs are charged to cost of revenues, research and
development expenses and selling, general and administrative expenses based on
the relative aggregate compensation of the employees in each of these
categories. The Company believes the allocation by Axel Johnson of the
proportionate cost is reasonable but is not necessarily indicative of the costs
that would have been incurred had the Company maintained its own benefit plans.

                                       32
<PAGE>
                              LARSCOM INCORPORATED

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 3--RELATED PARTY TRANSACTIONS: (CONTINUED)
    ADMINISTRATIVE SERVICES

    Axel Johnson provides limited services to the Company, including certain
treasury, accounting, tax, internal audit, legal and human resources functions.
The costs of these functions have been allocated to the Company based on
estimates of actual costs incurred. Management believes that such allocations
are reasonable. Such charges and allocations are not necessarily indicative of
the costs that would have been incurred if the Company had been a separate
entity. The allocated costs of these services amounting to $527,000, $549,000
and $526,000 in 1996, 1995 and 1994, respectively, have been included in
selling, general and administrative expenses in the consolidated statements of
operations. In December 1996, the Company entered into a transitional
administrative services agreement with Axel Johnson, pursuant to which Axel
Johnson will continue to provide the services outlined above for an initial
annual fee of $622,000.

    CREDIT AGREEMENT

    The Company and Axel Johnson entered into a credit agreement, pursuant to
which Axel Johnson has agreed to provide a revolving credit/working capital
facility (the "Credit Agreement") to the Company in an aggregate amount of
$15,000,000. The Credit Agreement has a term of 24 months, and any loans
thereunder bear interest during each calendar quarter at a rate per annum equal
to the sum of the three month London Interbank Offered Rate (LIBOR), plus 2.0%
initially on the date when the loan is made and adjusted thereafter on the first
business day of each calendar quarter. Additionally, the Company is required to
pay a commitment fee of 0.5% per annum on the unused portion of the Credit
Agreement. The Company is required to maintain compliance with certain covenants
under the Credit Agreement. As of December 31, 1996, $15,000,000 was available,
and during 1996 no borrowings were made, under the Credit Agreement.

LARVAN LEASE

    The Company leases its principal facilities from Larvan Properties
("Larvan"), a general partnership in which the Company owns a one third
interest. The Company paid $278,000, $278,000 and $278,000 in rent expense to
Larvan and earned partnership income of $36,000, $36,000 and $46,000 in 1996,
1995, and 1994, respectively.

NOTE 4--CAPITAL STOCK:

    In October 1996, the Company's Board of Directors approved a plan to
recapitalize the Company by authorizing (i) Class A Common Stock consisting of
100,000,000 shares, (ii) Class B Common Stock consisting of 11,900,000 shares
and (iii) 5,000,000 shares of undesignated Preferred Stock. Additionally, the
Company's existing Common Stock was reclassified as Class B Common Stock and a
1,190 to one stock split of the Class B Common Stock was effected. Such
recapitalization was effected on December 11, 1996. These accompanying
consolidated financial statements have been restated to reflect the
recapitalization and the stock split in all periods presented.

    The rights, preferences and privileges of each class of Common Stock are
identical except for voting rights. Each share of Class A Common Stock entitles
its holder to one vote and each share of Class B 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.

                                       33
<PAGE>
                              LARSCOM INCORPORATED

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 4--CAPITAL STOCK: (CONTINUED)
    The Board of Directors has the authority to issue up to 5,000,000
undesignated shares of Preferred Stock in one or more series and to fix the
rights, preferences, privileges and restrictions thereof, including dividend
rights, conversion rights, voting rights, terms of redemption, liquidation
preferences, sinking fund terms and the number of shares constituting any series
or the designation of such series, without any further vote or action by
stockholders.

    In December 1996, the Company completed an initial public offering of
7,000,000 shares of Class A Common Stock at a price of $12 per share of which
5,800,000 were sold by the Company and 1,200,000 shares were sold by Axel
Johnson. After deducting underwriting discount of $4,872,000 and issuance costs
of $1,449,000, the Company received net proceeds of $63,279,000 in December
1996. Subsequent to December 31, 1996, the underwriters exercised their
over-allotment option to sell additional shares and sold an additional 1,050,000
shares of which 350,000 were sold by the Company and 700,000 were sold by Axel
Johnson. Net proceeds to the Company in January 1997 were $3,906,000 after
deducting the underwriting discount of $294,000.

NOTE 5--INCOME TAXES:

    The provision for income taxes consists of the following:

<TABLE>
<CAPTION>
                                                                                YEARS ENDED DECEMBER 31,
                                                                             -------------------------------
                                                                               1996       1995       1994
                                                                             ---------  ---------  ---------
                                                                                     (IN THOUSANDS)
<S>                                                                          <C>        <C>        <C>
Current:
  Federal..................................................................  $   3,481  $   1,782  $     764
  State....................................................................        885        435        135
                                                                             ---------  ---------  ---------
                                                                                 4,366      2,217        899
                                                                             ---------  ---------  ---------
Deferred:
  Federal..................................................................       (731)       (63)      (149)
  State....................................................................       (198)       (69)        23
                                                                             ---------  ---------  ---------
                                                                                  (929)      (132)      (126)
                                                                             ---------  ---------  ---------
  Provision for income taxes...............................................  $   3,437  $   2,085  $     773
                                                                             ---------  ---------  ---------
                                                                             ---------  ---------  ---------
</TABLE>

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

<TABLE>
<CAPTION>
                                                                                     1996         1995         1994
                                                                                     -----        -----     -----------
<S>                                                                               <C>          <C>          <C>
Provision at statutory rate.....................................................         34%          34%          34%
  State income taxes, net of federal tax benefits...............................          5            5            7
  Research and development credits..............................................         (1)          (2)         (11)
  Non deductible goodwill amortization..........................................          2            7           22
  Other.........................................................................          1            1            2
                                                                                         --           --           --
Effective rate..................................................................         41%          45%          54%
                                                                                         --           --           --
                                                                                         --           --           --
</TABLE>

                                       34
<PAGE>
                              LARSCOM INCORPORATED

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 5--INCOME TAXES: (CONTINUED)
    Deferred tax assets/liabilities are comprised of the following:

<TABLE>
<CAPTION>
                                                                                 DECEMBER 31,
                                                                             --------------------
                                                                               1996       1995
                                                                             ---------  ---------
                                                                                (IN THOUSANDS)
<S>                                                                          <C>        <C>
Deferred tax assets:
  Inventory................................................................  $     838  $     509
  Accrued expenses.........................................................      1,047        579
  Reserves.................................................................        257        310
  Other....................................................................         99         17
                                                                             ---------  ---------
                                                                                 2,241      1,415
                                                                             ---------  ---------
Deferred tax liabilities:
  Depreciation and amortization............................................        474        513
  Other....................................................................     --             64
                                                                             ---------  ---------
                                                                                   474        577
                                                                             ---------  ---------
Net deferred tax asset.....................................................  $   1,767  $     838
                                                                             ---------  ---------
                                                                             ---------  ---------
</TABLE>

NOTE 6--EMPLOYEE BENEFIT PLANS

    THRIFT PLAN

    The Company participates in the Axel Johnson Thrift Plan (the "Thrift Plan")
qualified under Section 401(k) of the Internal Revenue Code. The Thrift Plan
allows employees to defer up to 16% of their compensation not to exceed the
amount allowed by the applicable Internal Revenue Service guidelines. The
Company matches 60% of employee contributions made on a pre-tax basis and 30% of
employee contributions made on a post-tax basis, subject to a maximum of 6% of
total eligible employee compensation. Company contributions vest ratably over
five years of service or two years of plan participation, whichever occurs
first. Contributions by the Company under the Thrift Plan amounted to $379,000,
$345,000 and $297,000 in 1996, 1995 and 1994, respectively.

    PENSION PLAN

    The Company's employees participate in a noncontributory defined benefit
pension plan sponsored by Axel Johnson. Benefits under the plan are based on
years of service and employees' compensation. The plan's assets are invested
principally in equity and fixed income securities. It is Axel Johnson's policy
to satisfy the minimum funding requirements of the Employee Retirement Income
Security Act of 1974 (ERISA).

                                       35
<PAGE>
                              LARSCOM INCORPORATED

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 6--EMPLOYEE BENEFIT PLANS (CONTINUED)

    Net periodic pension cost was determined by measuring the Projected Benefit
Obligation ("PBO") for the Company's employees using a discount rate of 7.3%,
8.5% and 8.3%, and an assumed long term rate of compensation of 4.5%, 5.3% and
4.0% in 1996, 1995 and 1994, respectively. The PBO for such employees was
determined using a discount rate of 7.5% and 7.3% at December 31, 1996 and 1995,
respectively. The PBO so measured was $3,819,000 and $3,566,000 at December 31,
1996 and 1995, respectively.

    Certain elements of pension cost, including expected return on assets (which
was 9.5% in 1996 and 9% in 1995 and 1994), and net amortization, were allocated
based on the relationship of the PBO for the Company to the total PBO of the
defined benefit pension plan. The elements of pension cost allocated to the
Company using this method were:

<TABLE>
<CAPTION>
                                                                         YEARS ENDED DECEMBER 31,
                                                                      -------------------------------
                                                                        1996       1995       1994
                                                                      ---------  ---------  ---------
                                                                              (IN THOUSANDS)
<S>                                                                   <C>        <C>        <C>
Service cost........................................................  $     556  $     496  $     504
Interest cost.......................................................        273        245        192
Net amortization....................................................         (2)        (7)        (3)
Expected return on assets...........................................       (261)      (213)      (173)
                                                                      ---------  ---------  ---------
    Net periodic pension cost.......................................  $     566  $     521  $     520
                                                                      ---------  ---------  ---------
                                                                      ---------  ---------  ---------
</TABLE>

    The Company's employees also are eligible to participate in the Axel Johnson
retirement restoration plan. This plan is for employees whose benefits under the
defined benefit pension plans are reduced due to limitations under federal tax
laws. The Company's pension expense for this plan, using the same methodology as
described above, was $83,000, $32,000 and $33,000 in 1996, 1995 and 1994,
respectively. The PBO at December 31, 1996 and 1995, was $370,000 and $150,000,
respectively.

    EMPLOYEE STOCK PURCHASE PLAN

    Effective October 1996, the Company's Board of Directors adopted an Employee
Stock Purchase Plan (the "Purchase Plan"), for which 310,000 shares of Class A
Common Stock have been reserved for issuance. The Purchase Plan permits eligible
employees to purchase Class A Common Stock through payroll deductions at 85% of
the lower of the fair market value of the Class A Common Stock at the beginning
or at the end of each offering period subject to various limitations. The
Purchase Plan became effective upon the closing of the Offering however no
shares were purchased during 1996.

    STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS

    In October 1996, the Company adopted a Stock Option Plan for Non-Employee
Directors (the "Directors' Plan") and reserved a total of 205,000 shares of the
Company's Class A Common Stock for issuance thereunder. The Directors' Plan
provides for the grant of stock options pursuant to an automatic grant mechanism
to members of the Board of Directors who are not employees of the Company or of
Axel Johnson. Each non-employee director will receive an initial grant, upon
first becoming a director (or, in the case of current non-employee directors,
upon consummation of the Offering), to purchase a total of 18,000 shares of
Class A Common Stock, and each year thereafter will receive an option to
purchase a total of 6,000 shares of Class A Common Stock. Each option is granted
at an exercise price equal to fair market value on date of grant. Each initial
grant vests in three equal annual occurrences, and each annual grant vests in
full on the three years following the date of grant. Options expire one year
after termination of Board Service or ten years after the date of grant. The
Directors Plan became effective upon the closing of

                                       36
<PAGE>
                              LARSCOM INCORPORATED

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 6--EMPLOYEE BENEFIT PLANS (CONTINUED)
the Offering in December 1996. As of December 31, 1996, no options were
exercisable and the weighted average remaining contractual life of outstanding
options was ten years. The following table summarizes activity under the plan:

<TABLE>
<CAPTION>
                                                                  RANGE OF PRICE   WEIGHTED AVERAGE
                                                                     PER SHARE      PRICE PER SHARE
                                                   SHARES         ---------------  -----------------
                                             -------------------
                                               (IN THOUSANDS)
<S>                                          <C>                  <C>              <C>
Options outstanding as of December 31,
  1995.....................................                N o t  a p p l i c a b 1 e
Options granted............................              54        $12.00-$12.00       $   12.00
Options cancelled or expired...............          --                 --                --
Options exercised..........................          --                 --                --
                                                         --
                                                                  ---------------         ------
Options outstanding as of December 31,
  1996.....................................              54        $12.00-$12.00       $   12.00
                                                         --
                                                         --
</TABLE>

    STOCK INCENTIVE PLAN

    In October 1996, the Company's Board of Directors approved a Stock Incentive
Plan (the "Incentive Plan") for which 2,485,000 shares of Class A Common Stock
have been reserved for issuance thereunder. The Incentive Plan, which became
effective upon the closing of the Offering, provides for the grant of incentive
stock options, non-qualified stock options, stock appreciation rights and stock
bonus awards to employees or eligible consultants. The Incentive Plan is
administered by the Compensation Committee of the Board of Directors (the
"Administrator"). With respect to any participant who owns stock possessing more
than ten percent of the voting power of all classes of the Company's outstanding
capital stock (a 10% stockholder), the exercise price of any incentive stock
option granted must equal 110% of the fair market value on the grant date. The
exercise price of incentive stock options for all other employees shall be no
less than 100% of the fair market value per share on the date of the grant. The
maximum term of an option granted under the Incentive Plan may not exceed ten
years from the date of grant (five years in the case of an incentive stock
option granted to a 10% stockholder). Options generally vest over a five year
period from the date of grant. As of December 31, 1996, no options were
exercisable and the weighted average remaining contractual life of outstanding
options was ten years. The following table summarizes activity under the plan:

<TABLE>
<CAPTION>
                                                              RANGE OF PRICE   WEIGHTED AVERAGE
                                                                 PER SHARE      PRICE PER SHARE
                                                 SHARES       ---------------  -----------------
                                             ---------------
                                             (IN THOUSANDS)
<S>                                          <C>              <C>              <C>
Options outstanding as of December 31,
  1995.....................................              N o t  a p p l i c a b 1 e
Options granted............................         1,292      $12.00-$12.00       $   12.00
Options cancelled or expired...............        --               --                --
Options exercised..........................        --               --                --
                                                    -----     ---------------         ------
Options outstanding as of December 31,
  1996.....................................         1,292      $12.00-$12.00       $   12.00
                                                    -----
                                                    -----
</TABLE>

    FAIR VALUE OF STOCK OPTIONS

    The weighted average fair value of options granted during 1996 under the
Company's two stock options plans was $5.15 per option. In determining the fair
value of options granted during 1996 the

                                       37
<PAGE>
                              LARSCOM INCORPORATED

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 6--EMPLOYEE BENEFIT PLANS (CONTINUED)
Company used the Black-Scholes option pricing model and assumed a weighted
average of the following: a risk free interest rate of 6.0 %, an average
expected option life of 4.04 years, an expected volatility of 47% and a zero
dividend yield. The fair value of options with graded vesting was calculated
using different estimated lives for each group of options depending on the
length of the vesting period for that group. The difference between as reported
and pro forma net income and earnings per share was not material because options
were granted late in December 1996. In future years, the difference between as
reported and pro forma net income and earnings per share is expected to be
material and such disclosures will be made.

NOTE 7--LEASES:

    The Company leases its primary facilities from a related party under a lease
which expires in January 1998. (See Note 3.) Total rent expense in 1996, 1995
and 1994, was $552,000, $515,000, and $585,000, respectively. Future annual
minimum lease payments under all noncancelable operating leases as of December
31, 1996, are as follows:

<TABLE>
<CAPTION>
                                                                                    AMOUNT
                                                                                 -------------
                                                                                      (IN
                                                                                  THOUSANDS)
<S>                                                                              <C>
Years ending December 31,
  1997.........................................................................    $     465
  1998.........................................................................          183
  1999.........................................................................          155
  2000.........................................................................          140
  2001 and thereafter..........................................................           60
                                                                                      ------
                                                                                   $   1,003
                                                                                      ------
                                                                                      ------
</TABLE>

NOTE 8--COMMITMENTS AND CONTINGENCIES:

    There are potential unasserted claims against the Company relating to
pricing deficiencies under two product supply contracts subject to General
Services Administration ("GSA") regulations. Management has completed an
assessment of its performance under the GSA contracts, assessed its potential
liability with the assistance of the Company's outside experts and legal
counsel, and voluntarily disclosed the identified pricing deficiencies to the
GSA contracting officer responsible for the Company's contracts. Although the
ultimate resolution of this matter potentially could involve purchase price
rebates and associated legal, audit and other costs of up to an aggregate of
approximately $1,300,000 or more, management believes, after consultation with
its outside experts and legal counsel, that the Company's exposure for this
matter is not likely to exceed $800,000, which includes estimated purchase price
rebates and associated legal, audit and other costs, and the Company has
established a reserve for this amount less an initial payment of $268,000 made
in December 1996. In management's opinion, the ultimate resolution of this
matter will not have a material adverse effect on the Company's financial
position or results of operations.

    In its distribution agreements, the Company typically agrees to indemnify
its customers for any expenses or liabilities resulting from claimed
infringements of patents, trademarks or copyrights of third parties.

                                       38
<PAGE>
                              LARSCOM INCORPORATED

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 9--SUBSEQUENT EVENTS:

    On March 20, 1997, the Company entered into an operating lease under which
the Company agreed to pay approximately $155,000 per month for 119,000 square
feet of space located close to the Company's current facilities in Santa Clara,
California. The lease commences in August 1997 and lasts for seven years. The
Company has an option to extend the lease for a period of five years subject to
certain conditions. These facilities are intended to replace the Company's
current facilities.

NOTE 10--UNAUDITED QUARTERLY CONSOLIDATED FINANCIAL DATA:

<TABLE>
<CAPTION>
                                                                                      QUARTERS ENDED
                                                                       --------------------------------------------
                                                                        MARCH 31,   JUNE 30,   SEPT. 30,  DEC. 31,
                                                                          1996        1996       1996       1996
                                                                       -----------  ---------  ---------  ---------
                                                                          (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                                    <C>          <C>        <C>        <C>
Sales................................................................   $  11,848   $  18,776  $  18,357  $  17,463
Gross profit.........................................................   $   6,422   $  10,442  $  10,156  $   9,475
Net income...........................................................   $     357   $   2,190  $   1,554  $     829
Supplemental net income per share(1).................................   $    0.03   $    0.15  $    0.12  $    0.07
</TABLE>

<TABLE>
<CAPTION>
                                                                                      QUARTERS ENDED
                                                                       --------------------------------------------
                                                                        MARCH 31,   JUNE 30,   SEPT. 30,  DEC. 31,
                                                                          1995        1995       1995       1995
                                                                       -----------  ---------  ---------  ---------
                                                                          (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                                    <C>          <C>        <C>        <C>
Sales................................................................   $  10,458   $  12,740  $  13,456  $  12,009
Gross profit.........................................................   $   6,250   $   7,297  $   7,595  $   6,374
Net income...........................................................   $     394   $     785  $     921  $     429
Supplemental net income per share(1).................................   $    0.03   $    0.06  $    0.06  $    0.03
</TABLE>

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

(1) See Note 1 of Notes to the Consolidated Financial Statements for an
    explanation of the determination of net income and of shares used to compute
    supplemental net income per share.

                                       39
<PAGE>
ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

    There were no disagreements with accountants on accounting and financial
disclosure.

                                       40
<PAGE>
                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

    The information required by this Item is incorporated by reference to the
Company's Proxy Statement.

ITEM 11.  EXECUTIVE COMPENSATION

    The information required by this Item is incorporated by reference to the
Company's Proxy Statement.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

    The information required by this Item is incorporated by reference to the
Company's Proxy Statement.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

    The information required by this Item is incorporated by reference to the
Company's Proxy Statement.

                                       41
<PAGE>
                                    PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

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

    1.  Financial statements--See Item 8 of this report

    2.  Exhibits

<TABLE>
<CAPTION>
 EXHIBIT
 NUMBER
---------
<S>        <C>        <C>
 3.1       (1)        Certificate of Incorporation of the Registrant
 3.2       (1)        Amended and Restated Certificate of Incorporation of the Registrant as filed in the State of
                        Delaware on December 11, 1996
 3.3       (1)        By-laws of the Registrant
 3.4       (1)        Form of Amended By-laws of the Registrant
10.1       (1)        Form of Larscom Incorporated Stock Option Plan For Non-Employee Directors
10.2       (1)        Form of Larscom Incorporated Stock Incentive Plan
10.3       (1)        Form of Larscom Incorporated Stock Purchase Plan
10.4       (1)        Lease Agreement between Larvan Properties and the Company
10.5       (1)        Partnership Agreement among Vanderson Construction, Donn H. Byrne, John D. Brady, Thomas J.
                        Cunningham, Jr. and the Company
10.6       (1)        Form of Services Agreement between Axel Johnson and the Company
10.7       (1)        Form of Credit Agreement between Axel Johnson and the Company
10.8       (1)        Form of Tax Sharing Agreement between Axel Johnson and the Company
10.9       (1)        Note between Axel Johnson and the Company dated August 23, 1996
10.10      (1)        Form of Registration Rights Agreement between Axel Johnson and the Company
10.11      (2)        Lease Agreement between Berg & Berg Enterprises Inc. and the Company
11.1       (2)        Statement re-computation of per share earnings
21.1       (2)        Subsidiaries of the Registrant
23.1       (2)        Consent of Independent Accountants
24         (2)        Power of Attorney
27         (2)        Financial Data Schedule
</TABLE>

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

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

(2) Filed herewith

b)  Reports of Form 8-K

No reports on Form 8-K were filed during the fourth quarter ended December 31,
1996.

c)  Exhibits

See Item 14(a) 2 above.

d)  Exhibits

                                       42
<PAGE>
    Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

Larscom Incorporated

                  /s/ DEBORAH M. SOON
       ------------------------------------------
         (Deborah M. Soon, President and Chief
  By               Executive Officer

                                       43