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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington D.C. 20549 FORM 10-Q (Mark One) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended March 31, 2004 OR (  ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934 For the Transition Period from  to Commission File Number: 1-12491 LARSCOM INCORPORATED  Delaware
    
    94-2362692(State or other jurisdiction of incorporation or organization)
    
    (IRS Employer Identification No.)
 39745 Eureka Drive
Newark, CA 94560
(510) 492-0800
 (Address of principal executive offices, zip code and telephone number) 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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes (  )
No (X) The number of the registrants shares outstanding as of May 7, 2004, was
5,100,255 of Common Stock.




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LARSCOM INCORPORATED
FORM 10-Q TABLE OF CONTENTS Part I:
    
    Financial Information
    
    
    3Item 1:
    
    Financial Statements (Unaudited)
    
    
    3Condensed Consolidated Balance Sheets
    
    
    3Condensed Consolidated Statements of Operations
    
    
    4Condensed Consolidated Statements of Cash Flows
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2:
    
    Management's Discussion and Analysis of Financial Condition and Results of Operations
    
    
    14Item 3:
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    26Item 4:
    
    Controls and Procedures
    
    
    27Part II:
    
    Other Information
    
    
    28Item 1:
    
    Legal Proceedings
    
    
    28Item 2:
    
    Changes in Securities
    
    
    28Item 3:
    
    Defaults upon Senior Securities
    
    
    28Item 4:
    
    Submission of Matters to a Vote of Security Holders
    
    
    28Item 5:
    
    Other Information
    
    
    28Item 6:
    
    Exhibits and Reports on Form 8-K
    
    
    29Signatures
    
    
    30CertificationsEXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1
  2




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##### Table of Contents



Part I: Financial Information 
 Item 1: Financial Statements (Unaudited)
 LARSCOM INCORPORATED 
 CONDENSED CONSOLIDATED BALANCE SHEETS
  March 31,
    
    December 31,2004
    
    2003ASSETSCurrent assets:Cash and cash equivalents
    
    $
    6,416
    
    
    $
    8,952Restricted cash
    
    
    333
    
    
    
    333Accounts receivable, net
    
    
    2,253
    
    
    
    3,633Inventories
    
    
    5,468
    
    
    
    5,503Income tax receivable
    
    
    68
    
    
    
    44Prepaid expenses and other current assets
    
    
    761
    
    
    
    1,160Total current assets
    
    
    15,299
    
    
    
    19,625Property and equipment, net
    
    
    1,174
    
    
    
    1,294Intangible assets, net
    
    
    2,079
    
    
    
    2,275Other non-current assets, net
    
    
    441
    
    
    
    506Total assets
    
    $
    18,993
    
    
    $
    23,700LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    2,760
    
    
    $
    4,370Accrued expenses and other current liabilities
    
    
    4,384
    
    
    
    5,411Deferred revenue
    
    
    1,328
    
    
    
    1,283Due to Axel Johnson
    
    
    
    
    
    
    190Total current liabilities
    
    
    8,472
    
    
    
    11,254Other non-current liabilities
    
    
    1,527
    
    
    
    1,640Total liabilities
    
    
    9,999
    
    
    
    12,894Commitments and contingenciesStockholders equity:Common Stock
    
    
    51
    
    
    
    51Additional paid-in capital
    
    
    89,560
    
    
    
    89,558Deferred compensation
    
    
    (21
    )
    
    
    (21
    )Accumulated other comprehensive income (loss)
    
    
    27
    
    
    
    (4
    )Accumulated deficit
    
    
    (80,623
    )
    
    
    (78,778
    )Total stockholders equity
    
    
    8,994
    
    
    
    10,806Total liabilities and stockholders equity
    
    $
    18,993
    
    
    $
    23,700
 The accompanying notes are an integral part of these financial statements. 3




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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
  Three Months EndedMarch 31,2004
    
    2003Product revenues
    
    $
    3,960
    
    
    $
    2,971Service revenues
    
    
    1,006
    
    
    
    1,254Total revenues
    
    
    4,966
    
    
    
    4,225Product cost of revenues
    
    
    3,090
    
    
    
    1,669Service cost of revenues
    
    
    88
    
    
    
    305Total cost of revenues
    
    
    3,178
    
    
    
    1,974Gross profit
    
    
    1,788
    
    
    
    2,251Operating expenses:Research and development
    
    
    1,055
    
    
    
    1,107Selling, general and administrative
    
    
    2,566
    
    
    
    3,418Amortization of acquisition intangibles
    
    
    108
    
    
    
    Restructuring recovery
    
    
    (7
    )
    
    
    (61
    )Impairment of assets
    
    
    44
    
    
    
    Total operating expenses
    
    
    3,766
    
    
    
    4,464Loss from operations
    
    
    (1,978
    )
    
    
    (2,213
    )Interest and other income
    
    
    137
    
    
    
    47Loss before income taxes
    
    
    (1,841
    )
    
    
    (2,166
    )Income tax provision
    
    
    5
    
    
    
    17Net loss
    
    $
    (1,846
    )
    
    $
    (2,183
    )Basic and diluted net loss per share
    
    $
    (0.36
    )
    
    $
    (0.81
    )Basic and diluted weighted average shares
    
    
    5,100
    
    
    
    2,695
 The accompanying notes are an integral part of these financial statements. 4




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LARSCOM INCORPORATED 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
  Three Months Ended March 31,2004
    
    2003Cash flows from operating activities:Net loss
    
    $
    (1,846
    )
    
    $
    (2,183
    )Depreciation and amortization
    
    
    360
    
    
    
    345Impairment of intangibles
    
    
    44
    
    
    
    Writedown of inventories
    
    
    580
    
    
    
    66Decrease in bad debt reserves
    
    
    (4
    )
    
    
    (174
    )Increase in deferred revenue
    
    
    45
    
    
    
    313Decrease in accrued restructuring
    
    
    (589
    )
    
    
    (101
    )Net (increase)/decrease in other working
capital accounts
    
    
    (922
    )
    
    
    1,438Net cash used in operating activities
    
    
    (2,332
    )
    
    
    (296
    )Cash flows from investing activities:Purchases of property and equipment
    
    
    (47
    )
    
    
    (5
    )Sales and maturities of short-term investments
    
    
    
    
    
    
    2,014Net cash (used in)/provided by investing activities
    
    
    (47
    )
    
    
    2,009Cash flows from financing activities:Payments (to)/from Axel Johnson
    
    
    (190
    )
    
    
    219Decrease in other long-term obligations
    
    
    
    
    
    
    (30
    )Proceeds from issuances of Common Stock
    
    
    2
    
    
    
    1Net cash (used in)/provided by financing activities
    
    
    (188
    )
    
    
    190Effect of unrealized investment gain/(loss) and foreign exchange rates
    
    
    31
    
    
    
    (4
    )(Decrease)/increase in cash and cash equivalents
    
    
    (2,536
    )
    
    
    1,899Cash and cash equivalents at beginning of period
    
    
    8,952
    
    
    
    15,643Cash and cash equivalents, at end of period
    
    $
    6,416
    
    
    $
    17,542Supplemental disclosure of cash flow informationInterest paid
    
    $
    1
    
    
    $
    1Income taxes paid
    
    $
    35
    
    
    $
    17
 The accompanying notes are an integral part of these financial statements. 5




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LARSCOM INCORPORATED 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 1Basis of Presentation: The condensed consolidated financial statements for the three months ended
March 31, 2004 and 2003, presented in this Quarterly Report on Form 10-Q, are
unaudited. In the opinion of management, these statements include all
adjustments necessary for a fair statement of the results for the interim
periods presented. The condensed consolidated financial statements should be
read in conjunction with the audited consolidated financial statements and
notes thereto included in the Larscom Incorporated (Larscom) Report on Form
10-K for the year ended December 31, 2003. The results of operations for the
three months ended March 31, 2004 are not necessarily indicative of the results
to be expected for the full year. The condensed consolidated balance sheet at
December 31, 2003 has been derived from the audited consolidated financial
statements at that date, but does not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. The accompanying consolidated financial statements have been prepared on a
going concern basis, which contemplates continuity of operations, realization
of assets and the satisfaction of liabilities in the normal course of business
and do not reflect adjustments that might result if we were not to continue as
a going concern. The auditors report on our financial statements as of
December 31, 2003 included an explanatory paragraph, which refers to our
recurring operating losses and net capital deficiency and notes that these
matters raise substantial doubt about our ability to continue as a going
concern. On April 29, 2004, we signed a definitive merger agreement with Verilink
Corporation (NASDAQ: VRLK). Under the terms of the definitive agreement,
Verilink will acquire Larscom for approximately 6 million shares of Verilink
common stock, with each Larscom share being converted into 1.166 Verilink
shares, subject to certain adjustments. The merger has been approved by the
boards of directors of each company, but is subject to the approval of each
companys stockholders and other customary closing conditions. If the
Companys stockholders approve the merger and all other conditions to closing
are satisfied or waived, the merger is expected to be completed in the summer
of 2004. However, because many of the closing conditions are beyond the
Companys control, there can be no assurance that the merger will be completed
by the summer of 2004, if at all. We believe that our cash and cash equivalents and cash flow from
operations will be sufficient to fund our operations through 2004. If the
proposed merger with Verilink is delayed or not ultimately consummated, we will
need to raise additional capital to fund our operations and capital spending
before we become profitable. If cash flows from operations are lower than
expected, including as a result of customer reaction to the proposed merger, if
we incur unanticipated expenses or if we are unable to effectively manage our
inventory level, we may need to obtain additional capital sooner than expected
or be forced to further reduce our costs through personnel cuts or other
measures. We are currently exploring opportunities to raise additional capital
through various financial vehicles, but sufficient funds may not be available
to us on terms that we deem acceptable or at all. Note 2Acquisitions: On June 5, 2003, we completed the acquisition of VINA Technologies, Inc.
(VINA). The consideration consisted of approximately 2,393,894 shares of
Larscom common stock, 454,752 warrants and options to purchase common stock and
the assumption of the liabilities and obligations of VINA. See the Companys
Form 10-K for the year ended December 31, 2003. Note 3 Recent Accounting Pronouncements: In December 2003, the Securities and Exchange Commission released Staff
Accounting Bulletin (SAB) 104, Revenue Recognition. SAB 104 revises or
rescinds portions of the interpretative guidance related to revenue recognition
included in Topic 13 of the codification of the staff accounting bulletins. We
have assessed the impact of SAB 104 and concluded that the adoption of SAB 104
by us did not have a material impact on our financial statements. 6




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Note 4Balance Sheet Components: Inventories consist of the following (in thousands): March 31,
    
    December 31,2004
    
    2003Raw materials
    
    $
    2,213
    
    
    $
    1,688Work-in-process
    
    
    458
    
    
    
    497Finished goods
    
    
    2,797
    
    
    
    3,318$
    5,468
    
    
    $
    5,503
 Amortized intangible assets consist of the following (in thousands): March 31, 2004Gross carrying
    
    Accumulated
    
    NetAmount
    
    Amortization
    
    IntangiblesDeveloped Technology
    
    $
    1,041
    
    
    $
    147
    
    
    $
    894Tradenames/trademarks
    
    
    103
    
    
    
    42
    
    
    
    61Customer contracts/relationships
    
    
    1,457
    
    
    
    333
    
    
    
    1,124Order backlog
    
    
    78
    
    
    
    78
    
    
    
    $
    2,679
    
    
    $
    600
    
    
    $
    2,079
 The aggregate amortization expense for the three months ended March 31,
2004 was $152,000. Amortization expense of $44,000 is included as a component
of cost of revenues and $108,000 is included in operating expenses. Minimum future amortization expense at March 31, 2004 is as follows (in
thousands): Remainder of 2004
    
    $
    4402005
    
    
    5862006
    
    
    4302007
    
    
    318Thereafter
    
    
    305$
    2,079
 During the three months ended March 31, 2004, the company determined that
the VINA tradenames/trademarks acquired as part of the merger with VINA in June
2003 had become impaired. The impairment is based on a projected discounted
cash flow model using a discount rate commensurate with the risk inherent in
our current business model. As a result, we recorded an impairment charge of
$44,000 included in operating expenses to write-down the technology to the net
present value of the expected cash flows related to the tradename/trademarks. 7




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Note 5Restructuring and Cost of Revenues Charges: After the VINA merger, on June 5, 2003, we completed a restructuring that
resulted in restructuring costs of $2,458,000 during 2003. Those restructuring
costs consist of $1,535,000 in facility consolidation costs associated
principally with moving our headquarters from Milpitas, CA, to Newark, CA,
$425,000 in impairment charges related to fixed assets and leasehold
improvements at the Milpitas location and $747,000 from reductions in force,
partially offset by $249,000 of rent collected from Silicon Wireless
Corporation. As part of an earlier closing of our facility in Durham, North Carolina,
we remain responsible for the existing lease. The reserve for this lease is
reduced as we make monthly payments. We entered into a sublease agreement with
Silicon Wireless Corporation, a start-up company, which had a commencement date
of February 15, 2002 and is for the entire 27,000 square-foot facility in
Durham, North Carolina. Due to the uncertainty of the receipt of income under
the sublease, we reduce restructuring expenses as the sublease income is
received. During the first quarter of 2004 and 2003, our restructuring
expenses were reduced by $62,000 in each period as a result of rent collected
from Silicon Wireless Corporation. We expect the remaining real estate lease
obligation, which comprises the remainder of the June, 2001 reserve balance,
will be paid-out by January 2007. We do not expect there to be any additional
costs related to the North Carolina restructuring. We abandoned our lease at the former Larscom headquarters in Milpitas, CA
as of September 2003 and remain responsible for the balance of the lease, which
expires in August of 2004. We expect that by the end of 2004 we will pay out
the remaining reserve balance for the 2003 restructurings, which consist
principally of the remaining lease payments on our former Milpitas facility. During the first quarter of 2004 we continued our expense reduction
efforts and reduced our staff by five people; two in the manufacturing area and
three in sales, general and administrative functions. This resulted in a
charge to restructuring expense of $56,000, offset by rent collected from
Silicon Wireless Corporation of $63,000. The following table provides beginning balances, activity and remaining
balances included in other current and non-current liabilities for the quarter
ended March 31, 2004: Reserve
    
    Current
    
    
    
    
    
    Non-Cash
    
    ReserveDecember 31,
    
    Quarter
    
    Cash
    
    Charges &
    
    March 31,Restructuring reserve
    
    2003
    
    Restructuring
    
    Charges
    
    Adjustments
    
    2004(in thousands)Employee termination costs
    
    $
    33
    
    
    $
    56
    
    
    $
    (73
    )
    
    $
    
    
    
    $
    16Real estate lease
    
    
    2,528
    
    
    
    
    
    
    
    (573
    )
    
    
    
    
    
    
    1,955Total
    
    $
    2,561
    
    
    $
    56
    
    
    $
    (646
    )
    
    $
    
    
    
    $
    1,971
 Note 6Deferred Tax Assets: Deferred tax assets include temporary differences related to intangible
assets associated with the acquisition of NetEdge Systems Inc. in 1997,
inventory write-downs, accrued expenses and net operating losses that carry
forward. We established a deferred tax asset valuation allowance due to the
uncertainty of realizing the tax loss carry-forwards and other deferred tax
assets in accordance with Statement of Financial Accounting Standards (SFAS)
No. 109, Accounting for Income Taxes. Our assessment was based principally
on the historical losses experienced by us in the U.S., unfavorable
macro-economic conditions and capital expenditure reductions announced by
several service providers. The deferred tax asset balance at March 31, 2004
amounted to $32,715,000, which was fully offset by a valuation allowance. As part of the merger with VINA, we recorded a deferred tax liability for
the value of the intangibles acquired, a deferred tax asset for the net
operating loss (NOL), credit carry-forwards and a difference in the
accounting and tax basis of the VINA assets. The net deferred tax asset related
to the merger has been fully reserved due to the 8




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uncertainty surrounding its
realization. Because the merger with VINA is an ownership change as broadly
defined in Section 382 of the Internal Revenue Code (IRC) of 1986, as
amended, the tax asset (before
reserves) relating to the VINA NOL carryforwards has been limited in accordance
with the provisions of IRC Section 382. Additional deferred tax assets may be recognized in future periods to the
extent that we can reasonably expect such assets to be realized. We will
evaluate the probability of realizing our deferred tax assets on a quarterly
basis. If we determine that an additional portion or all of the deferred tax
assets are realizable, we will reduce the income tax valuation allowance
accordingly. Note 7Net (Loss)/Income Per Share: Basic net (loss)/income per share is computed using the weighted-average
number of shares of Common Stock outstanding during the period. Diluted net
(loss)/income per share is computed using the weighted-average number of shares
of Common Stock outstanding and the dilutive effect of options to purchase
shares of Common Stock. In computing diluted earnings per share, the average
price of our Common Stock for the period is used in determining the number of
shares assumed to be purchased from the exercise of stock options. In the net
loss per share computation, the effect of options to purchase shares of Common
Stock is excluded, as their effect is antidilutive. The following table shows how basic and diluted net loss per share is
computed:  Three Months EndedMarch 31,2004
    
    2003Net loss
    
    $
    (1,846
    )
    
    $
    (2,183
    )Basic and diluted weighted averageCommon Stock outstanding
    
    
    5,100
    
    
    
    2,695Basic and diluted net loss per share
    
    $
    (0.36
    )
    
    $
    (0.81
    )
 Outstanding stock options and warrants totaling 870,372 shares at March
31, 2004 and outstanding stock options totaling 343,703 shares at March 31,
2003 are not included in the calculation of diluted weighted average Common
Stock outstanding because their effect would have been antidilutive for both
periods presented. These stock options and warrants could be dilutive in the
future. Note 8Accounting for Stock-Based Compensation We account for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board (APB) Opinion
No. 25, and Accounting for Stock Issued to Employees, Financial Accounting
Standard Board Interpretation No. 44 (FIN 44), Accounting for Certain
Transactions Involving Stock Compensationan Interpretation of APB 25. Under
APB No. 25, compensation expense is based on the difference, if any, on the
date of the grant, between the fair value of our stock and the exercise price. We amortize stock-based compensation using the straight-line method over
the vesting period of the options. The risk-free interest rate used in the
calculations was 3.18% for the first quarter of 2004 and 2.58% for the first
quarter of 2003. The expected volatility was 90%, the expected life was 5 years
and the dividend rate was zero for the first quarter of 2004 and 2003. Pro
forma information regarding net loss and earnings per share is presented and
has been determined as if we had accounted for employee stock options under the
fair value method of SFAS No. 123, as amended by SFAS No. 148. 9




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The fair value of options and shares issued pursuant to the option plans
and at the grant date were estimated using the Black-Scholes model. The
Black-Scholes option-pricing model was developed for use in estimating the fair
value of traded options that have no vesting restrictions and are fully
transferable. In addition, option-pricing models require the input of highly
subjective assumptions including the expected stock-price volatility. We use
projected volatility rates, which are based upon historical volatility rates.
Because employee stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in managements
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of options. The effects of applying pro forma disclosures of net loss and net loss per
share are not likely to be representative of the pro forma effects on net
loss/income and earnings per share in the future years, as the number of future
shares to be issued under these plans is not known and the assumptions used to
determine the fair value can vary significantly. The following table illustrates the effect on net loss and earnings per
share if we had applied the fair value recognition provisions of SFAS No. 123,
as amended by SFAS No. 148, to stock-based employee compensation (in thousands
except for per share data) (unaudited): Three Months EndedMarch 31,2004
    
    2003Net loss  as reported
    
    $
    (1,846
    )
    
    $
    (2,183
    )Less: costs included in expense
    
    
    
    
    
    
    Plus: employee compensation expense
on a pro forma basis
    
    
    (146
    )
    
    
    (81
    )Net loss  pro forma
    
    $
    (1,992
    )
    
    $
    (2,264
    )Basic net loss per share  as reported
    
    $
    (0.36
    )
    
    $
    (0.81
    )Basic net loss per share  pro forma
    
    $
    (0.39
    )
    
    $
    (0.84
    )Basic and diluted net loss per share -
as reported
    
    $
    (0.36
    )
    
    $
    (0.81
    )Shares  basic and diluted
    
    
    5,100
    
    
    
    2,695
 Note 9Accumulated Other Comprehensive Income/(Loss): Accumulated other comprehensive income/(loss) includes all changes in
equity from non-owner sources during the period. The items of adjustment from
net loss to comprehensive net loss for the periods presented relate to foreign
currency translation adjustments. 10




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Note 10Commitments and Contingencies: Commitments: Operating lease commitments are related principally to our buildings in
Newark, California and Durham, North Carolina and have terms that expire in
2008 and 2007, respectively. In addition, as part of the merger with VINA, we
have a facility in Milpitas, California (our former headquarters) with a lease
that will expire in August 2004. Total rent expense in the first quarter of
2004 and 2003, was $801,000 and $669,000, respectively. Sublease rental income
was $214,000 and $218,000 in the first quarter of 2004 and 2003, respectively.
Future annual minimum lease payments under all non-cancelable operating leases
and sublease rental income as of March 31, 2004 are as follows (in thousands): SubleaseLease
    
    RentalYears ending December 31,
    
    Payments
    
    Income2004 (April 1 to December 31)
    
    $
    1,326
    
    
    $
    4272005
    
    
    774
    
    
    
    2652006
    
    
    817
    
    
    
    2722007
    
    
    492
    
    
    
    232008
    
    
    284
    
    
    
    $
    3,693
    
    
    $
    987
 Contingencies: On April 29, 2004, we signed a definitive merger agreement with Verilink
Corporation (NASDAQ: VRLK). The merger has been approved by the boards of
directors of each company, but is subject to the approval of each companys
stockholders and other customary closing conditions. If the Companys
stockholders approve the merger and all other conditions to closing are
satisfied or waived, the merger is expected to be completed in the summer of
2004. However, because many of the closing conditions are beyond the Companys
control, there can be no assurance that the merger will be completed by the
summer of 2004, if at all. In our sales agreements, we typically agree to indemnify our customers for
any expenses or liability resulting from claimed infringements of patents,
trademarks or copyrights of third parties. The terms of these indemnification
agreements are generally perpetual any time after execution of the agreement.
The maximum amount of potential future indemnification is unlimited. To date
we have not paid any amounts to settle claims or defend lawsuits. As part of the merger with VINA we have assumed a liability recorded on
the books of VINA for California sales taxes for the period January 1, 1999
through March 31, 2000 resulting from a sales and use tax audit by the
California State Board of Equalization. We have paid a substantial portion of
the assessment to the State of California and the remainder of $55,000 is
currently under appeal. Note 11Segment Information: The Company operates under a single segment. Revenue related to
operations in the United States and other countries for the three months ended
March 31, 2004 and 2003 are as follows (in thousands): 11




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Three Months EndedMarch 31,Revenues (a)
    
    2004
    
    2003United States
    
    $
    4,546
    
    
    $
    3,480Other countries
    
    
    420
    
    
    
    745Total
    
    $
    4,966
    
    
    $
    4,225
 Long-lived assets as of March 31, 2004 and December 31, 2003 are as follows (in thousands): As ofMarch 31,
    
    December 31,Long-Lived Assets
    
    2004
    
    2003United States
    
    $
    3,694
    
    
    $
    4,075Other countries
    
    
    
    
    
    
    Total
    
    $
    3,694
    
    
    $
    4,075
 (a) Revenues are reported by shipment to the final destination as determined by
records required to comply with U.S. Department of Commerce regulations Note 12Guarantees and Warranty Obligations: Guarantees: We account for guarantees under Financial Accounting Standards Board
Interpretation No. 45 (FIN 45), Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others. FIN 45 requires that a liability be recorded in the guarantors
balance sheet upon issuance of a guarantee. In addition, FIN 45 requires
disclosures about the guarantees that an entity has issued, including a
reconciliation of changes in the entitys product warranty liabilities. We, as the guarantor, entered into one category of guarantee, namely
performance guarantees. Performance guarantees include contracts that
contingently require us to make payments to the beneficiary of the guarantee
based on our failure to perform under an obligating agreement. These
obligating agreements consist primarily of manufacturing services agreements,
non-cancelable and non-returnable purchase orders, and technology acquisition
agreements. The term of the guarantees is less than one year. We have not recorded
any liabilities for these potential future payments either because it is not
probable or we have yet to incur the expense. The guarantees do not have a
third party recourse provision. The following table discloses our obligations under guarantees as of March
31, 2004 (in thousands): MaximumPotential Amount
of Future PaymentsManufacturing
service agreements and
non-cancelable and non-returnable purchase orders
    
    $
    1,239
 12




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##### Table of Contents



Warranty Obligations: As permitted under Delaware law and in accordance with our bylaws, we
indemnify our officers and directors for certain events or occurrences, subject
to certain limits, while the officer or director is or was serving at our
request in such capacity. The term of the indemnification period is for the
officers or directors lifetime. The maximum amount of potential future
indemnification is unlimited; however, we have a director and officer insurance
policy that limits our exposure and enables us to recover a portion of any
future amounts paid. In addition, as part of the merger with VINA, we have
indemnified the former officers and directors against claims against them in
their former roles at VINA. We purchased a directors and officers insurance
policy to cover former directors and officers of VINA for a period of six years
following the merger for events that may occur, related to the former VINA
business. The maximum amount of potential future indemnification is unlimited;
however, we believe the policies we purchased limit our exposure and enables us
to recover a portion of any future amounts paid. As a result of our insurance
policy coverage, we believe the fair value of these indemnification agreements
is minimal. In our sales agreements, we typically agree to indemnify our customers for
any expenses or liability resulting from claimed infringements of patents,
trademarks or copyrights of third parties. The terms of these indemnification
agreements are generally perpetual any time after execution of the agreement.
The maximum amount of potential future indemnification is unlimited. To date
we have not paid any amounts to settle claims or defend lawsuits. We provide a three-year warranty for most of our products and a five-year
warranty for the Terra and IAD product lines. The following table depicts
product warranty activity during the three months ended March 31, 2004 (in
thousands): Dollar Amount ofLiability
Debit/(Credit)Balance at December 31, 2003
    
    $
    932Accrual for new warranties
    
    
    45Accruals related to pre-existing warranties (including changes
in estimates)
    
    
    (33
    )Settlements made in cash or in-kind during the period
    
    
    (52
    )Balance at March 31, 2004
    
    $
    892
 Note 13Changes in Stockholders Equity: Reclassification of Class A and Class B Common Shares: On June 3, 2003, Larscoms stockholders approved a proposal to reclassify
its Class A and Class B Common Stock into a single class of common stock. The
old Class B Common Stock had rights of four votes per share and was owned by
one stockholder, Axel Johnson, Inc. (Axel Johnson). These additional voting
rights gave Axel Johnson control of 82% of the voting interest prior to the
merger with VINA. After issuance of 2,393,894 shares in connection with the
VINA merger, and the reclassification of the Class B Common Stock into Common
Stock with one vote per share, Axel Johnsons control of the voting interest
was reduced to 28%. Additionally, as a result of the shares issued to VINA
shareholders, entities affiliated with Sierra Ventures V. L.P. received
Larscom shares resulting in beneficial ownership of another 28% interest in
Larscom. 13




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##### Table of Contents



Reverse Split of Class A Common Shares: On June 3, 2003 Larscoms shareholders approved a proposal to amend
Larscoms certificate of incorporation to effect a reverse split of Larscoms
Common Stock in a ratio to be determined by the Board of Directors. The Board
subsequently voted on June 5, 2003 to effect a reverse split with a 7-for-1
ratio with effect from June 6, 2003. All share and per share data has been
retroactively restated for the reverse stock split. Larscom Stock Options: As part of the merger with VINA, the existing VINA stock options and
warrants were assumed and converted into Larscom stock options and warrants,
containing the exact terms, price and earned vesting percentages, as those held
immediately prior to the merger (after the post-merger, post-split exchange
ratio of 0.03799 shares of Larscom common stock for each share of VINA common
stock). The VINA options and warrants were converted into 454,752 Larscom options
and warrants. Additionally, as a result of the change of control resulting
from the reclassification of shares previously discussed, and the VINA merger,
a large part of the outstanding stock options previously issued by Larscom
became fully vested due to a change-in-control provision contained in most of
the outstanding option agreements. This acceleration caused 61,818 additional
shares to become vested and exercisable on June 5, 2003 with an average
exercise price of approximately $19.72. Note 14Related Party Transactions: As a result of the change in control as described in Note 13 above,
Larscom no longer participates in the various benefit programs sponsored by
Axel Johnson. These programs included medical, dental and life insurance, and
workers compensation insurance. Larscom was also provided certain
administrative services including tax, accounting, treasury, legal and human
resources under an administrative services agreement. These services have now
been secured by us, on a separate basis, from various third parties. The
credit agreement we entered into with Axel Johnson was cancelled effective June
5, 2003. Additionally, Axel Johnson has assumed Larscoms liability for any
future funding liabilities for past participation by Larscom employees under
the Axel Johnson Inc. Retirement Plan and the Axel Johnson Inc. Retirement
Restoration Plan. Larscoms employees had ceased to accrue benefits under
these retirement plans after March 28, 1998. 
 Item 2: Managements Discussion and Analysis of Financial Condition and Results of Operations Overview We manufacture and market high-speed network-access products for
telecommunication service providers (SPs), and corporate enterprise users.
Our product offerings support bandwidth requirements ranging from full and
fractional T1/E1 to OC-3 (1.5 Mbps to 155 Mbps). Additionally, our solutions
support a number of networking protocols such as frame relay, asynchronous
transfer mode (ATM), inverse multiplexing over ATM (IMA), Ethernet and the
Internet Protocol. The accompanying financial statements have been prepared on a going
concern basis which contemplates continuity of operations, realization of
assets and liquidation of liabilities in the ordinary course of business and do
not reflect adjustments that might result if we were not to continue as a going
concern. The auditors report on our financial statements as of December 31,
2003 contains an explanatory paragraph, which refers to our recurring operating
losses and net capital deficiency and notes that these matters raise
substantial doubt about our ability to continue as a going concern. 14




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##### Table of Contents



The results for the prior year quarter ended March 31, 2003 do not include
the results of VINA, as the VINA acquisition did not occur until June 5, 2003. Merger Agreement with Verilink Corporation On April 28, 2004, the Company signed a definitive merger agreement with
Verilink Corporation (NASDAQ: VRLK). Under the terms of the definitive
agreement, Verilink will acquire Larscom for approximately 6 million shares of
Verilink common stock, with each Larscom share being converted into 1.166
Verilink shares, subject to certain adjustments. The merger has been approved
by the boards of directors of each company, but is subject to the approval of
each companys stockholders and other customary closing conditions. If the
Companys stockholders approve the merger and all other conditions to closing
are satisfied or waived, the merger is expected to be completed in the summer
of 2004. However, because many of the closing conditions are beyond the
Companys control, there can be no assurance that the merger will be completed
by the summer of 2004, if at all. We believe that our cash and cash equivalents and cash flow from
operations will be sufficient to fund our operations through 2004. If the
proposed merger with Verilink is delayed or not ultimately consummated, we will
need to raise additional capital to fund our operations and capital spending
before we become profitable. If cash flows from operations are lower than
expected, including as a result of customer reaction to the proposed merger, if
we incur unanticipated expenses or if we are unable to effectively manage our
inventory level, we may need to obtain additional capital sooner than expected
or be forced to further reduce our costs through personnel cuts or other
measures. We are currently exploring opportunities to raise additional capital
through various financial vehicles, but sufficient funds may not be available
to us on terms that we deem acceptable or at all. Summary of Critical Accounting Policies Our discussion and analysis of our financial condition and results of
operations is based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, we evaluate our estimates, including
those related to uncollectible receivables, investment values, income taxes,
restructuring and contingencies. We base our estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities. Actual results
may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements: Revenue Recognition and Deferred Revenue: Revenue from product sales is generally recognized upon delivery to our
customers when there is persuasive evidence of an arrangement, the fee is fixed
and determinable and collection of the receivable is reasonably assured.
However, some of our distributors, who maintain significant inventories of our
products, have a right to return products that remain unsold. In the case
where the distributor has a right to return products, we do not recognize
revenue until the distributor notifies us that the products have been shipped
to the end user. Service revenue earned from providing maintenance,
installation, training or other miscellaneous services is recognized when those
services are provided to the customer, if there is persuasive evidence of an
arrangement, the fee is fixed and determinable and collection of the receivable
is reasonably assured. If we believe that collection is not probable at the
time of shipment, we defer the revenue until the cash is collected. Deferred
revenue at March 31, 2004 totaled $1,328,000 and substantially all of that
revenue is expected to be earned over the next twelve months. Accounting for Acquisitions: 15




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##### Table of Contents



We accounted for the VINA acquisition as a purchase in accordance with the
provisions of Financial Accounting Standards Board (FASB), Statement of
Financial Accounting Standards (SFAS) No. 141, Business Combinations. As
such, we have reported all the acquired tangible and intangible assets and
liabilities of VINA at fair value. We are recognizing the fair value of the
purchased intangibles related to developed technology as a cost of product
revenue over an estimated useful life of six years. We are recognizing the
fair value of the other purchased intangibles as operating expenses over the
estimated useful life of each separate intangible. We recognized the fair
value associated with the in-process technology as an operating expense in
2003, when the merger was consummated. We have valued employee stock options
as part of the acquisition using the Black-Scholes valuation model. The value
of all vested options and the value of unvested options in excess of the
intrinsic value of such unvested options were included as part of the purchase
price consideration. We are reporting the intrinsic value of the unvested
options as deferred compensation and recording it as an operating expense over
the remaining vesting period of the options. We valued our stock issued as
part of the consideration using the 5-day average price surrounding the date
the acquisition was announced. Investments, Accounts Receivable and Allowances: We invest cash in excess of our daily needs in financial instruments
issued by banks, government agencies or large corporations. Our policy is to
invest these funds in financial instruments that are rated by Standard and
Poors (or other rating agency equivalents) as A- or better in the case of
general debt instruments or A-1 in the case of commercial paper. Our policy
restricts us from investing more than $5 million or 20% of our total
investments in any one institution or from investing in financial instruments
that mature in more than 1 year. While we believe, in our judgment, these
policies are protective of our funds, a default of any one institution would
lead to our incurring a significant loss of cash. Our investments are all
considered short term and therefore are included in cash and cash equivalents
on our balance sheet. Our accounts receivable are largely trade receivables from customers in
the United States. We perform ongoing credit evaluations of our customers,
and generally require no collateral from our customers. We maintain reserves
for potential credit losses based on our evaluation of the customers financial
condition, industry conditions and general economic conditions. While our
reserves have historically been within our expectations, we cannot guarantee
that our evaluation of the credit risk of our customers will be correct. In
addition, since our accounts receivable are concentrated in a relatively few
number of customers a significant change in the financial position of any one
of these customers could have a material impact on the collectibility of our
accounts receivable. To date, we have reserves for $616,000 in receivables
associated with the 2002 bankruptcy filing of MCI. Receivables from our three
largest customers MCI, LTI Datacomm and Avaya, Inc. represented 40% and 52% of
gross accounts receivable at March 31, 2004 and 2003, respectively. We provide
a sales return allowance for possible customer returns, based on historical
information that may differ from actual results due to changes in customer
circumstances or a misjudgment of either party in assessing the customers
needs. Inventories: Inventories include raw materials, work in process and finished goods
related to our products. Inventory costs include direct costs for material and
indirect costs allocated to inventory for labor and overhead. Inventories are
stated at the lower of standard cost or market. Write-downs of inventory are
generally taken, when in our estimate, future demand will not consume existing
inventories over the next twelve months. If actual future demand or market
conditions are less favorable than those projected by management, additional
inventory write-downs may be required. Accounting for Long-Lived Assets: We assess the impairment of long-lived assets periodically. An impairment
review is performed whenever events or changes in circumstances indicate that
the carrying value may not be recoverable. Factors considered important which
could trigger an impairment review include, but are not limited to: 1)
significant underperformance relative to expected, historical, or projected
future results; 2) significant changes in technology, the manner of use of the
acquired assets/technology or the overall strategy for the company and 3)
significant negative economic or 16




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##### Table of Contents



industry trends. The impairment is based on a projected discounted cash flow
model using a discount rate commensurate with the risk inherent in our current
business model. Restructuring Reserves: Restructuring reserves are based on estimates of the salary and benefit
obligations to terminated employees, amounts necessary to write off assets no
longer utilized by us and for contractual payments we expect to continue to
make for property no longer in use. Although we do not anticipate significant
changes, the actual costs may differ from these estimates. Warranty: We provide a three-year or five-year warranty for most of our products.
We provide for the estimated cost of warranty at the time we record revenue for
a product based on our historical costs, which includes material, labor and
overhead. While we believe that our reserves for estimated future warranty
costs are adequate, there are inherent risks associated with these estimates,
especially for those estimates related to products that have been recently
introduced. Income Taxes: Deferred tax assets and liabilities are recognized for the temporary
timing differences between the tax bases of assets and liabilities and the
amounts reported in financial statements. A valuation allowance is provided
against deferred tax assets if, in managements judgment, it is more likely
than not that the potential future benefits of these assets will not be
realized. Results of Operations Revenues. Our consolidated revenues of $4,966,000 for the first quarter
ended March 31, 2004 increased $741,000 or 18% over 2003s first quarter
revenues of $4,225,000. This increase was primarily due to $1,231,000 in sales
of Larscoms IAD product line, which was acquired in the merger with VINA in
June 2003. This increase was partially offset by a decrease in sales of our
other product lines and services, which recorded a combined revenue reduction
of $490,000. By channel of distribution, the bulk of the revenue increase for the first
quarter of 2004 versus the comparable period in 2003 came from higher sales to
service providers (SPs) and resellers, partially offset by a decrease in
sales to end users. Shipments to international locations represented 9% of
total revenues during the first quarter of 2004, versus 18% from the same
period of 2003. The combined revenues from MCI, LTI Datacomm and Avaya, Inc., our three
largest customers this quarter, accounted for 41% of the total revenues for the
first quarter of 2004 versus 52% for the first quarter of 2003. The financial
difficulties at MCI, including its bankruptcy filing, had, and we expect it to
continue to have, a major adverse impact on our revenues. After the bankruptcy
filing, because of MCIs debtor-in-possession financing and their timely
payment for shipments made after the bankruptcy filing, we resumed the
recording of revenues upon shipment to MCI. MCI has now emerged from
bankruptcy. The following table is the percentage of total revenues for our
customers who accounted for 10% or more of our revenues: Three Months EndedMarch 31,2004
    
    2003MCI
    
    
    19
    %
    
    
    26
    %LTI Datacomm
    
    
    12
    %
    
    
    14
    %Avaya, Inc.
    
    
    10
    %
    
    
    12
    %
 17




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##### Table of Contents



Gross Profit. Our gross profit for the first quarter of 2004 was
$1,788,000 versus $2,251,000 for the corresponding period of 2003. Our gross
profit percentage in the first quarter of 2004 of 36% represents a 17%
percentage point decline from the first quarter of 2003 gross profit percentage
of 53%. The reduction in gross profit dollars for the 2004 period versus the
2003 period was due to write-downs of inventories, the impact of unfavorable
manufacturing variances, lower profits earned on IAD products and, to a lesser
extent, the cost of intangible amortization expense from the VINA merger
included in cost of revenues. These reductions were partially offset by the
higher sales volume during the quarter over the prior-year period. Research and Development. Research and development expenses totaled
$1,055,000 for the first quarter of 2004, which was $52,000 or 5% lower than
the first quarter 2003 spending of $1,107,000. The expense decrease in the
first quarter was primarily due to lower personnel related costs. Selling, General and Administrative. Selling, general and administrative
expenses decreased 25% to $2,566,000 during the first quarter of 2004, as
compared to $3,418,000 for the same period in 2003. The reduced spending level
was due to lower expenditures for salaries, benefits, and relocation costs,
resulting from our workforce reductions as well as lower rent and depreciation
expense due to the consolidation of our headquarters. Partially offsetting the
decreases were increased consulting fees and bad debt expense. Through the VINA merger date of June 5, 2003, selling, general and
administrative expenses included contractual charges from Axel Johnson for
providing certain services to us related to treasury, accounting, tax, legal
and human resources. The costs of these services were allocated to us based on
estimates by Axel Johnson of actual costs incurred. We believe that such
allocations were reasonable. Such charges and allocations are not necessarily
indicative of the costs that would have been incurred if we had internally
provided such services. There were no allocated costs for these services in
the first quarter of 2004, versus $91,000 for the first quarter of 2003. The
contract for services with Axel Johnson was cancelled effective June 2003. Amortization of Acquisition Intangibles.There were costs totaling
$152,000 for the first quarter of 2004 for amortization of acquisition
intangibles related to our merger with VINA Technologies, Inc. Cost of
revenues included $42,000 of amortization expense and $108,000 was included in
operating expenses. There were no such expenses for the first quarter of 2003. Restructuring. During the first quarter of 2004 we continued our expense
reduction efforts, which resulted in a charge to restructuring expense of
$56,000, offset by rent collected from Silicon Wireless Corporation of $63,000.
This compares to the prior years first quarter that included only the
collection of rent, which resulted in a reduction to restructuring expense of
$61,000. Interest and Other Income.Interest and other income totaled $137,000 for
the first quarter of 2004, compared to $47,000 for the same period of 2003.
During the first quarter of 2004, $116,000 in other income was recognized from
the expiration of an unused customer credit. Interest income totaled $14,000
for the first quarter of 2004, compared to $65,000 for the same period in 2003.
The lower interest income for the three-month period of 2004 was primarily
attributed to lower average cash and cash equivalent balances as well as lower
interest rates received on interest bearing balances. Provision for Income Taxes. In the first quarter of 2004, we recorded an
income tax provision of $5,000 versus an income tax provision of $17,000 in
the first quarter of 2003, mainly to provide for expected state tax
obligations, respectively. Net Loss. The net loss for the first quarter of 2004 was ($1,846,000)
compared to a net loss of ($2,183,000) for the first quarter of 2003. The
reduced loss of ($337,000) was primarily due to lower selling, general and
administrative expenses from reduced headcount levels and the effects of
consolidating our headquarters in Newark, CA, all accomplished as part of our

merger synergy plan. These reductions to expenses were partially offset by 18




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##### Table of Contents



unfavorable manufacturing variances, intangible amortization related to the
VINA merger and asset impairment charges. Liquidity and Capital Resources At March 31, 2004, we had cash, cash equivalents and restricted cash of
$6,749,000. Cash, cash equivalents and restricted cash decreased by
approximately 27% or $2,536,000 from $9,285,000 on December 31, 2003. The
decrease in cash, cash equivalents and restricted cash in the first three
months of 2004 reflects the impact of operating losses and lower accounts
payable balances from payments of normal business obligations, partially offset
by depreciation, amortization and write-downs of inventories. Restricted cash
of $333,000 consists of a deposit with our bank for an irrevocable letter of
credit that is used as collateral for the lease on the Newark, California
facility. Capital expenditures for the first three months of 2004 were $47,000.
These expenditures consisted principally of the purchase of test equipment. We
anticipate capital expenditures to total approximately $370,000 for 2004. We believe that our cash and cash equivalents and cash flow from
operations will be sufficient to fund our operations through 2004. If the
proposed merger with Verilink is delayed or not ultimately consummated, we will
need to raise additional capital to fund our operations and capital spending
before we become profitable. If cash flows from operations are lower than
expected, including as a result of customer reaction to the proposed merger, if
we incur unanticipated expenses or if we are unable to effectively manage our
inventory level, we may need to obtain additional capital sooner than expected
or be forced to further reduce our costs through personnel cuts or other
measures. We are currently exploring opportunities to raise additional capital
through various financial vehicles, but sufficient funds may not be available
to us on terms that we deem acceptable or at all. In connection with the merger with VINA, Larscom and Axel Johnson Inc.
decided to terminate the services agreement and the credit line for $15,000,000
provided to us by Axel Johnson. Accordingly, the services agreement and credit
line were cancelled as of June 5, 2003. Our current contractual commitments consist principally of operating
leases for real estate and ongoing commitments for manufacturing services,
product inventories and other general services related to the normal operation
of the business. Our operating lease commitments relate principally to our buildings in
Newark, California, and Durham, North Carolina, and have terms that expire in
2008 and 2007, respectively. The lease of our former headquarter offices in
Milpitas, California will expire in August of 2004. Our total rent expense in
the first quarter of 2004 and 2003, was $801,000 and $669,000, respectively.
Sublease rental income was $214,000 and $218,000 in the first quarter of 2004
and 2003, respectively. Our future annual minimum lease payments under all
non-cancelable operating leases and sublease rental income as of March 31, 2004
are as follows (in thousands): SubleaseLease
    
    RentalYears ending December 31,
    
    Payments
    
    Income2004 (April 1 to December 31)
    
    $
    1,326
    
    
    $
    4272005
    
    
    774
    
    
    
    2652006
    

    
    817
    
    
    
    2722007
    
    
    492
    
    
    
    232008
    
    
    284
    
    
    
    $
    3,693
    
    
    $
    987
 We have purchase orders and contracts outstanding for goods and services
incurred in the normal course of business. The following table discloses our
obligations under guarantees as of March 31, 2004 (in thousands): 19




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##### Table of Contents



Less Than
    
    1-3
    
    4-5
    
    After 51 Year
    
    Years
    
    Years
    
    YearsOperating lease obligations
    
    $
    1,526
    
    
    $
    1,549
    
    
    $
    618
    
    
    $
    Manufacturing services agreements
    
    
    969Non-cancelable and non-returnable purchase orders
    
    
    270Total
    
    $
    2,765
    
    
    $
    1,549
    
    
    $
    618
    
    
    $
    
 The effects of inflation on our revenues and operating income have not
been material to date. CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS This Quarterly Report onForm 10-Qcontains 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. Our actual results may
differ materially from those indicated in any forward-looking statements, due
to the risks and uncertainties set forth below as well as other risks and
uncertainties we may describe from time to time in other filings with the
Securities and Exchange Commission. We undertake no obligation to revise any
forward-looking statements in order to reflect events or circumstances that may
arise after the date of this report. Readers are urged to review carefully and
consider the various risks and uncertainties described in this report and in
other reports filed with the Securities and Exchange Commission. Our proposed merger with Verilink may not be completed in a timely manner
or at all, which may adversely affect us.On April 29, 2004, we signed a
definitive merger agreement with Verilink Corporation (NASDAQ: VRLK). The
merger has been approved by the boards of directors of each company, but is
subject to the approval of each companys stockholders and other customary
closing conditions. If the Companys stockholders approve the merger and all
other conditions to closing are satisfied or waived, the merger is expected to
be completed in the summer of 2004. However, because many of the closing
conditions are beyond the Companys control, there can be no assurance that the
merger will be completed by the summer of 2004, if at all. We believe that our cash and cash equivalents and cash flow from
operations will be sufficient to fund our operations through 2004. If the
proposed merger with Verilink is delayed or not ultimately consummated, we will
need to raise additional capital to fund our operations and capital spending
before we become profitable. If cash flows from operations are lower than
expected, including as a result of customer reaction to the proposed merger, if
we incur unanticipated expenses or if we are unable to effectively manage our
inventory level, we may need to obtain additional capital sooner than expected
or be forced to further reduce our costs through personnel cuts or other
measures. We are currently exploring opportunities to raise additional capital
through various financial vehicles, but sufficient funds may not be available
to us on terms that we deem acceptable or at all. Additional risks related to the proposed merger with Verilink include, but
are not limited to, the following:  
    
    expected benefits from the merger may not be realized,
    
    while Larscoms and Verilinks share prices have been
volatile in recent periods, the merger exchange ratio is fixed
and no adjustment to the exchange ratio will be made as a result
of fluctuations in the market prices of Larscom or Verilink
Common Stock,
    
    the cost of the merger could harm the financial results
of the combined company,
    
    the merger could cause Larscom or Verilink to lose key
personnel, which could materially affect the combined companys
business and require it to incur substantial costs to recruit
replacements for lost personnel, 20




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
    
    general uncertainly related to the merger could harm Larscom and Verilink,
    
    third parties may terminate or alter existing contracts with Larscom or Verilink,
    
    some of Larscoms and Verilinks officers and directors
have conflicts of interest that may influence them to support or
approve the merger,
    
    during the pendency of the merger, Larscom and Verilink
may not be able to enter into a merger or business combination
with another party at a favorable price because of restrictions
in the merger agreement,
    
    failure to complete the merger may result in Larscom or
Verilink paying a termination fee to the other and could harm
Larscoms or Verilinks Common Stock price and future business
operations, and
    
    the merger may be completed even though material
adverse changes may result from the announcement of the merger,
industry-wide changes or other causes. Our independent accountants going concern explanatory paragraph and the
resulting perception in the financial marketplace may adversely affect us.
PricewaterhouseCoopers LLP has included in its report on our consolidated
financial statements for the fiscal year ended December 31, 2003, a going
concern explanatory paragraph, which states that the Company has suffered
recurring losses from operations and has a net capital deficiency that raise
substantial doubt about its ability to continue as a going concern. We have suffered recurring losses from operations and negative cash flow
from operations, investing and financing. For the year ended December 31,
2003, we used approximately $6.7 million of cash to fund our operating,
investing and financing activities and for the quarter ended March 31, 2004, we
used an additional $2.5 million of cash to fund our operating, investing and
financing activities. This factor, in combination with reduced levels of
working capital, raise substantial doubt about our ability to continue as a
going concern beyond this calendar year. Our ability to continue as a going
concern is dependent upon our ability to obtain adequate financing and achieve
a level of revenues adequate to support our capital and operating requirements. We are exploring opportunities to raise additional capital through various
financing vehicles, but sufficient funds may not be available to us on terms
that we deem acceptable, if they are available at all. In the event we are
unable to continue as a going concern, we may elect or be required to seek
protection from our creditors by filing a voluntary petition in bankruptcy or
may be subject to an involuntary petition in bankruptcy. The inclusion of the
going concern explanatory paragraph in PricewaterhouseCoopers LLPs audit
report and the resulting perception in the financial marketplace may cause our
stock price to fall and impair our ability to raise additional capital. In
addition, the receipt of a going concern explanatory paragraph may create a
concern among our current and future customers and vendors as to whether we
will be able to fulfill our contractual obligations. As a result, current and
future customers may determine not to do business with us, which would cause
our revenues to decline. Employee concern about the future of the business and
their continued prospects for employment may cause them to seek employment
elsewhere, depriving us of the human capital we need to be successful. Our entire industry was in an extended downturn and recovery may be
delayed.The downturn in the United States economy and the rapid and severe
downturn for the domestic telecommunications industry, beginning in late 2000,
negatively affected demand for our products. In addition to the deteriorating
domestic economic environment, the worldwide telecommunications market also
experienced reduced demand. This decreased demand led to fluctuating order
forecasts from some of our customers. While recent events have indicated that
a general economic recovery is underway, the difficult financial position of
many of our customers resulting from the prolonged downturn may delay the
timing of order increases for our products, if at all. For 2003, order demand
from many of our customers continued to decline as they experienced the impact
of the downturn in the telecommunications market. We expect to continue to incur operating losses and may not be profitable
in the future.We have experienced substantial net losses, including a net
loss of $1,846,000 for the quarter ended March 31, 2004 and net losses of
$13,262,000 and $4,895,000 for the years ended December 31, 2003 and 2002,
respectively. We have an 21




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accumulated deficit of $80,623,000 as of March 31,
2004. A continued decrease in revenues could have an adverse impact on our
finances. There can be no assurance as to when or if we will achieve
profitability. Our prospects for growth depend on recently-introduced products and
products under development.We expect revenues from sales of our established
products to decline over time both as a result of decreased demand and pricing
pressure. Therefore, our future operating results are highly dependent on
market acceptance of our recently-introduced products and products that may be
introduced in the future. These include, for example, the Orion 7400 and the
Orion 5000, 5001 and 5003, all of which have only recently been introduced.
There can be no assurance that such products will achieve widespread market
acceptance, and, in fact, some other products we introduced in recent years
have failed to meet our sales expectations. The industry-wide downturn caused
sales of new products, such as ours, to be well below expectations. We have,
in the past, experienced delays and changes in course in the development of new
products and the enhancement of existing products, and such delays and changes
in course may occur in the future. Our inability to develop and introduce new
products or product versions in a timely manner, due to resource constraints or
technological or other reasons, or to achieve timely and widespread market
awareness and acceptance of our new products or releases, would have a material
adverse effect on our business and operating results. Rapid technological change could hurt our ability to compete.The
telecommunications equipment industry is characterized by rapidly-changing
technologies and frequent new product introductions. The rapid development of
new technologies increases the risk that current or new competitors could
develop products that would reduce the competitiveness of our products. Our
success will depend to a substantial degree upon our ability to respond to
changes in technology and customer requirements. This will require the timely
development and marketing of new products and enhancements on a cost-effective
basis. There can be no assurance that we will be successful in developing,
introducing or managing the transition to new or enhanced products such as the
Orion 7400 or that any such products will be responsive to technological
changes or will gain market acceptance. In the past, some of the products we
have planned and introduced have not met our sales expectations. Our business could be materially and adversely affected by shifts in the
use of technology common throughout the industry today. Three shifts affecting
our products and industry are: the integration of CSU/DSU technology into
routers and switches, a move from T1/E1 services to more Ethernet-based
services and the increase in demand for more managed, customer-premise-based
services. The failure to accommodate these shifts in technology could impact
sales of our products and have a material adverse affect on our business and
operating results. To develop new products and product enhancements, we will need to continue
to invest in research and development, which could adversely affect our
business and operating results.As our revenue growth is dependent upon the
success and development of our recently introduced products and products under
development and as we must continue to modify our products to incorporate new
technologies and meet new standards, we will be required to continue to devote
time and resources to our research and development efforts. While our research
and development expenses were $4.2 million in 2002 and $4.8 million in 2003, we
may not have sufficient resources allocated to the development of new and
enhanced products to remain competitive. Our merger with VINA may not lead to the synergies expected.While we
have largely completed the plan for the integration of VINA and Larscom from
the June 5, 2003 merger of the two companies, there can be no assurance that
the merged Company can retain or attract sufficient new customers or reduce
expenses enough to achieve profitability in the near term or at all. We conducted eight rounds of restructuring/layoffs in the past thirty-four
months. Since mid-2001, we have conducted eight rounds of layoffs for an
aggregate reduction in workforce of 170 people. Although the restructuring
actions taken have lowered our expense base, we expect operating losses to
continue into 2004. Therefore, there can be no assurance that another material
restructuring and/or workforce reduction will not be required. In addition,
our workforce reductions may deprive us of the human capital we would need to
take full advantage of the recent upturn in the business cycle in our industry.
There can be no assurance that we will not lose employees in the future as a
result of the restructuring/layoffs, or that we will be able to recruit
suitable replacements. 22




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The absence of long-term backlog makes us vulnerable in periods of weak
demand. None of our customers are contractually obligated to purchase any
quantity of products in any particular period, and product sales to major
customers have varied widely from quarter-to-quarter and from year-to-year.
Our current customers might not continue to place orders with us, orders from existing customers might not
continue at the levels of previous periods and we might not be able to obtain
orders from new customers. Over the last several years, there has been a
reduction of equipment demand throughout the telecommunications industry.
Because of our limited backlog, this tends to have an immediate negative effect
on our operations, which we cannot fully offset on a timely basis by
implementing reductions in expenses. We depend upon a small number of customers some of whom have been
experiencing financial difficulties. A small number of customers have
accounted for a significant percentage of our sales. Therefore, sales for a
given quarter generally depend on orders received from, and product shipments
to, a limited number of customers. Sales to individual large customers are
often related to the customers specific equipment deployment projects, the
timing of which is subject to change on limited notice, in addition to the ebbs
and flows in our customers business conditions and the effect of competitors
product offerings. We have in the past experienced both accelerations and
slowdowns in orders related to such projects, causing changes in the sales
level of a given quarter relative to both the preceding and subsequent
quarters. Since most of our sales are in the form of large orders with short
delivery times to a limited number of customers, our backlog and consequently
our ability to predict revenues will continue to be limited. In addition,
announcements by us or our competitors of new products and technologies could
cause customers to defer, limit or end purchases of our existing products. In
the event that we lose one or more large customers, anticipated orders from
major customers fail to materialize, or delivery schedules are deferred or
canceled as a result of the above, or other unanticipated factors, our business
and operating results would be materially adversely affected. As a result of
the downturn in the telecommunications industry, many of our customers have
experienced financial difficulties and have reduced their expenditures on
capital equipment. The continued financial difficulties or failure of any of
our major customers would have a material adverse effect on our business and
operating results. One of our largest customers, MCI, filed for bankruptcy in
2002 and has only recently emerged from court protection, which could lead to a
substantial loss in their customer base or further reorganizations, all of
which could influence their order levels to us. In 2003 revenue from sales to
MCI decreased 19% from sales to MCI in 2002. Our operating results have fluctuated significantly in the past and may
fluctuate in the future on a quarterly and annual basis as a result of a number
of factors, many of which are beyond our control. Consequently, we believe
that period-to-period comparisons of our operating results are not necessarily
meaningful and should not be relied upon as indicative of future performance. Results in any period could also be affected by changes in:  
    
    market demand,
    
    competitive market conditions,
    
    market acceptance of new or existing products,
    
    sales channel development costs,
    
    the cost and availability of components,
    
    the mix of our customer base and sales channels,
    
    the mix of products sold,
    
    our sales promotion activities,
    
    our ability to expand or contract our sales and marketing organizations effectively,
    
    our ability to attract and retain key technical and managerial employees,
    
    conditions affecting the telecommunications industry and
    
    general economic conditions. We established our expense levels for product development and other
operating expenses based on projected sales levels and margins, but expenses
are relatively fixed in the short term. Accordingly, when sales are below
expectations in any given period, our inability to adjust spending
proportionally in the short term may exacerbate the adverse impact of a revenue
shortfall on our operating results. 23




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Because of all of the foregoing factors, our operating results in one or
more future periods may be subject to significant fluctuations. In the event
these factors result in financial performance below the expectations of public
market analysts and investors, the price of our Common Stock could be
materially adversely affected. Since the sales cycles for our products are typically long and
unpredictable, we have difficulty predicting future revenue and our operating
results may fluctuate significantly.A customers decision to purchase our
products often involves a significant commitment of its resources and a lengthy
evaluation and product qualification process. Our sales cycles vary from a few
months to over a year. As a result, we may incur substantial sales and
marketing expenses and expend significant management effort without any
assurance of a sale. A long sales cycle also subjects us to other risks,
including customers budgetary constraints, internal acceptance review and
order reductions and cancellations. Even after deciding to purchase our
products, our customers often deploy our products slowly. We depend heavily on component availability and key suppliers.On-time
delivery of our products depends upon the availability of components and
subsystems used in our products. We depend upon our suppliers to manufacture,
assemble and deliver components in a timely and satisfactory manner. We obtain
components and license certain embedded software from several single sources.
We do not believe we would be able to develop alternative sources for certain
essential components used in our products without incurring significant costs.
In addition, while we believe we would be able to develop alternative sources
for most of the other components and software used in our products there can be
no assurance that we would be able to do so, in a timely manner without
incurring substantial additional costs, if required. Any inability by our
suppliers to meet our demand or any prolonged interruption in supply, or a
significant increase in the price of one or more components or in the price of
software, would likely have an adverse impact on our business and operating
results. We generally do not have any long-term contracts with our suppliers
and, in fact, as a result of our merger with VINA, we have made a recent
decision to place a majority of our business with a single contract
manufacturer. It is possible that our major contract manufacturer and other
suppliers will not continue to be able and willing to meet our future
requirements. The market for our products is intensely competitive, and our failure to
compete effectively could reduce our revenues and margins.Competition in the
market place for high-speed network-access products is intense. Our products
compete primarily with Quick Eagle Networks, Verilink, Kentrox, Cisco Systems,
Alcatel, ADTRAN, RAD, Telco Systems, Carrier Access and Paradyne. We compete
to a lesser extent with other telecommunications equipment companies. Many of
our competitors have more broadly developed distribution channels and have made
greater advances than we have in emerging technologies. Cisco Systems and
Atcatel are two of the largest communications equipment companies in the world.
There can be no assurance that we will be able to continue to compete
successfully with existing or new competitors. We are controlled by Axel Johnson, Inc. and Sierra Ventures V LP.Axel
Johnson, Inc. and Sierra Ventures V LP each control approximately 28% of the
common Stock of Larscom. As a result, Axel Johnson, Inc. and Sierra Ventures V
LP combined have sufficient combined voting power to control the direction and
policies of Larscom, including mergers, the payment of dividends,
consolidations, the sale of all or substantially all of the assets of Larscom
and the election of the Board of Directors of Larscom, and to prevent or cause
a change in control of Larscom. There can be no assurance that Axel Johnson,
Inc. and Sierra Ventures V LP will not act in concert and affect our corporate
actions in a manner that conflicts with the interest of our other stockholders. We have recently reorganized our sales force. Until January of 2004, our
sales force was organized by type of account: major accounts, carrier accounts,
US indirect channels (distributors and resellers) and enterprise customers and
overseas accounts. As part of our VINA post-merger plans we have reorganized
our sales people along geographic areas. Certain of our sales people have been
assigned new customers and others will call on different types of customers.
There is a risk that the new relationships with customers resulting from the
reorganization might not be as productive as the prior organization in the near
term or at all. Failure of the new organization to achieve sales productivity
goals could have an adverse impact on our business and operating results. We rely on an indirect distribution channel for sales to many of our
domestic and international customers.This channel consists primarily of a
small group of master distributors, such as Tech Data, and a number of
authorized resellers. There are a number of risks associated with an indirect
distribution channel. The risks include a reduction in our ability to forecast
sales, reduced average selling prices, potential reductions in customer
satisfaction, loss of 24




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contact with users of our products, a potential build-up
of inventories at resellers and methods of advertising and promoting products
that result in additional expenses. All of these risk factors could have an
adverse impact on our business and operating results. In addition, most of our existing distributors also distribute products of
our competitors. As a result, our distributors may not recommend or continue
to use and offer our products, or our distributors may not devote sufficient
resources to market and provide the necessary customer support for our
products. Our distributors may terminate their agreements with us or
significantly reduce or delay the amount of products that they order from us at
any time. Any such termination, reduction or delay in orders could have an
adverse impact on our business and operating results We must comply with regulations and evolving industry standards. The
market for our products is characterized by the need to comply with a
significant number of communications regulations and standards, some of which
are evolving as new technologies are deployed. In the U.S., our products must
comply with various regulations defined by the Federal Communications
Commission and standards established by Underwriters Laboratories, as well as
industry standards established by various organizations. As standards for
services such as Asynchronous Transfer Mode, Frame Relay, Internet Protocol,
Ethernet and Synchronous Optical Network/Synchronous Digital Hierarchy evolve,
we may be required to modify our existing products or develop and support new
versions of our products. The failure of our products to comply, or delays in
compliance, with the various existing and evolving industry standards could
delay introduction of or affect the marketability of our products, which in
turn could have an adverse impact on our business and operating results. We may not be able to protect our intellectual property and proprietary
information. We rely upon a combination of trade secrets, contractual
restrictions, copyrights, trademark laws and patents to establish and protect
proprietary rights in our products and technologies. We believe that the
success of our business depends primarily on our proprietary technology,
information, processes and expertise, rather than patents. Much of our
proprietary information and technology is not patented and may not be
patentable. We have been issued only two U.S. patents to date and have four
patents pending. There can be no assurance that we will be able to protect our
technology or that competitors will not be able to develop similar technology
independently. We have entered into confidentiality and invention assignment
agreements with employees, and into non-disclosure agreements with suppliers,
distributors and appropriate customers so as to limit access to and disclosure
of our proprietary information. There can be no assurance that these statutory
and contractual arrangements will deter misappropriation of our technologies or
discourage independent third-party development of similar technologies. In the
event such arrangements are insufficient, our business and operating results
could be adversely impacted. We have not conducted a formal patent search relating to the technology
used in our products.From time to time, third parties may assert exclusive
patent, copyright, trademark and other intellectual property rights to
technologies that are important to us. Since patent applications in the U.S.
are not publicly disclosed immediately, applications that we do not know about
may have been filed by competitors of ours, which could relate to our products.
The scope of protection accorded to patents covering software-related
inventions is evolving and is subject to uncertainty, which may increase the
risk and cost to us if we discover third-party patents related to our software
products or if such patents are asserted against us in the future. In the
event of litigation to determine the validity of any third-party claims, such
litigation, whether or not determined in favor of us, could result in
significant expense to us and divert the efforts of our technical and
management personnel. In the event of an adverse ruling in such litigation, we
might be required to pay damages, discontinue the use and sale of infringing
products, and expend significant resources to develop non-infringing technology
or obtain licenses from third parties. There can be no assurance that licenses
from third parties would be available on acceptable terms, if at all. A
successful claim against us and our failure to develop or license a substitute
technology could have an adverse impact on our business and operating results. Our products may suffer from defects or errors that may subject us to
product warranty and product liability claims, which could adversely affect our
business and results of operations.Complex products such as ours might
contain undetected errors or failures when first introduced or as new versions
are released. If such errors or failures occur, we may be subject to delays in
or losses of market acceptance and sales, product returns, diversion of
development resources resulting in new product development delay, injury to our
reputation or increased service and 25




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warranty costs. Although we believe that
our reserves for estimated future warranty costs are adequate, our estimates,
particularly those related to products that have been recently introduced,
might not be correct. Warranty claims in excess of those expected could have
an adverse impact on our business and operating results. Our
agreements with our distributors and customers typically contain
provisions designed to limit our exposure to potential product liability
claims. However, it is possible that the limitation of liability provisions
contained in our agreements may not be effective or adequate under the laws of
certain jurisdictions. In addition, our errors and omissions insurance may be
inadequate to cover any potential product liability claim. Although we have
not experienced any product liability claims to date, it is possible that we
will be subject to such claims in the future. Such claims could have an
adverse impact on our business and results or operations. Our key personnel are critical to our business, and any failure to retain
these employees could adversely affect our ability to manage our operations.
Our success depends upon the continued contributions of our key management,
sales and engineering personnel, many of whom would be difficult to replace.
We believe that our future success will depend in large part upon our ability
to attract and retain qualified management, sales and technical personnel. Our
failure to attract or retain any such key employees could have a material
adverse effect on our business and operating results. As part of the strategy for growth and expansion of our business, we may
make acquisitions that could disrupt our business or harm our financial
condition.As part of our business strategy, we may invest in or acquire other
businesses, technologies or assets, or enter into strategic relationships with
third parties. For such acquisitions, we may issue additional stock, incur
debt, assume liabilities, incur impairment charges related to goodwill and
other intangible assets or incur other large and immediate write-offs. Our
operation of any acquired business would involve numerous risks including:  
    
    problems integrating any acquired operations with our own,
    
    unanticipated costs,
    
    diversion of managements attention from our core business,
    
    adverse effects on existing business relationships with customers,
    
    risks associated with entering markets in which we have no or limited experience,
    
    the potential loss of key employees, particularly those of the purchased organization and
a decrease in our cash position. 
 Item 3: Quantitative and Qualitative Disclosures about Market Risk Interest Rate Risk. We do not use derivative financial instruments in our
investment portfolio. Our investment portfolio generally has been comprised of
commercial paper rated A1/P1, bank certificates of deposit rated A- or better
and corporate bonds and medium-term notes rated A- or better. These securities
mature within one year and are classified as available for sale in accordance
with SFAS No. 115, Accounting for Certain Investments in Debt and Equity
Securities. Our investments are all considered short term and therefore
included in cash and cash equivalents on our balance sheet. Our current and
non-current liabilities are generally not interest bearing. Foreign Currency Exchange Rate Risk. Our international sales are
typically made in U.S. dollars and are generally not subjected to foreign
currency exchange rate risk. Certain of our operating expenses were incurred
in local currencies, principally the British pound. However, we have closed
our overseas sales offices and we have limited exposure to the British pound
associated with terminating our operations there. We do not currently hedge
against foreign currency rate fluctuations. Gains and losses from such
fluctuations have not been material to our consolidated results. The effect of
an immediate, hypothetical 10% change in the exchange rate for the British
pound or any foreign currency would not be material to us. 26




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Item 4: Controls and Procedures Evaluation of Disclosure Controls and Procedures.Our chief executive
officer and chief financial officer are responsible for establishing and
maintaining disclosure controls and procedures (as defined in the rules
promulgated under the Securities Exchange Act of 1934, as amended) for our
Company. Based on their evaluation of our disclosure controls and procedures
as of March 31, 2004, our chief executive officer and our chief financial
officer concluded that our disclosure controls and procedures were effective as
of the end of the period covered by this report. Changes in Internal Controls.There were no changes in our internal
control over financial reporting during the period covered by this report that
have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting. Limitations on the Effectiveness of Controls.A control system, no matter
how well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues, if any, within a company
have been detected. The Companys disclosure controls and procedures are
designed to provide reasonable assurance of achieving their objectives, and the
chief executive officer and the chief financial officer have concluded that
these controls and procedures are effective at the reasonable assurance
level. 27




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Part II: Other Information 
 Item 1: Legal Proceedings. We are not currently involved in any material legal proceedings. 
 Item 2: Changes in Securities. Not applicable. 
 Item 3: Defaults upon Senior Securities. Not applicable. 
 Item 4: Submission of Matters to a Vote of Security Holders. Not applicable. 
 Item 5: Other Information. Changes in Registrants Certifying Accountant: On April 19, 2004, the Company dismissed PricewaterhouseCoopers LLP
as its independent accountants. The Companys Audit Committee of the
Board of Directors (the Audit Committee) participated in and approved
the decision to change independent accountants. The audit reports of PricewaterhouseCoopers LLP on the consolidated
financial statements of the Company for the fiscal years ended December
31, 2003 and 2002, did not contain an adverse opinion or disclaimer of
opinion and were not qualified as to uncertainty, audit scope or
accounting principle, except that the report for the fiscal year ended
December 31, 2003 contained an explanatory paragraph expressing
substantial doubt regarding the Companys ability to continue as a going
concern. In connection with its audits for the two most recent fiscal years,
and through April 19, 2004, there were no disagreements with
PricewaterhouseCoopers LLP on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or
procedures, which disagreements, if not resolved to the satisfaction of
PricewaterhouseCoopers LLP, would have caused them to make reference
thereto in their report on the consolidated financial statements for such
years. During the fiscal years ended December 31, 2003 and 2002, and
through April 19, 2004, there were no reportable events (as defined in
Item 304(a)(1)(v) of Regulation S-K). The Company provided a copy of the foregoing disclosure to
PricewaterhouseCoopers LLP and requested that PricewaterhouseCoopers LLP
furnish a letter addressed to the SEC stating whether or not
PricewaterhouseCoopers LLP agreed with the statements made above by the
Company. A copy of the letter from PricewaterhouseCoopers LLP, dated
April 22, 2004, was filed as Exhibit 16.1 to our Form 8-K report filed
with the SEC on April 22, 2004 and incorporated herein by reference. The Audit Committee approved the selection of BDO Seidman LLP as the
Companys independent accountants for the year ended December 31, 2004.
During the two most recent fiscal years and through April 19, 2004, the
Company did not consult with BDO Seidman, LLP prior to its engagement
regarding either (i) the application of accounting principles to a
specified transaction, completed or proposed or the type of audit opinion
that might be rendered on the Companys financial statements and neither
a written 28




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report was provided to the Company or oral advice was provided that
BDO Seidman LLP concluded was an important factor considered by the
Company in reaching a decision as to the accounting, auditing or
financial reporting issue or (ii) any matter that was either the subject
of a disagreement or a reportable event within the meaning of Item
304(a)(1) of Regulation S-K. 
 Item 6: Exhibits and Reports onForm 8-K.  a.
    
    Exhibits.  31.1
    
    Certification of the Chief Executive Officer of Larscom
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of the Chief Financial Officer of Larscom
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of the Chief Executive Officer and Chief
Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.  b.
    
    Reports.We filed one report on Form 8-K during the quarter:The report was filed on February 5, 2004, reporting the release of
financial results of the fourth quarter and year ended December 31, 2003. 29




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized. LARSCOM INCORPORATEDDateMay 13, 2004
    
    By/s/ Daniel L. ScharreDaniel L. ScharrePresident and Chief Executive Officer(Principal Executive Officer)By/s/ Donald W. MorganDonald W. MorganVice President, Finance and Chief
Financial Officer

(Principal Financial Officer and Principal
Accounting Officer)
 30




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EXHIBIT INDEX  31.1
    
    Certification of the Chief Executive Officer of Larscom
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of the Chief Financial Officer of Larscom
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of the Chief Executive Officer and Chief
Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.