<PAGE>

                                   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, 1998

                                         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                   (I.R.S. Employer
incorporation or organization)                    Identification No.)

                               1845 MCCANDLESS DRIVE
                                 MILPITAS, CA 95035
                                   (408) 941-4000

      (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
                                            ---      ---

The number of the registrant's shares outstanding as of October 31, 1998 was
8,265,000 shares of Class A Common Stock and 10,000,000 shares of Class B Common
Stock.


<PAGE>


                                LARSCOM INCORPORATED

                                     FORM 10-Q

                                 TABLE OF CONTENTS

PART I:   FINANCIAL INFORMATION. . . . . . . . . . . . . . . . . . . . . .    3

ITEM I:   FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . .    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. . . . . . . . . . . . . . . . . . . .   10

ITEM 3:   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK . . .   19

PART II:  OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . .   20

ITEM 1:   LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . .   20

ITEM 2:   CHANGES IN SECURITIES. . . . . . . . . . . . . . . . . . . . . .   20

ITEM 3:   DEFAULTS UPON SENIOR SECURITIES. . . . . . . . . . . . . . . . .   20

ITEM 4:   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. . . . . . .   20

ITEM 5:   OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . .   20

ITEM 6:   EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . .   20

          A: EXHIBITS. . . . . . . . . . . . . . . . . . . . . . . . . . .   20

          B: REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . . . . .   20

          SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . .   21


                                          2
<PAGE>

PART I:        FINANCIAL INFORMATION
ITEM I:        FINANCIAL STATEMENTS

                                LARSCOM INCORPORATED

                       CONDENSED CONSOLIDATED BALANCE SHEETS
                                   (In thousands)


<TABLE>
<CAPTION>
                                     ASSETS

                                                      SEPTEMBER 30,   DECEMBER 31,
                                                          1998            1997
                                                      -------------   ------------
                                                             (Unaudited)
<S>                                                   <C>             <C>
Current assets:
     Cash and cash equivalents                          $  3,135       $  8,254
     Short-term investments                               18,558         16,598
     Accounts receivable, net                             10,127         17,070
     Inventories                                           9,874         13,328
     Deferred income taxes                                 2,972          2,741
     Due from Axel Johnson                                 2,447              -
     Prepaid expenses and other current assets             1,077          1,285
                                                        --------       --------
          Total current assets                            48,190         59,276
Property and equipment, net                                7,805          9,703
Intangible assets, net                                     8,818         10,658
Deferred income taxes                                      8,418          8,062
Other assets                                                  34            211
                                                        --------       --------
     Total assets                                       $ 73,265       $ 87,910
                                                        --------       --------
                                                        --------       --------

                  LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
     Current portion of capital lease obligations       $    120       $    341
     Accounts payable                                      4,467          8,219
     Accrued expenses and other current liabilities        6,163         13,562
     Due to Axel Johnson Inc.                                  -          3,243
                                                        --------       --------
          Total current liabilities                       10,750         25,365
                                                        --------       --------

Other non-current liabilities                                495            318
                                                        --------       --------

Commitments and contingencies (Note 6)

Stockholders' equity:
     Class A Common Stock                                     83             81
     Class B Common Stock                                    100            100
     Additional paid-in capital                           81,637         80,929
     Foreign currency translation adjustment                   7              -
     Accumulated deficit                                 (19,807)       (18,883)
                                                        --------       --------
          Total stockholders' equity                      62,020         62,227
                                                        --------       --------
          Total liabilities and stockholders' equity    $ 73,265       $ 87,910
                                                        --------       --------
</TABLE>


       See accompanying Notes to Condensed Consolidated Financial Statements


                                          3
<PAGE>

                                LARSCOM INCORPORATED

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



<TABLE>
<CAPTION>
                                                            THREE MONTHS ENDED            NINE MONTHS ENDED
                                                              SEPTEMBER 30,                 SEPTEMBER 30,
                                                        -------------------------     -------------------------
                                                           1998           1997           1998           1997
                                                        ----------     ----------     ----------     ----------
                                                                              (Unaudited)
<S>                                                     <C>            <C>            <C>            <C>
Revenues                                                 $ 18,212       $ 19,336       $ 59,181       $ 54,894
Cost of revenues                                           12,903          8,235         33,263         23,815
                                                         --------       --------       --------       --------
  Gross profit                                              5,309         11,101         25,918         31,079
                                                         --------       --------       --------       --------

Operating expenses:
  Research and development                                  2,828          2,436          9,131          7,052
  Selling, general and administrative                       6,423          5,220         20,184         15,411
                                                         --------       --------       --------       --------
    Total operating expenses                                9,251          7,656         29,315         22,463
                                                         --------       --------       --------       --------

Income (loss) from operations                              (3,942)         3,445         (3,397)         8,616
Interest expense charged by Axel Johnson Inc.                 (19)           (19)           (57)           (56)
Interest and other income                                     222            413          1,913          1,333
                                                         --------       --------       --------       --------
Income (loss) before income taxes                          (3,739)         3,839         (1,541)         9,893
Income tax provision (benefit)                             (1,452)         1,382           (617)         3,561
                                                         --------       --------       --------       --------
Net income (loss)                                        $ (2,287)      $  2,457       $   (924)      $  6,332
                                                         --------       --------       --------       --------
                                                         --------       --------       --------       --------

Basic and diluted earnings (loss) per share              $  (0.13)      $   0.14       $  (0.05)      $   0.35

Basic weighted average shares                              18,240         18,096         18,200         18,058
Diluted weighted average shares                            18,240         18,098         18,200         18,058
</TABLE>



       See accompanying Notes to Condensed Consolidated Financial Statements


                                          4
<PAGE>

                                LARSCOM INCORPORATED

                  CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (In thousands)


<TABLE>
<CAPTION>
                                                                 NINE MONTHS ENDED SEPTEMBER 30,
                                                                 -------------------------------
                                                                      1998            1997
                                                                 --------------   --------------
                                                                          (Unaudited)
<S>                                                              <C>                <C>
Cash flows from operating activities:
  Net income (loss)                                                $   (924)        $   6,332
  Depreciation and amortization                                       4,587             1,796
  Loss on disposal of property and equipment                              -               198
  Gain from sale of building                                         (1,329)                -
  Net increase in working capital                                      (490)           (6,251)
                                                                   --------         ---------
Net cash provided by operating activities                             1,844             2,075
                                                                   --------         ---------

Cash flows from investing activities:
  Purchases of property and equipment                                (1,347)           (2,719)
  Proceeds from sale of building                                      1,700                 -
  Purchases of short-term investments                               (96,478)         (191,944)
  Sales of short-term investments                                    47,788            49,102
  Maturities of short-term investments                               46,731           119,110
                                                                   --------         ---------
Net cash used by investing activities                                (1,606)          (26,451)
                                                                   --------         ---------

Cash flows from financing activities:
  Repayments to Axel Johnson Inc.                                    (5,692)             (732)
  Payment of capital lease obligations                                 (382)                -
  Proceeds from issuances of Class A Common Stock                       710             4,235
                                                                   --------         ---------
Net cash (used) provided by financing activities                     (5,364)            3,503
                                                                   --------         ---------

Effect of exchange rates on cash                                          7                 -
                                                                   --------         ---------

Decrease in cash and cash equivalents                                (5,119)          (20,873)
Cash and cash equivalents at beginning of period                      8,254            46,403
                                                                   --------         ---------
Cash and cash equivalents at end of period                         $  3,135         $  25,530
                                                                   --------         ---------
                                                                   --------         ---------

Supplemental disclosure of cash flow information
Interest paid                                                           $57               $56
                                                                   --------         ---------
Income taxes paid                                                  $  3,949         $   4,368
                                                                   --------         ---------

Supplemental disclosure of non-cash financing activities
Shares issued in connection with cancellation of the Company's
  Long-Term Incentive Plans                                        $      -         $     306
                                                                   --------         ---------
</TABLE>



       See accompanying Notes to Condensed Consolidated Financial Statements


                                          5
<PAGE>

                                LARSCOM INCORPORATED

                NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1-BASIS OF PRESENTATION:

     The condensed consolidated financial statements for the three and nine
months ended September 30, 1998 and 1997, presented in this Quarterly Report on
Form 10-Q are unaudited.  In the opinion of management, these statements include
all adjustments (consisting only of normal recurring 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
Larscom Incorporated's (the "Company") Report on Form 10-K for the year ended
December 31, 1997. The results of operations for the first nine months of 1998
are not necessarily indicative of the results to be expected for the full year.

NOTE 2-INVENTORIES:

     Inventories consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                    SEPTEMBER 30,  DECEMBER 31,
                                                       1998           1997
                                                    -------------  ------------
<S>                                                 <C>            <C>
Raw materials                                        $ 3,686        $ 4,266
Work in process                                        1,345          3,047
Finished goods                                         4,843          6,015
                                                     -------        -------
                                                     $ 9,874        $13,328
                                                     -------        -------
                                                     -------        -------

</TABLE>

NOTE 3-COMMON STOCK ISSUANCES:

     In December 1996, the Company completed an initial public offering of
7,000,000 shares of Class A Common Stock at a price of $12 per share of which
5,800,000 shares were sold by the Company and 1,200,000 shares were sold by Axel
Johnson Inc. ("Axel Johnson").  After deducting the underwriting discount of
$4,872,000 and issuance costs of $1,449,000 the Company received net proceeds of
$63,279,000 in December 1996.  In January 1997, the underwriters exercised their
over-allotment option to sell additional shares and sold an additional 1,050,000
shares of which the Company sold 350,000 and Axel Johnson sold 700,000.  Net
proceeds to the Company in January 1997 were $3,827,000 after deducting the
underwriting discount of $294,000 and additional selling expenses of $79,000.

     In March 1997, 25,518 shares were issued to certain employees, at a cost of
$12 per share, in connection with the cancellation of the Company's Long-Term
Incentive Plans.  In August 1997, the Company issued 61,769 shares of Class A
Common Stock for consideration of $408,000 under the Company's Employee Stock
Purchase Plan.  In January 1998, the Company issued 50,762 shares of Class A
Common Stock for consideration of $335,000 under the Company's Employee Stock
Purchase Plan.  In August 1998, the Company issued 77,478 shares of Class A
Common Sock for consideration of $375,000 under the Company's Employee Stock
Purchase Plan.


                                          6
<PAGE>

NOTE 4-EARNINGS PER SHARE:

     In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 128 ("SFAS 128"), "Earnings per Share" which
established a different method of computing earnings per share.  Under SFAS 128,
the Company is required to present both basic earnings per share and diluted
earnings per share.  Earnings per share for prior periods have been restated in
accordance with SFAS 128.  The following table sets forth the computation of
basic and diluted earnings per share (in thousands, except per share data):

<TABLE>
<CAPTION>
                                                  THREE MONTHS ENDED             NINE MONTHS ENDED
                                                    SEPTEMBER 30,                  SEPTEMBER 30,
                                              --------------------------     -------------------------
                                                 1998            1997           1998           1997
                                              ----------      ----------     ----------     ----------
<S>                                           <C>             <C>            <C>            <C>
Net income (loss)                             $ (2,287)       $  2,457       $   (924)      $  6,332
                                              --------        --------       --------       --------
                                              --------        --------       --------       --------
Weighted average Class A and B
   Common Stock outstanding                     18,240          18,096        18,200          18,058
Dilutive effect of options                           -               2             -               -
                                              --------        --------       --------       --------
Diluted average shares                          18,240          18,098         18,200         18,058
                                              --------        --------       --------       --------
                                              --------        --------       --------       --------

Basic and diluted earnings (loss) per share   $  (0.13)       $   0.14       $  (0.05)      $   0.35
</TABLE>

NOTE 5-COMPREHENSIVE INCOME:

     As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standard No. 130 ("SFAS 130"), "Reporting Comprehensive Income".
SFAS 130 establishes new rules for the reporting and display of comprehensive
income and its components; however, the adoption of this Statement had no
material impact on the Company's net income or stockholders' equity.  SFAS 130
requires separate reporting of comprehensive income which is defined as "the
change in equity of a business enterprise during a period from transactions and
other events and circumstances from nonowner sources".  The only item included
in other comprehensive income is foreign currency translation adjustments.

     The components of comprehensive income are as follows (in thousands):

<TABLE>
<CAPTION>
                                            NINE MONTHS ENDED SEPTEMBER 30,
                                            -------------------------------
                                                  1998           1997
                                               ----------     ----------
<S>                                         <C>               <C>
Net income (loss)                               $ (924)        $ 6,332
Other comprehensive income:
   Foreign currency translation adjustment           7               -
                                                ------         -------
Comprehensive income (loss)                     $ (917)        $ 6,332
                                                ------         -------
                                                ------         -------
</TABLE>

     The components of accumulated other comprehensive income, net of related
tax effects, are as follows (in thousands):

<TABLE>
<CAPTION>
                                              SEPTEMBER 30,  DECEMBER 31,
                                                 1998            1997
                                              -------------  ------------
<S>                                           <C>            <C>
Foreign currency translation adjustment         $    7         $     -
                                                ------         -------
                                                $    7         $     -
                                                ------         -------
                                                ------         -------
</TABLE>
                                          7
<PAGE>

NOTE 6-COMMITMENTS AND CONTINGENCIES:

     In April 1998, the Company received notification from the General Services
Administration ("GSA") that it had completed its audit of the Company's two
product supply contracts, which were subject to GSA regulations.  At December
31, 1997, the Company had a reserve of $532,000 to cover potential pricing
deficiencies, associated audit and legal costs and penalties under these
contracts.  As a result of the notification by GSA, the Company released the
reserve of $532,000 in the second quarter of 1998, which resulted in a reduction
in selling, general, and administrative expenses in the nine months ended
September 30, 1998.  The Company believes that no additional liabilities will
result from this matter.

     On December 31, 1997, the Company completed its acquisition of NetEdge
Systems, Inc.  Of the total purchase consideration $6,300,000 was placed into
escrow pending resolution of certain matters including purchase price
adjustments and other representations and warranties.  In September 1998,
$600,000 of the escrow amount was released to the Company and $400,000 was
released to the shareholders of NetEdge.  An additional $300,000 will be
released to the shareholders of NetEdge prior to the end of 1998.

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

NOTE 7-SALE OF BUILDING:

     In March 1998, the Company recorded, as other income, a one-time, pre-tax
gain of $1,329,000 from the sale of its former headquarters by a partnership in
which the Company holds a one-third interest.

NOTE 8-SUBSEQUENT EVENTS:

     On October 15, 1998, Larscom announced a corporate restructuring designed
to better align its expenses with anticipated revenues and to tighten its focus
on opportunities that offer the best long-term growth potential. The
restructuring includes a workforce reduction of approximately 16%.  As a 
result of its recent actions the Company is also in the process of assessing 
whether there has been any impairment of its intangible assets and goodwill 
which were carried at approximately $8,800,000 at September 30, 1998. These 
assets were originally recorded as a result of the acquisition of NetEdge 
Systems, Inc. in December 1997. The Company expects to incur a one-time 
pre-tax charge of approximately $10,000,000 in the fourth quarter relating to 
the restructuring, which consists primarily of severance payments and a 
write-down of a substantial portion of the intangible assets associated with 
the NetEdge acquisition.

     In November 1998, the Company offered holders of options to purchase 
Class A Common Stock the opportunity to have their existing options canceled 
and replaced with new options.  Both the original and replacement options 
have been granted under the Company's Stock Incentive Plan.  The new options 
are for the same number of shares as the replaced options and are on 
substantially the same terms except for the exercise price and the vesting 
period.  The exercise price for the new options will be the fair market value 
of the Company's Class A Common at a predetermined future date.  The new 
options will vest over a period of four years from the date of grant.  
Granting these new options will not result in any compensation expense.

                                          8
<PAGE>

NOTE 9-RECENT ACCOUNTING PRONOUNCEMENTS:

     In June 1997, the Financial Accounting Standards Board issued Statement No.
131 ("SFAS 131"), "Disclosures About Segments of An Enterprise and Related
Information".  SFAS 131 will require the Company to use the "management
approach" in disclosing segment information.  The adoption of this statement is
not expected to have a material impact on the Company's segment disclosures.


                                          9
<PAGE>

                                LARSCOM INCORPORATED

ITEM 2:        MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
               RESULTS OF OPERATIONS

     THE STATEMENTS CONTAINED IN THIS REPORT ON FORM 10-Q THAT ARE NOT PURELY
HISTORICAL ARE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF
THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED, INCLUDING STATEMENTS REGARDING THE COMPANY'S
EXPECTATIONS, HOPES, INTENTIONS OR STRATEGIES REGARDING THE FUTURE.  ALL
FORWARD-LOOKING STATEMENTS INCLUDED IN THIS DOCUMENT ARE BASED ON INFORMATION
AVAILABLE TO THE COMPANY ON THE DATE HEREOF, AND THE COMPANY ASSUMES NO
OBLIGATION TO UPDATE ANY SUCH FORWARD-LOOKING STATEMENTS. THE FORWARD-LOOKING
STATEMENTS CONTAINED HEREIN ARE SUBJECT TO CERTAIN FACTORS THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN SUCH FORWARD-LOOKING
STATEMENTS.  SUCH FACTORS INCLUDE, BUT ARE NOT LIMITED TO, THE FACTORS SET FORTH
IN THE COMPANY'S 1997 ANNUAL REPORT ON FORM 10-K AND THIS QUARTERLY REPORT ON
FORM 10-Q.

RESULTS OF OPERATIONS

     The Company's products can be split into two main categories - network
systems (broadband) and digital access (narrowband), based upon the bandwidth of
the products supplied.  The Company sells these products primarily through a
direct sales force and, to a lesser extent, through a variety of resellers
including original equipment manufacturers, value-added resellers, system
integrators and distributors.  A high proportion of the Company's sales are made
to a limited number of network service providers ("NSPs") and internet service
providers ("ISPs"). This proportion has remained relatively constant over the
past year.  Network systems sales represent an increasing percentage of total
revenues, a trend the Company expects to continue.

     REVENUE.  Revenues of $18,212,000 for the three months ended September 30,
1998 decreased by 6% from $19,336,000 in the comparable period in 1997.  
Revenues of $59,181,000 for the nine months ended September 30, 1998 grew by 8%
over revenues of $54,894,000 during the comparable period in 1997.  During the
three and nine months ended September 30, 1998, network systems sales were 44%
and 50% of total revenues, respectively, as compared to 36% in the corresponding
respective periods of 1997.  The increase in network systems sales in the three
months ended September 30, 1998, as compared to the corresponding 1997 period,
was due to  sales of EDGE products.  There were no EDGE product revenues in 1997
because the acquisition of NetEdge Systems, Inc. was consummated on December 31,
1997.  The higher network systems sales in the nine months ended September 30,
1998, as compared to the corresponding 1997 period, were due to sales of EDGE
products and, to a lesser extent, higher sales of the Orion 4000 product line.
Network systems sales were lower in the second and third quarters of 1998 as
compared to the immediately preceding quarters primarily due to reduced
shipments to certain of the Company's largest customers.  Digital access product
sales decreased in both the three and nine months ended September 30, 1998, when
compared to the corresponding 1997 periods, primarily as a result of lower
demand from certain of the Company's largest customers.  The Company has
previously announced publicly that it anticipates revenues for the fourth
quarter to be in the range of approximately $12,000,000 to $14,000,000.


                                          10
<PAGE>

     GROSS PROFIT.  As a percentage of revenue, gross profit for the three and
nine months ended September 30, 1998 decreased to 29% and 44%, respectively, as
compared to 57% for each of the comparable respective periods of 1997.  Gross
profit during the three and  nine months ended September 30, 1998 was lower than
the prior year periods primarily as a result of increased inventory reserves.
Expenses related to inventory reserves were $200,000, $1,100,000 and $3,553,000
in the first, second and third quarters of 1998, respectively.  Other
contributing factors were amortization of purchased technology of $1,289,000
that was not included in the corresponding 1997 periods and higher overhead
expenses.  In addition, gross margins in the first nine months of 1998 were
impacted by lower margins in the first quarter of 1998 on sales of finished
goods acquired as part of the NetEdge acquisition as well as manufacturing costs
incurred at the NetEdge facility.

     RESEARCH AND DEVELOPMENT.  Research and development expenses increased 16%
to $2,828,000 in the three months ended September 30, 1998 from $2,436,000 in
the comparable period in 1997.  During the nine months ended September 30, 1998
research and development expenses increased 29% from $7,052,000 to $9,131,000.
The greater research and development expenses were due primarily to additional
headcount associated with the purchase of NetEdge as well as continuing
investment in product enhancements and new products.  The Company expects that
research and development expenses will decrease in absolute dollars in future
periods as a result of the restructuring effected by the Company in October
1998.  See Note 8 of the Notes to the Condensed Consolidated Financial
Statements for more details.

     SELLING, GENERAL AND ADMINISTRATIVE.  Selling, general and administrative
expenses rose by 23% to $6,423,000 during the three months ended September 30,
1998 as compared to $5,220,000 in the comparable 1997 period.  During the first
nine months of 1998, selling, general and administrative expenses increased by
31% to $20,184,000 from $15,411,000 in the comparable 1997 period.  These
greater expenses were due primarily to additional personnel costs associated
with the acquisition of NetEdge, including expenses associated with an office in
the United Kingdom.  These higher expenses were offset in part in the first nine
months of 1998 by the release (during the second quarter of 1998) of the unused
reserve of $532,000 that had been established for potential unasserted claims
related to two General Services Administration contracts.  See Note 6 of the
Notes to the Condensed Consolidated Financial Statements for more details.  The
Company anticipates that selling, general and administrative expenses will
decrease in absolute dollars in the future as a result of the restructuring that
took place in October 1998.  See Note 8 of the Notes to the Condensed
Consolidated Financial Statements for more details.

     Selling, general and administrative expenses include charges from Axel
Johnson for legal, accounting, tax, treasury, human resources and administrative
services.  These charges were $106,000 and $156,000 during the three months
ended September 30, 1998 and 1997, respectively, and $319,000 and $468,000
during the nine months ended September 30, 1998 and 1997, respectively.

     INTEREST EXPENSE CHARGED BY AXEL JOHNSON.  Interest expense includes
charges for the unused portion of the line of credit available under the Credit
Agreement that the Company entered into with Axel Johnson in December 1996.  See
Liquidity and Capital Resources for more details.

     INTEREST AND OTHER INCOME.  Interest income was $222,000 and $584,000 for
the three and nine month periods ending September 30, 1998, respectively,
compared to $413,000 and $1,333,000 for the corresponding periods of the prior
year.  The reduction in interest income is primarily due to lower cash balances
resulting from cash paid for the acquisition of NetEdge in December 1997 and the
subsequent payment of assumed liabilities.

     In March 1998, the Company recorded a one-time, pre-tax gain of $1,329,000
from the sale of its former headquarters by a partnership in which the Company
holds a one-third interest.


                                          11
<PAGE>


     PROVISION FOR INCOME TAXES.  The Company's effective tax rate was 40% and
36% for the nine months ended September 30, 1998 and 1997, respectively.  These
rates differ from the federal statutory rate primarily due to state taxes which
were offset by non-taxable interest income received on the Company's cash
equivalents and short-term investments.  The higher effective tax rate in the
1998 period was primarily due to a decrease in non-taxable interest income as a
result of reduced funds available for investment.

     At September 30, 1998 the Company had recorded net deferred tax assets 
of $11,390,000.  In accordance with Statement of Financial Accounting 
Standard No. 109 ("SFAS 109"), "Accounting for Income Taxes", the Company has 
not recorded any valuation allowance against those assets because management 
has determined that it is more likely than not that all of these assets will 
be realized. This determination includes a significant amount of judgment and 
assumptions, including those which relate to the ability of the Company to 
generate taxable income in the future.  Some of the factors that the Company 
used to make this determination are: the Company has a strong earnings 
history; a significant portion of the deferred tax assets are deductible over 
fifteen years; losses can be carried forward for twenty years; some of the 
losses can be carried back to prior years; and the Company is able to switch 
its investments to taxable securities from non-taxable securities. The amount 
of the deferred tax assets considered realizable could be reduced in the near 
term if the Company's estimates of future taxable income in the carry-forward 
period are reduced.  This could have a material adverse effect on the 
Company's results of operations and financial condition.

LIQUIDITY AND CAPITAL RESOURCES

     The Company's operating activities provided cash of  $1,844,000 during the
nine months ended September 30, 1998 as compared to $2,075,000 in the same
period in 1997.  The cash provided during the 1998 period was primarily a result
of depreciation and amortization expense and decreases in inventories and
accounts receivable, offset by decreases in accounts payable, accrued expenses
and other current liabilities and by the net loss.

     From its acquisition by Axel Johnson in 1987 until its initial public
offering in December 1996, the Company met its operating and capital
requirements primarily from cash flows from operations and advances from Axel
Johnson.  Upon consummation of the IPO, the Company entered into a credit
agreement with Axel Johnson (the "Credit Agreement") under which the Company has
available a revolving line of credit of $15,000,000 which expires in December
1998.  As of September 30, 1998, there were no amounts outstanding under this
line of credit.  The Company believes that it will be able to extend the
expiration date of the Credit Agreement with similar terms and conditions for an
additional two years.  There can be no assurance, however, that such financing
will be available.

     The Company expects that capital expenditures for the whole of 1998 will be
approximately $2,000,000. In the nine months ended September 30, 1998 the
Company spent $1,347,000 on capital.  Capital expenditures during 1999 are
expected to be approximately $2,500,000.

     As of September 30, 1998, the Company had working capital of $37,440,000
including $21,693,000 in cash, cash equivalents and short-term investments.  The
Company believes that working capital, together with the Company's line of
credit and funds generated from operations, will provide adequate liquidity to
meet the Company's operating and capital requirements for at least the next
twelve months.  There can, however, be no assurance that future events, such as
the potential use of cash to fund acquisitions, would not require the Company to
seek additional capital at an earlier date or, if so required, that adequate
capital would be available on terms acceptable to the Company, or at all.


                                          12
<PAGE>

RECENT ACCOUNTING PRONOUNCEMENTS

     In June 1997, the Financial Accounting Standards Board issued Statement No.
131 ("SFAS 131"), "Disclosures About Segments of An Enterprise and Related
Information".  SFAS 131 will require the Company to use the "management
approach" in disclosing segment information.  The adoption of this statement is
not expected to have a material impact on the Company's segment disclosures.

CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS

     THE STATEMENTS CONTAINED IN THIS REPORT ON FORM 10-Q THAT ARE NOT PURELY
HISTORICAL ARE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF
THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED, INCLUDING STATEMENTS REGARDING THE COMPANY'S
EXPECTATIONS, HOPES, INTENTIONS OR STRATEGIES REGARDING THE FUTURE.  ALL
FORWARD-LOOKING STATEMENTS INCLUDED IN THIS DOCUMENT ARE BASED ON INFORMATION
AVAILABLE TO THE COMPANY ON THE DATE HEREOF, AND THE COMPANY ASSUMES NO
OBLIGATION TO UPDATE ANY SUCH FORWARD-LOOKING STATEMENTS. THE FORWARD-LOOKING
STATEMENTS CONTAINED HEREIN ARE SUBJECT TO CERTAIN FACTORS THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN SUCH FORWARD-LOOKING
STATEMENTS.  SUCH FACTORS INCLUDE, BUT ARE NOT LIMITED TO, THE FACTORS SET FORTH
IN THE COMPANY'S 1997 ANNUAL REPORT ON FORM 10-K AND THIS QUARTERLY REPORT ON
FORM 10-Q.


     CUSTOMER CONCENTRATION.  The Company believes that its relationships with
large customers, particularly NSPs and telecommunication companies, will be
critical to its future success.  A small number of customers have accounted for
a majority of the Company's revenues in each of the past several years.  During
the nine months ended September 30, 1998, three customers each accounted for
more than 10% of the Company's revenue.  On September 14, 1998, two of these
customers, WorldCom (including its subsidiary, UUNet Corporation) and MCI,
completed their merger and now operate under the name MCIWorldCom.  Together,
MCI and WorldCom accounted for 33% and 36% of the Company's revenues during the
nine months ended September 30, 1998 and 1997, respectively.  Separately, MCI
would have accounted for 16% and 26% of revenues in the corresponding,
respective periods. Accordingly, the Company's revenue is currently highly
dependent on continued orders from the newly combined entity as well as
additional large customers.

     Sales to specific large customers fluctuated significantly in the three and
nine months ended September 30, 1998 as compared with the corresponding periods
of 1997.  Sales to MCI (considered separately from WorldCom) decreased by 36%
and 34% in the three and nine month ended September 30, 1998 as compared to the
corresponding 1997 periods.  The decreases were largely offset by increases in
sales to WorldCom and its subsidiaries (excluding MCI) of 78% in the nine months
ended September 30, 1998.  The majority of the shipments of the EDGE product
line in 1998 were made to WorldCom.  Sales to IBM/Advantis decreased to 11% of
total revenues in the three and nine months of 1998, as compared to 14% and 15%
in the comparable respective 1997 periods.

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


                                          13
<PAGE>


     FLUCTUATIONS IN QUARTERLY OPERATING RESULTS; ABSENCE OF SIGNIFICANT
BACKLOG.  The Company's operating results have fluctuated significantly in the
past and may fluctuate in the future on a quarterly and annual basis as a result
of a number of factors, many of which are beyond the Company's control.  The
Company's sales historically have been concentrated in a small number of
customers.  Therefore, sales for a given quarter may depend to a significant
degree upon orders received from and product shipments to a limited number of
customers.  Sales to individual large customers are often related to the
customer's specific equipment deployment projects, the timing of which are
subject to change on limited notice.  The Company has experienced both
acceleration and slowdown in orders related to such projects, causing changes in
the sales level of a given quarter relative to both the preceding and subsequent
quarters.  Since 1994, sales to MCI, IBM/Advantis, AT&T, and WorldCom including
its subsidiaries and other current customers (excluding the impact of sales of
NetEdge products to the Company's existing customers) have occasionally varied
by up to $4.0 million from quarter to quarter.  For example, reductions in
orders by certain large customers contributed significantly to the Company's
lower revenues in the second and third quarters of 1998 as compared to the
corresponding quarters of 1997.  Since most of the Company's sales are in the
form of large orders with short delivery times to a limited number of customers,
the Company's backlog and consequent ability to predict revenues is limited.
One of the Company's largest customers, MCIWorldCom, is changing to a
just-in-time inventory system in which its vendor deliveries are made only when
equipment is needed.  The Company believes that this transition had a negative
impact on revenues during the third quarter of 1998 and could impact future
quarters particularly since the WorldCom/MCI merger has now been consummated.
In addition, announcements by the Company or its competitors of new products and
technologies could cause customers to defer purchases of the Company's existing
products.  In the event that anticipated orders from major customers fail to
materialize, or delivery schedules are deferred or canceled as a result of the
above factors or other unanticipated factors, the Company's business and
operating results could be materially adversely affected.  As a result, the
Company believes that period-to-period comparisons of its operating results are
not necessarily meaningful and should not be relied upon as indicative of future
performance.

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

     The Company's gross margin is affected by a number of factors including the
level of inventory reserves, product mix, production volume, product pricing,
costs of components, manufacturing costs, amortization of certain intangible
assets and price discounts given.  For example, a price reduction of a
particular product in response to competitive pressure which is not offset by a
reduction in production costs or by sales of other products with higher gross
margins would decrease the Company's overall gross margin and could have a
material adverse effect on the Company's business and operating results.

     The Company establishes its expenditure levels for product development and
other operating expenses based on projected sales levels and margins.  However,
expenses are relatively fixed in the short term.  Accordingly, if sales are
below expectations in any given period, the adverse impact of the revenue
shortfall on the Company's operating results may be greater due to the Company's
inability to adjust spending in the short term to compensate for the shortfall.


                                          14
<PAGE>

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

     RESTRUCTURING.  On October 15, 1998, Larscom announced a corporate 
restructuring designed to better align its expenses with anticipated revenues 
and to tighten its focus on opportunities that offer the best long-term 
growth potential.  The restructuring includes a workforce reduction of 
approximately 16%.  As a result of its recent actions the Company is also in 
the process of assessing whether there has been any impairment of its 
intangible assets and goodwill which were carried at approximately $8,800,000 
at September 30, 1998. These assets were originally recorded as a result of 
the acquisition of NetEdge Systems, Inc. in December 1997. The Company 
expects to incur a one-time pre-tax charge of approximately $10,000,000 in 
the fourth quarter relating to the restructuring, which consists primarily of 
severance payments and a write-down of a substantial portion of the 
intangible assets associated with the NetEdge acquisition. If the Company is 
not successful in reducing expenses to match anticipated lower revenues, or 
if revenues are lower than expected, results of operations and financial 
condition could be materially adversely affected.  

     The Company is conducting a search for a new Chief Executive Officer.  If
the search cannot be completed within a relatively short period of time the
Company's business could be materially adversely affected.

     DEPENDENCE ON RECENTLY INTRODUCED PRODUCTS AND PRODUCTS UNDER DEVELOPMENT.
The Company's future operating results are highly dependent on continuing market
acceptance of the Company's newest products, particularly in the network systems
group.  Network systems product sales represented 40% of revenues during the
whole of 1997 and 50% of revenues in the first nine months of 1998.  Network
systems product sales are expected to continue to increase as a percentage of
overall revenues in the longer term, although the proportion of network systems
sales to total revenues may vary from quarter to quarter.  Accordingly, the
Company's future success will be largely dependent on the market success of
newly introduced products and additional new products that may be introduced in
the future.  These include, for example, the WANmaker line of digital access
products which has only recently been introduced.  There


                                          15
<PAGE>

can be no assurance that such products will achieve widespread market
acceptance.  In addition, the Company has in the past experienced delays in the
development of new products and the enhancement of existing products, and such
delays may occur in the future.  The Company's potential inability to develop
and introduce new products or versions in a timely manner, due to resource
constraints or technological or other reasons, or to achieve timely and
widespread market acceptance of its new products or releases could have a
material adverse effect on the Company's business and operating results.

     YEAR 2000.  As the year 2000 approaches, the challenges associated with
moving into a new millennium have become a critical business concern around the
world.  Larscom recognizes the importance of approaching this situation in a
timely, proactive manner.  The Company established a Year 2000 Compliance
Program to ensure that the Company's products and internal systems currently in
use continue to function properly into the next century.  As such, the Company
has placed a high level of emphasis on preserving the integrity and continuity
of the business processes and activities that are vitally necessary for the
business to continue.  The initial priority for the Company was the evaluation
of products sold to customers.  The Company has committed the necessary
resources to make the Company's current product offerings Year 2000 compliant
and has completed the testing and remediation phase.  All of the Company's
current product offerings are Year 2000 compliant.  In those cases where a
product was found not to be in compliance the information was communicated to
the Company's customers via written notification.  In most cases, an upgrade
path has been provided to these customers so that compliance is attained.

     Larscom is in the process of reviewing and obtaining the required resources
to move into the implementation phase for its internal infrastructure.  The
Company is in the process of upgrading its primary business system for Year 2000
compliance.  Larscom anticipates the implementation phase to be completed by
December 1998.  Additionally, the Company is assessing and implementing
necessary changes for all areas of the Company's business which could be
impacted; these include manufacturing plant floor equipment, system test
laboratories, engineering laboratories, and the building infrastructure.
Based on assessments completed to date and compliance plans in process, Larscom
does not expect that the Year 2000 issue, including the cost of making its
products and critical systems compliant, will have a material effect on its
business operations or cash flows.  Direct costs related to all Year 2000
compliance testing and remediation are estimated to be approximately $540,000
over a two year period.  A substantial portion of these costs have already been
incurred.

     Larscom is engaged in the process of evaluating the Year 2000 readiness of
suppliers.  If Larscom determines that critical suppliers are not Year 2000
ready, Larscom will monitor their progress and take appropriate actions.  Based
on current progress and future plans, Larscom believes that the Year 2000 date
change will not significantly affect Larscom's ability to deliver products and
services to its customers on a timely basis.  However there can be no assurances
that the Year 2000 date change will not have a material adverse affect on the
Company's results of operations or financial condition.

     DEPENDENCE ON COMPONENT AVAILABILITY AND KEY SUPPLIERS.  On-time delivery
of the Company's products depends upon the availability of components and
subsystems used in its products.  The Company depends upon its suppliers to
manufacture, assemble and deliver components in a timely and satisfactory
manner.  The Company obtains components and licenses certain embedded software
from numerous single sources.  The Company does not believe it would be able to
develop alternative sources for components provided by Waferscale, Vicor, Xilinx
and PMC-Sierra.  The Company believes it would be able to develop alternative
sources for most of the components and software used in its products without
incurring substantial additional costs.  However, there can be no assurance that
the Company would be able to develop any such alternative sources, if required.
Any inability by the Company's suppliers to meet the Company's demand or any
prolonged interruption in supply or a significant price increase of one or more
components or software could have a material adverse effect on the Company's
business and operating results.  The Company generally does not have any
long-term contracts with such suppliers.  There can be no assurance that these
suppliers will continue to be able and willing to meet the Company's
requirements.


                                          16
<PAGE>

     RAPID TECHNOLOGICAL CHANGE.  The telecommunications equipment industry is
characterized by rapidly changing technologies and frequent new product
introductions.  The rapid development of new technologies increases the risk
that current or new competitors could develop products that would reduce the
competitiveness of the Company's products.  The Company's success will depend to
a substantial degree upon its ability to respond to changes in technology and
customer requirements.  This will require the timely selection, development and
marketing of new products and enhancements on a cost effective basis.  There can
be no assurance that the Company will be successful in developing, introducing
or managing the transition to new or enhanced products or that any such products
will be responsive to technological changes or will gain market acceptance.  If
the Company were to be unsuccessful or to incur significant delays in developing
and introducing such new products or enhancements, the Company's business and
operating results could be materially adversely affected. For example, the
Company is aware of a competing technology with network monitoring capabilities
that can be used in place of the Split-T product which the Company sells
primarily to MCIWorldCom.  If MCIWorldCom's customers opt for the alternative
technology as part of their services the Company's business and operating
results would be materially adversely affected.

     SOURCES OF ADDITIONAL FINANCE.  The Company has access, subject to certain
conditions, to a $15,000,000 credit facility provided by Axel Johnson.  However,
there can be no assurance that alternative sources of financing will be
available upon the expiration of such facility in December 1998, or that
additional sources of funding will be available on terms favorable to the
Company if the Company's borrowing requirements exceed the amount of the
facility.  The Company believes that it will be able to extend the expiration
date of the Credit Agreement with similar terms and conditions for an additional
two years.  There can be no assurance, however, that such financing will be
available.

     MANAGEMENT OF OPERATIONS.  The growth in the Company's business has placed
a significant strain on the Company's personnel, management and other resources,
and is expected to continue to do so.  These strains have been exacerbated by
the Company's recent restructuring as well as the recent resignation of the
Company's chief executive officer.  There can be no assurance that the Company
will be able to recruit a new chief executive officer in a timely manner.  The
Company's future success depends on its ability to retain employees following
the recent restructuring and the Company's recent financial performance
shortfalls.  In addition, the Company must continue to attract, train, motivate
and manage new employees successfully, as required for future growth, integrate
new management and employees into its overall operations and continue to improve
its operational, financial and management systems.  Availability of qualified
sales and technical personnel is limited, and competition for experienced sales
and technical personnel in the telecommunications equipment industry is intense.
The Company's failure to manage any expansion effectively, including the above
factors, could have a material adverse effect on the Company's business and
operating results.

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


                                          17

<PAGE>

     RISKS ASSOCIATED WITH ENTRY INTO INTERNATIONAL MARKETS.  The Company has
had minimal sales to international customers to date, and has had little
experience in international markets. While the acquisition of NetEdge increased
the exposure of the Company to international markets, sales outside the U.S.
continue to account for less than 10% of the Company's sales.  The conduct of
business outside the U.S. is subject to certain risks, including unexpected
changes in regulatory requirements and tariffs, difficulties in staffing and
managing foreign operations, longer payment cycles, greater difficulty in
accounts receivable collection, currency fluctuations, expropriation and
potentially adverse tax consequences.  In addition, to sell its products
internationally, the Company must meet standards established by
telecommunications authorities in various countries, as well as recommendations
of the International Telecommunications Union.  A delay in obtaining, or the
failure to obtain, certification of its products in countries outside the U.S.
could deny or preclude the Company's marketing and sales efforts in such
countries, which could have a material adverse effect on the Company's business
and operating results.

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

     RISKS ASSOCIATED WITH POTENTIAL ACQUISITIONS.  As part of its efforts to
grow its business, the Company  reviews acquisition prospects that would
complement its existing product offerings, augment its market coverage, enhance
its technological capabilities or offer growth opportunities, as evidenced by
the acquisition of NetEdge in December 1997.  This acquisition has not been a
success.  See Restructuring above for details.  The Company has no current
agreements or negotiations underway with respect to any such acquisitions.
Future acquisitions by the Company could result in potentially dilutive issuance
of equity securities and/or the incurrence of debt and the assumption of
contingent liabilities, any of which could have a material adverse effect on the
Company's business and operating results and/or the price of the Company's Class
A Common Stock.  In this regard, as a result of the ownership interest of Axel
Johnson in the Company, the Company will not be able to use pooling of interests
accounting for any future acquisition.  Accordingly, such acquisitions could
result in amortization of goodwill and other charges (including the immediate
write-off of purchased research and development in process) typically associated
with purchase accounting.  Acquisitions entail numerous risks, including
difficulties in the assimilation of acquired operations, technologies and
products, diversion of management's attention from other business concerns,
risks of entering markets in which the Company has limited or no prior
experience and potential loss of key employees of acquired organizations.  The
Company's management has limited prior experience in assimilating acquired
organizations.  No assurance can be given as to the ability of the Company to
successfully integrate any businesses, products, technologies or personnel that
might be acquired in the future, and the failure of the Company to do so could
have a material adverse effect on the Company's business and operating results.

     LIMITED PROTECTION OF INTELLECTUAL PROPERTY; PROPRIETARY INFORMATION.  The
Company relies upon a combination of trade secrets, contractual restrictions,
copyrights, trademark laws and patents to establish and protect proprietary
rights in its products and technologies.  Although the Company has been issued
only one U.S. patent to date, it believes that the success of its business
depends primarily on its proprietary technology, information and processes and
know-how, rather than patents.  Much of the Company's proprietary information
and technology is not patented and may not be patentable.  There can be no
assurance that the Company will be able to protect its technology or that
competitors will not be able to develop similar technology independently.  The
Company has entered into confidentiality and invention assignment agreements
with all of its employees, and enters into non-disclosure agreements with its


                                          18
<PAGE>

suppliers, distributors and appropriate customers so as to limit access to and
disclosure of its proprietary information.  There can be no assurance that these
statutory and contractual arrangements will deter misappropriation of the
Company's technologies or discourage independent third-party development of
similar technologies.  In the event such arrangements are insufficient, the
Company's business and operating results could be materially adversely affected.

ITEM 3:        QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     INTEREST RATE RISK.  The Company does not use derivative financial
instruments in its investment portfolio.  The Company's investment portfolio is
generally comprised of municipal government securities that mature within one
year.  The Company places investments in instruments that meet high credit
quality standards.  These securities are subject to interest rate risk, and
could decline in value if interest rates increase.  Due to the short duration
and conservative nature of the Company's investment portfolio, the Company does
not expect any material loss with respect to its investment portfolio.

     FOREIGN CURRENCY EXCHANGE RATE RISK.  Certain of the Company's sales and
marketing expenses are incurred in local currencies.  As a result the Company's
international results of operations are subject to foreign exchange rate
fluctuations.  The Company does not currently hedge against foreign currency
rate fluctuations.  Gains and losses from such fluctuations have not been
material to the Company's consolidated results of operations.


                                          19
<PAGE>


PART II:       OTHER INFORMATION

ITEM 1:        LEGAL PROCEEDINGS

                    The Company is 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

                    Not Applicable

ITEM 6:        EXHIBITS AND REPORTS ON FORM 8-K

               A:   Exhibits

                    27 Financial Data Schedule

               B:   Reports on Form 8-K

                    On October 8, 1998, the Company filed a report on Form 8-K.
                    Under Item 5, "Other Events", the Company reported that it
                    had issued a press release on October 1, 1998 which was
                    attached as an exhibit thereto.  In the press release the
                    Company announced that its President and Chief Executive
                    Officer, Deborah M. Soon, had resigned and that George M.
                    Donohoe, Executive Vice President had been appointed acting
                    Chief Executive Officer. In the same press release the
                    Company also announced that it has revised its outlook for
                    the fourth quarter of fiscal 1998 and currently anticipated
                    revenues for the period to be in the range of approximately
                    $12 million - $14 million.  The Company also stated that it
                    expects to incur one-time charges related to a restructuring
                    and a substantial operating loss during the fourth quarter
                    of fiscal 1998.


                                          20
<PAGE>

                                      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




DATE  November 12, 1998            BY   /s/ Bruce D. Horn

                                   Bruce D. Horn
                                   Vice President, Finance and
                                   Chief Financial Officer
                                   (Principal Financial and Accounting Officer)


                                          21