AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 16, 1997
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
LIVINGSTON ENTERPRISES, INC.

(Exact name of Registrant as specified in its charter)

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

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:

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

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

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: / /
--------------------------

CALCULATION OF REGISTRATION FEE

PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED PRICE (1) REGISTRATION FEE

Common Stock, no par value per share.................................. $40,000,000 $12,122

(1) Estimated pursuant to Rule 457(o) solely for purposes of calculating the
registration fee.
--------------------------

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.

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

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.

PROSPECTUS (SUBJECT TO COMPLETION)
ISSUED MAY , 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.
-------------------

PRICE $ A SHARE
-------------------

UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS (1) COMPANY (2) SHAREHOLDERS
--------------- --------------- --------------- --------------

PER SHARE............................... $ $ $ $
TOTAL (3)............................... $ $ $ $

- ------------
(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 & CO.
INCORPORATED

HAMBRECHT & QUIST

ROBERTSON, STEPHENS & COMPANY

, 1997

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.
------------------------

TABLE OF CONTENTS

PAGE
-----

Prospectus Summary......................................................................................... 3
The Company................................................................................................ 4
Risk Factors............................................................................................... 5
Use of Proceeds............................................................................................ 15
Dividend Policy............................................................................................ 15
Capitalization............................................................................................. 16
Dilution................................................................................................... 17
Selected Consolidated Financial Data....................................................................... 18
Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 19
Business................................................................................................... 26
Management................................................................................................. 36
Certain Transactions....................................................................................... 43
Principal and Selling Shareholders......................................................................... 44
Description of Capital Stock............................................................................... 46
Shares Eligible for Future Sale............................................................................ 47
Underwriters............................................................................................... 49
Legal Matters.............................................................................................. 51
Experts.................................................................................................... 51
Additional Information..................................................................................... 51
Index to Consolidated Financial Statements................................................................. F-1

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

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."

INTEGRATED REMOTE ACCESS SOLUTIONS
FOR INTERNET SERVICE PROVIDERS

Livingston's high performance, integrated remote access solutions enable 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. The Company believes that more ISPs
worldwide use Livingston's remote access servers than those of any other vendor.
Since the Company's introduction of its first remote access server in 1990, over
2,000 ISPs have purchased the Company's products.

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, the Company 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.

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. The Company believes that more
ISPs worldwide use Livingston's remote access servers than those of any other
vendor. 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.

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. 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

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

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

SIX MONTHS
ENDED
YEARS ENDED AUGUST 31, -----------
----------------------------------------------------- FEB. 29,
1992 1993 1994 1995 1996 1996
--------- --------- --------- --------- --------- -----------

CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net revenues............................................... $ 1,424 $ 2,083 $ 6,180 $ 20,461 $ 46,107 $ 21,405
Gross profit............................................... 951 1,121 3,327 12,407 27,540 12,745
Net income................................................. 320 86 1,027 4,904 8,845 4,852
Net income per share (2)................................... $ .03 $ .01 $ .08 $ .38 $ .62 $ .35
Shares used in per share computations (2).................. 12,525 12,525 12,525 12,945 14,214 13,725

FEB. 28,
1997
-----------

CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net revenues............................................... $ 31,315
Gross profit............................................... 17,356
Net income................................................. 4,685
Net income per share (2)................................... $ .32
Shares used in per share computations (2).................. 14,473

FEBRUARY 28, 1997
--------------------------
ACTUAL AS ADJUSTED(3)
--------- ---------------

CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents............................................................................ $ 7,256 $
Working capital...................................................................................... 17,749
Total assets......................................................................................... 27,649
Total shareholders' equity........................................................................... 20,118

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

(1) Based on 12,365,060 shares of Common Stock outstanding as of February 28,
1997. Excludes 2,444,275 shares of Common Stock issuable upon the exercise
of options outstanding under the Company's 1994 Stock Option Plan at
February 28, 1997, with a weighted average exercise price of $3.17 per
share, and 246,250 shares of Common Stock issuable upon the exercise of
options granted under the Company's 1994 Stock Option Plan subsequent to
February 28, 1997, with a weighted average exercise price of $14.23 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 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. The Company believes that more
ISPs worldwide use Livingston's remote access servers than those of any other
vendor. 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 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.

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 six months ended February 28, 1997, royalty
revenues from USR represented 6.2% and 12.9% 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. 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."

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 second 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. 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 six
months ended February 28, 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 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, 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. 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 Communications, Inc. ("Ascend"),
USR and Cisco Systems, Inc. ("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. 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 six months ended February 28, 1997, 88.1% and 82.9%,
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 59.3%, respectively, of product revenues during such
periods. The Company's top reseller in each period represented 27.2% and 17.4%,
respectively, of the Company's product revenues and the second largest reseller
in each period represented 13.3% and 10.3%, 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 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 44.7% of the Company's product revenues in fiscal
1996 and the six months ended February 28, 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 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.
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 and 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 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 LEGAL PROCEEDINGS. The Company recently settled a
lawsuit with USR (the "Settlement") arising from a dispute regarding an OEM
Software License and Development Agreement between the parties dated September
1, 1994 (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. 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. See "-- Dependence on Proprietary Technology."
The occurrence of future litigation with USR could have a material adverse
effect on the Company's business, results of operations and financial condition.

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 believes that this case is
without merit 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.

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. See "--Risks Associated with Legal Proceedings."

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 could 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
"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. 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 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 April 30, 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 12,370,272 shares of
Common Stock 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) 33,000 shares
will be eligible for sale

beginning 90 days after the date of this Prospectus; and (iii) 12,337,272 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."

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.

CAPITALIZATION

The following table sets forth the consolidated capitalization of the
Company as of February 28, 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.

FEBRUARY 28, 1997
----------------------

ACTUAL AS ADJUSTED
--------- -----------

(IN THOUSANDS,
EXCEPT SHARE DATA)

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; 12,365,060 shares issued and
outstanding, actual; 100,000,000 shares authorized; shares issued and outstanding,
as adjusted............................................................................. $ 894
Deferred stock compensation............................................................... (568)
Retained earnings......................................................................... 19,792
--------- -----------
Total shareholders' equity............................................................ 20,118
--------- -----------
Total capitalization.............................................................. $ 20,118 $
--------- -----------
--------- -----------

- ---------

(1) Excludes 2,444,275 shares of Common Stock issuable upon the exercise of
options outstanding under the Company's 1994 Stock Option Plan at February
28, 1997, with a weighted average exercise price of $3.17 per share, and
246,250 shares of Common Stock issuable upon the exercise of options granted
under the Company's 1994 Stock Option Plan subsequent to February 28, 1997,
with a weighted average exercise price of $14.23 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.

DILUTION

The net tangible book value of the Company as of February 28, 1997, was
$19,966,000 or $1.61 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 February 28, 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:

Assumed initial public offering price per share................... $
Net tangible book value per share before offering............... $ 1.61
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........................ $
---------
---------

The following table summarizes on an as adjusted basis, as of February 28,
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):

SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
---------------------- ---------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
--------- ----------- --------- ----------- ------------

Existing shareholders...................................... % $ % $
New public investors.......................................
--------- ----- --------- -----
Total.................................................. % $ %
--------- ----- --------- -----
--------- ----- --------- -----

The foregoing analysis assumes no exercise of the Underwriters'
over-allotment option and no exercise of stock options outstanding at February
28, 1997. As of February 28, 1997, there were options outstanding to purchase a
total of 2,444,275 shares of Common Stock at a weighted average exercise price
of $3.17 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 May 12, 1997, no options or shares had been issued under any
of these plans. Subsequent to February 28, 1997, the Board of Directors granted
options under the 1994 Stock Plan to purchase an additional 246,250 shares of
Common Stock at a weighted average exercise price of $14.23 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.

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 consolidated balance sheet data at August 31, 1995 and 1996 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 six months
ended February 29, 1996 and February 28, 1997 and the consolidated balance sheet
data at February 28, 1997 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 six months ended February
28, 1997 are not necessarily indicative of results to be expected for future
periods.

SIX MONTHS ENDED
YEAR ENDED AUGUST 31, ------------------------
----------------------------------------------------- FEB. 29, FEB. 28,
1992 1993 1994 1995 1996 1996 1997
--------- --------- --------- --------- --------- ----------- -----------

(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Product revenues.................................. $ 1,424 $ 2,083 $ 6,180 $ 20,138 $ 43,229 $ 20,442 $ 27,281
Royalty revenues.................................. -- -- -- 323 2,878 963 4,034
--------- --------- --------- --------- --------- ----------- -----------
Net revenues...................................... 1,424 2,083 6,180 20,461 46,107 21,405 31,315
Cost of revenues.................................. 473 962 2,853 8,054 18,567 8,660 13,959
--------- --------- --------- --------- --------- ----------- -----------
Gross profit.................................... 951 1,121 3,327 12,407 27,540 12,745 17,356
Operating expenses:
Research and development........................ 126 277 462 890 2,512 721 1,853
Selling and marketing........................... 213 327 673 2,831 8,670 3,441 6,434
General and administrative...................... 122 401 449 667 1,771 544 1,384
--------- --------- --------- --------- --------- ----------- -----------
Total operating expenses...................... 461 1,005 1,584 4,388 12,953 4,706 9,671
--------- --------- --------- --------- --------- ----------- -----------
Operating income.................................. 490 116 1,743 8,019 14,587 8,039 7,685
Interest income (expense), net.................... (6) (9) (21) (20) 85 1 124
--------- --------- --------- --------- --------- ----------- -----------
Income before income taxes........................ 484 107 1,722 7,999 14,672 8,040 7,809
Provision for income taxes........................ 164 21 695 3,095 5,827 3,188 3,124
--------- --------- --------- --------- --------- ----------- -----------
Net income.................................... $ 320 $ 86 $ 1,027 $ 4,904 $ 8,845 $ 4,852 $ 4,685
--------- --------- --------- --------- --------- ----------- -----------
--------- --------- --------- --------- --------- ----------- -----------
Net income per share.............................. $ .03 $ .01 $ .08 $ .38 $ .62 $ .35 $ .32
--------- --------- --------- --------- --------- ----------- -----------
--------- --------- --------- --------- --------- ----------- -----------
Shares used in per share computations (1)......... 12,525 12,525 12,525 12,945 14,214 13,725 14,473

AUGUST 31,
------------------------------------------------------- FEB. 28,
1992 1993 1994 1995 1996 1997
--------- --------- --------- --------- ----------- -----------
(IN THOUSANDS)

CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.................................. $ 187 $ 46 $ 627 $ 1,486 $ 3,749 $ 7,256
Working capital............................................ 323 509 1,511 5,891 14,243 17,749
Total assets............................................... 554 839 2,706 9,303 21,321 27,649
Total shareholders' equity................................. 375 352 1,379 6,283 15,323 20,118

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

(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.

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. 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."

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 February 28, 1997, cumulative royalties from USR totaled $7.2
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 Legal Proceedings."

International sales accounted for 29.7% and 44.7% of the Company's product
revenues in fiscal 1996 and the first six 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, 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 two quarters 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

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:

SIX MONTHS ENDED
YEAR ENDED AUGUST 31, ------------------------
------------------------------- FEB. 29, FEB. 28,
1994 1995 1996 1996 1997
--------- --------- --------- ----------- -----------

Product revenues...................................... 100.0% 98.4% 93.8% 95.5% 87.1%
Royalty revenues...................................... -- 1.6 6.2 4.5 12.9
--------- --------- --------- ----- -----
Net revenues.......................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues...................................... 46.2 39.4 40.3 40.5 44.6
--------- --------- --------- ----- -----
Gross profit........................................ 53.8 60.6 59.7 59.5 55.4
Operating expenses:
Research and development............................ 7.4 4.3 5.5 3.3 5.9
Selling and marketing............................... 10.9 13.8 18.8 16.1 20.5
General and administrative.......................... 7.3 3.3 3.8 2.5 4.4
--------- --------- --------- ----- -----
Total operating expenses.......................... 25.6 21.4 28.1 21.9 30.8
--------- --------- --------- ----- -----
Operating income...................................... 28.2 39.2 31.6 37.6 24.6
Interest income (expense), net........................ (0.3) (0.1) 0.2 0.0 0.4
--------- --------- --------- ----- -----
Income before income taxes............................ 27.9 39.1 31.8 37.6 25.0
Provision for income taxes............................ 11.3 15.1 12.6 14.9 10.0
--------- --------- --------- ----- -----
Net income........................................ 16.6% 24.0% 19.2% 22.7% 15.0%
--------- --------- --------- ----- -----
--------- --------- --------- ----- -----

Gross margin on product revenues...................... 53.8% 60.0% 57.0% 57.6% 48.8%
--------- --------- --------- ----- -----
--------- --------- --------- ----- -----

SIX MONTHS ENDED FEBRUARY 28, 1997 COMPARED TO SIX MONTHS ENDED FEBRUARY 29,
1996

NET REVENUES. Net revenues increased 46.3% to $31.3 million for the six
months ended February 28, 1997 as compared to $21.4 million for the six months
ended February 29, 1996. The increased net revenues reflect increased sales of
the Company's PortMaster 3 product and increased royalties, partially offset by
declining sales of the PortMaster 2 products. Royalty revenues were $4.0 million
and $963,000 for the six months ended February 28, 1997 and February 29, 1996,
respectively. Sales to international customers accounted for approximately 44.7%
of product revenues for the six months ended February 28, 1997 compared to 26.2%
for the prior year period.

GROSS PROFIT. The Company's gross profit for the six months ended February
28, 1997 increased to $17.4 million from $12.7 million for the six months ended
February 29, 1996. This increase was attributable to the introduction and
increased sales of the PortMaster 3 products and to increased royalties,
partially

offset by $2.0 million in charges for obsolete PortMaster 2 product and
component inventory. Gross margin on product revenues declined to 48.8% for the
six months ended February 28, 1997, compared to 57.6% for the comparable period
of 1996. The lower gross margin was due to the charge for obsolete PortMaster 2
inventory and due to approximately $840,000 reserved to provide 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 compensation, amounts paid for outside services, and costs of
materials utilized in product development. Research and development expenses
increased to $1.9 million, or 5.9% of net revenues, during the six months ended
February 28, 1997, from $721,000, or 3.3% of net revenues, for the six months
ended February 29, 1996. This 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 $6.4
million, or 20.5% of net revenues, for the six months ended February 28, 1997
from $3.4 million, or 16.1% of net revenues, for the six months ended February
29, 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. 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 $1.4 million, or 4.4% of net
revenues, for the six months ended February 28, 1997 from $544,000, or 2.5% 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
six months of fiscal 1997 was 40.0% compared to 39.6% 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.

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.

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 six 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.

QUARTER ENDED
----------------------------------------------------------------
NOV. 30, FEB. 29, MAY 30, AUG. 31, NOV. 30, FEB. 28,
1995 1996 1996 1996 1996 1997
--------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

Product revenues................................ $ 8,617 $ 11,825 $ 12,423 $ 10,364 $ 11,415 $ 15,866
Royalty revenues................................ 538 425 981 934 2,263 1,771
--------- --------- --------- --------- --------- ---------
Net revenues.................................... 9,155 12,250 13,404 11,298 13,678 17,637
Cost of revenues................................ 3,457 5,203 5,461 4,446 6,782 7,177
--------- --------- --------- --------- --------- ---------
Gross profit.................................. 5,698 7,047 7,943 6,852 6,896 10,460
Operating expenses:
Research and development...................... 243 478 432 1,359 973 880
Selling and marketing......................... 1,488 1,953 2,653 2,576 2,745 3,689
General and administrative.................... 211 333 448 779 623 761
--------- --------- --------- --------- --------- ---------
Total operating expenses.................... 1,942 2,764 3,533 4,714 4,341 5,330
--------- --------- --------- --------- --------- ---------
Operating income................................ 3,756 4,283 4,410 2,138 2,555 5,130
Interest income (expense), net.................. (1) 2 42 42 55 69
--------- --------- --------- --------- --------- ---------
Income before income taxes...................... 3,755 4,285 4,452 2,180 2,610 5,199
Provision for income taxes...................... 1,485 1,698 1,766 878 1,044 2,080
--------- --------- --------- --------- --------- ---------
Net income.................................. $ 2,270 $ 2,587 $ 2,686 $ 1,302 $ 1,566 $ 3,119
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Net income per share............................ $ .17 $ .19 $ .19 $ .09 $ .11 $ .22
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Shares used in per share computations........... 13,435 13,733 14,441 14,682 14,477 14,469

AS A PERCENTAGE OF NET REVENUES (1)
----------------------------------------------------------------
NOV. 30, FEB. 29, MAY 30, AUG. 31, NOV. 30, FEB. 28,
1995 1996 1996 1996 1996 1997
--------- --------- --------- --------- --------- ---------

Product revenues................................ 94.1% 96.5% 92.7% 91.7% 83.5% 90.0%
Royalty revenues................................ 5.9 3.5 7.3 8.3 16.5 10.0
--------- --------- --------- --------- --------- ---------
Net revenues.................................... 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
--------- --------- --------- --------- --------- ---------
Gross profit.................................. 62.2 57.5 59.3 60.6 50.4 59.3
Operating expenses:
Research and development...................... 2.7 3.9 3.2 12.0 7.1 5.0
Selling and marketing......................... 16.2 15.9 19.8 22.8 20.1 20.9
General and administrative.................... 2.3 2.7 3.4 6.9 4.5 4.3
--------- --------- --------- --------- --------- ---------
Total operating expenses.................... 21.2 22.5 26.4 41.7 31.7 30.2
--------- --------- --------- --------- --------- ---------
Operating income................................ 41.0 35.0 32.9 18.9 18.7 29.1
Interest income (expense), net.................. 0.0 0.0 0.3 0.4 0.4 0.4
--------- --------- --------- --------- --------- ---------
Income before income taxes...................... 41.0 35.0 33.2 19.3 19.1 29.5
Provision for income taxes...................... 16.2 13.9 13.2 7.8 7.6 11.8
--------- --------- --------- --------- --------- ---------
Net income.................................. 24.8% 21.1% 20.0% 11.5% 11.5% 17.7%
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------

Gross margin on product revenues................ 59.9% 56.0% 56.0% 57.1% 40.6% 54.8%
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------

- ---------

(1) Except gross margin on product revenues.

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 second quarter of fiscal 1997. The Company does not expect
sequential quarterly growth in product revenues to continue at the same rate
experienced from the first to the second quarter of fiscal 1997.

Royalties from USR increased from $538,000 in the first quarter of fiscal
1996 to $2.3 million in the first quarter of fiscal 1997, then declined to $1.8
million in the second quarter of fiscal 1997. The Company believes that its
royalty revenues from USR will terminate in fiscal 1998, if not sooner.

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 $840,000 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."

LIQUIDITY AND CAPITAL RESOURCES

Since inception, the Company has financed its operations primarily through
cash flows from operating activities. As of February 28, 1997, the Company's
principal sources of liquidity consisted of $7.3 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 six months ended February 28, 1997, cash provided by operating
activities was $4.9 million compared to $3.2 million during the six months ended
February 29, 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 February 28, 1997, the Company's
working capital was $17.7 million, which included $9.6 million and $4.5 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 $1.5
million in the six months ended February 28, 1997 from $197,000 in the six
months ended February 29, 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.

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. The Company believes that more ISPs worldwide
use Livingston's remote access servers than those of any other vendor. Since the
introduction of its first remote access server in 1990, over 2,000 ISPs have
purchased the Company's remote access products. 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.
Infonetics Research, Inc. forecasts that network product expenditures by ISPs
will increase from approximately $2.0 billion in 1996 to over $5.3 billion in
1998.

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.

[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.]

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

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

NAME AGE POSITION
- --------------------------------------------------- ----------- -------------------------------------------------------

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

- ---------

(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,

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.

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.

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

LONG-TERM
COMPENSATION
AWARDS
-------------
ANNUAL COMPENSATION SECURITIES
----------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS (1) OPTIONS (#) COMPENSATION
- ------------------------------------------------------------ ---------- ----------- ------------- -------------

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

- ---------

(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 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.

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.

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%
- -------------------------------- ----------- --------------- ----------- --------------- ----------- -----------

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................. -- -- -- -- -- --

- ---------
(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.

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

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................. -- -- -- -- -- --

- ---------
(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.

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 April 30, 1997, options to purchase a total of 2,538,380 shares
at a weighted average exercise price of $3.46 per share were outstanding, and
461,620 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

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

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.

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.

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

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

- ---------

* 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 12,370,272 shares outstanding as of April 30, 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.

(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.

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 April 30, 1997, there were 12,370,272 shares of Common Stock
outstanding, which were held of record by 58 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.

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
April 30, 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 12,370,272 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) 33,000
shares will be eligible for sale beginning 90 days after the date of this
Prospectus, and (iii) 12,337,272 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.

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
April 30, 1997, options to purchase 2,538,380 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.

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:

NUMBER OF
NAME SHARES
- ---------------------------------------------------------------------------------- -----------

Morgan Stanley & Co. Incorporated.................................................
Hambrecht & Quist LLC.............................................................
Robertson, Stephens & Company LLC.................................................

-----------
Total.........................................................................
-----------
-----------

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

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.

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 for each of the years in the three-year period ended August 31,
1996, 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.

LIVINGSTON ENTERPRISES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

PAGE
---------

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

F-1

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 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.
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 the results
of operations and its cash flows for each of the years in the three-year period
ended August 31, 1996 in conformity with generally accepted accounting
principles.

KPMG PEAT MARWICK LLP

Palo Alto, California
October 4, 1996, except for Note 10
which is as of May 15, 1997

F-2

LIVINGSTON ENTERPRISES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

AUGUST 31,
--------------------
1995 1996
--------- --------- FEBRUARY 28,
1997
------------
(UNAUDITED)

ASSETS

Current assets:
Cash and cash equivalents.................................................... $ 1,486 $ 3,749 $ 7,256
Accounts receivable, net of allowance of $150, $648, and $882,
respectively............................................................... 3,674 6,796 9,584
Inventories.................................................................. 3,557 7,650 4,511
Deferred income taxes........................................................ 139 1,893 3,763
Prepaid expenses and other current assets.................................... 55 153 166
--------- --------- ------------
Total current assets....................................................... 8,911 20,241 25,280
Property and equipment, net.................................................... 330 940 2,103
Other assets................................................................... 62 140 266
--------- --------- ------------
Total assets................................................................... $ 9,303 $ 21,321 $ 27,649
--------- --------- ------------
--------- --------- ------------

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
Accounts payable............................................................. $ 1,695 $ 2,787 $ 528
Accrued liabilities.......................................................... 1,087 1,575 4,942
Deferred revenue............................................................. -- 1,636 2,061
Current portion of notes payable to shareholders............................. 238 -- --
--------- --------- ------------
Total current liabilities.................................................. 3,020 5,998 7,531
--------- --------- ------------
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; 12,150,000,
12,235,200, and 12,365,060 issued and outstanding in 1995, 1996, and 1997,
respectively............................................................... 21 216 894
Deferred stock compensation.................................................. -- -- (568)
Retained earnings............................................................ 6,262 15,107 19,792
--------- --------- ------------
Total shareholders' equity................................................. 6,283 15,323 20,118
--------- --------- ------------
Total liabilities and shareholders' equity................................. $ 9,303 $ 21,321 $ 27,649
--------- --------- ------------
--------- --------- ------------

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

F-3

LIVINGSTON ENTERPRISES, INC. AND SUBSIDIARIES

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

SIX MONTHS ENDED
YEAR ENDED AUGUST 31, --------------------------
------------------------------- FEB. 29, FEB. 28,
1994 1995 1996 1996 1997
--------- --------- --------- ------------ ------------
(UNAUDITED)

Product revenues.................................... $ 6,180 $ 20,138 $ 43,229 $ 20,442 $ 27,281
Royalty revenues.................................... -- 323 2,878 963 4,034
--------- --------- --------- ------------ ------------
Net revenues........................................ 6,180 20,461 46,107 21,405 31,315
Cost of revenues.................................... 2,853 8,054 18,567 8,660 13,959
--------- --------- --------- ------------ ------------
Gross profit...................................... 3,327 12,407 27,540 12,745 17,356
Operating expenses:
Research and development.......................... 462 890 2,512 721 1,853
Selling and marketing............................. 673 2,831 8,670 3,441 6,434
General and administrative........................ 449 667 1,771 544 1,384
--------- --------- --------- ------------ ------------
Total operating expenses........................ 1,584 4,388 12,953 4,706 9,671
--------- --------- --------- ------------ ------------
Operating income.................................... 1,743 8,019 14,587 8,039 7,685
Interest income (expense), net...................... (21) (20) 85 1 124
--------- --------- --------- ------------ ------------
Income before income taxes.......................... 1,722 7,999 14,672 8,040 7,809
Provision for income taxes.......................... 695 3,095 5,827 3,188 3,124
--------- --------- --------- ------------ ------------
Net income...................................... $ 1,027 $ 4,904 $ 8,845 $ 4,852 $ 4,685
--------- --------- --------- ------------ ------------
--------- --------- --------- ------------ ------------
Net income per share................................ $ .08 $ .38 $ .62 $ .35 $ .32
--------- --------- --------- ------------ ------------
--------- --------- --------- ------------ ------------
Shares used in per share computations............... 12,525 12,945 14,214 13,725 14,473

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

F-4

LIVINGSTON ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)

COMMON STOCK TOTAL
------------------------- DEFERRED STOCK RETAINED SHAREHOLDERS'
SHARES AMOUNT COMPENSATION EARNINGS EQUITY
------------ ----------- --------------- --------- -------------

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 (unaudited)... 129,860 110 -- -- 110
Deferred stock compensation
(unaudited).................................. -- 568 (568) -- --
Net income (unaudited)......................... -- -- -- 4,685 4,685
------------ ----- ----- --------- -------------
Balances at February 28, 1997 (unaudited)........ 12,365,060 $ 894 $ (568) $ 19,792 $ 20,118
------------ ----- ----- --------- -------------
------------ ----- ----- --------- -------------

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

F-5

LIVINGSTON ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

YEAR ENDED AUGUST 31, SIX MONTHS ENDED
------------------------------- ----------------------------
1994 1995 1996 FEB. 29, 1996 FEB. 28, 1997
--------- --------- --------- ------------- -------------
(UNAUDITED)

CASH FLOW FROM OPERATING ACTIVITIES:
Net income....................................................... $ 1,027 $ 4,904 $ 8,845 $ 4,852 $ 4,685
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.................................. 25 60 193 66 197
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) (313) (1,870)
Changes in operating assets and liabilities:
Accounts receivable.......................................... (729) (2,446) (3,122) (2,467) (2,788)
Inventories.................................................. (391) (2,951) (4,093) (2,567) 3,139
Prepaids and other current assets............................ (62) 20 (98) (13) (13)
Accounts payable............................................. 11 1,523 1,092 926 (2,259)
Accrued liabilities.......................................... 811 186 488 1,892 3,367
Deferred revenue............................................. -- -- 1,636 804 425
--------- --------- --------- ------ ------
Net cash provided by operating activities........................ 644 1,227 3,376 3,180 4,883
--------- --------- --------- ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment............................ (63) (288) (803) (135) (1,360)
Other assets................................................... -- (60) (78) (62) (126)
--------- --------- --------- ------ ------
Net cash used in investing activities:........................... (63) (348) (881) (197) (1,486)
--------- --------- --------- ------ ------
CASH FLOWS USED IN FINANCING ACTIVITIES:
Proceeds from common stock issued.............................. -- -- 6 -- 110
Repayment of notes payable to shareholders..................... -- (20) (238) (181) --
--------- --------- --------- ------ ------
Net cash flows provided by (used in) financing activities........ -- (20) (232) (181) 110
--------- --------- --------- ------ ------
Net increase in cash and cash equivalents........................ 581 859 2,263 2,802 3,507

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 $ 4,288 $ 7,256
--------- --------- --------- ------ ------
--------- --------- --------- ------ ------
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 2,210 4,229
Cash paid for interest......................................... 21 20 35 12 --

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

F-6

LIVINGSTON ENTERPRISES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(INFORMATION RELATING TO THE SIX MONTHS ENDED FEBRUARY 29, 1996 AND
FEBRUARY 28, 1997 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 from 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.

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

LIVINGSTON ENTERPRISES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION RELATING TO THE SIX MONTHS ENDED FEBRUARY 29, 1996 AND
FEBRUARY 28, 1997 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. Included
in research and development expense in fiscal 1996 is approximately $632,000
principally related to modem technology acquired in exchange for 18,000 shares
of common stock and $443,000 in cash.

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. At February 28, 1997, $1.8 million
of royalty revenues remained outstanding.

F-8

LIVINGSTON ENTERPRISES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION RELATING TO THE SIX MONTHS ENDED FEBRUARY 29, 1996 AND
FEBRUARY 28, 1997 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 at February 28, 1997 and for the six months ended
February 29, 1996 and February 28, 1997 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 six months ended February 29, 1996 and February 28,
1997 have been provided based on an estimate of the Company's effective tax rate
for fiscal 1996 and 1997.

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

F-9

LIVINGSTON ENTERPRISES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION RELATING TO THE SIX MONTHS ENDED FEBRUARY 29, 1996 AND
FEBRUARY 28, 1997 IS UNAUDITED)

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

STOCK COMPENSATION PLANS

In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, ACCOUNTING FOR STOCK BASED COMPENSATION. The Company adopted SFAS No. 123
in September 1996. The Company will continue to account for employee stock
options in accordance with Accounting Principles Board Opinion No. 25 and has
adopted the "disclosure only" alternative described in SFAS No. 123. The Company
expects that the adoption of this statement will not have a material effect on
the financial position or results of operations.

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):

AS OF AUGUST 31,
--------------------
1995 1996
--------- --------- AS OF
FEB. 28, 1997
-------------
(UNAUDITED)

Raw materials............................................... $ 2,022 $ 5,215 $ 2,299
Work in process............................................. 732 439 868
Finished goods.............................................. 803 1,996 1,344
--------- --------- ------
$ 3,557 $ 7,650 $ 4,511
--------- --------- ------
--------- --------- ------

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

AS OF AUGUST 31,
--------------------
1995 1996
--------- --------- AS OF
FEB. 28, 1997
-------------
(UNAUDITED)

Equipment..................................................... $ 397 $ 1,026 $ 1,511
Furniture and fixtures........................................ 72 91 661
Leasehold improvements........................................ 22 177 482
--------- --------- ------
491 1,294 2,654
Less accumulated depreciation and amortization................ 161 354 551
--------- --------- ------
$ 330 $ 940 $ 2,103
--------- --------- ------
--------- --------- ------

F-10

LIVINGSTON ENTERPRISES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. BALANCE SHEET COMPONENTS (CONTINUED)

Accrued liabilities consisted of the following (in thousands):

AS OF AUGUST 31,
--------------------
1995 1996
--------- --------- AS OF
FEB. 28, 1997
-------------
(UNAUDITED)

Compensation and related benefits........................... $ 377 $ 825 $ 1,367
Warranty costs.............................................. -- 85 425
Modem swap program.......................................... -- -- 837
Modem license fees.......................................... -- -- 625
Income taxes................................................ 549 2 598
Other....................................................... 161 663 1,090
--------- --------- ------
$ 1,087 $ 1,575 $ 4,942
--------- --------- ------
--------- --------- ------

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 $238,005
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):

YEAR ENDED AUGUST 31,
-------------------------------
1994 1995 1996
--------- --------- ---------

Current:
Federal.......................................................... $ 593 $ 2,444 $ 5,873
State............................................................ 162 742 1,708
--------- --------- ---------
755 3,186 7,581
--------- --------- ---------

Deferred:
Federal.......................................................... (62) (68) (1,488)
State............................................................ 2 (23) (266)
--------- --------- ---------
(60) (91) (1,754)
--------- --------- ---------
$ 695 $ 3,095 $ 5,827
--------- --------- ---------
--------- --------- ---------

F-11

LIVINGSTON ENTERPRISES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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):

AS OF AUGUST 31,
--------------------
1995 1996
--------- ---------

Deferred tax assets:
Accruals and reserves...................................................... $ 92 $ 1,350
Deferred revenue........................................................... -- 650
Costs capitalized in inventory............................................. 39 27
Other...................................................................... 8 (134)
--------- ---------
$ 139 $ 1,893
Less valuation allowance..................................................... -- --
--------- ---------
Net deferred asset........................................................... $ 139 $ 1,893
--------- ---------
--------- ---------

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):

AS OF AUGUST 31,
-------------------------------
1994 1995 1996
--------- --------- ---------

Income tax at statutory rate....................................... $ 603 $ 2,800 $ 5,135
State tax, net of federal benefit.................................. 108 474 951
Research and development tax credits............................... -- (30) --
Foreign Sales Corporation benefit.................................. -- -- (92)
Other.............................................................. (16) (149) (167)
--------- --------- ---------
$ 695 $ 3,095 $ 5,827
--------- --------- ---------
--------- --------- ---------

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. 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

F-12

LIVINGSTON ENTERPRISES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

5. SHAREHOLDERS' EQUITY (CONTINUED)
grant. At August 31, 1996, 219,010 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. A
summary of stock option activity under the 1994 Plan follows:

AVAILABLE NUMBER OF
FOR GRANT SHARES PRICE PER SHARE
------------ ---------- ---------------

Balances as of August 31, 1994........................................ 1,500,000
Options granted..................................................... (1,043,250) 1,043,250 $0.033-$0.05
Options canceled.................................................... 132,000 (132,000) $0.033-$0.04
------------ ----------
Balances as of August 31, 1995........................................ 588,750 911,250 $0.033-$0.05
Increase in option pool............................................. 1,500,000
Options granted..................................................... (1,668,250) 1,668,250 $0.25-$10.50
Options exercised................................................... 52,200 (52,200) $0.04-$0.25
Options canceled.................................................... 301,500 (301,500) $0.033-$10.50
------------ ----------
Balances as of August 31, 1996........................................ 774,200 2,225,800 $0.033-$10.50
Options granted (unaudited)......................................... (392,800) 392,800 $10.50
Options exercised (unaudited)....................................... 129,860 (129,860) $0.033-$10.50
Options canceled (unaudited)........................................ 44,465 (44,465) $0.04-$10.50
------------ ----------
Balances as of February 28, 1997 (unaudited).......................... 555,725 2,444,275 $0.033-$10.50
------------ ---------- ---------------
------------ ---------- ---------------

In connection with options granted on February 21, 1997, the Company has
recorded deferred compensation expense of $568,000 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. No deferred compensation
expense was recognized for the six months ended February 28, 1997.

6. REVENUE

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

YEAR ENDED AUGUST 31, SIX MONTHS ENDED
------------------------------- --------------------------------
1994 1995 1996 FEB. 29, 1996 FEB. 28, 1997
--------- --------- --------- --------------- ---------------

(UNAUDITED)
Asia Pacific.................................................. 2% 5% 18% 13% 23%
Europe........................................................ 5% 6% 7% 6% 15%
Canada........................................................ 2% 3% 3% 5% 5%
Latin America................................................. 9% 2% 2% 2% 2%
--- --- --- --- ---
18% 17% 30% 26% 45%
--- --- --- --- ---
--- --- --- --- ---

F-13

LIVINGSTON ENTERPRISES, INC. AND SUBSIDIARIES

NOTE TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6. REVENUE (CONTINUED)

Significant resellers are summarized below:

YEAR ENDED AUGUST 31, SIX MONTHS ENDED
------------------------------------- ------------------------------------
1994 1995 1996 FEB. 29, 1996
----- ----- ----- ----------------- FEB. 28, 1997
-----------------
(UNAUDITED)

Customer A................................... 28% 29% 26% 27% 2%
Customer B................................... 17% 18% 6% 7% 4%
Customer C................................... 7% 11% 13% 15% 15%

RECEIVABLE BALANCE AT
FEB. 28, 1997
-----------------------

Customer A................................... 0%
Customer B................................... 1%
Customer C................................... 18%

7. COMMITMENTS

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

FISCAL YEAR ENDING AUGUST 31,
- -------------------------------------------------------------------------------------

1997................................................................................. $ 551
1998................................................................................. 606
1999................................................................................. 606
2000................................................................................. 606
2001................................................................................. 606
Thereafter........................................................................... 1,313
---------
Total minimum lease payments......................................................... $ 4,288
---------
---------

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 six month periods
ended February 29, 1996 and February 28, 1997 was $154,000 and $386,000,
respectively.

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 (8.25% as of
August 31, 1996). 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-14

LIVINGSTON ENTERPRISES, INC. AND SUBSIDIARIES

NOTE TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

9. RETIREMENT SAVINGS PLAN

The Company sponsors a 401(k) defined contribution benefit 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. SUBSEQUENT EVENTS

On May 9, 1997, the Board of Directors approved:

- the Company's 1997 Stock Plan (the 1997 Plan), subject to shareholder
approval. The Company reserved 1,500,000 shares of common stock for
issuance under 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.

- Board of Directors approved (effective upon the closing of the Company's
initial public offering) the 1997 Employee Stock Purchase Plan (the
"Purchase Plan"), subject to shareholder approval. 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 share 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. The Company has reserved 500,000 shares of
common stock for issuance under the Purchase Plan. No shares have been
issued to date.

- An amendment to the Articles of Incorporation to increase authorized
common stock to 100,000,000 shares and upon completion of the Company's
initial public offering to increase authorized preferred stock to
5,000,000 shares.

Also, on May 9, 1997, the Company's Board of Directors authorized management
of the Company to file a Registration Statement with the SEC permitting the
Company to sell shares of its common stock to the public.

F-15

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.

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

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 April 30, 1997, the Registrant has issued and sold 186,832
shares of Common Stock to employees and consultants at prices

II-1

ranging from $.033 to $10.50 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") in June 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

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.

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).

- ---------

* To be filed by amendment.

II-2

(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

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 16th day of May, 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:

SIGNATURE TITLE DATE
- ---------------------------------------- ------------------------------------------------------ ---------------

/s/ STEVEN M. WILLENS
---------------------------- President, Chief Executive Officer and Chairman May 16, 1997
Steven M. Willens

/s/ STEVEN A. HESS
---------------------------- Chief Financial Officer (Principal Financial and May 16, 1997
Steven A. Hess Accounting Officer)

/s/ JERROLD LIVINGSTON
---------------------------- Director May 16, 1997
Jerrold Livingston

/s/ RONALD H. WILLENS
---------------------------- Director May 16, 1997
Ronald H. Willens

/s/ ALBERT A. PIMENTEL
---------------------------- Director May 16, 1997
Albert A. Pimentel

/s/ ROBERT C. HAWK
---------------------------- Director May 16, 1997
Robert C. Hawk

II-4

LIVINGSTON ENTERPRISES, INC.

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

BALANCE AT DEDUCTIONS:
BEGINNING OF WRITE OFFS BALANCE AT
CLASSIFICATION PERIOD ADDITIONS OF ACCOUNTS END OF PERIOD
- ------------------------------------------------------------- --------------- ----------- ------------- ---------------

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

Six months ended February 28, 1996 (unaudited)........... $ 150 $ 200 $ 1 $ 349
Six months ended February 29, 1997 (unaudited)........... $ 648 $ 330 $ 96 $ 882

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

Six months ended February 28, 1996 (unaudited)........... $ -- $ -- $ -- $ --
Six months ended February 29, 1997 (unaudited)........... $ 85 $ 340 $ -- $ 425

EXHIBIT INDEX

EXHIBIT NO. DESCRIPTION
- -----------

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.

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).

- ---------

* To be filed by amendment.