LIVINGSTON ENTERPRISES INC, S-1/A, 1997-06-24

LIVINGSTON ENTERPRISES INC
S-1/A, 1997-06-24
COMPUTER INTEGRATED SYSTEMS DESIGN

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 24, 1997

REGISTRATION NO. 333-27335
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- --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------

AMENDMENT NO. 2

TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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LIVINGSTON ENTERPRISES, INC.

(Exact name of Registrant as specified in its charter)

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<S> <C> <C>
CALIFORNIA 7373 77-0127305
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
incorporation or organization) Number)
</TABLE>

4464 WILLOW ROAD
PLEASANTON, CALIFORNIA 94588
(510) 737-2100

(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)

STEVEN M. WILLENS
PRESIDENT AND CHIEF EXECUTIVE OFFICER
LIVINGSTON ENTERPRISES, INC.
4464 WILLOW ROAD
PLEASANTON, CALIFORNIA 94588
(510) 737-2100

(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------------------

COPIES TO:

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<S> <C>
Steven E. Bochner, Esq. William L. Hudson, Esq.
Nevan C. Elam, Esq. Randall M. Lake, Esq.
Richard S. Arnold, Jr., Esq. Brobeck, Phleger & Harrison LLP
Wilson Sonsini Goodrich & Rosati Spear Street Tower One Market Plaza
Professional Corporation San Francisco, California 94105
650 Page Mill Road (415) 442-0900
Palo Alto, California 94304
(415) 493-9300
</TABLE>

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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
--------------------------

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: / /

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: / /

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: / /

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: / /
--------------------------

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.

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<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>

PROSPECTUS (SUBJECT TO COMPLETION)
ISSUED JUNE , 1997

[LOGO]

COMMON STOCK
-----------------

OF THE SHARES OF COMMON STOCK OFFERED HEREBY, SHARES ARE BEING
SOLD BY THE COMPANY AND SHARES ARE BEING SOLD BY A SELLING
SHAREHOLDER. SEE "PRINCIPAL AND SELLING SHAREHOLDERS." THE COMPANY WILL
NOT RECEIVE ANY OF THE PROCEEDS FROM THE SALE OF SHARES BY THE SELLING
SHAREHOLDERS. PRIOR TO THIS OFFERING, THERE HAS BEEN NO PUBLIC
MARKET FOR THE COMMON STOCK OF THE COMPANY. IT IS CURRENTLY
ESTIMATED THAT THE INITIAL PUBLIC OFFERING PRICE WILL BE
BETWEEN $ AND $ PER SHARE. SEE "UNDERWRITERS"
FOR A DISCUSSION OF THE FACTORS TO BE CONSIDERED IN
DETERMINING THE INITIAL OFFERING PRICE. APPLICATION
HAS BEEN MADE TO LIST THE SHARES FOR QUOTATION ON
THE NASDAQ NATIONAL MARKET UNDER THE SYMBOL
"LIVS."

------------------------

THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
COMMENCING ON PAGE 5 HEREOF.
-----------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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PRICE $ A SHARE
-------------------

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<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS (1) COMPANY (2) SHAREHOLDERS
--------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
PER SHARE............................... $ $ $ $
TOTAL (3)............................... $ $ $ $
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(1) THE COMPANY AND THE SELLING SHAREHOLDERS HAVE AGREED TO INDEMNIFY THE
UNDERWRITERS AGAINST CERTAIN LIABILITIES, INCLUDING LIABILITIES UNDER THE
SECURITIES ACT OF 1933, AS AMENDED. SEE "UNDERWRITERS."

(2) BEFORE DEDUCTING EXPENSES PAYABLE BY THE COMPANY ESTIMATED AT $ .

(3) THE COMPANY AND CERTAIN SELLING SHAREHOLDERS HAVE GRANTED THE UNDERWRITERS
AN OPTION, EXERCISABLE WITHIN 30 DAYS OF THE DATE HEREOF, TO PURCHASE UP
TO AN AGGREGATE OF AND ADDITIONAL SHARES OF COMMON STOCK,
RESPECTIVELY, AT THE PRICE TO PUBLIC LESS UNDERWRITING DISCOUNTS AND
COMMISSIONS FOR THE PURPOSE OF COVERING OVER-ALLOTMENTS, IF ANY. IF THE
UNDERWRITERS EXERCISE SUCH OPTION IN FULL, THE TOTAL PRICE TO PUBLIC,
UNDERWRITING DISCOUNTS AND COMMISSIONS, PROCEEDS TO COMPANY AND PROCEEDS
TO SELLING SHAREHOLDERS WILL BE $ , $ , $ AND
$ , RESPECTIVELY. SEE "UNDERWRITERS."
------------------------

THE SHARES ARE OFFERED, SUBJECT TO PRIOR SALE, WHEN, AS AND IF ACCEPTED BY
THE UNDERWRITERS NAMED HEREIN AND SUBJECT TO APPROVAL OF CERTAIN LEGAL MATTERS
BY BROBECK, PHLEGER & HARRISON LLP, COUNSEL FOR THE UNDERWRITERS. IT IS EXPECTED
THAT DELIVERY OF THE SHARES WILL BE MADE ON OR ABOUT , 1997 AT THE
OFFICE OF MORGAN STANLEY & CO. INCORPORATED, NEW YORK, N.Y., AGAINST PAYMENT
THEREFOR IN IMMEDIATELY AVAILABLE FUNDS.
-------------------

MORGAN STANLEY DEAN WITTER

HAMBRECHT & QUIST

ROBERTSON, STEPHENS & COMPANY

, 1997
<PAGE>
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS
PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING SHAREHOLDER OR
ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY BY ANY PERSON IN ANY JURISDICTION IN WHICH IT IS
UNLAWFUL FOR SUCH PERSON TO MAKE SUCH AN OFFERING OR SOLICITATION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCES IMPLY THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
DATE SUBSEQUENT TO THE DATE HEREOF.
------------------------

UNTIL , 1997 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
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TABLE OF CONTENTS

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PAGE
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Prospectus Summary......................................................................................... 3
The Company................................................................................................ 4
Risk Factors............................................................................................... 5
Use of Proceeds............................................................................................ 16
Dividend Policy............................................................................................ 16
Capitalization............................................................................................. 17
Dilution................................................................................................... 18
Selected Consolidated Financial Data....................................................................... 19
Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 20
Business................................................................................................... 27
Management................................................................................................. 38
Certain Transactions....................................................................................... 45
Principal and Selling Shareholders......................................................................... 46
Description of Capital Stock............................................................................... 48
Shares Eligible for Future Sale............................................................................ 49
Underwriters............................................................................................... 51
Legal Matters.............................................................................................. 53
Experts.................................................................................................... 53
Additional Information..................................................................................... 53
Index to Consolidated Financial Statements................................................................. F-1
</TABLE>

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The Company intends to furnish to its shareholders annual reports containing
consolidated financial statements audited by an independent public accounting
firm and quarterly reports for the first three quarters of each fiscal year
containing unaudited consolidated financial information.
------------------------

The Company's logo, Livingston, PortMaster, ComOS, PMconsole, RADIUS and
ChoiceNet are trademarks of the Company. ProVision is a service mark of the
Company. This Prospectus also includes product names and other trade names and
trademarks of the Company and of other organizations.
------------------------

UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS DOES NOT GIVE
EFFECT TO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION.
------------------------

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE OFFERING,
AND MAY BID FOR, AND PURCHASE, SHARES OF COMMON STOCK IN THE OPEN MARKET. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITERS."

2
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INTEGRATED REMOTE ACCESS SOLUTIONS
FOR INTERNET SERVICE PROVIDERS

Livingston's high performance, integrated remote access solutions enable
Internet Service Providers ("ISPs") worldwide to cost-effectively connect their
subscribers to the Internet. All of the Company's remote access products
incorporate Livingston's ComOS operating system, which has been architected
specifically for remote access applications to provide robust routing, security,
centralized device management and subscriber administration functions. Since the
Company's introduction of its first remote access server in 1990, over 2,000
ISPs have purchased the Company's products. The Company believes that more ISPs
worldwide use Livingston's remote access servers than those of any other vendor
based on data compiled by Infonetics Research, Inc. and the Company's knowledge
of the remote access market.

Diagram of an ISP's Point of Presence

Housed within the ISP's local Point of Presence, Livingston's remote access
products connect dial-up subscribers communicating with the ISP over standard
analog, ISDN, Frame Relay or T1/E1 leased line connections to the Internet via
the ISP's router-based network. The Company's ComOS operating system enables the
ISP to perform a number of critical functions including:

- - Routing: support for TCP/IP, IPX, OSPF, PPP, RIP and other LAN/WAN protocols

- - Security: subscriber authentication, encryption and firewall filtering

- - Network management: configuration and device management

- - Subscriber administration: accounting, billing and Internet content management

Photo of Livingston's PortMaster 3, PortMaster 2,
FireWall Router, and Office Router products

In November 1996, Livingston introduced the PortMaster 3, the Company's next
generation access concentrator, which integrates digital modem, router and
communications server functionality with support for conventional analog, ISDN,
Frame Relay and T1/E1 service connections in a compact 3.5 inch high chassis.
The PortMaster 3 combines the Company's core software technology, the ComOS
operating system, with a streamlined hardware design to offer ISPs the following
advantages:

- - Integrated hardware solution

- - Designed to support emerging technologies such as 56K modems

- - Scalability and manageability

- - Reliability

- - Security and administrative capabilities

- - Low price per port

Livingston also provides office routers and firewall routers that are resold by
ISPs to corporate customers for Internet connectivity and other remote access
networking applications.
<PAGE>
PROSPECTUS SUMMARY

THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN
THIS PROSPECTUS.

THE COMPANY

Livingston is a leading provider of integrated remote access networking
solutions for ISPs worldwide. Used by ISPs to connect their subscribers to the
Internet, the Company's remote access servers deliver high performance at a low
price per port, making them particularly well-suited for the intensely
competitive ISP market. The Company also provides office routers and firewall
routers that are resold by ISPs to corporate customers for Internet connectivity
and other remote access networking applications. Since the Company's
introduction of its first remote access server in 1990, over 2,000 ISPs have
purchased the Company's remote access products. The Company believes that more
ISPs worldwide use Livingston's remote access servers than those of any other
vendor based on data compiled by Infonetics Research, Inc.* and the Company's
knowledge of the remote access market.

In November 1996, the Company introduced the PortMaster 3 access
concentrator, its next generation remote access platform, which integrates
digital modem, router and communications server functionality with support for
analog modems, ISDN PRI, Frame Relay and T1/E1 service connections in a compact
3.5 inch high chassis. The PortMaster 3 has been designed to be easily upgraded
to support emerging technologies such as 56K modem functionality. The PortMaster
3 combines the Company's core software technology, the ComOS operating system,
with an integrated hardware design that provides ISPs with a high port density,
highly scalable remote access solution. Architected specifically for remote
access applications, ComOS is incorporated in all of the Company's remote access
products and provides robust routing, security, centralized device management
and subscriber administration capabilities. Based on the foregoing factors, the
Company believes that the PortMaster 3 platform positions it to better address
the needs of large ISPs and Telcos, and to maintain its leadership position with
the Company's established base of local and regional ISP customers.

THE OFFERING

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Common Stock offered........................................ shares, including
shares by the Company and
shares by a Selling Shareholder

Common Stock to be outstanding after the offering........... shares (1)

Use of proceeds............................................. For general corporate purposes, including working capital

Proposed Nasdaq National Market symbol...................... LIVS
</TABLE>

SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

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<CAPTION>
NINE MONTHS
ENDED
YEARS ENDED AUGUST 31, -----------
----------------------------------------------------- MAY 31,
1992 1993 1994 1995 1996 1996
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<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net revenues............................................... $ 1,424 $ 2,083 $ 6,180 $ 20,461 $ 46,107 $ 34,809
Gross profit............................................... 951 1,121 3,327 12,407 27,540 20,688
Net income................................................. 320 86 1,027 4,904 8,845 7,543
Net income per share (2)................................... $ .03 $ .01 $ .08 $ .38 $ .63 $ .54
Shares used in per share computations (2).................. 12,423 12,423 12,423 12,842 14,102 13,942

MAY 31,
1997
-----------
<S> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net revenues............................................... $ 54,485
Gross profit............................................... 32,890
Net income................................................. 10,381
Net income per share (2)................................... $ .72
Shares used in per share computations (2).................. 14,374
</TABLE>

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<CAPTION>
MAY 31, 1997
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ACTUAL AS ADJUSTED(3)
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<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents............................................................................ $ 16,005 $
Working capital...................................................................................... 23,654
Total assets......................................................................................... 39,917
Total shareholders' equity........................................................................... 26,244
</TABLE>

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(1) Based on 12,405,735 shares of Common Stock outstanding as of May 31, 1997.
Excludes 2,601,247 shares of Common Stock issuable upon the exercise of
options outstanding under the Company's 1994 Stock Option Plan at May 31,
1997, with a weighted average exercise price of $3.99 per share, and 40,190
shares of Common Stock issuable upon the exercise of options granted under
the Company's 1994 Stock Option Plan subsequent to May 31, 1997, with a
weighted average exercise price of $17.50 per share. Also excludes (i)
1,500,000 shares of Common Stock reserved for issuance under the Company's
1997 Stock Plan and (ii) 500,000 shares of Common Stock reserved for
issuance under the Company's 1997 Employee Stock Purchase Plan. See
"Management--Executive Compensation," "Description of Capital Stock" and
Note 5 of Notes to Consolidated Financial Statements.

(2) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the determination of net income per share and shares used in per share
computations.

(3) As adjusted to reflect the sale of shares of Common Stock offered by
the Company hereby at an assumed initial public offering price of $ per
share and after deducting estimated underwriting discounts and commissions
and estimated offering expenses payable by the Company. See "Use of
Proceeds" and "Capitalization."

- ------------

* "The ISP Opportunity 1997" by Infonetics Research, Inc.

3
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THE COMPANY

Livingston Enterprises, Inc. ("Livingston" or the "Company") is a leading
provider of integrated remote access networking solutions for Internet Service
Providers ("ISPs") worldwide. Used by ISPs to connect their subscribers to the
Internet, the Company's remote access servers deliver high performance at a low
price per port, making them particularly well-suited for the intensely
competitive ISP market. The Company also provides office routers and firewall
routers that are resold by ISPs to corporate customers for Internet connectivity
and other remote access networking applications. Since the Company's
introduction of its first remote access server in 1990, over 2,000 ISPs have
purchased the Company's remote access products. The Company believes that more
ISPs worldwide use Livingston's remote access servers than those of any other
vendor based on data compiled by Infonetics Research, Inc.* and the Company's
knowledge of the remote access market.

The number of Internet subscribers and Internet traffic is growing rapidly
as the Internet continues to emerge as a global medium for communication,
commerce and entertainment. To accommodate Internet subscriber growth and
customers' increasing bandwidth requirements, many ISPs are dramatically
increasing their investments in networking infrastructure, particularly in the
area of remote access equipment.

The ISP market is evolving rapidly and competition in the industry has
intensified as many major telecommunications service providers have entered or
announced plans to enter the ISP market. ISPs increasingly need to provide
reliable service with maximum accessibility and minimum downtime to maintain
customer satisfaction, forcing ISPs to continually expand and upgrade their
networks without service interruption. Competition to attract and maintain
subscribers requires ISPs to improve the performance of their networks by
incorporating new technologies such as 56K modems. As a result, ISPs are
increasingly focused on procuring remote access equipment that is
cost-effective, reliable, scalable and interoperable, includes comprehensive
network management and security capabilities and provides support for emerging
technologies.

Livingston's goal is to be the leading supplier of technologically advanced
and cost-effective remote access solutions to ISPs worldwide. Livingston's
strategy is to leverage its flexible ComOS operating system and its modular
hardware design to provide cost-effective, highly scalable and reliable remote
access technologies that incorporate next generation networking functionality.
The Company is focused on maintaining its market leadership with local and
regional ISPs, continuing to build its direct sales and technical support
capabilities, and increasing its market share with major national and
international ISPs. The Company also plans to expand its presence in Europe,
Japan and other international markets.

Livingston was incorporated in California in 1986. Unless the context
otherwise requires, references in this Prospectus to "Livingston" and the
"Company" refer to Livingston Enterprises, Inc., a California corporation, and
its subsidiaries. The Company's principal executive offices are located at 4464
Willow Road, Pleasanton, California 94588. Its telephone number is (510)
737-2100 and its World Wide Web site is located at http://www.livingston.com.
Information contained in the Company's World Wide Web site is not part of this
Prospectus.

- ---------

* "The ISP Opportunity 1997" by Infonetics Research, Inc.

4
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RISK FACTORS

IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING
FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING AN INVESTMENT IN THE SHARES
OF COMMON STOCK OFFERED HEREBY. THIS PROSPECTUS CONTAINS FORWARD-LOOKING
STATEMENTS WHICH INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING
STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET FORTH BELOW AND
ELSEWHERE IN THIS PROSPECTUS.

UNPREDICTABLE AND FLUCTUATING QUARTERLY OPERATING RESULTS. Due to the
emerging and evolving nature of the markets for the Company's products and the
likelihood of increased competition, there can be no assurance that growth in
net revenues will continue or that the Company will continue to be profitable.
As a result of the Company's recent transition to its new product, PortMaster 3,
the Company believes that future quarterly operating results could be negatively
impacted by factors such as a continuing decline in sales of many of the
Company's earlier generation products, which the Company expects, and a lack of
sustained market acceptance of PortMaster 3. In addition, the Company expects
that software licensing royalties from US Robotics Access Corp., Inc. ("USR")
will terminate in fiscal 1998, if not sooner. For the Company's fiscal year
ended August 31, 1996 and the nine months ended May 31, 1997, royalty revenues
from USR represented 6.2% and 12.8% of net revenues, respectively. To the extent
that such termination in royalty revenue and a decline in revenue of the
Company's earlier generation products is not offset by sales of PortMaster 3 and
future products, the Company's business, quarterly operating results and
financial condition would be materially adversely affected. See "--Risks
Associated with the Termination of the USR Relationship."

The Company's quarterly operating results could also be materially adversely
affected by a wide variety of factors including the following: price
competition; the mix of products sold; the ability of the Company to provide
product features required by ISPs; product flaws that cannot be detected or
remedied in a timely manner; shortages of critical components; the buying
patterns of ISPs and other customers; the level of Internet usage by customers
of ISPs; the ability of the Company to succeed in selling products to large
ISPs, interexchange carriers such as AT&T, MCI and Sprint, and Regional Bell
Operating Companies ("RBOCs") (interexchange carriers and RBOCs may be
collectively referred to as "Telcos"); the ability of the Company to hire and
retain additional sales personnel; consolidation in the ISP markets; the mix of
distribution channels employed by the Company; changes in the levels of
inventory held by third party resellers; the timing of orders from, and
shipments to, customers; and seasonality and general economic conditions.

The Company typically operates with a relatively small backlog and, as a
result, quarterly sales and operating results generally depend on the volume and
timing of, and ability to fulfill, orders received within the quarter, which are
difficult to forecast. A significant portion of the Company's spending is
relatively fixed in advance based on the Company's forecasts of future sales. If
sales are below expectations in any given quarter, the adverse impact of the
shortfall on the Company's quarterly operating results may be magnified by the
Company's inability to adjust spending to compensate for the shortfall.

As a result of the Company's plans to expand its direct sales and marketing
and research and development capabilities, the Company anticipates that its
operating expenses will substantially increase, which, in the absence of
increased sales of the Company's products, could have a material adverse effect
on the Company's quarterly operating results. Accordingly, there can be no
assurance that the Company will be able to sustain profitability in the future,
particularly on a quarter-to-quarter basis, or that the Company will not
experience material fluctuations in quarterly operating results. Additionally,
it is possible that the Company's future quarterly operating results may fall
below the expectations of analysts and investors. In such event, the market
price of the Company's Common Stock would likely be materially adversely
affected. See "--Possible Volatility of Stock Price" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

5
<PAGE>

DEPENDENCE ON SALES OF PORTMASTER 3. In the fall of 1996, the Company
introduced PortMaster 3, sales of which represented a majority of the Company's
net revenues in the third quarter of fiscal 1997. There can be no assurance that
such level of sales will be maintained. In particular, there can be no assurance
that the initial level of sales does not reflect pent up demand from prior
quarters as a result of the anticipated introduction of PortMaster 3. The
PortMaster 3 is the Company's first product that contains an integrated modem
and thus directly competes with remote access products with integrated modems
offered by larger competitors such as Ascend Communications, Inc. ("Ascend"),
USR and Cisco Systems, Inc. ("Cisco") which have dominated this segment of the
remote access market. There can be no assurance that the PortMaster 3 can
successfully compete with products offered by these competitors. See "--
Allegation of Patent Infringement." In addition, future sales of PortMaster 3
would be materially adversely affected in the event that the Company is unable
to offer on a timely basis a 56K modem upgrade for PortMaster 3. Sales of
PortMaster 3 would also be materially adversely affected in the event that the
ISP market widely adopts an alternative 56K modem technology such as USR's x2
modem technology. See "-- Risks Associated with 56K Modem Technology." From time
to time, the Company's products may contain product flaws. Due to the complexity
of the PortMaster 3, there can be no assurance that the PortMaster 3 does not
contain undetected product flaws or that the Company will be able to timely or
effectively remedy such flaws. See "--Risks Associated with Rapid Technological
Changes." In addition, because the PortMaster 3 is the Company's first product
intended to address large ISPs and Telcos, there can be no assurance that this
product will prove suitable for, or achieve acceptance in, these markets. See
"--Risks Associated with Entry into New and Unfamiliar Markets." Sales of the
Company's earlier generation PortMaster products declined in the fourth quarter
of fiscal 1996 and the nine months ended May 31, 1997, and the Company expects
such sales will continue to decline and that the Company will be increasingly
dependent upon sales of PortMaster 3 to sustain and grow its net revenues. There
can be no assurance that sales of PortMaster 3 will be sufficient to sustain and
grow the Company's net revenues. The inability of the Company to increase sales
of its PortMaster 3 would have a material adverse effect on the Company's
business, results of operations and financial condition. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business--Industry Background and Market" and "--Technology and Products."

RISKS ASSOCIATED WITH NEW PRODUCT INTRODUCTIONS. The market for the
Company's products is characterized by rapidly changing technologies, evolving
industry standards, frequent competitive product introductions and short product
life cycles. The Company's introduction of new or enhanced products requires the
Company to effectively manage the transition from older products to newer
generation products in order to minimize disruption in customer ordering
patterns, avoid excessive levels of older product inventories and ensure that
adequate supplies of new products can be delivered to meet customer demand. In
the past, the Company has experienced problems with product transitions. For
example, the Company experienced a decrease in net revenues in the fourth
quarter of fiscal 1996, when sales of the Company's earlier generation products
decreased primarily as a result of the anticipated introduction of PortMaster 3.
As a result, the Company recorded charges aggregating approximately $3.3 million
through the first quarter of fiscal 1997 as a reserve for obsolete PortMaster 2
inventory. A failure by the Company to effectively manage new product
introductions in the future could have a material adverse effect on the
Company's business, results of operations and financial condition. See "--Risks
Associated with Rapid Technological Changes."

DEPENDENCE ON SALES TO LOCAL AND REGIONAL ISPS. Historically, the Company
has sold a substantial majority of its products to local and regional ISPs. The
business of local and regional ISPs is largely dependent upon free reciprocal
access to networks of large regional and national ISPs. Recently, certain
national ISPs have announced that they plan to eliminate such free access to
local and regional ISPs. There can be no assurance such limitations, or other
limitations by national ISPs, would not materially adversely impact the growth
or success of local and regional ISPs and thereby materially adversely impact
the sales of the Company's products. Additionally, local and regional ISPs often
have limited access to capital and as a result may be constrained in their
ability to purchase the Company's products. Accordingly, there can be

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no assurance that sales to such ISPs, individually or as a group, will equal or
exceed historical levels in any future period. A decrease in purchases of the
Company's products by local and regional ISPs generally would materially
adversely affect the Company's business, results of operations and financial
condition. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business--Sales and Marketing."

RISKS ASSOCIATED WITH 56K MODEM TECHNOLOGY. Modem technology is rapidly
evolving and with the recent introduction of 56K modem technology, ISPs are
increasingly demanding remote access solutions that incorporate 56K modem
technology. There currently are two principal competing 56K modem technologies:
(i) the x2 modem technology developed by USR and (ii) the K56flex modem
technology developed by Lucent Technologies ("Lucent") and Rockwell
Semiconductor Systems, Inc. ("Rockwell"). The Company has adopted the
Lucent/Rockwell technology and has announced its offer to provide an upgrade,
when and if available, to existing PortMaster 3 customers, upon request and at
no additional charge (other than shipping costs), to support K56flex
specifications. The Company does not plan to support the USR technology. In the
event that USR's technology becomes widely adopted by ISPs, or an industry
standard is adopted that is not compatible with the 56K modem solution
implemented by the Company, the Company's business, results of operations and
financial condition would be materially adversely affected. The Company believes
that in order to remain competitive it must successfully introduce a 56K modem
solution before the end of fiscal 1997. The Company depends on Lucent for the
development of microchips for its 56K implementation. There can be no assurance
that Lucent will be able to deliver to the Company sufficient quantities of 56K
microchips, that the Company will not experience problems or delays
incorporating these microchips into its products or that the Company will not
experience other difficulties introducing a 56K modem solution. Another
competitor of the Company which has adopted the Lucent/Rockwell technology
recently announced that it expected to experience an unanticipated delay in
availability of the 56K modem technology. There can be no assurance that the
Company will not also experience unanticipated delays in offering a 56K modem
solution. The inability of the Company to offer a 56K modem solution on a timely
basis would materially adversely impact sales of the PortMaster 3 and would have
a material adverse effect on the Company's business, results of operations and
financial condition. See "--Dependence on Sales of PortMaster 3."

RISKS ASSOCIATED WITH ENTRY INTO NEW AND UNFAMILIAR MARKETS. To date, a
substantial majority of the Company's revenues have been derived from sales to
local and regional ISPs. With the introduction of PortMaster 3, the Company
believes that it can better address the needs of large ISP and Telco markets.
These markets are characterized by longer, more costly sales cycles and
substantially greater competition than the local and regional ISP markets. Many
of the Company's competitors, such as Ascend, USR and Cisco, have substantially
greater resources, name recognition and experience than the Company, as well as
established relationships with many of the large ISPs and Telcos. Because the
PortMaster 3 is the Company's first product intended to address large ISPs and
Telcos, there can be no assurance that this product will prove suitable for, or
achieve acceptance in, these markets. To enter into and compete in these
markets, the Company will be required to expand its sales and marketing
capabilities, which will result in increased operating expenses. See "--Intense
Competition," "--Dependence on Developing a Direct Sales Capability" and
"--Unpredictable and Fluctuating Quarterly Operating Results." To the extent
that the Company is unable to penetrate such markets for its products or sales
of products in these unfamiliar markets do not offset such increased expenses,
the Company's business, results of operations and financial condition could be
materially adversely affected.

INTENSE COMPETITION. The remote access market is intensely competitive and
the Company's principal competitors include Ascend, USR and Cisco. Competitive
factors in the remote access ISP market include the breadth of product features,
pricing, product quality, reliability and functionality, marketing and sales
resources, customer service and support and reputation. The PortMaster 3 is the
Company's first product that contains an integrated modem and thus directly
competes with remote access products with integrated modems offered by larger
competitors such as Ascend, USR and Cisco which have dominated this segment

7
<PAGE>

of the remote access market. Competition in the large ISP and Telco segments of
the remote access market is particularly intense and the Company's competitors
have greater name recognition, resources, sales capabilities and market share
than the Company. As a result, the Company has a competitive disadvantage in
these markets. Increased competition could result in price reductions, the
inability of the Company to increase market share, or a loss of market share by
the Company, any of which could materially adversely affect the Company's
business, results of operations and financial condition. Additionally,
industry-wide consolidation, such as the recently announced mergers of USR with
3Com Systems, Inc. ("3Com") and Ascend with Cascade Communications, Inc.
("Cascade"), could result in increased competition in the remote access ISP
market because, among other things, such companies will be able to provide a
complete solution for integrated remote access combined with other networking
products not offered by the Company. Furthermore, the ISP industry could
experience consolidation and the acquisition of one of the Company's larger
customers by a corporation with relationships with one of the Company's
competitors could result in a loss of revenue attributable to such customer. To
the extent Telcos increase their share of the ISP market and the Company is
unsuccessful in penetrating the Telco segment of the market, the Company's
business, results of operations and financial condition could be materially
adversely affected. There can be no assurance that the Company's current and
future competitors will not develop or market technologies and products that
offer higher performance and are more cost-effective than the Company's current
or future products, thereby rendering the Company's technologies and products
obsolete. See "Business--Competition."

DEPENDENCE ON DEVELOPING A DIRECT SALES CAPABILITY. The Company believes
that it must augment its direct sales capability in order to effectively compete
in the large ISP and Telco markets. Accordingly, the Company has expanded, and
plans to continue to expand, its direct sales capabilities to establish direct
customer relationships. However, there can be no assurance that the Company will
be able to find, train and retain sufficient personnel to enhance or further
develop such direct sales capability or that the Company will be successful in
penetrating the large ISP and Telco markets. The market in which the Company
competes is characterized by intense competition for attracting and retaining
qualified sales personnel and there can be no assurance that the Company will be
successful in competing for such personnel. Many of the Company's competitors
have significant direct sales departments and possess substantially greater
resources to attract such personnel. In the event that the Company is
unsuccessful in developing its direct sales capability, the Company's business,
results of operations and financial condition could be materially adversely
affected.

RISKS ASSOCIATED WITH RELIANCE ON RESELLERS. For the year ended August 31,
1996 and for the nine months ended May 31, 1997, 88.1% and 79.6%, respectively,
of the Company's product revenues were made through value added resellers and
distributors ("resellers"). The Company's top ten resellers represented 73.8%
and 56.5%, respectively, of product revenues during such periods. The Company's
top reseller in each period represented 27.2% and 19.4%, respectively, of the
Company's product revenues and the second largest reseller in each period
represented 13.3% and 6.5%, respectively. Accordingly, the Company is dependent
upon the continued viability and financial stability of its resellers.
Furthermore, the Company expects to become more dependent upon resellers in the
international markets. While the Company maintains contractual relationships
with most of its resellers, these agreements generally do not require a reseller
to purchase the Company's products and may be terminated by a reseller at any
time without penalty. There can be no assurance that any of the Company's
resellers will continue to market the Company's products. Additionally, the
Company's resellers generally offer products of several different companies,
including those of the Company's competitors. Consequently, there is a risk that
resellers will give higher priority to products of other suppliers, thus
reducing their efforts to sell the Company's products. The foregoing risk is
exacerbated by the Company's plans to expand its direct sales capability which
could have a negative impact on the Company's relationship with resellers and
result in a reduction in the sales of the Company's products by such resellers.
In addition, the Company may, from time to time, terminate some of its
relationships with resellers and any such termination could have a material
adverse

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<PAGE>
effect on the Company's business and result in threatened or actual litigation.
For example, in November 1996, the Company terminated its relationship with one
of its largest resellers, who then threatened to sue the Company. There can be
no assurance that any future termination of a reseller would not have a material
adverse effect on the Company's business or that such termination would not
result in a lawsuit or that the Company would be successful in defending itself
in such a lawsuit. Livingston provides most of its resellers with product return
rights for stock balancing and price protection. There can be no assurance that
the Company will not experience significant product returns or claims for price
protection with respect to products held by resellers which could materially
adversely affect the Company's business, results of operations and financial
condition. See "--Risks Associated with International Sales" and "Business--
Sales and Marketing."

RISKS ASSOCIATED WITH THE MANAGEMENT OF EXPANDING OPERATIONS. The Company
has recently experienced a period of rapid growth and an expansion in the number
of its employees, the scope and complexity of its operating and financial
systems, and the geographic area of its operations. Such growth has placed and,
if sustained, will continue to place a significant strain upon the Company's
management, operations, financial systems and resources. The Company believes
that it must expand its manufacturing, research and development, marketing,
sales and customer support capabilities in order to effectively serve the
evolving needs of the Company's present and future customers. The Company's
Chief Executive Officer also serves as the Company's Chief Technical Officer and
the Company's Vice President of Sales also serves as the Company's Vice
President of Marketing. Consequently, the Company believes it needs to hire
additional senior management in the areas of research and development and
marketing. There can be no assurance that this can be achieved without
disruption to the Company's current management team. The failure by the Company
to hire additional qualified personnel in a timely manner could have a material
adverse effect on the Company's business, results of operations and financial
condition. See "--Dependence on Key Personnel" and "Management."

RISKS ASSOCIATED WITH RAPID TECHNOLOGICAL CHANGES. The market for the
Company's products is characterized by rapidly changing technologies, evolving
industry standards, frequent competitive product introductions and short product
life cycles. The Company's success will depend to a substantial degree upon its
ability to enhance its existing products and to develop and introduce, on a
timely and cost-effective basis, new products and features that meet changing
customer requirements and emerging industry standards. Inherent in the product
development process are a number of risks. The development of new,
technologically advanced products is a complex and uncertain process requiring
high levels of innovation, as well as the accurate anticipation of technological
and market trends. The Company's introduction of new or enhanced products may
contain undetected or unresolved software or hardware defects when they are
first introduced or as new versions are released. There can be no assurance
that, despite extensive testing by the Company, design defects will not be found
in new products or upgrades after commencement of commercial shipments,
resulting in additional costs to the Company, reduced acceptance of the
Company's products or damage to the Company's reputation and relationships with
its customers. Future delays in the introduction or shipment of new or enhanced
products, the inability of such products to gain market acceptance or problems
associated with new product transitions could have a material adverse effect on
the Company's business, results of operations and financial condition,
particularly on a quarterly basis. See "--Unpredictable and Fluctuating
Quarterly Operating Results," "--Risks Associated with New Product
Introductions," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business--Industry Background and Market" and
"--Research and Development."

RISKS ASSOCIATED WITH INTERNATIONAL SALES. International sales accounted
for approximately 29.7% and 41.4% of the Company's product revenues in fiscal
1996 and the nine months ended May 31, 1997, respectively, and the Company
expects that international sales will continue to account for a significant
portion of its product revenues in future periods. The Company is substantially
dependent on resellers for

9
<PAGE>
its international sales. Certain of the Company's resellers also act as
resellers for the Company's competitors and such resellers could devote greater
effort and resources to marketing competitive products. The loss of certain
resellers could have a material adverse effect on the Company's business,
results of operations and financial condition. In addition, in each calendar
year sales in Europe and certain other parts of the world in the third quarter
and sales in Japan in the second quarter are typically adversely affected as
many customers reduce their business activities during those periods. The
Company intends to enter into additional international markets and to continue
to expand its operations outside of North America by expanding its direct sales
force, adding resellers and pursuing additional strategic relationships which
will require significant management attention and expenditure of significant
financial resources. Sales to international customers are subject to additional
risks including longer receivables collection periods, greater difficulty in
accounts receivable collection, political and economic instability,
nationalization, trade restrictions, the impact of possible recessionary
environments in economies outside the United States, reduced protection for
intellectual property rights in some countries, currency fluctuations and tariff
regulations and requirements for export licenses. In particular, United States
law currently prohibits the export of certain encryption technology which the
Company may include in its future products. To the extent the export or import
of the Company's products is prohibited by the domestic laws of the United
States or any foreign country in which the Company does business, or uncertainty
relating to such laws limits the marketability of the Company's products
internationally, the Company could lose a substantial portion of its
international sales. There can be no assurance that the foregoing risks
associated with international sales will not materially adversely impact the
future level of such sales and, consequently, the Company's business, results of
operations and financial condition.

Although the Company's international sales are currently denominated in U.S.
dollars, fluctuations in currency exchange rates could cause the Company's
products to become relatively more expensive to customers in a particular
country, leading to a reduction in sales or profitability in that country. The
Company currently does not hedge against foreign currency price fluctuations.
Furthermore, future international activity may result in foreign currency
denominated sales, and, in such event, gains and losses on the conversion to
U.S. dollars of accounts receivable and accounts payable arising from
international operations may contribute to fluctuations in the Company's results
of operations. These factors may have a material adverse effect on the Company's
business, results of operations and financial condition. See "-- Risks
Associated with Reliance on Resellers," "--Tariff and Regulatory Matters,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business--Sales and Marketing."

DEPENDENCE ON KEY PERSONNEL. The Company's success depends on the
continuing contributions of its key personnel, all of whom would be difficult to
replace. In particular, the Company is dependent upon Steven M. Willens, who
serves as the Company's Chief Technical Officer as well as its President and
Chief Executive Officer. The Company has no long-term employment arrangements
with Mr. Willens. While the Company has a key man life insurance policy in the
amount of $5 million on the life of Mr. Willens with the Company designated as
beneficiary, the loss of Mr. Willens' services would have a material adverse
effect upon the Company. The Company's future success will depend, in part, upon
its ability to attract and retain highly qualified personnel. There can be no
assurance that the Company will be successful in hiring or retaining qualified
personnel. Loss of, or the inability to hire, key personnel could have a
material adverse effect on the Company's business, results of operations and
financial condition. See "--Risks Associated with the Management of Expanding
Operations" and "Management."

DEPENDENCE ON CONTRACT MANUFACTURERS AND SINGLE-SOURCE SUPPLIERS. The
Company's production operations consist primarily of materials planning and
procurement, quality control, kitting, final assembly, burn-in and testing of
certain products. The Company designs all of the hardware subassemblies for its
products and uses the services of contract manufacturers to build these
subassemblies and certain of its products to the Company's specifications. The
Company is also dependent upon single or limited source

10
<PAGE>
suppliers for a number of components and parts used in the Company's products,
including certain key microprocessors and integrated circuits. There can be no
assurance that these independent contractors and suppliers will be able to meet
the Company's future requirements for manufactured products, components and
subassemblies. The Company generally purchases single or limited source
components pursuant to purchase orders and has no guaranteed supply arrangements
with these suppliers. For example, the Company currently purchases all of its
modem microchips from Analog Devices, Inc. and with the Company's implementation
of 56K modem technology, the Company anticipates that it will become dependent
upon Lucent for modem microchips. In addition, the availability of many of these
components is dependent in part on the Company's ability to provide its
suppliers with accurate forecasts of its future requirements. Any extended
interruption in the supply of any of the key components currently obtained from
a single or limited source or the time necessary to transition a replacement
supplier's product or replacement component into the Company's products could
disrupt its operations and have a material adverse effect on the Company's
business, results of operations and financial condition in any given period. The
Company purchases certain components from foreign suppliers and the supply of
such components could be materially adversely affected by changing tariff and
regulatory structures, particularly those affecting the import and export of
electronics and technology. The Company may also be subject to increases in
component costs, which could also have a material adverse effect on the
Company's business, results of operations and financial condition. See
"Business--Manufacturing."

RISKS ASSOCIATED WITH THE TERMINATION OF THE USR RELATIONSHIP. Under an OEM
Software License Agreement (the "USR Agreement") dated September 1, 1994 entered
into between the Company and USR, Livingston granted USR a license to use the
Company's ComOS operating system. On December 17, 1996, the Company and USR
settled a lawsuit related to the USR Agreement and in connection with such
settlement, the parties entered into Amendment No. 1 to the USR Agreement (the
"Amendment"). Pursuant to the Amendment, the parties agreed that USR's right and
license to Livingston's ComOS source code will terminate on December 31, 1997.
Under the terms of the USR Agreement, USR may, in its sole discretion terminate
the Agreement upon 30 days notice. Unless earlier terminated, the Amendment
terminates on December 31, 1998. USR may for a period of two months, sublicense,
sell, lease and distribute any inventory of products based on or containing the
Livingston ComOS, on hand at the time of such termination. In that regard, the
Company believes that it is likely that its royalty revenue from USR will
terminate in fiscal 1998, if not sooner.

For the Company's fiscal year ended August 31, 1996 and the nine months
ended May 31, 1997, royalty revenues from USR represented 6.2% and 12.8% of net
revenues, respectively. To the extent that such termination in royalty revenues
is not offset by increased sales of the Company's products, the Company's
business, quarterly operating results and financial condition would be
materially adversely affected. See "--Risks Associated with Legal Proceedings"
and "--Allegation of Patent Infringement."

RISKS ASSOCIATED WITH LEGAL PROCEEDINGS. On December 17, 1996, the Company
settled a lawsuit with USR arising from a dispute regarding the USR Agreement.
USR currently uses code developed by USR based on Livingston's ComOS operating
system in USR's NETServer access server card, which is incorporated into its
Total Control Enterprises Network Hub. In addition, the USR NETServer 8 and 16
products use code also based on Livingston's ComOS. As a result of the
termination of USR's right and license to Livingston's ComOS source code on
December 31, 1997, the Company believes that its royalty revenue from the USR
Agreement will terminate in fiscal 1998, if not sooner. USR has substantially
greater resources than the Company and no assurance can be given that the
Company will be able to successfully compete with USR or that the Company and
USR will not enter into future litigation concerning the relationship between
the two corporations and their respective technologies. In fact, while to date
no lawsuit has been filed, the Company has alleged that USR has breached the
terms of the settlement and USR has alleged that the PortMaster 3 product
infringes USR's U.S. patent 5,528,595, captioned "Modem Input/Output Signal
Processing Techniques." See "--Dependence on Proprietary Technology" and
"--Allegation of Patent Infringement." The occurrence of future litigation with
USR

11
<PAGE>
could have a material adverse effect on the Company's business, results of
operations and financial condition.

The Company denies the allegations in both of the above complaints and
intends to vigorously defend its position in both instances. Nevertheless,
litigation is subject to inherent uncertainties and thus there can be no
assurance that either of these suits will be resolved favorably to the Company
or that either suit will not have a material adverse effect on the Company. The
defense of these suits or any other lawsuit could result in time-consuming and
expensive litigation, damages, and diversion of the attention of key personnel,
any of which could have a material adverse effect on the Company's business,
financial condition and results of operations.

DEPENDENCE ON PROPRIETARY TECHNOLOGY. The Company's future success and
ability to compete is dependent in part upon its proprietary technology. The
Company relies on a combination of contractual rights, trade secrets and
copyright laws to establish and protect its proprietary technology. The Company
currently has one patent application pending, but there can be no assurance that
a patent will be issued as a result of such application, that the Company's
patent will be upheld as valid, or that such patent will prevent the development
of competitive products. The Company generally enters into confidentiality
agreements with its employees, consultants, resellers, customers and potential
customers, and strictly limits access to and distribution of its source code,
and further limits the disclosure and use of other proprietary information.
However, as a result of the Company's licensing relationship with USR, the
Company has licensed, for a specified term, to USR the source code to its ComOS
operating software and in the event that such source code is released to
unauthorized third parties before the expiration of the license, the Company
could be materially adversely affected. There can be no assurance that the steps
taken by the Company in this regard will be adequate to prevent misappropriation
of its technology or that the Company's competitors will not independently
develop technologies that are substantially equivalent or superior to the
Company's technology. In addition, the laws of some foreign countries do not
protect the Company's proprietary rights to the same extent as do the laws of
the United States.

ALLEGATION OF PATENT INFRINGEMENT. On June 2, 1997, the Company received
written notice from USR alleging that the PortMaster 3 infringes USR's U.S.
patent 5,528,595, captioned "Modem Input/Output Signal Processing Techniques."
Although the Company believes that such patent may be invalid, it is possible
that USR may file suit against the Company to enforce such alleged patent or
other intellectual property rights. Regardless of the merits of any such
potential suit, there can be no assurance that the Company will prevail in
defending itself or that it would not be required to enter into license
arrangements or develop non-infringing technology. Furthermore, there can be no
assurance that USR will not assert other infringement claims in the future with
respect to the Company's current or future products. Any litigation could result
in product delays or costs which could have a material adverse effect on the
Company's business, results of operations and financial condition.

12
<PAGE>

The Company is also subject to the risk of adverse claims and litigation
alleging infringement of the intellectual property rights of other third
parties. There can be no assurance that other third parties will not assert
infringement claims in the future with respect to the Company's current or
future products or that any such claims will not require the Company to enter
into license arrangements or develop non-infringing technology, or result in
litigation, regardless of the merits of such claims.

No assurance can be given that any necessary licenses will be available or
that, if available, such licenses can be obtained on commercially reasonable
terms. The failure of the Company to adequately obtain such licenses, or to
protect its own proprietary technology through contractual rights, trade
secrets, patent and copyrights laws, could have a material adverse effect on the
Company's business, results of operations and financial condition. The defense
of any lawsuit could result in time-consuming and expensive litigation, damages,
license fees, royalty payments, and diversion of the attention of key personnel,
any of which could have a material adverse effect on the Company's business,
financial condition and results of operations. See "--Risks Associated with
Legal Proceedings" and "Business-- Proprietary Rights."

TARIFF AND REGULATORY MATTERS. Rates for telecommunications services are
governed by tariffs of licensed carriers that are subject to regulatory
approval. Future changes in these tariffs could have a material adverse effect
on the Company's business, results of operations and financial condition. For
example, should tariffs for public switched digital services increase in the
future relative to tariffs for private leased services, the cost-effectiveness
of the Company's products would be reduced, and its business, results of
operations and financial condition could be materially adversely affected. In
addition, the Company's products must meet standards and receive certification
for connection to the public telecommunications network prior to their sale. In
the United States, the Company's products must comply with Part 15(a)
(industrial equipment), Part 15(b) (residential equipment) and Part 68 (analog
lines) of the Federal Communications Commission regulations. The Company's
products also must be certified by domestic telecommunications carriers in both
the United States and in foreign countries. In foreign countries, the Company's
products are subject to a wide variety of government review and certification
requirements. The Company is currently undertaking an effort to qualify for ISO
9002 series quality certification in order to fulfill the quality system
requirements for the European markets. The Company applied for ISO 9002
certification on November 11, 1996. Foreign customers typically require that the
Company's products receive certification from the country's primary
telecommunication carriers. The failure to obtain on a timely basis or retain
domestic certification or foreign regulatory approvals could have a material
adverse effect on the Company's business, results of operations and financial
condition. See "Business--Industry Background and Market."

CONTROL BY OFFICERS AND DIRECTORS; CERTAIN FAMILY RELATIONSHIPS. Following
this offering, the Company's executive officers and directors, together with
entities affiliated with such individuals, will beneficially own approximately
% of the Company's Common Stock (approximately % if the Underwriters'
over-allotment option is exercised in full). Following this offering, Steven
Willens, the Company's President, Chief Executive Officer and Chairman of the
Board, Ronald Willens, the Company's Executive Vice President, Secretary, a
director and the father of Steven Willens, and Jerrold Livingston, a director,
former President and Chief Executive Officer and the father-in-law of Steven
Willens will beneficially own approximately % of the Company's outstanding
Common Stock. Accordingly, these shareholders will be able to elect at least a
majority of the Company's directors, will retain the voting power to approve all
matters requiring shareholder approval and will continue to have significant
influence over the affairs of the Company. This concentration of ownership could
have the effect of delaying or preventing a change in control of the Company.
See "Management" and "Principal and Selling Shareholders."

BROAD DISCRETION OF MANAGEMENT TO ALLOCATE OFFERING PROCEEDS. The Company
will use the proceeds from this offering for general corporate purposes,
including working capital and as a result, the Company's

13
<PAGE>
management will have broad discretion to allocate the proceeds of this offering
and to determine the timing of expenditures. See "Use of Proceeds."

ABSENCE OF DIVIDENDS. The Company has not paid any dividends on its Common
Stock since its inception and does not anticipate paying any dividends upon its
Common Stock in the foreseeable future.

NO PRIOR PUBLIC TRADING MARKET. Prior to this offering, there has been no
public market for the Common Stock, and there can be no assurance that an active
trading market will develop or be sustained. The initial public offering price,
which will be established by negotiations between the Company and the
Underwriters, may not be indicative of the market price of the shares of Common
Stock after the offering. See "Underwriters."

POSSIBLE VOLATILITY OF STOCK PRICE. The equity markets, particularly the
market for high-technology corporations, recently have experienced significant
price and volume fluctuations that are unrelated to the operating performance of
individual companies. These broad market fluctuations may materially adversely
affect the market price of the Common Stock. In addition, the market price of
the shares of Common Stock is likely to be highly volatile. Factors such as
fluctuations in the Company's operating results, announcements of technological
innovations or new products by the Company or its competitors, developments with
respect to patents or proprietary rights, announcement of litigation by or
against the Company, changes in stock market analyst recommendations regarding
the Company or its competitors and general market conditions may have a material
adverse effect on the market price of the Common Stock.

CERTAIN ANTI-TAKEOVER PROVISIONS. Certain provisions of the Company's
Articles of Incorporation and Bylaws, each as amended, may have the effect of
making it more difficult for a third party to acquire, or of discouraging a
third party from attempting to acquire, control of the Company. Such provisions
could limit the price that certain investors might be willing to pay in the
future for shares of the Company's Common Stock. Certain of these provisions
provide for a classified board of directors and eliminate cumulative voting in
the election of directors. In addition, upon completion of this offering, the
Company's Board of Directors will have the authority to issue up to 5,000,000
shares of Preferred Stock and to determine the price, rights, preferences,
privileges and restrictions, including voting rights, of those shares without
any further vote or action by the shareholders. The rights of the holders of
Common Stock will be subject to, and may be materially adversely affected by,
the rights of the holders of any Preferred Stock that may be issued in the
future. The issuance of Preferred Stock, while providing flexibility in
connection with possible financings or acquisitions or other corporate purposes,
could have the effect of making it more difficult for a third party to acquire a
majority of the outstanding voting stock of the Company. The Company has no
current plans to issue shares of Preferred Stock. The Company's Bylaws and
indemnity agreements provide that the Company will indemnify officers and
directors against losses they may incur in legal proceedings resulting from
their service to the Company. These provisions may make it more difficult for
shareholders to take certain corporate actions and could have the effect of
delaying or preventing a change in control of the Company.

SHARES ELIGIBLE FOR FUTURE SALE. Sales of Common Stock (including shares
issued upon the exercise of outstanding options) in the public market after this
offering could materially adversely affect the market price of the Common Stock.
Such sales also might make it more difficult for the Company to sell equity
securities or equity-related securities in the future at a time and price that
the Company deems appropriate. Upon completion of this offering (based on shares
outstanding at May 31, 1997), the Company will have outstanding an aggregate of
shares of Common Stock, assuming no exercise of the Underwriters'
over-allotment option and no exercise of outstanding options. Of these shares,
all of the shares sold in this offering will be freely tradeable without
restriction or further registration under the Securities Act, unless such shares
are purchased by "affiliates" of the Company as that term is defined in Rule 144
under the Securities Act (the "Affiliates"). The remaining 12,405,735 shares of
Common Stock

14
<PAGE>

held by existing shareholders are "restricted securities" as that term is
defined in Rule 144 under the Securities Act ("Restricted Shares"). Restricted
Shares may be sold in the public market only if registered or if they qualify
for an exemption from registration under Rules 144 or 701 promulgated under the
Securities Act. As a result of the contractual restrictions described below and
the provisions of Rules 144 and 701, the Restricted Shares will be available for
sale in the public market as follows: (i) no shares will be eligible for
immediate sale on the date of this Prospectus; (ii) no shares will be eligible
for sale beginning 90 days after the date of this Prospectus; and (iii)
12,405,735 shares will be eligible for sale upon expiration of the lock-up
agreements 180 days after the date of this Prospectus. All officers, directors,
shareholders and certain option holders of the Company have agreed not to offer,
pledge, sell, contract to sell, grant any option, right or warrant to purchase,
or otherwise transfer or dispose of, directly or indirectly (or enter into any
swap or other arrangement that transfers to another, in whole or in part, any of
the economic consequences of ownership of), any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for shares of Common
Stock, for a period of 180 days after the date of this Prospectus, without the
prior written consent of Morgan Stanley & Co. Incorporated. The Company intends
to file a registration statement on Form S-8 which would allow shares issuable
upon exercise of options previously granted to be freely tradeable following
release of such lock-up obligations, subject to compliance with Rule 144 in the
case of Affiliates of the Company. See "Shares Eligible for Future Sale."

IMMEDIATE AND SUBSTANTIAL DILUTION. Purchasers of the Common Stock offered
hereby will suffer an immediate and substantial dilution of $ per share in
the net tangible book value of the Common Stock from the initial public offering
price of $ per share. To the extent outstanding options to purchase the
Company's Common Stock are exercised, there will be further dilution. See
"Dilution."

15
<PAGE>
USE OF PROCEEDS

The net proceeds to the Company from the sale of the shares of
Common Stock offered by the Company hereby are estimated to be approximately
$ million (approximately $ million if the Underwriters' over-allotment
option is exercised in full), at an assumed initial public offering price of
$ per share and after deducting estimated underwriting discounts and
commissions and estimated offering expenses payable by the Company. The
principal purposes of this offering are to obtain additional equity capital, to
create a public market for the Common Stock and to facilitate future access by
the Company to the capital markets. The Company expects to use the net proceeds
of this offering for general corporate purposes, including working capital. The
Company expects to use approximately $2.5 million of the net proceeds for
capital expenditures over the next twelve months. A portion of the net proceeds
may also be used for the acquisition of businesses, products and technologies
that are complementary to those of the Company. The Company has no present
plans, agreements or commitments with respect to any such transaction. Pending
such uses, the Company intends to invest the net proceeds of this offering in
short-term, interest-bearing, investment-grade securities.

DIVIDEND POLICY

The Company has never declared or paid cash dividends on its Common Stock
and does not anticipate paying cash dividends in the foreseeable future. In
addition, the Company's bank line of credit prohibits the payment of cash
dividends without the bank's consent.

16
<PAGE>
CAPITALIZATION

The following table sets forth the consolidated capitalization of the
Company as of May 31, 1997 (i) on an actual basis and (ii) as adjusted to give
effect to the receipt by the Company of the estimated net proceeds from the sale
of shares of Common Stock offered by the Company hereby at an assumed
initial public offering price of $ per share and after deducting estimated
underwriting discounts and commissions and estimated offering expenses payable
by the Company.

<TABLE>
<CAPTION>
MAY 31, 1997
----------------------
<S> <C> <C>
ACTUAL AS ADJUSTED
--------- -----------

<CAPTION>
(IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
Preferred stock, no par value: no shares authorized, issued and outstanding, actual;
5,000,000 shares authorized; none issued and outstanding, as adjusted................... --
Common stock, no par value: 30,000,000 shares authorized; 12,405,735 shares issued and
outstanding, actual; 30,000,000 shares authorized; shares issued and
outstanding, as adjusted................................................................ $ 2,165
Deferred stock compensation............................................................... (1,409)
Retained earnings......................................................................... 25,488
--------- -----------
Total shareholders' equity............................................................ 26,244
--------- -----------
Total capitalization.............................................................. $ 26,244 $
--------- -----------
--------- -----------
</TABLE>

- ---------

(1) Excludes 2,601,247 shares of Common Stock issuable upon the exercise of
options outstanding under the Company's 1994 Stock Option Plan at May 31,
1997, with a weighted average exercise price of $3.99 per share, and 40,190
shares of Common Stock issuable upon the exercise of options granted under
the Company's 1994 Stock Option Plan subsequent to May 31, 1997, with a
weighted average exercise price of $17.50 per share. Also excludes (i)
1,500,000 shares of Common Stock reserved for issuance under the Company's
1997 Stock Plan and (ii) 500,000 shares of Common Stock reserved for
issuance under the Company's 1997 Employee Stock Purchase Plan. See
"Management--Executive Compensation," "Description of Capital Stock" and
Note 5 of Notes to Consolidated Financial Statements.

17
<PAGE>
DILUTION

The net tangible book value of the Company as of May 31, 1997, was
$26,074,000 or $2.10 per share of Common Stock. Net tangible book value per
share is determined by dividing the tangible book value of the Company (total
tangible assets less total liabilities) by the number of outstanding shares of
Common Stock at that date. After giving effect to the sale by the Company of the
shares of Common Stock offered hereby at an assumed initial public
offering price of $ per share, and after deducting underwriting discounts
and commissions and estimated offering expenses payable by the Company, the
Company's as adjusted net tangible book value at May 31, 1997 would have been
$ or $ per share. This represents an immediate increase in net
tangible book value of $ per share to existing shareholders and an immediate
dilution of $ per share to new public investors. The following table
illustrates the per share dilution:

<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................... $
Net tangible book value per share before offering............... $ 2.10
Increase in net tangible book value attributable to new
investors.....................................................
---------
As adjusted net intangible book value per share after the
offering........................................................
---------
Dilution per share to new public investors........................ $
---------
---------
</TABLE>

The following table summarizes on an as adjusted basis, as of May 31, 1997,
the difference between the number of shares of Common Stock purchased from the
Company, the total consideration paid and the average price per share of Common
Stock paid by the existing shareholders and by the new investors (at an assumed
initial public offering price of $ per share and before deducting estimated
underwriting discounts and commissions and estimated offering expenses payable
by the Company):

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
---------------------- ---------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
--------- ----------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Existing shareholders...................................... % $ % $
New public investors.......................................
--------- ----- --------- -----
Total.................................................. % $ %
--------- ----- --------- -----
--------- ----- --------- -----
</TABLE>

The foregoing analysis assumes no exercise of the Underwriters'
over-allotment option and no exercise of stock options outstanding at May 31,
1997. As of May 31, 1997, there were options outstanding to purchase a total of
2,601,247 shares of Common Stock at a weighted average exercise price of $3.99
per share. In addition, in May 1997, the Board of Directors adopted the 1997
Stock Plan and the 1997 Employee Stock Purchase Plan, pursuant to which
1,500,000 and 500,000 shares, respectively, were reserved for issuance
thereunder. As of June 24, 1997, no options or shares had been issued under any
of these plans. Subsequent to May 31, 1997, the Board of Directors granted
options under the 1994 Stock Plan to purchase an additional 40,190 shares of
Common Stock at a weighted average exercise price of $17.50 per share. To the
extent these stock options are exercised, there will be further dilution to
purchasers in this offering. See "Management--Executive Compensation,"
"Description of Capital Stock" and Note 5 of Notes to Consolidated Financial
Statements.

18
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data should be read in
conjunction with the Company's consolidated financial statements and related
notes thereto, and with Management's Discussion and Analysis of Financial
Condition and Results of Operations, included elsewhere herein. The consolidated
statement of operations data for the years ended August 31, 1994, 1995 and 1996
and the nine months ended May 31, 1997 and the consolidated balance sheet data
at August 31, 1995 and 1996 and May 31, 1997 are derived from, and are qualified
by reference to, the audited consolidated financial statements of the Company
included elsewhere in this Prospectus and should be read in conjunction with
those financial statements and the notes thereto, which have been audited by
KPMG Peat Marwick LLP, independent certified public accountants, whose report is
included elsewhere in this Prospectus. The consolidated balance sheet data at
August 31, 1994 are derived from audited consolidated financial statements not
included in this Prospectus. The consolidated statement of operations data for
the years ended August 31, 1992 and 1993 and the consolidated balance sheet data
at August 31, 1992 and 1993 are derived from unaudited consolidated financial
statements not included in this Prospectus. The consolidated statement of
operations data for the nine months ended May 31, 1996 are derived from
unaudited consolidated financial statements included elsewhere in this
Prospectus. The unaudited consolidated financial statements have been prepared
on the same basis as the audited consolidated financial statements and, in the
opinion of management, contain all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the Company's
financial position and results of operations for such periods. The results of
operations for the nine months ended May 31, 1997 are not necessarily indicative
of results to be expected for future periods.

<TABLE>
<CAPTION>
NINE MONTHS ENDED MAY
YEAR ENDED AUGUST 31, 31,
----------------------------------------------------- ------------------------
1992 1993 1994 1995 1996 1996 1997
--------- --------- --------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Product revenues.................................. $ 1,424 $ 2,083 $ 6,180 $ 20,138 $ 43,229 $ 32,865 $ 47,488
Royalty revenues.................................. -- -- -- 323 2,878 1,944 6,997
--------- --------- --------- --------- --------- ----------- -----------
Net revenues...................................... 1,424 2,083 6,180 20,461 46,107 34,809 54,485
Cost of revenues.................................. 473 962 2,853 8,054 18,567 14,121 21,595
--------- --------- --------- --------- --------- ----------- -----------
Gross profit.................................... 951 1,121 3,327 12,407 27,540 20,688 32,890
Operating expenses:
Research and development........................ 126 277 462 890 2,512 1,153 3,074
Selling and marketing........................... 213 327 673 2,831 8,670 6,094 11,934
General and administrative...................... 122 401 449 667 1,771 992 2,305
--------- --------- --------- --------- --------- ----------- -----------
Total operating expenses...................... 461 1,005 1,584 4,388 12,953 8,239 17,313
--------- --------- --------- --------- --------- ----------- -----------
Operating income.................................. 490 116 1,743 8,019 14,587 12,449 15,577
Interest income (expense), net.................... (6) (9) (21) (20) 85 43 276
--------- --------- --------- --------- --------- ----------- -----------
Income before income taxes........................ 484 107 1,722 7,999 14,672 12,492 15,853
Provision for income taxes........................ 164 21 695 3,095 5,827 4,949 5,472
--------- --------- --------- --------- --------- ----------- -----------
Net income.................................... $ 320 $ 86 $ 1,027 $ 4,904 $ 8,845 $ 7,543 $ 10,381
--------- --------- --------- --------- --------- ----------- -----------
--------- --------- --------- --------- --------- ----------- -----------
Net income per share.............................. $ .03 $ .01 $ .08 $ .38 $ .63 $ .54 $ .72
--------- --------- --------- --------- --------- ----------- -----------
--------- --------- --------- --------- --------- ----------- -----------
Shares used in per share computations (1)......... 12,423 12,423 12,423 12,842 14,102 13,942 14,374
</TABLE>

<TABLE>
<CAPTION>
AUGUST 31,
------------------------------------------------------- MAY 31,
1992 1993 1994 1995 1996 1997
--------- --------- --------- --------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 187 $ 46 $ 627 $ 1,486 $ 3,749 $ 16,005
Working capital........................................... 323 509 1,511 5,891 14,243 23,654
Total assets.............................................. 554 839 2,706 9,303 21,321 39,917
Total shareholders' equity................................ 375 352 1,379 6,283 15,323 26,244
</TABLE>

- ------------

(1) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the determination of net income per share and shares used in per share
computations.

19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

Livingston is a leading provider of remote access networking solutions for
ISPs worldwide. In 1990, the Company introduced its first PortMaster
communications server incorporating its proprietary ComOS operating system,
which was developed specifically for remote access applications. In 1991, the
Company introduced its remote access routers which are resold by ISPs to
corporate customers for Internet connectivity and other remote access networking
applications. In November 1996, the Company began shipping its PortMaster 3
access concentrator which incorporates the Company's enhanced ComOS, support for
high speed digital connections such as ISDN PRI and T1/E1, and up to 60 digital
modems. Because this remote access solution includes modem functionality, the
PortMaster 3 has a substantially higher selling price than the Company's earlier
generation products. The PortMaster 3 has been designed to be easily upgraded to
support emerging technologies such as 56K modem functionality. The Company has
announced its offer to provide this upgrade, when and if available, to existing
PortMaster 3 customers, upon request, at no additional charge (other than
shipping costs). The Company accrues for the cost of providing the 56K upgrade
at the time of sale. Sales of the PortMaster 3 have increased significantly
since its introduction while sales of the Company's earlier generation
communications servers have declined. The Company believes that it will be
dependent upon sales of the PortMaster 3 for a majority of the Company's net
revenues for the foreseeable future. See "Risk Factors--Dependence on Sales of
PortMaster 3." See "Risk Factors--Allegation of Patent Infringement."

In 1994, the Company entered into an OEM Software License and Development
agreement with USR, pursuant to which the Company receives software license
royalties related to sales by USR of products that incorporate the Company's
ComOS operating system. Royalty payments are normally received by Livingston
sixty days after USR's quarter end, and are recorded as royalty revenue at that
time. Through May 31, 1997, cumulative royalties from USR totaled $10.2 million.
As a result of the Settlement with USR, the Company expects royalty revenues
from USR to terminate in fiscal 1998, if not earlier. See "Risk Factors--Risks
Associated with the Termination of the USR Relationship."

International sales accounted for 29.7% and 41.4% of the Company's product
revenues in fiscal 1996 and the first nine months of fiscal 1997, respectively.
The Company expects that international sales will continue to account for a
significant portion of its product revenues in future periods. Although the
Company's international sales are currently denominated in U.S. dollars,
fluctuations in currency exchange rates could cause the Company's products to
become relatively more expensive to customers in a particular country, leading
to a reduction in sales or profitability in such country. Furthermore, future
international activity may result in foreign currency denominated sales, and, in
such event, gains and losses on the conversion to U.S. dollars of accounts
receivable and accounts payable arising from international operations may cause
material fluctuations in the Company's results of operations.

Historically, the majority of the Company's sales have been made to local
and regional ISPs through the Company's reseller channel. In connection with the
introduction of the PortMaster 3, the Company began to significantly expand its
direct sales force in order to better address the needs of large ISPs and
Telcos. Recently, the Company has expanded its direct sales force and has
established eight branch offices in North America, a European headquarters in
France and a branch office in the United Kingdom. In response to growth in the
ISP market and the Company's expanded base of customers, the Company has
significantly increased its research and development activities. The Company has
also expanded its technical support operations and manufacturing capacity. These
activities, and the expansion of the Company's infrastructure to support them,
have resulted in significantly higher operating expenses in fiscal 1996 and the
first nine months of fiscal 1997.

The Company typically provides certain postcontract customer support ("PCS")
in connection with the sale of its products. Prior to the second quarter of
fiscal 1996, PCS consisted principally of telephone

20
<PAGE>
support and minor maintenance for its PortMaster 2 products. During this period,
the Company recognized revenue at the time of product shipment and accrued the
estimated costs of providing PCS. During the second quarter of fiscal 1996, the
Company decided to provide significant feature enhancements to ComOS, free of
charge, to the Company's installed customer base. Accordingly, the Company
recognized the portion of product revenue attributable to the value of PCS
ratably over 12 months, the period during which PCS is expected to be provided.
In November 1996, the Company began selling PortMaster 3, which is accompanied
by a one year hardware and software warranty. The portion of the PortMaster 3
selling price that is attributable to PCS is recognized ratably over the 12
month support period. Additional warranty and support coverage is made available
to PortMaster 3 customers as a purchase option. PCS revenues to date have not
been significant.

RESULTS OF OPERATIONS

The following table sets forth, as a percentage of net revenues (except for
gross margin on product revenues), certain statement of operations data for the
periods indicated:

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED AUGUST 31, ------------------------
------------------------------- MAY 31, MAY 31,
1994 1995 1996 1996 1997
--------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Product revenues...................................... 100.0% 98.4% 93.8% 94.4% 87.2%
Royalty revenues...................................... -- 1.6 6.2 5.6 12.8
--------- --------- --------- ----- -----
Net revenues.......................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues...................................... 46.2 39.4 40.3 40.6 39.6
--------- --------- --------- ----- -----
Gross profit........................................ 53.8 60.6 59.7 59.4 60.4
Operating expenses:
Research and development............................ 7.4 4.3 5.5 3.3 5.6
Selling and marketing............................... 10.9 13.8 18.8 17.5 22.0
General and administrative.......................... 7.3 3.3 3.8 2.8 4.2
--------- --------- --------- ----- -----
Total operating expenses.......................... 25.6 21.4 28.1 23.6 31.8
--------- --------- --------- ----- -----
Operating income...................................... 28.2 39.2 31.6 35.8 28.6
Interest income (expense), net........................ (0.3) (0.1) 0.2 0.1 0.5
--------- --------- --------- ----- -----
Income before income taxes............................ 27.9 39.1 31.8 35.9 29.1
Provision for income taxes............................ 11.3 15.1 12.6 14.2 10.0
--------- --------- --------- ----- -----
Net income........................................ 16.6% 24.0% 19.2% 21.7% 19.1%
--------- --------- --------- ----- -----
--------- --------- --------- ----- -----

Gross margin on product revenues...................... 53.8% 60.0% 57.0% 57.0% 54.5%
--------- --------- --------- ----- -----
--------- --------- --------- ----- -----
</TABLE>

NINE MONTHS ENDED MAY 31, 1997 COMPARED TO NINE MONTHS ENDED MAY 31, 1996

NET REVENUES. Net revenues increased 56.5% to $54.5 million for the nine
months ended May 31, 1997 as compared to $34.8 million for the nine months ended
May 31, 1996. The increased net revenues reflect introduction and increased
sales of the Company's PortMaster 3 product and increased royalties, partially
offset by declining sales of the PortMaster 2 products. Specifically, sales of
the Company's PortMaster 2 products declined by 48% from the nine month period
ended May 31, 1996 to the corresponding period ending May 31, 1997, while
royalty revenues increased 260% from the nine month period ending May 31, 1996
to the corresponding period ending May 31, 1997. Royalty revenues were $7.0
million and $1.9 million for the nine months ended May 31, 1997 and 1996,
respectively. Sales to international customers accounted for approximately 41.4%
of product revenues for the nine months ended May 31, 1997 compared to 25.5% for
the prior period.

21
<PAGE>

GROSS PROFIT. The Company's gross profit for the nine months ended May 31,
1997 increased to $32.9 million from $20.7 million for the nine months ended May
31, 1996. This increase was attributable to the introduction and increased sales
of the PortMaster 3 products and to increased royalties, partially offset by
$2.3 million in charges for obsolete PortMaster 2 product and component
inventory. Gross margin on product revenues declined to 54.5% for the nine
months ended May 31, 1997, compared to 57.0% for the comparable period of 1996.
The lower gross margin was due to the charge for obsolete PortMaster 2 inventory
and approximately $2.5 million reserved to provide, when and if available, the
Company's 56K modem solution, upon request, for PortMaster 3 products sold
during the period.

RESEARCH AND DEVELOPMENT. Research and development expenses consist
primarily of employee compensation, amounts paid for outside services, and costs
of materials utilized in product development. Research and development expenses
increased to $3.1 million, or 5.6% of net revenues, during the nine months ended
May 31, 1997, from $1.2 million, or 3.3% of net revenues, for the nine months
ended May 31, 1996. The increase was due primarily to the addition of personnel
for the development of PortMaster 3, enhancement of the ComOS operating system
and development of future products. The Company believes that significant
research and development efforts are necessary in order for it to compete in the
evolving market for remote access products. Accordingly, the Company expects its
research and development expenditures to increase in absolute dollars and as a
percentage of net revenues.

SELLING AND MARKETING. Selling and marketing expenses consist primarily of
base and incentive compensation paid to sales, customer support and marketing
personnel, travel and related expenses, and costs associated with promotional
and trade show activities. Selling and marketing expenses increased to $11.9
million, or 22.0% of net revenues, for the nine months ended May 31, 1997 from
$6.1 million, or 17.5% of net revenues, for the nine months ended May 31, 1996.
The increase reflects significant hiring of direct sales personnel in North
America and Europe and technical support personnel in North America, as well as
increased incentive compensation due to increased sales volume. Also included
are charges relating to a marketing program to promote the Company's presence in
Europe. The Company expects selling and marketing expenses to increase both in
absolute dollars and as a percentage of net revenues as the Company pursues its
strategy of expanding its direct sales force.

GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of compensation paid to administrative personnel and related overhead.
General and administrative expenses increased to $2.3 million, or 4.2% of net
revenues, for the nine months ended May 31, 1997 from $1.0 million, or 2.8% of
net revenues, for the corresponding period in the prior year as the Company
continued to build its infrastructure to support growth in its manufacturing,
research and development, and selling and marketing functions. The Company
expects that general and administrative expenses will increase in absolute
dollars as the Company continues to expand its operations and incurs higher
administration expenses related to reporting and other requirements of a public
company.

PROVISION FOR INCOME TAXES. The Company's effective tax rate for the first
nine months of fiscal 1997 was 34.5% compared to 39.7% in fiscal 1996. See Notes
1 and 4 of Notes to Consolidated Financial Statements.

YEAR ENDED AUGUST 31, 1996 COMPARED TO THE YEAR ENDED AUGUST 31, 1995

NET REVENUES. Net revenues increased 125% to $46.1 million for fiscal 1996,
as compared to $20.5 million for fiscal 1995. This increase was due primarily to
higher sales of the Company's communication servers and routers. Royalty
revenues were $2.9 million and $323,000 in fiscal 1996 and fiscal 1995,
respectively. Sales to international customers accounted for 29.7% of product
revenues in fiscal 1996 compared to 16.9% in fiscal 1995. This increase in
international sales was the result of an expansion of the Company's reseller
relationships in Japan and Europe.

22
<PAGE>
GROSS PROFIT. The Company's gross profit for fiscal 1996 increased to $27.5
million from $12.4 million for fiscal 1995. This increase was due primarily to
higher unit sales and increased royalties. Gross margin on product revenues
(excluding royalty revenues) declined to 57.0% in fiscal 1996 compared to 60.0%
in fiscal 1995 as a result of a charges of $1.3 million taken in the second half
of fiscal 1996 related to the Company's establishment of an inventory reserve in
connection with the PortMaster 2 product line.

RESEARCH AND DEVELOPMENT. Research and development expenses increased to
$2.5 million, or 5.5% of net revenues, in fiscal 1996 compared to $890,000, or
4.3% of net revenues, in fiscal 1995, due primarily to the addition of personnel
for the development of the PortMaster 3 and for enhancements and feature
upgrades to ComOS. Research and development expenses in fiscal 1996 included
$632,000 for purchased in-process research and development, primarily related to
modem technology.

SELLING AND MARKETING. Selling and marketing expenses increased to $8.7
million, or 18.8% of net revenues, in fiscal 1996 compared to $2.8 million, or
13.8% of net revenues, in fiscal 1995. The increase was due primarily to
increased staffing levels in sales intended to broaden the geographic reach for
the Company's products, increased marketing expenses related to trade show
participation and development of collateral materials, and increased staffing of
technical support operations in response to a growing installed base of
products.

GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
to $1.8 million, or 3.8% of net revenues, in fiscal 1996 compared to $667,000,
or 3.3% of net revenues, in fiscal 1995 due to increased personnel and overhead
costs and increased use of outside professional services as the Company began to
build its infrastructure to support growth in its manufacturing, research and
development, and selling and marketing functions.

PROVISION FOR INCOME TAXES. The Company's effective tax rate for fiscal
1996 was 39.7% compared to 38.7% in fiscal 1995.

YEAR ENDED AUGUST 31, 1995 COMPARED TO THE YEAR ENDED AUGUST 31, 1994

NET REVENUES. Net revenues increased 231% to $20.5 million for fiscal 1995
from $6.2 million for fiscal 1994. This increase was due to an increase in unit
sales of PortMaster 2 products and router products. In fiscal 1995 royalty
revenues were $323,000.

GROSS PROFIT. The Company's gross profit for fiscal 1995 increased to $12.4
million from $3.3 million for fiscal 1994, due primarily to higher unit sales
and royalties from USR. Gross margin on product revenues increased to 60.0% in
fiscal 1995 from 53.8% in fiscal 1994. This increase was primarily due to
decreased component material costs related to increased volume purchases of
components.

RESEARCH AND DEVELOPMENT. Research and development expenses increased to
$890,000, or 4.3% of net revenues, in fiscal 1995 compared to $462,000, or 7.4%
of net revenues, in fiscal 1994. This increase primarily reflects increased
spending for consulting services.

SELLING AND MARKETING. Selling and marketing expenses increased to $2.8
million, or 13.8% of net revenues, in fiscal 1995 compared to $673,000, or 10.9%
of net revenues, in fiscal 1994. These increases reflect higher staffing levels
in sales, marketing, and technical service in order to develop the Company's
reseller channel domestically and internationally and to support a growing
installed product base.

GENERAL AND ADMINISTRATIVE. General and administrative expenses were
$667,000, or 3.3% of net revenues, in fiscal 1995 compared to $449,000, or 7.3%
of net revenues, in fiscal 1994.

PROVISION FOR INCOME TAXES. The Company's effective tax for fiscal 1995 was
38.7% compared to 40.4% in fiscal 1994.

23
<PAGE>
QUARTERLY RESULTS OF OPERATIONS

The following table presents consolidated statement of operations data, both
in absolute dollars and as a percentage of net revenues, for the seven most
recent quarters. This information is unaudited, but in the opinion of the
Company's management, has been prepared on the same basis as the audited
Consolidated Statements of Operations appearing elsewhere in this Prospectus and
includes all adjustments (consisting only of normal recurring adjustments) that
the Company considers necessary for a fair presentation thereof. Such statement
of operations data should be read in conjunction with the Company's audited
consolidated financial statements and notes thereto. The results for any quarter
are not necessarily indicative of results for any future period.

<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------------------------
NOV. 30, FEB. 29, MAY 30, AUG. 31, NOV. 30, FEB. 28, MAY 31,
1995 1996 1996 1996 1996 1997 1997
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Product revenues..................... $ 8,617 $ 11,825 $ 12,423 $ 10,364 $ 11,415 $ 15,866 $ 20,207
Royalty revenues..................... 538 425 981 934 2,263 1,771 2,963
--------- --------- --------- --------- --------- --------- ---------
Net revenues......................... 9,155 12,250 13,404 11,298 13,678 17,637 23,170
Cost of revenues..................... 3,457 5,203 5,461 4,446 6,782 7,177 7,636
--------- --------- --------- --------- --------- --------- ---------
Gross profit....................... 5,698 7,047 7,943 6,852 6,896 10,460 15,534
Operating expenses:
Research and development........... 243 478 432 1,359 973 880 1,221
Selling and marketing.............. 1,488 1,953 2,653 2,576 2,745 3,689 5,500
General and administrative......... 211 333 448 779 623 761 921
--------- --------- --------- --------- --------- --------- ---------
Total operating expenses......... 1,942 2,764 3,533 4,714 4,341 5,330 7,642
--------- --------- --------- --------- --------- --------- ---------
Operating income..................... 3,756 4,283 4,410 2,138 2,555 5,130 7,892
Interest income (expense), net....... (1) 2 42 42 55 69 152
--------- --------- --------- --------- --------- --------- ---------
Income before income taxes........... 3,755 4,285 4,452 2,180 2,610 5,199 8,044
Provision for income taxes........... 1,485 1,698 1,766 878 901 1,795 2,776
--------- --------- --------- --------- --------- --------- ---------
Net income....................... $ 2,270 $ 2,587 $ 2,686 $ 1,302 $ 1,709 $ 3,404 $ 5,268
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Net income per share................. $ .17 $ .19 $ .18 $ .09 $ .12 $ .24 $ .37
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Shares used in per share
computations....................... 13,333 13,904 14,589 14,588 14,359 14,371 14,391
</TABLE>

<TABLE>
<CAPTION>
AS A PERCENTAGE OF NET REVENUES (1)
---------------------------------------------------------------------------
NOV. 30, FEB. 29, MAY 30, AUG. 31, NOV. 30, FEB. 28, MAY 31,
1995 1996 1996 1996 1996 1997 1997
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Product revenues..................... 94.1% 96.5% 92.7% 91.7% 83.5% 90.0% 87.2%
Royalty revenues..................... 5.9 3.5 7.3 8.3 16.5 10.0 12.8
--------- --------- --------- --------- --------- --------- ---------
Net revenues......................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues..................... 37.8 42.5 40.7 39.4 49.6 40.7 33.0
--------- --------- --------- --------- --------- --------- ---------
Gross profit....................... 62.2 57.5 59.3 60.6 50.4 59.3 67.0
Operating expenses:
Research and development........... 2.7 3.9 3.2 12.0 7.1 5.0 5.3
Selling and marketing.............. 16.2 15.9 19.8 22.8 20.1 20.9 23.7
General and administrative......... 2.3 2.7 3.4 6.9 4.5 4.3 4.0
--------- --------- --------- --------- --------- --------- ---------
Total operating expenses......... 21.2 22.5 26.4 41.7 31.7 30.2 33.0
--------- --------- --------- --------- --------- --------- ---------
Operating income..................... 41.0 35.0 32.9 18.9 18.7 29.1 34.0
Interest income (expense), net....... 0.0 0.0 0.3 0.4 0.4 0.4 0.7
--------- --------- --------- --------- --------- --------- ---------
Income before income taxes........... 41.0 35.0 33.2 19.3 19.1 29.5 34.7
Provision for income taxes........... 16.2 13.9 13.2 7.8 6.6 10.2 12.0
--------- --------- --------- --------- --------- --------- ---------
Net income....................... 24.8% 21.1% 20.0% 11.5% 12.5% 19.3% 22.7%
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Gross margin on product revenues..... 59.9% 56.0% 56.0% 57.1% 40.6% 54.8% 62.2%
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
</TABLE>

- ---------

(1) Except gross margin on product revenues.

24
<PAGE>

Net revenues increased in each of the first three quarters of fiscal 1996
principally as a result of increased remote access unit shipments. Product
revenues declined in the fourth quarter of fiscal 1996 due primarily to the
decrease in sales of PortMaster 2 communication servers. The Company believes
that the decline in PortMaster 2 sales was due primarily to delays in purchasing
decisions by the Company's customers in anticipation of the introduction of
PortMaster 3. The Company commenced shipment of PortMaster 3 in the first
quarter of fiscal 1997, and sales of PortMaster 3 represented a majority of net
revenues in the third quarter of fiscal 1997. The Company does not expect
sequential quarterly growth in product revenues to continue at the same rate
experienced from the second to the third quarter of fiscal 1997.

Royalties from USR increased from $538,000 in the first quarter of fiscal
1996 to $3.0 million in the third quarter of fiscal 1997. The Company believes
that its royalty revenues from USR will terminate in fiscal 1998, if not sooner.
See "Risk Factors--Risks Associated with the Termination of the USR
Relationship."

Gross margin on product revenues has fluctuated on a quarterly basis
generally because of product mix. Gross margin on product revenues in the
quarter ended November 30, 1996 was adversely affected by a charge of
approximately $2.0 million related to the provision for obsolete and overstocked
product and component inventory due to the decline in PortMaster 2 sales, and
due to approximately $2.0 million reserved for further upgrades to implement the
Company's 56K modem solution for PortMaster 3 products sold.

Research and development expenses have generally increased in dollar amount
due to increased staffing and higher amounts spent on outside consulting. In the
quarter ended August 31, 1996, research and development expenses included
$632,000 for purchased in-process research and development, principally related
to modem technology. Selling and marketing expenses have increased in dollar
amount and as a percentage of net revenues reflecting increased personnel and
related expenses, spending for promotional expenses, travel expense, and costs
associated with opening new sales offices in North America and Europe. General
and administrative expenses have increased in dollar amount due to increased
personnel and related expenses and increased outside professional services. The
increase in general and administrative expenses in the quarter ended August 31,
1996 included a charge of approximately $117,000 related to a buy-out of the
Company's lease commitment for its previous headquarters facilities in
connection with the Company's move to its new, larger headquarters facility in
November 1996.

The Company's future net revenues are difficult to predict. Although the
Company typically operates with some backlog, net revenues and operating results
in any quarter depend on the volume and timing of, and the ability to fulfill,
orders received within the quarter. In addition, due to the Company's
utilization of its reseller channel, the Company's net revenues in any period
are highly dependent upon the sales efforts and success of its resellers, which
are not within the Company's control. There can be no assurance that the
Company's resellers will give a high priority to the marketing of the Company's
products as compared to competitive products or alternative networking
solutions, or that the resellers will continue to carry the Company's products.
Further, the Company's strategy is to broaden its customer base by increasing
its direct sales force and there can be no assurance that this new sales force
and the resellers will be capable of achieving the Company's growth goals.

The Company anticipates that quarterly operating results will fluctuate as a
result of a number of factors, including customers' capital spending cycles, the
timing of new product announcements by the Company or its competitors, changes
in pricing policies by the Company, its competitors or its suppliers, the
availability and cost of key components, and market acceptance of new and
enhanced versions of the Company's products. In addition, it is possible that in
some future quarter the Company's operating results may be below the
expectations of public market analysts and investors. In such event, the market
price of the Company's Common Stock would likely be materially adversely
affected. See "Risk Factors-- Unpredictable and Fluctuating Quarterly Operating
Results" and "--Possible Volatility of Stock Price."

25
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES

Since inception, the Company has financed its operations primarily through
cash flows from operating activities. As of May 31, 1997, the Company's
principal sources of liquidity consisted of $16.0 million of cash and cash
equivalents and an unsecured $5 million line of credit. The line of credit bears
interest at the bank's prime rate and specifies financial and operating
covenants, including restrictions on the Company's ability to purchase its own
stock and a prohibition on payment of cash dividends. There have been no
borrowings under the line of credit.

During the nine months ended May 31, 1997, cash provided by operating
activities was $13.6 million compared to $4.2 million during the nine months
ended May 31, 1996. The Company's operating activities in fiscal 1996, 1995 and
1994 provided cash flows of $3.4 million, $1.2 million, and $644,000,
respectively. Cash provided by operating activities during these periods was
attributable primarily to increases in net income, partially offset by increases
in accounts receivable and inventories. As of May 31, 1997, the Company's
working capital was $23.7 million, which included $10.8 million and $4.2 million
of accounts receivable and inventory, respectively.

The Company's investing activities have consisted primarily of purchases of
property and equipment. Cash used in investing activities increased to $1.8
million in the nine months ended May 31, 1997 from $455,000 in the nine months
ended May 31, 1996 due primarily to purchases of furniture and fixtures for the
new headquarters facility which the Company moved into in November 1996. Cash
used in investing activities totaled $881,000, $348,000, and $63,000 in fiscal
1996, 1995 and 1994, respectively.

The Company expects to use approximately $2.5 million for capital
expenditures over the next twelve months. The Company believes that the net
proceeds from this offering, together with available funds, its existing bank
line of credit and cash flows expected to be generated from operations, will be
sufficient to meet its anticipated cash needs at least through fiscal 1998.

26
<PAGE>
BUSINESS

Livingston is a leading provider of remote access networking solutions for
ISPs worldwide. Used by ISPs to connect their subscribers to the Internet, the
Company's remote access servers deliver high performance at a low price per
port, making them particularly well-suited for the intensely competitive ISP
market. The Company also provides office routers and firewall routers that are
resold by ISPs to corporate customers for Internet connectivity and other remote
access networking applications. Since the introduction of its first remote
access server in 1990, over 2,000 ISPs have purchased the Company's remote
access products. The Company believes that more ISPs worldwide use Livingston's
remote access servers than those of any other vendor based on data compiled by
Infonetics Research, Inc.* and the Company's knowledge of the remote access
market. In November 1996, the Company introduced the PortMaster 3 access
concentrator, its next generation remote access platform, which the Company
believes positions it to better address the needs of large ISPs and Telcos, and
to maintain its leadership position with the Company's established base of local
and regional ISP customers. The Company's goal is to be the leading supplier of
technologically advanced and cost-effective remote access solutions to ISPs
worldwide.

INDUSTRY BACKGROUND AND MARKET

GROWTH OF THE INTERNET AND INTERNET INFRASTRUCTURE

The Internet has emerged as a global network enabling millions of
businesses, organizations and individuals to communicate, share information and
conduct business electronically. A network of networks, the Internet comprises
hundreds of publicly and commercially owned networks that communicate and share
traffic using a common, industry standard communications protocol suite called
TCP/IP. According to International Data Corporation, the number of Internet
World Wide Web users will increase to 163 million in 2000, from an estimated 35
million users in 1996.

Individuals and corporate customers typically access the Internet through
ISPs which maintain networks offering Internet access through local points of
presence ("POPs"). A POP consists of telecommunications and internetworking
equipment connected to the Internet through high speed dedicated lines leased
from telecommunications providers or through Frame Relay or ATM service
connections. To accommodate the growing numbers of Internet users and their
bandwidth requirements, many ISPs are dramatically increasing investments in
networking infrastructure, particularly in the area of remote access equipment.

REMOTE ACCESS EQUIPMENT AND THE MARKET FOR REMOTE ACCESS SOLUTIONS

Internet subscribers connect to ISPs through remote access equipment, such
as access concentrators, communications servers and access routers, utilizing
analog or digital dial-up lines or leased line connections. The remote access
market is among the fastest growing segments in the networking industry. In its
report entitled "The ISP Opportunity 1997," Infonetics Research, Inc. forecasts
that network product expenditures by ISPs will increase from approximately $3.6
billion in 1997 to $7.9 billion in 1999.

As depicted on the following page, a dial-up subscriber communicates with an
ISP over a standard analog, ISDN or T1/E1 leased line connection. An access
concentrator, which contains multiple digital modems, or a communications server
with externally connected analog modems housed within the POP, receives the
subscriber's call, performs user authentication and billing functions, and
passes traffic through to the Internet via the ISP's router-based network. For
high speed communications, access routers located at the subscribers' premises
manage the exchange of Internet traffic between the ISP's network and the
subscribers' network over dedicated leased lines. Software operating with the
remote access hardware enables the ISP to perform critical functions such as
device and network management, subscriber administration, authorization and
accounting, firewall filtering and protocol routing.

- ---------

* "The ISP Opportunity 1997" by Infonetics Research, Inc.

27
<PAGE>
[This diagram shows the principal pieces of networking equipment
(including remote access servers, ethernet hubs, and routers) utilized
in an Internet service providers' point of presence.]

OVERVIEW OF THE ISP MARKET AND INDUSTRY DYNAMICS

The worldwide ISP market currently includes local, regional, national and
international companies providing a range of services for business and consumers
including Internet access, Web site hosting, sales of network equipment and
network management, design and consulting services. An ISP's business model, and
the ISP's requirements for remote access solutions, differ based on the size and
nature of the ISP's subscriber base and the scope of the ISP's operations.

Local ISPs tend to focus on a relatively small geographic market and
generally operate networks consisting of a small number of POPs. Local ISPs
typically provide basic Internet dial-up connectivity to their customers and
differentiate themselves by providing value-added services. These ISPs demand
remote access equipment that is easy to install, configure and operate, and tend
to purchase this equipment primarily through indirect distribution channels.
Regional ISPs address a broader customer base, operate relatively complex
networks consisting of multiple POPs, and usually demand remote access equipment
that is highly scalable and that integrates seamlessly in a heterogeneous
networking environment. Regional ISPs have historically purchased the majority
of their remote access products through resellers, although the direct sales
channel is increasingly becoming an important method of sale for this class of
ISP. The large national and international ISPs, which include companies such as
UUNET, Netcom, PSINet, and BBN Planet, as well as the major online service
providers such as America Online and Compuserve, provide Internet service to
millions of users, operate networks consisting of hundreds of POPs and represent
the most sophisticated category of ISP. These large ISPs also have greater
requirements for device scalability and manageability, in addition to requiring
support for heterogeneous networking environments and technical support. Large
ISPs primarily purchase remote access equipment from the vendor's direct sales
force. In addition, many of the regional, national and international ISPs resell
remote access equipment to their corporate customers for Internet connectivity,
intranet and other remote access networking applications.

The ISP market is evolving rapidly and competition in the industry has
recently intensified. New groups of telecommunications service providers,
including the major interexchange carriers, RBOCs and other competitive access
providers have entered, or have announced plans to enter, the ISP market and are
rapidly building their dial-up networks. To remain competitive, many ISPs have
adopted a flat rate pricing model for Internet access, which has put pressure on
their margins as user connect time and bandwidth requirements have increased.
ISPs increasingly need to provide reliable service with maximum accessibility
and minimum downtime to maintain customer satisfaction, forcing ISPs to
continually expand and improve their networks without service interruption.
Competition to attract and maintain subscribers requires ISPs to improve the
performance of their networks by incorporating new technologies such as 56K
modems. As a result, ISPs are increasingly focused on procuring remote access
equipment that is cost-effective, reliable, scalable and interoperable, includes
comprehensive network management and security capabilities and provides support
for emerging technologies.

28
<PAGE>
THE LIVINGSTON SOLUTION

Livingston's remote access concentrators and servers solve the needs of ISPs
by delivering high performance at a low price per port, making them particularly
well-suited for the intensely competitive ISP market. The Company's products
combine its core software technology, the ComOS operating system, with an
integrated hardware design that provides ISPs with a high port density, highly
scalable remote access solution. ComOS has been specifically designed for remote
access applications and is incorporated in all of the Company's remote access
products. ComOS provides robust routing, security, centralized device management
and subscriber administration capabilities. In November 1996, the Company
introduced the PortMaster 3 access concentrator, its next generation remote
access platform, which integrates digital modem, router and communications
server functionality with support for analog modems, ISDN PRI, Frame Relay and
T1/E1 service connections in a compact 3.5 inch high chassis. The PortMaster 3
has been designed to be easily upgraded to support emerging technologies such as
56K modem functionality. Based on the foregoing factors, the Company believes
that the PortMaster 3 platform positions it to better address the needs of large
ISPs and Telcos, and to maintain its leadership position with the Company's
established base of local and regional ISP customers.

The PortMaster 3 offers ISPs the following advantages:

INTEGRATED HARDWARE SOLUTION: The PortMaster 3 eliminates the need for
externally connected modems within a POP by integrating digital modem, router
and communications server functionality in a compact 3.5 inch high chassis. The
integration of these separate remote access functions reduces the cost per port
and the support requirements for product installation, operation and management.

SUPPORT OF EMERGING TECHNOLOGIES: The PortMaster 3 employs a modular design
that facilitates the incorporation of new communications technologies as they
become available. For example, the PortMaster 3 has been designed to be easily
upgraded to support 56K modem functionality. The Company has announced its offer
to provide this upgrade, when and if available, to existing PortMaster 3
customers, upon request, at no additional charge (other than shipping costs).

SCALABILITY AND MANAGEABILITY: Livingston's ComOS assists ISPs in
establishing POPs that can scale to accommodate any number of users and accept
any combination of dial-up or leased-line services. The scalability of ComOS
allows ISPs to link dozens of PortMaster 3 chassis stacked together to form one
larger logical unit that can be centrally managed and administered.

RELIABILITY: The combination of Livingston's ComOS and the Company's
advanced hardware architecture results in a reliable solution for ISPs. The
Company's True Digital modem technology has minimal power requirements, thus
reducing heat dissipation and significantly decreasing the potential for
equipment downtime. This technology also provides for real time diagnostics and
fault-tolerant modem pooling, further reducing service disruptions.

SECURITY AND ADMINISTRATION: The Company's ComOS provides a comprehensive
set of security capabilities for ISPs including encryption, firewall filtering
and subscriber authorization. ComOS includes the Company's RADIUS software
module which provides subscriber authentication and accounting for remote
network access. The RADIUS specifications developed by the Company are generally
regarded as the industry standard for subscriber administration. ComOS also
includes ChoiceNet, a network filtering feature that provides Internet content
management on a per-user basis so that a subscriber can specify authorized World
Wide Web sites and eliminate access to unauthorized sites.

LOW PRICE PER PORT: The streamlined and efficient product architecture of
the PortMaster 3, along with the Company's ComOS operating system, enables the
Company to provide remote access solutions at one of the lowest prices per port
in the industry.

29
<PAGE>
COMPANY STRATEGY

The Company's goal is to be the leading supplier of technologically advanced
and cost-effective remote access solutions to ISPs worldwide. The Company is
pursuing the following strategies to achieve this goal:

LEVERAGE TECHNOLOGY TO PROVIDE LEADING REMOTE ACCESS SOLUTIONS. Livingston
seeks to leverage its highly flexible ComOS operating system and its modular
hardware design capabilities to provide cost-effective, highly scalable and
reliable remote access solutions that incorporate next generation networking
technologies such as 56K modem functionality. The Company's future development
efforts will focus on enhancing the capabilities of ComOS and designing remote
access solutions that provide higher port density and support for high speed
communications technologies such as Fast Ethernet, ATM, and xDSL, as well as
Virtual Private Network security standards.

MAINTAIN MARKET SHARE WITH LOCAL AND REGIONAL ISPS. The Company is focused
on maintaining its leadership position with local and regional ISPs by
continuing to offer comprehensive and cost-effective solutions such as the
PortMaster 3. The Company established its leadership in this market by providing
scalable, affordable, reliable solutions that have enabled many ISPs to easily
expand and upgrade their remote access networks. The Company believes that it
has also differentiated itself by providing high quality technical support, and
plans to continue helping local and regional ISPs succeed by addressing their
specific support requirements.

TARGET LARGE ISPS AND TELCOS. The Company believes that its
recently-introduced high port density PortMaster 3 platform provides it with the
opportunity to pursue the large ISPs and Telcos. Based on the flexibility,
scalability and reliability of the PortMaster 3, the Company believes it is able
to meet the demanding requirements of these potential customers. An important
element of this strategy involves the expansion of the Company's direct sales
force and the development of key account relationships. In addition, the Company
plans to expand its product support capabilities as well as to continue
development of higher port density products that provide enhanced features and
higher performance.

INCREASE PENETRATION OF INTERNATIONAL MARKETS. The Company is focused on
continuing to capitalize on the growth of the Internet in Europe and Asia, by
targeting additional ISPs through enhancing its sales and service efforts and by
developing relationships with strategic resellers. The Company recently
established a European headquarters in Mougins, France as well as a branch
office in the United Kingdom. Currently, the Company manages its Japan and Asia
Pacific region resellers from its Pleasanton, California headquarters. The
Company anticipates establishing a direct sales and service presence in Japan
and developing new reseller relationships in the rest of the Asia Pacific
region.

TECHNOLOGY AND PRODUCTS

Livingston offers the PortMaster 3 remote access concentrator, communication
servers and access routers that are targeted to ISPs and their customers and are
designed specifically for remote access applications such as connecting to the
Internet, linking remote offices to corporate computing resources, and providing
public access to corporate World Wide Web sites. All of the Company's products
are based on its ComOS operating system, and include a one year warranty on the
hardware as well as one year of free technical support and software upgrades.

COMOS OPERATING SYSTEM

ComOS is a hardware independent operating system designed specifically for
remote access applications and has been continuously tested and improved since
its introduction in 1990. ComOS incorporates a modular architecture, well
defined interfaces and reduced code size, supports all major routing protocols
and facilitates system configuration and device management through its network
management module. Also included is the Company's RADIUS software module which
provides subscriber authentication and

30
<PAGE>
accounting for remote network access. The RADIUS specifications developed by the
Company are generally regarded as the industry standard for subscriber
administration. ComOS also includes ChoiceNet, a network filtering feature that
provides Internet content management on a per-user basis so that a subscriber
can specify authorized World Wide Web sites and eliminate access to unauthorized
sites. The Company believes that ComOS provides it with a significant
competitive advantage. ComOS is critical to the Company's ability to provide
remote access solutions which are cost-effective, reliable, scalable and
interoperable, include comprehensive network management and security
capabilities and provide support for emerging technologies.

THE PORTMASTER 3 ACCESS CONCENTRATOR

The PortMaster 3, the Company's next generation remote access platform, is
an integrated access concentrator used by ISPs to receive and process in-bound
calls from subscribers. PortMaster 3 performs user authentication,
authorization, accounting and billing functions and passes data traffic through
to the Internet via the ISP's router-based network. The PortMaster 3 hardware
together with the ComOS operating system provide a solution which utilizes fewer
electrical components, consumes less power, generates less heat, and is
relatively inexpensive to manufacture. The PortMaster 3 consolidates analog
modem, ISDN PRI, Frame Relay, and T1/E1 services together with the Company's
proven router communications server technology into a single unit. The
PortMaster 3 can be configured with up to 60 digital modem ports per system, and
currently supports the V.34 28.8K modem standard. The PortMaster 3 has been
designed to be easily upgraded to support emerging technologies such as 56K
modem functionality. Unlike competing products, which utilize modem hardware
consisting of an analog-based modem and a digital-to-analog converter,
Livingston's True Digital modem technology implements all modem functionality in
a single Digital Signal Processor (DSP). True Digital modem technology is
designed to provide lower energy consumption, greater reliability, and more
consistent system performance. Multiple PortMaster 3 chassis can be stacked
together to form one larger logical unit that supports hundreds of
high-bandwidth dial-up connections that can be centrally managed. The list price
for the PortMaster 3 chassis ranges from $6,950 to $11,150, and can be
configured with up to six modem cards. Each 8-port and 10-port modem card is
priced at $3,450 and $4,300, respectively. The PortMaster 3 is the Company's
first product that contains an integrated modem and thus directly competes with
remote access products with integrated modems offered by larger competitors such
as Ascend, USR and Cisco which have dominated this segment of the remote access
market.

THE PORTMASTER 2 COMMUNICATION SERVERS

The Company's initial dial-up remote access products were introduced in 1990
and provide network access over standard analog telephone lines, when used in
conjunction with external V.34 modems from other vendors. PortMaster 2 products
include: the PortMaster 2E, a modular unit which can be configured with 10 to 30
asynchronous ports, priced from $2,695 to $3,750; and the PortMaster 25, a
25-port fixed-configuration unit, priced at $3,495. To date, the installed base
of PortMaster 2 products represents almost 1 million ports supporting
approximately 10 million dial-up subscribers. The Company believes the success
of its PortMaster 2 products has been critical to establishing the Company's
reputation among ISPs and that the Company has a significant opportunity to
migrate PortMaster 2 customers to the PortMaster 3 platform over time.

ACCESS ROUTERS

In addition to access concentrators and servers, the Company provides office
routers and firewall routers that are resold by ISPs to corporate customers for
Internet connectivity and other remote access networking applications.

OFFICE ROUTERS. Livingston's Office Routers are targeted for use by small
businesses and remote offices that need to connect to an ISP's network. These
systems are available with support for dial-up

31
<PAGE>
analog, ISDN BRI, Frame Relay, and T1/E1 services and allow PCs on a
subscriber's LAN to share bandwidth and phone line costs. Office Router prices
range from $1,195 to $1,395.

FIREWALL IRX ROUTERS. The Company's FireWall IRX Routers allow a company to
provide public access to its World Wide Web site or File Transfer Protocol
server through a connection to the Internet while simultaneously granting
employees, working at home or at remote office sites, access to the corporate
network. FireWall IRX Routers utilize Livingston's packet filtering technology
and multiple ethernet ports to isolate the corporate network from the public
network, log and control internal and outbound access, and prevent network
attacks from the outside world. FireWall IRX Routers support analog modem, ISDN
BRI, fractional T1, full T1/E1 and Frame Relay services. Prices for these
products range from $2,395 to $3,250.

SALES AND MARKETING

The Company sells its products through direct and indirect channels in North
America. To date, the majority of the Company's sales have been generated
through resellers which accounted for 88.1% and 79.6% of product revenues in
fiscal 1996 and the first nine months of fiscal 1997, respectively. The Company
has expanded and plans to continue to expand its direct sales force and key
account relationships in an effort to increase its market share with large ISPs
and Telcos in North America. The Company uses telemarketing, direct mail, trade
shows and seminars, selected advertising and the Internet to market its
products.

In international markets, the Company primarily sells its products through
its network of over 30 resellers, who assist in the marketing process. Recently,
the Company increased its focus on its international sales and marketing efforts
and has established a European headquarters in France with a branch office in
the United Kingdom. Sales operations for the Asia Pacific region are currently
managed out of the Company's headquarters in Pleasanton, California. Sales to
international customers accounted for 29.7% of product revenues in fiscal 1996
and 41.4% for the first nine months of 1997.

The Company recently began to offer an equipment finance program that allows
customers to fund the acquisition of the Company's products through leases
offered by a third-party leasing broker, doing business as Livingston Capital
Corporation ("LCC"). Under the terms of the master lease agreements with LCC,
upon termination of the lease and return of the equipment, the Company is
generally obligated to remarket the products. In the event the Company is
requested to remarket on behalf of LCC it will be on a best-efforts basis.

Livingston provides most of its resellers with product return rights for
stock balancing and price protection. Subject to purchasing an equal dollar
amount of other Livingston products and within certain limits, stock balancing
rights permit resellers to return products for credit. Price protection would
require the Company to grant retroactive price adjustments for inventory of
Livingston products held by resellers if Livingston lowers its prices for such
products. Although Livingston believes that it has adequate reserves to cover
product returns and price reductions, there can be no assurance that the Company
will not experience significant returns or price protection adjustments in the
future. See "Risk Factors--Risks Associated with Reliance on Resellers." As of
May 31, 1997, the Company employed 50 people in sales and marketing.

CUSTOMER SERVICE AND SUPPORT

The Company believes that a high level of technical support is essential in
achieving end-user customer satisfaction. The Company provides a range of
customer services with an escalating level of costs depending on the level of
service required. The majority of Livingston's service and support activities
relate to WAN connection and network configuration issues that can generally be
resolved by a technician by telephone or electronic mail. Certain of the
Company's resellers also provide end-user customers with service and support.

32
<PAGE>
The Company typically provides certain postcontract customer support ("PCS")
in connection with the sale of its products. Prior to the second quarter of
fiscal 1996, PCS consisted principally of telephone support and minor
maintenance for its PortMaster 2 products. During this period, the Company
recognized revenue at the time of product shipment and accrued the estimated
costs of providing PCS. During the second quarter of fiscal 1996, the Company
decided to provide significant feature enhancements to ComOS, free of charge, to
the Company's installed customer base. Accordingly, the Company recognized the
portion of product revenue attributable to the value of PCS ratably over 12
months, the period during which PCS is expected to be provided. In November
1996, the Company began selling PortMaster 3, which is accompanied by a one year
hardware and software warranty. The portion of the PortMaster 3 selling price
that is attributable to PCS is recognized ratably over the 12 month support
period. Additional warranty and support coverage is made available to PortMaster
3 customers as a purchase option, under the ProVision program or on a fee per
hour basis. The ProVision Services program offers customers 24 hours, seven days
a week technical support over the phone, extended hardware warranty, upgrades of
the latest ComOS software, and updated product manuals. To date, revenue
attributable to post warranty services has not been significant.

Livingston makes extensive use of on-line services to distribute technical
advice and software updates including a bulletin board service and the Company's
Web site. Livingston also offers technical training to its resellers and
end-user customers, a one year warranty on its hardware and software products
and free upgrades of its software for the one year warranty period. The
PortMaster 3 has been designed to be easily upgraded to support emerging
technologies such as 56K modem functionality. The Company has announced its
offer to provide this upgrade, when and if available, to existing PortMaster 3
customers, upon request, at no additional charge (other than shipping costs).
The Company accrues for this cost at the time of sale. As of May 31, 1997, the
Company employed 59 people in customer service.

RESEARCH AND DEVELOPMENT

The Company's research and development efforts are focused on developing new
products and core technologies for the remote access market, further enhancing
the functionality, performance and flexibility of the Company's ComOS, and
providing support for WAN protocol standards and telecommunication carrier
services. Livingston currently focuses its development efforts on additional
remote access technologies, particularly in the area of higher port density,
integration of higher speed digital transmission services such as T3,
development of ISP administrative software programs and support for network
security standards.

The Company's future success depends on its ability to continue to enhance
its existing products and to develop new products that address the remote access
requirements of its customers. The Company closely monitors changing customer
requirements by communicating directly with ISP customers, resellers and market
research organizations. Livingston also receives input by actively participating
in industry groups responsible for establishing technical standards.

Product development schedules are inherently difficult to predict, and there
can be no assurance that the Company will achieve its targets for product
development, introduction and shipment. Also, there can be no assurance that the
Company's product development efforts will result in commercially successful
products or that the Company's products will not be rendered obsolete by
changing technology or new product announcements by other companies.

The Company's research and development expenditures were $2.5 million,
$890,000 and $462,000 in fiscal 1996, 1995 and 1994, respectively. As of May 31,
1997, Livingston's research and development staff consisted of 32 employees.

33
<PAGE>
MANUFACTURING

Livingston's manufacturing operations consist primarily of materials
planning and procurement, quality control, kitting, final assembly, burn-in, and
testing. The Company designs all of the hardware subassemblies for its products
and uses the services of contract manufacturers to build these subassemblies to
the Company's specifications. The Company presently uses a variety of
independent third party contract assembly companies to perform printed circuit
board assembly and in-circuit testing. The manufacturing process enables the
Company to configure the hardware and software in combinations to meet a wide
variety of individual customer requirements. The Company uses automated test
equipment, burn-in procedures, and comprehensive inspection, testing and
statistical process control testing by technicians to assure the quality and
reliability of its products. To date, the Company has not experienced any
significant product defects or product returns.

The Company is dependent upon single or limited source suppliers for a
number of components and parts used in the Company's products, including certain
key microprocessors and integrated circuits. There can be no assurance that
these independent contractors and suppliers will be able to meet the Company's
future requirements for manufactured products, components and subassemblies. The
Company generally purchases single or limited source components pursuant to
purchase orders and has no guaranteed supply arrangements with these suppliers.
For example, the Company currently purchases all of its modem microchips from
Analog Devices, Inc. and with the implementation of the Company's 56K modem
technology, the Company anticipates that it will become dependent upon Lucent
for modem microchips. In addition, the availability of many of these components
is dependent in part on the Company's ability to provide its suppliers with
accurate forecasts of its future requirements. Any extended interruption in the
supply of any of the key components currently obtained from a single or limited
source or in the time necessary to transition a replacement component into the
Company's products could disrupt its operations and have a material adverse
effect on the Company in any given period. The Company purchases certain
components from foreign suppliers and the supply of such components could be
adversely affected by changing tariff and regulatory structures, particularly
those affecting the import and export of electronics and technology. The Company
may also be subject to increases in component costs, which could also have a
material adverse effect on the Company's business, results of operations and
financial condition.

The Company uses a rolling six month forecast based on anticipated product
orders to determine its general materials and component requirements. Lead times
for materials and components ordered by the Company vary and depend on factors
such as the specific supplier, contract terms, and demand for a component at a
given time. Currently, the Company acquires materials, completes certain
standard subassemblies and assembles fully-configured systems based on the
Company's forecast. If orders do not match forecasts, the Company may have
excess or inadequate inventory of certain materials and components. In November
1996, with the introduction of the PortMaster 3 access concentrator, the Company
experienced a decrease in demand for its older PortMaster 2 products. As a
result, the Company recorded charges aggregating approximately $3.3 million
through the first quarter of fiscal 1997 as a reserve for obsolete PortMaster 2
inventory. There can be no assurance that the Company will not experience a
similar problem as it introduces future products and attempts to adjust its
production planning as demand for older products declines. As of May 31, 1997
there were 36 employees in manufacturing.

REGULATORY MATTERS

The Company's products must meet standards and receive certification for
connection to the public telecommunications network prior to their sale. In the
United States, the Company's products must comply with Part 15(a) (industrial
equipment), Part 15(b) (residential equipment) and Part 68 (analog lines) of the
Federal Communications Commission regulations. The Company's products also must
be certified by domestic telecommunications carriers in both the United States
and in foreign countries. In foreign countries, the Company's products are
subject to a wide variety of government review and certification

34
<PAGE>

requirements. The Company is currently undertaking an effort to qualify for ISO
9002 series quality certification in order to fulfill the quality system
requirements for the European markets.

The Company made application for ISO 9002 certification November 11, 1996.
ISO (the International Organization for Standardization) is a worldwide
federation of national standards bodies who collaborate with the International
Electromechanical Commission (IEC) on all matters of electrotechnical
standardization. ISO 9002 is the quality system used when conformance to
specified requirements is to be assured by a supplier during production,
installation, and servicing of manufactured products.

The ISO 9002 certification process includes a number of tasks including the
development of quality control manuals, establishment of written operational
procedures, establishment of processes for reviewing and updating procedures,
and internal compliance audits of these processes and procedures. An external
audit of the ISO 9002 process is conducted by an affiliate of ISO, the National
Standards Authority of Ireland (NSAI). If the subject company is determined to
be in compliance with the provision of ISO 9002, certification is awarded.
Currently, Livingston has completed approximately 25% of the work required for
certification and intends to complete the entire process by November 1998.

COMPETITION

The remote access market is intensely competitive and the Company's
principal competitors include Ascend, USR and Cisco. Competitive factors in the
remote access ISP market include the breadth of product features, pricing,
product quality, reliability and functionality, marketing and sales resources,
customer service and support, and reputation. The Company believes that it
competes favorably with respect to the foregoing factors. Competition in the
large ISP and Telco segments of the remote access market is particularly intense
and the Company's competitors have greater name recognition, resources, sales
capabilities and market share than the Company. As a result, the Company has a
competitive disadvantage in these markets. Increased competition could result in
price reductions, the inability of the Company to increase market share, or a
loss of market share by the Company, any of which could materially adversely
affect the Company's business, results of operations and financial condition.

Additionally, industry-wide consolidation, such as the recently announced
mergers of USR with 3Com and Ascend with Cascade, could result in increased
competition in the remote access ISP market because, among other things, such
companies will be able to provide a complete solution for integrated remote
access combined with other networking products not offered by the Company.
Furthermore, the ISP industry could experience consolidation and the acquisition
of one of the Company's larger customers by a corporation with relationships
with one of the Company's competitors could result in a loss of revenue
attributable to such customer. To the extent Telcos increase their share of the
ISP market and the Company is unsuccessful in penetrating the Telco segment of
the market, the Company's business, results of operations and financial
condition could be materially adversely affected. There can be no assurance that
the Company's current and future competitors will not develop or market
technologies and products that offer higher performance and are more
cost-effective than the Company's current or future products, thereby rendering
the Company's technologies and products obsolete.

PROPRIETARY RIGHTS

Although the Company believes that its success is more dependent upon its
technical expertise than its proprietary rights, the Company's future success
and ability to compete is dependent in part upon its proprietary technology. The
Company relies on a combination of contractual rights, trade secrets and
copyright laws to establish and protect its proprietary technology. The Company
currently has one patent application pending, but there can be no assurance that
a patent will be issued as a result of such application, that the Company's
patent will be upheld as valid, or that such patent will prevent the development
of competitive products. The Company generally enters into confidentiality
agreements with its employees, consultants, resellers, customers and potential
customers, and strictly limits access to, and

35
<PAGE>
distribution of its source code, and further limits the disclosure and use of
other proprietary information. There can be no assurance that the steps taken by
the Company in this regard will be adequate to prevent misappropriation of its
technology or that the Company's competitors will not independently develop
technologies that are substantially equivalent or superior to the Company's
technology. In addition, the laws of some foreign countries do not protect the
Company's proprietary rights to the same extent as do the laws of the United
States.

The Company is also subject to the risk of adverse claims and litigation
alleging infringement of the intellectual property rights of others. There can
be no assurance that third parties will not assert infringement claims in the
future with respect to the Company's current or future products or that any such
claims will not require the Company to enter into license arrangements or
develop non-infringing technology, or result in litigation, regardless of the
merits of such claims. In addition, any such litigation could result in product
delays or costs which would have a material adverse effect on the Company's
business, results of operations and financial condition. No assurance can be
given that any necessary licenses will be available or that, if available, such
licenses can be obtained on commercially reasonable terms. The failure of the
Company to adequately obtain such licenses, or to protect its own proprietary
technology through contractual rights, trade secrets, patent and copyrights
laws, could have a material adverse effect on the Company's business, results of
operations and financial condition. See "Risk Factors--Dependence on Proprietary
Technology."

FACILITIES

The Company's principal operations are conducted out of two leased buildings
located in Pleasanton, and Dublin, California with a total of 64,472 square feet
of office and manufacturing space. The Company also maintains eight branch
offices in the United States. The Company's European operations are
headquartered in Mougins, France with a branch office in the United Kingdom.

In April 1997, the Company entered into an agreement to lease an additional
45,525 square feet of office space adjacent to its current headquarters
building. The expansion facility will be available for occupancy in Spring 1998.
The Company believes that its current and expansion facilities will be adequate
to meet the anticipated level of operations through fiscal 1998.

EMPLOYEES

On May 31, 1997, Livingston employed 200 individuals. Of these, 32 were
involved in research and development, 109 in sales, marketing, and customer
support, 36 in manufacturing, and 23 in administration. The Company believes
that it maintains good relations with its employees and has not experienced any
interruption of operations as a result of labor disagreements.

BACKLOG

The Company's sales are generally fulfilled within a few weeks from the date
of an order and customers have up to two weeks to cancel or delay orders.
Accordingly, the Company does not believe that backlog is a meaningful indicator
of future sales.

LEGAL PROCEEDINGS

On June 5, 1997, a complaint was filed against the Company in California
Superior Court by Capella Worldwide Networking, Inc., the Company's largest
distributor in fiscal 1996. The Company terminated its relationship with Capella
in November 1996. The complaint purports to allege contract and tort causes of
action arising out of the Company's termination of Capella as a distributor. The
complaint seeks injunctive and declaratory relief as well as unspecified damages
for alleged lost profits, including compensatory, punitive and treble damages.
The Company has not yet responded to the Complaint and discovery has not yet
commenced. The Company denies the allegations in the complaint and intends to
defend its position.

36
<PAGE>

Nevertheless, litigation is subject to inherent uncertainties and thus there can
be no assurance that this suit will be resolved favorably to the Company or that
it will not have a material adverse effect on the Company.

In April 1997, a complaint for unfair competition was filed against the
Company as one of a group of companies separately developing 56K modem
technology by a plaintiff on behalf of the general public. The complaint alleges
that the Company knowingly made false and misleading statements regarding the
capabilities of its 56K modem technology. The Company denies the allegations in
the complaint and intends to vigorously defend its position. Nevertheless,
litigation is subject to inherent uncertainties and thus there can be no
assurance that this suit will be resolved favorably to the Company or that it
will not have a material adverse effect on the Company.

On December 17, 1996, the Company settled a lawsuit with USR arising from a
dispute regarding an OEM Software License and Development Agreement between the
parties. See "Risk Factors--Risks Associated with Legal Proceedings" and
"--Allegation of Patent Infringement."

37
<PAGE>
MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The following table sets forth certain information with respect to the
executive management and directors of the Company:

<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------------------- ----------- -------------------------------------------------------
<S> <C> <C>
Steven M. Willens.................................. 37 President, Chief Executive Officer, Chief Technology
Officer and Chairman
Ronald H. Willens.................................. 65 Executive Vice President, Secretary and Director
Joseph E. Sasek.................................... 38 Vice President of Sales and Marketing
Steven A. Hess..................................... 45 Chief Financial Officer
Jurgen Obermann.................................... 34 Managing Director of Europe, the Middle East and Africa
Paul L. Harvey..................................... 45 Director of Customer Service
Jerrold Livingston................................. 67 Director
Albert A. Pimentel (1)(2).......................... 42 Director
Robert C. Hawk (1)(2).............................. 57 Director
</TABLE>

- ---------

(1) Member of the Compensation Committee.

(2) Member of the Audit Committee.

MR. STEVEN WILLENS co-founded the Company in 1986 and joined the Company on
a full-time basis in 1989, serving as Vice President of Engineering. In October
1994, he was appointed President and Chief Executive Officer. In October 1995,
he was appointed Chairman of the Board of Directors. Mr. Willens also served as
Secretary of the Company from 1986 to October 1994. From 1984 to 1989, Mr.
Willens held several management positions in engineering and marketing at Sun
Microsystems. From 1981 to 1984, he was a Product Manager at Hewlett Packard.

DR. RONALD WILLENS co-founded the Company in 1986, has served as Executive
Vice President of the Company since 1988 and has served as Secretary of the
Company since October 1994. From 1962 to 1988, Dr. Willens served in various
technical management capacities with AT&T Labs in Murray Hill, New Jersey.

MR. SASEK joined the Company in July 1994 as Director of Sales, and was
promoted to Vice President of Sales in August 1995 and to Vice President of
Sales and Marketing in June 1996. From 1990 to 1992, Mr. Sasek held several
field sales management positions, and from February 1992 to July 1994 was field
sales director for Telebit Corporation, a dial-up networking company.

MR. HESS joined the Company in February 1996 as Chief Financial Officer.
From January 1995 to February 1996, he was Vice President of Finance and Chief
Financial Officer at Asante Technologies, Inc., a manufacturer of local area
networking equipment. From 1988 to October 1995, Mr. Hess held executive
management positions, primarily as Chief Financial Officer for Telebit
Corporation, a dial-up networking company.

MR. OBERMANN joined the Company in September 1996, as Managing Director of
the Company's Europe, the Middle East and Africa operations. From April 1993 to
September 1996, Mr. Obermann was the Director of Marketing for Cisco responsible
for Europe, the Middle East and Africa. Prior to that, from July 1991 to April
1993, he was product manager for LAN, WAN and Internet products at PanDacom
GmbH, a German company which distributes telecommunications and internetworking
equipment.

MR. HARVEY joined the Company in February 1997 as Director of Customer
Service. From May 1992 to February 1997, Mr. Harvey was Director of Worldwide
Customer Support Center of Amdahl Corporation,

38
<PAGE>
a manufacturer of mainframe computers. From 1976 to April 1992, he held a
variety of customer support positions with Amdahl Corporation.

MR. LIVINGSTON co-founded the Company in 1986, and served as its President
and Chief Executive Officer until September 1994 and as its Chairman until
October 1995 at which time he retired. From 1983 to 1986, Mr. Livingston was
Director, Environmental Medical Services with Litton Industries. From 1971 to
1983 he served as Director of Environmental Safety for ITEK, a defense
contractor.

MR. PIMENTEL has served as a member of the Company's Board of Directors
since November 1995. Mr. Pimentel has been Senior Vice President of Finance and
Chief Financial Officer with WebTV Networks, Inc., an Internet appliance and
service company, since November 1996. From July 1992 to October 1996, Mr.
Pimentel was Senior Vice President and Chief Financial Officer with LSI Logic
Corporation, a semiconductor company. From 1990 to June 1992, Mr. Pimentel was
Vice President of Finance and Chief Financial Officer for Momenta Corporation, a
pen based PC company.

MR. HAWK has served as a member of the Company's Board of Directors since
February 1997. Mr. Hawk is currently retired. From May 1996 to April 1997, Mr.
Hawk was President and Chief Executive Officer of US West Multimedia Group, a
Denver, Colorado based RBOC. From 1988 to April 1996, Mr. Hawk served as
President of the Carrier and Information Provider division of US West
Communications. Mr. Hawk currently serves as a director of Premisys
Communications, Inc., PairGain Technologies, Inc. and Xylan Corporation.

Dr. Ronald Willens and Mr. Steven Willens are father and son respectively,
and Jerrold Livingston is Steven Willens' father-in-law. Other than those
relationships, there are no other family relationships between any of the
directors or executive officers of the Company.

CLASSIFIED BOARD

The Company's Bylaws currently authorize up to five directors. All directors
hold office until the next annual meeting of shareholders or until their
successors are duly elected and qualified. The Company's Board of Directors
approved an amendment and restatement of its Bylaws, subject to shareholder
approval, that provides, among other things, that effective upon qualification
of the Company as a "listed corporation," as defined in Section 301.5(d) of the
California Code, the Board of Directors will consist of two classes with
directors in each class serving staggered two-year terms. Class I consists of
Steven M. Willens and Albert A. Pimentel. The initial term of office of the
Class I directors expires at the annual meeting of shareholders in calendar
1997. Class II consists of Robert C. Hawk, Jerrold Livingston and Ronald H.
Willens. The initial term of office of the Class II directors expires at the
annual meeting of shareholders in calendar 1998. Upon the expiration of the term
of each class of directors, members constituting such class of directors will be
elected for a two-year term at the next succeeding annual meeting of
shareholders. See "Description of Capital Stock."

BOARD COMMITTEES

The Board of Directors has a Compensation Committee, currently comprised of
Mr. Hawk and Mr. Pimentel, which makes recommendations to the Board of Directors
concerning salaries and incentive compensation for all officers, directors and
consultants of the Company, and an Audit Committee, currently comprised of Mr.
Hawk and Mr. Pimentel, which reviews the internal accounting procedures of the
Company and consults with and reviews the services provided by the Company's
independent auditors. See "--Compensation Committee Interlocks and Insider
Participation."

DIRECTOR COMPENSATION

Directors receive no cash compensation for services provided in that
capacity but are reimbursed for out-of-pocket expenses incurred in connection
with attendance at meetings of the Board of Directors.

39
<PAGE>
Upon joining the Board of Directors, Mr. Pimentel was granted an option to
purchase 150,000 shares of the Company's Common Stock at a price of $.25 per
share and Mr. Hawk was granted an option to purchase 35,000 shares of the
Company's Common Stock at a price of $10.50 per share, pursuant to the Company's
1994 Stock Option Plan.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The members of the Compensation Committee of the Board of Directors are Mr.
Pimentel and Mr. Hawk. No member of the Compensation Committee or executive
manager of the Company has a relationship that would constitute an interlocking
relationship with executive managers or directors of another entity.

LIMITATIONS ON DIRECTORS' LIABILITY AND INDEMNIFICATION

The Company's Restated Articles of Incorporation include a provision that
eliminates the personal liability of its directors to the Company and its
shareholders for monetary damages for breach of the directors' fiduciary duties
in certain circumstances. This limitation has no effect on a director's
liability (i) for acts or omissions that involve intentional misconduct or a
knowing and culpable violation of law, (ii) for acts or omissions that a
director believes to be contrary to the best interest of the Company or its
shareholders or that involve the absence of good faith on the part of the
director, (iii) for any transaction from which a director derived an improper
personal benefit, (iv) for acts or omissions that show a reckless disregard for
the director's duty to the Company or its shareholders in circumstances in which
the director was aware, or should have been aware, in the ordinary course of
performing a director's duties, of a risk of a serious injury to the Company or
its shareholders, (v) for acts or omissions that constitute an unexcused pattern
of inattention that amounts to an abdication of the director's duty to the
Company or its shareholders, (vi) under Section 310 of the California
Corporations Code (the "California Code") concerning contracts or transactions
between the Company and a director or (vii) under Section 316 of the California
Code concerning directors' liability for improper dividends, loans and
guarantees. The provision does not affect the availability of injunctions and
other equitable remedies available to the Company's shareholders for any
violation of a director's fiduciary duty to the Company or its shareholders.

The Company's Restated Articles of Incorporation also include an
authorization for the Company to indemnify its agents (as defined in Section 317
of the California Code), through bylaw provisions, by agreement or otherwise, to
the fullest extent permitted by law. Pursuant to this provision, the Company's
Bylaws provide for indemnification of the Company's directors, officers and
employees. In addition, the Company, at its discretion, may provide
indemnification to persons whom the Company is not obligated to indemnify. The
Bylaws also allow the Company to enter into indemnity agreements with individual
directors, officers, employees and other agents. These indemnity agreements have
been entered into with all directors and executive officers and provide the
maximum indemnification permitted by law. These agreements, together with the
Company's Bylaws and Articles of Incorporation, may require the Company, among
other things, to indemnify these directors or executive officers (other than for
liability resulting from willful misconduct of a culpable nature), to advance
expenses to them as they are incurred, provided that they undertake to repay the
amount advanced if it is ultimately determined by a court that they are not
entitled to indemnification, and to obtain directors' and officers' insurance if
available on reasonable terms. Section 317 of the California Code and the
Company's Bylaws make provision for the indemnification of officers, directors
and other corporate agents in terms sufficiently broad to indemnify such
persons, under certain circumstances, for liabilities (including reimbursement
of expense incurred) arising under the Securities Act.

The Company, with the approval of the Board of Directors, intends to obtain
directors' and officers' liability insurance prior to the effectiveness of this
offering.

40
<PAGE>
EXECUTIVE COMPENSATION

The following table shows the compensation received in the fiscal year ended
August 31, 1996 by the Company's Chief Executive Officer and the Company's other
executive managers who earned in excess of $100,000 during such fiscal year
(collectively, the "Named Executive Officers").

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
-------------
ANNUAL COMPENSATION SECURITIES
----------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS (1) OPTIONS (#) COMPENSATION
- ------------------------------------------------------------ ---------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
Steven M. Willens........................................... $ 170,885 $ 25,000 -- --
Chairman, President and
Chief Executive Officer

Ronald H. Willens........................................... 160,420 25,000 -- --
Executive Vice President and Secretary

Joseph E. Sasek............................................. 110,042 40,000 225,000 $ 57,801 (2)
Vice President of Sales and Marketing

Steven A. Hess (3).......................................... 77,765 -- 225,000 --
Chief Financial Officer

Jurgen Obermann (4)......................................... -- -- -- --
Managing Director of Europe, the Middle East and Africa

Paul L. Harvey (5).......................................... -- -- -- --
Director of Customer Service
</TABLE>

- ---------

(1) Earned for services during the year.

(2) Amount represents $54,077 in sales commissions earned during fiscal 1996.

(3) Steven A. Hess joined the Company in February 1996 at an annual salary of
$140,000.

(4) Jurgen Obermann joined the Company in September 1996 at an annual salary of
$150,000 and was granted an option to purchase 45,000 shares of Common
Stock.

(5) Paul L. Harvey joined the Company in February 1997 at an annual salary of
$125,000 and was granted an option to purchase 30,000 shares of Common
Stock.

41
<PAGE>
OPTIONS GRANTS IN FISCAL 1996

The following table sets forth information for the Named Executive Officers
with respect to grants of options to purchase Common Stock of the Company made
during the fiscal year ended August 31, 1996.

<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS(1) VALUE
---------------------------- AT ASSUMED ANNUAL RATES
NUMBER OF % OF TOTAL OF STOCK PRICE
SECURITIES OPTIONS APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM (2)
OPTIONS EMPLOYEES IN PRICE ------------------------
NAME GRANTED FISCAL YEAR PER SHARE EXPIRATION DATE 5% 10%
- -------------------------------- ----------- --------------- ----------- --------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Steven M. Willens............... -- -- -- -- -- --
Ronald H. Willens............... -- -- -- -- -- --
Joseph E. Sasek................. 225,000 13.5% $ .25 09/08/05 $ 35,375 $ 89,646
Steven A. Hess.................. 225,000 13.5 1.67 02/29/06 236,307 598,849
Jurgen Obermann................. -- -- -- -- -- --
Paul L. Harvey.................. -- -- -- -- -- --
</TABLE>

- ---------
(1) Consists of stock options granted pursuant to the Company's 1994 Stock
Option Plan. Mr. Sasek's option became exercisable immediately, subject to a
right of repurchase which lapses according to a vesting schedule of 25% at
the end of one year following the vesting commencement date as determined by
the Board of Directors and 1/36 of the remaining amount per month
thereafter, and Mr. Hess' option became exerciseable immediately, subject to
a right of repurchase which lapses according to a vesting schedule of 20% at
the end of one year following the vesting commencement date as determined by
the Board of Directors and 1/48 of the remaining amount per month
thereafter, as long as each optionee remains an employee with, consultant to
or director of the Company. The maximum term of each option granted is ten
years from the date of grant. The exercise price is equal to the fair market
value of the stock on the date of grant as determined by the Board of
Directors.

(2) Potential gains are net of the exercise price but before taxes associated
with the exercise. The 5% and 10% assumed annual rates of compounded stock
appreciation are mandated by the rules of the Securities and Exchange
Commission and do not represent the Company's estimate or projection of the
future Common Stock price. Actual gains, if any, on stock option exercises
are dependent on the future financial performance of the Company, overall
market conditions and the option holders' continued employment through the
vesting period. This table does not take into account any appreciation in
the price of the Common Stock from the date of grant to the date of this
Prospectus, other than the columns reflecting assumed rates of appreciation
of 5% and 10%.

AGGREGATED OPTION EXERCISES IN FISCAL 1996
AND FISCAL 1996 YEAR-END OPTION VALUES

The following table sets forth information for the Named Executive Officers
with respect to exercises of options to purchase Common Stock of the Company in
the fiscal year ended August 31, 1996.

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT 8/31/96 AT 8/31/96 (1)
SHARES ACQUIRED -------------------------- ---------------------------
NAME ON EXERCISE (#) VALUE REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------- --------------- --------------------- ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Steven M. Willens.............. -- -- -- -- -- --
Ronald H. Willens.............. -- -- -- -- -- --
Joseph E. Sasek................ -- -- 375,000 -- $ 3,875,253 --
Steven A. Hess................. -- -- 225,000 -- 1,986,750 --
Jurgen Obermann................ -- -- -- -- -- --
Paul L. Harvey................. -- -- -- -- -- --
</TABLE>

- ---------
(1) Based on the fair market value of the Company's Common Stock at August 31,
1996 ($10.50 per share as determined by the Board of Directors) less the
exercise price payable for such shares.

42
<PAGE>
STOCK PLANS

1994 STOCK OPTION PLAN. The Company's 1994 Stock Option Plan was adopted by
the Board of Directors on August 19, 1994. An aggregate of 3,000,000 of the
Company's Common Stock is reserved for issuance under the 1994 Stock Option
Plan. The 1994 Stock Option Plan provides for grants to employees (including
executive management and employee directors) of "incentive stock options" within
the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), and for grants to employees and consultants of nonstatutory stock
options. As of May 31, 1997, options to purchase a total of 2,601,247 shares at
a weighted average exercise price of $3.99 per share were outstanding, and
176,018 shares remained available for future option grants. The 1994 Stock
Option Plan may be administered by the Board of Directors or a committee of the
Board (the "Administrator"). The Administrator determines the terms of options
granted under the 1994 Stock Option Plan, including the number of shares subject
to the option, exercise price, term and the rate at which the options become
exercisable. Currently, each option that has been granted under the 1994 Plan is
immediately exerciseable, subject to a right of repurchase which lapses
according to a vesting schedule determined by the Administrator. The exercise
price of all incentive stock options granted under the 1994 Stock Option Plan
must be at least equal to the fair market value of the Common Stock of the
Company on the date of grant. The exercise price of all nonstatutory stock
options must equal at least 85% of the fair market value of the Common Stock on
the date of grant. The exercise price of any stock option granted to an optionee
who owns stock representing more than 10% of the voting power of all classes of
stock of the Company must equal at least 110% of the fair market value of the
Common Stock on the date of grant. The exercise price may be paid in cash or
pursuant to a loan or installment arrangement approved by the Board. With
respect to any participant who owns stock representing more than 10% of the
voting power of all classes of stock of the Company, the term of incentive stock
options are limited to five years or less. The term of all options may not
exceed ten years. If not terminated earlier by the Administrator, the 1994 Stock
Option Plan will terminate in 2004. The Administrator has the authority to amend
or terminate the 1994 Stock Option Plan as long as such action does not
adversely affect any outstanding option. In the event of a proposed sale of all
or substantially all of the Company's assets, or a merger of the Company with or
into another corporation, each option may be assumed or an equivalent option
substituted by the successor corporation (if any). Upon completion of this
offering, no further option grants will be made under the 1994 Stock Option
Plan.

1997 STOCK PLAN. The Company's 1997 Stock Plan was adopted by the Board of
Directors in May 1997 and will be submitted to shareholders for approval in May
1997. The 1997 Stock Plan provides for the grant of incentive stock options to
employees (including officers and directors) and for the grant of nonstatutory
stock options and stock purchase rights ("SPRs") to employees, directors and
consultants. A total of 1,500,000 shares of Common Stock has been reserved for
issuance under the 1997 Stock Plan plus any shares which have been reserved but
unissued under the 1994 Stock Option Plan. In addition, an annual increase in
the number of shares reserved will be added on each anniversary date of the
adoption of the 1997 Stock Plan equal to the lesser of (i) 600,000 shares, (ii)
4% of the outstanding shares on such date or (iii) a lesser amount determined by
the Board. Prior to this offering, there were no options or SPRs outstanding
under the 1997 Stock Plan.

The 1997 Stock Plan may be administered by the Board of Directors or a
committee designated by the Board (the "Administrator"). Options and SPRs
granted under the 1997 Stock Plan are not generally transferable by the optionee
except by will or by the laws of descent and distribution, and are exercisable
during the lifetime of the optionee only by such optionee. Options granted under
the 1997 Stock Plan must be exercised within three months of the end of the
optionee's status as an employee, director or consultant of the Company, or
within twelve months after such optionee's death or disability, but in no event
later than the expiration of the option term. The exercise price of all
incentive and nonstatutory stock options granted under the 1997 Stock Plan shall
be determined by the Administrator. With respect to any participant who owns
stock possessing more than ten percent of the voting power of all classes of the
Company's outstanding capital stock (a "10% Stockholder"), the exercise price of
any incentive stock

43
<PAGE>
option granted must equal at least 110% of the fair market value on the grant
date. The exercise price of incentive stock options and nonstatutory stock
options for all other employees shall be no less than 100% of the fair market
value per share on the date of grant. The maximum term of an option granted
under the 1997 Stock 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% stockholder). In
the case of SPRs, unless the Administrator determines otherwise, the Company
shall have a repurchase option exercisable upon the voluntary or involuntary
termination of the purchaser's employment with the Company for any reason
(including death or disability). Such repurchase option lapses at a rate
determined by the Administrator. The purchase price for shares repurchased by
the Company shall be the original purchase price paid by the purchaser and may
be paid by cancellation of any indebtedness of the purchaser to the Company. In
the event of a merger or sale of substantially all of the assets of the Company,
the acquiring or successor corporation must either assume the outstanding
options and SPRs under the 1997 Stock Plan or substitute equivalent options or
SPRs to purchase shares of the acquiring or successor corporation (or a parent
or subsidiary of the acquiring or successor corporation). If an employee is
involuntarily terminated by the acquiring or successor corporation within twelve
months of the merger or asset sale (other than for cause), or if such acquiring
or successor corporation refuses to substitute or assume outstanding options or
SPRs, the employee's options and SPRs fully vest and become immediately
exercisable.

1997 EMPLOYEE STOCK PURCHASE PLAN. The Company's 1997 Employee Stock
Purchase Plan (the "Stock Purchase Plan") was adopted by the Board of Directors
in May 1997 and will be submitted to the shareholders for approval in May 1997.
The Company has reserved a total of 500,000 shares of Common Stock for issuance
under the Stock Purchase Plan, plus an annual increase to be added on each
anniversary date of the adoption of the Stock Purchase Plan equal to the lesser
of (i) 150,000 shares, (ii) 1% of the outstanding shares on such date or (iii) a
lesser amount determined by the Board. The Stock Purchase Plan, which is
intended to qualify under Section 423 of the Internal Revenue Code of 1986, as
amended (the "Code"), permits eligible employees of the Company to purchase
shares of Common Stock through payroll deductions of up to ten percent (10%) of
their compensation, up to a maximum of $25,000 worth of Common Stock (valued at
the date of grant) in each calendar year. The Stock Purchase Plan will be
implemented by consecutive overlapping 24-month offering periods (each an
"Offering Period"). The initial Offering Period will begin on the effective date
of this offering and will end on the last trading day in the period ending March
31, 1999. All employees who work at least twenty hours per week and more than
five months per calendar year are eligible to participate in the Stock Purchase
Plan.

The price of Common Stock purchased under the Stock Purchase Plan will be
85% of the lower of the fair market value of the Common Stock on the first day
of each Offering Period or the date of purchase. Employees may withdraw from the
Stock Purchase Plan at any time during an Offering Period, and the balance of
the payroll deductions will be returned to the employee. Participation in the
Stock Purchase Plan ends automatically upon termination of employment with the
Company. Rights granted under the Stock Purchase Plan are not transferable by a
participant other than by will, the laws of descent and distribution or as
otherwise provided under the Stock Purchase Plan.

The Stock Purchase Plan will be administered by the Board of Directors or by
a committee appointed by the Board. The Board may amend or modify the Stock
Purchase Plan at any time. The Stock Purchase Plan will terminate ten years
after the effective date of its adoption, unless sooner terminated by the Board.

SECTION 401(k) PLAN

In September 1995, the Board approved the Livingston Retirement Savings Plan
(the "401(k) Plan"), covering the Company's full-time employees located in the
United States. Pursuant to the 401(k) Plan, employees may elect to reduce their
current compensation by up to the statutorily prescribed annual limit ($9,500 in
calendar years 1996 and 1997) and to have the amount of such reduction
contributed to the 401(k) Plan. The 401(k) Plan permits, but does not require,
additional matching contributions to the

44
<PAGE>
401(k) Plan by the Company on behalf of all participants in the 401(k) Plan. The
Company has not made any contributions to the 401(k) Plan. The 401(k) Plan is
intended to qualify under Section 401(k) of the Code, such that contributions to
the 401(k) Plan by employees or by the Company, and the investment earnings
thereon, are not taxable to employees until withdrawn from the 401(k) Plan, and
such that contributions by the Company, if any, will be deductible by the
Company.

CERTAIN TRANSACTIONS

The Company and Jerrold Livingston entered into a Deferred Compensation Plan
dated May 2, 1996, as amended (the "Compensation Plan"). Under the terms of the
Compensation Plan, Mr. Livingston is entitled to receive an aggregate annual
amount of $110,000 in recognition of past services rendered to the Company. The
Compensation Plan will terminate upon the earlier of (i) January 1, 2005, (ii)
the termination of the lock-up period in connection with the closing of an
initial public offering of the Company's Common Stock or (iii) the closing of a
merger or sale of the Company.

45
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS

The following table sets forth information known to the Company with respect
to the beneficial ownership of its Common Stock as of April 30, 1997 and as
adjusted to reflect the sale of Common Stock offered hereby, for (i) each person
who is known by the Company to own beneficially more than five percent of the
Common Stock, (ii) each of the Company's directors, (iii) each Named Executive
Officer, (iv) all directors and executive officers as a group and (v) by the
Selling Shareholders.

<TABLE>
<CAPTION>
PERCENT
SHARES TO BENEFICIALLY
NUMBER OF BE OWNED(2)(3)
SHARES SOLD IN ------------------------
BENEFICIALLY THIS BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED(1) OFFERING OFFERING OFFERING
- --------------------------------------------------------------- --------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Ronald H. Willens.............................................. 4,050,000 -- 32.7%
Steven M. Willens.............................................. 4,050,000 -- 32.7
Jerrold Livingston............................................. 4,050,000(4) 32.7
Joseph E. Sasek................................................ 375,000(5) -- 2.9
Steven A. Hess................................................. 225,000(6) -- 1.8
Jurgen Obermann................................................ 45,000(7) -- *
Albert A. Pimentel............................................. 150,000(8) -- 1.2
Robert C. Hawk................................................. 35,000 -- *
All directors and executive officers as a group (9 persons).... 13,010,000(9) 98.6
</TABLE>

- ---------

* Less than one percent.

(1) Except as otherwise indicated in the footnotes to this table and pursuant to
applicable community property laws, the persons named in the table have sole
voting and investment power with respect to all shares of Common Stock.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Options under the 1994 Stock
Option Plan are immediately exercisable in full but subject to a right of
repurchase by the Company which lapses according to a vesting schedule. All
shares of Common Stock subject to options exerciseable are deemed
outstanding for computing the percentage of the person holding such options
but are not deemed outstanding for computing the percentage of any other
person.

(2) Based on 12,405,735 shares outstanding as of May 31, 1997.

(3) This column assumes no exercise of the Underwriter's over-allotment option.
If, however, the Underwriters' over-allotment option is exercised in full,
certain shareholders will sell an aggregate of additional shares of
Common Stock. Specifically, in such event, in addition to those share
amounts set forth in the table above, (i) Ronald Willens will sell an
aggregate of shares and will beneficially own shares, which is
% of the Company's outstanding Common Stock, after completion of this
Offering, and (ii) Steven Willens will sell an aggregate of shares and
will beneficially own shares, which is % of the Company's
outstanding Common Stock, after completion of the Offering.

(4) Includes 72,460 shares held by the Randall Scott Livingston Trust, 17,390
shares held by the Joshua Matthew Livingston Trust, 17,390 shares held by
the Travis Michael Livingston Trust, 17,390 shares held by the Rebecca
Roseann Livingston Trust, 14,490 shares held by the Rhonda Denise Willens
Trust, 14,490 shares held by the Melissa Leanne Willens Trust and 14,490
shares held by the Mark Daniel Willens Trust.

(5) Includes 375,000 shares issuable under stock options held by Mr. Sasek
exerciseable within 60 days of April 30, 1997.

46
<PAGE>
(6) Includes 225,000 shares issuable under stock options held by Mr. Hess
exerciseable within 60 days of April 30, 1997.

(7) Includes 45,000 shares issuable under stock options held by Mr. Obermann
exerciseable within 60 days of April 30, 1997.

(8) Includes 150,000 shares issuable under stock options held by Mr. Pimentel
exerciseable within 60 days of April 30, 1997.

(9) Includes 825,000 shares issuable under stock options held by such directors
and executive officers exerciseable within 60 days of April 30, 1997.

47
<PAGE>
DESCRIPTION OF CAPITAL STOCK

The authorized capital stock of the Company consists of 30,000,000 shares of
Common Stock. The following summaries of certain provisions of the Common Stock
do not purport to be complete, are subject to, and qualified in their entirety
by, the provisions of the Company's Amended and Restated Articles of
Incorporation (the "Restated Articles"), which is included as an exhibit to the
Registration Statement of which this Prospectus forms a part, and by applicable
law.

COMMON STOCK

As of May 31, 1997, there were 12,405,735 shares of Common Stock
outstanding, which were held of record by 52 shareholders. The holders of Common
Stock are entitled to one vote per share on all matters to be voted upon by the
shareholders. The holders of Common Stock are entitled to receive ratably such
dividends, if any, as may be declared from time to time by the Board of
Directors out of funds legally available for that purpose. See "Dividend
Policy." In the event of a liquidation, dissolution or winding up of the
Company, the holders of Common Stock are entitled to share ratably in all assets
remaining after payment of liabilities. Holders of Common Stock have no
preemptive or conversion rights or other subscription rights. There are no
redemption or sinking fund provisions applicable to the Common Stock. All
outstanding shares of Common Stock are fully paid and non-assessable, and the
shares of Common Stock to be issued upon the closing of this offering will be
fully paid and non-assessable.

PREFERRED STOCK

The Board of Directors has approved an amendment to the Restated Articles
which authorizes the issuance of up to 5,000,000 shares of Preferred Stock in
one or more series and to fix the designations, powers, preferences and
privileges, and relative participating, optional or special rights and the
qualifications, limitations or restrictions thereof, including dividend rights,
conversion rights, voting rights, terms of redemption and liquidation
preferences, any or all of which may be greater than the rights of the Common
Stock. Subject to approval of such amendment by the shareholders, and effective
upon the filing of the Restated Articles, the Board of Directors, without
further shareholder approval, can issue Preferred Stock with voting, conversion
or other rights that could adversely affect the voting power and other rights of
holders of Common Stock. Preferred Stock could thus be issued quickly with terms
calculated to delay, or prevent a change in control of the Company or make
removal of management more difficult. Additionally, the issuance of Preferred
Stock may have the effect of decreasing the market price of the Common Stock,
and may adversely affect the voting and the other rights of the holders of
Common Stock. At present, there are no shares of Preferred Stock outstanding and
the Company has no plans to issue any of the Preferred Stock.

CALIFORNIA LAW AND CERTAIN PROVISIONS

Certain provisions of California law and the Company's Restated Articles of
Incorporation and Bylaws, could make more difficult the removal of incumbent
officers and directors and the acquisition of the Company by means of a tender
offer, a proxy contest or otherwise. Upon qualification of the Company as a
"listed corporation," as defined in Section 301.5(d) of the California Code,
cumulative voting will be eliminated and the Board of Directors will be divided
into two classes of directors, serving staggered two-year terms. At each annual
meeting, one class of directors will be elected for a two-year term. See
"Management." These provisions are expected to discourage certain types of
coercive takeover practices and inadequate takeover bids and to encourage
persons seeking to acquire control of the Company to negotiate first with the
Company. The Company believes that the benefits of increased protection of the
Company's potential ability to negotiate with the proponent of an unfriendly or
unsolicited proposal to acquire or restructure the Company outweigh the
disadvantages of discouraging such proposals because, among other things,
negotiation of such proposals could result in an improvement of their terms.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the Common Stock is ChaseMellon
Shareholder Services, L.L.P. of San Francisco, California. Its telephone number
is (415) 954-9512.

48
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE

Prior to this offering, there has been no public market for the Common Stock
of the Company. Future sales of substantial amounts of Common Stock in the
public market could adversely affect prevailing market prices from time to time.
Furthermore, since only a limited number of shares will be available for sale
shortly after this offering because of certain contractual and legal
restrictions on resale (as described below), sales of substantial amounts of
Common Stock of the Company in the public market after the restrictions lapse
could adversely affect the prevailing market price and the ability of the
Company to raise equity capital in the future.

Upon completion of this offering the Company will have outstanding an
aggregate of shares of Common Stock (based upon shares outstanding at
May 31, 1997), assuming no exercise of the Underwriters' over-allotment option
and no exercise of outstanding options. Of these shares, all of the shares sold
in this offering will be freely tradeable without restriction or further
registration under the Securities Act, unless such shares are purchased by
"affiliates" of the Company as that term is defined in Rule 144 under the
Securities Act. The remaining 12,405,735 shares of Common Stock held by existing
stockholders are "restricted securities" as that term is defined in Rule 144
under the Securities Act ("Restricted Shares"). Restricted Shares may be sold in
the public market only if registered or if they qualify for an exemption from
registration under Rules 144 or 701 promulgated under the Securities Act, which
rules are summarized below. As a result of the contractual restrictions
described below and the provisions of Rules 144 and 701, the Restricted Shares
will be available for sale in the public market as follows: (i) no shares will
be eligible for immediate sale on the date of this Prospectus, (ii) no shares
will be eligible for sale beginning 90 days after the date of this Prospectus,
and (iii) 12,405,735 shares will be eligible for sale upon expiration of the
lock-up agreements 180 days after the date of this Prospectus.

All officers, directors and certain stockholders of the Company have agreed
not to offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase, or otherwise transfer or dispose of, directly or indirectly
(or enter into any swap or other arrangement that transfers to another, in whole
or in part, any of the economic consequences of ownership of), any shares of
Common Stock or any securities convertible into or exercisable or exchangeable
for shares of Common Stock, for a period of 180 days after the date of this
Prospectus, without the prior written consent of Morgan Stanley & Co.
Incorporated.

In general, under Rule 144, beginning 90 days after the date of this
Prospectus, a person (or persons whose shares are aggregated) who has
beneficially owned Restricted Shares for at least one year (including the
holding period of any prior owner except an Affiliate) would be entitled to sell
within any three-month period a number of shares that does not exceed the
greater of: (i) one percent of the number of shares of Common Stock then
outstanding (which will equal approximately shares immediately after
this offering); or (ii) the average weekly trading volume of the Common Stock on
the Nasdaq National Market during the four calendar weeks preceding the filing
of a notice on Form 144 with respect to such sale. Sales under Rule 144 are also
subject to certain manner of sale provisions and notice requirements and to the
availability of current public information about the Company. Under Rule 144(k),
a person who is not deemed to have been an Affiliate of the Company at any time
during the 90 days preceding a sale, and who has beneficially owned the shares
proposed to be sold for at least two years (including the holding period of any
prior owner except an Affiliate), is entitled to sell such shares without
complying with the manner of sale, public information, volume limitation or
notice provisions of Rule 144; therefore, unless otherwise restricted, "144(k)
shares" may therefore be sold immediately upon the completion of this offering.
In general, under Rule 701 of the Securities Act as currently in effect, any
employee, consultant or advisor of the Company who purchases shares from the
Company in connection with a compensatory stock or option plan or other written
agreement is eligible to resell such shares 90 days after the effective date of
this offering in reliance on Rule 144, but without compliance with certain
restrictions, including the holding period, contained in Rule 144.

49
<PAGE>

The Company intends to file a registration statement under the Securities
Act covering shares of Common Stock reserved for issuance under the Company's
1994 Stock Option Plan, 1997 Stock Plan and Stock Purchase Plan. See
"Management--Stock Plans." Such registration statement is expected to be filed
and become effective as soon as practicable after the effective date of this
offering. Accordingly, shares registered under such registration statement will,
subject to Rule 144 volume limitations applicable to Affiliates, be available
for sale in the open market, unless such shares are subject to vesting
restrictions with the Company or the lock-up agreements described above. As of
May 31, 1997, options to purchase 2,601,247 shares of Common Stock were issued
and outstanding under the 1994 Stock Option Plan, and no options to purchase
shares had been granted under the Company's 1997 Stock Plan and Stock Purchase
Plan.

50
<PAGE>
UNDERWRITERS

Under the terms and subject to the conditions contained in the Underwriting
Agreement dated the date hereof, (the "Underwriting Agreement") Underwriters
named below, for whom Morgan Stanley & Co. Incorporated, Hambrecht & Quist LLC,
and Robertson, Stephens & Company LLC are acting as Representatives, have
severally agreed to purchase, and the Company and the Selling Shareholder have
severally agreed to sell them, the respective number of shares of Common Stock,
set forth opposite the name of such Underwriters below:

<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
- ---------------------------------------------------------------------------------- -----------
<S> <C>
Morgan Stanley & Co. Incorporated.................................................
Hambrecht & Quist LLC.............................................................
Robertson, Stephens & Company LLC.................................................

-----------
Total.........................................................................
-----------
-----------
</TABLE>

The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to the approval of certain legal matters by their
counsel and to certain other conditions. The Underwriters are obligated to take
and pay for all of the shares of Common Stock offered hereby (other than those
covered by the Underwriters' over-allotment option described below) if any such
shares are taken.

The Underwriters initially propose to offer part of the shares of Common
Stock offered hereby directly to the public at the initial public offering price
set forth on the cover page hereof and part to certain dealers at a price which
represents a concession not in excess of $ per share under the initial public
offering price. The Underwriters may allow, and such dealers may re-allow, a
concession not in excess of $ per share to other Underwriters or to certain
other dealers. After the initial offering of the shares of Common Stock, the
offering price and other selling terms may from time to time be varied by Morgan
Stanley & Co. Incorporated.

Pursuant to the Underwriting Agreement, the Company and certain of the
Selling Shareholders have granted to the Underwriters an option, exercisable for
30 days from the date of this Prospectus, to purchase up to an aggregate of
additional shares of Common Stock, at the public offering price set forth
on the cover page hereof, less underwriting discounts and commissions. The
Underwriters may exercise such option to purchase solely for the purpose of
covering over-allotments, if any, made in connection with the offering of the
shares of Common Stock offered hereby. To the extent such option is exercised,
each Underwriter will become obligated, subject to certain conditions, to
purchase approximately the same percentage of such additional shares of Common
Stock as the number set forth next to such Underwriter's name in the preceding
table bears to the total number of shares of Common Stock set forth next to the
names of all Underwriters in the preceding table.

In order to facilitate the offering of the Common Stock, the Underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the Common Stock. Specifically, the Underwriters may overallot in
connection with the offering, creating a short position in the Common Stock for
their own

51
<PAGE>
account. In addition, to cover overallotments or to stabilize the price of the
Common Stock, the Underwriters may bid for, and purchase, shares of Common Stock
in the open market. Finally, the underwriting syndicate may reclaim selling
concessions allowed to an underwriter or a dealer for distributing the Common
Stock in the offering, if the syndicate repurchases previously distributed
Common Stock in transactions to cover syndicate short positions, in
stabilization transactions or otherwise. Any of these activities may stabilize
or maintain the market price of the Common Stock above independent market
levels. The Underwriters are not required to engage in these activities, and may
end any of these activities at any time.

The Underwriters have informed the Company that they do not intend sales to
discretionary accounts to exceed five percent of the total number of shares of
Common Stock offered by them.

The Company, the Selling Shareholders and the Underwriters have agreed to
indemnify each other against certain liabilities, including liabilities under
the Securities Act.

Each of the Company and the directors, executive officers and certain other
stockholders of the Company has agreed that, without the prior written consent
of Morgan Stanley & Co. Incorporated on behalf of the Underwriters, it will not
(i) offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase or otherwise transfer or dispose of, directly or indirectly,
any shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock or (ii) enter into any swap or other arrangement
that transfers to another, in whole or in part, any of the economic consequences
of ownership of the Common Stock, whether any such transaction described in
clause (i) or (ii) above is to be settled by delivery of Common Stock or such
other securities, in cash or otherwise, during the period ending 180 days after
the date of this Prospectus, other than (x) the Shares and (y) the issuance by
the Company of shares of Common Stock upon the exercise of an option or a
warrant or the conversion of a security outstanding on the date of this
Prospectus of which the Underwriters have been advised in writing.

The Underwriters have reserved up to shares of Common Stock for sale at
the initial public offering price to certain persons associated with the
Company, as such persons have expressed an interest in purchasing such shares of
Common Stock in the Offering. The number of shares available for sale to the
general public will be reduced to the extent such persons purchase such reserved
shares. Any reserved shares not so purchased will be offered by the Underwriters
to the general public on the same basis as the other shares offered hereby.

PRICING OF THE OFFERING

Prior to the Offering, there has been no public market for the Common Stock
of the Company. The initial public offering price for the Common Stock was
determined by negotiations among the Company, representatives of the Selling
Shareholders and the Representatives of the Underwriters. Among the factors to
be considered in determining the initial public offering price will be the
future prospects of the Company and its industry in general, sales, earnings and
certain other financial and operating information of the Company in recent
periods, and the price-earnings ratios, price-sales ratios, market prices of
securities and certain financial and operating information of companies engaged
in activities similar to those of the Company.

52
<PAGE>
LEGAL MATTERS

The validity of the Common Stock offered hereby will be passed upon for the
Company by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo
Alto, California. Certain legal matters will be passed upon for the Underwriters
by Brobeck, Phleger & Harrison LLP, San Francisco, California.

EXPERTS

The consolidated financial statements of the Company as of August 31, 1995
and 1996 and May 31, 1997, and for each of the years in the three-year period
ended August 31, 1996 and the nine months ended May 31, 1997, have been included
herein and in the registration statement in reliance upon the report of KPMG
Peat Marwick LLP, independent certified public accountants, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing.

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission, a
Registration Statement on Form S-1 under the Securities Act with respect to the
shares of Common Stock offered hereby. This Prospectus does not contain all the
information set forth in the Registration Statement and the exhibits and
schedules thereto. For further information with respect to the Company and such
Common Stock, reference is made to the Registration Statement and to the
exhibits and schedules filed therewith. Statements contained in this Prospectus
as to the contents of any contract or other document referred to are not
necessarily complete, and in each instance reference is made to the copy of such
contract or other document filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference. A copy of
the Registration Statement may be inspected by anyone without charge at the
principal office of the Securities and Exchange Commission in Washington, D.C.,
and copies of all or any part of the Registration Statement may be obtained from
the Public Reference Section of the Securities and Exchange Commission, 450
Fifth Street, N.W., Washington, D.C. 20549, upon payment of certain fees. The
Commission maintains a World Wide Web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission. The address of the site is
http://www.sec.gov.

The Company intends to furnish to its shareholders annual reports containing
audited financial statements examined by independent auditors and quarterly
reports containing interim unaudited financial information for the first three
quarters of each fiscal year.

53
<PAGE>
LIVINGSTON ENTERPRISES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of Independent Auditors............................................................................. F-2
Consolidated Balance Sheets................................................................................ F-3
Consolidated Statements of Operations...................................................................... F-4
Consolidated Statements of Shareholders' Equity............................................................ F-5
Consolidated Statements of Cash Flows...................................................................... F-6
Notes to Consolidated Financial Statements................................................................. F-7
</TABLE>

F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Shareholders

Livingston Enterprises, Inc.

We have audited the accompanying consolidated balance sheets of Livingston
Enterprises, Inc. and subsidiaries as of August 31, 1995 and 1996 and May 31,
1997, and the related consolidated statements of operations, shareholders'
equity, and cash flows for each of the years in the three-year period ended
August 31, 1996 and the nine months ended May 31, 1997. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated statements based
on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Livingston
Enterprises, Inc. and subsidiaries at August 31, 1995 and 1996 and May 31, 1997,
and the results of operations and its cash flows for each of the years in the
three-year period ended August 31, 1996 and the nine months ended May 31, 1997
in conformity with generally accepted accounting principles.

KPMG PEAT MARWICK LLP

Palo Alto, California
June 18, 1997

F-2
<PAGE>
LIVINGSTON ENTERPRISES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
AUGUST 31,
-------------------- MAY 31,
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
ASSETS

Current assets:
Cash and cash equivalents....................................................... $ 1,486 $ 3,749 $ 16,005
Accounts receivable, net of allowance of $150, $648, and $1,008, respectively... 3,674 6,796 10,754
Inventories..................................................................... 3,557 7,650 4,220
Deferred income taxes........................................................... 139 1,893 5,900
Prepaid expenses and other current assets....................................... 55 153 448
--------- --------- ---------
Total current assets.......................................................... 8,911 20,241 37,327
Property and equipment, net....................................................... 330 940 2,298
Other assets...................................................................... 62 140 292
--------- --------- ---------
Total assets...................................................................... $ 9,303 $ 21,321 $ 39,917
--------- --------- ---------
--------- --------- ---------

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
Accounts payable................................................................ $ 1,695 $ 2,787 $ 2,062
Accrued liabilities............................................................. 1,087 1,575 8,318
Deferred revenue................................................................ -- 1,636 3,293
Current portion of notes payable to shareholders................................ 238 -- --
--------- --------- ---------
Total current liabilities..................................................... 3,020 5,998 13,673
--------- --------- ---------
Commitments and contingencies
Shareholders' equity:
Preferred stock, no par value; 1,500,000 shares authorized in 1995; none issued
and outstanding in 1995....................................................... -- -- --
Common stock, no par value; 30,000,000 shares authorized in 1995, 1996, and
1997; 12,150,000, 12,235,200, and 12,405,735 issued and outstanding in 1995,
1996, and 1997, respectively.................................................. 21 216 2,165
Deferred stock compensation..................................................... -- -- (1,409)
Retained earnings............................................................... 6,262 15,107 25,488
--------- --------- ---------
Total shareholders' equity.................................................... 6,283 15,323 26,244
--------- --------- ---------
Total liabilities and shareholders' equity.................................... $ 9,303 $ 21,321 $ 39,917
--------- --------- ---------
--------- --------- ---------
</TABLE>

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

F-3
<PAGE>
LIVINGSTON ENTERPRISES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, NINE MONTHS ENDED
------------------------------- --------------------------
1994 1995 1996 MAY 31, 1997
--------- --------- --------- MAY 31, 1996 ------------
------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Product revenues.................................... $ 6,180 $ 20,138 $ 43,229 $ 32,865 $ 47,488
Royalty revenues.................................... -- 323 2,878 1,944 6,997
--------- --------- --------- ------------ ------------
Net revenues........................................ 6,180 20,461 46,107 34,809 54,485
Cost of revenues.................................... 2,853 8,054 18,567 14,121 21,595
--------- --------- --------- ------------ ------------
Gross profit...................................... 3,327 12,407 27,540 20,688 32,890
Operating expenses:
Research and development.......................... 462 890 2,512 1,153 3,074
Selling and marketing............................. 673 2,831 8,670 6,094 11,934
General and administrative........................ 449 667 1,771 992 2,305
--------- --------- --------- ------------ ------------
Total operating expenses........................ 1,584 4,388 12,953 8,239 17,313
--------- --------- --------- ------------ ------------
Operating income.................................... 1,743 8,019 14,587 12,449 15,577
Interest income (expense), net...................... (21) (20) 85 43 276
--------- --------- --------- ------------ ------------
Income before income taxes.......................... 1,722 7,999 14,672 12,492 15,853
Provision for income taxes.......................... 695 3,095 5,827 4,949 5,472
--------- --------- --------- ------------ ------------
Net income...................................... $ 1,027 $ 4,904 $ 8,845 $ 7,543 $ 10,381
--------- --------- --------- ------------ ------------
--------- --------- --------- ------------ ------------
Net income per share................................ $ .08 $ .38 $ .63 $ .54 $ .72
--------- --------- --------- ------------ ------------
--------- --------- --------- ------------ ------------
Shares used in per share computations............... 12,423 12,842 14,102 13,942 14,374
</TABLE>

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

F-4
<PAGE>
LIVINGSTON ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
COMMON STOCK DEFERRED TOTAL
----------------------- STOCK RETAINED SHAREHOLDERS'
SHARES AMOUNT COMPENSATION EARNINGS EQUITY
------------ --------- ------------- --------- -------------
<S> <C> <C> <C> <C> <C>
Balances at August 31, 1993...................... 12,150,000 $ 21 $ -- $ 331 $ 352

Net income..................................... -- -- -- 1,027 1,027
------------ --------- ------------- --------- -------------
Balances at August 31, 1994...................... 12,150,000 21 -- 1,358 1,379

Net income..................................... -- -- -- 4,904 4,904
------------ --------- ------------- --------- -------------
Balances at August 31, 1995...................... 12,150,000 21 -- 6,262 6,283

Issuance of common stock....................... 15,000 4 -- -- 4
Issuance of common stock for acquired in
process research and development............. 18,000 189 -- -- 189
Exercise of common stock options............... 52,200 2 -- -- 2
Net income..................................... -- -- -- 8,845 8,845
------------ --------- ------------- --------- -------------
Balances at August 31, 1996...................... 12,235,200 216 -- 15,107 15,323

Exercise of common stock options............... 170,535 482 -- -- 482
Deferred compensation related to grants of
stock options................................ -- 1,467 (1,467) -- --
Amortization of deferred stock compensation.... -- -- 58 -- 58
Net income..................................... -- -- -- 10,381 10,381
------------ --------- ------------- --------- -------------
Balances at May 31, 1997......................... 12,405,735 $ 2,165 $ (1,409) $ 25,488 $ 26,244
------------ --------- ------------- --------- -------------
------------ --------- ------------- --------- -------------
</TABLE>

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

F-5
<PAGE>
LIVINGSTON ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, NINE MONTHS ENDED
------------------------------- ---------------------------
1994 1995 1996 MAY 31, 1997
--------- --------- --------- MAY 31, 1996 ------------
-------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income...................................................... $ 1,027 $ 4,904 $ 8,845 $ 7,543 $ 10,381
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization................................. 25 60 193 122 331
In-process research and development charged to expense as
acquired.................................................... -- -- 189 -- --
Interest on notes payable to shareholders..................... 12 22 -- -- --
Deferred income taxes......................................... (60) (91) (1,754) (546) (4,007)
Amortization of deferred stock compensation................... -- -- -- -- 58
Changes in operating assets and liabilities:
Accounts receivable......................................... (729) (2,446) (3,122) (1,081) (3,958)
Inventories................................................. (391) (2,951) (4,093) (2,954) 3,430
Prepaids and other current assets........................... (62) 20 (98) (40) (295)
Accounts payable............................................ 11 1,523 1,092 (511) (725)
Accrued liabilities......................................... 811 186 488 313 6,743
Deferred revenue............................................ -- -- 1,636 1,373 1,657
--------- --------- --------- ------ ------------
Net cash provided by operating activities....................... 644 1,227 3,376 4,219 13,615
--------- --------- --------- ------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment........................... (63) (288) (803) (387) (1,689)
Other assets.................................................. -- (60) (78) (68) (152)
--------- --------- --------- ------ ------------
Net cash used in investing activities:.......................... (63) (348) (881) (455) (1,841)
--------- --------- --------- ------ ------------
CASH FLOWS USED IN FINANCING ACTIVITIES:
Proceeds from common stock issued............................. -- -- 6 -- 482
Repayment of notes payable to shareholders.................... -- (20) (238) (238) --
--------- --------- --------- ------ ------------
Net cash flows provided by (used in) financing activities....... -- (20) (232) (238) 482
--------- --------- --------- ------ ------------
Net increase in cash and cash equivalents....................... 581 859 2,263 3,526 12,256

Cash and cash equivalents at beginning of period................ 46 627 1,486 1,486 3,749
--------- --------- --------- ------ ------------
Cash and cash equivalents at end of period...................... $ 627 $ 1,486 $ 3,749 $ 5,012 $ 16,005
--------- --------- --------- ------ ------------
--------- --------- --------- ------ ------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Common stock issued in exchange for acquired in-process
research and development charged to expense................. $ -- $ -- $ 189 $ -- $ --
Cash paid for income taxes.................................... 22 2,862 8,063 5,530 4,229
Cash paid for interest........................................ 21 20 35 35 --
</TABLE>

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

F-6
<PAGE>
LIVINGSTON ENTERPRISES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(INFORMATION RELATING TO THE NINE MONTHS ENDED MAY 31, 1996 IS UNAUDITED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

THE COMPANY

Livingston Enterprises, Inc. (the Company), a California corporation, is a
provider of integrated remote access networking solutions for Internet Service
Providers.

BASIS OF CONSOLIDATION

The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries for which intercompany accounts and
transactions have been eliminated.

USE OF ESTIMATES

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, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

The Company considers all highly liquid investments with remaining
maturities of three months or less at time of acquisition to be cash
equivalents. Approximately $15.5 million of short-term investments were
considered cash equivalents at May 31, 1997.

The Company accounts for cash equivalents and short-term investments in
accordance with Statement of Financial Accounting Standards (SFAS) No. 115,
ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES. All cash and
cash equivalents are classified as available-for-sale under the provisions of
SFAS No. 115. The securities are carried at cost, which approximates fair value,
and any unrealized gains or losses, net of taxes, would be reported as a
separate component of shareholders' equity.

REVENUE RECOGNITION

The Company recognizes revenues from sales of remote access products upon
shipment. The Company grants its value-added resellers limited rights to
exchange products and price protection on unsold merchandise. The Company
establishes an estimated allowance for future product returns based on
historical returns experience and provides for appropriate price protection
reserves at the time the related revenue is recorded. To date, returns for
exchange and amounts granted from price protection have not been significant.

The Company accounts for revenue related to the software portion of their
product in accordance with Statement of Position 91-1, SOFTWARE REVENUE
RECOGNITION. Postcontract customer support ("PCS") revenues generally are
recognized ratably over the term of the support period (generally one year). PCS
revenues to date have not been significant and are included in product revenues.
The unamortized portion of PCS is reported as deferred revenue.

The Company records royalty revenue at the time the amount is determinable
and collection is certain.

F-7
<PAGE>
LIVINGSTON ENTERPRISES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION RELATING TO THE NINE MONTHS ENDED MAY 31, 1996 IS UNAUDITED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES

Inventories are valued using standard costs, which approximate the lower of
cost or market using the first-in, first-out method.

PROPERTY AND EQUIPMENT

Property and equipment are recorded at cost and are depreciated using the
straight-line method over the estimated useful lives of the assets, generally
three to five years. Leasehold improvements are amortized using the
straight-line method over the estimated useful life of the assets or related
lease term, whichever is shorter.

The Company adopted the provisions of SFAS No. 121, ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, on
September 1, 1996. SFAS No. 121 requires that long-lived assets and certain
identified intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell. Adoption of this statement did not have a material impact on the Company's
financial position, results of operations, or liquidity.

RESEARCH AND DEVELOPMENT COSTS

Research and development expenditures are generally charged to operations as
incurred. SFAS No. 86, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE TO BE SOLD,
LEASED OR OTHERWISE MARKETED, governs accounting for software development costs.
This statement provides for the capitalization of certain software development
costs once technological feasibility is established. The cost capitalized is
then amortized on a straight-line basis over the estimated product life, or
using the ratio of current revenue to total projected product revenues,
whichever is greater. To date, software development costs incurred subsequent to
the establishment of technological feasibility have not been material. In June
1996, the Company acquired in process research and development for 18,000 shares
of common stock. The Company also expended $443,000 cash for in process modem
technology. Both of these amounts are included in research and development
expense in fiscal 1996.

CONCENTRATION OF CREDIT RISK

Financial instruments that potentially subject the Company to concentrations
of credit risk consist principally of cash and cash equivalents and trade
receivables. Cash and cash equivalents consist of deposits with a major U.S.
commercial bank. The Company sells its products primarily to Internet Service
Providers through resellers. To reduce its credit risk, the Company performs
ongoing credit evaluations of its customers and maintains an allowance for
doubtful accounts to cover any credit losses.

F-8
<PAGE>
LIVINGSTON ENTERPRISES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION RELATING TO THE NINE MONTHS ENDED MAY 31, 1996 IS UNAUDITED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts of cash, cash equivalents, accounts receivable,
accounts payable, and accrued liabilities approximate fair values due to the
short maturity of the instruments.

PRODUCT RELATED COSTS

Product related costs consist of warranty costs, modem technology license
fees, and costs related to the Company's 56K Modem Swap Program. This program
allows customers to upgrade to 56K modem technology as it becomes available at
no charge to them. The Company provides for all of the above costs at the time
revenue is recognized.

INCOME TAXES

The Company accounts for income taxes in accordance with SFAS No. 109,
ACCOUNTING FOR INCOME TAXES. SFAS No. 109 prescribes an asset and liability
approach that results in the recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been recognized in
the Company's consolidated financial statements or tax returns. In estimating
future tax consequences, SFAS No. 109 generally considers all expected future
events other than enactment of changes in tax laws or rates.

INTERIM ACCOUNTING

The financial statements for the nine months ended May 31, 1996 include all
adjustments (consisting only of normal adjustments) that management considers
necessary for a fair presentation of its financial position at such date and its
operating results and cash flows for those periods. Results for interim periods
are not necessarily indicative of results for the entire year.

Income taxes for the nine months ended May 31, 1996 have been provided based
on an estimate of the Company's effective tax rate for fiscal 1996.

PER SHARE INFORMATION

Net income per share is computed using the weighted average number of common
shares and common share equivalents outstanding during the periods presented.
Common share equivalents result from the dilutive effect of outstanding options
to purchase common stock. Pursuant to the requirements of the Securities and
Exchange Commission (SEC), common shares issued by the Company during the twelve
months immediately preceding the initial public offering, plus the number of
equivalent shares resulting from options granted during this period, have been
included in the calculation of the shares used in computing net income per share
as if they were outstanding for all periods presented (using the treasury stock
method and the estimated public offering price).

The Financial Accounting Standards Board recently issued SFAS No. 128,
EARNINGS PER SHARE, which requires the presentation of basic earnings per share
(EPS) and, for companies with potentially dilutive securities, such as
convertible debt, options, and warrants, diluted EPS. SFAS No. 128 is effective
for annual and interim periods ending after December 31, 1997. The Company
expects that basic EPS will be higher than primary EPS as presented in the
accompanying consolidated financial statements and that

F-9
<PAGE>
LIVINGSTON ENTERPRISES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION RELATING TO THE NINE MONTHS ENDED MAY 31, 1996 IS UNAUDITED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
diluted EPS will not differ materially from fully diluted EPS as presented in
the accompanying consolidated financial statements.

STOCK-BASED COMPENSATION

The Company accounts for its stock-based compensation arrangements in
accordance with the provisions of Accounting Principles Board (APB) Opinion No.
25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related interpretations. As
such, compensation expense would be recorded on the date of grant only if the
fair value of the underlying stock exceeded the exercise price. On September 1,
1996, the Company adopted the disclosure provisions of SFAS No. 123, ACCOUNTING
FOR STOCK-BASED COMPENSATION, which requires entities to provide pro forma net
income and pro forma earnings per share disclosures for employee stock option
grants made in fiscal year 1995 and future years as if the fair value-based
method defined in SFAS No. 123 had been applied.

RECLASSIFICATIONS

Certain amounts in the accompanying 1994 and 1995 consolidated financial
statements have been reclassified to conform with the 1996 consolidated
financial statement presentation.

2. BALANCE SHEET COMPONENTS

Inventories consisted of the following (in thousands):

<TABLE>
<CAPTION>
AS OF AUGUST 31,
-------------------- AS OF
1995 1996 MAY 31, 1997
--------- --------- -------------
<S> <C> <C> <C>
Raw materials............................................... $ 2,022 $ 5,215 $ 2,121
Work in process............................................. 732 439 811
Finished goods.............................................. 803 1,996 1,288
--------- --------- ------
$ 3,557 $ 7,650 $ 4,220
--------- --------- ------
--------- --------- ------
</TABLE>

Property and equipment consisted of the following (in thousands):

<TABLE>
<CAPTION>
AS OF AUGUST 31,
-------------------- AS OF
1995 1996 MAY 31, 1997
--------- --------- -------------
<S> <C> <C> <C>
Equipment..................................................... $ 397 $ 1,026 $ 1,854
Furniture and fixtures........................................ 72 91 678
Leasehold improvements........................................ 22 177 452
--------- --------- ------
491 1,294 2,984
Less accumulated depreciation and amortization................ 161 354 686
--------- --------- ------
$ 330 $ 940 $ 2,298
--------- --------- ------
--------- --------- ------
</TABLE>

F-10
<PAGE>
LIVINGSTON ENTERPRISES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION RELATING TO THE NINE MONTHS ENDED MAY 31, 1996 IS UNAUDITED)

2. BALANCE SHEET COMPONENTS (CONTINUED)

Accrued liabilities consisted of the following (in thousands):

<TABLE>
<CAPTION>
AS OF AUGUST 31,
-------------------- AS OF
1995 1996 MAY 31, 1997
--------- --------- -------------
<S> <C> <C> <C>
Compensation and related benefits........................... $ 377 $ 825 $ 1,657
Warranty costs.............................................. -- 85 400
Modem swap program.......................................... -- -- 1,991
Modem license fees.......................................... -- -- 600
Income taxes................................................ 549 2 1,956
Other....................................................... 161 663 1,714
--------- --------- ------
$ 1,087 $ 1,575 $ 8,318
--------- --------- ------
--------- --------- ------
</TABLE>

3. RELATED PARTY TRANSACTIONS

The Directors of the Company periodically made cash advances to the Company
to fund operations. Outstanding amounts due to the Directors aggregated $238,000
as of August 31, 1995, which included interest of $34,000 at the rate of 9% per
annum. In October 1995, all outstanding principal balances and accrued interest
were repaid to the Directors.

4. INCOME TAXES

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

<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED AUGUST 31, ENDED MAY 31,
------------------------------- -------------
1994 1995 1996 1997
--------- --------- --------- -------------
<S> <C> <C> <C> <C>
Current:
Federal.......................................... $ 593 $ 2,444 $ 5,873 7,494
State............................................ 162 742 1,708 1,985
--------- --------- --------- ------
755 3,186 7,581 9,479
--------- --------- --------- ------

Deferred:
Federal.......................................... (62) (68) (1,488) (3,015)
State............................................ 2 (23) (266) (992)
--------- --------- --------- ------
(60) (91) (1,754) (4,007)
--------- --------- --------- ------
$ 695 $ 3,095 $ 5,827 5,472
--------- --------- --------- ------
--------- --------- --------- ------
</TABLE>

F-11
<PAGE>
LIVINGSTON ENTERPRISES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION RELATING TO THE NINE MONTHS ENDED MAY 31, 1996 IS UNAUDITED)

4. INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities are presented below (in
thousands):

<TABLE>
<CAPTION>
AS OF AUGUST 31,
-------------------- AS OF
1995 1996 MAY 31, 1997
--------- --------- -------------
<S> <C> <C> <C>
Deferred tax assets:
Accruals and reserves....................................... $ 92 $ 1,350 $ 4,933
Deferred revenue............................................ -- 650 1,444
Costs capitalized in inventory.............................. 39 27 27
Other....................................................... 8 (134) (504)
--------- --------- ------
$ 139 $ 1,893 5,900
Less valuation allowance...................................... -- -- --
--------- --------- ------
Net deferred asset............................................ $ 139 $ 1,893 $ 5,900
--------- --------- ------
--------- --------- ------
</TABLE>

The differences between the "expected" income tax expense computed at the
federal statutory rate of 35% and the Company's actual income tax expense are as
follows (in thousands):

<TABLE>
<CAPTION>
AS OF AUGUST 31,
------------------------------- AS OF
1994 1995 1996 MAY 31, 1997
--------- --------- --------- -------------
<S> <C> <C> <C> <C>
Income tax at statutory rate........................ $ 603 $ 2,800 $ 5,135 $ 5,548
State tax, net of federal benefit................... 108 474 951 646
Research and development tax credits................ -- (30) -- (115)
Foreign Sales Corporation benefit................... -- -- (92) (661)
Other............................................... (16) (149) (167) 54
--------- --------- --------- ------
$ 695 $ 3,095 $ 5,827 5,472
--------- --------- --------- ------
--------- --------- --------- ------
</TABLE>

Management believes that it is more likely than not, based on historical
operating results, that the Company will generate sufficient future taxable
income to realize the net deferred tax assets.

5. SHAREHOLDERS' EQUITY

In March 1996, the Company restated its Articles of Incorporation cancelling
its authorized Preferred Stock and the shareholders approved a three for one
stock split. Common Share and per share data in these consolidated financial
statements have been retroactively adjusted to reflect the stock split.

In May 1997, the Board of Directors approved that the Company restate its
Articles of Incorporation to increase authorized common stock to 100,000,000
shares, and, upon completion of the Company's initial public offering, to
authorize 5,000,000 shares of preferred stock.

At May 31, 1997, the Company has three stock-based compensation plans, which
are described below. The Company applied APB Opinion No. 25 and related
Interpretations in accounting for its plans. Accordingly, no compensation
expense has been recognized for its plans, except for certain grants of common
stock options to employees during fiscal 1997 where the fair value of the
underlying common stock exceeded the exercise price at the time of grant. Had
compensation expense for the Company's

F-12
<PAGE>
LIVINGSTON ENTERPRISES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION RELATING TO THE NINE MONTHS ENDED MAY 31, 1996 IS UNAUDITED)

5. SHAREHOLDERS' EQUITY (CONTINUED)

stock-based compensation plans been determined consistent with SFAS No. 123, the
Company's net income and earnings per share would have been reduced to the pro
forma amounts indicated below:

<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
AUGUST 31, ENDED MAY 31,
1996 1997
----------- --------------
<S> <C> <C> <C>
Net income As reported $ 8,845 $ 10,381
Proforma $ 8,765 $ 9,734

Earnings As reported .63 .72
per share Proforma .62 .68
</TABLE>

The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted average
assumptions:

<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Dividend yield............................................................... 0.0% 0.0%
Expected volatility.......................................................... 63.0% 63.0%
Risk-free interest rate...................................................... 5.6% 6.2%
Expected option life (years)................................................. 3.5 3.5
</TABLE>

A summary of stock option activity under the 1994 Plan follows:

<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
----------- -------------
<S> <C> <C>
Balances as of August 31, 1994.................................... -- $ --

Options granted................................................. 1,043,250 0.04

Options forfeited............................................... (132,000) 0.03
-----------

Balances as of August 31, 1995.................................... 911,250 0.04

Options granted................................................. 1,688,250 2.56

Options exercised............................................... (52,200) 0.04

Options forfeited............................................... (301,500) 0.16
-----------

Balances as of August 31, 1996.................................... 2,225,800 1.91

Options granted................................................. 696,050 11.46

Options exercised............................................... (170,535) 2.83

Options forfeited............................................... (150,068) 9.03
-----------

Balances as of May 31, 1997....................................... 2,601,247 $ 3.99
----------- ------
----------- ------
</TABLE>

F-13
<PAGE>
LIVINGSTON ENTERPRISES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION RELATING TO THE NINE MONTHS ENDED MAY 31, 1996 IS UNAUDITED)

5. SHAREHOLDERS' EQUITY (CONTINUED)

The weighted average fair value of options granted during the year ended
August 31, 1996 and the nine months ended May 31, 1997 was $1.290 and $5.135,
respectively.

A summary of stock option outstanding at May 31, 1997 under the 1994 Plan
follows:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
--------------------------------------
WEIGHTED AVERAGE
-------------------------- OPTIONS EXERCISABLE
REMAINING -----------------------
RANGE OF CONTRACTUAL EXERCISE EXERCISE
EXERCISE PRICES NUMBER LIFE PRICE NUMBER PRICE
- ----------------- ---------- ------------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
$0.03 to $0.25 1,380,077 8.22 $ 0.16 1,380,077 $ 0.16
$1.67 328,520 8.75 $ 1.67 328,520 $ 1.67
$3.20 10,300 8.82 $ 3.20 10,300 $ 3.20
$6.90 52,500 8.92 $ 6.90 52,500 $ 6.90
$10.50 756,200 9.45 $ 10.50 756,200 $ 10.50
$17.50 73,650 9.94 $ 17.50 73,650 $ 17.50
---------- ----------
$0.03 to $17.50 2,601,247 8.71 $ 3.99 2,601,247 $ 3.99
---------- ----------
---------- ----------
</TABLE>

At August 31, 1996 and May 31, 1997, 219,010 and 612,789 options were
vested, and all options, whether or not vested, are exercisable, subject to a
right of repurchase, at the original issuance price, which lapses according to
the vesting schedule.

In connection with options granted in 1997, the Company has recorded
deferred compensation expense of $1,467,000 for the difference between the
option grant price and the deemed fair value of the Company's common stock at
the date of grant. The amount is being amortized over the vesting period of the
individual options, generally a 60 month period. Deferred compensation expense
of $58,000 was recognized during the nine months ended May 31, 1997.

The Company has reserved 3,000,000 shares of common stock for issuance under
the 1994 Stock Option Plan (the 1994 Plan). The 1994 Plan provides for incentive
and non-statutory stock options to be granted to employees (including officers),
directors, consultants, and other independent contractors.

Stock options are granted at prices of not less than 85% of the fair market
value of the common stock at the time of grant, except that stock options
granted to any employee who owns stock representing more than 10% of total
combined voting power of all classes of the Company's capital stock must have an
exercise price of not less than 110% of fair market value. Shares available for
purchase on the exercise of options generally vest at a rate of 20% in the first
year and thereafter at a rate of 1/48 per each month the optionee is employed or
acts as a consultant of the Company. Options expire ten years from the date of
grant.

In May 1997, the Company reserved 1,500,000 shares of common stock for
issuance under the 1997 Stock Plan (the 1997 Plan) which provides for grants of
stock options and stock purchase rights to employees, consultants, non-employee
directors, and any parent or subsidiary of the Company. Options and rights are
granted at prices equal to the fair market value of the common stock at the time
of grant. other conditions of the 1997 Plan are substantially the same as those
of the 1994 Plan. No options or purchase rights have been granted under the 1997
Plan to date.

F-14
<PAGE>
LIVINGSTON ENTERPRISES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION RELATING TO THE NINE MONTHS ENDED MAY 31, 1996 IS UNAUDITED)

5. SHAREHOLDERS' EQUITY (CONTINUED)

Also in May 1997, the Company reserved 500,000 shares of common stock for
issuance under the 1997 Employee Stock Purchase Plan (the "Purchase Plan"),
effective upon the closing of the Company's initial public offering. Under the
Purchase Plan, eligible employees may purchase common shares during six month
payment periods commencing November 1 and May 1 of each year at a price per
share of 85% of the lower of the average market price per share on the first or
last business day of the six month period. Participating employees may elect to
have up to 10% of regular pay withheld and applied toward the purchase of such
shares up to a maximum of 10,000 shares in any six month period. An employee's
rights under the Purchase Plan terminate upon voluntary withdrawal from the
Purchase Plan at any time or upon termination of employment. No shares have been
issued to date.

6. REVENUE

The Company distributes its products primarily through value-added
resellers. Export sales, identified by region, are summarized below:

<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, NINE MONTHS ENDED
------------------------------- --------------------------------
1994 1995 1996 MAY 31, 1996 MAY 31, 1997
--------- --------- --------- --------------- ---------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Asia Pacific.................................................. 2% 5% 18% 14% 20%
Europe........................................................ 5% 7% 7% 6% 15%
Canada........................................................ 2% 3% 3% 3% 4%
Latin America................................................. 9% 2% 2% 2% 2%
--- --- --- --- ---
18% 17% 30% 25% 41%
--- --- --- --- ---
--- --- --- --- ---
</TABLE>

F-15
<PAGE>
LIVINGSTON ENTERPRISES, INC. AND SUBSIDIARIES

NOTE TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION RELATING TO THE NINE MONTHS ENDED MAY 31, 1996 IS UNAUDITED)

6. REVENUE (CONTINUED)

Significant resellers are summarized below:

<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
NINE MONTHS ENDED
------------------------------------- ------------------------------------
1994 1995 1996 MAY 31, 1996 MAY 31, 1997
----- ----- ----- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
Customer A................................... 28% 30% 27% 28% 1%
Customer B................................... 17% 18% 6% 6% 3%
Customer C................................... 7% 11% 13% 14% 19%

RECEIVABLE BALANCE AT
MAY 31, 1997
-----------------------
<S> <C>
Customer A................................... 0%
Customer B................................... 0%
Customer C................................... 22%
</TABLE>

7. COMMITMENTS

The Company leases its facilities under non-cancelable operating leases. At
May 31, 1997, future minimum lease payments under operating leases with initial
remaining non-cancelable terms of one or more years are as follows (in
thousands):

<TABLE>
<CAPTION>
FISCAL YEAR ENDING AUGUST 31,
- -------------------------------------------------------------------------------------
<S> <C>
1997 (three months remaining)........................................................ $ 188
1998................................................................................. 708
1999................................................................................. 718
2000................................................................................. 704
2001................................................................................. 670
Thereafter........................................................................... 1,641
---------
Total minimum lease payments......................................................... $ 4,629
---------
---------
</TABLE>

Rent expense was $62,000, $156,000, and $566,000 for the years ended August
31, 1994, 1995, and 1996, respectively. Rent expense for the nine month periods
ended May 31, 1996 and May 31, 1997 was $260,000 and $597,000, respectively.

The Company and one of its directors entered into a Deferred Compensation
Plan dated May 2, 1996, as amended (the "Compensation Plan"). Under the terms of
the Compensation Plan, the director is entitled to receive an aggregate annual
amount of $110,000 in recognition of past services rendered to the Company. The
Compensation Plan will terminate upon the earlier of (i) January 1, 2005, (ii)
the termination of the lock-up period in connection with the closing of an
initial public offering of the Company's Common Stock or (iii) the closing of a
merger or sale of the Company.

8. BANK LINE OF CREDIT

In May 1996, the Company obtained an unsecured, $5 million bank line of
credit which bears interest at the bank's prime interest rate (8.50% as of May
31, 1997). The line of credit expires March 1, 1998. Covenants under the line of
credit require the Company to maintain certain minimum levels of profitability,
net worth, and financial ratios, and restrict dividends and stock repurchases.
There have been no borrowings under the line of credit agreement.

F-16
<PAGE>
LIVINGSTON ENTERPRISES, INC. AND SUBSIDIARIES

NOTE TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION RELATING TO THE NINE MONTHS ENDED MAY 31, 1996 IS UNAUDITED)

9. RETIREMENT SAVINGS PLAN

The Company sponsors a 401(k) defined contribution plan that covers all
employees who have completed at least three months of service. This plan allows
for employees to defer up to 15% of their pretax salary in certain investments
at the discretion of the employees. The Company has the option to make
discretionary employer contributions, however, no such contributions have been
made since inception of the plan.

10. CONTINGENCIES

In April 1997, a complaint for unfair competition was filed against the
Company as one of a group of companies separately developing 56K modem
technology by a plaintiff on behalf of the general public. The complaint alleges
that the Company knowingly made false and misleading statements regarding the
capabilities of its 56K modem technology. The Company denies the allegation in
the complaint and intends to vigorously defend its position. Nevertheless,
litigation is subject to inherent uncertainties and thus there can be no
assurance that this suit will be resolved favorably to the Company or that it
will not have a material adverse effect on the Company's business, results of
operations and financial condition.

On June 2, 1997, the Company received written notice from US Robotics Access
Corp., Inc. ("USR") alleging that the PortMaster 3 infringes USR's U.S. patent
5,528,595, captioned "Modem Input/Output Signal Processing Techniques." Although
the Company believes that such patent may be invalid, it is possible that USR
may file suit against the Company to enforce such alleged patent or other
intellectual property rights. Regardless of the merits of any such potential
suit, there can be no assurance that the Company will prevail in defending
itself or that it would not be required to enter into license arrangements or
develop non-infringing technology. Furthermore, there can be no assurance that
USR will not assert other infringement claims in the future with respect to the
Company's current or future products. Any litigation could result in product
delays or costs which could have a material adverse effect on the Company's
business, results of operations and financial condition.

On June 5, 1997, a complaint was filed against the Company in California
Superior Court by Capella Worldwide Networking, Inc. ("Capella"), the Company's
largest distributor in fiscal 1996. The Company terminated its relationship with
Capella in November 1996. The complaint purports to allege contract and tort
causes of action arising out of the Company's termination of Capella as a
distributor. The complaint seeks injunctive and declaratory relief as well as
unspecified damages for alleged lost profits, including compensatory, punitive
and treble damages. The Company has not yet responded to the Complaint and
discovery has not yet commenced. The Company denies the allegations in the
complaint and intends to defend its position. Nevertheless, litigation is
subject to inherent uncertainties and thus there can be no assurance that this
suit will be resolved favorably to the Company or that it will not have a
material adverse effect on the Company.

Due to the fact that the above mentioned legal matters are at an early
stage, no estimate of loss can be made by the Company at this time.

F-17
<PAGE>
[LOGO]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Company in connection
with the sale of Common Stock being registered. All amounts are estimates except
the SEC registration fee and NASD filing fee.

<TABLE>
<S> <C>
SEC registration fee.............................................. $ 12,122
NASD filing fee................................................... 4,500
Nasdaq National Market listing fee................................ 50,000
Printing and engraving costs...................................... 125,000
Legal fees and expenses........................................... 310,000
Accounting fees and expenses...................................... 250,000
Blue Sky fees and expenses........................................ 10,000
Transfer Agent and Registrar fees................................. 5,000
Miscellaneous expenses............................................ 35,000
---------
Total......................................................... 801,622
---------
---------
</TABLE>

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

The Bylaws of the Company provide for the indemnification of the Company's
officers and directors against certain liabilities and expenses relating to
lawsuits and other proceedings in which they may become involved. Section 317 of
the California Corporations Code also provides for indemnification of a
corporation's directors and officers under certain circumstances.

Section 204(a)(10) and (11) and Section 317 of the California Corporations
Code and the Bylaws of the Company contain provisions covering indemnification
of corporate directors and officers against certain liabilities and expenses
incurred as a result of proceedings involving such persons in their capacities
as directors and officers, including proceedings under the Securities Act or the
Exchange Act.

The Company provides indemnity insurance pursuant to which its directors and
officers are indemnified or insured under certain circumstances against certain
liabilities or losses, including liabilities under the Securities Act. The
Company has obtained shareholder approval to enter into indemnity agreements
with their respective directors and officers. Each agreement provides for
indemnification of the fines, settlements and other amounts incurred by such
person in connection with the good faith performance of his or her duties as a
director or officer. The indemnification agreements also provide for the advance
payment by the Company of expenses incurred in defending any proceeding to which
the director or officer may be a party, provided that the affected director or
officer executed an undertaking, acceptable to the disinterested members of the
board of directors, agreeing to repay all amounts advanced for defense of the
proceeding if it shall be ultimately determined that such director or officer
was not entitled to be indemnified in accordance with Sections 204(a)(10) and
(11) and Section 317 of the California Corporations Code.

The Company understands that the staff of the Commission is of the opinion
that statutory, charter and contractual provisions as are described above have
no effect on claims arising under the federal securities laws.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

Since 1994 the registrant has issued and sold the following unregistered
securities: as of May 31, 1997, the Registrant has issued and sold 222,735
shares of Common Stock to employees and consultants at prices

II-1
<PAGE>

ranging from $.033 to $17.50 per share, upon exercise of stock options, pursuant
to the Registrant's 1994 Stock Option Plan; in December 1995, the Company issued
15,000 shares of Common Stock to Douglas Meltzer in consideration of past
services rendered to the Company and the signing of a confidentiality agreement;
and in connection with the Company's acquisition of certain assets, with a value
of $189,000 as determined by the Company's Board of Directors, of Lloyd
Internetworking, Inc. ("Lloyd") on June 28, 1996, the Company issued 18,000
shares of Common Stock to Lloyd shareholders.

The sales of the above securities were deemed to be exempt from registration
under the Securities Act in reliance on Section 4(2) of the Securities Act, or
Rule 701 promulgated under Section 3(b) of the Securities Act, as transactions
by an issuer not involving a public offering or transactions pursuant to
compensatory benefit plans and contracts relating to compensation as provided
under such Rule 701. The recipients of securities in each such transaction
represented their intention to acquire the securities for investment only and
not with a view to or for sale in connection with any distribution thereof and
appropriate legends were affixed to the share certificates and instruments
issued in such transaction. All recipients had adequate access, through their
relationships with the Company, to information about the Registrant.

ITEM 16. EXHIBITS

(a) Exhibits

<TABLE>
<C> <S>
1.1+ Underwriting Agreement.

3.1+ Restated Articles of Incorporation of Livingston Enterprises, Inc., a California
corporation, as currently in effect.

3.4+ Bylaws of the Registrant, as currently in effect.

3.5+ Bylaws of the Registrant, as in effect immediately following the closing of the
offering made under this Registration Statement.

4.1* Specimen Common Stock Certificate.

5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation.

10.1+ Form of Indemnification Agreement between the Company and each of its directors
and officers.

10.2+ 1994 Stock Option Plan and forms of agreement thereunder.

10.3+ 1997 Stock Plan and form of agreement thereunder.

10.4+ 1997 Employee Stock Purchase Plan and forms of agreements thereunder.

10.5+ Lease dated January 24, 1996 between Registrant and Willow Road Associates, LLC
for the facility located at 4464 Willow Road, Pleasanton, CA 94588.

10.6+ Deferred Compensation Plan dated May 2, 1996, as amended, between the Company
and Jerrold Livingston.

10.7+ Master Revolving Note with Comerica Bank dated April 30, 1996.

10.8** OEM Software License and Development Agreement between the Company and U.S.
Robotics Access Corp. (f/k/a U.S. Robotics, Inc.), as amended.

11.1 Calculation of earnings per share.
</TABLE>

II-2
<PAGE>

<TABLE>
<C> <S>
23.1 Consent of KPMG Independent Auditors.

23.2* Consent of Counsel (included in Exhibit 5.1).

24.1+ Power of Attorney (see page II-4).
</TABLE>

- ---------

* To be filed by amendment.

** Confidential treatment has been requested with respect to certain portions
of this exhibit. Omitted portions have been filed separately with the
Securities and Exchange Commission.

+ Previously filed.

(b) Financial Statement Schedules

II. Valuation and Qualifying Accounts

Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.

ITEM 17. UNDERTAKINGS

The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.

Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions referenced in Item 14 of
this Registration Statement or otherwise, the Registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer, or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.

The undersigned Registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of Prospectus shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.

II-3
<PAGE>
SIGNATURES

Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Pleasanton, State of
California, on the 24th day of June, 1997.

LIVINGSTON ENTERPRISES, INC.

By: /s/ STEVEN M. WILLENS
----------------------------------

Steven M. Willens
PRESIDENT AND CHIEF EXECUTIVE
OFFICER

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Steven M. Willens and Steven A. Hess and each of
them his attorneys-in-fact, each with the power of substitution, for him and in
his name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration Statement,
and to sign any registration statement for the same offering covered by this
Registration Statement that is to be effective upon filing pursuant to Rule
462(b) promulgated under the Securities Act of 1933, and all post-effective
amendments thereto, and to file the same, with all exhibits thereto in all
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming that such
attorneys-in-fact and agents or any of them, or his or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ---------------------------------------- ------------------------------------------------------ ---------------

<C> <S> <C>
/s/ STEVEN M. WILLENS
---------------------------- President, Chief Executive Officer and Chairman June 24, 1997
Steven M. Willens

/s/ STEVEN A. HESS
---------------------------- Chief Financial Officer (Principal Financial and June 24, 1997
Steven A. Hess Accounting Officer)

/s/ JERROLD LIVINGSTON
---------------------------- Director June 24, 1997
Jerrold Livingston

/s/ RONALD H. WILLENS
---------------------------- Director June 24, 1997
Ronald H. Willens

/s/ ALBERT A. PIMENTEL
---------------------------- Director June 24, 1997
Albert A. Pimentel

/s/ ROBERT C. HAWK
---------------------------- Director June 24, 1997
Robert C. Hawk
</TABLE>

II-4
<PAGE>
LIVINGSTON ENTERPRISES, INC.

SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)

<TABLE>
<CAPTION>
BALANCE AT DEDUCTIONS:
BEGINNING OF WRITE OFFS BALANCE AT
CLASSIFICATION PERIOD ADDITIONS OF ACCOUNTS END OF PERIOD
- ------------------------------------------------------------- --------------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
Allowance for returns and doubtful accounts
Year ended August 31, 1994............................... $ -- $ 13 $ -- $ 13
Year ended August 31, 1995............................... $ 13 $ 137 $ -- $ 150
Year ended August 31, 1996............................... $ 150 $ 563 $ 65 $ 648

Nine months ended May 31, 1996 (unaudited)............... $ 150 $ 539 $ 3 $ 686
Nine months ended May 31, 1997........................... $ 648 $ 642 $ 282 $ 1,008

Warranty accrual
Year ended August 31, 1994............................... $ -- $ -- $ -- $ --
Year ended August 31, 1995............................... $ -- $ -- $ -- $ --
Year ended August 31, 1996............................... $ -- $ 85 $ -- $ 85

Nine months ended May 31, 1996 (unaudited)............... $ -- $ -- $ -- $ --
Nine months ended May 31, 1997........................... $ 85 $ 340 $ 25 $ 400
</TABLE>

<PAGE>
EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ---------
<S> <C>
1.1+ Underwriting Agreement.

3.1+ Restated Articles of Incorporation of Livingston Enterprises, Inc., a California corporation, as
currently in effect.

3.4+ Bylaws of the Registrant, as currently in effect.

3.5+ Bylaws of the Registrant, as in effect immediately following the closing of the offering made under this
Registration Statement.

4.1* Specimen Common Stock Certificate.

5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation.

10.1+ Form of Indemnification Agreement between the Company and each of its directors and officers.

10.2+ 1994 Stock Option Plan and forms of agreement thereunder.

10.3+ 1997 Stock Plan and form of agreement thereunder.

10.4+ 1997 Employee Stock Purchase Plan and forms of agreements thereunder.

10.5+ Lease dated January 24, 1996 between Registrant and Willow Road Associates, LLC for the facility located
at 4464 Willow Road, Pleasanton, CA 94588.

10.6+ Deferred Compensation Plan dated May 2, 1996, as amended, between the Company and Jerrold Livingston.

10.7+ Master Revolving Note with Comerica Bank dated April 30, 1996.

10.8** OEM Software License and Development Agreement between the Company and U.S. Robotics Access Corp. (f/k/a
U.S. Robotics, Inc.), as amended.

11.1 Calculation of earnings per share.

23.1 Consent of KPMG Independent Auditors.

23.2* Consent of Counsel (included in Exhibit 5.1).

24.1+ Power of Attorney (see page II-4).
</TABLE>

- ---------

* To be filed by amendment.

** Confidential treatment has been requested with respect to certain portions
of this exhibit. Omitted portions have been filed separately with the
Securities and Exchange Commission.

+ Previously filed.

<PAGE>

OEM SOFTWARE LICENSE AND
DEVELOPMENT AGREEMENT

Dated September 1, 1994

between

Livingston Enterprises, Inc.
and
U.S. Robotics, Inc.

This OEM Software License and Development Agreement (this "Agreement") is
made effective September 1, 1994, by and between U.S. Robotics, Inc., a
Delaware corporation with a place of business at 8100 North McCormick Blvd.,
Skokie, Illinois 60076 ("USR"), as licensee, and Livingston Enterprises,
Inc., a California corporation with a place of business at 6920 Koll Center
Parkway, Pleasanton, California 94566 ("Livingston" or "Licensor"), as
licensor.

In consideration of the premises and of the mutual covenants and promises set
forth herein, USR and Licensor hereby agree as follows:

SECTION 1. PURPOSE OF AGREEMENT.

Licensor has developed certain computer software identified in Exhibit 2.7
attached hereto which USR desires to license for inclusion in and
sublicensing with certain USR products and systems. Licensor desires to
grant to USR, its Subsidiaries and Permitted Assigns, certain rights with
respect to such software. In order to include such software in its
products, USR will require certain software development services and the
technical support and assistance of Licensor's software engineering and
development personnel and Licensor is willing to provide such development
services, support and assistance for a fee.

SECTION 2. DEFINED TERMS.

When used in this Agreement and any Exhibits or Schedules attached hereto,
the capitalized terms listed below shall have the respective meanings
indicated:

2.1 "CODE" means computer programming code. If not otherwise specified,
"Code" means only Object Code and NOT Source Code, which are defined
as follows:

2.1.1 "OBJECT CODE" means the machine-readable form of the Code.

2.1.2 "SOURCE CODE" means the human-readable form of the Code and
related program and system documentation, including all
comments and any procedural code.

<PAGE>

2.2 "DERIVATIVE WORK" means a work which is based upon one or more
preexisting works, such as a revision, enhancement, modification,
translation, abridgment, condensation, expansion, or any other form
in which such preexisting works may be transformed or adapted, and
which if prepared without authorization of the owner of the copyright
in such preexisting work, would constitute a copyright infringement.
"Derivative Work" also includes any compilation that incorporates such
a preexisting work.

2.3 "DEVELOPMENT PROJECT" means the development, testing and
implementation of all Maintenance Modifications, Enhancements and
Upgrades to the Licensed Software described in Exhibit 4.1 attached
which are necessary or reasonably required in order to allow the
Licensed Software to run on the USR Hardware Platforms and perform in
accordance with the Specifications for such Licensed Software.

2.4 "LICENSOR DEVELOPMENT SERVICES" means the software engineering and
development and technical support services described in the Statement
of Work for the Development Project attached as Exhibit 4.1 which
Licensor shall perform in accordance with Section 4 of this Agreement.

2.5 "DOCUMENTATION" means user manuals and other written materials that
relate to the Licensed Software.

2.6 "ENHANCEMENTS" means all changes or additions to the Code and related
Documentation comprising the Licensed Software, other than Maintenance
Modifications and Upgrades, including, but not limited to, all new
releases, that improve functions, add new functions, or improve
performance by changes in system design or coding and all changes
and/or additions made to support new releases of the operating systems
with which the Code is designed to operate, support new input/output
(I/O) devices, or provide other incidental updates.

2.7 "LICENSED SOFTWARE" means the Object Code, Documentation and other
materials relating to the programs specified and/or described in
Exhibit 2.7 and any further Schedules or Exhibits attached hereto,
together with the Object Code, Documentation and other materials
relating to all Maintenance Modifications and Enhancements thereto,
and together with the Object Code, Documentation and other materials
relating to any Upgrades that are hereafter made subject to this
Agreement.

2.8 "PERMITTED ASSIGNS" means any person to whom USR assigns its rights or
interests under this Agreement with the written approval of
Livingston, as set forth in Section 11.11 hereof.

2.9 "MAINTENANCE MODIFICATION" means any modification or revision, other
than Enhancements and Upgrades, to Code or Documentation that correct
programming

-2-
<PAGE>

errors or make other incidental changes or corrections. "Maintenance
Modifications" include, but are not limited to any Bug fixes.

2.10 "SPECIFICATIONS" means the specifications for the functional and
operational parameters and characteristics of the Licensed Software
set forth or referenced in Exhibit 2.7 attached hereto.

2.11 "SUBSIDIARY" means a corporation, company or other entity (1) more
than fifty percent (50%) of whose outstanding shares or securities
having the right to vote for the election of directors of other
managing authority are, or (2) which does not have outstanding shares
or securities, as may be the case in a partnership, joint venture or
unincorporated association, but more than fifty percent (50%) of the
ownership interest of which, representing the right to make the
decisions for such corporation company or other entity, is now or
hereafter owned or controlled, directly or indirectly, by a party
hereto, but such corporation, company or other entity shall be deemed
to be a Subsidiary only so long as such ownership or control exists.

2.12 "THIRD PARTY SOFTWARE" means any third party Code and Documentation
identified in Exhibits 2.7 and/or 4.1 attached hereto, including any
Maintenance Modifications, Enhancements and Upgrades thereto, which
Livingston obtains and provides or sublicenses to USR pursuant to
Sections 4.4 and 6.3 of this Agreement.

2.13 "UPGRADES" means changes or additions to Code and related
Documentation that (1) provide substantial additional value and
utility, (2) as a practical matter could be priced and offered
separately as optional additions to the Code and Documentation, and
(3) are not made available to any other customers or licensees without
a separate or additional charge.

2.14 "USR HARDWARE PLATFORMS" means the specific hardware products of USR
and its Subsidiaries described in Section 3.1.1 of this Agreement.

2.15 "OEM SUPPLY AGREEMENT" means the OEM Supply Agreement entered into by
and between Livingston and USR, dated as of September 1, 1994 pursuant
to which USR has agreed to sell certain modem products to Livingston.

2.16 "BUG" means a defect in the Licensed Software which causes the
software to perform in a manner which substantially differs from the
specifications of the Licensed Software and which can be replicated
with reasonable effort on the then applicable model of the Livingston
product line corresponding to Livingston's current PortMaster product
line or on such other equipment as the Parties reasonably agree is
appropriate under the circumstances. Without limiting the generality
of any defect in Code which affects more than 5% of the units of
Products containing such Code or which causes any Product to be
inoperable more than 5% of the time shall be deemed a "Bug" unless the
parties otherwise agree.

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2.17 "CLIENT CODE" means a program which executes on a remote CPU to
connect to the USR hardware platforms over a network.

SECTION 3. LICENSE GRANT FOR LICENSED SOFTWARE.

3.1 SCOPE. Subject to the terms and conditions set forth in this
Agreement, Licensor hereby grants to USR and its Permitted Assigns a
worldwide, nonexclusive. non-transferable, perpetual right and license
to use, copy, reproduce, display, execute, modify, distribute, lease
and prepare Derivative Works based on all License Software that is
now, or hereafter becomes, the subject of this Agreement, subject
further to the following restrictions:

3.1.1 USR shall only distribute or lease copies of the Licensed
Software in executable form and in conjunction with the
manufacture and/or sale or lease of, and only for use in,
those USR Hardware Platforms described in Exhibit 3.1.1
attached hereto, regardless of the name or names under which
such products are marketed and sold; provided that USR and
its Subsidiaries may not supply such products to any
unaffiliated third party on an OEM or private label basis
without the prior written consent of Livingston.

3.1.2 No Code in whole or in part shall be used or incorporated in
any USR Hardware Platform except those which are described
in Exhibit 3.1.1 and any amendments thereto which the
parties may hereafter agree to.

3.1.3 Except as otherwise agreed in writing by Livingston, USR
shall include appropriate copyright and other proprietary
notices (in the form provided by Livingston) in all copies
of the Licensed Software distributed to other parties.

3.1.4 All contracts and purchase orders, if any, for USR Hardware
Platform Products supplied to the U.S. Government under a
prime contract or to a contractor operating under a U.S.
Government contract shall include the following paragraph or
substantially equivalent language.

"Use, duplication, or disclosure by the Government is
subject to restrictions as set forth in subparagraph
(c)(1)(ii) of the Rights in Technical Data and Computer
Software clause at 252.227-7013."

3.1.5 In addition, subject to the same restrictions, USR may copy
and distribute Client Code related to the Licensed Software
as provided by Licensor and as modified to operate in
conjunction with the USR Hardware Platforms incorporating
the Licensed Software.

3.2 RIGHT TO GRANT SUBLICENSES. The right and license granted above shall
include the right of USR to sublicense and authorize other parties
(including its Subsidiaries,

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subcontractors, dealers, distributors, and agents collectively,
"Sublicensees") to do any, some, or all of the foregoing, with respect
to the Licensed Software, provided that such other parties agree to be
bound by the terms of this Agreement. Specifically, sublicensing
pursuant to the foregoing shall only be authorized pursuant to the
following terms:

3.2.1 Such sublicenses shall only be granted pursuant to a written
sublicense agreement. Such sublicense agreements may be in
any form, provided that they contain substantially the same
provisions relating to the Licensed Software as are
contained in this Agreement with respect to intellectual
property rights, warranties, limitations of liability,
indemnities and confidential information. Livingston shall
have the right to approve the relevant provisions of the
sublicense agreement utilized in connection with the
foregoing issues. Without limiting the generality of the
foregoing, Sublicensees shall be prohibited from further
sublicensing, assigning or transferring the Licensed
Software without the prior written consent of Livingston.

3.2.2 USR shall not sublicense and Sublicensees shall have no
rights to the Licensed Source Code. Further, sublicensees
shall be prohibited from reverse engineering, disassembling
or decompiling the Licensed Software.

3.2.3 USR agrees to notify Livingston in writing of any sublicense
granted pursuant hereto. Such notice shall include the
Sublicensee's name, address and contact person, and shall
give a brief summary of the nature of the transaction.

3.2.4 With respect to any activities of Sublicensees, royalties
shall be payable in accordance with the terms as set forth
in Section 6 and Exhibit 6.2 of this Agreement. Reporting
and auditing of such royalties shall also be effected in
accordance with Section 6 and Exhibit 6.2 herein.

3.3 PATENTS AND PATENT APPLICATIONS. Licensor further grants to USR its
Subsidiaries and its and their respective customers, mediate and
immediate, a worldwide, nonexclusive, nontransferable, and
royalty-free license under all patents or patent applications if any,
covering the Licensed Software owned or licensable by Licensor during
the term of this Agreement to make, have made, use, have used, lease,
and/or otherwise transfer such Licensed Software, including Derivative
Works thereof, as set forth in Section 3.1 above.

3.4 COPIES FOR INTERNAL USE. The foregoing grant of license includes the
right to make and use reasonable numbers of copies of the Licensed
Software exclusively for archival, test, maintenance, warranty service
and product demonstration purposes without any obligation to pay
royalties with respect thereto.

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<PAGE>

SECTION 3A. LICENSE GRANT FOR SOURCE CODE.

3A.1 Subject to the terms and conditions contained in this Agreement,
Licensor hereby grants to USR and its Permitted Assigns a
nonperpetual, nonexclusive, nontransferable right and license
(revocable as set forth in Section 3A.1.4) to use, copy, reproduce and
create Derivative Works of the Source Code (the "Licensed Source
Code") which is required to generate the Object Code contained in the
Licensed Software (as defined herein and specified in Exhibit 2.7
hereto), subject further to the following limitations and
restrictions:

3A.1.1 USR shall use the Licensed Source Code only for the
following purposes and subject to the following
limitations, (i) the modification and creation of
Derivative Works based upon the Licensed Software in
connection with porting of the Licensed Software to the
USR Hardware Platforms described in Exhibit 3.1.1 and
as appropriate for any USR Hardware Platforms added
thereto by amendment, (ii) developing and/or porting
Maintenance Modifications, Enhancements and Upgrades of
the Licensed Software to the USR Hardware Platforms
described in Exhibit 3.1.1 or subsequently added
thereto by amendment, and (iii) developing customized
modifications of the Licensed Software and otherwise
supporting and servicing the needs of purchasers and
end users of the USR Hardware Platforms described in
Exhibit 3.1.1 or subsequently added thereto by
amendment.

3A.1.2 USR acknowledges and agrees that it is acquiring only
the right to use the Licensed Source Code as strictly
authorized hereunder. All ownership, copyrights,
patent rights (if any) and other intellectual property
rights in and to the Licensed Source Code shall remain
vested in Licensor. USR shall not transfer, assign or
sublicense the Licensed Source Code. USR further
acknowledges the confidential and proprietary nature of
the Licensed Source Code and agrees to exert and
implement all commercially reasonable efforts and
measures to maintain and preserve the confidentiality
and to prevent the unauthorized use thereof, which
efforts and measures shall include, but not be limited
to, the following:

(a) all such efforts and measures as USR
exerts and implements for the protection of
its own trade secrets of a similar nature
(which shall in no event comprise less than
reasonable care and diligence);

(b) restriction of access to the Licensed
Source Code to those employees of USR who
have a bona fide need for such access in
connection with the activities contemplated
herein and

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<PAGE>

who have executed written instruments
acknowledging and agreeing to honor their
duties and obligations to maintain the
confidentiality and abstain from unauthorized
use of such confidential and proprietary
information. In addition, USR shall maintain
a list of all such employees who at any time
have accessed the Licensed Source Code while
it is in the possession of control of USR and
such list shall include, for each such
employee, his or her name, title and a brief
summary specifying the portions of the
Licensed Source Code which he or she has
accessed and setting forth the reason that
such employee needed such access.

(c) maintenance of all copies of the
Licensed Source Code in a physically secure
place and on computers the use of and access
to which are restricted to authorized
personnel. USR shall further notify Licensor
of the location of all copies of the Licensed
Source Code.

(d) prompt destruction or return to Licensor
of all copies of the Licensed Source Code
upon termination of this Agreement or upon
Licensor's request in the event of
termination of the right and license granted
herein for the Licensed Source Code in
accordance with Section 3A.1.4 below. Except
in the case of a material breach by USR of
the provisions of this Section 3A.1.2., USR
may retain a copy of any portions of the
Licensed Source Code which are reasonably
required to fix "Bugs" which have been
reported by USR to Livingston prior to such
request. All Licensed Source Code shall be
returned to Livingston or destroyed upon
repair of the reported "Bugs" or upon the
expiration of three months following the date
of such request, whichever is earlier.

(e) In all cases in which USR destroys
Licensed Source Code as set forth herein USR
shall provide to Licensor a written
certification signed by an officer of USR
which states that such destruction has been
accomplished in accordance with the terms of
this Agreement.

3A.1.3 Subject to reasonable undertakings by Livingston with
respect to maintaining the confidentiality and
restraining from unauthorized use of USR's confidential
and proprietary information, Livingston shall be
afforded, upon request, reasonable opportunities to
observe and evaluate the adequacy of the efforts and
measures exerted and implemented by USR

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<PAGE>

with respect to its obligations to maintain the
confidentiality and prevent unauthorized use of the
Licensed Source Code.

3A.1.4 Livingston shall have the option to terminate the right
and license to the Licensed Source Code granted herein
at any time on or after August 31, 1996, as follows:

(a) Such option shall be exercised by written
notice given to USR not less than one year prior
to the date on which the termination is to become
effective.

(b) Livingston may request the return or
destruction of the Licensed Source Code at any
time on or after the effective date of such
termination.

(c) Nothing in this Section 3A.1.4 and no notice
or request given pursuant hereto shall prevent
Livingston from requesting an earlier return or
destruction of the Licensed Source Code upon
termination of this Agreement pursuant to and in
accordance with any other provisions of this
Agreement.

(d) Notwithstanding the foregoing, during the
term of this Agreement and after the return or
destruction of the Licensed Software by USR,
Livingston agrees that in the event it fails to
fulfill its support obligations as set forth in
Section 5 hereof, Livingston will grant USR
personnel reasonable access to and use of the
Licensed Source Code at Livingston's facilities or
at the facilities of a mutually agreeable third
party so as to permit USR to perform such
maintenance and support functions in a reasonably
efficient and effective manner.

3A.1.5 Upon termination of USR's rights to use the Licensed
Source Code pursuant to 3A. 1.4 above, USR may request
that the Licensed Source Code be placed and maintained
in Escrow with a recognized software Escrowee at USR's
expense to be held for release to USR upon mutually
agreed terms and conditions in the event that
Livingston fails or refuses to fulfill its obligations
to grant access pursuant to Section 3 A.1.4(d).

SECTION 4. DEVELOPMENT PROJECT.

4.1 SCOPE. The Development Project shall be carried out by USR with the
full support of Licensor, including but not limited to the provision
by Licensor of the Licensor Development Services described in the
Statement of Work set forth on Exhibit 4.1 attached hereto.

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<PAGE>

4.2 PROJECT SCHEDULE. Licensor agrees to cooperate with USR and make
qualified personnel available at the times and places reasonably
requested by USR for consultation with and to provide direct
assistance to USR to the extent reasonably necessary to enable the
Development Project to be completed in accordance with the schedule
established.

4.3 QUALITY OF WORK. All of the Licensor Development Services shall be
performed in a good and professional manner and the work product
produced by Licensor's personnel shall meet or exceed all applicable
industry standards for similar work as well as meeting the
Specifications.

4.4 THIRD PARTY SOFTWARE DEVELOPMENT. As set forth in Exhibits 2.7 and
4.1 attached, Livingston may obtain licenses for certain Third Party
Software subject to a paid up license under which Livingston is
entitled, upon payment of an additional license fee to sublicense such
Third Parry Software to USR as a part of the Licensed Software. Upon
receipt from Licensor of satisfactory documentation evidencing such
Third Party Software licenses and USR's potential rights as a
sublicensee thereunder, USR shall promptly notify Livingston with
respect to whether USR is willing to accept a sublicense of such Third
Party Software. If USR does accept a sublicense of such Third Party
Software, USR shall promptly reimburse or pay the incremental license
fees which Livingston shall have paid or become obligated to pay to
the third party licensor with respect to such sublicense for USR as
provided in Section 6.3 hereof. If USR accepts the sublicense of the
Third Party Software, USR must agree to accept all of the terms,
conditions and restrictions of the Licensee agreement between
Livingston and the third party as are applicable to sublicensees
thereunder.

4.5 JOINT EFFORTS; CROSS-LICENSING. The parties agree that, except as
otherwise specifically provided herein, the copyright and other
intellectual property rights in any Code, Documentation or other work,
trade secret or invention which is created, conceived or invented by
either of them but which results directly from their joint development
efforts and cooperation pursuant to this Agreement, shall belong to
the party who creates such Code, Documentation or other work, trade
secret or inventions.

Further, except as they may otherwise agree in writing hereafter, the
parties agree that in the event they should be deemed joint authors,
joint creators or co-inventors of any such work, trade secret or
invention, all intellectual property rights in such newly authored,
created or invented work, trade secret or invention (excluding any
portion thereof consisting of preexisting Source Code or Derivative
Works thereof) shall be transferred and assigned, subject to the
license back described below, to the party making the greatest
contribution of time and effort, to creation and development work
resulting in such work, trade secret or invention. Licensor shall own
all portions of any joint work consisting of pre-existing Source Code
or Derivative Works thereof.

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Each such jointly created work, trade secret or invention shall be
disclosed promptly by the creator or inventor thereof to the other
party hereunder and such other party shall be granted a perpetual,
royalty-free license to copy, make, use, sublicense and sell such
work, trade secret or invention, subject only to such restrictions or
are reasonably necessary to protect and preserve the owner's
intellectual property rights therein. However, except as may be
otherwise specifically agreed in writing, nothing in this Section 4.5
shall be construed as a transfer or unrestricted license by either
party to the other of any of such party's Source Code which may be
used by the other party in such joint effort.

SECTION 5. SUPPORT AND MAINTENANCE: ENHANCEMENTS AND UPGRADES.

5.1 INITIAL MAINTENANCE PERIOD. During the period commencing on the date
hereof and ending upon the expiration of one (1) year following first
shipment of a production version of the Licensed Software in a USR
Product, Licensor, at no additional charge to USR shall provide USR
with (i)"Bug" fixes for all defects in the Licensed Software which are
reported by USR or discovered independently by Licensor and (ii) all
Maintenance Modifications to the Licensed Software which are otherwise
created by or for Licensor, whether or not such Maintenance
Modifications, are released to Licensor's other customers during such
period. Licensor shall provide USR with copies of the Source Code for
all such Bug fixes, and Maintenance Modifications, subject to the
provisions of Section 3A hereof, on a timely basis, which shall in no
event be later than the earlier of (i) the expiration of three months
following implementation of the Bug fix, (ii) the release of
Maintenance Modifications that incorporate it or (iii) its
incorporation into a new standard release of the Licensed Software.

5.2 ONGOING MAINTENANCE AND SUPPORT. Following the initial maintenance
period described in Section 5.1 above and so long thereafter as USR
continues to pay royalties to Licensor pursuant hereto, Licensor shall
make available to USR ongoing maintenance and support consisting of
Maintenance Modifications ("Support Services") pursuant to an annual
Software Support Agreement in the form attached as Exhibit 5.2. In
the event of any conflict or inconsistency between this Agreement and
such Software Support Agreement, the provisions of this agreement
shall control. USR may elect to purchase Support Services or choose
not to on an annual basis, in its sole discretion such support
services shall be provided for the compensation set forth in Section
6.5.

5.3 ENHANCEMENTS AND UPGRADES. During the initial maintenance period
described above, Livingston shall provide, at no additional charge
beyond the royalties and other compensation payable hereunder, all
Enhancements and Upgrades to the Licensed Software. During all
subsequent periods in which USR subscribes for Support Services,
Licensor shall have an option to also offer any Enhancements and
Upgrades to the Licensed Software to USR upon terms and conditions not
less favorable than

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<PAGE>

those offered to any other of Licensor's Customers determined in
accordance with Section 6.4 of this Agreement. USR shall be
responsible for distributing such Enhancements and Upgrades to its
customers who have purchased USR Hardware Platforms containing the
Licensed Software.

5.4 CHANGES TO LICENSED SOFTWARE. All Maintenance Modifications,
Enhancements and Upgrades provided to USR pursuant to this Section 5
and Exhibit 5.2 shall be and become Licensed Software subject to this
Agreement. Licensor shall deliver complete Code and Documentation,
including Source Code subject to the provisions of Section 3A, for all
such Maintenance Modifications, Enhancements and Upgrades to USR
promptly and in no event later than the first general release thereof
to Licensor's other customers.

5.5 COOPERATION BY USR. USR will cooperate with Licensor in the
maintenance and support of the Licensed Software during the term
hereof by:

5.5.1 promptly reporting any "Bugs" or other defects in the
Licensed Software which are discovered by USR;

5.5.2 working, with the cooperation of Licensor. to develop
Enhancements and Upgrades to the Licensed Software which USR
deems to be desirable. The Rights in such Enhancements and
Upgrades shall be determined as provided in Section 4.5.

5.6 CUSTOMER SUPPORT PROCEDURES.

5.6.1 USR will provide technical support to its customers and end
users of the USR Hardware Platform products incorporating
the Licensed Software, and will provide such technical
training to its resellers as USR in its discretion
determines to be necessary or appropriate.

5.6.2 Livingston agrees to regularly supply bug notes or other
documentation defining the relevant hardware and software
information, symptoms, solutions, or work-arounds for major
Licensed Software problems.

5.6.3 Livingston agrees to supply technical documentation that is
useful or necessary to perform customer support and
troubleshooting or to analyze the technical benefits and
risks of introducing a new software or hardware release of
the Licensed Software into USR's customer base.

5.6.4 USR and Livingston agree to the following escalation policy
to manage problems that impact the performance of the
Licensed Software at end-user sites:

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(a) If USR is unable to resolve a problem experienced by a
customer that is seriously impacting the performance of the
Licensed Software in the USR Hardware Platform products in a
customer's network, then USR technical services personnel
will call upon the designated engineering resources at USR
for assistance. Within 5 business days, USR's Technical
Services and Engineering personnel will determine if contact
with Livingston is required.

(b) Within 5 business days of written or electronic mail
notification to Livingston's designated technical support
organization USR and Livingston will jointly agree to
classify the problem in one of three categories: (a) user
problem; (b) USR problem; or (c) Licensed Software problem.
A "user problem" is one that is a consequence of user error,
and is not a function of an inherent problem with the
product or documentation. A 'Licensed Software problem' is
one that is a function of an inherent problem with the
product, and is likely the consequence of a "Bug" or other
apparent defect in the Licensed Software or Documentation as
developed and implemented by Livingston. A "USR problem" is
any other problem.

(c) If the Parties cannot determine and agree on the correct
category for the problem by the end of 5 business days at
the level of their respective customer service and support
organizations, it will be immediately escalated to the
responsible product managers of the products at USR and
Livingston. Within 5 business days of that escalation. the
product managers will jointly establish an action plan and
timetable designed both to identify the category of the
problem, and, if USR so requests, to solve the problem for
the customer and the Parties will jointly execute that plan.

(d) A category (a) 'user problem' and category (b) 'USR problem'
should generally be managed by USR without additional
support from Livingston.

A category (c) 'Licensed Software problem' is a problem that
by definition may require support from and-involvement of
Livingston. USR may elect to implement its own solution or
to request Livingston's assistance. In the event that a
category (c) 'Licensed Software problem' is being worked on
by the Parties' respective service and support
organizations, no charges by Livingston to USR for support
will be justified or warranted during the Initial
Maintenance Period described in Section 5.1 and thereafter
during all periods for which the applicable support and
maintenance fees, as per Section 6.5, have been paid, and
Livingston will cooperate fully in the development of a
solution to the problem. All Category (c) problems must be
brought to the attention of the responsible product managers
of the products at USR and Livingston.

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(e) Within 5 business days of the decision that any given
problem is a category (c) 'Licensed Software problem, and
USR's determination to involve Livingston, Livingston and
USR will jointly develop and implement an action plan aimed
at eliminating the problem the customer is experiencing.
Category (c) 'Licensed Software problem' will be further
classified into two categories, 1) Critical Problems and 2)
Non-Critical Problems. Critical Problems are problems
classified by Livingston and USR as critical to the
fundamental operation of the USR product. Livingston will
generate a fix for each such critical problem and send it to
USR on the appropriate media as soon as possible.
Livingston will contact USR within five(5) working days as
to the status of resolution of the problem. Non-Critical
Problems are problems which are not critical to the
fundamental operation of the affected USR product. At USR's
request, Livingston will attempt to generate fixes for
problems classified by Livingston and USR as non-critical to
the fundamental operation of the affected USR Hardware
Platform products in the next release of the Licensed
Software. When possible Livingston will describe temporary
work-arounds to USR.

(f) Livingston acknowledges and agrees that Category (c)
'Licensed Software problems' which are critical problems or
are otherwise of material significance which remain
unresolved for an extended duration threaten the success of
the USR products in the market place, and may require that
USR gain access to the source code, if the Source Code is
not then otherwise in USR's possession pursuant to this
Agreement. USR has the right to identify unresolved category
(c) 'problems' of material significance that must be
resolved within the next three months by Livingston, after
which USR will be granted access to the Source Code as
specified in Section 3A.1.4(d) to implement a fix for its
customer base. At no time will Livingston's rights in such
Source Code and documentation be transferred to USR. USR
will have the right to distribute, royalty free, the fixes
so created in binary form to its customers.

5.7 GOVERNMENT CONTRACTS. USR agrees to include the following paragraph
in all contracts and purchase orders for the Licensed Products
supplied to the U.S. Government under a prime contract or to a
contractor operating under a US. Government contract:

"Use, duplication, or disclosure by the Government is subject to
restrictions as set forth in subparagraph (c)(1)(ii) of the Rights in
Technical Data and Computer Software clause at 252.227-7013."

SECTION 6. FEES AND ROYALTIES; PAYMENT.

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6.1 NON-RECURRING ENGINEERING FEES. In consideration of the Development
Services to be performed by Licensor, USR agrees to pay Licensor
non-recurring engineering fees totaling [CONFIDENTIAL TREATMENT
REQUESTED], as follows:

6.1.1 [CONFIDENTIAL TREATMENT REQUESTED] will be paid upon
execution and delivery of this Agreement;

6.1.2 [CONFIDENTIAL TREATMENT REQUESTED] be paid upon satisfactory
completion of Phase I of the Development Project and

6.1.3 [CONFIDENTIAL TREATMENT REQUESTED] be paid upon satisfactory
completion of Phase II of the Development Project.

6.2 ROYALTIES. In consideration of the rights and licenses granted to USR
pursuant to Section 3 hereof, USR agrees to pay royalties to Licensor,
with respect to the Licensed Software, which royalties shall be
computed as set forth in Exhibit 6.2 attached hereto (the
"Royalties"). The Royalties shall be paid in accordance with the
following procedure:

6.2.1 Royalties shall be computed and paid an a quarterly basis
within 60 days following the end of each of USR's fiscal
quarters during the term hereof.

6.2.2 Each Royalty payment shall be accompanied by USR's sales and
sublicense report which shall set forth in reasonable detail
the product sales and sublicenses of the Licensed Software
for such quarterly period upon which the Royalties are
based and the calculations used by USR to determine the
amount of the Royalty payment then due.

6.2.3 Licensor shall have the right, exercisable not more
frequently than once in any 12-month period, upon reasonable
notice and regular business hours, to inspect and review,
directly or through its certified public accountants, USR's
books and records which are related to sales of products and
grants of sublicenses relevant to the computation of the
Royalties for the sole purpose of verifying or testing the
accuracy of USR's reports and Royalty payments. The costs
and expenses of such inspection shall be borne by Licensor
except that Licensor shall not be required to reimburse USR
for any time spent by USR staff or any USR overhead.

6.3 THIRD PARTY SOFTWARE FEES. Licensor shall be entitled to
reimbursement for the out-of-pocket costs reasonably incurred by
Licensor in connection with any sublicense to USR of Third Party
Software included in the Licensed Software with USR's consent. USR,
at its option may decline to pay such sublicense fee, in which case,
unless USR obtains the necessary license directly, the Enhancements to
the Licensed Software provided by the Third Party Software will be
omitted from the Licensed Software. In

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addition, if USR elects to accept a sublicense of any Third Party
Software from Livingston, USR will also be obligated to reimburse or
pay any incremental annual maintenance fees incurred by Livingston in
accordance with the license documents disclosed to USR with respect to
the sublicense of the Third Party Software to USR.

6.4 MOST FAVORED LICENSEE. If at any time during the term of this
Agreement, Licensor enters into a similar agreement with any other
licensee with respect to the Licensed Software or other Software with
essentially identical functionality, on terms, conditions or rates
more favorable than those accorded to USR hereunder for amounts of
royalty and fee revenues which are not demonstrably substantially
greater than those paid or payable to Licensor pursuant hereto,
Licensor shall, within thirty (30) days of its acceptance of the new
agreement with the other licensee, notify USR of such transaction.
Within thirty (30) days of receipt of Licensor's notice, USR may give
written notice to Licensor that this Agreement is to be amended to
provide USR with the same terms, conditions and/or royalty rates
provided to the other Licensee. Such amendment shall be made
retroactive to the effective date of the other licensee's agreement.

6.5 SUPPORT AND MAINTENANCE FEES. For Support Services provided by
Licensor pursuant to Section 5.2 above (after the first year), USR
shall pay an annual maintenance fee which does not exceed
[CONFIDENTIAL TREATMENT REQUESTED] per year in the first year
following the initial maintenance period. In subsequent years the
maximum annual maintenance fee will not exceed [CONFIDENTIAL TREATMENT
REQUESTED]% ([CONFIDENTIAL TREATMENT REQUESTED]) of the previous
year's fee.

SECTION 7. LICENSOR'S WARRANTIES; INDEMNIFICATION.

7.1 MEDIA WARRANTY. For a period of ninety (90) days from the date of
delivery of any item of the Licensed Software, to USR, Licensor
warrants that the media in which such item of the Licensed Software is
embodied and the media on which any later version or release is
delivered will be free from defects in material and workmanship.

7.2 NO SOFTWARE PERFORMANCE WARRANTY. Licensor represents and warrants
only that the Code (including Source Code) delivered by it to USR
pursuant hereto constitutes a complete copy of the Licensed Software
and the Licensed Source Code which Licensor has agreed to deliver
pursuant hereto. With respect to the operating and performance
characteristics of such Code, Licensor delivers and USR accepts it "AS
IS," without warranty.

7.3 RIGHTS WARRANTY. Licensor warrants that it has the authority to enter
into and perform its obligations under this Agreement and to grant the
licenses provided herein. Licensor further warrants that, except for
the Third Party Software, the Licensed Software is the property of
Licensor, and with respect to the Third Party Software, the

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<PAGE>

Licensor has full rights under valid licenses covering the Third Party
Software licensed to USR under this Agreement and the use and dealings
therewith by USR and its successors, assigns and customers, immediate
and intermediate.

7.4 INDEMNIFICATION. Licensor agrees to defend, indemnify and hold USR
harmless against any claims that the Licensed Software infringes upon
or violates any patent, copyright, trade secret, trade name,
trademark, maskwork right or any other proprietary right of any third
party (Intellectual Property Right"). If any claim that the Licensed
Software infringes upon or violates any Intellectual Property Right is
made against USR or its customers, USR shall promptly notify Licensor,
and Licensor shall defend, indemnify and hold USR harmless against any
and all liability, losses, damages, expenses (including attorney's
fees) and demands of any kind arising out of any such claim, whether
or not notorious or successful, provided that USR (i) gives Licensor
reasonably prompt notice of such claim, (ii) fully cooperates with
Licensor, at Licensor's expense, in the defense of such claim, and
(iii) gives Licensor the right to control the defense and settlement
of any such claim, except that Licensor shall not enter into any
settlement that affects USR's rights or interests without USR's prior
written approval. USR shall have no authority to settle any claim on
behalf of Licensor.

If by reason of any such claim, USR or its customers shall be
prevented or are likely to be prevented from selling or using any USR
Products, or if, in Licensor's opinion, such claim is likely to occur,
Licensor will use its best efforts, at its expense, to (i) obtain all
rights required to permit the sale or use of such products by USR and
its customers; or (ii) modify or replace the Licensed Software to make
it non-infringing (and extend this indemnity thereto), provided that
any such replacement or modified Licensed Software are satisfactory to
USR. If Licensor is unable to achieve either of the options set forth
above within a reasonable period of time after the issuance of an
injunction, but in no event longer than one hundred eighty (180) days,
Licensor shall promptly refund to USR an amount equal to all
Royalties, if any, theretofore paid by USR to Licensor with respect to
such products, plus the fees paid by USR pursuant to Section 6.1
hereof, provided, however, that this refund obligation shall not apply
in the case of an injunction affecting only Third Party Software.

7.5 DISCLAIMER. THE LIMITED WARRANTIES AND INDEMNIFICATION CONTAINED IN
THIS SECTION 7 ARE GIVEN AND MADE IN LIEU OF ALL OTHER WARRANTIES,
EXPRESS, IMPLIED OR STATUTORY, INCLUDING BUT NOT LIMITED TO ANY
IMPLIED WARRANTIES OF MERCHANTABILITY. FITNESS FOR A PARTICULAR
PURPOSE OR NONINFRINGMENT.

SECTION 8. TERM AND TERMINATION.

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<PAGE>

8.1 TERM OF AGREEMENT. This Agreement shall become effective on the first
day that it has been executed by an authorized representative of USR,
and by an authorized representative of Livingston. Unless sooner
terminated hereunder, this Agreement shall remain in force through
expiration of all copyrights and other intellectual property rights in
all Licensed Software.

8.2 TERMINATION. USR may, at its option, terminate this Agreement at any
time for any reason. Such termination shall become effective thirty
(30) days after USR gives written notice of termination executed by an
authorized representative of USR. Either party may terminate this
Agreement in the event of a material breach by the other party which
continues uncured ninety (90) days after the breaching party has
received a written notice from the terminating party which describes
the breach in reasonable detail. If this Agreement is in effect for a
period exceeding one (1) year and USR terminates this Agreement
pursuant to the first sentence of this Section 8.2 with the intent of
replacing Licensor's Code in the USR Hardware Platforms described in
Exhibit 3.1.1 (to the extent, if any, that such Code has theretofore
been integrated or incorporated into any of such USR Hardware
Platforms) and any subsequent amendments thereto, without 180 days
written notice, then royalty fees shall be paid with respect to the
sales of Products which contain functionality that is substantially
equivalent to that provided by the Licensed Software, with or without
Livingston's Code, for a period of 180 days from the date of notice of
termination. Notwithstanding the forgoing sentence, USR shall have no
obligation to make any such payment in the event that Livingston
commits a material breach of its obligations under this Agreement or
permits such a breach to remain uncured during such 180 day period or
any portion thereof and nothing herein shall prohibit or restrict USR
from independently developing or licensing any technology which is
similar in function to the Licensed Software.

8.3 TERMINATION BY LIVINGSTON. In addition to its right to terminate as
provided in Section 8.2 above. Livingston may. at its option.
terminate this Agreement for any of the following reasons:

8.3.1 USR breaches any obligation to pay any determinable amount
of money owed pursuant hereto which it fails to cure within
five (5) business days following receipt of written notice
thereof describing such breach and the amount or amounts
owed in reasonable detail.

8.3.2 USR commits a material breach of its obligations under
Section 3A hereof which remains uncured fifteen (15)
business days following receipt of written notice thereof
describing such breach in reasonable detail.

8.3.3 USR voluntarily effects termination of the OEM Supply
Agreement for any reason other than breach by Livingston or
mutual agreement of the parties thereto.

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<PAGE>

Such termination shall become effective thirty (30) days after
Livingston gives written notice of termination executed by an
authorized representative of Livingston.

8.4 SURVIVAL AFTER TERMINATION. The termination of this Agreement shall
not affect any liability of USR accrued pursuant hereto or any paid-up
right or license granted to USR hereunder. In the event of termination
of this Agreement, in whole or in part, any right, license or
sublicense exercised or granted prior to such termination (including
those for internal use by USR, USR's Subsidiaries, and other third
parties such as dealers, distributors, agents, and customers), and any
corresponding payment obligations of USR hereunder, shall survive and
continue. Without limiting the generality of the foregoing, (1) USR
may sublicense, sell, lease and distribute any inventory of products
based on or containing Licensed Software, including work in progress,
on hand at the time of such termination, (2) USR may continue to
exercise the rights and licenses granted hereunder for a period of up
to six (6) months after termination to fill any orders received by
USR, its Subsidiaries, distributors, agents or dealers received and
accepted from their customers prior to the effective date of
termination, and (3) USR may continue to exercise the rights and
licenses granted hereunder as necessary to provide maintenance and
support for customers. Neither, USR, its Subsidiaries, dealers,
distributors, agents nor customers shall have any obligation to return
to Licensor any copies of Licensed Software or Derivative Works
thereof made or obtained prior to such termination, except that, upon
demand by Licensor following termination of this Agreement. USR shall
return to Licensor or destroy all copies of the Licensed Source Code
and design Documentation for the Licensed Software as provided in
Section 3A.

In addition, the provisions of Sections 2, 3, 4.5, 7, 8, 10 and 11
shall survive and continue with respect to all Licensed Software that
is the subject of this Agreement at the time of termination.

8.5 RESERVATION OF PUBLIC DOMAIN RIGHTS. The existence, termination or
expiration of this Agreement shall not be construed as eliminating or
limiting any rights that USR, its Subsidiaries, dealers, distributors,
agents and customers would have had if USR had never entered into this
Agreement, including but not limited to rights to copy works that are
in the public domain.

8.6 INDEPENDENT DEVELOPMENT PROCEDURES. During the time that USR is in
possession of the Licensed Source Code delivered to it pursuant to
Section 3A and for a period of nine (9) months thereafter, if USR
undertakes or commences any independent development (as contemplated
in Sections 8.2 and 11.1 herein) of any Code with functionality that
is comparable to that of the Licensed Software, then USR shall comply
with the following "clean room" procedures:

8.6.1 No personnel who have accessed any portion of the Licensed
Source Code delivered to USR pursuant to Section 3A hereof,
which is related to the

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<PAGE>

functionality that is the subject of such independent
development (which shall include all persons whose names
have been recorded in the list described in Section
3A.1.2(b) and who are designated therein as having had such
access), shall perform any such independent development
work. Further, no personnel who have accessed the Licensed
Source Code shall disclose any information contained in the
Licensed Source Code to, or otherwise consult with or
advise, any persons performing such development work with
respect to the development of Code having any functionality
that is comparable to that of the Licensed Software.

8.6.2 No personnel connected with such independent development
shall reverse engineer, disassemble or decompile any of the
Licensed Software.

8.6.3 Such independently developed Code shall not include or
incorporate any Livingston trade secreted, proprietary,
copyrighted or patented materials, in any form.

8.6.4 In order to ensure USR's compliance with the foregoing
measures, Livingston shall be entitled to inspect USR's
facilities and review its procedures, records and
development efforts, provided that Livingston and its
representatives may use the information obtained thereby
only for the foregoing purposes and shall maintain all such
information in confidence in accordance with Section 11.9
hereof and, provided further, that nothing herein shall
entitle Livingston to have access to any Source Code
licensed by USR from any third party. The scope and timing
of any such inspection or review shall be agreed to by the
Parties, in good faith.

8.6.5 Notwithstanding the foregoing, the Parties hereby agree that
if USR licenses or otherwise acquires Code that has
functionality comparable to that of the Licensed Software
and that was developed independently by any third party or
by USR personnel in accordance with the foregoing provisions
and ports such independently developed Code into any USR
product without enhancing or altering the functionality of
such Code in any material respect, such porting activity, in
and of itself shall not be deemed an independent development
effort subject to subsection 8.6.1 hereof.

SECTION 9. NO UNDERTAKING TO MARKET.

USR shall have full freedom and flexibility in its decisions concerning the
development or marketing of products consisting of the USR Hardware
Platforms that incorporate or are based on Licensed Software, including the
decision of whether to market or discontinue marketing any particular
product whether to offer products separately and/or in combination with
other code and Documentation and in its decisions regarding terms,
conditions and pricing. Nothing in this Agreement, shall be construed as
an obligation, guarantee or

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<PAGE>

commitment by USR that any product that incorporates or is based on the
Licensed Software shall be announced and marketed by USR, or that any
marketing effort will be productive of any particular level of sales or
of royalties or other additional payments to Licensor.

It is understood that USR may license or transfer copies of products that
incorporate or are based on Licensed Software at volume discounts,
promotional or special charges, dealer discounts, special bids or other
pricing arrangements and may increase or decrease any prices, charges or
fees relating to any products, without notice to or approval of Licensor.

SECTION 10. LIMITATION OF LIABILITIES.

10.1 EXCLUSION OF CERTAIN DAMAGES.

IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER FOR ANY
CONSEQUENTIAL. INDIRECT, SPECIAL OR INCIDENTAL DAMAGES RESULTING FROM
BREACH OF THE AGREEMENT, EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE
POSSIBILITY OF SUCH POTENTIAL LOSS OR DAMAGE.

10.2 LIMITED LIABILITY. In no event shall USR be liable for amounts in
excess of the amounts payable in accordance with the terms of this
Agreement and the applicable Schedules and Exhibits hereto.

SECTION 11. GENERAL.

11.1 FREEDOM OF ACTION. This Agreement shall not be construed to limit
either party's right to obtain services or software programs from
other sources, or to prohibit or restrict either party from
independently developing (in accordance with the provisions of Section
8.6 hereof, or acquiring competitive materials. Nothing in this
Agreement restricts either Party from making, having made, using,
leasing, licensing, selling or otherwise disposing of any products or
services whatsoever, nor is either Party's right to deal with any
other vendors, suppliers, contractors or customers limited thereby.

11.2 ENTIRE AGREEMENT. The provisions of this Agreement and the applicable
Schedules and Exhibits hereto. in effect from time to time, constitute
the entire agreement between the parties and supersede all prior
agreements. oral or written. and all other communications relating to
the subject matter hereof and thereof.

11.3 GOVERNING LAW: VENUE. This Agreement shall be construed and enforced
in accordance with the laws of the State of California applicable to
agreements between residents of California wholly executed and wholly
performed in such state. Any action or proceeding brought by either
party against the other arising out of or related to this Agreement
shall be brought only in a state or federal court of competent

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<PAGE>

jurisdiction located in the State of California or the State of
Illinois, and the parties hereby consent to the in personam
Jurisdiction of said courts.

11.4 SEVERABILITY. This Agreement is intended to constitute an independent
and distinct agreement of the parties. If any provision of this
Agreement or Schedules and Exhibits hereto is held by a court of
competent jurisdiction to be unenforceable or contrary to law, the
remaining provisions of this Agreement and the Schedules and Exhibits
hereto will remain in full force and effect.

11.5 NOTICE; AND PAYMENTS. Any notice required or permitted to be made or
given by either party hereto pursuant to this Agreement will be
sufficiently made or given on the date of issuance if sent by such
party to the other party by mail. telecopy, commercial courier,
personal delivery, or a similar reliable delivery method, addressed as
set forth below or to such other address as a party shall designate by
written notice given to the other party.

In the case of USR:

U.S. Robotics, Inc.
8100 North McCormick Blvd.
Skokie, IL 60076
Attn: Semir Sirazi

With a copy to:

U.S. Robotics, Inc.
8100 North McCormick Blvd.
Skokie, IL 60076
Attn: Legal Department

In the case of Licensor:

Livingston Enterprises, Inc.
6920 Koll Center Parkway, # 220
Pleasanton, CA 94566
Attn: Mr. Steve Willens

With a copy to:

Livingston Enterprises. Inc.
6920 Koll Center Parkway, 4220
Pleasanton, CA 94566
Attn: Vice President of Operations

-21-
<PAGE>

11.6 AMENDMENT; WAIVER. No amendment or modification of this Agreement
shall be effective unless it is set forth in a writing which refers to
the particular provisions so amended or modified and is executed by
officers of both parties. No waiver or any provision of this Agreement
shall be effective unless it is set forth in a writing which refers to
the provision so waived and the instrument containing such provision
and is executed by an officer of the party waiving its rights. No
failure or delay by either party in exercising any right, power or
remedy will operate as a waiver of any such right, power or remedy.

11.7 TRADEMARKS AND ADVERTISING. Nothing in the Agreement confers upon
Licensor any right to use USR's trademarks, trade names or service
marks in connection with any non-USR product, service, promotion,
publication, or to adopt any trademark which is confusing similar to
any Customer trademark or which includes a prominent portion of any
USR trademark so as to indicate Licensor's product equivalence or
affinity to, or applicability or compatibility with any USR product.
Licensor may represent that its products operate in conjunction with
or on certain USR products, if such is the case and if Licensees
reference to USR is not misleading. USR may, at its option, identify
the Licensed Software as having been developed by the Licensor. USR
shall take reasonable steps to modify any such reference to Licensor
if Licensor objects in writing to the manner of such use.

11.8 NOTICE OF BREACH. Except in the event of a material breach of a
provision contained in Section 3A hereof, USR shall not be deemed to
be in breach of any of its obligations hereunder unless and until
Licensor shall have given USR written notice by certified or
registered mail, return receipt requested, specifying the nature of
such breach and USR shall have failed to cure such breach within
ninety (90) days after USR'S receipt of such written notice.

11.9 CONFIDENTIALITY. In order to protect their respective trade secrets
and other proprietary or confidential information which the parties
have therefore disclosed or may hereafter disclose to one another in
connection with the negotiation and preparation of this Agreement or
with the performance by the parties of their respective duties and
obligations hereunder, the parties have entered into a separate
Non-Disclosure Agreement dated and effective 11 November, 1993, a true
and complete copy of which is attached hereto and incorporated herein
by this reference. The parties hereby agree that such Non-Disclosure
Agreement shall hereafter cover all confidential information created
or disclosed by either party pursuant hereto and that, in the event of
any conflict or inconsistency between this Agreement and such
Non-Disclosure Agreement, the provisions of this Agreement shall
control.

11.10 PUBLIC ANNOUNCEMENTS. USR and Licensor further agree that their
discussions relating to this Agreement and the existence and terms
hereof shall be treated as confidential and neither party shall issue
any press release or make any public announcement with respect thereto
without the prior review and approval of the other party.

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<PAGE>

11.11 ASSIGNMENT. This agreement will bind and inure to the benefit of the
respective Party's successors and assigns; provided that USR may not
assign (or delegate) this Agreement, in whole or in part, without
Livingston's prior written consent. Any attempted assignment (or
delegation) without such consent shall be void.

11.12 INJUNCTIVE RELIEF. If USR breaches any of the provisions contained in
Sections 3, 3A, 8.6, 11.7, 11.9 or 11.10 (or if Livingston reasonably
anticipates such a breach), then Livingston shall be entitled, in
addition to any other remedy available to it, to injunctive relief
enjoining such breach. USR acknowledges that other remedies would be
inadequate in the event of such a breach. If Livingston breaches any
of the provisions contained in Sections 3, 3A, 4, 5, 7, 8.6, 11.7,
11.9 or 11.10 (or if USR reasonably anticipates such a breach), then
USR shall be entitled, in addition to any other remedy available to
it, to injunctive relief enjoining such breach. Livingston
acknowledges that other remedies would be inadequate in the event of
such a breach.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized officers, representatives or principals.

U.S. ROBOTICS, INC. LIVINGSTON ENTERPRISES, INC.
("USR") ("Licensor")

By: /s/ George A. Vineyard By: /s/ Ronald H. Willens
-------------------------------- ----------------------------------

Name: George A. Vineyard Name: Ronald H. Willens
-------------------------------- --------------------------------

Title: Vice President Title: Vice President Operations
-------------------------------- -------------------------------

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<PAGE>

EXHIBIT 2.7

OEM SOFTWARE LICENSE AND DEVELOPMENT AGREEMENT

DATED SEPTEMBER 1, 1994

BETWEEN

LIVINGSTON ENTERPRISES, INC.

AND

U.S. ROBOTICS, INC.

LICENSED SOFTWARE, LICENSED SOURCE CODE AND SYSTEM SPECIFICATIONS

The programs listed below as Licensed Software which may be ported to execute
in machine-readable (binary) form in the USR Hardware Platforms, specified
UNIX or DOS based hosts, or remote user client machines, comprise the
"Licensed Software" and are included under this Agreement. The Licensed
Software is described below and in the related manuals at time of execution
of this Agreement which are attached hereto and made a part hereof. As
required by the Agreement, Licensor shall also make the related Source Code
which is listed or described below as Licensed Source Code or Additional
Source Code available to USR. As used herein. all references to "UNIX" mean
only the following specified releases:

(i) Sun Platform: OS4.1.3. Solaris and subsequent revisions
(ii) Hewlett Packard 9000 Platform: HPUX 9.3 and subsequent
revisions
(iii) IBM-RS 6000 Platform: AIX Rel.3.2 and subsequent
revisions.

LICENSED SOFTWARE (OBJECT CODE)

1. The executable Object Code generated by Licensor's Source Code for Release
[CONFIDENTIAL TREATMENT REQUESTED] of the Portmaster Model PM-2E dated June
1, 1994.

2. The executable Object Code generated by Licensor's Source Code for the
Frame Relay Protocol from Release [CONFIDENTIAL TREATMENT REQUESTED] of the
IRX Router product. This specifically excludes hardware device drivers
which send and receive HDLC data frames.

3. The executable Object Code distributed by Licensor as a DOS device driver
known as PPPODI.COM version 1.9 and a Microsoft Windows virtual device
driver known as PPVXD.386 version 1.0. These device drivers provide an
Ethernet system interface to the client IBM compatible PC (386 only) and
send and receive PPP compliant network frames for the TCP/IP and IPX
protocols.

2.7.1
<PAGE>

4. The executable Object Code distributed by Licensor as a DOS executable
known as NWTELNET.EXE version 1.4. This utility program provides
administrative telnet access to a host using the SPX/IPX protocol.

5. The executable Object Code distributed by Licensor as both a DOS executable
and a UNIX executable known as PMDIAL version 1.3. This utility initiates
a dial-our SLIP or PPP session on a host which supports the functionality
of the Portmaster Model PM-2E running Release [CONFIDENTIAL TREATMENT
REQUESTED]

6. The executable Object Code distributed by Licensor as a UNIX executable
known as PM-OPEN version [CONFIDENTIAL TREATMENT REQUESTED] referred to in
product documentation as PMCONSOL for X windows). This management
application utilizes the X Window systems. This executable application is
specifically licensed to Licensee until September 1, 1995.

7. The executable Object Code distributed by Licensor as both a DOS executable
and a UNIX executable known as PMRESET version 1.3. This utility resets a
serial port on a host which supports the functionality of the Portmaster
Model PM-2E running Release [CONFIDENTIAL TREATMENT REQUESTED]

8. The Object Code library known as PMLIB for Release [CONFIDENTIAL TREATMENT
REQUESTED] of the Portmaster Model PM-2E.

9. The executable Object Code known as the boot prom code (other than BIOS
specific Code which is licensed from third parties) for the Portmaster
Model PM-2E.

LICENSED SOURCE CODE

1. The Source Code used to generate Licensor's Release [CONFIDENTIAL TREATMENT
REQUESTED] of the Portmaster PM-2E dated June 1, 1994.

2. The Source Code used to generate Licensor's Frame Relay Protocol from
Release [CONFIDENTIAL TREATMENT REQUESTED] of the IRX Router product. This
specifically excludes hardware device drivers which send and receive HDLC
data frames.

3. The Source Code for the library known as PMLIB for Release [CONFIDENTIAL
TREATMENT REQUESTED] of the Portmaster Model PM-2E.

4. The Source Code for the boot prom (other than BIOS specific Code which is
licensed from third parties) described above.

ADDITIONAL LICENSED SOFTWARE (OBJECT CODE) AND LICENSED SOURCE CODE PLANNED FOR
FUTURE DEVELOPMENT.

2.7.2
<PAGE>

1. Upgrade functionality which provides dial-in and dial-out capability for
Appletalk over PPP. for the Source Code licensing of this functionality,
USR must either pay the Source Code licensing fee to the third party as
described in the contract between Livingston and the third party or
otherwise obtain the required license from the third party.

2. Upgrade functionality for providing dial-out modem pooling for Macintosh
computers on an Appletalk ethernet network. For the Source Code licensing
of this functionality, USR must either pay the Source Code licensing fee to
the third party as described in the contract between Livingston and the
third party or otherwise obtain the required license from the third party.

3. Upgrades, Enhancements, and Maintenance Modifications made available in
Licensor's general software distribution for the Portmaster Model PM-2E
during the first year of this Agreement.

4. Upgrade functionality, if any, that is developed in Phase 3 of the
Development Project with respect to (1) Modem dial-out (sharing) with
Novell Networks, (2) Additional Routing Protocols, (3) Event/Security
Logging and (4) SNMP Configuration Management as described in the Statement
of Work attached as Exhibit 4.1.

ADDITIONAL SOURCE CODE

From time to time Licensor may provide additional Source Code (including but
not limited to the Source Code for PPODI) to Licensee for the purpose of
debugging application problems. Unless specified in writing by Licensor, no
rights to this Source Code will be granted to Licensee. This Source Code
must be returned to Licensor within 90 days of receipt by Licensee.

SYSTEM SPECIFICATIONS FOR PHASE 1

Includes the current functionality of the Licensed Software as described the
manuals which are attached hereto and made a part hereof.

ADDITIONAL SYSTEM SPECIFICATIONS FOR PHASE 2

Additional functionality to be added in Phase 2 described in Exhibit 4.1 are
also included under this licensing agreement. The functionality to be added
for Phase 2 includes:

- - Appletalk over PPP
- - Appletalk dial out/modem pooling

PHASE 3 (FUTURES) SYSTEM SPECIFICATIONS

Additional functionality which may be added pursuant to Phase 3 described in
Exhibit 4.1.

- - Dial-out modem sharing for Novell networks, supporting the Novell NASI
interface and Int14 method

2.7.3
<PAGE>

- - Additional Routing protocols
- OSPF
- BGP
- EGP
- - Improved system and security event logging to Novell, Apple and UNIX
servers
- - Windows Virtual Driver (VxD replacement for PPPODI)
- - SNMP Configuration management

2.7.4
<PAGE>

EXHIBIT 3.1.1

SYSTEM INTEGRATION AND TESTING

OEM SOFTWARE LICENSE AND DEVELOPMENT AGREEMENT

DATED SEPTEMBER 1, 1994

BETWEEN

LIVINGSTON ENTERPRISES, INC.

AND

U.S. ROBOTICS, INC.

USR HARDWARE PLATFORMS

The Livingston Software is licensed to be incorporated and execute in the
following hardware platforms:

1. Current and future Total Control WAN HUB (a rack mountable chassis with 17
application slots, a mid-plane, a dual T1 direct connect interface, which
may include 1 network management card, a gateway application card and up to
16 quad modem cards, x.25 PAD, etc.) gateway application cards installed in
Total Control WAN/HUB products wherein such gateway application cards
service only direct telco interfaces such as channelized T1/E1, Analog
PSTN, primary rate ISDN and Switched 56 Connections.

2. 1 or 2 port units which may be developed consisting of standalone devices
with a fixed configuration of 1 ethernet or token ring interface and either
8 or 16 direct telco interfaces for analog PSTN, basic rate ISDN or
Switched 56 service, but not primary rate ISDN.

3. 8 or 16 port units which may be developed consisting of standalone devices
with a fixed configuration of 1 ethernet or token ring interface and either
8 or 16 direct telco interfaces for analog PSTN, basic rate ISDN or
Switched 56 service, but not primary rate ISDN.

4. A standalone unit which may be developed consisting of a fixed
configuration of 1 ethernet or token ring interface and one direct telco
interface for primary rate ISDN service which supports 24 or 30 64-KBPS
channels.

3.1.1
<PAGE>

EXHIBIT 4.1

OEM SOFTWARE LICENSE AND DEVELOPMENT AGREEMENT

DATED SEPTEMBER 1, 1994

BETWEEN

LIVINGSTON ENTERPRISES, INC.

AND

U.S. ROBOTICS, INC.

STATEMENT OF WORK

Livingston and USR will primarily be responsible for completing certain work
during the phases of the project under this Agreement. In all cases, timely
support will be required from either company to the party who is primarily
responsible for a functional area of the project.

PHASE 1

OPERATING SOFTWARE
The Livingston Operating Software includes the operating system, protocol
stacks, call control/management code, and network interface drivers.
Livingston will prepare the code to be compiled by a 32-bit compiler and
run in an Intel x86 protected mode environment. USR will port this code to
run in the Total Control Gateway card and Shared Access platforms under the
VRTX operating system.

GATEWAY CARD PACKET BUS
USR will design the Packet Bus API and will port the Livingston code to
this interface. Livingston will directly assist in this effort.

TOKEN RING NETWORK INTERFACE
Each company will independently develop its token ring network interface
cards and port the token ring drivers to their respective platforms. USR
will grant to Livingston an non-exclusive, paid-up license to use the
source code for USR's proprietary token ring driver software. Livingston
shall not distribute, sub-license, transfer, sell or lease copies of the
source code to any third party. Livingston and its successors have the
right to incorporate compiled versions, object code, in any of its products
and may distribute, sub-license, transfer, sell or lease copies of the
executable code which are bundled with the Livingston software.

4.1.1
<PAGE>

BOOT PROM/LOADER CODE
A BIOS extension will be required in the USR Total Control Gateway card and
Shared Access platforms to provide the functionality of TFTP boot, and
software download into FLASH memory. Livingston will provide the
Portmaster boot prom source code (excluding any BIOS specific code that is
licensed by Livingston from third parties) to be used as a reference to aid
USR in this development.

DOS/WINDOWS REMOTE CLIENT USER INTERFACE
USR will develop its own user interface software for DOS and Windows for
configuration and dialing, to be used with Livingston's PPPODI. Source
code modifications may need to be made to PPPODI to support this user
interface as heretofore discussed by the Parties.

NETWORK MANAGEMENT
Livingston will replace all reference to "Livingston" and "Portmaster" in
the UNIX versions of pmconsol. and replace them with names to be provided
in writing by USR. USR will distribute and support the UNIX version of
pmconsol.

USR will develop a Windows version of pmconsol which uses the pmlib library
and such version shall become part of the Licensed Software. USR will have
to modify pmlib to, at minimum, add support for the Novell LAN Workplace
protocol stacks and the WINSOCK interface.

INSTALLATION AND UTILITY PROGRAMS
USR will develop their own installation and utility programs, and use the
Livingston version of these programs as reference.

SYSTEM INTEGRATION AND TESTING
Both companies will participate in the system integration and testing of
the new products. Livingston will provide to USR any test applications or
test jigs that can aid in functional, stress, or production testing.

PHASE 2

APPLETALK OVER PPP
Livingston will develop an Appletalk connectivity solution, which will at
least include routing protocols, zone information protocols, and service
information protocols. Additionally, dial-out shared modem (modem pool)
support will be developed. This functionality will be integrated into the
base Livingston software by Livingston and ported to the USR platforms by
USR. Livingston may use Third Party software to accomplish this
functionality.

PHASE 3 FUTURES

The following functionality is anticipated in future Livingston software
releases. If developed, this functionality will be included with this Software
Licensing Agreement. This functionality may be developed by either party or be
developed jointly.

4.1.2
<PAGE>

MODEM DIAL-OUT (SHARING) WITH NOVELL NETWORKS

This is an important feature which will provide DOS INT14 and NovellNASI
support for dial out modem sharing/pooling.

WINDOWS VIRTUAL DRIVER
Livingston will develop and make available to UR a VxD Windows virtual
driver replacement for PPPODI.

ADDITIONAL ROUTING PROTOCOLS
Livingston may add support for OSPF and BGP routing protocols.

EVENT/SECURITY LOGGING
Phase 1 functionality is limited to logging security events to a UNIX
syslog daemon. Phase 1 event and security logging functionality may be
adapted to work equally well in UNIX, DOS (Novell) and Apple environment,
and additional event and security logging functionality may be added as
jointly agreed.

SNMP CONFIGURATION MANAGEMENT
The current supports MIBII. Livingston may extend SNMP management to fully
support configuration of the system with SNMP. USR will assist Livingston
in developing an Enterprise MIB.

4.1.3
<PAGE>

EXHIBIT 5.2

OEM SOFTWARE LICENSE AND DEVELOPMENT AGREEMENT

DATED SEPTEMBER 1, 1994

BETWEEN

LIVINGSTON ENTERPRISES, INC.

AND

U.S. ROBOTICS, INC.

SOFTWARE MAINTENANCE AND SUPPORT AGREEMENT

[LIVINGSTON SOFTWARE SUPPORT AGREEMENT ATTACHED]

5.1
<PAGE>

EXHIBIT 6.2

OEM SOFTWARE LICENSE AND DEVELOPMENT AGREEMENT

DATED SEPTEMBER 1, 1994

BETWEEN

LIVINGSTON ENTERPRISES, INC.

AND

U.S. ROBOTICS, INC.

--------------

ROYALTY RATES AND COMPUTATION

1. The Royalty payable with respect to Licensed Software embodied in or
bundled with gateway cards for WAN Hub products shall be computed at the
rate of:

(1) [CONFIDENTIAL TREATMENT REQUESTED] of the actual net
revenues received by USR from the sale of each gateway card;
incorporating the Licensed Software or

(2) [CONFIDENTIAL TREATMENT REQUESTED] for each dial-in modem
and/or RS232 port supported by such gateway card;

whichever is greater.

Notwithstanding the foregoing, the aggregate royalties paid by USR pursuant
to this Agreement during any 12 month period with respect to gateway cards
incorporating the Licensed Software and Upgrades thereto sold during such
period divided by the aggregate number of dial-in modems and/or RS 232
ports supported thereby shall equal an average of not less than
[CONFIDENTIAL TREATMENT REQUESTED] per modem/port. This computation shall
be performed not less frequently than once each six (6) months and, in the
event of a shortfall, USR shall have the option of paying sufficient
incremental royalties to meet this requirement or giving Livingston the
option to terminate this Agreement upon 180 days written notice. The
Parties agree to discuss the foregoing minimum average royalties per port
during the 12th month following the first customer shipment of the gateway
cards and to consider in good faith whether such provision should be
amended in light of then prevailing market conditions.

2. The Royalty payable with respect to Licensed Software embodied in or
bundled with each stand-alone of 1 or 2 port LAN access server product,
shall be computed at the rate of

6.1
<PAGE>

[CONFIDENTIAL TREATMENT REQUESTED] of actual net revenue received by USR
from sales of such products.

The Royalty payable with respect to Licensed Software embodied in or
bundled with each stand-alone or rackmountable 8 or 16 port LAN access
server product, or any standalone product supporting primary rate ISDN
telco interfaces shall be computed at the rate of [CONFIDENTIAL TREATMENT
REQUESTED] of actual net revenue received by USR from sales of such
products.

3. If USR provides Client Code or Upgrades to the Licensed Software to any of
its customers or end users of the USR Hardware Platform products and
imposes a separate fee or charge therefor, USR shall pay to Licensor an
additional Royalty equal to [CONFIDENTIAL TREATMENT REQUESTED] of the
actual net revenue derived by USR from such separate fees or charges.

4. For purposes of this Exhibit 6.2 and the Agreement to which it is attached,
"net revenue" means the payments actually received by USR with respect to
sales of the products in question, less any rebates, refunds, returns,
sales taxes, use taxes or other transaction taxes, shipping and other
handling charges actually incurred by USR which are paid or owed to
unrelated third parties and are separately invoiced to USR's customers.

6.2
<PAGE>

LOGO

SOFTWARE SUPPORT AGREEMENT AGREEMENT NO. _______________
______________________________________________________________________________

CUSTOMER LOCATION (SITE) CUSTOMER BILLING ADDRESS

____________________________________ _______________________________________
Name Name

____________________________________ _______________________________________
Address Address

____________________________________ _______________________________________
City State Zip City State Zip

____________________________________ _______________________________________
Primary Contact Telephone Customer PO No.

____________________________________
Alternate Contact Telephone

This Agreement includes the Terms and Conditions and schedules attached
(collectively, the "Agreement") and is entered into by and between Livingston
Enterprise and the Customer set forth above.

1.0 Product Schedule

Warranty
Product # Description Expiration Annual Charge
______________________________________________________________________________
1.
______________________________________________________________________________
2.
______________________________________________________________________________
3.
______________________________________________________________________________

Comments Total Annual Charge $ _____________

Customer acknowledges that Customer has read, understands, and agrees to be
bound by the Terms and Conditions set forth in this Agreement.

__________________________________ Livingston Enterprises

By:_______________________________ By:___________________________________
(Signature) (Signature)

__________________________________ ______________________________________
Name (Please print or type) Name (Please print or type)

__________________________________ ______________________________________
Title Date Title Date

Page 1 of 3
<PAGE>

SOFTWARE SUPPORT AGREEMENT
_____________________________________________________________________________

2.0 DEFINITIONS

2.1 "Products" mean all of the software items listed on the Product Schedule
on the front side of this agreement and on any Supplemental Product Schedule.

2.2 "Software" means the software supplied by Livingston Enterprises.

2.3 "Site" means the location specified on the front side of the Agreement.

3.0 TERM OF AGREEMENT

3.1 This Agreement shall be effective on the Commencement Date specified on
the front side provided it has been signed by an authorized Customer
representative and accepted by Livingston Enterprises.

3.2 The initial term of this Agreement is twelve months from the
Commencement Date. the Agreement will be automatically renewed for
additional annual periods at Livingston Enterprises' then prevailing support
charges. This Agreement may be terminated by either party at any time after
the initial term by delivery of 60 days written notice. If either party
fails to perform its obligations under this Agreement and such failure
continues for a period of twenty (20) days after written notice thereof, the
other party shall have the right to terminate this Agreement.

3.3 Coverage for products added to this Agreement after the Commencement Date
shall commence at the expiration of the Products' warranty period and shall
terminate at the termination of this Agreement. Coverage for added products
will be billed at Livingston Enterprises support rates prevailing at the time
the Products are added, at the same invoice frequency as other billings under
this Agreement.

4.0 ELIGIBILITY FOR SUPPORT

4.1 This Agreement shall apply to all Software Products supplied by Livingston
Enterprises located at the Site, including Products added after the Agreement's
Commencement Date. When Customer purchases or licenses additional products from
Livingston Enterprises for shipment to the Site, Customer agrees to add these
products to this Agreement at Livingston Enterprises then prevailing support
charges.

4.2 Products must be at Livingston Enterprises specified revision level to be
eligible for coverage. Products covered under warranty automatically meet this
requirement.

5.0 SERVICE PROVIDED

5.1 All services provided herein are performed within Livingston Enterprises'
normal working hours of 8 a.m. to 5 p.m. Pacific Tim, Monday through Friday,
excluding Livingston Enterprises holidays.

5.2 Livingston Enterprises will distribute new releases of Software on a
periodic basis as stated in this Agreement. Releases will be distributed on
the same type of tape media on which the original product was delivered. One
(1) copy of Software will be sent for the Site covered by this Agreement.
Customer agrees to install the new releases.

5.3 Livingston Enterprises will provide telephone consulting on the routine
use and operation of the software. Telephone consulting is limited to
questions not explicitly covered in documentation provided by Livingston
Enterprises. Telephone consulting will include software problem reporting
service, which will be handled as follows:

Critical Problems - For problems classified by Livingston Enterprises as
critical to the fundamental operation of the Product, Livingston Enterprises
will generate a fix and send it to the Customer on the appropriate tape media
as soon as possible. Livingston Enterprises will contact the Customer with a
status report within one (1) working day after the initial problem report
call.

Non-critical Problems - Livingston Enterprises will attempt to install fixes
for problems classified by Livingston Enterprises as non-critical to the
fundamental operation of the Product in the next release of the Software.
When feasible, Livingston Enterprises will describe temporary work-arounds to
the Customer.

6.0 EXCLUSIONS

6.1 Livingston Enterprises obligation to provide support service under this
Agreement is contingent upon proper use of the Product. Livingston
Enterprises shall be under no obligation to provide services under this
Agreement should such service be required in Livingston Enterprises' opinion,
because of failure of the Product caused by improper use,

Page 2 of 3
<PAGE>

accident or because Software is not maintained at Livingston Enterprises
specified release level.

6.2 On-site support by Livingston Enterprises personnel at the Site is not
provided under this Agreement.

6.3 Operating supplies or accessories such as magnetic tape are not covered by
this Agreement.

7.0 CUSTOMER RESPONSIBILITIES

7.1 Customer shall notify Livingston Enterprises immediately of Software
malfunction and provide Livingston Enterprises with complete information
concerning the malfunction.

7.2 Customer shall designate a Primary and Alternate system Administrator for
the Site. Authorized use of telephone consulting services described herein is
limited to these designated System Administrators.

8.0 CHARGES

8.1 Support charges for this Agreement will be invoiced annually in advance.
Invoices shall be due and payable upon receipt.

8.2 Livingston Enterprises may at its sole option immediately terminate or
temporarily suspend all of its responsibilities stated in this Agreement. In
the event Customer is delinquent in the payment of any invoice from Livingston
Enterprises for a period in excess of thirty (30) days.

8.3 Customer will be invoiced for any Products added to this Agreement at the
expiration of the Product's warranty. Charges for a partial period of coverage
shall be prorated on the basis of a 30-day month.

8.4 Livingston Enterprises may change support charges at any time after the
expiration of the minimum initial term upon providing sixty (60) days prior
written notice.

8.5 Charges for services not covered under this Agreement shall be invoiced at
Livingston Enterprises' time and materials rates in effect at the time service
is performed.

8.6 Charges are exclusive of all sales, use, and like taxes. Customer shall
pay or reimburse Livingston Enterprises for all such taxes.

9.0 DISCLAIMER OF WARRANTY

9.1 LIVINGSTON ENTERPRISES DISCLAIMS ALL WARRANTIES EXPRESS OR IMPLIED
INCLUDING ALL IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A
PARTICULAR PURPOSE.

10.0 LIVINGSTON ENTERPRISES LIABILITY TO THE CUSTOMER FOR DAMAGES FROM ANY
CAUSE WHATSOEVER AND REGARDLESS OF THE FORM OF ACTION WHETHER IN CONTRACT OR
TORT INCLUDING NEGLIGENCE, SHALL BE LIMITED TO THE PURCHASE PRICE OF THE
SPECIFIC PRODUCT BEING SERVICED WHICH CAUSED THE DAMAGE. LIVINGSTON
ENTERPRISES SHALL NOT BE LIABLE FOR DAMAGES RESULTING FROM LOSS OF DATA,
PROFITS, USE OF PRODUCTS, OR FOR ANY INCIDENTAL, INDIRECT, OR CONSEQUENTIAL
DAMAGES IN CONNECTION WITH THIS AGREEMENT OR SERVICES OR MATERIALS PROVIDED.

11.0 GENERAL

11.1 This Agreement is the complete agreement between the parties with respect
to the subject matter therein, and supersedes all other understandings whether
written or oral, and may only be modified in writing signed by both parties.

11.2 The waiver of any breach or default under this Agreement shall not
constitute the waiver of any subsequent breach or default.

11.3 This Agreement shall be governed by the laws of California.

Page 3 of 3
<PAGE>

AMENDMENT NO. 1
TO OEM SOFTWARE LICENSE AND DEVELOPMENT AGREEMENT

DATED SEPTEMBER 1, 1994

BETWEEN

LIVINGSTON ENTERPRISES, INC.
AND
U.S. ROBOTICS ACCESS CORP.
(F/K/A U.S. ROBOTICS, INC.)

This Amendment (this "Amendment") is made effective December 17, 1996, by and
between U.S. Robotics Access Corp. ("USR") (formerly U.S. Robotics, Inc.) a
Delaware corporation with executive offices at 8100 N. McCormick Blvd.,
Skokie, IL 60076, as licensee, and Livingston Enterprises, Inc.
("Livingston" or "Licensor"), a California corporation with its executive
offices at 4464 Willow Road, Pleasanton, CA 94588. USR and Livingston are
sometimes referred to herein individually as a "Party" and collectively
"Parties."

WHEREAS, the Parties heretofore entered into a certain OEM Software License
and Development Agreement dated September 1, 1994 (the "License Agreement");
and

WHEREAS, the Parties have had certain disputes and engaged in litigation with
respect to the interpretation of the License Agreement; and

WHEREAS, the Parties now wish to settle and compromise such disputes and
litigation and, in connection therewith, desire to amend the License
Agreement as set forth herein.

NOW, THEREFORE, in consideration of the premises, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
the Parties hereby agree as follows:

1. Except as otherwise expressly provided herein or as the context
otherwise clearly requires, all references to capitalized terms set forth in
this Amendment shall have the same meanings as provided in the License
Agreement.

2. This Amendment shall become effective upon its execution and delivery by
both Parties, which may be effected with counterparts. Upon and after the
effectiveness of this Amendment, all references in the License Agreement as
amended hereby to "this Agreement" shall mean and included the License
Agreement as so amended.

3. Section 2.9 ("Maintenance Modification") of the License Agreement is
hereby amended by the deletion of the words "changes or" appearing after the
words "or make other" in the third line thereof.

<PAGE>

4. Section 3.1 of the License Agreement is hereby amended by the deletion
of the word "perpetual" appearing after the word "non-transferable" in the
third line thereof.

5. Section 3 of the License Agreement is hereby modified by the insertion
at the end thereof of a new Section 3.5 as follows:

3.5 ACKNOWLEDGMENT OF COMOS. Commencing on and after
January 1, 1997, USR shall exert commercially reasonable
efforts to acknowledge in its marketing, advertising and
product promotional materials, where appropriate, for USR
products which incorporate some portion of the Licensed
Software, the fact that the USR Code developed for such
products is based upon Livingston's ComOS Code under
license. The Parties acknowledge that advanced commitments
are required for the production and distribution of many
marketing, advertising and product promotion materials and
that USR will not be expected to revise all such materials
immediately, but that USR will exert commercially reasonable
efforts to complete such revisions within 120 days of
January 1, 1997.

6. Section 3A.1.2(d) is hereby amended to delete the second and third
sentences.

7. Section 3A.1.4 of the License Agreement is hereby amended in its entirety
to read as follows:

3A.1.4. The right and license to the Licensed Source code
granted in this Section 3A shall terminate at the close of
business on December 31, 1997, except as otherwise expressly
provided in Section 3A.1.5 below or as otherwise authorized
in writing by Livingston. Such termination shall become
effective on such date without any further act or notice on
the part of Livingston.

8. Section 3A.1.5 of the License Agreement shall be amended in its entirety
to read as follows:

3A.1.5 Upon termination (December 31, 1997) of the right and
license to the Licensed Source Code granted pursuant to
Section 3A, USR shall promptly (no later than three business
days) return and deliver to a mutually agreed upon escrow
agent (i) a true and complete copy of the most current version
of Licensed Source Code including any code files containing
any Derivative Works created by USR; and, (ii) a true and
complete copy of the most current version of the Licensed
source Code. The escrow agent will hold such copies of the
Licensed source Code intrust for the benefit of USR until
December 31, 1998, for the sole purpose of USR access for
the customer support and maintenance purposes that are
described below and for archival purposes. Such escrow
account will be maintained at the sole cost of USR and will
be in accordance with the terms and conditions and
substantially in the form as set forth in Exhibit 3A.1.5.
All other copies of the Licensed Source Code described above
shall be removed from backup and destroyed by USR in
accordance with Sections 3A1.2(d) and (e) of the Agreement.

2
<PAGE>

USR shall have the right, until December 31, 1998 to receive
from the escrow agent the Licensed Source Code (or any
appropriate portions) under the following conditions and
circumstances:

A. Use of the Licensed Source Code by USR shall be
strictly limited to the maintenance and support of
its customer base which has sublicensed the
Licensed Software under the terms of the
Agreement. Specifically, such maintenance and
support shall be limited to: (i) Bug fixes,
(ii) Maintenance Modifications, (as such
definition has been revised herein) and
(iii) identification and correction of "latent
defects" in the Licensed Source Code which cause
"significant" problems for USR customers. It is
expressly agreed by USR that under no
circumstances shall the Licensed Source Code be
used for the development of Enhancements or, to
accomplish any feature advances in the Licensed
Source Code and/or Licensed Software. The
reference model for such a determination shall be
Livingston's ComOS, as archived in the escrow
account referred to above.

B. To effect a release of the Licensed Source Code by
the escrow agent, USR shall submit to the
designated Livingston contact (specified in E.
below), a written Notice requesting the Licensed
Source Code which shall contain the following
information:

(i) a description of, and relevant information relating to,
the nature of the Bug, Maintenance Modification, or
"latent defect" in the Licensed Source Code;

(ii) whether the above has been duplicated;

(iii) why USR believes that it needs the Licensed Source
Code to fix the Bug, perform the Maintenance
Modification or fix the latent defect;

(iv) an estimate of the time necessary to perform the
authorized work.

C. Acceptance of a USR request based on the Notice
described above shall not be unreasonably
withheld by Livingston. Livingston will use its
"best efforts" to notify the escrow agent to
release the Licensed Source Code to USR as soon as
is practically possible, but no later than five
(5) business days following receipt of USR's
Notice. When USR has completed its authorized use
of the Licensed Source Code, it will delete all
copies that it has obtained and certify to
Livingston that it has done so.

D. If Livingston rejects the USR request, based upon
good faith concern that the request appears to be
outside the authorized scope of use, it will
notify USR of such rejection within five (5)
business days following receipt of USR's Notice.
The parties will then attempt to negotiate in good
faith, to resolve any

3
<PAGE>

misunderstandings and resolve the issue. If necessary,
the negotiations will be escalated to designated officers
(specified below) of the respective parties. If, within
a period of fifteen (15) business days, the parties have
not resolved their dispute, the matter will be submitted
to a third party arbitrator, to be designated in advance
by the parties. Such arbitrator will be familiar with
software issues and computer law, the costs of the
arbitrator to be split between the parties. The parties
agree to use all reasonable efforts to resolve the matter
within thirty (30) days of the engagement of the
arbitrator. The parties agree to abide by the decision
of the arbitrator on whether the Licensed Source Code
shall be released to USR by the escrow agent.

E. The primary Livingston contact for Notices shall
be Carl Rigney, the secondary Livingston contact
shall be David Hanson, with copies to Richard
Godfrey. The primary USR contact authorized to
submit notices shall be Ken Peirce, with copies to
Rebecca Maxwell. The designated Livingston
officer for escalation shall be Steven Willens.
The designated USR contact for escalation shall be
Ross Manire. The parties agree to immediately
notify one another upon the changes of any of the
above contacts.

F. Upon termination of the Agreement on December 31, 1998,
USR will immediately remove and destroy all copies of
Licensed source Code in its possession, and the
Escrow Agreement will terminate. The escrow agent
will then destroy all copies of the Licensed Source
Code in its possession.

9. Section 5.2 of the License Agreement shall be amended in its entirety to
read as follows:

5.2 ONGOING MAINTENANCE AND SUPPORT. From and after
September 30, 1996, Livingston shall have no ongoing
maintenance or support obligations to USR in connection with
the Licensed Software, except that Livingston shall provide
to USR, upon request, copies of any and all support and user
documentation, bug fix notes, troubleshooting tips, etc.
which Livingston routinely provides to its customers using
any version of Livingston's ComOS.

10. Section 8.1 of the License Agreement is hereby amended in its entirety to
read as follows:

8.1 TERM OF AGREEMENT. This Agreement shall become
effective on the first day that is has been executed by an
authorized representative of USR and by an authorized
representative of Livingston. Unless sooner terminated as
provided hereunder, this Agreement shall expire on
December 31, 1998.

11. Section 8.4 of the License Agreement is hereby amended in its entirety to
read as follows:

4
<PAGE>

8.4 SURVIVAL AFTER TERMINATION/EXPIRATION. The termination
or expiration of this Agreement shall not affect any
liability of USR accrued pursuant hereto or any paid-up
right or license granted to USR hereunder. In the event of
termination or expiration of this Agreement, in whole or in
part, any right, license or sublicense exercised or granted
prior to such termination or expiration (including those for
internal use by USR, USR's Subsidiaries, and other third
parties such as dealers, distributors, agents, customers,
and endusers), and any corresponding payment obligations of
USR hereunder, shall survive and continue and the rights of
USR to further market, distribute and sublicense the
Licensed Source Code shall terminate. Without limiting the
generality of the foregoing, (1) USR may for a period of two
(2) months, sublicense, sell, lease and distribute any
inventory of products based on or containing Licensed
Software, on hand at the time of such termination or
expiration, (2) USR may for a term of two (2) months,
continue to exercise the rights and licenses granted
hereunder to fill any orders received by USR, its
Subsidiaries, distributors, agents or dealers received and
accepted from their customers prior to the effective date of
termination or expiration, and (3) USR may indefinitely
continue to exercise the rights and licenses granted
hereunder as necessary to provide maintenance and support
for customers. Neither, USR, its Subsidiaries, dealers,
distributors, agents nor customers shall have any obligation
to return to Licensor any copies of Licensed Software or
Derivative Works thereof made or obtained prior to such
termination.

In addition, the provisions of Sections 2, 4.5, 7, 8, 10,
and 11 shall survive and continue with respect to all
Licensed Software that is the subject of this Agreement at
the time of termination.

12. Section 8.2 of the License Agreement shall be amended by the deletion of
all of the text thereof appearing after the words "in reasonable detail" at
the end of the third sentence thereof.

13. Section 11.5 of the License Agreement shall be amended by the substitution
of the name "Rick Spotts" for "Semir Sirazi" as the principle contact person for
notices sent to USR, and by the substitution of the following for the address
for Livingston Enterprises, Inc. to which notices and copies of notices
addressed to Livingston shall be sent: 4464 Willow Road, Pleasanton, CA 94588.

14. The License Agreement shall be further amended by the deletion of the
following sections, subsections and exhibits: 2.3 ("Development Project");
2.4 ("Licensor Development Services"); 2.12 ("Third Party Software"); 2.15.
("OEM Supply Agreement"); 4.1 (Scope); 4.2 (Schedule); 4.3 (Quality of Work);
4.4 (Third Party Software Development); 5.1 (Initial Maintenance Period); 5.3
(Enhancements and Upgrades); 5.4 (Changes to Licensed Software); 5.5
(Cooperation by USR); 5.6 (Customer Support Procedures); 6.1 (Non-Recurring
Engineering Fees); 6.3 (Third Party Software Fees); 6.5 (Support and
Maintenance Fees); 8.3.3; Exhibit 4.1 and Exhibit 5.2.

15. Except as expressly otherwise provided in this Amendment, the terms,
conditions and provisions of the License Agreement shall continue in full
force and effect.

5
<PAGE>

IN WITNESS WHEREOF, the Parties have caused this Amendment to be executed
by their duly authorized officers, effective as of the date first set forth
above.

U.S. ROBOTICS ACCESS CORP. LIVINGSTON ENTERPRISES, INC.
("USR") ("LIVINGSTON")

By: /s/ George A. Vineyard By: /s/ Richard J. Godfrey
------------------------------------- --------------------------------

Name: George A. Vineyard Name: Richard J. Godfrey
----------------------------------- ------------------------------

Title: Vice President and General Counsel Title: General Counsel
----------------------------------- -----------------------------

<PAGE>
EXHIBIT 11.1

<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
---------------------------------------- --------------------------
8/31/94 8/31/95 8/31/96 5/31/97
------------ ------------ ------------ 5/31/96 ------------
------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net income........................................ 1,027,000 4,904,000 8,845,000 7,543,000 10,381,000
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Weighted average common shares outstanding........ 12,150,000 12,150,000 12,168,838 12,162,870 12,312,514
Common stock options, utilizing treasury stock
method when dilutive............................ -- 418,640 1,659,827 1,506,219 1,787,819
Staff Accounting Bulletin No. 83 issuances and
grants (1)...................................... 273,333 273,333 273,333 273,333 273,333
------------ ------------ ------------ ------------ ------------
Weighted average shares outstanding............... 12,423,333 12,841,973 14,101,998 13,942,422 14,373,666
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Earnings per share:............................... 0.08 0.38 0.63 0.54 0.72
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>

- ---------

(1) Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No.
83, common and preferred stock issued for consideration below the assumed
initial public offering (IPO) price, and stock options and warrants granted
with exercise prices below the IPO price during the 12-month period
preceding the date of the initial filing of the Registration Statement, have
been included in the calculation of common equivalent shares, using the
treasury stock method, as if they were outstanding for all periods
presented.

<PAGE>
EXHIBIT 23.1

The Board of Directors
Livingston Enterprises, Inc.

The audits referred to in our report dated June 18, 1997 included the
related financial statement schedule as of May 31, 1997, and for each of the
years in the three-year period ended August 31, 1996 and the nine-month period
ended May 31, 1997, included in the registration statement. This financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement schedule
based on our audits. In our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.

We consent to the use of our reports included herein and to the reference to
our firm under the heading "Experts" and "Selected Consolidated Financial Data"
in the prospectus.

Palo Alto, CA KPMG PEAT MARWICK LLP
June 24, 1997