LARSCOM INC - 10-K Annual Report

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 þ No o

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rules 12b-2. Yes o No þ

The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2003, was approximately $10,518,000.

The number of the registrant’s shares outstanding as of March 8, 2004, was 5,100,255 shares of Common Stock.

Portions of the to-be-filed Proxy Statement for the Registrant’s 2003 Annual Meeting of Stockholders (the “Proxy Statement”) are incorporated by reference in Part III of this Annual Report on Form 10-K.

This Annual Report on Form 10-K contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The actual results that we achieve may differ materially from those indicated in any forward-looking statements due to the risks and uncertainties set forth under the “Certain Factors Affecting Future Operating Results” section (in Part II, Item 7) and elsewhere in this Form 10-K. 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 carefully review and consider the various disclosures made by us in this report, and in our other reports filed with the Securities and Exchange Commission (the “SEC”), that attempt to advise interested parties on the risks and factors that may affect our business.

You are advised to read this Form 10-K in conjunction with other reports and documents that we file from time-to-time with the SEC. In particular, please read our Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K that we may file from time-to-time. You may obtain copies of these reports directly from us or from the SEC at the SEC’s Public Reference Room at 450 Fifth Street, N.W. Washington, D.C. 20549, and you may obtain information about obtaining access to the Reading Room by calling the SEC at

1-800-SEC-0330. In addition, the SEC maintains information for electronic filers (including us) at its web site www.sec.gov. We make available free of charge on or through our Internet website our SEC filings on Form 10-K, 10-Q and 8-Ks and amendments thereto as soon as reasonably practicable after electronic filing with the SEC.

Orion 5000, Orion 5001, Orion 5003, Orion 7400, eLink-300, Integrator-300, MX-600, Mega-T/ E, Orion 2000, Orion 4000, Larscom 6000, TerraMux, TerraUno, TerraBoss, Orion 200, Access-T, Business OfficeXchange, LineLearn and Access-T 1500 are U.S. registered trademarks of Larscom Incorporated.

Larscom Incorporated manufactures and markets high-speed network-access products for telecommunication service providers (“SPs”), and corporate enterprise users. Our product offerings support bandwidth requirements ranging from full and fractional T1/ E1 to OC-3 (1.5 Mbps to 155 Mbps). Additionally, our solutions support a number of networking protocols such as frame relay, asynchronous transfer mode (“ATM”), inverse multiplexing over ATM (“IMA”), Ethernet and the Internet Protocol (“IP”).

Prior to Larscom’s initial public offering in December 1996, Larscom was a wholly-owned subsidiary of Axel Johnson, Inc. (“Axel Johnson”). Upon consummation of that offering Axel Johnson owned 55% of the Class A and B Common Stock of Larscom and controlled 83% of the voting interest. On June 5, 2003, we completed an acquisition in which we acquired VINA Technologies, Inc. (“VINA”) in a stock-for-stock transaction. VINA was acquired pursuant to an Agreement and Plan of Merger, dated as of March 17, 2003 (the “Merger Agreement”), by and among Larscom, VINA and London Acquisition Corp., a wholly owned subsidiary of Larscom (“Merger Sub”). Pursuant to the Merger Agreement, Merger Sub was merged with and into VINA, with VINA being the surviving corporation (the “Merger”). As a result of the Merger, VINA became a wholly owned subsidiary of Larscom. In connection with the Merger: (a) each outstanding share of VINA common stock was exchanged for 0.2659 shares of Larscom common stock, resulting in the issuance of an aggregate of 2,393,624 shares of Larscom common stock for all outstanding shares of VINA common stock (after giving effect to a 1-for-7 reverse stock split implemented immediately prior to the merger) and (b) all options and warrants to purchase shares of VINA common stock outstanding immediately prior to the consummation of the Merger were converted into options and warrants to purchase shares of Larscom’s common stock. Additionally, prior to the merger, and at the election of Axel Johnson, their Class B Common Stock with special voting rights was converted into Common Stock with each share holding a single voting right. Therefore, Axel Johnson controlled approximately 28% of the voting interest as of December 31, 2003.

As corporate users continue to seek out new and innovative ways to reduce their expenses and improve their productivity through networking solutions, SPs and carriers continue to expand their service portfolios to meet growing customer demands. Local area networks (“LANs”) in today’s enterprises are a necessity for connecting in-building PCs, servers, and voice applications. However, it is less and less often the case that the information and tools required by the business all reside within a single building or campus. This, coupled with the increasingly global nature of business and the need to move information quickly, has led to a greater reliance and need for strong corporate wide area networks (“WANs”).

The increased demand for greater WAN speed and capacity has been accompanied by increased demand for reliable, high-speed network-access solutions. In addition to dedicated 56/64 Kbps and T1/ E1 services, enterprise customers are now using private and public frame relay, ATM, digital subscriber line (“DSL”), cable, wireless and optical services, all to enhance the productivity of their employees. Because of the general availability of excess capacity and high speeds in LAN networks and in core telecommunications networks, there is increased pressure on technologies currently used to deliver service between these two networks, the portion of SP’s networks often referred to as the “last mile.” At present, these services are often delivered at T1/ E1 (1.5 to 2.0 Mbps) or E3/ T3 (34-45 Mbps or less), speeds generally much slower than either the LANs or core telecommunications networks they connect. Higher speed connections for the “last mile” are often uneconomical or unavailable outside of core metropolitan areas.

As a result of the increased demand for greater WAN capacity and the complexity and continuing evolution of service offerings, businesses have been transitioning from the use of traditional T1/ E1 services to T3/ E3 services as well as newer optical services delivered over SONET/ SDH networks. SPs and corporate users want the ability to rapidly and efficiently make more services and bandwidth available as needs increase. Accordingly, SPs and corporate users require telecommunications equipment, which supports a broad range of higher-speed services as well as traditional legacy services and that operates reliably, economically, flexibly and consistently, on a global basis.

2001, 2002 and 2003 were difficult years for many SPs. As a result, the overall capital spending for wire-line infrastructure significantly declined. However, with the recent increase in economic activity, principally in the U.S, industry analysts are projecting modest increases to SP’s capital spending. We expect capital spending to increase in at least two markets that we serve:


	•	High speed applications using optical networks — as most business users continue to increase their adoption of bandwidth-intensive applications such as enterprise requirement planning systems (“ERP”), partner extranets, eCommerce, international communications with subsidiaries or branch offices, and other productivity enhancing applications, we expect significant growth to occur for high-speed services provided by optical technologies like synchronous optical network (“SONET”) and synchronous digital hierarchy (“SDH”). Providers are now starting to investigate a new standard called Ethernet over SONET (“EoS”) for offering greater-than-T1 bandwidth services in incremental levels based on the Ethernet protocol. However, we don’t believe carriers are ready to abandon prior technologies based on time-division multiplexing (“TDM”) services and are seeking single-platform solutions that can accommodate both Ethernet and TDM.

	•	Simple integrated voice and data transmission solutions — The small and medium business users (“SMBs”) segment of the market appears to be focused on simple solutions that offer integrated voice and data services across a single network connection rather than separate solutions for voice and data transmission needs. We expect SPs to increase their use of integrated access devices (“IADs”) to solve the needs of this market segment.

We help make our customers successful in their business through the use of reliable products that are backed by our service and support organization. The following describes the applications for each of our five product groups:

Orion 5000. The Orion 5000 multiplexer is designed for high-density, optical-friendly traffic aggregation. With direct interface to both TDM and SONET/ SDH network architectures, the Orion 5000 is designed to enable the migration to fiber-based transports. Able to house up to seven redundant programmable M13 multiplexers (aggregating up to 196 T1 lines or 147 E1 lines) in a compact two rack unit 23-inch chassis, the Orion 5000 is one of the highest density M13 multiplexers on the market. The M13 multiplexer also has a programmable capability for either DS3 (45 Mbps) or STS-1 (51.84 Mbps) traffic. Taking T1/ E1 traffic aggregation to the next evolutionary step, direct optical access is provided by the Orion 5000’s OC-3/ STM-1 interface. The Orion 5000 consolidates up to three DS3s into an OC-3/ STM-1 connection.

Orion 5001. The Orion 5001 provides M13 multiplexing in a compact, efficient form factor. Designed specifically to deliver a cost-effective solution with carrier-class reliability, the Orion 5001 multiplexes 28 T1s into a single T3. The compact Orion 5001 fits well as a replacement for traditional bulky M13 multiplexers wherever rack space is at a premium. While SPs backhaul traffic between central offices on a T3, the Orion 5001 allows the enterprise to seamlessly distribute T1 service across its campus. Where mission critical applications require an always-on connection, the twin M13 modules provide 1:1 redundancy. Rapid, configurable switching between modules minimizes frame loss. We believe that the Orion 5001 M13 multiplexer is among the most power-efficient products in its class. The carrier-class Orion 5001 is NEBS level 3 compliant; making it well-suited for both co-location and carrier deployments.

Orion 5003. A natural extension to the Orion 5000 family of optical multiplexers, the Orion 5003 provides, optical-friendly DS3 or STS-1 traffic aggregation. With direct interfaces to both TDM and SONET/ SDH network architectures, the Orion 5003 is designed to enable the migration to fiber-based transport. This OC-3/ STM-1 multiplexer provides programmable support for DS3 or STS-1 traffic, allowing support of redundant automatic protection switching (“APS”) optical pairs and multi-node Unidirectional Path-Switching Ring (“UPSR”) applications. The Orion 5003 multiplexes up to three DS3/ STS-1 (channelized or clear channel) data streams. With built-in OC-3/ STM-1 module redundancy, a SONET GR-253 standard interface, and NEBS compliance, the Orion 5003 provides carrier-class DS3 traffic aggregation in a compact, one-RU, 19-inch chassis, making it well-suited for deployment at the “customers’ premise” or for co-location and carrier deployments.

Orion 7400. The new Orion 7400 family of next generation SONET multi-service access platforms is designed to allow service providers to capitalize on an increasing corporate demand for services based on the Ethernet protocol. The Orion 7400 enables service providers to deliver both Ethernet and TDM services across an existing SONET infrastructure. Standards-based Ethernet over SONET (“EoS”) achieves high bandwidth efficiency and enables remote provisioning of bandwidth “on demand” in increments as small as

1.5 Mbps. The Orion 7400 family can deliver 10/100 Ethernet, Gigabit Ethernet, T1, and T3 services in a compact, one rack unit package. It provides connections to the SP’s network using OC-3 (a 155 Mbps service) or STS-1 (a 51.84 Mbps service), and offers the reliability of redundant APS. The Orion 7400 features operation, administration, maintenance and provisioning (“OAM&P”) through the data communications channel (“DCC”) using industry communications standards including TL-1, SNMP, and HTTP (Internet browsers).

eLink-300. The eLink-300 provides an easy-to-use solution for delivering integrated voice, data, and Internet services across a single T1 WAN connection to SMBs. The eLink-300 eliminates the need for multiple devices at the “customer premise” by combining a channel bank and advanced call handling for voice connections, a CSU/ DSU for line termination, a DHCP server for dynamic IP address management, a firewall for LAN security, and an IP router in a single, compact unit. The eLink-300 delivers full line-rate T1 performance and advanced call handling, including caller ID pass-through, distinctive ringing, and support for multi-line phones. The eLink-300 protects the customer’s capital investment with the ability to upgrade the service delivered (voice-only, data-only, integrated voice and data) as well as providing scalable voice capacity by activating ports. With ePorts, the customer buys only the ports they need now and can later activate additional ports “on demand” (up to 24) as the business grows. A unique automatic installation, configuration, and provisioning feature called “AutoCAP” has the potential to eliminate “truck rolls” by the service provider when signing up new customers. The AutoCAP feature automatically detects and sets all system parameters, significantly cutting typical set-up and installation time.

Integrator-300. The Integrator-300 IAD provides easy and cost-effective integration of any type of voice and data services on a single, T1 network connection. The Integrator-300 eliminates the need for multiple devices at the customer premise by combining a channel bank and advanced call handling for voice connections, a CSU/ DSU for line termination, a DHCP server for IP address management, a firewall for LAN security, and an IP router in a single, compact unit. It provides up to 24 analog voice interfaces with as many as three 4- or 8-port FXS or FXO cards. Customers can start with 4 or 8 ports and easily grow capacity as the business grows. Business OfficeXchange^TM (“BOX”) software allows flexible call management with local call routing (“LCR”) and ensures performance with service level agreement software.

MX-600. The MX-600 is a modular, high-density solution for delivering integrated voice, data, and Internet access services to SMBs via a single or dual T1 WAN connection. This flexible, chassis-based IAD simplifies network architecture and lowers operating expenses by combining a sophisticated telephony terminal, an IP router, a CSU/ DSU, a DHCP server, and a firewall in a single unit. The MX-600 provides up to 48 analog voice interfaces, plus an option for connecting to private branch exchange (“PBX”) or Key Systems via an FT1/ DSX-1 port. Three slots support any combination of 8-port FXS or FXO or 16-port FXS cards. It also includes two network T1 ports, a V.35 port, and a 10/100 Base-T LAN port. BOX software allows flexible call management with Local Call Routing (“LCR”) and ensures performance with service level agreement software.

Mega-T/ E. Larscom pioneered inverse-multiplexing solutions with the Mega-T, the first inverse multiplexer to bridge the bandwidth gap between T1 and T3. It provides economical access to greater-than-T1 bandwidth for high-speed applications, delivering a data channel of up to 6 Mbps from four T1 circuits. We also manufacture and market an E1 version of the product, the Mega-E, to bridge the bandwidth gap between E1 and E3. Our patented inverse-multiplexing algorithm used for the Mega-T/ E handles alignment of the individual T1s or E1s and allows for differential delay between individual T1s or E1s. This algorithm also allows the data transmission rate to be lowered automatically in the event that individual T1/ EI circuits fail and to be raised automatically when the circuits are restored. The Mega-T/ E has the ability to identify individual T1/ E1 circuits, thereby simplifying troubleshooting. The Mega-T/ E is primarily used for transport for high-speed LAN Internetworking, as well as frame-relay network-access above T1 or E1 speeds and real-time compressed voice traffic. The Mega-T241 transports an E1 signal over two T1 lines to connect local E1 voice and data applications directly to public or private T1 networks or to extend an E1 circuit across a T1 network.

Orion 2000. The Orion 2000 ATM inverse multiplexer (“IMA”) is designed for SPs wishing to provide either native ATM services or ATM extensions at economical prices. It is compliant with the ATM Forum IMA specification and can interface directly with an OC-3 or DS3 ATM user-to-network interface or network-to-network interface on any ATM device. The Orion 2000 offers ATM connectivity at speeds up to 12 Mbps (8 x T1) or up to 16 Mbps (8 x E1), with data packets having extremely low cell-delay variation, which is a requirement for delay-sensitive traffic such as video. The unit has ASCII terminal and SNMP interfaces that enable local or remote configuration, performance monitoring, alarm notification and diagnostic testing. In addition, an optional graphical user interface offers point-and-click monitoring and control.

The Orion 4000 is able to support full and fractional T3 networks. Its T1 and E1 inverse multiplexing modules provide transparent channels for applications such as LAN interconnection or video transmission. The T3 Mux and T1 Mux modules provide flexibility in transporting T1 circuits across the network. They can be used to consolidate several fractional T3 applications onto a single T3 circuit, to act as a DS3 cross connect, to combine T1 traffic from a digital private branch exchange (“PBX”) or to serve as a T1 multiplexer with inverse multiplexed data. The T3 Clear single-density and double-density modules provide clear channel 45 Mbps transmission. The T2E844 module provides a leading high-density solution for delivering E1 services over T1 facilities for up to 32 E1s in a 12-slot chassis.

Larscom 6000. The Larscom 6000 is an intelligent access device using the Frame-Relay Forum’s standards for multilink frame relay (“MFR”) to provide inverse multiplexing benefits to frame-relay customers. The Larscom 6000 assists SPs in offering advanced services at a low total cost of operation. The Larscom 6000 also provides integrated service level agreement management without any additional hardware or monitoring/reporting systems, allowing customers to monitor performance statistics and to deliver them in a standardized format directly to a variety of core-management systems. SNMP management and web-based device monitoring allows users to view the status of the Larscom 6000 from any web-enabled computer.

TerraMux. The TerraMux drop-and-insert multiplexing DSU is designed for businesses needing both voice and data services. By multiplexing two data ports and a voice port onto one full or fractional T1 or E1 line, TerraMux simplifies the network and reduces access costs. With its unique “LineLearn” capability that automatically discerns how many and what types of lines are connected to a device, TerraMux automatically configures the network and drop-and-insert ports and sets the speed of the primary data port to make network access simple and efficient. Management options include a built-in graphical test set, email alerts for trouble-ticketing, web browser, Telnet access and simple network management protocol (“SNMP”). The TerraMux can be used to manage up to nine TerraUnos or TerraMuxes.

TerraUno. The TerraUno T1/ E1 DSU is a network-access device optimized for connecting routers, bridges and other high-speed devices to E1 or T1 public network services such as the Internet and frame relay. The TerraUno is easy to install with its plug-and-play LineLearn capability.

TerraBoss. The TerraBoss has the same functionality as the TerraUno, plus extensive management features including SNMP, Telnet and web browsing with email alerts. The TerraBoss can be used to manage up to nine TerraUno systems.

Orion 4500. Linking one or two high-speed applications across a DS3 or E3 line, the Orion 4500 T3/ E3 CSU/ DSU Access Multiplexer serves a wide range of broadband applications. It is optimized for Internet backbones, scalable, fractional DS3/ E3 Internet access services, and corporate and public organizations needing the broad bandwidth of DS3 or E3 for WAN connections. The Orion 4500 splits the DS3 or E3 bandwidth between two high-speed serial ports. Each port can be configured in multiples of 3.158 Mbps (DS3 compatibility), 3.759 Mbps (E3 G.751 standard), or 3.072 Mbps (E3 G.832 standard), or one port can be used in clear-channel or unframed mode for full payload-line bandwidth. In addition, the Orion 4500 can automatically reconfigure bandwidth allocation for peak and non-peak usage. The flexibility of the Orion 4500 extends to its management options, which includes an integral SNMP agent plus a menu-driven terminal interface with an ASCII graphical test set. The Orion 4500 also provides detailed 24-hour performance histories, alarm logging and dial-out, and extensive loop-back and test pattern options.

Orion 200. The Orion 200 combines the features of a multiplexer, a multi-port DSU, and a performance monitor with support for full and fractional E1 and T1 services. This product is designed to provide global network access. The Orion 200 multiplexes two high-speed serial applications at multiples of 56 or 64 Kbps, using standard interfaces. Any combination of E1 or T1 network ports can be installed — including E1-to-T1 or T1-to-E1 conversions. Its primary application is LAN interconnection, often coupled with digital PBX traffic as well as videoconferencing.

Access-T and Access-T 1500. The Access-T family is a series of T1/ FT1 multiplexing CSU/ DSUs. The primary use of the Access-T family is for LAN interconnection, often coupled with the multiplexing of digital PBX traffic onto a single T1/ FT1 circuit. The Access-T 1500 is a shelf-based version of the Access-T that utilizes a hub and spoke architecture, allowing centralized network nodes to serve units at dispersed sites and to concentrate traffic in a single location where network hubs are constrained by lack of space. Network management is simplified with centralized configuration, performance monitoring, and diagnostics. Management options include integral SNMP, Telnet, and a terminal interface. Up to 30 units can be chained together with Access-T 1500 units. Designed to cut maintenance costs and maximize uptime, the Access-T family allows customers to make efficient use of existing bandwidth without increasing the network infrastructure.

Our primary customers are SPs, distributors, systems integrators, value-added resellers (“VARs”), federal, state and local government agencies and end-user corporations.

We believe that our relationship with large customers, particularly the SPs, will be critical to our future success. Our customers prefer to purchase the majority of their network access solutions from a single vendor, which might benefit us if we broaden and enhance our product line. In 2003, 2002 and 2001 SPs represented 53%, 42% and 51%, respectively, of our total revenues. The following table summarizes the percentage of total revenues for customers accounting for more than 10% of our revenues:

Our revenues from Lucent increased due to the addition of our IAD product line, acquired in our merger with VINA in June 2003. 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 year-to-year. There can be no assurance that our current customers will continue to place orders with us, that orders from existing customers will continue at the levels of previous periods or that we will be able to obtain orders from new customers. Loss of, or a material reduction in, orders by one or more of our major customers could have a material adverse effect on our business and operating results.

Our backlog at any point in time is usually small. Accordingly, sales in any quarter are largely dependent on orders received during that quarter. Furthermore, agreements with our customers typically provide that they can change delivery schedules and cancel orders within specified time frames, typically up to 30 days before the scheduled shipment date, without penalty. Our customers have in the past built, and may in the future build, significant inventory to facilitate more rapid deployment of anticipated major projects or for other reasons (including misjudgments about levels of future demand for their own services). Decisions by such customers to reduce their inventory levels could lead to reductions in purchases from us. Customer decisions to delay delivery, cancel orders or reduce purchases could have a material adverse effect on our business and operating results.

We sell our products in the U.S. primarily through our direct sales organization and to a lesser extent through distributors, VARs and systems integrators. Sales to large SPs are handled by our direct sales force. We continue to develop 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 the reliance upon an indirect distribution channel. These include a reduction in our ability to forecast sales, potential reductions in customer satisfaction, loss of contact with users of our products and methods of advertising and promoting the products, which will result in additional expenses. These, and other factors, could adversely impact our business.

We market our products internationally through non-exclusive international distributors and systems integrators. We rely on a small portion of our U.S. sales force to maintain these relationships.

SPs require that products undergo extensive lab testing and field trials prior to their deployment in the network. Accordingly, we continually submit successive generations of our current products as well as new products to our customers for evaluation and approval. Additionally, sales to international customers require products that meet country-specific certification standards for safety, emissions and network connectivity. The length of the various approval processes is affected by a number of factors, including the complexity of the product involved, the priorities and budgetary constraints of customers and regulatory issues.

Our products are required to meet rigorous standards imposed by both customers and internal product quality assurance testing procedures. The warranty period for most of our products is three to five years. We have service contracts with many of our major customers, and provide rapid-response service via arrangements with our service partner worldwide, NextiraOne Solutions. These contracts typically establish response time and level of service commitments, without penalties for non-performance. We maintain a 24-hour, 7-day a week technical assistance support center, and provide rapid response with contracted response times, plus a wide range of repair programs. We also provide technical applications assistance, installation services and training.

We believe that our future success depends on our ability to achieve technological leadership through timely enhancements of existing products and development of new products that meet customer needs. Our continued commitment to research and development, particularly related to emerging technologies, will be required for us to remain competitive.

Our product families are designed specifically to meet the demands of our larger customers. Relationships with these customers provides us with insight into their evolving needs and allows us to anticipate new technology requirements. Enhancements to our product families are developed by including our major customers’ responses to our interview questions in the product definition and review process. Timely customer feedback is important to us in making modifications to existing products and designing new products.

The development of new, technologically-advanced products is a complex and uncertain process, requiring high levels of innovation. Expertise is required in the general areas of telephony, data networking and network management, as well as specific technologies such as Ethernet, DSL, ATM, SONET and SDH. Further, the telecommunications industry is characterized by the need to design products that meet industry standards. Such industry standards are often changing or incomplete as new and emerging technologies and service offerings are introduced by SPs. As a result, there is a potential for delays in product development due to the need to comply with new or modified standards. The introduction of new and enhanced products also requires that we manage the transitions from older products so as to minimize disruptions in customer orders, avoid excess inventory of old products and ensure that adequate supplies of new products can be delivered to meet customer orders. There can be no assurance that 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 acceptance in the market place.

Our manufacturing operations consist of materials procurement, third-party assembly of printed circuit boards and chassis, product testing and inspection and system configuration for shipment. We have recently consolidated our third-party manufacturing primarily with one local source and have been able to implement quality control systems through the entire manufacturing process, including statistically monitored process control programs. We utilize traditional procurement methods with our suppliers, using standard purchase orders and blanket orders for scheduling and commitments. Most purchase-order payment terms are standard, with payment due in 30 days and with some orders negotiated to net 45 days payment terms. We use automated functional product testing to remain flexible to customers’ needs while maintaining control of the quality of the manufacturing process.

Turnkey-based manufacturing is utilized primarily for our higher-volume, repetitive production assemblies. In turnkey manufacturing, unlike manufacturing on consignment, the contract manufacturer is responsible for procuring the components utilized in the manufacturing process. This approach transfers some of the economic risks of material cost fluctuation, excess inventory, scrap, inventory obsolescence and working capital management to the vendor. Consigned kits may be utilized on lower-volume assemblies. We are, in most cases, required to commit to purchase certain volumes within various time frames. Although we believe that the benefits of turnkey manufacturing outweigh the risks, it is possible that our dependence on turnkey manufacturing will impact our ability to alter the manufacturing schedule rapidly enough to satisfy changes in customer demand, especially in an environment of increasing component lead times. We continue to perform final assembly and testing of non-turnkey finished products.

On-time delivery of our products is dependent upon the availability of components used in our products. We purchase parts and components for assembly from a variety of pre-approved suppliers through a worldwide procurement-sourcing program. We attempt to manage risks by developing alternate sources and by maintaining long-term relationships with our suppliers. We acquire certain components from sole sources, either to achieve economies of scale or because of proprietary technical features designed into our products. To date, we have been able to obtain adequate supplies of required components in a timely manner from existing sources or, when necessary, from alternate sources. A substantial portion of our shipments in any fiscal period relate to orders received in that period. In addition, a significant percentage of our orders are shipped within three business days of receiving the order. To meet this demand, we maintain a supply of finished goods inventories at our manufacturing facility. There can be no assurance that interruptions or delays in supplies of key components will not occur. Any interruptions or delays in supplies of key components could have an adverse impact on our business and operating results.

We have achieved and maintain ISO 9001:2000 quality certification and employ a comprehensive quality control program. However, complex products such as ours might contain undetected errors or failures when first introduced or as new versions are released. Despite testing by our customers and us, there can be no assurance that existing or future products will not contain undetected errors or failures when first introduced or as new versions are released. We provide a three-year or five-year warranty for most of our products.

The markets for our products are intensely competitive and we expect competition to intensify in the future. 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. We believe that our ability to compete successfully depends upon a number of factors, including timely development of new products and features, product quality and performance, price, announcements by competitors, product line breadth, experienced sales, marketing and service organizations and evolving industry standards. Certain competitors have more broadly developed distribution channels and have made greater advances than we have in certain emerging technologies. Cisco Systems and Alcatel are two of the largest telecommunications 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.

Our business is being materially adversely affected by the integration of CSU/ DSU and inverse multiplexing functionality into switches and routers. New technologies could further displace some parts of the T1/ E1 CSU/ DSU product line. For example, symmetrical and high bit rate digital subscriber line (“SDSL”

and “HDSL”) are subscriber loop technologies that enable service providers to deploy high-bandwidth services that could replace more traditional T1/ FT1 services, upon which many of our products are based. In addition, the intelligent access device (“IAD”) business is characterized by intense price competition.

The telecommunications equipment industry is characterized by the existence of a large number of patents and frequent litigation based on allegations of patent infringement. 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 have been issued two U.S. patents to date and have four patents pending. We believe that the success of our business depends primarily on our proprietary technology, information, processes and expertise, rather than patents. From time to time, third parties may assert exclusive patent, copyright, trademark and other intellectual property rights to technologies that are important to us. We have not conducted a formal patent search relating to the technology used in our products, due in part to the high cost and limited benefits of a formal search. In addition, since patent applications in the U.S. are not publicly disclosed until the patent is issued, applications 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 our distribution 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. 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.

The laws of certain foreign countries in which our products are or may be developed, manufactured or sold may not protect our products or intellectual property rights as effectively as the laws of the U.S., thus making the possibility of misappropriation of our technology and products more likely.

As of December 31, 2003, we had 85 full-time employees compared to 94 full-time employees on December 31, 2002. We have never experienced any work stoppage and none of our employees are represented by a labor union. We believe our relationship with our employees is good.

Larscom Incorporated maintains a site on the web at www.larscom.com; however, information found on the Company’s web site is not incorporated by reference into this report. The Company makes available free of charge on or through the web site the Company’s annual report on form 10K, quarterly reports on form 10Q, current reports on form 8K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the Securities and Exchange Commission.

Daniel L. Scharre has served as president, chief executive officer and a member of the Board since November 2001. Prior to joining us, Mr. Scharre served as chairman, president and chief executive officer of Adaptive Broadband Corp., a provider of high-speed, wireless last-mile access equipment, from April 2001 to October 2001, as president and chief executive officer from January 2001 to April 2001, as president and chief operating officer from July 2000 to January 2001, as executive vice president from April 1998 to June 2000 and as vice president and chief technology officer from September 1997 to April 1998. Adaptive Broadband Corporation filed for bankruptcy in July of 2001. Prior to his four-year tenure at Adaptive Broadband, Mr. Scharre held executive positions at ComStream Inc., Ilex Systems, and Loral Western Development Labs, all providers of digital telecommunications equipment and systems. Mr. Scharre holds a BS in physics from the California Institute of Technology, a Ph.D. in physics from the University of California, Berkeley, and an MBA from Santa Clara University. He previously served on the faculty at Stanford University.

Gurdip Jande joined us as vice president of marketing in February 2002. Prior to joining us, Mr. Jande served in various positions at Nortel Networks, a voice and date communications equipment manufacturing company, including as vice president, corporate strategic business development from January 2000 to December 2001, vice president marketing, emerging service providers from October 1999 to December 1999, vice president, market development from March 1998 to September 1999, and as director, business development from January 1997 to February 1998. Mr. Jande earned a BS in electrical engineering from the University of Ottawa, Canada, and an MBA from the University of Miami.

Donald W. Morgan has served as vice president of finance and chief financial officer of Larscom since October 1999. Prior to joining us, Mr. Morgan was an independent tax and financial consultant to several small-business and start-up technology firms from December 1997 to September 1999. He served as vice president of finance and administration for Inrange Technologies Corporation, a data communications equipment manufacturing company from July 1991 to November 1997. Prior to that, Mr. Morgan served in a number of senior financial positions with UNISYS Corporation. Mr. Morgan earned a BS degree in business administration from Northeastern University and an MS degree in finance from the University of Illinois.

Peter Moulds joined us as vice president of worldwide sales in September 2003. Prior to joining us, Mr. Moulds was a venture partner with Lightspeed Venture Partners, an information technology focused venture capital firm from January 2001 until March 2003. From April 1997 to January 1999, he served at the vice president of sales for FreeGate Corporation, which was subsequently acquired by Tut Systems. Prior to that, Mr. Moulds served in a number of senior sales management positions including vice president of sales for Ascend Communications, a provider of wide area network technologies, which later merged with Lucent. Mr. Moulds earned a BS degree in electrical engineering and computer science from the University of California at Berkeley.

Adam Opoczynski joined Larscom as vice president of engineering in December 2002. Prior to joining Larscom, Mr. Opoczynski served in several senior management positions at ECI Telecom, Inc. a wholly-owned U.S. subsidiary of ECI Limited that is a provider of transmission and voice compression equipment. From January 2001 to January 2002 Mr. Opoczynski served as a vice president of research and development for the North American Transmission Division of ECI, a developer of cross-connect and data aggregation systems. From April 1999 to January 2001 he served as vice president of R&D for the Data Division of ECI, a developer of carrier class frame relay and ATM switching systems. From December 1997 to April 1999 he served as director of engineering for the Access Business Unit of ECI, a developer of low capacity DLC and

ADSL systems. Prior to his tenure at ECI, Mr. Opoczynski held various senior management positions with Fujitsu Network Communications, Inc., ADC Telecommunications, Inc. and Siemens Communication Systems, Inc., all of which were manufacturers of telecommunications equipment. Mr. Opoczynski holds a BS in electronics and telecommunications from Warsaw University of Technology, Warsaw, Poland.

There is no family relationship among any directors or executive officers of Larscom Incorporated.

We currently lease a 40,500 square-foot facility located in Newark, California, a 119,000 square-foot facility located in Milpitas, California and a 27,000 square-foot facility in Durham, North Carolina. At the Milpitas facility, 39,000 square feet are sublet. We abandoned the remainder of the Milpitas facility at the end of September 2003 as a result of our merger with VINA and the decision to consolidate our headquarters in Newark, California. The entire Durham, North Carolina facility of 27,000 square-feet was sublet effective February 15, 2002. All of our manufacturing, sales, administration, customer service, marketing and research and development are performed at our Newark facility. We believe that our existing facilities are more than adequate for our current needs and we expect to discontinue the Milpitas and Durham leases at the end of their respective lease terms.

No matters were submitted to a vote of stockholders during the quarter ended December 31, 2003.

The following table sets forth the high and low bid prices for our Common Stock as reported on the Nasdaq National Market from January 1, 2002 through October 22, 2002 and on the Nasdaq SmallCap Market from October 23, 2002 through December 31, 2003. These prices reflect inter-dealer prices, without retail markup, markdown or commission, and may not necessarily represent actual transactions.

As of March 8, 2004, there were 166 holders of record of our Common Stock. We had an estimated 5,223 beneficial holders of our Common Stock, held in street name, as of March 8, 2004.

We currently intend to retain any future earnings for use in our business and do not anticipate paying any cash dividends in the foreseeable future.

On June 3, 2003, our stockholders approved a proposal to reclassify its Class A and Class B Common Stock into a single class of Common Stock. The old Class A shares had rights of one vote per share. The old Class B Common Stock had rights of four votes per share and was owned by one stockholder, Axel Johnson. These additional voting rights gave Axel Johnson control of 82% of the voting interest prior to the merger with VINA. After issuance of 2,393,894 shares in connection with the VINA merger, and the reclassification of the

Class B Common Stock into Common Stock with one vote per share, Axel Johnson’s control of the voting interest was reduced to 28%. Additionally, as a result of the shares issued to VINA shareholders, entities affiliated with Sierra Ventures V. L.P. received shares having 28% of our voting interest.

On June 3, 2003 our shareholders approved a proposal to amend our certificate of incorporation to effect a reverse split of our Common Stock in a ratio to be determined by the Board of Directors. The Board subsequently voted on June 5, 2003 to effect a reverse split with a 7-for-1 ratio with effect from June 6, 2003. All share and per share data has been retroactively restated for the reverse stock split.

As part of the merger with VINA, the existing VINA stock options and warrants were replaced with Larscom stock options and warrants, containing the exact terms, price and earned vesting percentages, as those held immediately prior to the merger (after the post-merger, post-split exchange ratio of 0.03799 shares of Larscom common stock for each share of VINA common stock). The assumption of the VINA options and warrants resulted in the issuance of 454,752 Larscom options and warrants. Additionally, as a result of the change of control resulting from the reclassification of shares previously discussed, and the VINA merger, a large part of the outstanding stock options previously issued by Larscom became fully vested due to a change-in-control provision contained in most of the outstanding option agreements. This acceleration caused 61,818 additional shares to become vested and exercisable on June 5, 2003 with an average exercise price of approximately $19.72.

We manufacture and market high-speed network-access products for telecommunication service providers (“SPs”), and corporate enterprise users. Our product offerings support bandwidth requirements ranging from full and fractional T1/E1 to OC-3 (1.5 Mbps to 155 Mbps). Additionally, our solutions support a number of networking protocols such as frame relay, asynchronous transfer mode (“ATM”), inverse multiplexing over ATM (“IMA”), Ethernet and the Internet Protocol.

Prior to our initial public offering in December 1996, we were a wholly-owned subsidiary of Axel Johnson. Upon consummation of that offering Axel Johnson owned 55% of our Class A and B Common Stock and controlled 83% of the voting interest. On June 5, 2003, we completed an acquisition in which we acquired

VINA in a stock-for-stock transaction. VINA was acquired pursuant to the Merger Agreement, dated as of March 17, 2003, by and among Larscom, VINA and Merger Sub, a wholly owned subsidiary of Larscom. Pursuant to the Merger Agreement, Merger Sub was merged with and into VINA, with VINA being the surviving corporation. As a result of the Merger, VINA became a wholly owned subsidiary of Larscom. In connection with the Merger: (a) each outstanding share of VINA common stock was exchanged for 0.2659 shares of Larscom common stock, resulting in the issuance of an aggregate of 2,393,624 shares of Larscom common stock for all outstanding shares of VINA common stock (after giving effect to a 1-for-7 reverse stock split implemented immediately prior to the merger) and (b) all options and warrants to purchase shares of VINA common stock outstanding immediately prior to the consummation of the Merger were converted into options and warrants to purchase shares of Larscom’s common stock. Additionally, prior to the merger, and at the election of Axel Johnson, their Class B Common Stock with special voting rights was converted into Common Stock with each share holding a single voting right. Therefore, Axel Johnson controlled approximately 28% of the voting interest as of December 31, 2003.

The accompanying financial statements have been prepared on a going concern basis which contemplates continuity of operations, realization of assets and liquidation of liabilities in the ordinary course of business and do not reflect adjustments that might result if we were not to continue as a going concern. The auditor’s report on our financial statements as of December 31, 2003 contains an explanatory paragraph, which refers to our recurring operating losses and net capital deficiency and notes that these matters raise substantial doubt about our ability to continue as a going concern.

We believe that our cash and cash equivalents and cash flow from operations will be sufficient to fund our operations through 2004. We will need to raise additional capital to fund our operations and capital spending before we become profitable. If cash flows from operations are lower than expected, including as a result of customer reaction to the going concern explanatory paragraph in our auditor’s report, if we incur unanticipated expenses or if we are unable to effectively manage our inventory level, we may need to obtain additional capital sooner than expected. We are currently exploring opportunities to raise additional capital through various financial vehicles, but sufficient funds may not be available to us on terms that we deem acceptable or at all.

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 from product sales is generally recognized upon delivery to our customers when there is persuasive evidence of an arrangement, the fee is fixed and determinable and collection of the receivable is reasonably assured. However, some of our distributors, who maintain significant inventories of our products, have a right to return products that remain unsold. In the case where the distributor has a right to return products, we do not recognize revenue until the distributor notifies us that the products have been shipped to the end user. Service revenue earned from providing maintenance, installation, training or other miscellaneous services is recognized when those services are provided to the customer, if there is persuasive evidence of an arrangement, the fee is fixed and determinable and collection of the receivable is reasonably assured. If we believe that collection is not probable at the time of shipment, we defer the revenue until the cash is collected.

On June 5, 2003, we completed the acquisition of VINA. The consideration consisted of approximately 2,393,894 shares of our common stock, 454,752 warrants and options to purchase common stock and the assumption of the liabilities and obligations of VINA. We accounted for the VINA acquisition as a purchase in accordance with the provisions of Financial Accounting Standards Board (“FASB”), Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations.” As such, we have reported all the acquired tangible and intangible assets and liabilities of VINA at fair value. We are recognizing the fair value of the purchased intangibles related to developed technology as a cost of product revenue over an estimated useful life of six years. We are recognizing the fair value of the other purchased intangibles as operating expenses over the estimated useful life of each separate intangible. We have recognized the fair value associated with the in-process technology as an operating expense during 2003, when the merger was consummated. We have valued employee stock options as part of the acquisition using the Black-Scholes valuation model. The value of all vested options and the value of unvested options in excess of the intrinsic value of such unvested options are included as part of the purchase price consideration. We are reporting the intrinsic value of the unvested options as deferred compensation and recording it as an operating expense over the remaining vesting period of the option. We have valued our stock issued as part of the consideration using the 5-day average price surrounding the date the acquisition was announced.

In accordance with SFAS No. 144, “Accounting for the impairment or Disposal of Long-Lived Assets”, we evaluate the accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed. SFAS 144 requires recognition of impairment of long-lived assets if the net book value of such assets exceeds the estimated future cash flows attributable to such assets. If the carrying value of a long lived asset is considered impaired, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the long-lived assets to be held and used, or by the amount by which the carrying value exceeds the fair value less the cost to dispose of assets to be disposed. Fair value is determined primarily by using the anticipated cash flows discounted at a rate commensurate with the risk involved. During the third quarter of 2003, we determined that the MBX technology and related assets acquired as part of the merger with VINA in June 2003 had become impaired. The impairment was based on a projected discounted cash flow model using a discount rate commensurate with the risk inherent in our current business model. As a result, we recorded a loss of $1,956,000 to write-off the MBX technology and other related assets.

In accordance with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”, beginning in 2003, we establish a liability for the estimated fair value of an exit or disposal activity in the period in which the liability is incurred. We use our judgment and information available to us at the date of the financial statements to reevaluate our initial estimates of the exit costs. If we believe that our previous estimates of exit costs or timing of payments are no longer accurate in light of current conditions, we adjust the liability with a corresponding increase or decrease to current period earnings. Any adjustments to estimates of our exit costs under restructuring plans are reflected on the same line item in the statement of operations as the initial charge to establish the restructuring liability. Remaining liabilities for restructuring costs related to June 2001 restructuring continues to be accounted for in accordance with the provisions of EITF No. 94-3.

We invest cash in excess of our daily needs in financial instruments issued by banks, government agencies or large corporations. Our policy is to invest these funds in financial instruments that are rated by Standard and Poors (or other rating agency equivalents) as A- or better in the case of general debt instruments or A-1 in the case of commercial paper. Our policy restricts us from investing more than $5 million or 20% of our total investments in any one institution or from investing in financial instruments that mature in more than 1 year. While we believe, in our judgment, these policies are protective of our funds; a default of any one institution would lead to our incurring a significant loss of cash.

Our accounts receivable are largely trade receivables from customers in the United States. We perform ongoing credit evaluations of our customers, and generally require no collateral from our customers. We maintain reserves for potential credit losses based on our evaluation of the customer’s financial condition, industry conditions and general economic conditions. While our reserves have historically been within our expectations, we cannot guarantee that our evaluation of the credit risk of our customers will be correct. In addition, since our accounts receivable are concentrated in a relatively few number of customers a significant change in the financial position of any one of these customers could have a material impact on the collectibility of our accounts receivable. To date, we have reserves for $616,000 in receivables associated with the 2002 bankruptcy filing of MCI. Receivables from our two largest customers (Lucent and MCI in 2003; AT&T and MCI in 2002) represented 36% and 38% of net accounts receivable at December 31, 2003 and 2002, respectively. Our accounts payable are comprised of trade payables.

Inventories are stated at the lower of standard cost or market. Write-downs of inventory are generally taken, when in our estimate, future demand will not consume existing inventories over the next twelve months. If actual future demand or market conditions are less favorable than those projected by management, additional inventory write-downs may be required.

We account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issues to Employees”, and related Interpretations. Under APB 25, compensation cost is measured as the excess, if any, of the closing market price of our stock at the date of grant over the exercise price of the option granted. We recognize compensation cost for stock options, if any, ratably over the vesting period. Generally, we grant options with an exercise price equal to the closing market price of our stock on the grant date. During the year, we have recognized as compensation expense $12,000 related to the intrinsic value of options granted in connection with the VINA merger. We provide additional pro forma disclosures as required under SFAS 123, “Accounting for Stock-Based Compensation” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure, an amendment of FASB Statement No. 123.”

We provide a three-year or five-year warranty for most of our products. We provide for the estimated cost of warranty at the time we record revenue for a product based on our historical costs, which includes material, labor and overhead. While we believe that our reserves for estimated future warranty costs are adequate, there are inherent risks associated with these estimates, especially for those estimates related to products that have been recently introduced.

We provide a sales return allowance for possible customer returns, based on historical information. These returns may occur due to changes in customer circumstances or a misjudgment of either party in assessing the customer’s needs.

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.

connecting in-building PCs, servers, and voice applications. However, it is less and less often the case that the information and tools required by the business all reside within a single building or campus. This, coupled with the increasingly global nature of business and the need to move information quickly, has led to a greater reliance and need for strong corporate WANs.

2001, 2002 and 2003 were difficult years for many SPs. As a result, the overall capital spending for wire-line infrastructure significantly declined. However, with the recent increase in economic activity, principally in the U.S., industry analysts are projecting modest increases to SP’s capital spending.

The following table sets forth the percentage of revenues represented by certain items in our consolidated statements of operations for the periods indicated:

Revenues. Our total revenues of $21,926,000 for the year ended December 31, 2003 decreased $1,561,000 or 6.6% from 2002’s total revenues of $23,487,000. Revenues from our legacy product lines (Multiplexer and Inverse Multiplexer; CSU/ DSU; ATM access) and services recorded a combined decrease of $6,645,000 from 2002. We believe that increased price competition mainly in legacy markets as well as reduced capital spending from most telecommunications customers in general, including some of our largest customers, contributed to this decrease. This decrease was partially offset by sales of $4,835,000 from our new IAD product line, which was acquired in the merger with VINA in June 2003.

By channel of distribution, the revenue reduction for 2003 versus the comparable period of 2002 reflected lower sales to end-users, partially offset by increases from resellers and domestic distributors. Shipments to international locations represented 11% of total revenues during 2003 compared to 18% of total revenues during 2002.

The combined revenues from MCI, Lucent, and LTI Datacom, our three largest customers for 2003, accounted for 44% of the total revenues for 2003 versus 27% for 2002, when there was a small amount of revenue from Lucent. Our revenues from Lucent have increased due to the addition of our IAD product line, acquired in our merger with VINA. The financial difficulties at MCI, including its bankruptcy filing, had, and we expect it to continue to have, a major adverse impact on our revenues. The following table is the percentage of total revenues for our customers who accounted for 10% or more of our revenues:

Gross Profit. Our total gross profit dollars for 2003 were $9,019,000 versus $13,140,000 for 2002. The reduction in gross profit dollars for the 2003 period versus the 2002 period was mainly due to the impairment charge of $1,592,000 included in cost of revenues from the write-off of assets related to the MBX product line, acquired as part of the merger with VINA, which had become impaired. The reduction in gross profit dollars was also due to lower gross profit on our IAD products, lower total revenues and a write-off of $176,000 for certain demo equipment that had become impaired. Our gross profit percentage in 2003 was 41% or 15 percentage points lower than last year’s result of 56 percent. The 15 percentage point decline from 2002 to 2003 was principally due to MBX and demonstration equipment impairment charges, lower gross margins earned on IAD products and amortization expense from intangible assets acquired in the VINA merger.

Research and Development. Research and development expenses totaled $4,845,000 for 2003, which was $646,000 or 15% higher than 2002’s expenses of $4,199,000. The increase was primarily due to higher headcount related expenses and outside contractors’ costs as a result of our increased investment in new products. We had 20 research and development employees at the end of the 2003 compared to 19 at the end of 2002.

Selling, General and Administrative. Selling, general and administrative expenses decreased 10% to $14,418,000 during 2003, as compared to $16,051,000 for 2002. The lower expenses were due primarily to reductions in: employee related expenses ($1,100,000); commission expense ($333,000); bad debt expense ($315,000); facility costs ($263,000); and depreciation expense ($208,000), resulting from the 2003 and 2002 restructurings and reductions-in-force programs, as well as a reduction in administrative charges from Axel Johnson ($314,000). These reductions were partially offset by an increase of $1,205,000 in insurance costs related to the VINA merger.

Selling, general and administrative expenses included some contractual charges from Axel Johnson for providing certain services to us related to treasury, accounting, tax, internal audit, legal and human resources. These charges ended June 5, 2003, the date of the VINA merger. The costs of these services were allocated to us based on estimates by Axel Johnson of actual costs incurred. We believe that such allocations were reasonable. Such charges and allocations are not necessarily indicative of the costs that would have been incurred if we had internally provided such services. The allocated costs of these services amounted to $151,000 for the period January 1, 2003 through June 5, 2003, and $465,000 for calendar year 2002.

Restructuring. In connection with the VINA merger on June 5, 2003, we announced additional corporate restructurings because of synergy plans developed as a result of the merger of the two companies. We incurred restructuring costs of $2,458,000 during the year, consisting of $1,535,000 in facility consolidation costs associated principally with moving its headquarters from Milpitas, CA to Newark, CA partially offset by $249,000 of rent collected from Silicon Wireless Corporation; $425,000 in impairment charges related to fixed assets and leasehold improvements at the Milpitas location and $747,000 from reductions-in-force. That compares to net restructuring charges of $254,000 for 2002.

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

Interest and Other Income. Interest and other income amounted to $381,000 for 2003 as compared to $356,000 for 2002. Interest income was $160,000 for 2003, versus $408,000 for 2002. Other income and expense for 2003 was $221,000 in income as compared to $52,000 in expenses for 2002. The $273,000 improvement in other income and expense in 2003 was primarily due to $232,000 in other income recognized from the expiration of an unused customer credit in 2003. The lower interest income for the current year was attributed to lower cash, cash equivalent and short-term investment balances as well as lower interest rates earned on our cash and cash equivalents. The average cash, restricted cash, cash equivalent and short-term investment balances for 2003 was $13,999,000 versus $20,421,000 for 2002. The average interest rates earned on cash, restricted cash and cash equivalent balances was approximately 1% in 2003 as compared to 2% in 2002 earned on cash, cash equivalent and short-term investment balances. Our investment portfolio generally is comprised of commercial paper rated A1/P1 as well as bank certificates of deposit, corporate medium-term notes and bonds rated A- or better.

Provision for Income Taxes. The tax provision for 2003 was $37,000. The tax benefit of $2,113,000 for 2002 is comprised largely of an income tax refund of $1,894,000 for taxes paid in 1996, 1997 and 1998, as a result of a 2002 change in the federal income tax code and $262,000 for the release of an accrual related to prior years closed audits. The tax code change allowed corporations with certain tax losses to file for refunds of taxes paid in previous years.

Net loss. The net loss for 2003 was $13,262,000, as compared to a net loss of $4,895,000 for the same period of 2002. The increased net loss of $8,367,000 was principally due to lower revenues and gross margins for the year ended December 31, 2003, of $2,190,000, net restructuring and impairment charges in 2003 of $2,204,000 and $2,132,000, respectively, the effects of the tax benefit due to income tax refunds of $2,150,000 realized in 2002, and amortization and in-process R&D charges in 2003 of $551,000 and $155,000, respectively, partially offset by lower operating expenses in 2003 of $1,011,000.

Revenues. Our consolidated revenues of $23,487,000 for the year ended December 31, 2002 were 44% lower than 2001’s annual revenues of $41,871,000. The primary reason was the industry-wide slowdown. Our Multiplexer and Inverse Multiplexer product lines accounted for the major portion of the decrease from 2001 with a combined revenue reduction of $17,609,000 or 96% of the total revenue reduction.

By channel of distribution, the majority of the revenue reduction for 2002 versus the comparable period of 2001 was attributable to lower direct sales to SPs and domestic distributors. Shipments to international locations represented 18% of total revenues during 2002 compared to 16% of total revenues during 2001. On a twelve-month comparative basis, 2002 international revenues were 40% less than 2001 international revenues.

The combined revenues from MCI and AT&T, our two largest customers during 2002 and 2001, accounted for 34% of the total revenues for 2002 versus 47% for 2001. The financial difficulties at MCI, including its bankruptcy filing, had, and we expect it to continue to have, a major adverse impact on our

Gross Profit. Our total gross profit dollars for 2002 were $13,140,000 versus $17,020,000 for 2001. The reduction in gross profit dollars for the 2002 periods versus the 2001 periods was primarily due to sales volume declines partially offset by improvements to our gross margin percentage. Our gross profit percentage in 2002 was 56% or 15 percentage points higher than 2001’s result of 41 percent. The 15-percentage point improvement from 2001 to 2002 was primarily due to an asset impairment charge in 2001, higher 2001 excess and obsolete inventory charges as well as higher 2001 Orion 5000 manufacturing costs and overall material costs and warranty costs.

Research and Development. Research and development expenses totaled $4,199,000 for 2002, which was $2,580,000 or 38% below 2001’s expenses of $6,779,000. The reduction was primarily due to lower employee related expenses of $2,194,000 and lower recruiting and relocation costs of $433,000, all of which resulted from the restructuring and reduction in force programs enacted in 2001 and 2002. We had 19 research and development employees at the end of the 2002 compared to 29 at the end of 2001.

Selling, General and Administrative. Selling, general and administrative expenses decreased 22% to $16,051,000 during 2002, as compared to $20,680,000 for 2001. The lower expenses were due primarily to reductions in employee related expenses ($2,392,000), commission expense ($1,054,000), outside services ($460,000), travel ($391,000) and communication expenses ($368,000) associated with the 2001 and 2002 restructuring and reduction in force programs.

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 were 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 $465,000 for 2002, which was the same as 2001.

Restructuring. In May and October of 2002, we announced additional corporate restructurings as a result of the ongoing stagnation of the telecom market. Over these two restructurings, 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 $122,000 in rent collected under the sublease agreement with Silicon Wireless Corporation. That compares to a $5,772,000 restructuring charge for 2001 when we reduced our workforce by 88 people, closed our leased facility in Durham, North Carolina and wrote-off assets associated with the closing.

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

Interest and Other Income. Interest and other income amounted to $356,000 for 2002 as compared to $1,198,000 for 2002. Interest income, which is the major component of Interest and Other Income, was $408,000 for 2002, versus $1,243,000 for 2001. The lower interest income for the current year was attributed to lower interest rates as well as lower cash and short-term investment balances. The average interest rate for 2002 was 2% versus an average interest rate in 2001 of 5%, for a 3-percentage point decline. Average interest bearing cash and short-term balances declined by 17% to $20,421,000 from $24,749,000. Our investment portfolio generally is comprised of commercial paper rated A1/P1; bank certificates of deposit rated A- or better and corporate medium-term notes and bonds rated A- or better.

Provision for Income Taxes. The tax benefit of $2,113,000 for 2002 is comprised primarily of an income tax refund of $1,894,000 for taxes paid in 1996, 1997 and 1998, as a result of a 2002 change in the federal income tax code and $262,000 for the release of an accrual related to prior years closed audits. The tax code change allowed corporations with certain tax losses to file for refunds for taxes paid in previous years. The tax provision for 2001 was $15,866,000.

Net loss. The net loss for 2002 was $4,895,000, as compared to a net loss of $30,879,000 for the same period of 2001. The lower net loss for 2002 versus 2001 was primarily due to the booking in 2001 of an valuation allowance charge against the deferred tax assets ($15,981,000), restructuring costs ($5,772,000), asset impairment charges ($1,911,000), excess and obsolete inventory write-downs ($1,891,000) and higher manufacturing costs for the Orion 5000 M13 multiplexer product family ($1,000,000).

At December 31, 2003, we had cash and cash equivalents of $8,952,000. Cash, cash equivalents and short-term investments declined by approximately 49% from $17,657,000 on December 31, 2002. The $8,705,000 decrease in cash, cash equivalents and short-term investments in 2003 is primarily attributable to the net loss, and the cash outlays required in the merger with VINA in June 2003, partially offset by non-cash charges of $4,385,000 from depreciation and amortization, impairment of fixed assets, and impairment of intangibles. In addition, at year-end 2003, we had restricted cash of $333,000 consisting of a deposit with our bank for an irrevocable letter of credit for a like amount that is used as collateral for the lease on the Newark, California facility.

Capital expenditures for 2003 were $346,000. These expenditures consisted principally of the purchase of computers, software and test equipment. We anticipate capital expenditures to total approximately $500,000 for 2004.

Operating lease commitments are related principally to our buildings in Newark, California; Milpitas, California and Durham, North Carolina and have terms that expire in 2008, 2004 and 2007, respectively. Total rent expense in 2003, 2002 and 2001, was $2,042,000, $2,265,000 and $2,217,000, respectively. Sublease rental income was $709,000, $922,000 and $1,041,000 in 2003, 2002 and 2001, respectively. Future annual minimum

The effects of inflation on our revenues and operating income have not been material to date.

As of December 31, 2002, Axel Johnson owned 53% of Class A and B Common Stock of Larscom and controlled 82% of the voting interest. In connection with the June 5, 2003 merger with VINA, Axel Johnson converted their Class B Common Stock to Common Stock with a single vote per share. As of December 31, 2003 Axel Johnson owned approximately 28% of the Common Stock and voting interest of Larscom. See Note 6 — Related Party Transactions to the Consolidated Financial Statements. Related party transactions with Axel Johnson disclosed in the consolidated financial statements are as follows:

We participated in various employee benefits programs sponsored by Axel Johnson until June 5, 2003, when we established our own programs for most benefits. Axel Johnson continued to administer a portion of our 401K program until January 6, 2004 and retained responsibility for the Axel Johnson Retirement Plan and the Axel Johnson, Inc. Retirement Restoration Program. Larscom had discontinued active participation in both Axel Johnson, Inc. Retirement Plans as of March 31, 1998. Axel Johnson retains full responsibility for funding and administration of the Axel Johnson Retirement Plans. Prior to June 5, 2003, the Axel Johnson programs we participated in included medical, dental, life insurance and workers’ compensation. In general, we reimbursed Axel Johnson for our proportionate cost of these programs based on historical experience and relative headcount. The costs reimbursed to Axel Johnson included costs for reported claims as well as changes in reserves for incurred but not reported claims. We recorded expenses related to the reimbursement of these costs of approximately $664,000, $663,000 and $737,000 in 2003, 2002 and 2001, respectively. We believe the allocation by Axel Johnson of the proportionate cost was reasonable, but not necessarily indicative of the costs that would have been incurred had we maintained our own benefit plans during that time.

Axel Johnson provided certain functional services to us, including certain treasury, accounting, tax, internal audit, legal and human resources, most of which were discontinued as of the June 5, 2003 merger with VINA. The costs of these services were allocated to us based on estimates by Axel Johnson of actual costs incurred. We believe that such allocations were reasonable. Such charges and allocations are not necessarily indicative of the costs that would have been incurred if we had been a separate entity. The allocated costs of these services amounting to $151,000, $465,000 and $465,000 in 2003, 2002 and 2001, respectively, have been included in selling, general and administrative expenses in the consolidated statements of operations.

We and Axel Johnson had entered into a Credit Agreement, pursuant to which Axel Johnson agreed to provide a revolving credit/working capital facility to us in an aggregate amount of $15,000,000. The Credit Agreement was discontinued as of June 5, 2003, coincident with the merger with VINA. Under terms of the Credit Agreement we were required to pay a commitment fee of 0.5% per annum on the unused portion of the Credit Agreement. No borrowings were made under the Credit Agreement.

In December 2003, the Securities and Exchange Commission released Staff Accounting Bulletin (“SAB”) 104, “Revenue Recognition”. SAB 104 revises or rescinds portions of the interpretative guidance related to revenue recognition included in Topic 13 of the codification of the staff accounting bulletins. We have assessed the impact of SAB 104 and concluded that the adoption of SAB 104 by us did not have a material impact on our financial statements.

In December 2003, the FASB issued additional guidance in FASB Interpretation No. (“FIN”) 46-R clarifying the provisions of FIN 46, “Consolidation of Variable Interest Entities, an interpretation of ARB No. 51”. FIN 46-R provides a deferral of FIN 46 for certain entities until March 15, 2004. 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. We believe that the adoption of this standard will not have a material impact on our financial statements.

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

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

In November 2002, the FASB issued FIN 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others”. FIN 45 requires that a liability be recorded in the guarantor’s balance sheet upon issuance of a guarantee. In addition, FIN 45 requires disclosures about the guarantees that an entity has issued, including a reconciliation of changes in the entity’s product warranty liabilities. The initial recognition and initial measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantor’s fiscal year-end. The disclosure requirements of FIN 45 are effective for financial statements of interim or annual periods ending after December 15, 2002, and have been implemented in our financial statements in Note 12.

In July 2002, the FASB issued SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities”. SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (“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).” SFAS 146 requires that a liability for costs associated with an exit or disposal activity be recognized and measured initially at fair value only when the liability is incurred. The provisions of SFAS 146 are effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of this standard has not had a material impact upon our financial condition, cash flows or results of operations.

In November 2002, the Emerging Issues Task Force 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 adoption of this standard has not had a material impact upon our financial condition, cash flows or results of operations.

In May 2002, the FASB issued SFAS No. 145, “Rescission of SFAS Nos. 4, 44, and 64, Amendment of SFAS No. 13, and Technical Corrections”. Among other things, SFAS 145 rescinds various pronouncements regarding early extinguishment of debt and allows extraordinary accounting treatment for early extinguishment only when the provisions of APB Opinion No. 30, “Reporting the Results of Operations — Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions” are met. SFAS 145 provisions regarding early extinguishment of debt are generally effective for fiscal years beginning after May 15, 2002. The adoption of this standard has not had a material impact upon our financial condition, cash flows or results of operations.

Our Independent accountant’s report includes a “going concern” explanatory paragraph, which may adversely affect our stock price and our ability to raise additional capital and may create a concern among customers and vendors as to whether we will be able to fulfill our contractual obligations.

We have suffered recurring losses from operations and negative cash flow from operations, investing and financing. For the year ended December 31, 2003, we used approximately $6.7 million of cash to fund our operating, investing and financing activities. This factor, in combination with reduced levels of working capital, raise substantial doubt about our ability to continue as a going concern beyond this calendar year and a reasonable period thereafter. Our ability to continue as a going concern is dependent upon our ability to obtain adequate financing and achieve a level of revenues adequate to support our capital and operating requirements. PricewaterhouseCoopers LLP has included in its report on our consolidated financial statements for the fiscal year ended December 31, 2003, a going concern explanatory paragraph, which states that “the Company has suffered recurring losses from operations and has a net capital deficiency that raise substantial doubt about its ability to continue as a going concern.”

We are exploring opportunities to raise additional capital through various financing vehicles, but sufficient funds may not be available to us on terms that we deem acceptable, if they are available at all. In the event we are unable to continue as a going concern, we may elect or be required to seek protection from our creditors by filing a voluntary petition in bankruptcy or may be subject to an involuntary petition in bankruptcy. The inclusion of the going concern explanatory paragraph in PricewaterhouseCoopers LLP’s audit report may cause our stock price to fall and impair our ability to raise additional capital. In addition, the receipt of a going concern explanatory paragraph may create a concern among our current and future customers and vendors as to whether we will be able to fulfill our contractual obligations. As a result, current and future customers may determine not to do business with us, which would cause our revenues to decline. Employee concern about the future of the business and their continued prospects for employment as a result of the going concern explanatory paragraph may cause them to seek employment elsewhere, depriving us of the human capital we need to be successful.

Our entire industry was in an extended downturn and recovery may be delayed. The downturn for the United States economy and the rapid and severe downturn for the domestic telecommunications industry, beginning in late 2000, negatively affected demand for our products. In addition to the deteriorating domestic economic environment, the worldwide telecommunications market also experienced reduced demand. This decreased demand led to fluctuating order forecasts from some of our customers. While recent events have indicated that a general economic recovery is underway, the difficult financial position of many of our customers, resulting from the prolonged downturn, may delay the timing of order increases for our products, if at all. For 2003, order demand from many of our customers continued to decline as they experienced the impact of the downturn in the telecommunications market.

We expect to continue to incur operating losses and may not be profitable in the future. We have experienced substantial net losses, including a net loss of $13,262,000 in 2003 and $4,895,000 in 2002 and had an accumulated deficit of $78,778,000 as of December 31, 2003. A continued decrease in revenues could have an adverse impact on our finances. There can be no assurance as to when or if we will achieve profitability.

Our prospects for growth depend on recently-introduced products and products under development. We expect revenues from sales of our established products to decline over time both as a result of decreased demand and pricing pressure. Therefore, our future operating results are highly dependent on market acceptance of our recently-introduced products and products that may be introduced in the future. These include, for example, the Orion 7400 and the Orion 5000, 5001 and 5003, all of which have only recently been introduced. There can be no assurance that such products will achieve widespread market acceptance, and, in fact, some other products we introduced in recent years have failed to meet our sales expectations. The industry-wide downturn caused sales of new products, such as ours, to be well below expectations. We have, in the past, experienced delays and changes in course in the development of new products and the enhancement of existing products, and such delays and changes in course may occur in the future. Our inability to develop and introduce new products or product versions in a timely manner, due to resource constraints or technological or other reasons, or to achieve timely and widespread market awareness and acceptance of our new products or releases, would have a material adverse effect on our business and operating results.

Rapid technological change could hurt our ability to compete. The telecommunications equipment industry is characterized by rapidly-changing technologies and frequent new product introductions. The rapid development of new technologies increases the risk that current or new competitors could develop products that would reduce the competitiveness of our products. Our success will depend to a substantial degree upon our ability to respond to changes in technology and customer requirements. This will require the timely development and marketing of new products and enhancements on a cost-effective basis. There can be no assurance that we will be successful in developing, introducing or managing the transition to new or enhanced products such as the Orion 7400 or that any such products will be responsive to technological changes or will gain market acceptance. In the past, some of the products we have planned and introduced have not met our sales expectations.

Our business could be materially and adversely affected by shifts in the use of technology common throughout the industry today. Three shifts affecting our products and industry are: the integration of CSU/ DSU technology into routers and switches, a move from T1/ E1 services to more Ethernet-based services and the increase in demand for more managed, customer-premise-based services. The failure to accommodate these shifts in technology could impact sales of our products and have a material adverse affect on our business and operating results.

To develop new products and product enhancements, we will need to continue to invest in research and development, which could adversely affect our business and operating results. As our revenue growth is dependent upon the success and development of our recently introduced products and products under development and as we must continue to modify our products to incorporate new technologies and meet new standards, we will be required to continue to devote time and resources to our research and development efforts. While our research and development expenses were $4.2 million in 2002 and $4.8 million in 2003, we may not have sufficient resources allocated to the development of new and enhanced products to remain competitive.

Our recent merger with VINA may not lead to the synergies expected. While we have largely completed the plan for the integration of VINA and Larscom from the June 5, 2003 merger of the two companies, there can be no assurance that the merged Company can retain or attract sufficient new customers or reduce expenses enough to achieve profitability in the near term or at all.

We conducted seven rounds of restructuring/layoffs in the past thirty-one months. Since mid-2001, we have conducted seven rounds of layoffs for an aggregate reduction in workforce of 165 people. Although the restructuring actions taken have lowered our expense base, we expect operating losses to continue into 2004. Therefore, there can be no assurance that another material restructuring and/or workforce reduction will not be required. In addition, our workforce reductions may deprive us of the human capital we would need to take full advantage of the recent upturn in the business cycle in our industry. There can be no assurance that we will not lose employees in the future as a result of the restructuring/layoffs, or that we will be able to recruit suitable replacements.

The absence of long-term backlog makes us vulnerable in periods of weak demand. None of our customers are contractually obligated to purchase any quantity of products in any particular period, and product sales to major customers have varied widely from quarter-to-quarter and from year-to-year. Our

current customers might not continue to place orders with us, orders from existing customers might not continue at the levels of previous periods and we might not be able to obtain orders from new customers. Over the last several years, there has been a reduction of equipment demand throughout the telecommunications industry. Because of our limited backlog, this tends to have an immediate negative effect on our operations, which we cannot fully offset on a timely basis by implementing reductions in expenses.

We depend upon a small number of customers some of whom have been experiencing financial difficulties. A small number of customers have accounted for a significant percentage of our sales. Therefore, sales for a given quarter generally depend on orders received from, and product shipments to, a limited number of customers. Sales to individual large customers are often related to the customer’s specific equipment deployment projects, the timing of which is subject to change on limited notice, in addition to the ebbs and flows in our customers’ business conditions and the effect of competitors’ product offerings. We have in the past experienced both accelerations and slowdowns in orders related to such projects, causing changes in the sales level of a given quarter relative to both the preceding and subsequent quarters. Since most of our sales are in the form of large orders with short delivery times to a limited number of customers, our backlog and consequently our ability to predict revenues will continue to be limited. In addition, announcements by us or our competitors of new products and technologies could cause customers to defer, limit or end purchases of our existing products. In the event that we lose one or more large customers, anticipated orders from major customers fail to materialize, or delivery schedules are deferred or canceled as a result of the above, or other unanticipated factors, our business and operating results would be materially adversely affected. As a result of the downturn in the telecommunications industry, many of our customers have experienced financial difficulties and have reduced their expenditures on capital equipment. The continued financial difficulties or failure of any of our major customers would have a material adverse effect on our business and operating results. One of our largest customers, MCI, filed for bankruptcy in 2002 and has not yet emerged from court protection, which could lead to a substantial loss in their customer base or further reorganizations, all of which could influence their order levels to us. In 2003 revenue from sales to MCI decreased 19% from sales to MCI in 2002.

Our operating results have fluctuated significantly in the past and may fluctuate in the future on a quarterly and annual basis as a result of a number of factors, many of which are beyond our control. Consequently, we believe that period-to-period comparisons of our operating results are not necessarily meaningful and should not be relied upon as indicative of future performance.


	•	market demand,

	•	competitive market conditions,

	•	market acceptance of new or existing products,

	•	sales channel development costs,

	•	the cost and availability of components,

	•	the mix of our customer base and sales channels,

	•	the mix of products sold,

	•	our sales promotion activities,

	•	our ability to expand or contract our sales and marketing organizations effectively,

	•	our ability to attract and retain key technical and managerial employees,

	•	conditions affecting the telecommunications industry and

	•	general economic conditions.

We established our expense levels for product development and other operating expenses based on projected sales levels and margins, but expenses are relatively fixed in the short term. Accordingly, when sales are below expectations in any given period, our inability to adjust spending proportionally in the short term may exacerbate the adverse impact of a revenue shortfall on our operating results.

Because of all of the foregoing factors, our operating results in one or more future periods may be subject to significant fluctuations. In the event these factors result in financial performance below the expectations of public market analysts and investors, the price of our Common Stock could be materially adversely affected.

Since the sales cycles for our products are typically long and unpredictable, we have difficulty predicting future revenue and our operating results may fluctuate significantly. A customer’s decision to purchase our products often involves a significant commitment of its resources and a lengthy evaluation and product qualification process. Our sales cycles vary from a few months to over a year. As a result, we may incur substantial sales and marketing expenses and expend significant management effort without any assurance of a sale. A long sales cycle also subjects us to other risks, including customer’s budgetary constraints, internal acceptance review and order reductions and cancellations. Even after deciding to purchase our products, our customers often deploy our products slowly.

We depend heavily on component availability and key suppliers. On-time delivery of our products depends upon the availability of components and subsystems used in our products. We depend upon our suppliers to manufacture, assemble and deliver components in a timely and satisfactory manner. We obtain components and license certain embedded software from several single sources. We do not believe we would be able to develop alternative sources for certain essential components used in our products without incurring significant costs. In addition, while we believe we would be able to develop alternative sources for most of the other components and software used in our products there can be no assurance that we would be able to do so, in a timely manner without incurring substantial additional costs, if required. Any inability by our suppliers to meet our demand or any prolonged interruption in supply, or a significant increase in the price of one or more components or in the price of software, would likely have an adverse impact on our business and operating results. We generally do not have any long-term contracts with our suppliers and, in fact, as a result of our merger with VINA, we have made a recent decision to place a majority of our business with a single contract manufacturer. It is possible that our 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 Atcatel are two of the largest communications equipment companies in the world. There can be no assurance that we will be able to continue to compete successfully with existing or new competitors.

We are controlled by Axel Johnson, Inc. and Sierra Ventures V LP. Axel Johnson, Inc. and Sierra Ventures V LP each control approximately 28% of the common Stock of Larscom. As a result, Axel Johnson, Inc. and Sierra Ventures V LP combined have sufficient combined voting power to control the direction and policies of Larscom, including mergers, the payment of dividends, consolidations, the sale of all or substantially all of the assets of Larscom and the election of the Board of Directors of Larscom, and to prevent or cause a change in control of Larscom. There can be no assurance that Axel Johnson, Inc. and Sierra Ventures V LP will not act in concert and affect our corporate actions in a manner that conflicts with the interest of our other stockholders.

We have recently reorganized our sales force. Our sales force until January of 2004 was organized by type of account: major accounts, carrier accounts, US indirect channels (distributors and resellers) and enterprise customers and overseas accounts. As part of our VINA post-merger plans we have reorganized our sales people along geographic areas. Certain of our sales people have been assigned new customers and others will call on different types of customers. There is a risk that the new relationships with customers resulting from the reorganization might not be as productive as the prior organization in the near term or at all. Failure of the new organization to achieve sales productivity goals could have an adverse impact on our business and operating results.

We rely on an indirect distribution channel for sales to many of our domestic and international customers. This channel consists primarily of a small group of master distributors, such as Tech Data, and a number of authorized resellers. There are a number of risks associated with an indirect distribution channel.

The risks include a reduction in our ability to forecast sales, reduced average selling prices, potential reductions in customer satisfaction, loss of contact with users of our products, a potential build-up of inventories at resellers and methods of advertising and promoting products that result in additional expenses. All of these risk factors could have an adverse impact on our business and operating results.

In addition, most of our existing distributors also distribute products of our competitors. As a result, our distributors may not recommend or continue to use and offer our products, or our distributors may not devote sufficient resources to market and provide the necessary customer support for our products. Our distributors may terminate their agreements with us or significantly reduce or delay the amount of products that they order from us at any time. Any such termination, reduction or delay in orders could have an adverse impact on our business and operating results

We must comply with regulations and evolving industry standards. The market for our products is characterized by the need to comply with a significant number of communications regulations and standards, some of which are evolving as new technologies are deployed. In the U.S., our products must comply with various regulations defined by the Federal Communications Commission and standards established by Underwriters Laboratories, as well as industry standards established by various organizations. As standards for services such as Asynchronous Transfer Mode, Frame Relay, Internet Protocol, Ethernet and Synchronous Optical Network/ Synchronous Digital Hierarchy evolve, we may be required to modify our existing products or develop and support new versions of our products. The failure of our products to comply, or delays in compliance, with the various existing and evolving industry standards could delay introduction of or affect the marketability of our products, which in turn could have an adverse impact on our business and operating results.

We may not be able to protect our intellectual property and proprietary information. We rely upon a combination of trade secrets, contractual restrictions, copyrights, trademark laws and patents to establish and protect proprietary rights in our products and technologies. We believe that the success of our business depends primarily on our proprietary technology, information, processes and expertise, rather than patents. Much of our proprietary information and technology is not patented and may not be patentable. We have been issued only two U.S. patents to date and have four patents pending. There can be no assurance that we will be able to protect our technology or that competitors will not be able to develop similar technology independently. We have entered into confidentiality and invention assignment agreements with employees, and into non-disclosure agreements with suppliers, distributors and appropriate customers so as to limit access to and disclosure of our proprietary information. There can be no assurance that these statutory and contractual arrangements will deter misappropriation of our technologies or discourage independent third-party development of similar technologies. In the event such arrangements are insufficient, our business and operating results could be adversely impacted.

We have not conducted a formal patent search relating to the technology used in our products. From time to time, third parties may assert exclusive patent, copyright, trademark and other intellectual property rights to technologies that are important to us. Since patent applications in the U.S. are not publicly disclosed immediately, applications that we do not know about may have been filed by competitors of ours, which could relate to our products. The scope of protection accorded to patents covering software-related inventions is evolving and is subject to uncertainty, which may increase the risk and cost to us if we discover third-party patents related to our software products or if such patents are asserted against us in the future. In the event of litigation to determine the validity of any third-party claims, such litigation, whether or not determined in favor of us, could result in significant expense to us and divert the efforts of our technical and management personnel. In the event of an adverse ruling in such litigation, we might be required to pay damages, discontinue the use and sale of infringing products, and expend significant resources to develop non-infringing technology or obtain licenses from third parties. There can be no assurance that licenses from third parties would be available on acceptable terms, if at all. A successful claim against us and our failure to develop or license a substitute technology could have an adverse impact on our business and operating results.

Our products may suffer from defects or errors that may subject us to product warranty and product liability claims, which could adversely affect our business and results of operations. Complex products such as ours might contain undetected errors or failures when first introduced or as new versions are released. If such errors or failures occur, we may be subject to delays in or losses of market acceptance and sales, product

returns, diversion of development resources resulting in new product development delay, injury to our reputation or increased service and warranty costs. Although we believe that our reserves for estimated future warranty costs are adequate, our estimates, particularly those related to products that have been recently introduced, might not be correct. Warranty claims in excess of those expected could have an adverse impact on our business and operating results. Our agreements with our distributors and customers typically contain provisions designed to limit our exposure to potential product liability claims. However, it is possible that the limitation of liability provisions contained in our agreements may not be effective or adequate under the laws of certain jurisdictions. In addition, our errors and omissions insurance may be inadequate to cover any potential product liability claim. Although we have not experienced any product liability claims to date, it is possible that we will be subject to such claims in the future. Such claims could have an adverse impact on our business and results or operations.

Our key personnel are critical to our business, and any failure to retain these employees could adversely affect our ability to manage our operations. Our success depends upon the continued contributions of our key management, sales and engineering personnel, many of whom would be difficult to replace. We believe that our future success will depend in large part upon our ability to attract and retain qualified management, sales and technical personnel. Our failure to attract or retain any such key employees could have a material adverse effect on our business and operating results.

As part of the strategy for growth and expansion of our business, we may make acquisitions that could disrupt our business or harm our financial condition. As part of our business strategy, we may invest in or acquire other businesses, technologies or assets, or enter into strategic relationships with third parties. For such acquisitions, we may issue additional stock, incur debt, assume liabilities, incur impairment charges related to goodwill and other intangible assets or incur other large and immediate write-offs. Our operation of any acquired business would involve numerous risks including:


	•	problems integrating any acquired operations with our own,

	•	unanticipated costs,

	•	diversion of management’s attention from our core business,

	•	adverse effects on existing business relationships with customers,

	•	risks associated with entering markets in which we have no or limited experience,

	•	the potential loss of key employees, particularly those of the purchased organization and

	•	a decrease in our cash position.

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 medium-term notes and bonds 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.”

Due to our investments in commercial paper, an immediate, hypothetical 10% decrease in interest rates would not have a material effect on our current year financial condition or results of operations. Because the instruments are so short in duration, their principal value would not be materially affected. If a 10% reduction in interest rates on our investments occurred on January 1, 2004 and remained in effect throughout 2004, the effect would be immaterial. We do not hold any long-term fixed instruments.

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. 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 exchange rate for any foreign currency would not be material to us.

All schedules, with the exception of Schedule II Valuation and Qualifying Accounts (see Part IV Item 14), are omitted because they are not applicable or the required information is shown in the Consolidated Financial Statements or Notes thereto.

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Larscom Incorporated and its subsidiaries at December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Larscom Incorporated management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Larscom Incorporated (“Larscom” or the “Company”) develops, manufactures and markets a broad range of high-speed, internetworking products for SPs, ISPs and corporate users. We operate in one industry segment.

The consolidated financial statements include the accounts of Larscom Incorporated and our wholly-owned subsidiary. All material intercompany transactions and account balances have been eliminated in consolidation.

Financial instruments, which subject us to concentrations of credit risk, consist primarily of investments in certain debt securities and accounts receivable. We are exposed to credit risks in the event of default by the financial institutions or issuers of investments to the extent recorded on the balance sheet. Our accounts receivable are largely trade receivables from customers in the United States. We perform ongoing credit evaluations of our customers, and generally require no collateral from our customers. We maintain reserves for potential credit losses, and to date have not experienced any material losses. However, during 2002, as a result of MCI filing for bankruptcy, we established reserves of $616,000 for accounts receivable owed to us by MCI prior to their bankruptcy filing. While we have filed our claim with the bankruptcy court for the total amount reserved, we expect to receive substantially less than the full amount owed to us. Net receivables from the two largest customers represented 36% and 38% of net accounts receivable at December 31, 2003 and 2002, respectively.

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

Cash and cash equivalents include all cash and highly liquid investments with original maturities of ninety days or less. The carrying amount of cash and cash equivalents approximates fair value because of the short-term maturity of those investments and the financial stability of the issuers. Restricted cash of $333,000 consists of a deposit with our bank for an irrevocable letter of credit for a like amount that is used as collateral for the lease on the Newark, California facility.

We participated in Axel Johnson’s centralized cash management system until June 5, 2003, when we established a separate system managed solely by us.

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingencies at the date of the financial statements and the reported amounts of revenue and expenses during the reported periods. Actual results could differ from those estimates.

Inventories are stated at the lower of standard cost or market. Standard cost approximates actual average cost. 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.

The net book value of prepaid royalties (which are included in Prepaid expenses and other current assets on the Consolidated Balance Sheet) was $75,000 and $100,000 at December 31, 2003 and 2002, respectively. Prepaid royalties are amortized over the shorter of the anticipated useful life of the technology or the contractual royalty period.

Property and equipment are recorded at cost. Depreciation is computed using the straight-line method based upon the estimated useful lives of the assets, which is three years for Computers and Software and five

years for Machinery and Equipment and Furniture and Fixtures. Leasehold improvements are amortized using the straight-line method over the shorter of the estimated useful lives or the lease term of the respective assets. When property and equipment are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and the resulting gain or loss is included in the results of the current operations. Costs of repairs and maintenance are expensed as incurred. The Company periodically evaluates the recoverability of its long-lived assets based on the expected, undiscounted cash flows and the market valuation approach.

Following our adoption of SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”, we establish a liability for the estimated fair value of an exit or disposal activity in the period in which the liability is incurred. At that time, and thereafter until the plan activities are complete, the actual costs or timing of payments associated with the plan may differ from our estimates. We use our judgment and information available to us at the date of the financial statements to reevaluate our initial estimates of the exit costs. If we believe that our previous estimates of exit costs or timing of payments are no longer accurate in light of current conditions, we adjust the liability with a corresponding increase or decrease to current period earnings. Any adjustments to estimates of our exit costs under restructuring plans are reflected on the same line item in the statement of operations as the initial charge to establish the restructuring liability.

Accrued restructuring costs at December 31, 2003 for the 2003 restructurings, reflect our estimate of the fair value of future rental obligations and other costs associated with the Milpitas office space that we do not plan to use in our operations as a result of the restructuring plans, along with estimated remaining payments related to employee termination costs. The determination of fair value is based on the remaining lease payments, which end in August of 2004. We do not expect any sublease rental income given the current market conditions for leased property in Northern California and the relatively short period remaining on the lease. Remaining liabilities for restructuring costs related to the June 2001 restructuring continues to be accounted for in accordance with the provisions of EITF No. 94-3.

At each balance sheet date, or upon the occurrence of a triggering event, an evaluation is performed by management to ascertain whether the intangible assets were impaired by comparing the carrying value with the estimated future cash flows. We record impairment of the carrying value, if any, based on the difference between the carrying value and the fair market value of the intangible assets, less the cost to dispose of assets to be disposed. Fair value is determined primarily by using the anticipated cash flows discounted at a rate commensurate with the risk involved. During the third quarter of 2003, we determined that the MBX technology and related assets acquired as part of the merger with VINA in June 2003 had incurred a triggering event due to changes in the market for the MBX technology and had therefore become impaired. The impairment was based on a projected discounted cash flow model using a discount rate commensurate with the risk inherent in our current business model. As a result, we recorded a loss of $1,956,000 to write-off the MBX technology and other related assets.

We provide a three-year or five-year warranty for most of our products. A provision for the estimated cost of warranty, which is based on our historical costs and includes material, labor and overhead, is recorded at the time revenue is recognized. While we believe that our reserves for estimated future warranty costs are adequate, there are inherent risks associated with these estimates, particularly for those estimates related to products that have been recently introduced.

Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their financial statement reported amounts. A valuation allowance is provided against deferred tax assets if it is more likely than not that they will not be realized. On June 5, 2003, as a result of the merger with VINA, Axel Johnson’s ownership interest in the company dropped below 50%. As a result, we will no longer file as part of the combined group, for the purposes of filing a California franchise tax return after that date.

Basic loss per share excludes any dilutive effects of options, warrants and convertible securities. Basic loss per share is computed using the weighted-average number of common shares outstanding during the period. Diluted loss per share is computed using the weighted-average number of common and potential common shares outstanding during the period. Potential common shares consist of the incremental common shares issuable upon the exercise of stock options (using the Treasury Stock Method). Potential common shares are excluded from the computation if their effect is antidilutive.

The following table sets forth the computation of basic and diluted loss per share:

Outstanding stock options are not included in diluted loss per share because their effect would have been antidilutive for all periods presented. These stock options could be dilutive in the future. See Note 9 for details of options issued.

As permitted under SFAS 123, “Accounting for Stock-Based Compensation”, we are continuing to measure compensation costs for stock-based compensation plans using the intrinsic value method prescribed by Accounting Principles Board (“APB”) Opinion No. 25 “Accounting for Stock Issued to Employees.” The pro forma disclosures of the difference between compensation cost included in net income and the related cost measured by the fair value method, as required by SFAS 123 as amended by FASB 148, “Accounting for

Stock-Based Compensation — Transition and Disclosure — an amendment of FASB Statement No. 123”,are presented here.

For purposes of pro forma disclosures, the estimated fair value of the options under the Stock Incentive Plan is amortized to expense over the vesting period of the respective options. Our pro forma information for the years ended December 31 is as follows (in thousands, except per share information):

For all financial instruments, including short-term investments, accounts receivable, accounts payable and accrued liabilities the carrying value is considered to approximate fair value due to the relatively short- term maturities of the respective instruments.

Assets and liabilities of our foreign subsidiary are translated from its functional currency at exchange rates in effect at the balance sheet date and revenues and expenses are translated at average exchange rates prevailing during the year. Because the functional currency is the local currency, the resulting translation adjustments are reflected as a separate component of stockholders’ equity.

On June 3, 2003 Larscom’s shareholders approved a proposal to amend Larscom’s certificate of incorporation to effect a reverse split of Larscom’s Common Stock in a ratio to be determined by the Board of Directors. The Board subsequently voted on June 5, 2003 to effect a reverse split with a 7-for-1 ratio with effect from June 6, 2003. All share and per share data has been retroactively restated for the 7-for-1 reverse stock split. On June 3, 2003, our stockholders also approved a proposal to reclassify our Class A and Class B Common Stock into a single class of Common Stock. The old Class A shares had rights of one vote per share. The old Class B Common Stock had rights of four votes per share and was owned by one stockholder, Axel Johnson.

In December 2003, the Securities and Exchange Commission released SAB 104, “Revenue Recognition”. SAB 104 revises or rescinds portions of the interpretative guidance related to revenue recognition included in Topic 13 of the codification of the staff accounting bulletins. The Company has assessed the impact of SAB 104 and concluded that the adoption of SAB 104 by the Company did not have a material impact on its financial statements.

In December 2003, the FASB issued additional guidance (“FIN 46-R”) clarifying the provisions of FIN 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51”. FIN 46-R provides a deferral of FIN 46 for certain entities until March 15, 2004. 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. The Company believes that the adoption of this standard will not have a material impact on its financial statements.

In November 2002, the FASB issued FIN 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN 45 requires that a liability be recorded in the guarantor’s balance sheet upon issuance of a guarantee. In addition, FIN 45 requires disclosures about the guarantees that an entity has issued, including a reconciliation of changes in the entity’s product warranty liabilities. The initial recognition and initial measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantor’s fiscal year-end. The disclosure requirements of FIN 45 are effective for financial statements of interim or annual periods ending after December 15, 2002, and have been implemented in our financial statements in Note 12.

In July 2002, the FASB issued SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities”. SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies 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).” SFAS 146 requires that a liability for costs associated with an exit or disposal activity be recognized and measured initially at fair value only when the liability is incurred. The provisions of SFAS 146 are effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of this standard has not had a material impact upon our financial condition, cash flows or results of operations.

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 adoption of this standard has not had a material impact upon our financial condition, cash flows or results of operations.

In May 2002, the FASB issued SFAS 145, “Rescission of SFAS Nos. 4, 44, and 64, Amendment of SFAS 13, and Technical Corrections”. Among other things, SFAS 145 rescinds various pronouncements

regarding early extinguishment of debt and allows extraordinary accounting treatment for early extinguishment only when the provisions of APB Opinion No. 30, “Reporting the Results of Operations — Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions” are met. SFAS 145 provisions regarding early extinguishment of debt are generally effective for fiscal years beginning after May 15, 2002. The adoption of this standard has not had a material impact upon our financial condition, cash flows or results of operations.

At December 31, 2003, we had cash, restricted cash and cash equivalents of $9,285,000. Restricted cash was $333,000 of that total. Cash, cash equivalents and short-term investments declined by approximately 47% from $17,657,000 on December 31, 2002. The $8,372,000 decrease in cash, restricted cash, cash equivalents and short-term investments in 2003 is primarily attributable to the net loss, and the cash outlays required in the merger with VINA in June, 2003.

On June 5, 2003, we completed the acquisition of VINA Technologies, Inc. The consideration consisted of approximately 2,393,894 shares of Larscom common stock, 454,752 warrants and options to purchase common stock and the assumption of the liabilities and obligations of VINA.

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

The total purchase price we recorded was $7,041,000 consisting of (a) a total of approximately 2,393,894 shares of Larscom common stock issued upon consummation and valued at approximately $5,329,000, using a fair value per share of $2.23, (b) approximately $883,000 of consideration for options and warrants to purchase approximately 454,752 equivalent shares of Larscom common stock assumed as part of the merger, and (c) direct transaction costs of approximately $829,000. The fair value of Larscom’s common stock issued was determined using the 5-day average price surrounding the date the acquisition was announced. The fair value of the options assumed in the transaction was determined using the Black-Scholes option-pricing model and the following assumptions: expected life of 4.92 years, risk-free interest rate of 2.20%, expected volatility of 90% and no expected dividend yield. The following assumptions were used to perform the calculations for the warrants assumed: remaining contractual life of 1.63 years, risk-free interest rate of 1.30% and expected volatility of 90%. This acquisition was accounted for as a purchase. The purchase price of the VINA merger is as follows (in thousands):

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

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

A value of $4,343,000 has been allocated to amortizable intangible assets with useful lives ranging from 6 months to 6 years as follows: Developed technology — 5 to 6 years; Trade name/ trademarks — 3 years; Customer contracts/ relationships — 3 to 5 years; and Order backlog — 6 months.

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

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

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

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

Supplemental pro forma information reflecting the acquisition of VINA as if it occurred on January 1, 2003 for the year ended December 31, 2003 and as if it had occurred on January 1, 2002 for the year ended December 31, 2002 is as follows (in thousands, except per share data):

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

The aggregate amortization expense for the year ended December 31, 2003 and December 31, 2002 was $718,000 and $125,000, respectively. Amortization of the costs associated with developed technology are being charged to cost of revenues, while amortization of the costs associated with tradenames/trademarks, customer contracts/relationships and order backlog are being charged to operating expenses. The amortization expense related to cost of revenues and operating expense totaled $166,000 and $385,000 respectively for 2003.

Minimum future amortization expense at December 31, 2003 is as follows (in thousands):

During the third quarter of 2003, the company determined that the MBX technology and related assets acquired as part of the merger with VINA in June 2003 had become impaired. The impairment was based on a projected discounted cash flow model using a discount rate commensurate with the risk inherent in our current business model. As a result, we recorded a loss of $1,956,000 to write-off the MBX technology and other related assets. The components of the impairment were as follows (in thousands):

The impairment charges were classified in the financial statements for 2003 as follows (in thousands):

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 $122,000 in rent collected under the sublease agreement with Silicon Wireless Corporation.

After the VINA merger, on June 5, 2003, a restructuring was effected which resulted in restructuring costs of $2,458,000 during the year, consisting of $1,535,000 in facility consolidation costs associated principally with moving our headquarters from Milpitas, CA, to Newark, CA, partially offset by $249,000 of rent collected from Silicon Wireless Corporation as discussed below; $425,000 in impairment charges related to fixed assets and leasehold improvements at the Milpitas location and $747,000 from reductions in force.

In connection with the closing of our facility in Durham, North Carolina, we remain responsible for the existing lease. The reserve for this lease is reduced as we make monthly payments. We entered into a sublease agreement with Silicon Wireless Corporation, a start-up company, that had a commencement date of February 15, 2002 and is for the entire 27,000 square-foot facility in Durham, North Carolina. Due to the uncertainty of the receipt of income under the sublease, we reduce restructuring expenses as the sublease income is received. During 2003, our restructuring expenses were reduced by $249,000 as a result of rent collected from Silicon Wireless Corporation. We expect the remaining real estate lease obligation, which comprises the remainder of the June, 2001 reserve balance, will be paid-out by January 2007. We do not expect there to be any additional costs related to the North Carolina restructuring.

We have abandoned our lease at the former Larscom headquarters in Milpitas, CA as of September, 2003 and remain responsible for the balance of the lease which expires in August of 2004. While this property is available for lease, we do not expect to be able to find a tenant given the current market conditions for leased property in Northern California and the relatively short period remaining on the lease. We expect that the remaining reserve balance for the 2003 restructurings, which consist principally of the remaining lease payments on our former Milpitas facility, will be paid out by the end of 2004.

During 2003 we incurred non-cash charges of $415,000 and cash outlays of $1,607,000 related to our restructurings.

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

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

On June 3, 2003, our stockholders approved a proposal to reclassify our Class A and Class B Common Stock into a single class of common stock. The old Class B Common Stock had rights of four votes per share and was owned by one stockholder, Axel Johnson, Inc. These additional voting rights gave Axel Johnson control of 82% of the voting interest prior to the merger with VINA. After issuance of 2,393,894 shares in connection with the VINA merger and the reclassification of the Class B Common Stock into Common Stock with one vote per share, Axel Johnson’s control of the voting interest was reduced to 28%. As of December 31, 2002, Axel Johnson had owned 53% of the Class A and B Common Stock of Larscom and controlled 82% of the voting interest.

Sierra Ventures V LP (“Sierra”) became owner of approximately 28% of our Common Stock as a result of the June 5, 2003 merger with VINA and remained owner of that same amount as of December 31, 2003.

Our Board includes two members from Axel Johnson and one member from Sierra. Axel Johnson Board members were not eligible for compensation prior to the merger. Effective with the June 5, 2003 merger with VINA, existing Board members from Axel Johnson and Sierra, as well as existing independent Board members are given annual compensation of 1,500 Common Stock option grants and either $16,000 in cash payments or 3,500 Common Stock option grants, at the election of the Board member, for 12 months of service. New Board members are given an initial grant of 4,500 Common Stock options.

Amounts (due to) or due from Axel Johnson consist of cash remittances made by us to Axel Johnson from our operating bank accounts offset by cash advances to us from Axel Johnson for purchases of property and equipment and fluctuating working capital needs. As of June 5, 2003, we began operation of our own cash network. Amounts owed to Axel Johnson at year-end 2003 relate to remaining payments due to Axel Johnson primarily for employee 401(k) programs and some residual medical plan payments. Neither Axel Johnson nor Larscom Incorporated has charged interest on the balances due. The average month-end balances due from or (due to) Axel Johnson were as follows: ($571,000) for 2003; $31,000 for 2002 and ($182,000) for 2001. The following is an analysis of the balance (due to) or due from Axel Johnson:

The allocated costs of these services amounting to $151,000, $465,000 and $465,000 in 2003, 2002 and 2001, respectively, have been included in selling, general and administrative expenses in the consolidated statements of operations.

Effective March 31, 1998, our employees ceased to accrue benefits under the Axel Johnson sponsored defined benefit pension plan, the Axel Johnson Inc. Retirement Plan. Accrued liabilities prior to March 31, 1998 will remain in the Axel Johnson pension plan until benefits are paid to employees upon termination or retirement in a manner prescribed by the plan. After March 1998, our employees also ceased to accrue benefits under Axel Johnson’s unfunded pension plan, the Axel Johnson Inc. Retirement Restoration Plan, for employees whose benefits under the defined pension plan are reduced due to limitations under federal tax laws. Effective June 5, 2003, in connection with the merger with VINA, Axel Johnson assumed complete responsibility for any further costs or liability for these plans, therefore, we have made no provision for these plans as of December 31, 2003 and the following information pertains to activity in the prior two years.

The following sets forth our benefit obligation and the net periodic pension costs for both plans as required by Statement of Financial Accounting Standards No. 132, “Employers’ Disclosures about Pensions and Other Post-retirement Benefits”:

Certain elements of pension cost, including expected return on assets and net amortization, were allocated based on the relationship of the projected benefit obligation (“PBO”) for Larscom Incorporated to the total PBO of the defined benefit pension plan. Based on this same relationship, our portion of the unfunded PBO for the Axel Johnson Inc. Retirement Plan was $1,988,000 and $748,000 as of December 31, 2002 and 2001, respectively. The PBO for our employees with accrued benefits in the unfunded Retirement Restoration Plan was $469,000 and $329,000 as of December 31, 2002 and 2001, respectively.

Prior to the June 5, 2003 merger with VINA, there were two classes of Common Stock, Class A and Class B. The rights, preferences and privileges of each class of Common Stock were identical except for voting rights. Each share of the Class A Common Stock entitled its holder to one vote and each share of Class B Common Stock entitled its holder to four votes for each share of Class A Common Stock into which Class B Common Stock is convertible. The Class B Common Stock was convertible into Class A Common Stock on a share-for-share basis, subject to adjustment for dividends, stock splits, subdivisions or combinations. Axel Johnson owned all of the then issued and outstanding Class B Common Stock. Effective with the June 5, 2003 merger with VINA, both Class A and Class B Common Stock was converted into a single class of Common Stock entitling the holder to one vote per share.

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

On June 5, 2003, as a result of the merger with VINA, Axel Johnson’s ownership interest in the company dropped below 50%. As a result, the company will no longer file as part of a combined group, for the purposes of filing a California franchise tax return after that date.

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

The tax rate for 2002 included a benefit of $2,113,000 comprised primarily of an income tax refund of $1,894,000 for taxes paid in 1996, 1997 and 1998, as a result of a 2002 change in the federal income tax code and $262,000 for the release of an accrual related to prior years closed audits.

Deferred income taxes reflect the temporary differences between the carrying value of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The components of the deferred tax assets are as follows:

At December 31, 2003, we had total deferred tax assets of $31,991,000, as compared to $23,182,000 at December 31, 2002. These assets include temporary differences related to intangible assets associated with the acquisition of VINA Technologies, Inc. in June, 2003 and the acquisition of NetEdge Systems Inc. in 1997, inventory write-downs, accrued expenses and net operating losses that carry forward. In the second quarter ended June 30, 2001, we 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 SFAS No. 109, “Accounting for Income Taxes”. Our assessment was based principally on the historical losses experienced by the Company in the U.S. and uncertainty of future taxable income, unfavorable macro-economic conditions and capital expenditure reductions announced by several SPs.

SFAS 109 requires the establishment of a valuation allowance for deferred tax assets when it is more likely than not that these assets will not be realized. The 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 a portion or all of the deferred tax assets are realizable, we will reduce the income tax valuation allowance accordingly. During 2003 we increased the valuation allowance by the increase in the deferred tax assets. The deferred tax assets increased during

2003 by $8,809,000. The increase was principally due to the net operating losses generated from operations, as well as unused tax credits and net operating loss carryforwards acquired from the VINA merger (as limited by section 382 of the Internal Revenue Code of 1986, as amended).

As of December 31, 2003, the Company’s federal and state net operating loss carry-forwards for income tax purposes were approximately $35,853,000 and $31,033,000 respectively. If not utilized, the federal and state net operating loss carry-forwards will begin to expire in 2016 and 2006 respectively. The Company’s federal research tax credit carry-forwards for income tax purposes are approximately $3,803,000. If not utilized, the federal tax credit carry-forwards will begin to expire in 2016. The Company has a full valuation allowance for all our deferred tax assets because of uncertainty regarding their realization.

On October 11, 1996 we adopted and the Board of Directors and Stockholders approved a Stock Option Plan for Non-Employee Directors (the “Directors’ Plan”) and reserved a total of 29,285 shares of Common Stock for issuance thereunder. The Board of Directors and stockholders approved an additional 14,285-share allotment for the Directors’ Plan in 2000. The Directors’ Plan provided for the grant of stock options, pursuant to an automatic grant mechanism, to members of the Board of Directors who were not employees of Larscom or of Axel Johnson with regard to their service as directors. Each non-employee director received an initial grant, upon first becoming a director, to purchase a total of 2,571 shares of Common Stock, and each year thereafter, received an option to purchase a total of 857 shares of Common Stock. Each option was granted at an exercise price equal to fair market value on date of grant. Each initial grant vests in three equal annual installments and each annual grant vests in full in the third year following the date of grant. Options expire one year after termination of Board service or ten years after the date of grant. In June 2003, the Stockholders approved the amendment of the Stock Incentive Plan (below) to allow for grants to Non-Employee Directors. Therefore, the Directors Plan has been terminated. Options issued under this plan will continue with their same terms and conditions. There were approximately 17,000 options outstanding on December 31, 2003 under this plan.

On October 11, 1996 we adopted and the Board of Directors and Stockholders approved a Stock Incentive Plan (the “Incentive Plan”) under which 569,285 shares of Common Stock have been reserved for issuance. The Board of Directors and stockholders approved an additional 400,000-share allotment for the Incentive Plan in 2000. The Incentive Plan provides for the grant of incentive stock options, non-qualified

stock options, stock appreciation rights and stock bonus awards to employees and eligible consultants. The Compensation Committee of the Board of Directors administers the Incentive Plan. The maximum term of an option granted under the Incentive Plan may not exceed ten years from the date of grant (five years in the case of an incentive stock option granted to a 10% or more stockholder). Options granted prior to May 2000 generally vest over a four-year period from the date of grant. Options granted in May 2000 and thereafter generally vest over a three-year period. In June 2003, the stockholders approved an amendment to the Incentive Plan to allow for grants of stock awards under the Incentive Plan to non-employee directors. There were approximately 348,000 options outstanding on December 31, 2003 under this plan.

The following table summarizes activity under the Directors’ and Incentive Plans:

The following table summarizes information about stock options outstanding at December 31, 2003, under the Directors’ Plan and the Incentive Plan (number of options in thousands) combined:

As permitted under SFAS 123, we are continuing to measure compensation cost for stock-based compensation plans using the intrinsic value method prescribed by APB 25. The pro forma disclosures of the difference between compensation cost included in net loss and the related cost measured by the fair value method are described below.

The fair value of these options was estimated at the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:

The weighted average estimated fair value of options granted under the Directors’ Plan, the Incentive Plan and the Purchase Plan were as follows:

lease payments under all non-cancelable operating leases and sublease rental income as of December 31, 2003 are as follows (in thousands):

In our distribution agreements, we typically agree to indemnify our customers for any expenses or liabilities resulting from claimed infringements of patents, trademarks or copyrights of third parties. There have been no material payments made under our customer indemnification for the years 2003, 2002 and 2001.

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

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 December 31, 2003 (in thousands):

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

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 is 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.

Our chief executive officer and chief financial officer are responsible for establishing and maintaining “disclosure controls and procedures” (as defined in rules promulgated under the Securities Exchange Act of 1934, as amended) for Larscom Incorporated. Based on their evaluation of our disclosure controls and procedures as of December 31, 2003, our chief executive officer and chief financial officer have concluded that the Company’s controls and procedures were effective as of December 31, 2003.

There were no significant changes in the Company’s internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

A control system, no matter how well conceived, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected. The Company’s disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives, and the chief executive officer and chief financial officer have concluded that these controls and procedures are effective at the “reasonable assurance” level.

Other than the information regarding our executive officers contained in Part I of this Form 10-K report, the information required by this Item is incorporated by reference to sections captioned “Election of Directors,” “Management,” “Section 16(a) Beneficial Ownership Reporting and Compliance” and “Code of Ethics” in the definitive Larscom Incorporated Proxy Statement for the 2004 Annual Meeting of Stockholders (the “Proxy Statement”) to be filed within 120 days after fiscal year end.

The information required by this Item is incorporated by reference to the section captioned “Executive Compensation” in the Proxy Statement.

The information required by this Item is incorporated by reference to the sections captioned “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” in the Proxy Statement.

The information required by this Item is incorporated by reference to the sections captioned “Certain Transactions” in the Proxy Statement.

The information required by this Item is incorporated by reference to the sections captioned “Independent Auditors Fees,” “Audit Committee Disclosure” and “Policy on audit committee Pre-Approval” in the Proxy Statement.


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

	2. Financial Statement Schedule.


(1)	Incorporated by reference to exhibits 3.4, 10.1 and 10.3, respectively, to Larscom Incorporated Registration Statement on Form S-1 (Commission File No. 333-14001), which became effective on December 18, 1996.

(2)	Incorporated by reference to exhibit 10.11 in Registrant’s Form 10-K for the fiscal year ended December 31, 1996.

(3)	Incorporated by reference to exhibit 10.1 in Registrant’s Form 10-Q for the third quarter ended September 30, 2000.

(4)	Incorporated by reference to exhibit 10.14 in Registrant’s Form 10-K for the fiscal year ended December 31, 2000.

(5)	Incorporated by reference to exhibits 10.1.1, 10.2.1, 10.3.1, 10.17 and 10.20, respectively, in Registrant’s Form 10-K for the fiscal year ended December 31, 2001.

(6)	Incorporated by reference to exhibit 10.2 in Registrant’s Form 10-Q for the first quarter ended March 30, 2002.

(7)	Incorporated by reference to exhibits 10.3, 10.4, 10.5 and 10.8 in Registrant’s Form 10-Q for the second quarter ended June 30, 2002.


(8)	Incorporated by reference to Appendix A to the Larscom Incorporated Registration Statement on Form S-4 (SEC File No. 333-104554).

(9)	Incorporated by reference to exhibits 10.29 and 10.30, respectively, in Registrant’s form 10-K for the fiscal year ended December 31, 2002.

We furnished the following reports on Form 8-K during the quarter ending December 31, 2003:

Report on Form 8-K, dated October 27, 2003, relating to our earnings release for the third quarter of fiscal 2003.

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


	By:	/s/ DONALD W. MORGAN



	Donald W. Morgan
	Vice President, Finance
	and Chief Financial Officer
	(Principal Financial Officer
	and Principal Accounting Officer)

Know all these persons by these presents, that each person whose signature appears below continues and appoints Daniel L. Scharre and Donald W. Morgan and each of them, jointly and severally, his attorneys-in-fact, each with full power of substitution, for him in any and all capacities, to sign any and all amendments to this Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each said attorneys-in-fact or his substitute or substitutes may do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.


(1)	Incorporated by reference to exhibits 3.4, 10.1 and 10.3, respectively, to Larscom Incorporated Registration Statement on Form S-1 (Commission File No. 333-14001), which became effective on December 18, 1996.

(2)	Incorporated by reference to exhibit 10.11 in Registrant’s Form 10-K for the fiscal year ended December 31, 1996.

(3)	Incorporated by reference to exhibit 10.1 in Registrant’s Form 10-Q for the third quarter ended September 30, 2000.

(4)	Incorporated by reference to exhibit 10.14 in Registrant’s Form 10-K for the fiscal year ended December 31, 2000.

(5)	Incorporated by reference to exhibits 10.1.1, 10.2.1, 10.3.1, 10.17 and 10.20, respectively, in Registrant’s Form 10-K for the fiscal year ended December 31, 2001.

(6)	Incorporated by reference to exhibit 10.2 in Registrant’s Form 10-Q for the first quarter ended March 30, 2002.

(7)	Incorporated by reference to exhibits 10.3, 10.4, 10.5 and 10.8 in Registrant’s Form 10-Q for the second quarter ended June 30, 2002.

(8)	Incorporated by reference to Appendix A to the Larscom Incorporated Registration Statement on Form S-4 (SEC File No. 333-104554).

(9)	Incorporated by reference to exhibits 10.29 and 10.30, respectively, in Registrant’s form 10-K for the fiscal year ended December 31, 2002.


þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003

or

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to


Delaware		94-2362692
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

39745 Eureka Drive		94560
Newark, California		(ZIP Code)
(Address of principal executive offices)


		Page

PART I			1
Item 1.	BUSINESS		1
Item 2.	PROPERTIES		12
Item 3.	LEGAL PROCEEDINGS		12
Item 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS		12

PART II			12
Item 5.	MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS		12
Item 6.	SELECTED CONSOLIDATED FINANCIAL DATA		14
Item 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		14
Item 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		30
Item 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA		31
Item 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE		61
Item 9A.	CONTROLS AND PROCEDURES		61

PART III			61
Item 10.	DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT		61
Item 11.	EXECUTIVE COMPENSATION		61
Item 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS		61
Item 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS		61
Item 14.	PRINCIPAL ACCOUNTANT FEES AND SERVICES		62

PART IV			62
Item 15.	EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K		62
Signatures			65
EXHIBIT 3.2
EXHIBIT 10.16
EXHIBIT 10.17
EXHIBIT 10.18
EXHIBIT 10.19
EXHIBIT 23.1
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1


EoS and TDM Edge Access Multiplexers:		Products that enable several data-streams to be sent over a single physical line and be converted back to the individual data-streams at the receiving end. Multiplexers help to provide more efficient utilization of network resources by allowing multiple data sources to share a single connection to the WAN. Larscom provides both optical (SONET, SDH, EoS) and copper-based (TDM) multiplexers as well as a single platform that can provide both solutions (the Orion 7400 family). Multiplexers represented 5% of our total revenues for 2003.
Integrated Access Devices (“IADs”):		Products that enable SPs with small and medium business customers (“SMBs”) to efficiently integrate voice, data, and Internet access in a single system across a single line connection. IADs eliminate the need for multiple devices at the customer premise by combining a channel bank and advanced call handling for voice connections, a CSU/ DSU for line termination, a DHCP server for IP address management, a firewall for LAN security, and an IP router in a single, compact unit. Integrated Access Devices represented 22% of our total revenues for 2003.


Inverse Multiplexers:		Products that enable a single data-stream to be sent over several physical lines and converted back to a single data-stream at the receiving end. Larscom pioneered developments in inverse multiplexing to help customers “bridge the bandwidth gap” between T1/ E1 and T3/ E3. Fractional T3/ E3 service, provided in this manner, allows SPs and corporate users to leverage the existing T1/ E1-based infrastructure to provide affordable and readily-available high-speed services with an increased degree of fault tolerance. Inverse Multiplexers represented 19% of our total revenues for 2003.
CSU/ DSUs:		Products that provide an interface between user data communications equipment and SPs. They perform framing, line-conditioning and equalization functions. Channel service units/data service units (“CSU/ DSUs”) provide interconnection between the LAN and the WAN. CSU/ DSUs represented 31% of our total revenues for 2003.
Service:		Repair, maintenance, installation and training. Service represented 23% of our total revenues for 2003.



	Year Ended
	December 31,

	2003			2002			2001

MCI		17	%		20	%		38	%
Lucent		16	%		*			*
LTI Datacom		11	%		7	%		3	%
AT&T		7	%		14	%		9	%


Name	Age		Position

Daniel L. Scharre		53	President, Chief Executive Officer and Director
Gurdip Jande		42	Vice President, Marketing
Donald W. Morgan		58	Vice President, Finance and Chief Financial Officer
Peter L. Moulds		48	Vice President, Worldwide Sales
Adam Opoczynski		57	Vice President, Engineering


Item 4.	*Submission of Matters to a Vote of Security Holders*


Item 5.	*Market for Registrant’s Common Equity and Related Shareholder Matters*



	2003				2002


	Bid Prices

	High		Low		High		Low

First quarter	$	3.1500	$	1.7500	$	12.5300	$	7.0000
Second quarter	$	7.2500	$	1.7500	$	9.5200	$	4.6900
Third quarter	$	5.3600	$	2.4000	$	4.9000	$	2.0300
Fourth quarter	$	5.7500	$	3.3500	$	3.5000	$	1.6100


	*Reclassification of Class A and Class B Common Shares:*



			Years Ended December 31,

			2003			2002			2001			2000			1999


			(In thousands, except per share data)
Consolidated Statement of Operations Data:
Product revenues			$	16,904		$	17,977		$	36,150		$	49,136		$	48,274
Service revenues				5,022			5,510			5,721			5,528			4,565

		Total revenues		21,926			23,487			41,871			54,664			52,839

Product cost of revenues				11,995			9,276			23,419			23,519			24,298
Service cost of revenues				912			1,071			1,432			2,423			2,125

		Total cost of revenues		12,907			10,347			24,851			25,942			26,423

		Gross profit		9,019			13,140			17,020			28,722			26,416

Operating expenses:
	Research and development			4,845			4,199			6,779			9,900			8,049
	Selling, general and administrative			14,418			16,051			20,680			24,116			21,570
	Amortization of acquisition intangibles			385			—			—			—			—
	Restructuring			2,458			254			5,772			—			—
	Impairment of assets			364			—			—			—			—
	In-process research & development			155			—			—			—			—

		Total operating expenses		22,625			20,504			33,231			34,016			29,619

Loss from operations				(13,606	)		(7,364	)		(16,211	)		(5,294	)		(3,203	)
		Other income, net		381			356			1,198			1,760			1,247

Loss before income taxes				(13,225	)		(7,008	)		(15,013	)		(3,534	)		(1,956	)
		Income tax provision (benefit)		37			(2,113	)		15,866			(1,035	)		(684	)

Net Loss			$	(13,262	)	$	(4,895	)	$	(30,879	)	$	(2,499	)	$	(1,272	)

Basic and diluted loss per share			$	(3.26	)	$	(1.82	)	$	(11.49	)	$	(0.94	)	$	(0.49	)

Basic and diluted weighted average shares				4,073			2,693			2,687			2,656			2,619


Item 7.	*Management’s Discussion and Analysis of Financial Condition and Results of Operations*


	*Investments, Accounts Receivable Risk and Accounts payable*



			Years Ended
			December 31,

			2003			2002			2001

Product revenues				77	%		77	%		86	%
Service revenues				23			23			14

		Total revenues		100			100			100

Product cost of revenues				55			39			56
Service cost of revenues				4			5			3

		Total cost of revenues		59			44			59

		Gross profit		41			56			41

Operating expenses:
	Research and development			22			18			16
	Selling, general and administrative			66			68			49
	Amortization of acquisition intangibles			2			—			—
	Restructuring			11			1			14
	Impairment of assets			1			—			—
	In-process research & development			1			—			—

		Total operating expenses		103			87			79

Loss from operations				(62	)		(31	)		(38	)
		Other income, net		2			1			3

Loss before income taxes				(60	)		(30	)		(35	)
		Income tax provision (benefit)		—			(9	)		39

Net Loss				(60	)%		(21	)%		(74	)%


Item 1.	*Business*


	*Multiplexers:*


	*Integrated Access Devices:*


	*Inverse Multiplexers:*


					Selling,
			Research &		General &
	Manufacturing		Development		Administration		Total

May of 2002		4		4		8		16
October of 2002		—		6		8		14
June of 2003		4		5		10		19
July/ September of 2003		1		2		17		20
December of 2003		—		7		1		8

Total		9		24		44		77



	Twelve Months
	Ended
	December 31,

	2002			2001

MCI		20	%		38	%
AT&T		14	%		9	%


	Less Than						After
	1 Year		1-3 Years		4-5 Years		5 Years

Operating lease obligations	$	1,968	$	1,469	$	771	$	—
Manufacturing services agreements		1,445		—		—		—
Non-cancelable and non-returnable purchase orders		156		—		—		—
Contingent payment for licensed technology		100		—		—		—

	$	3,669	$	1,469	$	771	$	—


Item 7A.	*Quantitative and Qualitative Disclosures About Market Risk*


Item 8.	*Financial Statements and Supplementary Data*


	Page

Report of Independent Auditors		32
Consolidated Balance Sheets as of December 31, 2003 and 2002		33
Consolidated Statements of Operations for the years ended December 31, 2003, 2002 and 2001		34
Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss) for the years ended December 31, 2003, 2002 and 2001		35
Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001		36
Notes to Consolidated Financial Statements		37


																			Accumulated
			Class A				Class B												Other						Total
			Common Stock				Common Stock						Additional						Comprehensive						Stock-			Comprehensive
													Paid-In			Deferred			Income			Accumulated			holders’			Income
			Shares		Amount		Shares			Amount			Capital			Compensation			(Loss)			Deficit			Equity			(Loss)


			(In thousands)
Balance at December 31, 2000				1,245		13		1,429			14			82,760			—			(1	)		(29,742	)		53,044
Comprehensive income (loss):
	Net loss			—		—		—			—			—			—						(30,879	)		(30,879	)	$	(30,879	)

		Comprehensive loss																										$	(30,879	)

Issuance under stock plans				17		—		—			—			612			—						—			612

Balance at December 31, 2001				1,262	$	13		1,429		$	14		$	83,372		$	—		$	(1	)	$	(60,621	)	$	22,777
Comprehensive income (loss):
	Net loss			—		—		—			—			—			—						(4,895	)		(4,895	)	$	(4,895	)
	Unrealized investment gain adjustment																—			4						4

		Comprehensive loss																										$	(4,895	)

Issuance under stock plans				4		—		—			—			21			—						—			21

Balance at December 31, 2002				1,266	$	13		1,429		$	14		$	83,393		$	—		$	3		$	(65,516	)	$	17,907
Comprehensive income (loss):
	Net loss			—		—		—			—			—			—						(13,262	)		(13,262	)	$	(13,262	)
	Foreign currency translation adjustment			—		—		—			—			—			—			(3	)		—			(3	)	$	(3	)
	Unrealized investment gain adjustment			—		—		—			—			—			—			(4	)		—			(4	)		(4	)

		Comprehensive loss																										$	(13,269	)

	Shares issues in connection with VINA merger			2,394		24								6,188			(87	)		—						6,125
	Amortization of deferred compensation			—													12			—						12
	Reclassification of Class B shares			1,429		14		(1,429	)		(14	)
	Departure of employees with unvested stock options													(54	)		54			—						—
Issuance under stock plans				10		—		—			—			31			—						—			31

Balance at December 31, 2003				5,099	$	51		(0	)	$	0		$	89,558		$	(21	)	$	(4	)	$	(78,778	)	$	10,806


	*Concentrations of Credit Risk and Customer Concentration*



	Years Ended December 31,

	2003			2002(1)			2001(1)


	(In thousands, except per share data)
Net loss	$	(13,262	)	$	(4,895	)	$	(30,879	)
Weighted average Common Stock outstanding		4,073			2,693			2,687
Basic and diluted loss per share	$	(3.26	)	$	(1.82	)	$	(11.49	)


Value of Larscom Stock issued		$	5,329
Value of options and warrants issued			883
Direct transaction costs			829

	Total purchase price	$	7,041


Tangible assets acquired		$	6,750
Amortizable intangible assets:
Developed technology			2,590
Trade names/trademarks			152
Customer contracts/relationships			1,523
Order backlog			78

	Total assets acquired		11,093
In-process research and development			155
Liabilities assumed			(3,718	)
Deferred compensation			87
Insurance premium liability assumed			(576	)

	Net assets acquired	$	7,041



	(Unaudited)
	December 31,

	2003			2002

Total net revenues	$	25,243		$	48,630
Net loss	$	(20,755	)	$	(29,661	)
Net loss per share	$	(5.10	)	$	(11.01	)



	December 31, 2003

	Gross
	Carrying		Accumulated		Net
	Amount		Amortization		Intangibles

Developed technology	$	1,041	$	103	$	938
Tradenames/trademarks		147		30		117
Customer contracts/relationships		1,457		237		1,220
Goodwill		854		854		—
Other intangible assets		2,192		2,192		—
Order backlog		78		78		—

	$	5,769	$	3,494	$	2,275



	December 31, 2002

	Gross
	Carrying		Accumulated		Net
	Amount		Amortization		Intangibles

Goodwill	$	854	$	854	$	—
Other intangible assets		2,192		2,192		—

	$	3,046	$	3,046	$	—


Impaired intangible assets		$	1,448
Impaired fixed assets			364
Impaired prepaid expenses			15
Impaired inventories			129

	Total MBX impairment charges	$	1,956


Included in cost of revenues		$	1,592
Included in operating expenses			364

	Total MBX impairment charges	$	1,956


						Cumulative
			Cumulative			Non-Cash			Reserve
	Total		Cash			Charges &			December 31,
June 2001 Restructuring	Charges		Charges			Adjustments			2003


	(In thousands)
Employee termination costs	$	2,293	$	(1,782	)	$	(511	)	$	—
Real estate lease		2,080		(991	)		407			1,496
Fixed asset write-down		388		—			(388	)		—

Total	$	4,761	$	(2,773	)	$	(492	)	$	1,496


		2002

		(In thousands)
Reconciliation of projected benefit obligation
	Projected benefit obligation at January 1,	$	5,559
	Service cost		16
	Interest cost		402
	Actuarial loss		677
	Benefits paid		(204	)

	Projected benefit obligation at December 31,	$	6,450

Weighted-average assumptions as of December 31,
	Discount rate		6.75	%
	Expected return on plan assets		8.50	%
	Rate of compensation increase		4.25	%
Components of net periodic (benefit) cost
	Service cost	$	16
	Interest cost		402
	Expected return on assets		(443	)
	Net amortization		7

	Net periodic benefit	$	(18	)



	Options Outstanding


	Directors’ Plan					Incentive Plan

				Weighted					Weighted
				Average					Average
	Number of			Exercise		Number of			Exercise
	Shares			Price		Shares			Price

	(In thousands)					(In thousands)
December 31, 2000		15			59.08		460			25.55
Granted		3			16.59		110			11.20
Exercised		—			—		(8	)		15.33
Canceled		—			—		(197	)		25.55

December 31, 2001		17			52.71		365			21.56
Granted		2			7.21		100			8.19
Exercised		—			—		—			—
Canceled		—			—		(178	)		22.40

December 31, 2002		19			48.58		287			16.31
Granted		5			5.29		98			2.60
Granted as part of VINA merger		—			—		185			24.29
Exercised		—			—		(9	)		3.51
Canceled		(7	)		58.55		(213	)		19.50

December 31, 2003		17			31.16		348			14.67

Options exercisable at December 31, 2003		13		$	39.60		258		$	18.34



		Options Outstanding						Options Exercisable

				Weighted
		Number		Average		Weighted		Number		Weighted
		Outstanding at		Remaining		Average		Exercisable at		Average
		December 31,		Contractual		Exercise		December 31,		Exercise
Range of Exercise Prices		2003		Life (years)		Price		2003		Price

$1.93 - $3.00			64		9.14	$	2.00		20	$	2.08
$3.01 - $6.00			47		8.62	$	4.40		17	$	4.17
$6.01 - $9.00			112		8.02	$	8.69		92	$	8.73
$9.01 - $15.00			41		6.15	$	11.49		41	$	11.49
$15.01 - $30.00			68		6.48	$	26.72		68	$	26.72
$31.01 - $172.00			33		6.23	$	61.24		33	$	61.24

	Total/Average		365		7.64	$	15.46		271	$	19.37