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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 THE
SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2003

OR

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

For the Transition Period
from________ to________

Commission File Number: 1-12491

LARSCOM INCORPORATED

(Exact name of registrant as specified in its charter)


|                                                               |  |                                  
|-------------------------------------------------------------- |  | ---------------------------------
|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 (X) No
(   )

The number of the registrants shares outstanding as of November 7, 2003, was
5,097,990 of Common Stock.





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TABLE OF CONTENTS



|                              |                                                                                               |                                                      |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|Part I: Financial Information
|                              | Item 1: Financial Statements (Unaudited)                                                     
|                              |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS               
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS     
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                              |                                                                                               | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|                              | Item 2: Managements Discussion and Analysis of Financial Condition and Results of Operations
|                              | Item 3: Quantitative and Qualitative Disclosures about Market Risk                           
|                              | Item 4: Controls and Procedures                                                              
|Part II: Other Information   
|                              | Item 1: Legal Proceedings                                                                    
|                              | Item 2: Changes in Securities                                                                
|                              | Item 3: Defaults upon Senior Securities                                                      
|                              | Item 4: Submission of Matters to a Vote of Security Holders                                  
|                              | Item 5: Other Information                                                                    
|                              | Item 6: Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                   
|Exhibit Index                
|EXHIBIT 31.1                 
|EXHIBIT 31.2                 
|EXHIBIT 32.1                 



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LARSCOM INCORPORATED
FORM 10-Q

TABLE OF CONTENTS

|           |  |                                                                                       |  |   
|---------- |  | ------------------------------------------------------------------------------------- |  | --
|Part I:    |  | Financial Information                                                                 |  | 3 
|Item 1:    |  | Financial Statements (Unaudited)                                                      |  | 3 
|           |  | Condensed Consolidated Balance Sheets                                                 |  | 3 
|           |  | Condensed Consolidated Statements of Operations                                       |  | 4 
|           |  | Condensed Consolidated Statements of Cash Flows                                       |  | 5 
|           |  | Notes to Condensed Consolidated Financial Statements                                  |  | 6 
|Item 2:    |  | Managements Discussion and Analysis of Financial
Condition and Results of Operations |  | 19
|Item 3:    |  | Quantitative and Qualitative Disclosures about
Market Risk                            |  | 32
|Item 4:    |  | Controls and Procedure                                                                |  | 33
|Part II:   |  | Other Information                                                                     |  | 34
|Item 1:    |  | Legal Proceedings                                                                     |  | 34
|Item 2:    |  | Changes in Securities                                                                 |  | 34
|Item 3:    |  | Defaults upon Senior Securities                                                       |  | 34
|Item 4:    |  | Submission of Matters to a Vote of Security Holders                                   |  | 34
|Item 5:    |  | Other Information                                                                     |  | 34
|Item 6:    |  | Exhibits and Reports on Form 8-K                                                      |  | 34
|Signatures |  |                                                                                       |  | 35

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Part I: Financial Information
Item 1: Financial Statements (Unaudited)




LARSCOM INCORPORATED




CONDENSED CONSOLIDATED BALANCE SHEETS


(In thousands) (Unaudited)


|                              |                                                |                                      |                                            |         |   |               |       |              |   |        |  | 
|----------------------------- | ---------------------------------------------- | ------------------------------------ | ------------------------------------------ | ------- | - | ------------- | ----- | ------------ | - | ------ |  | 
|                              |                                                |                                      |                                            |         |   | September 30, |       | December 31,
|                              |                                                |                                      |                                            |         |   | 2003          |       | 2002        
|                              |                                                |                                      |                                            |         |   |               |       |             
|                              |                                                |                                      |                                            | ASSETS  |   |               |       |              |   |        |  | 
|Current assets:               |                                                |                                      |                                            |         |   |               |       |             
|                              | Cash and cash equivalents                      |                                      | $                                          | 11,103  |   |               | $     | 15,643       |  
|                              | Restricted cash                                |                                      |                                            | 333     |   |               |       |             |  
|                              | Short-term investments                         |                                      |                                            |        |   |               |       | 2,014        |  
|                              | Accounts receivable, net                       |                                      |                                            | 3,423   |   |               |       | 3,079        |  
|                              | Inventories                                    |                                      |                                            | 3,982   |   |               |       | 3,816        |  
|                              | Income tax receivable                          |                                      |                                            | 35      |   |               |       | 60           |  
|                              | Prepaid expenses and other current assets      |                                      |                                            | 2,014   |   |               |       | 1,322        |  
|                              |                                                |                                      |                                            |         |   |               |       |              |  
|                              |                                                |                                      | Total current assets                       |         |   | 20,890        |       |              |   | 25,934 | 
|Property and equipment, net   |                                                |                                      | 1,620                                      |         |   |               | 1,918 |             
|Intangible assets, net        |                                                |                                      | 2,687                                      |         |   |               |      |             
|Other non-current assets, net |                                                |                                      | 448                                        |         |   |               | 208   |             
|                              |                                                |                                      |                                            |         |   |               |       |              |  
|                              |                                                |                                      | Total assets                               |         | $ | 25,645        |       |              | $ | 28,060 | 
|                              |                                                |                                      |                                            |         |   |               |       |              |  
|                              |                                                | LIABILITIES AND STOCKHOLDERS EQUITY |                                            |         |   |               |       |              |   |       
|Current liabilities:          |                                                |                                      |                                            |         |   |               |       |             
|                              | Accounts payable                               |                                      | $                                          | 3,709   |   |               | $     | 1,898        |  
|                              | Accrued expenses and other current liabilities |                                      |                                            | 5,999   |   |               |       | 4,510        |  
|                              | Deferred revenue                               |                                      |                                            | 2,233   |   |               |       | 2,102        |  
|                              | Due to Axel Johnson                            |                                      |                                            | 192     |   |               |       | 25           |  
|                              |                                                |                                      |                                            |         |   |               |       |              |  
|                              |                                                |                                      | Total current liabilities                  |         |   | 12,133        |       |              |   | 8,535  | 
|Other non-current liabilities |                                                |                                      | 1,745                                      |         |   |               | 1,618 |             
|                              |                                                |                                      |                                            |         |   |               |       |              |  
|                              |                                                |                                      | Total liabilities                          |         |   | 13,878        |       |              |   | 10,153 | 
|                              |                                                |                                      |                                            |         |   |               |       |              |  
|Stockholders equity:         |                                                |                                      |                                            |         |   |               |       |             
|                              | Class A Common Stock                           |                                      |                                            | 51      |   |               |       | 89           |  
|                              | Class B Common Stock                           |                                      |                                            |        |   |               |       | 100          |  
|                              | Additional paid-in capital                     |                                      |                                            | 89,610  |   |               |       | 83,231       |  
|                              | Deferred compensation                          |                                      |                                            | (101    | ) |               |       |             |  
|                              | Accumulated other comprehensive loss           |                                      |                                            | (4      | ) |               |       | (1           | )
|                              | Unrealized investment gain                     |                                      |                                            |        |   |               |       | 4            |  
|                              | Accumulated deficit                            |                                      |                                            | (77,789 | ) |               |       | (65,516      | )
|                              |                                                |                                      |                                            |         |   |               |       |              |  
|                              |                                                |                                      | Total stockholders equity                 |         |   | 11,767        |       |              |   | 17,907 | 
|                              |                                                |                                      |                                            |         |   |               |       |              |  
|                              |                                                |                                      | Total liabilities and stockholders equity |         | $ | 25,645        |       |              | $ | 28,060 | 
|                              |                                                |                                      |                                            |         |   |               |       |              |  

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

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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data) (Unaudited)

|                                          |                                         |                                |        |                    |       |                   |        |       |       |      |         |        |        |   |        |        |        |  
|----------------------------------------- | --------------------------------------- | ------------------------------ | ------ | ------------------ | ----- | ----------------- | ------ | ----- | ----- | ---- | ------- | ------ | ------ | - | ------ | ------ | ------ | -
|                                          |                                         |                                |        | Three Months Ended |       | Nine Months Ended
|                                          |                                         |                                |        | September 30,      |       | September 30,    
|                                          |                                         |                                |        |                    |       |                  
|                                          |                                         |                                |        | 2003               |       | 2002              |        | 2003  |       | 2002
|                                          |                                         |                                |        |                    |       |                   |        |       |       |     
|Product revenues                          |                                         | $                              | 4,984  |                    |       | $                 | 4,009  |       |       | $    | 11,930  |        |        | $ | 14,725 |       
|Service revenues                          |                                         |                                | 1,264  |                    |       |                   | 1,333  |       |       |      | 3,814   |        |        |   | 4,162  |       
|                                          |                                         |                                |        |                    |       |                   |        |       |       |      |         |        |        |   |        |       
|                                          |                                         | Total revenues                 |        |                    | 6,248 |                   |        |       | 5,342 |      |         |        | 15,744 |   |        |        | 18,887 |  
|                                          |                                         |                                |        |                    |       |                   |        |       |       |      |         |        |        |   |        |       
|Product cost of revenues                  |                                         |                                | 4,967  |                    |       |                   | 1,926  |       |       |      | 9,065   |        |        |   | 7,232  |       
|Service cost of revenues                  |                                         |                                | 232    |                    |       |                   | 202    |       |       |      | 804     |        |        |   | 815    |       
|                                          |                                         |                                |        |                    |       |                   |        |       |       |      |         |        |        |   |        |       
|                                          |                                         | Total cost of revenues         |        |                    | 5,199 |                   |        |       | 2,128 |      |         |        | 9,869  |   |        |        | 8,047  |  
|                                          |                                         |                                |        |                    |       |                   |        |       |       |      |         |        |        |   |        |       
|                                          |                                         | Gross profit                   |        |                    | 1,049 |                   |        |       | 3,214 |      |         |        | 5,875  |   |        |        | 10,840 |  
|                                          |                                         |                                |        |                    |       |                   |        |       |       |      |         |        |        |   |        |       
|Operating expenses:                       |                                         |                                |        |                    |       |                   |        |       |       |      |         |        |        |   |        |       
|                                          | Research and development                |                                |        | 1,502              |       |                   |        | 1,036 |       |      |         | 3,840  |        |   |        | 3,073  |       
|                                          | Selling, general and administrative     |                                |        | 3,744              |       |                   |        | 3,844 |       |      |         | 11,341 |        |   |        | 12,390 |       
|                                          | Amortization of acquisition intangibles |                                |        | 155                |       |                   |        |      |       |      |         | 248    |        |   |        |       |       
|                                          | Restructuring                           |                                |        | 2,301              |       |                   |        | (61   | )     |      |         | 2,391  |        |   |        | 192    |       
|                                          | Impairment of assets                    |                                |        | 364                |       |                   |        |      |       |      |         | 364    |        |   |        |       |       
|                                          | In-process research & development       |                                |        |                   |       |                   |        |      |       |      |         | 155    |        |   |        |       |       
|                                          |                                         |                                |        |                    |       |                   |        |       |       |      |         |        |        |   |        |       
|                                          |                                         | Total operating expenses       |        |                    | 8,066 |                   |        |       | 4,819 |      |         |        | 18,339 |   |        |        | 15,655 |  
|                                          |                                         |                                |        |                    |       |                   |        |       |       |      |         |        |        |   |        |       
|Loss from operations                      |                                         |                                | (7,017 | )                  |       |                   | (1,605 | )     |       |      | (12,464 | )      |        |   | (4,815 | )     
|                                          |                                         | Interest and other income      |        |                    | 148   |                   |        |       | 90    |      |         |        | 229    |   |        |        | 308    |  
|                                          |                                         |                                |        |                    |       |                   |        |       |       |      |         |        |        |   |        |       
|Loss before income taxes                  |                                         |                                | (6,869 | )                  |       |                   | (1,515 | )     |       |      | (12,235 | )      |        |   | (4,507 | )     
|                                          |                                         | Income tax provision/(benefit) |        |                    | 14    |                   |        |       | 5     |      |         |        | 38     |   |        |        | (1,851 | )
|                                          |                                         |                                |        |                    |       |                   |        |       |       |      |         |        |        |   |        |       
|Net loss                                  |                                         | $                              | (6,883 | )                  |       | $                 | (1,520 | )     |       | $    | (12,273 | )      |        | $ | (2,656 | )     
|                                          |                                         |                                |        |                    |       |                   |        |       |       |      |         |        |        |   |        |       
|Basic and diluted net loss per share      |                                         | $                              | (1.35  | )                  |       | $                 | (0.56  | )     |       | $    | (3.29   | )      |        | $ | (0.99  | )     
|                                          |                                         |                                |        |                    |       |                   |        |       |       |      |         |        |        |   |        |       
|Basic and diluted weighted average shares |                                         |                                | 5,097  |                    |       |                   | 2,694  |       |       |      | 3,729   |        |        |   | 2,693  |       
|                                          |                                         |                                |        |                    |       |                   |        |       |       |      |         |        |        |   |        |       

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

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LARSCOM INCORPORATED




CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


(In thousands) (Unaudited)


|                                                                               |                                                                 |   |                                 |         |      |   |        |        |  
|------------------------------------------------------------------------------ | --------------------------------------------------------------- | - | ------------------------------- | ------- | ---- | - | ------ | ------ | -
|                                                                               |                                                                 |   | Nine Months Ended September 30,
|                                                                               |                                                                 |   |                                
|                                                                               |                                                                 |   | 2003                            |         | 2002
|                                                                               |                                                                 |   |                                 |         |     
|Cash flows from operating activities, net of acquired business:                |                                                                 |   |                                 |         |      |   |        |       
|                                                                               | Net loss                                                        |   | $                               | (12,273 | )    |   | $      | (2,656 | )
|                                                                               | Depreciation and amortization                                   |   |                                 | 1,755   |      |   |        | 1,164  |  
|                                                                               | Impairment of fixed assets                                      |   |                                 | 789     |      |   |        |       |  
|                                                                               | Impairment of intangibles                                       |   |                                 | 1,448   |      |   |        |       |  
|                                                                               | Writedown of inventories                                        |   |                                 | 849     |      |   |        | 647    |  
|                                                                               | (Decrease)/increase in bad debt reserves                        |   |                                 | (276    | )    |   |        | 120    |  
|                                                                               | (Decrease)/increase in deferred revenue                         |   |                                 | (227    | )    |   |        | 587    |  
|                                                                               | Increase/(decrease) in accrued restructuring                    |   |                                 | 1,270   |      |   |        | (855   | )
|                                                                               | Net decrease in other working capital accounts                  |   |                                 | 806     |      |   |        | 1,057  |  
|                                                                               |                                                                 |   |                                 |         |      |   |        |        |  
|Net cash (used in)/provided by operating activities                            |                                                                 |   | (5,859                          | )       |      |   | 64     |       
|                                                                               |                                                                 |   |                                 |         |      |   |        |        |  
|Cash flows from investing activities:                                          |                                                                 |   |                                 |         |      |   |        |       
|                                                                               | Purchases of property and equipment                             |   |                                 | (230    | )    |   |        | (192   | )
|                                                                               | Cash acquired in business acquisition, net of transaction costs |   |                                 | (266    | )    |   |        |       |  
|                                                                               | Purchases of short-term investments                             |   |                                 |        |      |   |        | (9,248 | )
|                                                                               | Sales and maturities of short-term investments                  |   |                                 | 2,014   |      |   |        | 15,420 |  
|                                                                               | Licenses long-term                                              |   |                                 |        |      |   |        | (333   | )
|                                                                               |                                                                 |   |                                 |         |      |   |        |        |  
|Net cash provided by investing activities                                      |                                                                 |   | 1,518                           |         |      |   | 5,647  |       
|                                                                               |                                                                 |   |                                 |         |      |   |        |        |  
|Cash flows from financing activities:                                          |                                                                 |   |                                 |         |      |   |        |       
|                                                                               | Payments from/(to) Axel Johnson Inc.                            |   |                                 | 167     |      |   |        | (77    | )
|                                                                               | Decrease in deferred rent and other long-term obligations       |   |                                 | (54     | )    |   |        | (55    | )
|                                                                               | Proceeds from issuances of Class A Common Stock                 |   |                                 | 29      |      |   |        | 22     |  
|                                                                               |                                                                 |   |                                 |         |      |   |        |        |  
|Net cash provided by/(used in) financing activities                            |                                                                 |   | 142                             |         |      |   | (110   | )     
|                                                                               |                                                                 |   |                                 |         |      |   |        |        |  
|Effect of unrealized investment (loss)/gain and foreign exchange rates on cash |                                                                 |   | (8                              | )       |      |   | 11     |       
|                                                                               |                                                                 |   |                                 |         |      |   |        |        |  
|(Decrease)/increase in cash and cash equivalents                               |                                                                 |   | (4,207                          | )       |      |   | 5,612  |       
|Cash and cash equivalents at beginning of period                               |                                                                 |   | 15,643                          |         |      |   | 9,789  |       
|                                                                               |                                                                 |   |                                 |         |      |   |        |        |  
|Cash and cash equivalents, restricted cash at end of period                    |                                                                 | $ | 11,436                          |         |      | $ | 15,401 |       
|                                                                               |                                                                 |   |                                 |         |      |   |        |        |  
|Supplemental disclosure of cash flow information                               |                                                                 |   |                                 |         |      |   |        |       
|Interest paid                                                                  |                                                                 | $ | 2                               |         |      | $ | 2      |       
|                                                                               |                                                                 |   |                                 |         |      |   |        |        |  
|Income taxes paid                                                              |                                                                 | $ | 16                              |         |      | $ | 39     |       
|                                                                               |                                                                 |   |                                 |         |      |   |        |        |  
|Acquisition of business for stock (see note 2)                                 |                                                                 | $ | 7,132                           |         |      | $ |       |       
|                                                                               |                                                                 |   |                                 |         |      |   |        |        |  

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

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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 and
nine months ended September 30, 2003 and 2002, 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,
2002. The results of operations for the three months and nine months ended
September 30, 2003 are not necessarily indicative of the results to be expected
for the full year. The condensed consolidated balance sheet at December 31,
2002 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.

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 and the assumption of certain liabilities and obligations
of VINA, including those arising under its stock option plans.

VINA was a leading developer of multi-service broadband access
communications equipment that enables communications service providers to
deliver bundled voice and data services. VINAs products integrate various
broadband access technologies, including existing circuit-based and emerging
packet-based networks, onto a single platform to alleviate capacity constraints
in communications networks.

The total purchase price we recorded was $7,132,000 consisting of (a) a
total of approximately 2,393,894 shares of Larscom common stock issued upon
consummation and valued at approximately $5,329,000, using a fair value per
share of $2.23, (b) approximately $883,000 of consideration for options and
warrants to purchase approximately 454,752 equivalent shares of Larscom common
stock assumed as part of the merger, and (c) direct transaction costs of
approximately $920,000. The fair value of Larscoms common stock issued was
determined using the 5-day average price surrounding the date the acquisition
was announced. The fair value of the options assumed in the transaction was
determined using the Black-Scholes option-pricing model and the following
assumptions: expected life of 4.92 years, risk-free interest rate of 2.20%,
expected volatility of 90% and no expected dividend yield. The following
assumptions were used to perform the calculations for the warrants assumed:
remaining contractual life of 1.63 years, risk-free interest rate of 1.30% and
expected volatility of 90%. This acquisition was accounted for as a purchase.
The purchase price of the VINA merger is as follows (in thousands):

|                                     |                      |   |       |       | 
|------------------------------------ | -------------------- | - | ----- | ----- | 
|Value of Larscom Stock issued        |                      | $ | 5,329 |      
|Value of options and warrants issued |                      |   | 883   |      
|Direct transaction costs             |                      |   | 920   |      
|                                     |                      |   |       |      
|                                     | Total purchase price |   | $     | 7,132 | 
|                                     |                      |   |       |      

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Under the purchase method of accounting, the total purchase price is
allocated to VINAs net tangible and intangible assets based upon their fair
value as of the date of completion of the merger. Based upon managements
estimate of fair value, which was based upon the independent valuation, the
purchase price allocation, which is subject to change based on Larscoms final
analysis, is as follows (in thousands):

|                                    |                       |   |        |        | 
|----------------------------------- | --------------------- | - | ------ | ------ | 
|Tangible assets acquired            |                       | $ | 6,760  |       
|Amortizable intangible assets:      |                       |   |        |       
|Developed technology                |                       |   | 2,638  |       
|Trade names/trademarks              |                       |   | 155    |       
|Customer contracts/relationships    |                       |   | 1,551  |       
|Order backlog                       |                       |   | 78     |       
|                                    |                       |   |        |       
|                                    | Total assets acquired |   |        | 11,182 | 
|In-process research and development |                       |   | 155    |       
|Liabilities assumed                 |                       |   | (3,735 | )     
|Deferred compensation               |                       |   | 106    |       
|Insurance premium liability assumed |                       |   | (576   | )     
|                                    |                       |   |        |       
|                                    | Net assets acquired   |   | $      | 7,132  | 
|                                    |                       |   |        |       

Of the purchase price of VINA, $155,000 represented acquired in-process
research and development (IPRD), which had not yet reached technological
feasibility and had no alternative future use as of the date of acquisition.
Accordingly, this amount was immediately charged to expense upon consummation
of the acquisition. The estimate of in-process research and development costs
involved one project, which was 87% complete and a discount rate of 30% was
used to value the project. Subsequent to the acquisition of Vina, there have
been no significant developments related to the current status of the acquired
in-process research and development project that would result in material
changes to the assumptions.

A value of $4,422,000 has been allocated to amortizable intangible assets
with useful lives ranging from 6 months to 6 years as follows: Developed
technology  5 to 6 years; Trade name / trademarks  3 years; Customer
contracts/relationships  3 to 5 years; and Order backlog  6 months.

An independent valuation of the purchased assets was performed to assist
in determining the fair value of each identifiable tangible and intangible
asset and in allocating the purchase price among the acquired assets including
the portion of the purchase price attributed to acquired IPRD projects.
Standard valuation procedures and techniques were utilized in determining the
fair value.

Developed technology and in-process technology were identified and valued
through analysis of VINAs current development projects, their respective
stages of development, the time and resources needed to complete them, their
expected income-generating ability, their target markets and the associated
risks.

The income approach, which includes an analysis of the markets, cash flows
and risks associated with achieving such cash flows, was the methodology
utilized in valuing IPRD, developed technology and trade names/trademarks.
Each intangible asset is valued based upon the estimated impact on our expected
future after-tax cash flows. The net changes in our expected future after-tax
cash flows generated by the respective IPRD, developed technology and trade
names/trademarks were then discounted to present value. The discount was based
on an analysis of the weighted-average cost of capital for the industry.

Customer contracts/relationships and order backlog were valued using the
cost method. The cost to develop the customer contracts and relationships and
to earn the order backlog were estimated and valued on an after-tax basis.

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Supplemental pro forma information reflecting the acquisition of VINA as if it
occurred on December 31, 2001 is as follows for the three months and nine
months ended September 30, 2003 and 2002 (in thousands, except per share data)
(unaudited):

|                   |  |                                 |        |                                |  |      |        |      |  |   |         |   |  |   |         |  
|------------------ |  | ------------------------------- | ------ | ------------------------------ |  | ---- | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                   |  | Three Months ended September 30 |        | Nine Months ended September 30
|                   |  |                                 |        |                               
|                   |  | 2003                            |        | 2002                           |  | 2003 |        | 2002
|                   |  |                                 |        |                                |  |      |        |     
|Total net revenues |  | $                               | 6,248  |                                |  | $    | 11,377 |      |  | $ | 19,061  |   |  | $ | 37,985  |  
|Net loss           |  | $                               | (6,883 | )                              |  | $    | (7,554 | )    |  | $ | (19,183 | ) |  | $ | (25,426 | )
|Net loss per share |  | $                               | (1.35  | )                              |  | $    | (2.80  | )    |  | $ | (5.14   | ) |  | $ | (9.44   | )

Such information is not necessarily representative of the actual results that
would have occurred for those periods.

Note 3 Recent Accounting Pronouncements:

In April 2003, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) 149, Amendment of
Statement 133 on Derivative Instruments and Hedging Activities, which amends
SFAS 133 for certain decisions made by the FASB Derivatives Implementation
Group. In particular, SFAS 149 (1) clarifies under what circumstances a
contract with an initial net investment meets the characteristic of a
derivative, (2) clarifies when a derivative contains a financing component, (3)
amends the definition of an underlying to conform it to language used in FASB
Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others, and (4)
amends certain other existing pronouncements. This Statement is effective for
contracts entered into or modified after June 30, 2003, and for hedging
relationships designated after June 30, 2003. In addition, most provisions of
SFAS 149 are to be applied prospectively. We have no financial instruments
within the scope of this pronouncement.

In May 2003, the FASB issued SFAS 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. SFAS 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its
scope as a liability (or an asset in some circumstances). SFAS 150 is
effective for financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. It is to be implemented by reporting the
cumulative effect of a change in an accounting principle for financial
instruments created before the issuance date of the Statement and still
existing at the beginning of the interim period of adoption. Restatement is
not permitted. We have no financial instruments within the scope of this
pronouncement.

In November 2002, the FASB issued FASB 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. The initial recognition and initial measurement
provisions of FIN 45 are applicable on a prospective basis to guarantees issued
or modified after December 31, 2002, irrespective of the guarantors fiscal
year-end. The disclosure requirements of FIN 45 are effective for financial
statements of interim or annual periods ending after December 15, 2002, and
have been implemented in our financial statements and in Note 12 below.

In November 2002, the EITF reached a consensus on Issue No. 00-21,
Revenue Arrangements with Multiple Deliverables. EITF Issue No. 00-21
provides guidance on how to account for arrangements that involve the delivery
or performance of multiple products, services and/or rights to use assets. The
provisions of EITF Issue No. 00-21 will apply to revenue arrangements entered into in fiscal periods beginning
after June 15, 2003. We do not

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expect the adoption of this standard to have a
material impact upon our financial condition, cash flows or results of
operations.

In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective immediately for all new variable interest entities created or
acquired after January 31, 2003. For variable interest entities created or
acquired prior to February 1, 2003, the provisions of FIN 46 must be applied
for the first interim or annual period beginning after June 15, 2003. FIN 46
is effective for interests held by public entities in variable interest
entities or potential variable interest entities created before February 1,
2003, for financial statement periods ending after December 15, 2003, and
otherwise is effective after June 15, 2003. We do not expect the adoption of
FIN 46 to have a material impact upon our financial condition, cash flows or
results of operations.

Note 4Balance Sheet Components:

Inventories consist of the following (in thousands):

|                |  |               |       |              |  |   |       | 
|--------------- |  | ------------- | ----- | ------------ |  | - | ----- | 
|                |  | September 30, |       | December 31,
|                |  | 2003          |       | 2002        
|                |  |               |       |             
|Raw materials   |  | $             | 1,691 |              |  | $ | 916   | 
|Work-in-process |  |               | 532   |              |  |   | 521   | 
|Finished goods  |  |               | 1,759 |              |  |   | 2,379 | 
|                |  |               |       |              |  |   |       | 
|                |  | $             | 3,982 |              |  | $ | 3,816 | 
|                |  |               |       |              |  |   |       | 

Amortized intangible assets consist of the following (in thousands):

|                                 |  |                    |       |              |  |             |     |  |  |   |       | 
|-------------------------------- |  | ------------------ | ----- | ------------ |  | ----------- | --- |  |  | - | ----- | 
|                                 |  | September 30, 2003
|                                 |  |                   
|                                 |  | Gross carrying     |       | Accumulated  |  | Net        
|                                 |  | Amount             |       | Amortization |  | Intangibles
|                                 |  |                    |       |              |  |            
|Developed Technology             |  | $                  | 1,086 |              |  | $           | 60  |  |  | $ | 1,026 | 
|Tradenames/trademarks            |  |                    | 155   |              |  |             | 17  |  |  |   | 138   | 
|Customer contracts/relationships |  |                    | 1,551 |              |  |             | 137 |  |  |   | 1,414 | 
|Product license                  |  |                    | 333   |              |  |             | 250 |  |  |   | 83    | 
|Order backlog                    |  |                    | 78    |              |  |             | 52  |  |  |   | 26    | 
|                                 |  |                    |       |              |  |             |     |  |  |   |       | 
|                                 |  | $                  | 3,203 |              |  | $           | 516 |  |  | $ | 2,687 | 
|                                 |  |                    |       |              |  |             |     |  |  |   |       | 

The aggregate amortization expense for the three and nine months ended
September 30, 2003 was $320,000 and $496,000, respectively. The aggregate
amortization expense for the three and nine months ended September 30, 2002 was
$42,000 and $125,000, respectively. Substantially all of the intangible assets
were acquired in connection with the VINA merger. Amortization expense is
included as a component of both cost of revenues and operating expenses.

Minimum future amortization expense at September 30, 2003 is as follows
(in thousands):

|                  |  |   |       | 
|----------------- |  | - | ----- | 
|Remainder of 2003 |  | $ | 229   | 
|2004              |  |   | 688   | 
|2005              |  |   | 646   | 
|2006              |  |   | 465   | 
|2007              |  |   | 336   | 
|Thereafter        |  |   | 323   | 
|                  |  |   |       | 
|                  |  | $ | 2,687 | 
|                  |  |   |       | 

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During the three months ended September 30, 2003, the company determined
that the MBX technology and related assets 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 a loss of
$1,956,000 to write-off the technology and other related assets. The
components of the impairment were as follows (in thousands):

|                           |                              |   |       |       | 
|-------------------------- | ---------------------------- | - | ----- | ----- | 
|Impaired intangible assets |                              | $ | 1,448 |      
|Impaired fixed assets      |                              |   | 364   |      
|Impaired prepaid expenses  |                              |   | 15    |      
|Impaired inventories       |                              |   | 129   |      
|                           |                              |   |       |      
|                           | Total MBX impairment charges |   | $     | 1,956 | 
|                           |                              |   |       |      

The impairment charges were classified in the financial statements as
follows for the three and nine months ended September 30, 2003 (in thousands):

|                               |                              |   |       |       | 
|------------------------------ | ---------------------------- | - | ----- | ----- | 
|Included in cost of revenues   |                              | $ | 1,592 |      
|Included in operating expenses |                              |   | 364   |      
|                               |                              |   |       |      
|                               | Total MBX impairment charges |   | $     | 1,956 | 
|                               |                              |   |       |      

Note 5Restructuring and Cost of Revenues Charges:

During 2001 we announced two corporate restructuring programs in response
to our own reduced revenues, negative macro-economic conditions and declining
demand in our markets. These initiatives were focused on improving operating
performance by reducing expenses. The restructuring programs included
workforce reductions of approximately 42% (88 people), the closing of our
facility in Durham, North Carolina and the write-off of fixed assets due
primarily to the workforce reduction and facility closing. Implementing these
programs led to charges to results in the second and fourth quarters of 2001
totaling $5,772,000. In May and October of 2002, we announced additional
corporate restructurings as a result of the ongoing stagnation of the telecom
market. Consequently, 30 positions were eliminated from our workforce in May
and October of 2002, with a charge to operating results of $570,000. Partially
offsetting this charge was a $194,000 reduction to the prior restructuring
reserves primarily for outplacement services, which were not fully utilized and
$122,000 in rent collected under a sublease agreement with Silicon Wireless
Corporation, which is described below. After the VINA merger, on June 5, 2003,
a restructuring was effected, which resulted in a reduction of 19 positions and
a charge to operating results in the second quarter of 2003 of $212,000.

During the third quarter of 2003, Larscom continued its restructuring
plans announced after the merger with VINA. We incurred additional
restructuring costs of $2,301,000 during the quarter, consisting of $1,535,000
in facility consolidation costs associated principally with moving its
headquarters from Milpitas, CA, to Newark, CA, partially offset by $63,000 of
rent collected from Silicon Wireless Corporation as discussed below; $425,000
in impairment charges related to fixed assets and leasehold improvements at the
Milpitas location and $423,000 from reductions in force, partially offset by
$19,000 in unused severance expense from a prior period.

In connection with the 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, that 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 third quarter of 2003,
our restructuring expenses were reduced by $63,000 as a result of rent
collected from Silicon Wireless Corporation. We expect the remaining real
estate lease obligation will be paid-out by January 2007.

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We have 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. While this property is available
for lease, we do not expect to be able to find a tenant given the current
market conditions for leased property in Northern California and the relatively
short period remaining on the lease.

The following table provides details on the activity and remaining
balances of the 2001, 2002 and 2003 restructuring charges as of September 30,
2003:

|                           |  |         |       |         |  |                |        |               |  |            |      |   |  |   |       | 
|-------------------------- |  | ------- | ----- | ------- |  | -------------- | ------ | ------------- |  | ---------- | ---- | - |  | - | ----- | 
|                           |  |         |       |         |  |                |        |               |  | Cumulative |      |   |  |  
|                           |  |         |       |         |  | Cumulative     |        | Non-Cash      |  | Reserve   
|                           |  | Total   |       | Cash    |  | Charges &      |        | September 30,
|June 2001 Restructuring    |  | Charges |       | Charges |  | Adjustments    |        | 2003         
|                           |  |         |       |         |  |                |        |              
|                           |  |         |       |         |  | (in thousands) |        |               |  |           
|Employee termination costs |  | $       | 2,293 |         |  | $              | (1,782 | )             |  | $          | (511 | ) |  | $ |      | 
|Real estate lease          |  |         | 2,080 |         |  |                | (918   | )             |  |            | 407  |   |  |   | 1,569 | 
|Fixed asset write-down     |  |         | 388   |         |  |                |       |               |  |            | (388 | ) |  |   |      | 
|                           |  |         |       |         |  |                |        |               |  |            |      |   |  |   |       | 
|Total                      |  | $       | 4,761 |         |  | $              | (2,700 | )             |  | $          | (492 | ) |  | $ | 1,569 | 
|                           |  |         |       |         |  |                |        |               |  |            |      |   |  |   |       | 
|                          
|                           |  |         |       |         |  |                |        |               |  | Cumulative |      |   |  |  
|                           |  |         |       |         |  | Cumulative     |        | Non-Cash      |  | Reserve   
|                           |  | Total   |       | Cash    |  | Charges &      |        | September 30,
|October 2001 Restructuring |  | Charges |       | Charges |  | Adjustments    |        | 2003         
|                           |  |         |       |         |  |                |        |              
|                           |  |         |       |         |  | (in thousands) |        |               |  |           
|Employee termination costs |  | $       | 966   |         |  | $              | (892   | )             |  | $          | (74  | ) |  | $ |      | 
|Real estate lease          |  |         | 45    |         |  |                | (45    | )             |  |            |     |   |  |   |      | 
|                           |  |         |       |         |  |                |        |               |  |            |      |   |  |   |       | 
|Total                      |  | $       | 1,011 |         |  | $              | (937   | )             |  | $          | (74  | ) |  | $ |      | 
|                           |  |         |       |         |  |                |        |               |  |            |      |   |  |   |       | 
|                          
|                           |  |         |       |         |  |                |        |               |  | Cumulative |      |   |  |  
|                           |  |         |       |         |  | Cumulative     |        | Non-Cash      |  | Reserve   
|                           |  | Total   |       | Cash    |  | Charges &      |        | September 30,
|May 2002 Restructuring     |  | Charges |       | Charges |  | Adjustments    |        | 2003         
|                           |  |         |       |         |  |                |        |              
|                           |  |         |       |         |  | (in thousands) |        |               |  |           
|Employee termination costs |  | $       | 394   |         |  | $              | (358   | )             |  | $          | (36  | ) |  | $ |      | 
|                           |  |         |       |         |  |                |        |               |  |            |      |   |  |   |       | 

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|                                  |  |         |       |         |  |                |      |               |  |            |      |   |  |   |       | 
|--------------------------------- |  | ------- | ----- | ------- |  | -------------- | ---- | ------------- |  | ---------- | ---- | - |  | - | ----- | 
|                                  |  |         |       |         |  |                |      |               |  | Cumulative |      |   |  |  
|                                  |  |         |       |         |  | Cumulative     |      | Non-Cash      |  | Reserve   
|                                  |  | Total   |       | Cash    |  | Charges &      |      | September 30,
|October 2002 Restructuring        |  | Charges |       | Charges |  | Adjustments    |      | 2003         
|                                  |  |         |       |         |  |                |      |              
|                                  |  |         |       |         |  | (in thousands) |      |               |  |           
|Employee termination costs        |  | $       | 176   |         |  | $              | (163 | )             |  | $          | (13  | ) |  | $ |      | 
|                                  |  |         |       |         |  |                |      |               |  |            |      |   |  |   |       | 
|                                 
|                                  |  |         |       |         |  |                |      |               |  | Cumulative |      |   |  |  
|                                  |  |         |       |         |  | Cumulative     |      | Non-Cash      |  | Reserve   
|                                  |  | Total   |       | Cash    |  | Charges &      |      | September 30,
|June 2003 Restructuring           |  | Charges |       | Charges |  | Adjustments    |      | 2003         
|                                  |  |         |       |         |  |                |      |              
|                                  |  |         |       |         |  | (in thousands) |      |               |  |           
|Employee termination costs        |  | $       | 212   |         |  | $              | (239 | )             |  | $          | 27   |   |  | $ |      | 
|                                  |  |         |       |         |  |                |      |               |  |            |      |   |  |   |       | 
|                                 
|                                  |  |         |       |         |  |                |      |               |  | Cumulative |      |   |  |  
|                                  |  |         |       |         |  | Cumulative     |      | Non-Cash      |  | Reserve   
|                                  |  | Total   |       | Cash    |  | Charges &      |      | September 30,
|July/September 2003 Restructuring |  | Charges |       | Charges |  | Adjustments    |      | 2003         
|                                  |  |         |       |         |  |                |      |              
|                                  |  |         |       |         |  | (in thousands) |      |               |  |           
|Employee termination costs        |  |         | 423   |         |  | $              | (370 | )             |  | $          | (4   | ) |  | $ | 49    | 
|Real estate lease                 |  |         | 1,535 |         |  |                |     |               |  |            |     |   |  |   | 1,535 | 
|Fixed asset write-down            |  |         | 425   |         |  |                |     |               |  |            | (425 | ) |  |   |      | 
|                                  |  |         |       |         |  |                |      |               |  |            |      |   |  |   |       | 
|Total                             |  | $       | 2,383 |         |  | $              | (370 | )             |  | $          | (429 | ) |  | $ | 1,584 | 
|                                  |  |         |       |         |  |                |      |               |  |            |      |   |  |   |       | 

We expect the remaining employee termination costs to be paid-out by the
end of 2003.

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##### Table of Contents



The following table provides details on the staff reductions for our
restructuring and reduction-in-force programs in 2003, 2002 and 2001:

|                       |  |               |    |             |  |                |    |         |  |          |    |  |  |  |     | 
|---------------------- |  | ------------- | -- | ----------- |  | -------------- | -- | ------- |  | -------- | -- |  |  |  | --- | 
|                       |  |               |    |             |  |                |    |         |  | Selling, |    |  |  | 
|                       |  |               |    |             |  | Research       |    | General |  |          |    | 
|                       |  |               |    |             |  | &              |    | &       |  |          |    | 
|                       |  | Manufacturing |    | Development |  | Administration |    | Total  
|                       |  |               |    |             |  |                |    |        
|June of 2001           |  |               | 3  |             |  |                | 24 |         |  |          | 26 |  |  |  | 53  | 
|October of 2001        |  |               | 12 |             |  |                | 5  |         |  |          | 18 |  |  |  | 35  | 
|May of 2002            |  |               | 4  |             |  |                | 4  |         |  |          | 8  |  |  |  | 16  | 
|October of 2002        |  |               |   |             |  |                | 6  |         |  |          | 8  |  |  |  | 14  | 
|June of 2003           |  |               | 4  |             |  |                | 5  |         |  |          | 10 |  |  |  | 19  | 
|July/September of 2003 |  |               | 1  |             |  |                | 2  |         |  |          | 17 |  |  |  | 20  | 
|                       |  |               |    |             |  |                |    |         |  |          |    |  |  |  |     | 
|Total                  |  |               | 24 |             |  |                | 46 |         |  |          | 87 |  |  |  | 157 | 
|                       |  |               |    |             |  |                |    |         |  |          |    |  |  |  |     | 

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 have concluded that a deferred tax asset valuation allowance
should be established due to the uncertainty of realizing the tax loss
carry-forwards and other deferred tax assets in accordance with Statement of
Financial Accounting Standards 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 valuation allowance was
reduced by $1,894,000 in the first quarter of 2002 due to our ability to
utilize additional net operating loss carry-backs against taxes paid in 1996,
1997 and 1998. This is a result of the 2002 change in the federal income tax
code for tax loss carry-backs. A federal tax filing was made during the third
quarter of 2002 and a refund of $1,894,000 was received during that quarter.
The deferred tax asset balance at September 30, 2003 amounted to $33,125,000
and the valuation allowance balance was $33,125,000.

As part of the merger with VINA, we recorded a deferred tax liability for
the value of the intangibles acquired, and a deferred tax asset for the net
operating loss (NOL) and credit carryforwards acquired and the 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 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 will 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.

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The following table shows how basic and diluted net loss per share is
computed:

(in thousands, except per share data) (unaudited)


|                                                                                                                                                                                                     |  |                    |        |                   |  |      |        |      |  |   |         |   |  |   |        |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ------ | ----------------- |  | ---- | ------ | ---- |  | - | ------- | - |  | - | ------ | -
|                                                                                                                                                                                                     |  | Three Months Ended |        | Nine Months Ended
|                                                                                                                                                                                                     |  | September 30,      |        | September 30,    
|                                                                                                                                                                                                     |  |                    |        |                  
|                                                                                                                                                                                                     |  | 2003               |        | 2002              |  | 2003 |        | 2002
|                                                                                                                                                                                                     |  |                    |        |                   |  |      |        |     
|Net loss                                                                                                                                                                                             |  | $                  | (6,883 | )                 |  | $    | (1,520 | )    |  | $ | (12,273 | ) |  | $ | (2,656 | )
|                                                                                                                                                                                                     |  |                    |        |                   |  |      |        |      |  |   |         |   |  |   |        |  
|Basic and diluted weighted average
Common Stock outstanding                                                                                                                                          |  |                    | 5,097  |                   |  |      | 2,694  |      |  |   | 3,729   |   |  |   | 2,693  |  
|Basic and diluted net loss per share                                                                                                                                                                 |  | $                  | (1.35  | )                 |  | $    | (0.56  | )    |  | $ | (3.29   | ) |  | $ | (0.99  | )
|                                                                                                                                                                                                     |  |                    |        |                   |  |      |        |      |  |   |         |   |  |   |        |  
|* The diluted earnings per
share calculation for the
above-referenced periods
excluded the following
options and warrants to
purchase common stock because
their effect would have been
antidilutive |  |                    | 728    |                   |  |      | 368    |      |  |   | 490     |   |  |   | 356    |  

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, and
comply with the disclosure provisions of SFAS No. 148, Accounting for
Stock-Based Compensation, Transition and Disclosure. 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 account
for stock issued to non-employees in accordance with the provisions of SFAS No.
148 and the EITF Issue No. 96-18, Accounting for Equity Instruments that are
Issued to other than Employees for Acquiring, or in Conjunction with Selling
Goods or Services.

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 were: 2.56%, 2.20% and 2.15% for the first three quarters of 2003,
respectively; and 4.20%, 4.30% and 4.29% for the first three quarters of 2002, respectively. The
expected volatility was 90% and the dividend rate zero for all periods. The
expected life was 4.93, 4.92 and 5.00 years for the first three quarters of
2003, respectively and 4.73, 4.92 and 4.95 years for the first three quarters
of 2002, respectively. 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.

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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 Ended |        | Nine Months Ended
|                                                         |  | September 30,      |        | September 30,    
|                                                         |  |                    |        |                  
|                                                         |  | 2003               |        | 2002              |  | 2003 |        | 2002
|                                                         |  |                    |        |                   |  |      |        |     
|Net loss  -  as reported                                 |  | $                  | (6,883 | )                 |  | $    | (1,520 | )    |  | $ | (12,273 | ) |  | $ | (2,656 | )
|Less: employee compensation expense
as reported          |  |                    | 20     |                   |  |      | 0      |      |  |   | 25      |   |  |   | 0      |  
|Plus: employee compensation expense
on a pro forma basis |  |                    | (22    | )                 |  |      | (413   | )    |  |   | (282    | ) |  |   | (591   | )
|                                                         |  |                    |        |                   |  |      |        |      |  |   |         |   |  |   |        |  
|Net loss  -  pro forma                                   |  | $                  | (6,885 | )                 |  | $    | (1,933 | )    |  | $ | (12,530 | ) |  | $ | (3,247 | )
|                                                         |  |                    |        |                   |  |      |        |      |  |   |         |   |  |   |        |  
|Basic net loss per share  -  as
reported                 |  | $                  | (1.35  | )                 |  | $    | (0.56  | )    |  | $ | (3.29   | ) |  | $ | (0.99  | )
|Basic net loss per share  - pro
forma                    |  | $                  | (1.35  | )                 |  | $    | (0.72  | )    |  | $ | (3.36   | ) |  | $ | (1.21  | )
|Basic and diluted net loss per share -
as reported       |  | $                  | (1.35  | )                 |  | $    | (0.56  | )    |  | $ | (3.29   | ) |  | $ | (0.99  | )
|Shares  -  basic and diluted                             |  |                    | 5,097  |                   |  |      | 2,694  |      |  |   | 3,729   |   |  |   | 2,693  |  

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.

Note 9Comprehensive Income/(Loss):

Comprehensive Income/(Loss) includes all changes in equity from
non-owner sources during the period. There were two items of adjustment from
net loss to comprehensive net loss for the periods presented, which relate to
unrealized gains on short-term investments and foreign currency translation
adjustments. Amounts for unrealized gains on short-term investments and
foreign currency translation adjustments were immaterial for the periods
presented.

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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
2007. In addition, as part of the merger with VINA, we have leased facilities
in Milpitas, California (our former headquarters) and Nashua, New Hampshire
with lease terms that will expire in August, 2004 and December 2003,
respectively. Total rent expense in the third quarter of 2003 and 2002, was
$685,000 and $566,000, respectively. For the nine months ended September 30,
rent expense was $1,857,000 and $1,695,000 for 2003 and 2002, respectively.
Sublease rental income was $209,000 and $276,000 in the third quarter of 2003
and 2002, respectively. Sublease rental income was $631,000 for the nine months
ended September 30, 2003 and $766,000 for the nine months ended September 30,
2002. Future annual minimum lease payments under all non-cancelable operating
leases and sublease rental income as of September 30, 2003 are as follows (in
thousands):

|                            |  |          |       |        |  |          |       | 
|--------------------------- |  | -------- | ----- | ------ |  | -------- | ----- | 
|                            |  |          |       |        |  | Sublease
|                            |  | Lease    |       | Rental
|                            |  | Payments |       | Income
|                            |  |          |       |       
|Years ending December 31,   |  |          |       |        |  |          |       | 
|2003 (Oct 1 to December 31) |  | $        | 691   |        |  | $        | 212   | 
|2004                        |  |          | 1,968 |        |  |          | 639   | 
|2005                        |  |          | 713   |        |  |          | 265   | 
|2006                        |  |          | 756   |        |  |          | 272   | 
|2007                        |  |          | 487   |        |  |          | 23    | 
|2008                        |  |          | 284   |        |  |          |      | 
|                            |  |          |       |        |  |          |       | 
|                            |  | $        | 4,899 |        |  | $        | 1,411 | 
|                            |  |          |       |        |  |          |       | 

Contingencies:

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 is currently under
appeal.

Note 11Geographic Information:

Revenue related to operations in the United States and other countries for
the three months and nine months ended September 30, 2003 and 2002 are as
follows (in thousands):

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|                |  |                    |       |                   |  |      |       |      |  |   |        |  |  |   |        | 
|--------------- |  | ------------------ | ----- | ----------------- |  | ---- | ----- | ---- |  | - | ------ |  |  | - | ------ | 
|                |  | Three Months Ended |       | Nine Months Ended
|Revenues (a)    |  | September 30,      |       | September 30,    
|                |  |                    |       |                  
|                |  | 2003               |       | 2002              |  | 2003 |       | 2002
|                |  |                    |       |                   |  |      |       |     
|United States   |  | $                  | 5,769 |                   |  | $    | 4,343 |      |  | $ | 13,899 |  |  | $ | 15,463 | 
|Other countries |  |                    | 479   |                   |  |      | 999   |      |  |   | 1,845  |  |  |   | 3,424  | 
|                |  |                    |       |                   |  |      |       |      |  |   |        |  |  |   |        | 
|Total           |  | $                  | 6,248 |                   |  | $    | 5,342 |      |  | $ | 15,744 |  |  | $ | 18,887 | 
|                |  |                    |       |                   |  |      |       |      |  |   |        |  |  |   |        | 

Long-lived assets as of September 30, 2003 and December 31, 2002 are as follows (in thousands):

|                  |  |               |       |              |  |   |       | 
|----------------- |  | ------------- | ----- | ------------ |  | - | ----- | 
|                  |  | As of        
|                  |  |              
|Long-Lived Assets |  | September 30, |       | December 31,
|                  |  | 2003          |       | 2002        
|                  |  |               |       |             
|United States     |  | $             | 4,755 |              |  | $ | 2,121 | 
|Other countries   |  |               |      |              |  |   | 5     | 
|                  |  |               |       |              |  |   |       | 
|Total             |  | $             | 4,755 |              |  | $ | 2,126 | 
|                  |  |               |       |              |  |   |       | 

(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 indemnities:

In November 2002, the FASB issued 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. The
initial recognition and initial measurement provisions of FIN 45 are applicable
on a prospective basis to guarantees issued or modified after December 31,
2002, irrespective of the guarantors fiscal year-end. The disclosure
requirements of FIN 45 are effective for financial statements of interim or
annual periods ending after December 15, 2002, and have been implemented in our
financial statements.

We, as the guarantor, enter 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 they are 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 September
30, 2003 (in thousands):

|                                                  |  |                    |       |  | 
|------------------------------------------------- |  | ------------------ | ----- |  | 
|                                                  |  | Maximum           
|                                                  |  | Potential Amount  
|                                                  |  | of Future Payments
|                                                  |  |                   
|Non-cancelable and non-returnable purchase orders |  | $                  | 3,411 | 
|                                                  |  |                    |       | 

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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 nine months ended September 30, 2003 (in
thousands):

|                                                                             |  |                  |       |  
|---------------------------------------------------------------------------- |  | ---------------- | ----- | -
|                                                                             |  | Dollar Amount of
|                                                                             |  | Liability       
|                                                                             |  | Debit/(Credit)  
|                                                                             |  |                 
|Balance at December 31, 2002                                                 |  | $                | 732   |  
|Accrual for new warranties                                                   |  |                  | 130   |  
|Accruals related to pre-existing warranties (including changes
in estimates) |  |                  | (187  | )
|Addition of VINA warranty reserves at fair value                             |  |                  | 385   |  
|Settlements made in cash or in-kind during the period                        |  |                  | (53   | )
|                                                                             |  |                  |       |  
|Balance at September 30, 2003                                                |  | $                | 1,007 |  
|                                                                             |  |                  |       |  

We also, as permitted under Delaware law and in accordance with our
Bylaws, indemnify our officers and directors for certain events or occurrences,
subject to certain limits, while the officer 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.

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 control of another 28% of voting interest in
Larscom.

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Reverse Split of Class A Common Shares:

On June 3, 2003 Larscoms shareholders also 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 replaced with 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 assumption of the VINA options and warrants resulted in the issuance
of 454,752 non-qualified 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

The market for telecommunications equipment went through a period of
rationalization and contraction as service providers digested the network
overbuild of the late 1990s and 2000. This excess has left most service
providers, our primary customers, cutting capital equipment budgets, and
focusing on squeezing efficiencies out of the existing network infrastructure.
While our business has generally suffered as a result, our restructuring
programs have substantially reduced our operating expense levels for 2002 and
for the first nine months of 2003 versus the operating expense levels during
2001.

On March 18, 2003, we and VINA issued a joint press release announcing the
execution of the Agreement and Plan of Merger, dated as of March 17, 2003, by
and among us, London Acquisition Corp., a Delaware corporation and our
wholly-owned subsidiary the Merger Sub, and VINA. On June 5, 2003, we
completed the merger and Merger Sub merged with and into VINA. At a later
date, it is intended that VINA will merge with and into us and

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the separate corporate existence of VINA would disappear. As a result of
the merger, each issued and outstanding share of VINA Common Stock, was
automatically converted into the right to receive 0.03799 of a validly issued,
fully paid and non-assessable share of our Common Stock, adjusted for our June
6, 2003, 7-for-1 reverse stock split. The aggregate consideration consisted of
approximately 2,393,894 shares of Larscom Common Stock and the assumption of
certain liabilities and obligations of VINA, including those arising under its
stock option plans.

The results for the nine months ended September 30, 2003 include the
results of VINA, for the period of June 6, 2003 through September 30, 2003.

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:

Revenue from product sales is generally recognized when products are
shipped to our customers. However, some of our distributors, who maintain
significant inventories of our products, have a right to return products or a
portion of products that remain unsold. In the case where the distributor has
a right to return products or a portion of products, we do not recognize
revenue until the distributor notifies us that the products have been shipped
to the end user or the right to return a portion of products has expired.
Service revenue earned from providing maintenance, installation, training or
other miscellaneous services is recognized when those services are provided to
the customer. If we believe that collection is not probable at the time of
shipment, we elect to defer the revenue until the cash is collected.

Investment and Accounts Receivable Risk:

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 A1/P1 in the case of commercial paper. Our policy
restricts us from investing more than $5 million or 20% of the total investment
in any one institution or from investing in financial instruments that mature
in more than 1 year. While we believe these policies are protective of our
funds, a default of any one institution would lead to our incurring a
significant loss of cash.

Our accounts receivable are largely 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 $528,000 in receivables associated
with the 2002 bankruptcy filing of MCI. Our three largest customer receivable
balances (Lucent, MCI and Tech Data) represented 54% of gross accounts
receivable on September 30, 2003.

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Inventories:

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. We
accounted for the VINA inventories acquired at their fair market value.

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 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.

During the three months ended September 30, 2003, we determined that the
MBX technology and related assets acquired as part of the merger with VINA in
June 2003 had become impaired. As a result, we recorded a loss of $1,956,000
to write-off the technology and other related assets. The components of the
impairment were as follows (in thousands):

|                           |                              |   |       |       | 
|-------------------------- | ---------------------------- | - | ----- | ----- | 
|Impaired intangible assets |                              | $ | 1,448 |      
|Impaired fixed assets      |                              |   | 364   |      
|Impaired prepaid expenses  |                              |   | 15    |      
|Impaired inventories       |                              |   | 129   |      
|                           |                              |   |       |      
|                           | Total MBX impairment charges |   | $     | 1,956 | 
|                           |                              |   |       |      

The impairment charges were classified in the financial statements as
follows for the three and nine months ended September 30, 2003 (in thousands):

|                               |                              |   |       |       | 
|------------------------------ | ---------------------------- | - | ----- | ----- | 
|Included in cost of sales      |                              | $ | 1,592 |      
|Included in operating expenses |                              |   | 364   |      
|                               |                              |   |       |      
|                               | Total MBX impairment charges |   | $     | 1,956 | 
|                               |                              |   |       |      

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 warranty for most of our products and a five-year
warranty for the Terra and IAD product lines. 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.

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Sales Return Allowance:

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.

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.

Recent Accounting Pronouncements:

In April 2003, the FASB issued SFAS 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities, which amends SFAS 133 for
certain decisions made by the FASB Derivatives Implementation Group. In
particular, SFAS 149 (1) clarifies under what circumstances a contract with an
initial net investment meets the characteristic of a derivative, (2) clarifies
when a derivative contains a financing component, (3) amends the definition of
an underlying to conform it to language used in FASB Interpretation No. 45,
Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, and (4) amends certain other
existing pronouncements. This Statement is effective for contracts entered
into or modified after June 30, 2003, and for hedging relationships designated
after June 30, 2003. In addition, most provisions of SFAS 149 are to be
applied prospectively. We have no financial instruments within the scope of
this pronouncement.

In May 2003, the FASB issued SFAS 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. SFAS 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its
scope as a liability (or an asset in some circumstances). SFAS 150 is
effective for financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. It is to be implemented by reporting the
cumulative effect of a change in an accounting principle for financial
instruments created before the issuance date of the Statement and still
existing at the beginning of the interim period of adoption. Restatement is
not permitted. We have no financial instruments within the scope of this
pronouncement.

In November 2002, the FASB issued 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. The
initial recognition and initial measurement provisions of FIN 45 are applicable
on a prospective basis to guarantees issued or modified after December 31,
2002, irrespective of the guarantors fiscal year-end. The disclosure
requirements of FIN 45 are effective for financial statements of interim or
annual periods ending after December 15, 2002, and have been implemented in our
financial statements.

In November 2002, the EITF reached a consensus on Issue No. 00-21,
Revenue Arrangements with Multiple Deliverables. EITF Issue No. 00-21
provides guidance on how to account for arrangements that involve the delivery
or performance of multiple products, services and/or rights to use assets. The
provisions of EITF Issue No. 00-21 will apply to revenue arrangements entered
into in fiscal periods beginning after June 15, 2003. We do not expect the
adoption of this standard to have a material impact on our financial condition,
cash flows or results of operations.

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In January 2003, the FASB issued FIN 46, Consolidation of Variable
Interest Entities, an Interpretation of ARB No. 51. FIN 46 requires certain
variable interest entities to be consolidated by the primary beneficiary of the
entity if the equity investors in the entity do not have the characteristics of
a controlling financial interest or do not have sufficient equity at risk for
the entity to finance its activities without additional subordinated financial
support from other parties. FIN 46 is effective immediately for all new
variable interest entities created or acquired after January 31, 2003. For
variable interest entities created or acquired prior to February 1, 2003, the
provisions of FIN 46 must be applied for the first interim or annual period
beginning after June 15, 2003. FIN 46 is effective for interests held by
public entities in variable interest entities or potential variable interest
entities created before February 1, 2003, for financial statement
periods ending after December 15, 2003, and
otherwise is effective after June 15, 2003. We do not expect the adoption of
FIN 46 to have a material impact upon our financial condition, cash flows or
results of operations.

Results of Operations

Revenues. Our consolidated revenues of $6,248,000 for the third quarter
ended September 30, 2003 increased $906,000 or 17% over 2002s third quarter
revenues of $5,342,000. This increase was primarily due to $1,659,000 in sales
of Larscoms IAD product line, which was acquired in the merger with VINA in
June 2003. The increase was partially offset by a decrease in sales of our
other product lines and services, which recorded a combined revenue reduction
of $753,000. For the nine months ending September 30, 2003, revenues totaled
$15,744,000, which was 17% below the comparable nine-month period of 2002 when
total revenues were $18,887,000. Reduced Multiplexer and Inverse Mutiplexer
product line shipments were the primary contributors to the lower revenues in
the first nine months of 2003 versus 2002. The reduction in Multiplexer and
Inverse Multiplexer product line shipments for the first nine months of 2003
versus 2002 were partially offset by sales of Larscoms IAD product line, which
was acquired in the merger with VINA.

By channel of distribution, the bulk of the revenue increase for the third
quarter of 2003 versus the comparable period in 2002 came from higher sales to
service providers (SPs) and domestic and international distributors,
partially offset by a decrease in sales to end users. For the first nine
months of 2003 versus the comparable period of 2002, the reduction in revenue
was attributable to lower sales to end users, SPs and domestic and
international distributors. Shipments to international locations represented
8% of total revenues during the third quarter of 2003 versus 19% from
the same period of 2002. For the nine-month period ended September 30, 2003,
international revenues were 12% of total revenues versus 18% during the same
period of last year.

The combined revenues from Lucent, LTI Datacom and MCI, our three largest
customers, accounted for 47% of the total revenues for the third quarter of
2003 versus 33% for the third quarter of 2002, in which there were no revenues
from Lucent. The combined revenues from MCI, Lucent and LTI Datacom accounted
for 42% of the total revenues for the first nine months of 2003 versus 27% for
the first nine months of 2002, in which there were no revenues from Lucent.
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. The following table is the
percentage of total revenues for our customers who accounted for 10% or more of
our revenues:

|                     |  |                    |    |                   |  |      |    |      |  |  |    |   |  |  |    |  
|-------------------- |  | ------------------ | -- | ----------------- |  | ---- | -- | ---- |  |  | -- | - |  |  | -- | -
|                     |  | Three Months Ended |    | Nine Months Ended
|                     |  | September 30,      |    | September 30,    
|                     |  |                    |    |                  
|                     |  | 2003               |    | 2002              |  | 2003 |    | 2002
|                     |  |                    |    |                   |  |      |    |     
|MCI                  |  |                    | 13 | %                 |  |      | 26 | %    |  |  | 17 | % |  |  | 21 | %
|Lucent               |  |                    | 19 | %                 |  |      | 0  | %    |  |  | 13 | % |  |  | 0  | %
|Avaya
Communications |  |                    | 8  | %                 |  |      | 10 | %    |  |  | 10 | % |  |  | 8  | %
|AT&T                 |  |                    | 7  | %                 |  |      | 10 | %    |  |  | 8  | % |  |  | 15 | %
|LTI Datacom          |  |                    | 15 | %                 |  |      | 7  | %    |  |  | 12 | % |  |  | 6  | %

Gross Profit. Our gross profit for the third quarter of 2003 was
$1,049,000 versus $3,214,000 for the corresponding period of 2002. The
reduction in gross profit dollars for the 2003 period versus the 2002 period
was

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due primarily to the MBX impairment charges, impairment of unutilized
demonstration equipment and amortization expense from intangible assets
acquired in the VINA merger. These reductions were partially offset by the
higher sales volume during the quarter over the prior year period. Our gross
profit percentage in the third quarter of 2003 of 17% represents a 43% decline
from the third quarter of 2002 gross profit rate of 60%. This decrease was
largely due to the MBX technology and demonstration equipment impairment
charges (28 percentage point decline), the impact of lower profits earned on
IAD products (7 percentage point decline), higher manufacturing and warranty
related costs (6 percentage point decrease) and amortization expense from
intangible assets acquired in the VINA merger (2 percentage point decline).

For the nine months ended September 30, 2003, our gross profit was
$5,875,000, versus $10,840,000 for the comparable nine-month period of 2002.
The reduction in gross profit dollars for the nine months of 2003 versus the
comparable period of 2002 was due primarily to sales volume declines, MBX
technology and demonstration equipment impairment charges, amortization expense
from intangible assets acquired in the VINA merger and to a lesser extent, the
impact of higher manufacturing and warranty related costs. Our gross profit
percentage for the first nine months of 2003 was 37% or 20 percentage points
lower than last years first nine months result of 57%. This decrease was due
to the impairment charges and amortization of intangible assets mentioned above
(17 percentage point decrease), as well as the impact of lower profits earned
on IAD products, and higher manufacturing and warranty related costs (3
percentage point decrease).

Research and Development. Research and development expenses totaled
$1,502,000 for the third quarter of 2003, which was $466,000 or 45% higher than
the third quarter 2002 spending of $1,036,000. For the nine months ending
September 30, 2003, research and development costs totaled $3,840,000 as
compared to spending in the nine-month period of 2002 of $3,073,000 or a 25%
increase. The expense increase in both the third quarter and nine-month
periods were primarily due to higher spending on salaries, benefits, and
software expenses related to new product development projects.

Selling, General and Administrative. Selling, general and administrative
expenses decreased 3% to $3,744,000 during the third quarter of 2003, as
compared to $3,844,000 for the same period in 2002. The reduced spending level
was due mainly to lower expenditures for travel and outside services. For the
nine months ending September 30, 2003, selling, general and administrative
expenses were $11,341,000, compared to $12,390,000 for the same period of 2002,
which represents a $1,049,000 or 9% reduction from the comparable period last
year. The reduced spending level was due largely to lower selling and
commission expenses associated with the lower sales for the 2003 period, lower
salaries and related benefits resulting from our workforce reductions, lower
relocation and recruiting costs, a reduction to the bad debts reserve, and
lower allocated expenses from Axel Johnson as described below. Partially
offsetting the decreases were increased insurance costs related to some
non-recurring Directors and Officers life insurance expenses in connection with
the VINA merger, along with higher insurance premiums generally.

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 third quarter of 2003, versus
$116,000 for the third quarter of 2002. For the nine months ended September
30, 2003, the allocated costs of these services amounted to $151,000, versus
$349,000 for the comparable period in 2002. The contract for services with
Axel Johnson was cancelled effective June 2003.

Amortization of Acquisition Intangibles.There was a charge of $278,000
for the third quarter of 2003 and $371,000 for the nine months ended September
30, 2003 for amortization of acquisition intangibles related to our merger with
VINA Technologies, Inc. There were no such charges for the comparable periods
in 2002.

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Restructuring. During the third quarter of 2003, Larscom continued with
its restructuring plans announced after the merger with VINA. We incurred
additional restructuring costs of $2,301,000 during the third quarter,
consisting of $1,535,000 in facility consolidation costs associated principally
with moving our headquarters from Milpitas, CA to Newark, CA, partially offset
by $63,000 as a result of rental income we received for subleasing our leased
facility in Durham, North Carolina, $425,000 in impairment charges related to
the write-off of fixed assets and leasehold improvements following the move of
our headquarters from Milpitas, CA to our new location in Newark, CA and
$423,000 from reductions in force, partially offset by $19,000 in unused
severance expense from a prior period. That compares to a net benefit of
($61,000) in the second quarter of 2002 for subleasing our leased facility in
Durham, North Carolina. For the nine months ended September 30, 2003,
restructuring expense amounted to $2,391,000, reflecting an additional $390,000
in costs from the reduction in force in the second quarter of 2003. This
compares to restructuring costs of $192,000 for the comparable nine month
period in 2002.

In-process Research and Development.There were no charges for in-process
research and development in the third quarter of 2003. In-process research and
development of $155,000 was recognized for the nine months ended September 30,
2003, in connection with the VINA merger. There were no such charges for the
comparable periods in 2002.

Interest and Other Income.Interest and other income totaled $148,000 for
the third quarter of 2003, compared to $90,000 for the same period of 2002.
For the nine months ended September 30, 2003, interest and other income was
$229,000 compared to $308,000 for the nine months ended September 30, 2002.
During the third quarter of 2003, $116, 000 in other income was recognized from
the expiration of an unused customer credit. Interest income was $31,000 for
the third quarter of 2003, as compared to $111,000 for the same period in 2002.
For the first nine months of 2003, interest income was $138,000 as compared to
$339,000 for the same period in 2002. The lower interest income for the
three-month and nine-month periods of 2003 was primarily attributed to lower
average cash, cash equivalent, restricted cash and short-term investment
balances as well as lower interest rates received on interest bearing balances.
Our investment portfolio generally is 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.

Provision for Income Taxes. In the third quarter of 2003, we recorded an
income tax provision of $14,000 versus an income tax provision of $5,000 in
the third quarter of 2002. We recorded a tax provision of $38,000 for the nine
months ended September 30, 2003 compared with a tax benefit of $1,851,000 for
the nine months ended September 30, 2002. The difference for the nine-month
period was primarily the result of a 2002 change in the Federal income tax code
affecting corporations. The tax code change allows corporations with certain
tax losses to file for refunds of taxes paid in previous years. The tax
benefit is principally due to our filing for refunds of $1,894,000 of taxes
paid in 1996, 1997 and 1998.

Net Loss. The net loss for the third quarter of 2003 was ($6,883,000)
compared to a net loss of ($1,520,000) for the third quarter of 2002. The
increased loss of ($5,363,000) was primarily due to restructuring charges
incurred in connection with moving our headquarters from Milpitas, CA to
Newark, CA, impairment charges, intangible amortization related to the VINA
merger, unfavorable manufacturing variances, and higher research and
development costs, partially offset by the higher sales volume.

For the nine months ended September 30, 2003, the net loss was
($12,273,000) compared with a net loss of ($2,656,000) in the prior year
nine-month period. The increased net loss of ($9,617,000) was principally due
to lower revenues and gross margins for the nine months ended September 30,
2003, restructuring charges, impairment of MBX technology and demonstration
equipment in the third quarter of 2003, amortization and in-process research
and development charges, and the benefit of income tax refunds for prior years
realized in the nine months ended September 30, 2002.

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Liquidity and Capital Resources

At September 30, 2003, we had cash, cash equivalents and restricted cash
of $11,436,000 and no short-term investments. Cash and cash equivalents
decreased by approximately 27% or $4,207,000 from $15,643,000 on December 31,
2002. The decrease in cash, cash equivalents and restricted cash in the first
nine months of 2003 largely reflects the impact of operating losses net of
depreciation and amortization and asset impairments for the nine months of 2003
($8,281,000) partially offset by the transfer of funds from short-term
investments ($2,014,000). Short-term investments were transferred to cash
equivalents as longer-term securities matured. Restricted cash of $333,000
consists of a deposit with our bank for an irrevocable letter of credit for a
like amount that is used as collateral for the lease on the Newark, California
facility.

Capital expenditures for the first nine months of 2003 were $230,000.
These expenditures consisted principally of the purchase of computers, software
and test equipment. We anticipate capital expenditures to total approximately
$430,000 for 2003.

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. We believe our cash and short-term
investments, after consideration of future operations, will be sufficient to
fund our cash requirements, at least through the next 12 months. Nonetheless,
future events, such as the potential use of cash to fund any significant losses
that we might incur or acquisitions we might undertake, might require us to
seek additional capital. In that event, it is possible we may not be able to
obtain adequate capital on terms attractive to us or at all.

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
2007. The lease of our former headquarter offices in Milpitas, California will
expire in August of 2004. In addition, as a result of our merger on June 5,
2003 with VINA, we now have a facility in Nashua, New Hampshire with a lease
that will expire in December of 2003. Our total rent expense in the third
quarter of 2003 and 2002, was $685,000 and $566,000, respectively. For the nine
months ended September 30, 2003 and 2002 rent expense was $1,857,000 and
$1,695,000, respectively. Sublease rental income was $209,000 and $276,000 in
the third quarter of 2003 and 2002, respectively. Sublease rental income was
$631,000 for the nine months ended September 30, 2003 and $766,000 for the nine
months ended September 30, 2002. Our future annual minimum lease payments
under all non-cancelable operating leases and sublease rental income as of
September 30, 2003 are as follows (in thousands):

|                                |  |          |       |        |  |          |       | 
|------------------------------- |  | -------- | ----- | ------ |  | -------- | ----- | 
|                                |  |          |       |        |  | Sublease
|                                |  | Lease    |       | Rental
|                                |  | Payments |       | Income
|                                |  |          |       |       
|Years ending December 31,       |  |          |       |        |  |          |       | 
|2003 (October 1 to December 31) |  | $        | 691   |        |  | $        | 212   | 
|2004                            |  |          | 1,968 |        |  |          | 639   | 
|2005                            |  |          | 713   |        |  |          | 265   | 
|2006                            |  |          | 756   |        |  |          | 272   | 
|2007                            |  |          | 487   |        |  |          | 23    | 
|2008                            |  |          | 284   |        |  |          |      | 
|                                |  |          |       |        |  |          |       | 
|                                |  | $        | 4,899 |        |  | $        | 1,411 | 
|                                |  |          |       |        |  |          |       | 

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 September 30, 2003 (in thousands):

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|                                                  |  |                    |       |  | 
|------------------------------------------------- |  | ------------------ | ----- |  | 
|                                                  |  | Maximum           
|                                                  |  | Potential Amount  
|                                                  |  | of Future Payments
|                                                  |  |                   
|Non-cancelable and non-returnable purchase orders |  | $                  | 3,411 | 
|                                                  |  |                    |       | 

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 on Form 10-Q contains certain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. 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.

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 acquired VINA. 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. Prior to the VINA merger, with the exception of our
acquisition of NetEdge in 1997, we had no recent experience in integrating
acquired businesses with our existing business.

We consummated our merger with VINA on June 5, 2003. The integration of
the companies is complex, time consuming and expensive and may disrupt our and
VINAs businesses. The combined company needs to overcome significant
challenges in order to realize any benefits or synergies from the merger.
These challenges include the timely, efficient and successful execution of a
number of post-merger events, including:



| |  |  | integrating the operations and technologies of the two companies;                      
| | - |  | ---------------------------------------------------------------------------------------
|
| |  |  | retaining and assimilating the key personnel of each company;                          
|
| |  |  | retaining existing customers of both companies and attracting additional customers;    
|
| |  |  | retaining strategic partners of each company and attracting new strategic partners; and
|
| |  |  | creating uniform standards, controls, procedures, policies and information systems.    

The execution of these post-merger events involves considerable risks and
may not be successful. These risks include:



| |  |  | the potential disruption of the combined companys ongoing
business and distraction of its management;                                                                     
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the potential strain on the combined companys financial and
managerial controls and reporting systems and procedures;                                                     
|
| |  |  | unanticipated expenses and potential delays related to
integration of the operations, technology and other resources of the
two companies;                                 
|
| |  |  | the impairment of relationships with employees, suppliers and
customers as a result of any integration of new management
personnel;                                        
|
| |  |  | greater than anticipated costs and expenses related to
restructuring, including employee severance or relocation costs and
costs related to vacating leased facilities; and
|
| |  |  | potential unknown liabilities associated with the merger and the
combined operations.                                                                                      

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The combined company may not succeed in addressing these risks or any
other problems encountered in connection with the merger. The inability to
successfully integrate the operations, technology and personnel, or any
significant delay in achieving integration, could have a material adverse
effect on the combined company after the merger and, as a result, on the market
price of our Common Stock.

In addition, the merger with VINA involves other risks and uncertainties to
us, including:



| |  |  | if the benefits to the merger do not exceed the associated
costs, our financial results could be materially harmed;                                                                  
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the merger could cause us to lose key personnel, which could
materially affect our business and require us to incur substantial
costs to recruit replacements for lost personnel; and
|
| |  |  | general uncertainty related to the merger could harm us by
causing customers to delay or defer purchasing decisions or
increasing the volatility of our share price.                 

Our entire industry has been in an extended downturn.The downturn for the
United States economy and the rapid and severe downturn for the domestic
telecommunications industry, beginning in late 2000, have negatively affected
demand for our products. In addition, the worldwide telecommunications market
experienced reduced demand. This decreased demand has led to fluctuating order
forecasts from some of our customers. There can be no certainty as to the
degree of severity or duration of this severe downturn in the United States
telecommunications industry. We also cannot predict the extent and timing of
the impact of the worldwide downturn for the telecommunications industry.

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 $12,273,000 in the first nine months of 2003, $4,895,000 in 2002 and
$30,879,000 in 2001 and had an accumulated deficit of $77,789,000 as of
September 30, 2003. 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. We believe our cash and short-term investments, after
consideration of future operations, will be sufficient to fund our cash
requirements, at least through the next 12 months. Nonetheless, future events,
such as the potential use of cash to fund any significant losses that we might
incur or acquisitions we might undertake, might require us to seek additional
capital. In that event, it is possible we may not be able to obtain adequate
capital on terms attractive to us or at all.

Our prospects for growth depend on recently-introduced products, products
acquired in our merger with VINA, products under development and products
licensed from others.We expect sales of our established products to decline
over time. Therefore, our future operating results are highly dependent on
market acceptance of our recently-introduced products, products that may be
introduced in the future and products that we license from others. These
include, for example, the Orion 7400, the elink 300 product line, the Orion
5000, 5001 and 5003 and the Orion 4500, 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 of such products and other
products we introduced in recent years have failed to meet our sales
expectations. The industry-wide downturn has caused sales of new products,
such as ours, to be well below expectations. If any of such products do not
achieve their expected rate of market acceptance, we may have to discontinue
such products. In addition, we have licensed the intellectual property and
development rights for the Orion 5000, 5001 and 5003. Our dependence on others
for the initial design of this product increases the risk that we may not be
successful with future enhancements to the product line. 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.

We conducted six rounds of restructuring/layoffs in the past three years.
Our June 22, 2001 restructuring included a workforce reduction of approximately
25% (53 people) and the closure of our North Carolina facility. On October 18,
2001, we announced additional reductions in force of approximately 17% (35
people) of the base 2001 workforce. On May 31, 2002 we announced another
reduction in force of approximately 13% (16 people) of our

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remaining workforce.
On October 21, 2002, we announced an additional reduction of 13% of our
workforce (14 people). In addition, as a result of our merger on June 5, 2003
with VINA, we reduced the combined workforce in June by 28% (30 people) from
the May 31, 2003 workforce of both companies. Additional merger related
workforce reductions (20 people) occurred in the third quarter of 2003.
Although the restructuring actions taken have lowered and will continue to
lower our expense base, we expect operating losses to continue in 2003.
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 any 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.

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 our
recently announced Orion 7400 product, 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.

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. 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 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. One of our largest
customers, MCI, filed for bankruptcy in 2002, which could lead to a substantial
loss in their customer base or a major reorganization, all of which could
influence their order levels to us. In 2002 revenue from sales to MCI
decreased 71% from sales to MCI in 2001.

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

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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 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.

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.

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, we have made a recent decision to change our major supplier for
contract manufacturing of VINA products. It is possible that our major
contract supplier and other suppliers will not continue to be able and willing
to meet our future requirements or successfully manufacture new products being
transferred to their facility.

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 greater resources, more broadly developed distribution
channels and have made greater advances than we have in emerging technologies.
Cisco Systems and Altcatel 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.

During growth periods, it is difficult to hire all the qualified personnel
we need.To grow our business, we must continue to attract, train, motivate
and manage new employees successfully, integrate new management and employees
into our overall operations and continue to improve our operational, financial
and management systems. Availability of qualified sales and technical
personnel is limited, and competition for experienced sales and technical
personnel in the telecommunications equipment industry is intense during times
when business in the telecommunications equipment

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industry is strong. In the
past, we have had difficulty in filling all of our hiring requisitions. Our
failure to manage the retention of key employees effectively could have a
material adverse effect on our business and operating results.

We have recently reorganized our sales force.In October 2002, we
reorganized our sales force to concentrate on four account types:



| |  |  | major accounts                                                              
| | - |  | ----------------------------------------------------------------------------
|
| |  |  | carrier accounts                                                            
|
| |  |  | U.S. indirect channels (distributors and resellers) and enterprise customers
|
| |  |  | overseas accounts                                                           

As result of the merger with VINA, we reorganized our consolidated sales
force along these lines again in June 2003. As part of this reorganization we
have reassigned certain of our sales people to different, specific customer
accounts and different types of customers. During this quarter, we decided to
close our overseas sales offices in Hong Kong and the United Kingdom. While we
expect to manage our domestic and international customers with the U.S. based
personnel, 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 are significantly engaged in selling in international markets, which
results in operational difficulties and risks.Sales outside the U.S.
approximated 18% of our revenues for 2002 and 12% for the first nine months of
2003. The conduct of business outside the U.S. is subject to certain customary
risks, including unexpected changes in regulatory requirements and tariffs,
difficulties in selling into international markets without a direct presence,
longer payment cycles, greater difficulty in accounts receivable collection,
currency fluctuations, possible expropriation and potentially adverse tax
consequences. In addition, to sell our products internationally, we must meet
standards established by telecommunications authorities in a variety of
countries as well as recommendations of the International Telecommunications
Union. A delay in obtaining, or the failure to obtain, certification of our
products in countries outside the U.S. could inhibit or preclude our marketing
and sales efforts in such countries, which could have an adverse impact on our
business and operating results.

We have developed an indirect distribution channel for sales to domestic
customers.This channel consists primarily of a small group of master
distributors, such as Tech Data, and a number of authorized resellers. 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 contact
with users of our products, a potential build-up of inventories at resellers
and new methods of advertising and promoting products that will result in
additional expenses. All of these risk factors 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 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. 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

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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 that 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.

We provide our customers a three-year or longer warranty on most product
lines.Complex products such as ours might contain undetected errors or
failures when first introduced or as new versions are released. Although we
believe that our reserves for estimated future warranty costs are adequate, our
estimates, particularly those related to products that have been recently
introduced, might not be correct. Warranty claims in excess of those expected
could have an adverse impact on our business and operating results.

We have concentrated stock ownership.Our present directors and executive
officers and their respective affiliates beneficially own 59% of our
outstanding common stock. As a result, if these stockholders act together,
they will be able to exercise significant influence over all matters requiring
stockholder approval, including the election of directors and approval of
significant corporate transactions. Such concentrations of ownership may also
have the effect of delaying, preventing or deterring a change in control.




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.

At September 30, 2003, we had no short-term investments.

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 recently
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.

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Item 4: Controls and Procedures

Evaluation of Disclosure Controls and Procedures.Based on their
evaluation of our disclosure controls and procedures (as defined in the rules
promulgated under the Securities Exchange Act of 1934), 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 significant 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.

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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.

Peter Moulds, Vice President of Worldwide Sales, was elected an officer on September 9, 2003.




Item 6: Exhibits and Reports on Form 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 two reports on Form 8-K during the quarter:                                                                                                                
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The first report was filed on August 4, 2003, reporting the release of
results of the second quarter of 2003.                                                       
|
| |  |  | The second report was filed on August 13, 2003, to include the
unaudited pro forma consolidated financial statements related to the
combination of Larscom and VINA.

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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 INCORPORATED                                          
|                      |  |                                                               
|DateNovember 11, 2003 |  | By/s/ Daniel L. Scharre                                       
|                      |  |                                                               
|                      |  |                                                               
|                      |  | Daniel L. Scharre                                             
|                      |  | President and Chief Executive Officer                         
|                      |  | (Principal Executive Officer)                                 
|                      |  |                                                               
|                      |  | By/s/ Donald W. Morgan                                        
|                      |  |                                                               
|                      |  |                                                               
|                      |  | Donald W. Morgan                                              
|                      |  | Vice President, Finance and Chief Financial Officer           
|                      |  | (Principal Financial Officer and Principal Accounting Officer)

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Exhibit Index

|            |  |                                                                                                                                    
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                        
|            |  |                                                                                                                                    
|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.