##### Table of Contents



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 March 31, 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.)

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

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes  No X

The number of the registrants shares outstanding as of April 30, 2003, was
8,867,295 of Class A Common Stock and 10,000,000 of Class B Common Stock.





---

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                                                                                   
|Certifications                                                                               
|EXHIBIT 99.1                                                                                 



---



##### Table of Contents



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 |  | 14
|        
|Item 3:  |  | Quantitative and Qualitative Disclosures about
Market Risk                            |  | 26
|        
|Item 4:  |  | Controls and Procedures                                                               |  | 26
|        
|Part II: |  | Other Information                                                                     |  | 27
|        
|Item 1:  |  | Legal Proceedings                                                                     |  | 27
|        
|Item 2:  |  | Changes in Securities                                                                 |  | 27
|        
|Item 3:  |  | Defaults upon Senior Securities                                                       |  | 27
|        
|Item 4:  |  | Submission of Matters to a Vote of Security Holders                                   |  | 27
|        
|Item 5:  |  | Other Information                                                                     |  | 27
|        
|Item 6:  |  | Exhibits and Reports on Form 8-K                                                      |  | 27



|               |  |  |  |   
|-------------- |  |  |  | --
|Signatures     |  |  |  | 28
|               |  | 
|Certifications |  |  |  | 29

2



---



##### Table of Contents












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

LARSCOM INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands) (Unaudited)

|                              |                                                |                                            |                                      |         |        |           |       |         |              |  |  | 
|----------------------------- | ---------------------------------------------- | ------------------------------------------ | ------------------------------------ | ------- | ------ | --------- | ----- | ------- | ------------ |  |  | 
|                              |                                                |                                            |                                      |         |        | March 31, |       |         | December 31, | 
|                              |                                                |                                            |                                      |         |        | 2003      |       |         | 2002         | 
|                              |                                                |                                            |                                      |         |        |           |       |         |              | 
|                              |                                                |                                            |                                      | ASSETS  |        |           |       |         |              |  |  | 
|Current assets:               |                                                |                                            |                                      |         |        |           |       |        
|                              | Cash and cash equivalents                      |                                            | $                                    | 17,542  |        |           | $     | 15,643  |             
|                              | Short-term investments                         |                                            |                                      |        |        |           |       | 2,014   |             
|                              | Accounts receivable, net                       |                                            |                                      | 1,932   |        |           |       | 3,079   |             
|                              | Inventories                                    |                                            |                                      | 3,331   |        |           |       | 3,816   |             
|                              | Income tax receivable                          |                                            |                                      | 56      |        |           |       | 60      |             
|                              | Prepaid expenses and other current assets      |                                            |                                      | 1,478   |        |           |       | 1,322   |             
|                              |                                                |                                            |                                      |         |        |          
|                              |                                                | Total current assets                       |                                      |         | 24,339 |           |       |         | 25,934       | 
|Property and equipment, net   |                                                |                                            | 1,620                                |         |        |           | 1,918 |        
|Other non-current assets, net |                                                |                                            | 167                                  |         |        |           | 208   |        
|                              |                                                |                                            |                                      |         |        |          
|                              |                                                | Total assets                               |                                      | $       | 26,126 |           |       | $       | 28,060       | 
|                              |                                                |                                            |                                      |         |        |          
|                              |                                                |                                            | LIABILITIES AND STOCKHOLDERS EQUITY |         |        |           |       |         |              |  | 
|Current liabilities:          |                                                |                                            |                                      |         |        |           |       |        
|                              | Accounts payable                               |                                            | $                                    | 2,049   |        |           | $     | 1,898   |             
|                              | Accrued expenses and other current liabilities |                                            |                                      | 4,201   |        |           |       | 4,510   |             
|                              | Deferred revenue                               |                                            |                                      | 2,415   |        |           |       | 2,102   |             
|                              | Due to Axel Johnson                            |                                            |                                      | 244     |        |           |       | 25      |             
|                              |                                                |                                            |                                      |         |        |          
|                              |                                                | Total current liabilities                  |                                      |         | 8,909  |           |       |         | 8,535        | 
|Other non-current liabilities |                                                |                                            | 1,496                                |         |        |           | 1,618 |        
|                              |                                                |                                            |                                      |         |        |          
|                              |                                                | Total liabilities                          |                                      |         | 10,405 |           |       |         | 10,153       | 
|                              |                                                |                                            |                                      |         |        |          
|Stockholders equity:         |                                                |                                            |                                      |         |        |           |       |        
|                              | Class A Common Stock                           |                                            |                                      | 89      |        |           |       | 89      |             
|                              | Class B Common Stock                           |                                            |                                      | 100     |        |           |       | 100     |             
|                              | Additional paid-in capital                     |                                            |                                      | 83,232  |        |           |       | 83,231  |             
|                              | Accumulated other comprehensive loss           |                                            |                                      | (1      | )      |           |       | (1      | )           
|                              | Unrealized investment gain                     |                                            |                                      |        |        |           |       | 4       |             
|                              | Accumulated deficit                            |                                            |                                      | (67,699 | )      |           |       | (65,516 | )           
|                              |                                                |                                            |                                      |         |        |          
|                              |                                                | Total stockholders equity                 |                                      |         | 15,721 |           |       |         | 17,907       | 
|                              |                                                |                                            |                                      |         |        |          
|                              |                                                | Total liabilities and stockholders equity |                                      | $       | 26,126 |           |       | $       | 28,060       | 
|                              |                                                |                                            |                                      |         |        |          

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

3



---



##### Table of Contents






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

|                                    |  |                    |        |   |      |   |        |  
|----------------------------------- |  | ------------------ | ------ | - | ---- | - | ------ | -
|                                    |  | Three Months Ended |       
|                                    |  | March 31,          |       
|                                    |  |                    |       
|                                    |  | 2003               |        |   | 2002 |  
|                                    |  |                    |        |   |      |  
|Product revenues                    |  | $                  | 2,971  |   |      | $ | 6,329  |  
|Service revenues                    |  |                    | 1,254  |   |      |   | 1,387  |  
|                                    |  |                    |        |   |      |  
|Total revenues                      |  |                    | 4,225  |   |      |   | 7,716  |  
|                                    |  |                    |        |   |      |  
|Product cost of revenues            |  |                    | 1,669  |   |      |   | 2,730  |  
|Service cost of revenues            |  |                    | 305    |   |      |   | 317    |  
|                                    |  |                    |        |   |      |  
|Total cost of revenues              |  |                    | 1,974  |   |      |   | 3,047  |  
|                                    |  |                    |        |   |      |  
|Gross profit                        |  |                    | 2,251  |   |      |   | 4,669  |  
|                                    |  |                    |        |   |      |  
|Operating expenses:                 |  |                    |        |   |      |   |        |  
|Research and development            |  |                    | 1,107  |   |      |   | 979    |  
|Selling, general and administrative |  |                    | 3,418  |   |      |   | 4,286  |  
|Restructuring                       |  |                    | (61    | ) |      |   |       |  
|                                    |  |                    |        |   |      |  
|Total operating expenses            |  |                    | 4,464  |   |      |   | 5,265  |  
|                                    |  |                    |        |   |      |  
|Loss from operations                |  |                    | (2,213 | ) |      |   | (596   | )
|Interest and other income           |  |                    | 47     |   |      |   | 85     |  
|                                    |  |                    |        |   |      |  
|Loss before income taxes            |  |                    | (2,166 | ) |      |   | (511   | )
|Income tax provision/(benefit)      |  |                    | 17     |   |      |   | (1,874 | )
|                                    |  |                    |        |   |      |  
|Net (loss)/income                   |  | $                  | (2,183 | ) |      | $ | 1,363  |  
|                                    |  |                    |        |   |      |  
|Basic net (loss)/income per share   |  | $                  | (0.12  | ) |      | $ | 0.07   |  
|                                    |  |                    |        |   |      |  
|Diluted net (loss)/income per share |  | $                  | (0.12  | ) |      | $ | 0.07   |  
|                                    |  |                    |        |   |      |  
|Basic weighted average shares       |  |                    | 18,865 |   |      |   | 18,845 |  
|                                    |  |                    |        |   |      |  
|Diluted weighted average shares     |  |                    | 18,865 |   |      |   | 18,878 |  
|                                    |  |                    |        |   |      |  

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

4



---



##### Table of Contents






LARSCOM INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) (Unaudited)

|                                                                               |  |                              |        |   |      |   |        |  
|------------------------------------------------------------------------------ |  | ---------------------------- | ------ | - | ---- | - | ------ | -
|                                                                               |  | Three Months Ended March 31, |       
|                                                                               |  |                              |       
|                                                                               |  | 2003                         |        |   | 2002 |  
|                                                                               |  |                              |        |   |      |  
|Cash flows from operating activities:                                          |  |                              |        |   |      |   |        |  
|Net (loss)/income                                                              |  | $                            | (2,183 | ) |      | $ | 1,363  |  
|Depreciation and amortization                                                  |  |                              | 345    |   |      |   | 375    |  
|Decrease in deferred income taxes                                              |  |                              |       |   |      |   | (1,894 | )
|Writedown
of inventories                                                       |  |                              | 66     |   |      |   |       |  
|(Decrease)/increase in bad debt reserves                                       |  |                              | (174   | ) |      |   | 5      |  
|Increase in deferred revenue                                                   |  |                              | 313    |   |      |   | 1,578  |  
|Decrease in accrued restructuring                                              |  |                              | (101   | ) |      |   | (583   | )
|Net decrease/(increase) in other working capital accounts                      |  |                              | 1,438  |   |      |   | (1,277 | )
|                                                                               |  |                              |        |   |      |  
|Net cash used in operating activities                                          |  |                              | (296   | ) |      |   | (433   | )
|                                                                               |  |                              |        |   |      |  
|Cash flows from investing activities:                                          |  |                              |        |   |      |   |        |  
|Purchases of property and equipment                                            |  |                              | (5     | ) |      |   | (43    | )
|Purchases of short-term investments                                            |  |                              |       |   |      |   | (9,247 | )
|Sales and maturities of short-term investments                                 |  |                              | 2,014  |   |      |   | 5,092  |  
|                                                                               |  |                              |        |   |      |  
|Net cash provided/(used) by investing activities                               |  |                              | 2,009  |   |      |   | (4,198 | )
|                                                                               |  |                              |        |   |      |  
|Cash flows from financing activities:                                          |  |                              |        |   |      |   |        |  
|Payments from Axel Johnson Inc.                                                |  |                              | 219    |   |      |   | 49     |  
|Decrease in long-term deposits and capital lease obligations                   |  |                              | (30    | ) |      |   | (68    | )
|Proceeds from issuances of Class A Common Stock                                |  |                              | 1      |   |      |   | 18     |  
|                                                                               |  |                              |        |   |      |  
|Net cash provided/(used) in financing activities                               |  |                              | 190    |   |      |   | (1     | )
|                                                                               |  |                              |        |   |      |  
|Effect of unrealized investment (loss)/gain and foreign exchange rates on cash |  |                              | (4     | ) |      |   | 3      |  
|                                                                               |  |                              |        |   |      |  
|Increase/(decrease) in cash and cash equivalents                               |  |                              | 1,899  |   |      |   | (4,629 | )
|Cash and cash equivalents at beginning of period                               |  |                              | 15,643 |   |      |   | 9,789  |  
|                                                                               |  |                              |        |   |      |  
|Cash and cash equivalents at end of period                                     |  | $                            | 17,542 |   |      | $ | 5,160  |  
|                                                                               |  |                              |        |   |      |  
|Supplemental disclosure of cash flow information                               |  |                              |        |   |      |   |        |  
|Interest paid                                                                  |  | $                            | 1      |   |      | $ | 1      |  
|                                                                               |  |                              |        |   |      |  
|Income taxes paid                                                              |  | $                            | 17     |   |      | $ | 23     |  
|                                                                               |  |                              |        |   |      |  

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

5



---



##### Table of Contents






LARSCOM INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1Basis of Presentation:

The condensed consolidated financial statements for the three months ended
March 31, 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 Report on Form 10-K for the
year ended December 31, 2002. The results of operations for the three months
ended March 31, 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 Recent Accounting Pronouncements:

In July 2002, the Financial Accounting Standards Board (FASB) issued
SFAS 146, Accounting for Costs Associated with Exit or Disposal Activities.
SFAS 146 requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred. SFAS 146
eliminates the definition and requirement for recognition of exit costs in EITF
Issue No. 94-3, Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring), where a liability for an exit cost was recognized at the
date of an entitys commitment to an exit plan. This statement is effective
for exit or disposal activities initiated after December 31, 2002. We do not
believe that the adoption of this statement will have a material impact on our
results of operations, financial position or cash flows.

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.

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. The Company is currently
evaluating this issue and its impact on our financial statements.

In December 2002, the FASB issued SFAS 148, Accounting for Stock-Based
Compensation, Transition and Disclosure. SFAS No. 148 provides alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. SFAS No. 148 also requires
that disclosures of the pro forma effect of using the fair value method of
accounting for stock-based employee compensation be displayed more prominently
and in a tabular format. Additionally, SFAS No. 148 requires disclosure of the
pro forma effect in interim financial statements. The transition and annual
disclosure requirements of SFAS No. 148 are effective for fiscal years ended
after December 15, 2002. The interim disclosure requirements are effective for
interim periods beginning after December 15, 2002. The interim disclosure
requirements of SFAS No. 148 have been included in our financial statements.

6



---



##### Table of Contents



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. We
believe that the adoption of this standard will not have a material impact on
its financial statements.

Note 3Inventories:

Inventories consist of the following (in thousands):

|                |  |           |       |  |              |   |       |  | 
|--------------- |  | --------- | ----- |  | ------------ | - | ----- |  | 
|                |  | March 31, |       |  | December 31, |  
|                |  | 2003      |       |  | 2002         |  
|                |  |           |       |  |              |  
|Raw materials   |  | $         | 588   |  |              | $ | 916   | 
|Work-in-process |  |           | 307   |  |              |   | 521   | 
|Finished goods  |  |           | 2,436 |  |              |   | 2,379 | 
|                |  |           |       |  |              |  
|                |  | $         | 3,331 |  |              | $ | 3,816 | 
|                |  |           |       |  |              |  

Note 4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 restructuring as a result of the ongoing stagnation of the telecom
market. Consequently, 30 positions were eliminated from our workforce 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 by some of the laid-off
employees and $183,000 in rent collected under the sublease agreement with
Silicon Wireless Corporation.

A sublease agreement was signed on February 27, 2002, between us and
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. The agreement included an initial
four-and-one-half-months free-rent period. Due to the uncertainty of the
receipt of income under the sublease, we have decided to release the associated
real-estate accrual as the sublease income is received. During the first
quarter of 2003, restructuring expense was reduced by $61,000 as a result of
rent collected from Silicon Wireless Corporation for our facility. We expect
the remaining real estate lease obligation will be paid-out by January 2007.

The following table provides details on the activity and remaining
balances of the 2001 and 2002 restructuring charges as of March 31, 2003:

7



---



##### Table of Contents



|                           |  |                |       |  |         |            |        |             |          |            |           |         |  |   |       | 
|-------------------------- |  | -------------- | ----- |  | ------- | ---------- | ------ | ----------- | -------- | ---------- | --------- | ------- |  | - | ----- | 
|                           |  |                |       |  |         |            |        |             |          | Cumulative |           |         |  |   |      
|                           |  |                |       |  |         | Cumulative |        |             | Non-Cash |            |           | Reserve | 
|                           |  | Total          |       |  | Cash    |            |        | Charges &   |          |            | March 31, |        
|June 2001 Restructuring    |  | Charges        |       |  | Charges |            |        | Adjustments |          |            | 2003      |        
|                           |  |                |       |  |         |            |        |             |          |            |           |        
|                           |  | (in thousands) |      
|Employee termination costs |  | $              | 2,293 |  |         | $          | (1,782 | )           |          | $          | (511      | )       |  | $ |      | 
|Real estate lease          |  |                | 2,080 |  |         |            | (748   | )           |          |            | 407       |         |  |   | 1,739 | 
|Fixed asset write-down     |  |                | 388   |  |         |            |       |             |          |            | (388      | )       |  |   |      | 
|                           |  |                |       |  |         |            |        |             |          |            |           |        
|Total                      |  | $              | 4,761 |  |         | $          | (2,530 | )           |          | $          | (492      | )       |  | $ | 1,739 | 
|                           |  |                |       |  |         |            |        |             |          |            |           |        

|                           |  |                |       |  |         |            |      |             |          |            |           |         |  |   |   | 
|-------------------------- |  | -------------- | ----- |  | ------- | ---------- | ---- | ----------- | -------- | ---------- | --------- | ------- |  | - | - | 
|                           |  |                |       |  |         |            |      |             |          | Cumulative |           |         |  |   |  
|                           |  |                |       |  |         | Cumulative |      |             | Non-Cash |            |           | Reserve | 
|                           |  | Total          |       |  | Cash    |            |      | Charges &   |          |            | March 31, |        
|October 2001 Restructuring |  | Charges        |       |  | Charges |            |      | Adjustments |          |            | 2003      |        
|                           |  |                |       |  |         |            |      |             |          |            |           |        
|                           |  | (in thousands) |      
|Employee termination costs |  | $              | 966   |  |         | $          | (892 | )           |          | $          | (74       | )       |  | $ |  | 
|Real estate lease          |  |                | 45    |  |         |            | (45  | )           |          |            |          |         |  |   |  | 
|Fixed asset write-down     |  |                |      |  |         |            |     |             |          |            |          |         |  |   |  | 
|                           |  |                |       |  |         |            |      |             |          |            |           |        
|Total                      |  | $              | 1,011 |  |         | $          | (937 | )           |          | $          | (74       | )       |  | $ |  | 
|                           |  |                |       |  |         |            |      |             |          |            |           |        

|                           |  |                |     |  |         |            |      |             |          |            |           |         |  |   |   | 
|-------------------------- |  | -------------- | --- |  | ------- | ---------- | ---- | ----------- | -------- | ---------- | --------- | ------- |  | - | - | 
|                           |  |                |     |  |         |            |      |             |          | Cumulative |           |         |  |   |  
|                           |  |                |     |  |         | Cumulative |      |             | Non-Cash |            |           | Reserve | 
|                           |  | Total          |     |  | Cash    |            |      | Charges &   |          |            | March 31, |        
|May 2002 Restructuring     |  | Charges        |     |  | Charges |            |      | Adjustments |          |            | 2003      |        
|                           |  |                |     |  |         |            |      |             |          |            |           |        
|                           |  | (in thousands) |    
|Employee termination costs |  | $              | 394 |  |         | $          | (358 | )           |          | $          | (36       | )       |  | $ |  | 
|Real estate lease          |  |                |    |  |         |            |     |             |          |            |          |         |  |   |  | 
|Fixed asset write-down     |  |                |    |  |         |            |     |             |          |            |          |         |  |   |  | 
|                           |  |                |     |  |         |            |      |             |          |            |           |        
|Total                      |  | $              | 394 |  |         | $          | (358 | )           |          | $          | (36       | )       |  | $ |  | 
|                           |  |                |     |  |         |            |      |             |          |            |           |        

|                           |  |                |     |  |         |            |      |             |          |            |           |         |  |   |    | 
|-------------------------- |  | -------------- | --- |  | ------- | ---------- | ---- | ----------- | -------- | ---------- | --------- | ------- |  | - | -- | 
|                           |  |                |     |  |         |            |      |             |          | Cumulative |           |         |  |   |   
|                           |  |                |     |  |         | Cumulative |      |             | Non-Cash |            |           | Reserve | 
|                           |  | Total          |     |  | Cash    |            |      | Charges &   |          |            | March 31, |        
|October 2002 Restructuring |  | Charges        |     |  | Charges |            |      | Adjustments |          |            | 2003      |        
|                           |  |                |     |  |         |            |      |             |          |            |           |        
|                           |  | (in thousands) |    
|Employee termination costs |  | $              | 176 |  |         | $          | (159 | )           |          | $          |          |         |  | $ | 17 | 
|Real estate lease          |  |                |    |  |         |            |     |             |          |            |          |         |  |   |   | 
|Fixed asset write-down     |  |                |    |  |         |            |     |             |          |            |          |         |  |   |   | 
|                           |  |                |     |  |         |            |      |             |          |            |           |        
|Total                      |  | $              | 176 |  |         | $          | (159 | )           |          | $          |          |         |  | $ | 17 | 
|                           |  |                |     |  |         |            |      |             |          |            |           |        

We expect the remaining real estate lease obligation will be paid-out by
January 2007 and the remaining employee termination costs to be paid-out by the
end of 2003.

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

8



---



##### Table of Contents



|                |  |               |    |  |             |          |    |                |         |          |       |  |  |  |     | 
|--------------- |  | ------------- | -- |  | ----------- | -------- | -- | -------------- | ------- | -------- | ----- |  |  |  | --- | 
|                |  |               |    |  |             |          |    |                |         | 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  | 
|                |  |               |    |  |             |          |    |                |         |          |       | 
|Total           |  |               | 19 |  |             |          | 39 |                |         |          | 60    |  |  |  | 118 | 
|                |  |               |    |  |             |          |    |                |         |          |       | 

Note 5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-back provisions. A federal tax filing was made during
the third quarter of 2002 and a refund was received during that quarter for the
entire $1,894,000 amount. The deferred tax asset balance at March 31, 2003
amounted to $23,953,000 and the valuation allowance balance was $23,953,000.

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 6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.

9



---



##### Table of Contents



The following table shows how basic and diluted net (loss)/income per
share is computed (in thousands, except per share data):

|                                                                                                                                      |  |                    |        |   |      |   |        | 
|------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ------ | - | ---- | - | ------ | 
|                                                                                                                                      |  | Three Months Ended |       
|                                                                                                                                      |  | March 31,          |       
|                                                                                                                                      |  |                    |       
|                                                                                                                                      |  | 2003               |        |   | 2002 |  
|                                                                                                                                      |  |                    |        |   |      |  
|Net (loss)/ income                                                                                                                    |  | $                  | (2,183 | ) |      | $ | 1,363  | 
|                                                                                                                                      |  |                    |        |   |      |  
|Basic
weighted average Class A and B
Common Stock outstanding                                                                         |  |                    | 18,865 |   |      |   | 18,845 | 
|Effective of dilutive securities:                                                                                                     |  |                    |        |   |      |   |        | 
|Stock options                                                                                                                         |  |                    |       |   |      |   | 33     | 
|Diluted weighted average Class A and B
Common Stock outstanding                                                                       |  |                    | 18,865 |   |      |   | 18,878 | 
|Basic net (loss)/income per share                                                                                                     |  | $                  | (0.12  | ) |      | $ | 0.07   | 
|                                                                                                                                      |  |                    |        |   |      |  
|Diluted net (loss)/income per share                                                                                                   |  | $                  | (0.12  | ) |      | $ | 0.07   | 
|                                                                                                                                      |  |                    |        |   |      |  
|Weighted average in-the-money Class A Common Stock
options outstanding excluded from the basic
and diluted loss per share calculation |  |                    | 24     |   |      |   |       | 

Note 7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 Emerging Issues Task Force (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
calculation is 2.56% for the first three months of 2003 and 4.20% for the first
three months of 2002. The expected volatility is 90% for the first three months
of 2003 and 2002. No dividend is expected to be paid. The expected life is
4.93 years for the first quarter of 2003 and 4.73 years for the first quarter
of 2002. 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.

10



---



##### Table of Contents



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):

|                                                  |  |                    |        |   |      |   |        |  
|------------------------------------------------- |  | ------------------ | ------ | - | ---- | - | ------ | -
|                                                  |  | Three Months Ended |       
|                                                  |  | March 31           |       
|                                                  |  |                    |       
|                                                  |  | 2003               |        |   | 2002 |  
|                                                  |  |                    |        |   |      |  
|Net (loss)/income  as reported                   |  | $                  | (2,183 | ) |      | $ | 1,363  |  
|Compensation expenses net of taxes                |  | $                  | (81    | ) |      | $ | (139   | )
|Net (loss)/income  pro forma                     |  | $                  | (2,264 | ) |      | $ | 1,224  |  
|Basic net (loss)/income per share  as reported   |  | $                  | (0.12  | ) |      | $ | 0.07   |  
|Basic net (loss)/income per share  pro forma     |  | $                  | (0.12  | ) |      | $ | 0.06   |  
|Diluted net (loss)/income per share  as reported |  | $                  | (0.12  | ) |      | $ | 0.07   |  
|Diluted net (loss)/income per share  pro forma   |  | $                  | (0.12  | ) |      | $ | 0.06   |  
|Shares  Basic                                    |  |                    | 18,865 |   |      |   | 18,845 |  
|Shares  Diluted                                  |  |                    | 18,865 |   |      |   | 18,878 |  

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 8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. Such amounts were immaterial for the periods presented.

Note 9Commitments and Contingencies:

Commitments:

Operating lease commitments are related principally to our buildings in
Milpitas, California and Durham, North Carolina and have terms that expire in
2004 and 2007, respectively. Total rent expense in the first quarter of 2003
and 2002, was $507,000 and $487,000, respectively. Sublease rental income was
$155,000 and $240,000 in the first quarter of 2003 and 2002, respectively.
Future annual minimum lease payments under all non-cancelable operating leases
and sublease rental income as of March 31, 2003 are as follows (in thousands):

11



---



##### Table of Contents



|                              |  |          |       |  |        |          |       | 
|----------------------------- |  | -------- | ----- |  | ------ | -------- | ----- | 
|                              |  |          |       |  |        | Sublease |      
|                              |  | Lease    |       |  | Rental |         
|                              |  | Payments |       |  | Income |         
|Years ending December 31,     |  |          |       |  |        |         
|2003 (April 1 to December 31) |  | $        | 1,792 |  |        | $        | 485   | 
|2004                          |  |          | 1,617 |  |        |          | 502   | 
|2005                          |  |          | 338   |  |        |          | 265   | 
|2006                          |  |          | 347   |  |        |          | 273   | 
|2007 and thereafter           |  |          | 29    |  |        |          | 23    | 
|                              |  |          |       |  |        |         
|                              |  | $        | 4,123 |  |        | $        | 1,548 | 
|                              |  |          |       |  |        |         

On March 18, 2003, we and VINA Technologies, Inc., a Delaware corporation
(VINA), issued a joint press release announcing the execution of an Agreement
and Plan of Merger, dated as of March 17, 2003 (the Merger Agreement), by and
among us, London Acquisition Corp., a Delaware corporation and our wholly-owned
subsidiary (Merger Sub), and VINA. In accordance with the Merger Agreement,
Merger Sub would merge with and into VINA (the Merger). At a later date, it
is intended that VINA would merge with and into us and the separate corporate
existence of VINA would disappear. As a result of the Merger, each issued and
outstanding share of VINA Common Stock, would be automatically converted into
the right to receive 0.2659 of a validly issued, fully paid and nonassessable
share of our Common Stock.

The consummation of the Merger is subject to the approval of our and
VINAs stockholders and other customary closing conditions. The Merger is
intended to be a tax-free reorganization under Section 368 of the Internal
Revenue Code of 1986, as amended, and is expected to be treated as a purchase
for financial accounting purposes, in accordance with generally accepted
accounting principles.

In connection with the Merger Agreement, certain VINA stockholders,
including executive officers and members of the board of directors of VINA,
representing approximately 40% of the voting power of outstanding VINA stock
entered into a voting agreement (the VINA Voting Agreement) with us in which,
among other things, each stockholder agreed, until the earlier of the
consummation of the Merger or the termination of the Merger Agreement, to vote
its shares of Common Stock in favor of the adoption of the Merger Agreement.
Our majority stockholder, representing approximately 82% of the voting power of
our outstanding stock also entered into a voting agreement with VINA in which,
among other things, the stockholder agreed, until the earlier of the
consummation of the Merger or the termination of the Merger Agreement, to vote
its shares of Common Stock in favor of the adoption of the Merger Agreement.

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.

12



---



##### Table of Contents



Note 10Geographic Information:

Revenue and long-lived assets related to operations in the United States
and other countries for the three months ended March 31, 2003 and 2002 and as
of March 31, 2003 and March 31, 2002 are as follows (in thousands):

|                |  |                    |       |  |      |   |       | 
|--------------- |  | ------------------ | ----- |  | ---- | - | ----- | 
|                |  | Three Months Ended |      
|Revenues (a)    |  | March 31,          |      
|                |  |                    |      
|                |  | 2003               |       |  | 2002 |  
|                |  |                    |       |  |      |  
|United States   |  | $                  | 3,528 |  |      | $ | 6,418 | 
|Other countries |  |                    | 697   |  |      |   | 1,298 | 
|                |  |                    |       |  |      |  
|Total           |  | $                  | 4,225 |  |      | $ | 7,716 | 
|                |  |                    |       |  |      |  

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

|                  |  |           |       |  |              |   |       | 
|----------------- |  | --------- | ----- |  | ------------ | - | ----- | 
|                  |  | As of     |      
|                  |  |           |      
|Long-Lived Assets |  | March 31, |       |  | December 31, |  
|                  |  | 2003      |       |  | 2002         |  
|                  |  |           |       |  |              |  
|United States     |  | $         | 1,780 |  |              | $ | 2,121 | 
|Other countries   |  |           | 7     |  |              |   | 5     | 
|                  |  |           |       |  |              |  
|Total             |  | $         | 1,787 |  |              | $ | 2,126 | 
|                  |  |           |       |  |              |  

Note 11Guarantees:

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 March
31, 2003 (in thousands):

13



---



##### Table of Contents






|                                                  |  |                    |       | 
|------------------------------------------------- |  | ------------------ | ----- | 
|                                                  |  | Maximum            |      
|                                                  |  | Potential Amount   |      
|                                                  |  | of Future Payments |      
|                                                  |  |                    |      
|Manufacturing services agreements                 |  | $                  | 97    | 
|Non-cancelable and non-returnable purchase orders |  |                    | 707   | 
|Axel Johnson Administrative Services Agreement    |  |                    | 272   | 
|Contingent payment for licensed technology        |  |                    | 100   | 
|                                                  |  |                    |      
|Total                                             |  | $                  | 1,176 | 
|                                                  |  |                    |      

The following table depicts product warranty during the fiscal year ended
March 31, 2003 (in thousands):

|                                                                             |  |                  |      |  
|---------------------------------------------------------------------------- |  | ---------------- | ---- | -
|                                                                             |  | Dollar Amount of |     
|                                                                             |  | Liability        |     
|                                                                             |  | Debit/(Credit)   |     
|                                                                             |  |                  |     
|Balance at December 31, 2002                                                 |  | $                | 732  |  
|Accrual for new warranties                                                   |  |                  | 262  |  
|Accruals related to pre-existing warranties (including changes
in estimates) |  |                  | (130 | )
|Settlements made in cash or in kind during the period                        |  |                  | (196 | )
|                                                                             |  |                  |     
|Balance at March 31, 2003                                                    |  | $                | 668  |  
|                                                                             |  |                  |     

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. 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.

Item 2:       Managements Discussion and Analysis of Financial Condition and Results of Operations

Overview

The market for telecommunications equipment is going through a period of
rationalization and contraction as service providers digest 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 is generally suffering as a result, our restructuring
programs have substantially reduced our operating expense levels for 2002 and
for the first quarter of 2003 versus the operating expense levels during the
four quarters of 2001.

On March 18, 2003, we and VINA, issued a joint press release announcing
the execution of the Merger Agreement, 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. In accordance with the Merger Agreement,
Merger Sub would merge with and into VINA creating the Merger. At a later
date, it is intended that VINA would merge with and into us and the separate
corporate existence of VINA would disappear. As a result of the Merger, each
issued and outstanding share of VINA Common Stock, would be automatically
converted into the right to receive 0.2659 of a validly issued, fully paid and
nonassessable share of our Common Stock.

14



---



##### Table of Contents



The consummation of the Merger is subject to the approval of our and
VINAs stockholders and other customary closing conditions. The Merger is
intended to be a tax-free reorganization under Section 368 of the Internal
Revenue Code of 1986, as amended, and is expected to be treated as a purchase
for financial accounting purposes, in accordance with generally accepted
accounting principles.

In connection with the Merger Agreement, certain VINA stockholders,
including executive officers and members of the board of directors of VINA,
representing approximately 40% of the voting power of outstanding VINA stock
entered into the VINA voting agreement with us in which, among other things,
each stockholder agreed, until the earlier of the consummation of the Merger or
the termination of the Merger Agreement, to vote its shares of Common Stock in
favor of the adoption of the Merger Agreement. Our majority stockholder,
representing approximately 82% of the voting power of our outstanding stock
also entered into a voting agreement with VINA in which, among other things,
the stockholder agreed, until the earlier of the consummation of the Merger or
the termination of the Merger Agreement, to vote its shares of Common Stock in
favor of the adoption of the Merger Agreement.

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 that
remain unsold. In the case where the distributor has a right to return
products, we do not recognize revenue until the distributor notifies us that
the products have been shipped to the end user. Service revenue earned from
providing maintenance, installation, training or other miscellaneous services
is recognized when those services are provided to the customer. If 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, in our judgment, these policies are
protective of our funds; a default of any one institution would lead to our
incurring a significant loss of cash.

Our 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

15



---



##### Table of Contents



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/WorldCom. Receivables from
our three largest customers (MCI/WorldCom, LTI Datacomm and Avaya) represented
51% of gross accounts receivable on March 31, 2003.

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.

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. 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.

Sales Return Allowance

We provide a sales return allowance for possible customer returns, based
on historical information that may be 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 July 2002, the FASB issued SFAS 146, Accounting for Costs Associated
with Exit or Disposal Activities. SFAS 146 requires that a liability for a
cost associated with an exit or disposal activity be recognized when the
liability is incurred. SFAS 146 eliminates the definition and requirement for
recognition of exit costs in EITF Issue No. 94-3, Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring), where a liability for
an exit cost was recognized at the date of an entitys commitment to an exit
plan. This statement is effective for exit or disposal activities initiated
after December 31, 2002. We do not believe that the adoption of this statement
will have a material impact on our results of operations, financial position or
cash flows.

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

16



---



##### Table of Contents



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 are currently
evaluating this issue and its impact on our financial statements.

In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation, Transition and Disclosure. SFAS No. 148 provides
alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation. SFAS No. 148
also requires that disclosures of the pro forma effect of using the fair value
method of accounting for stock-based employee compensation be displayed more
prominently and in a tabular format. Additionally, SFAS No. 148 requires
disclosure of the pro forma effect in interim financial statements. The
transition and annual disclosure requirements of SFAS No. 148 are effective for
fiscal years ended after December 15, 2002. The interim disclosure
requirements are effective for interim periods beginning after December 15,
2002. The interim disclosure requirements of SFAS No. 148 have been included
in our financial statements.

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. We believe that the adoption of this standard
will not have a material impact on our financial statements.

Results of Operations

Revenues. Our consolidated revenues of $4,225,000 for the first quarter
ended March 31, 2003 declined 45% from 2002s first quarter revenues of
$7,716,000. Our Multiplexer and Inverse Multiplexer product lines accounted
for the major portion of the decrease from last years first quarter with a
combined revenue reduction of $2,915,000 or 84 % of the $3,491,000 total
decline in revenues.

By channel of distribution, the bulk of the revenue reductions for the
first quarter of 2003 as compared to the first quarter of 2002 came from
service providers (SPs) ($1,413,000) and end users ($953,000). Shipments to
international locations represented 16% of total revenues during the first
quarter of 2003 and were 46% lower than the same period of 2002.

The combined revenues from MCI/WorldCom, Inc., LTI Datacomm and Avaya, our
three largest customers, accounted for 52% of the total revenues for the first
three months of 2003 versus 30% for the first three months of 2002. The
financial difficulties at MCI/WorldCom, 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/WorldCom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/WorldCom.
The following table is the percentage of total revenues for our greater than
10% customers:


17Table of Contents

|                     |  |                    |    |   |      |  |    |  
|-------------------- |  | ------------------ | -- | - | ---- |  | -- | -
|                     |  | Three Months Ended |   
|                     |  | March 31,          |   
|                     |  |                    |   
|                     |  | 2003               |    |   | 2002 | 
|                     |  |                    |    |   |      | 
|MCI/WorldCom, Inc.   |  |                    | 26 | % |      |  | 20 | %
|LTI Datacom          |  |                    | 14 | % |      |  | 4  | %
|Avaya Communications |  |                    | 12 | % |      |  | 6  | %
|AT&T                 |  |                    | 8  | % |      |  | 17 | %

Gross Profit. Our total gross margin dollars for the first quarter of
2003 were $2,251,000 versus $4,669,000 for the same period of 2002. The
reduction in gross margin dollars for the 2003 period versus the 2002 period
was due to sales volume declines ($2,129,000) as well as an 8% decline in gross
margin percentage ($289,000). Our gross profit percentage in last years
first quarter was 61% or 8 percentage points higher than this years
first-quarter result of 53%. The 8 percentage point decline in gross margin
was largely due to the impact of higher per unit overhead costs on lower first
quarter 2003 sales volumes ($497,000), favorable manufacturing variances in the
first quarter of 2002 ($64,000) partially offset by improved materials cost
from services representing a larger part of sales and lower overall sales
discounts ($272,000).

Research and Development. Research and development expenses totaled
$1,107,000 for the first quarter of 2003, which was $128,000 or 13% higher than
the first quarter 2002 spending of $979,000. The expense increase in the first
quarter was primarily due to higher spending on new product development
projects in the first quarter of 2003.

Selling, General and Administrative. Selling, general and administrative
expenses decreased 20% to $3,418,000 during the three months ended March 31,
2003, as compared to $4,286,000 for the same period in 2002. The reduced
spending level was mainly due to lower salaries and related benefits
($324,000), resulting from our workforce reductions in 2001 and 2002, lower
relocation costs ($304,000), primarily from the relocation of two officers in
2002 and an reduction to the bad debts reserve ($184,0000), reflecting our
improved collections for the first quarter of 2003.

Selling, general and administrative expenses include contractual charges
from Axel Johnson for providing certain services to us related to treasury,
accounting, tax, internal audit, legal and human resources. The costs of these
services have been allocated to us based on estimates by Axel Johnson of actual
costs incurred. We believe that such allocations are reasonable. Such charges
and allocations are not necessarily indicative of the costs that would have
been incurred if we had internally provided such services. The allocated costs
of these services amounted to $91,000 for the first quarter 2003, versus
$116,000 for the first quarter of 2002.

Restructuring. During the first quarter of 2003, we reduced our
restructuring expenses by $61,000 compared to the first quarter of 2002 as a
result of rental income we received for subleasing our leased facility in
Durham, North Carolina.

Interest and Other Income.Interest and other income amounted to $47,000
for the first quarter of 2003, as compared to $85,000 for the same period of
2002. Interest income, which is the major component of interest and other
income, was $65,000 for the first quarter of 2003, compared to $115,000 for the
same period in 2002. The lower interest income for the three-month period was
attributed to lower average interest rates (1% versus 2%) and lower average
cash and short-term investment balances ($18 million versus $21 million). 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 first quarter of 2003, we recorded an
income tax provision of $17,000 versus an income tax benefit of $1,874,000 in
the first quarter of 2002. The tax benefit of $1,874,000 for the three-month
period ended March 31, 2002 was comprised primarily of an income tax refund as
a result of a 2002 change in the federal income tax code. The tax code change
allows corporations with certain tax losses to file for refunds for taxes paid
in previous years. The tax benefit of $1,874,000 is mainly due to our filing
for total refunds of $1,894,000 for taxes paid in 1996, 1997 and 1998.

18



---



##### Table of Contents



Net (Loss)/Income. The net loss in the first quarter of 2003 was
$2,183,000 as compared to the net income of $1,363,000 in the first quarter of
2002. The net loss was principally due to lower revenues in the first quarter
of 2003, partially offset by lower operating expenses. The net income reported
in the first quarter of 2002 was the result of the benefit of income tax
refunds for the years 1996, 1997 and 1998 more than offsetting our operating
loss.

Liquidity and Capital Resources

At March 31, 2003, we had cash and cash equivalents of $17,542,000 and no
short-term investments. Cash and cash equivalents increased by approximately
12% from $15,643,000 on December 31, 2002. The increase in cash and cash
equivalents in the first three months of 2003 reflects the movement between
cash and short-term investments based on the timing of maturities of the
investment securities.

Cash and cash equivalents and short-term investments declined by $115,000
or 1% on March 31, 2003 from December 31, 2002. The net loss less non-cash
items of depreciation and amortization used $1,838,000 of cash. Largely
offsetting the cash usage were decreases to accounts receivable from collection
efforts ($1,147,000), and inventories from control programs ($485,000) as well
as an increase to amounts owed Axel Johnson ($219,000).

Capital expenditures for the first three months of 2003 were $5,000.
These expenditures consisted principally of the purchase of computers, software
and test equipment. We anticipate capital expenditures to total approximately
$603,000 for 2003.

We have a revolving line of credit of $15,000,000 under a credit agreement
with Axel Johnson Inc. (the Credit Agreement). The Credit Agreement expires
in December 2003. This agreement contains various representations, covenants,
conditions and events of default typical for financing a business of a similar
size and nature, including a condition to any drawdown that no material adverse
change has occurred in our financial condition or results of operation. We
currently have a letter from Axel Johnson Inc. dated August 8, 2002, stating
that it is Axel Johnsons intent to allow borrowings under the credit line,
provided we do not experience any material adverse change after August 8, 2002.
Upon an event of default or upon election by Axel Johnson if it no longer
holds at least a majority of our outstanding voting power or it has elected
less than a majority of our directors, any borrowings under the line of credit
shall become payable in full. If the pending merger with VINA Technologies,
Inc. is approved, Axel Johnson will no longer hold a majority of our
outstanding voting power as specified in the Credit Agreement. To date we have
not found it necessary to use this line of credit. In addition to the Credit
Agreement, we and Axel Johnson Inc. have an administrative service agreement
and a tax-sharing agreement for the purposes of defining the on-going
relationship between the two entities. As of March 31, 2003 Axel Johnson
owned 53% of our Class A and Class B Common Stock, representing 82% of the
outstanding voting power.

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 request borrowings under our credit
line with Axel Johnson Inc. or seek additional capital from other sources. In
that event, it is possible we would not be able to make the representations and
warranties necessary to effect a borrowing under the Axel Johnson Inc. Credit
Agreement, or if the merger with VINA Technologies, Inc. is consummated, Axel
Johnson will hold less than a majority of voting power and may elect to cease
making loans under the agreement, or we may not be able to obtain adequate
capital from other sources.

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. We also have a commitment to pay a technology-licensing fee,
dependent on our decision to incorporate certain technologies in a product
currently under development.

Our operating lease commitments relate principally to our buildings in
Milpitas, California and Durham, North Carolina and have terms that expire in
2004 and 2007, respectively. Our total rent expense in the first quarter of
2003 and 2002, was $507,000 and $487,000, respectively. Sublease rental income
was $155,000 and $240,000 in

19



---



##### Table of Contents



the first quarter of 2003 and 2002, respectively. Our future annual minimum
lease payments under all non-cancelable operating leases and sublease rental
income as of March 31, 2003 are as follows (in thousands):

|                              |  |          |       |  |        |          |       | 
|----------------------------- |  | -------- | ----- |  | ------ | -------- | ----- | 
|                              |  |          |       |  |        | Sublease |      
|                              |  | Lease    |       |  | Rental |         
|Years ending December 31,     |  | Payments |       |  | Income |         
|                              |  |          |       |  |        |         
|2003
(April 1 to December 31) |  | $        | 1,880 |  |        | $        | 485   | 
|2004                          |  |          | 1,617 |  |        |          | 502   | 
|2005                          |  |          | 338   |  |        |          | 264   | 
|2006                          |  |          | 347   |  |        |          | 272   | 
|2007 and thereafter           |  |          | 29    |  |        |          | 23    | 
|                              |  |          |       |  |        |         
|                              |  | $        | 4,211 |  |        | $        | 1,546 | 
|                              |  |          |       |  |        |         

We have purchase orders and contracts outstanding for goods and services
incurred in the normal course of business as well as a contingent technology
licensing agreement explained above. The following table discloses our
obligations under guarantees as of March 31, 2003 (in thousands):

|                                                  |  |                    |       | 
|------------------------------------------------- |  | ------------------ | ----- | 
|                                                  |  | Maximum            |      
|                                                  |  | Potential Amount   |      
|                                                  |  | of Future Payments |      
|                                                  |  |                    |      
|Manufacturing services agreements                 |  | $                  | 97    | 
|Non-cancelable and non-returnable purchase orders |  |                    | 707   | 
|Axel Johnson Administrative Services Agreement    |  |                    | 272   | 
|Contingent payment for licensed technology        |  |                    | 100   | 
|Total                                             |  | $                  | 1,176 | 

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 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. With
the exception of our acquisition of NetEdge in 1997, we have no recent
experience in integrating acquired businesses with our existing business.

We, London Acquisition Corp., our wholly owned subsidiary (Merger Sub),
and VINA Technologies, Inc. (VINA) entered into an Agreement and Plan of
Merger, dated as of March 17, 2003, pursuant to which Merger Sub will merge
with and into VINA (the Merger). The consummation of the Merger is subject
to the approval of our and Vinas stockholders and other customary closing
conditions. The integration of the companies will be complex, time consuming
and expensive and may disrupt our and VINAs businesses. The combined company
will need 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:

20



---



##### Table of Contents





| |  |  | 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 will involve 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.                                                                                      

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 pending Merger 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;                   
|
| |  |  | 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;                                
|
| |  |  | during the pendency of the Merger we may not be able to enter into a
merger or business combination with another party at a favorable price
because of the restrictions of the Merger Agreement; and
|
| |  |  | failure to complete the Merger may result in our paying a termination
fee and could harm our Common Stock price and future business and
operations.                                                 

Our entire industry is 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 to the deteriorating domestic economic
environment, the worldwide telecommunications market is experiencing 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 economic downturn or the reduced demand in the
telecommunications industry. We also cannot predict the extent and timing of
the impact of the economic downturn in the United States and the worldwide
downturn for the telecommunications industry on economies in Canada, Europe and
other countries and geographic regions. For the quarter ended March 31, 2003,
order demand from our customers continued to decline as they experienced the
impact of the downturn in the telecommunications market.

We expect to continue to incur operating losses and may not be profitable
in the future.We have experienced substantial net losses, including a net
loss of $2,183,000 in the first quarter of 2003, $4,895,000 in 2002 and
$30,879,000 in 2001 and had an accumulated deficit of $67,699,000 as of March
31, 2003. A continued decrease in

21



---



##### Table of Contents



revenues could have an adverse impact on our finances. There can be no
assurance as to when or if we will achieve profitability.

Our prospects for growth depend on recently-introduced products, 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 Larscom 6200 and 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 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. 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 four rounds of restructuring/layoffs in the past two 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 remaining workforce.
On October 21, 2002, we announced an additional reduction of 13% of our
workforce (14 people). Thirty-three percent (39 people) of the total
reductions in employees were from engineering personnel. Although the
restructuring actions taken have lowered 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 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

22



---



##### Table of Contents



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. Our largest
customer, MCI/WorldCom, 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/WorldCom decreased 71% from sales to MCI/WorldCom 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 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 Class A 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

23



---



##### Table of Contents



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. It is
possible that our new major contract supplier and other suppliers will not
continue to be able and willing to meet our future requirements.

The market for our products is intensely competitive, and our failure to
compete effectively could reduce our revenues and margins.Competition in the
market place for high-speed network-access products is intense. Our products
compete primarily with Quick Eagle Networks, Verilink, Kentrox, Cisco Systems,
Alcatel, ADTRAN, RAD, Telco Systems, Carrier Access and Paradyne. We compete
to a lesser extent with other telecommunications equipment companies. Many of
our competitors have more broadly developed distribution channels and have made
greater advances than we have in emerging technologies. Cisco Systems and
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.

We are controlled by Axel Johnson Inc.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 Inc. is the sole holder of the Class B Common
Stock. As a result, Axel Johnson Inc. has sufficient voting power to control
the direction and policies of Larscom absolutely, including mergers, the
payment of dividends, consolidations, the sale of all or substantially all of
the assets of Larscom and the election of the Board of Directors of Larscom,
and to prevent or cause a change in control of Larscom.

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 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 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 16% for the first quarter 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 staffing and managing foreign operations, 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 recently reorganized our sales force.In October 2002, we
reorganized our sales force to concentrate on four account types:



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

As part of this reorganization we have reassigned certain of our sales people
to different, specific customer accounts and different types of customers.
There is a risk that the new relationships with customers resulting from the
reorganization might not be as productive as the prior organization in the near
term or at all. Failure of the new organization to achieve sales productivity
goals could have an adverse impact on our business and operating results.

24



---



##### Table of Contents



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. We have been issued only one U.S. patent to date. There can be no
assurance that we will be able to protect our technology or that competitors
will not be able to develop similar technology independently. We have entered
into confidentiality and invention assignment agreements with employees, and
into non-disclosure agreements with suppliers, distributors and appropriate
customers so as to limit access to and disclosure of our proprietary
information. There can be no assurance that these statutory and contractual
arrangements will deter misappropriation of our technologies or discourage
independent third-party development of similar technologies. In the event such
arrangements are insufficient, our business and operating results could be
adversely impacted.

We have not conducted a formal patent search relating to the technology
used in our products.From time to time, third parties may assert exclusive
patent, copyright, trademark and other intellectual property rights to
technologies that are important to us. Since patent applications in the U.S.
are not publicly disclosed immediately, applications which 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.

Our Class A Common Stock has traded below one dollar and may be subject to
de-listing from the Nasdaq SmallCap Market.On July 16, 2002, we received a
notice from Nasdaq that our Common Stock had failed to

25



---



##### Table of Contents



maintain the required minimum closing bid price of $1.00 for a period of
30 consecutive trading days as well as the minimum requirements for market
value of publicly traded shares on the Nasdaq National Market. As a result,
Nasdaq provided us 90 calendar days, or until October 14, 2002 to regain
compliance with this requirement or face de-listing from trading on the Nasdaq
National Market. Prior to our de-listing, we submitted an application to
Nasdaq for transfer to their SmallCap market. The application was approved and
our stock began trading on the Nasdaq SmallCap market effective on October 23,
2002. In order for our common stock to continue to remain listed on the Nasdaq
SmallCap we must satisfy various listing maintenance standards including a
minimum closing bid price of $1.00 and a minimum market value of publicly
traded shares.

We have asked for shareholder approval of a reverse stock split and, if
approved by the stockholders, will implement a reverse stock split in
connection with the Merger or, even if the Merger is not consummated, may
implement a reverse stock split to maintain compliance with the Nasdaq minimum
bid price requirements. The effect however, of a reverse stock split on the
market price of our Common Stock cannot be predicted and the history of similar
stock splits for companies in like circumstances is varied. The market price
per share of our Common Stock after the reverse stock split may not rise in
proportion to the reduction in the number of shares of Common Stock outstanding
resulting from the reverse stock split. Also, the possibility exists that
liquidity in shares of Common Stock could be adversely affected by the reduced
number of shares that would be outstanding after the reverse stock split. The
market price per post reverse stock split share may not exceed or remain in
excess of the $1.00 minimum closing bid price requirement and we may not
otherwise meet the Nasdaq requirements for continued listing on the Nasdaq
SmallCap Market. If we are unable to meet Nasdaqs SmallCap listing
requirements our Class A Common Stock could trade on the OTC Bulletin Board or
in the pink sheets maintained by the National Quotation Bureau, Inc. Such
alternatives are generally considered to be less efficient markets, and our
stock price, as well as the liquidity of our Class A Common Stock, could be
adversely impacted as a result.




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 March 31, 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. However, certain of our sales and marketing
expenses are incurred in local currencies, principally the British Pound.
Consequently, our international results of operations are subject to foreign
exchange rate fluctuations. We do not currently hedge against foreign currency
rate fluctuations. Gains and losses from such fluctuations have not been
material to our consolidated results. The effect of an immediate, hypothetical
10 % change in the exchange rate for the British Pound or any other foreign
currency would not be material to us.




Item 4: Controls and Procedures



| | a. |  | Evaluation of Disclosure Controls and Procedures
Based on their evaluation of our disclosure controls and procedures
conducted within 90 days of the date of filing this report on Form 10-Q, our
Chief Executive Officer and the Chief Financial Officer have concluded that
our disclosure controls and procedures (as defined in Rules 13a-14(c)
promulgated under the Securities Exchange Act of 1934) are effective.
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b. |  | Changes in Internal Controls
There were no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the
date of their evaluation.                                                                                                                                                                                                                   

26



---



##### Table of Contents
























|         |  |                                                                 
|-------- |  | ----------------------------------------------------------------
|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.                                              
|        
|         |  | Not applicable.                                                 
|        
|Item 6:  |  | Exhibits and Reports on Form 8-K.                               

a.     Exhibits.



| |  |  | 10.1 Agreement and Plan of Merger by and among Larscom Incorporated,
London Acquisition Corp. and VINA Technologies, Inc., dated as of March
17, 2003. (1)                 
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | 10.2 VINA Voting Agreement, by and between Larscom Incorporated, and
certain stockholders of VINA Technologies, Inc., dated as of March 17,
2003. (2)                      
|
| |  |  | 99.1 Periodic Report Certification filed pursuant to Section 906 of the
Public Company Accounting Reform and Investor Protection Act of 2002 (18
U.S.C. § 1350, as adopted)
|
| |  |  | (1) Incorporated by reference to exhibit 2.1 in registrants Form 8-K
dated March 18, 2003.                                                                                
|
| |  |  | (2) Incorporated by reference to exhibit 2.3 in registrants Form 8-K
dated March 18, 2003.                                                                                

b.     Reports.



| |                                                                                                                                                                                                                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We filed one report on Form 8-K dated March 18, 2003. Information
regarding the item reported is as follows: On March 18, 2003, VINA
Technologies, Inc., a Delaware corporation, and Larscom Incorporated, a
Delaware corporation, issued a joint press release announcing the
execution of an Agreement and Plan of Merger, dated as of March 17, 2003.

27



---



##### Table of Contents






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 | May 12,
2003 | By |  | /s/ Daniel L. ScharreDaniel L. Scharre
President and Chief Executive Officer
(Principal Executive Officer)                                             
|    
|     |              | By |  | /s/ Donald W. MorganDonald W. Morgan
Vice President, Finance and Chief Financial
Officer
(Principal Financial Officer and Principal
Accounting Officer)

28



---



##### Table of Contents






CERTIFICATIONS

I, Daniel L. Scharre, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of Larscom
Incorporated;

2.     Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;

3.     Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this quarterly
report;

4.     The registrants other certifying officer and I are responsible
for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;

b) Evaluated the effectiveness of the registrants disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the Evaluation Date); and

c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;

5.     The registrants other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):

a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and

b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls;
and

6.     The registrants other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

|      |  |                                              | 
|----- |  | -------------------------------------------- | 
|Date: |  | May 12, 2003                                
|     
|By:   |  | /s/ Daniel L. ScharreChief Executive Officer

29



---



##### Table of Contents



I, Donald W. Morgan, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of Larscom
Incorporated;

2.     Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;

3.     Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this quarterly
report;

4.     The registrants other certifying officer and I are responsible
for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;

b) Evaluated the effectiveness of the registrants disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the Evaluation Date); and

c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;

5.     The registrants other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):

a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and

b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls;
and

6.     The registrants other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date:   May 12, 2003

|    |  |                                             | 
|--- |  | ------------------------------------------- | 
|By: |  | /s/ Donald W. MorganChief Financial Officer

30



---



##### Table of Contents



EXHIBIT INDEX



|99.1 |  | Periodic Report Certification filed pursuant to
Section 906 of the Public Company Accounting Reform and Investor
Protection Act of 2002 (18 U.S.C. § 1350, as adopted)
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------