##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549


Form 10-Q/A

Amendment No. 1




| |           
| | ----------
| | (Mark One)

| |   |                                                                                              
| | - | ---------------------------------------------------------------------------------------------
| | þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) 
     OF THE SECURITIES EXCHANGE ACT OF 1934



| |                                                 
| | ------------------------------------------------
| | For the quarterly period ended June 30,
    2000
|
| | or                                              



| |   |                                                                                               
| | - | ----------------------------------------------------------------------------------------------
| | o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) 
     OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period
from                     to

Commission File Number 000-26441

Clarent Corporation

(Exact name of registrant as specified in its
charter)


|                                                                   |  |                                         
|------------------------------------------------------------------ |  | ----------------------------------------
|Delaware                                                           |  | 77-0433687                              
|(State or other jurisdiction of
    incorporation or organization) |  | (I.R.S. Employer
    Identification No.)

700 Chesapeake Drive

Redwood City, California 94063


(Address of principal executive offices and
zip code)


(650) 306-7511

(Registrants telephone number, including
area code)


Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the
past
90 days.  Yes þ          No o

The number of shares outstanding of the
registrants common stock, $0.001 par value, was 33,332,903
at June 30, 2000.

This report consists of 26 pages of which this
page is number 1.



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1



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TABLE OF CONTENTS



|                              |                                                                                               |  |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION
|                              | ITEM 1. FINANCIAL STATEMENTS                                                                 
|                              | NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                               
|                              | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                              | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           
|PART II. OTHER INFORMATION   
|                              | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                                     
|                              | SIGNATURES                                                                                   



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##### Table of Contents



EXPLANATORY NOTE

This amendment on Form 10-Q/A amends
Items 1, 2 and 3 of Part I and Item 6 of
Part II of the Quarterly Report of Clarent Corporation (the
Company) on Form 10-Q previously filed for the
quarter ended June 30, 2000 (the Prior Report).
Subsequent to the issuance of the Companys financial
statements on the Prior Report, the Company discovered
accounting and financial irregularities affecting such financial
statements. Many of these irregularities related to revenue
recognition and cash reporting arising primarily from operations
in the Companys Asia-Pacific regional office. The Company
has determined that these irregularities require the restatement
of certain of its previously issued financial statements. This
amendment is filed in connection with the Companys
restatement of its financial statements for the quarters ended
March 31, 2000, June 30, 2000, September 30,
2000, December 31, 2000, March 31, 2001 and
June 30, 2001, as well as for the year ended
December 31, 2000. The circumstances necessitating the
restatement and their effects for the quarter ended
June 30, 2000 are more fully described in Notes 1 and
10 of Notes to Unaudited Condensed Consolidated Financial
Statements. In addition, the Companys current litigation
proceedings are described in Note 13 of Notes to Unaudited
Condensed Consolidated Financial Statements.

Financial statement information and related
disclosures included in this amended filing reflect, where
appropriate, changes as a result of the restatement. Statements
used in this Form 10-Q/A containing the words
(i) now, currently,
present, to date, and words of similar
import, and (ii) knowledge, and words of similar
import, are used to refer to conditions existing on the filing
date of this Form 10-Q/A. Except as specifically indicated
above, no other information included in the Prior Report on
Form 10-Q is amended by the Form 10-Q/A and such
information remains as of the date of the Prior Report. We
direct you to refer to our Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 2001 and to
the other reports we file with the Securities and Exchange
Commission from time to time after the date of this report for
more current information regarding Clarent, including Risk
Factors that May Impact Future Operating Results.

CLARENT CORPORATION

FORM 10-Q/A INDEX

|                              |  |                                                                                                                              |    |      |    | 
|----------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------- | -- | ---- | -- | 
|                              |  |                                                                                                                              |    | Page
|                              |  |                                                                                                                              |    | No. 
|                              |  |                                                                                                                              |    |     
|PART I: FINANCIAL INFORMATION
|Item 1.                       |  | Financial Statements (Unaudited)                                                                                             |    |      | 3  | 
|                              |  | Condensed Consolidated Balance Sheets as of
    June 30, 2000 (restated) and December 31, 1999                               |    |      | 3  | 
|                              |  | Condensed Consolidated Statements of Operations
    for the Three and Six Months Ended June 30, 2000
    (restated) and 1999 |    |      | 4  | 
|                              |  | Condensed Consolidated Statements of Cash Flows
    for the Six Months Ended June 30, 2000 (restated) and
    1999           |    |      | 5  | 
|                              |  | Notes to Unaudited Condensed Consolidated
    Financial Statements                                                           |    |      | 6  | 
|Item 2.                       |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations                                    |    |      | 18 | 
|Item 3.                       |  | Quantitative and Qualitative Disclosures about
    Market Risk                                                               |    |      | 24 | 
|PART II: OTHER INFORMATION   
|Item 6.                       |  | Exhibits and Reports on Form 8-K                                                                                             |    |      | 25 | 
|Signatures                    |  |                                                                                                                              | 26 |     

2



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##### Table of Contents






PART I.     FINANCIAL
INFORMATION




ITEM 1.     FINANCIAL
STATEMENTS

CLARENT CORPORATION

CONDENSED CONSOLIDATED BALANCE
SHEETS

(In thousands)


|                                         |                                           |                            |                                            |              |         |         |        |         |         |         | 
|---------------------------------------- | ----------------------------------------- | -------------------------- | ------------------------------------------ | ------------ | ------- | ------- | ------ | ------- | ------- | ------- | 
|                                         |                                           | June 30,                   |                                            | December 31,
|                                         |                                           | 2000                       |                                            | 1999        
|                                         |                                           |                            |                                            |             
|                                         |                                           | (Unaudited)                |                                            |             
|                                         |                                           | (Restated)                 |                                            |             
|ASSETS                                  
|Current assets:                          |                                           |                            |                                            |              |         |         |        |        
|                                         | Cash and cash equivalents                 |                            | $                                          | 199,157      |         |         | $      | 238,724 |        
|                                         | Short-term investments                    |                            |                                            | 77,017       |         |         |        | 42,581  |        
|                                         | Accounts receivable, gross                |                            |                                            | 22,202       |         |         |        | 26,532  |        
|                                         | Receivables allowance                     |                            |                                            | (2,787       | )       |         |        | (2,314  | )      
|                                         |                                           |                            |                                            |              |         |         |        |        
|                                         | Accounts receivable, net                  |                            |                                            | 19,415       |         |         |        | 24,218  |        
|                                         | Inventories                               |                            |                                            | 15,894       |         |         |        | 8,404   |        
|                                         | Prepaid expenses and other current assets |                            |                                            | 2,888        |         |         |        | 2,826   |        
|                                         |                                           |                            |                                            |              |         |         |        |        
|                                         |                                           | Total current assets       |                                            |              | 314,371 |         |        |         | 316,753 |        
|Property and equipment, net              |                                           |                            | 17,591                                     |              |         |         | 12,696 |        
|Other assets                             |                                           |                            | 9,367                                      |              |         |         | 5,919  |        
|                                         |                                           |                            |                                            |              |         |         |        |        
|                                         |                                           |                            | Total assets                               |              | $       | 341,329 |        |         | $       | 335,368 | 
|                                         |                                           |                            |                                            |              |         |         |        |        
|LIABILITIES AND STOCKHOLDERS
    EQUITY
|Current liabilities:                     |                                           |                            |                                            |              |         |         |        |        
|                                         | Accounts payable                          |                            | $                                          | 15,402       |         |         | $      | 8,552   |        
|                                         | Deferred revenue                          |                            |                                            | 10,170       |         |         |        | 10,117  |        
|                                         | Other accrued liabilities                 |                            |                                            | 10,656       |         |         |        | 7,857   |        
|                                         |                                           |                            |                                            |              |         |         |        |        
|                                         |                                           | Total current liabilities  |                                            |              | 36,228  |         |        |         | 26,526  |        
|Stockholders equity:                    |                                           |                            |                                            |              |         |         |        |        
|                                         | Common stock                              |                            |                                            | 356,766      |         |         |        | 353,894 |        
|                                         | Deferred compensation                     |                            |                                            | (3,680       | )       |         |        | (5,990  | )      
|                                         | Accumulated other comprehensive loss      |                            |                                            | (162         | )       |         |        | (112    | )      
|                                         | Accumulated deficit                       |                            |                                            | (47,823      | )       |         |        | (38,950 | )      
|                                         |                                           |                            |                                            |              |         |         |        |        
|                                         |                                           | Total stockholders equity |                                            |              | 305,101 |         |        |         | 308,842 |        
|                                         |                                           |                            |                                            |              |         |         |        |        
|                                         |                                           |                            | Total liabilities and stockholders equity |              | $       | 341,329 |        |         | $       | 335,368 | 
|                                         |                                           |                            |                                            |              |         |         |        |        

See accompanying notes to condensed consolidated
financial statements.

3



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CLARENT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS

(In thousands, except per share
amounts)


(Unaudited)


|                                                                |                                                |                          |         |                  |        |            |         |        |        |   |         |        |        |   |         |        |        | 
|--------------------------------------------------------------- | ---------------------------------------------- | ------------------------ | ------- | ---------------- | ------ | ---------- | ------- | ------ | ------ | - | ------- | ------ | ------ | - | ------- | ------ | ------ | 
|                                                                |                                                |                          |         |                 
|                                                                |                                                | Three Months Ended       |         | Six Months Ended
|                                                                |                                                | June 30,                 |         | June 30,        
|                                                                |                                                |                          |         |                 
|                                                                |                                                | 2000                     |         | 1999             |        | 2000       |         | 1999  
|                                                                |                                                |                          |         |                  |        |            |         |       
|                                                                |                                                | (Restated)               |         |                  |        | (Restated) |         |       
|Net revenue:                                                    |                                                |                          |         |                  |        |            |         |        |        |   |         |        |        |   |         |       
|                                                                | Product and software                           |                          | $       | 17,428           |        |            | $       | 8,486  |        |   | $       | 37,913 |        |   | $       | 14,614 |       
|                                                                | Service                                        |                          |         | 3,058            |        |            |         | 818    |        |   |         | 5,563  |        |   |         | 1,404  |       
|                                                                |                                                |                          |         |                  |        |            |         |        |        |   |         |        |        |   |         |       
|                                                                |                                                | Total net revenue        |         |                  | 20,486 |            |         |        | 9,304  |   |         |        | 43,476 |   |         |        | 16,018 | 
|Cost of revenue:                                                |                                                |                          |         |                  |        |            |         |        |        |   |         |        |        |   |         |       
|                                                                | Product and software                           |                          |         | 8,614            |        |            |         | 3,424  |        |   |         | 16,013 |        |   |         | 6,210  |       
|                                                                | Service                                        |                          |         | 2,080            |        |            |         | 722    |        |   |         | 3,718  |        |   |         | 1,217  |       
|                                                                |                                                |                          |         |                  |        |            |         |        |        |   |         |        |        |   |         |       
|                                                                |                                                | Total cost of revenue    |         |                  | 10,694 |            |         |        | 4,146  |   |         |        | 19,731 |   |         |        | 7,427  | 
|                                                                |                                                |                          |         |                  |        |            |         |        |        |   |         |        |        |   |         |       
|Gross profit                                                    |                                                |                          | 9,792   |                  |        |            | 5,158   |        |        |   | 23,745  |        |        |   | 8,591   |       
|Operating expenses:                                             |                                                |                          |         |                  |        |            |         |        |        |   |         |        |        |   |         |       
|                                                                | Research and development                       |                          |         | 5,566            |        |            |         | 1,991  |        |   |         | 9,906  |        |   |         | 3,557  |       
|                                                                | Sales and marketing                            |                          |         | 11,819           |        |            |         | 5,623  |        |   |         | 22,874 |        |   |         | 9,648  |       
|                                                                | General and administrative                     |                          |         | 2,866            |        |            |         | 1,272  |        |   |         | 5,307  |        |   |         | 2,629  |       
|                                                                | Amortization of deferred compensation          |                          |         | 932              |        |            |         | 13,662 |        |   |         | 2,310  |        |   |         | 15,642 |       
|                                                                | Amortization of goodwill and other intangibles |                          |         | 225              |        |            |         |       |        |   |         | 451    |        |   |         |       |       
|                                                                |                                                |                          |         |                  |        |            |         |        |        |   |         |        |        |   |         |       
|                                                                |                                                | Total operating expenses |         |                  | 21,408 |            |         |        | 22,548 |   |         |        | 40,848 |   |         |        | 31,476 | 
|                                                                |                                                |                          |         |                  |        |            |         |        |        |   |         |        |        |   |         |       
|Loss from operations                                            |                                                |                          | (11,616 | )                |        |            | (17,390 | )      |        |   | (17,103 | )      |        |   | (22,885 | )     
|Other income (expense), net                                     |                                                |                          | 4,399   |                  |        |            | (163    | )      |        |   | 8,514   |        |        |   | (147    | )     
|                                                                |                                                |                          |         |                  |        |            |         |        |        |   |         |        |        |   |         |       
|Loss before provision for income taxes                          |                                                |                          | (7,217  | )                |        |            | (17,553 | )      |        |   | (8,589  | )      |        |   | (23,032 | )     
|Provision for income taxes                                      |                                                |                          | (259    | )                |        |            | (11     | )      |        |   | (284    | )      |        |   | (11     | )     
|                                                                |                                                |                          |         |                  |        |            |         |        |        |   |         |        |        |   |         |       
|Net loss                                                        |                                                | $                        | (7,476  | )                |        | $          | (17,564 | )      |        | $ | (8,873  | )      |        | $ | (23,043 | )     
|                                                                |                                                |                          |         |                  |        |            |         |        |        |   |         |        |        |   |         |       
|Basic and diluted net loss per share                            |                                                | $                        | (0.23   | )                |        | $          | (2.73   | )      |        | $ | (0.28   | )      |        | $ | (3.87   | )     
|                                                                |                                                |                          |         |                  |        |            |         |        |        |   |         |        |        |   |         |       
|Shares used to compute basic and diluted
    net loss per share |                                                |                          | 32,934  |                  |        |            | 6,429   |        |        |   | 32,174  |        |        |   | 5,951   |       
|                                                                |                                                |                          |         |                  |        |            |         |        |        |   |         |        |        |   |         |       

See accompanying notes to condensed consolidated
financial statements.

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CLARENT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS

(In thousands)


(Unaudited)


|                                                                               |                                                                                               |                                                         |                                           |         |         |        |        |         |        |        |  
|------------------------------------------------------------------------------ | --------------------------------------------------------------------------------------------- | ------------------------------------------------------- | ----------------------------------------- | ------- | ------- | ------ | ------ | ------- | ------ | ------ | -
|                                                                               |                                                                                               |                                                        
|                                                                               |                                                                                               | Six Months Ended June 30,                              
|                                                                               |                                                                                               |                                                        
|                                                                               |                                                                                               | 2000                                                    |                                           | 1999   
|                                                                               |                                                                                               |                                                         |                                           |        
|                                                                               |                                                                                               | (Restated)                                              |                                           |        
|Operating activities:                                                          |                                                                                               |                                                         |                                           |         |         |        |        |        
|                                                                               | Net loss                                                                                      |                                                         | $                                         | (8,873  | )       |        | $      | (23,043 | )     
|                                                                               | Adjustments to reconcile net loss to net cash
    provided by (used in) operating activities: |                                                         |                                           |         |         |        |        |         |       
|                                                                               |                                                                                               | Depreciation                                            |                                           |         | 3,481   |        |        |         | 869    |       
|                                                                               |                                                                                               | Amortization of deferred compensation                   |                                           |         | 2,310   |        |        |         | 15,642 |       
|                                                                               |                                                                                               | Amortization of goodwill and other intangibles          |                                           |         | 451     |        |        |         |       |       
|                                                                               |                                                                                               | Changes in operating assets and liabilities:            |                                           |         |         |        |        |         |        |       
|                                                                               |                                                                                               |                                                         | Accounts receivable                       |         |         | 3,303  |        |         |        | (6,284 | )
|                                                                               |                                                                                               |                                                         | Inventories                               |         |         | (7,490 | )      |         |        | (1,958 | )
|                                                                               |                                                                                               |                                                         | Prepaid expenses and other current assets |         |         | (62    | )      |         |        | (251   | )
|                                                                               |                                                                                               |                                                         | Other assets                              |         |         | (1,645 | )      |         |        | (396   | )
|                                                                               |                                                                                               |                                                         | Accounts payable and accrued liabilities  |         |         | 9,649  |        |         |        | 3,905  |  
|                                                                               |                                                                                               |                                                         | Deferred revenue                          |         |         | 53     |        |         |        | 3,223  |  
|                                                                               |                                                                                               |                                                         |                                           |         |         |        |        |        
|                                                                               |                                                                                               | Net cash provided by (used in) operating
    activities |                                           |         | 1,177   |        |        |         | (8,293 | )     
|                                                                               |                                                                                               |                                                         |                                           |         |         |        |        |        
|Investing activities:                                                          |                                                                                               |                                                         |                                           |         |         |        |        |        
|                                                                               | Purchases of investment securities                                                            |                                                         |                                           | (80,836 | )       |        |        |        |       
|                                                                               | Sales and maturities of investment securities                                                 |                                                         |                                           | 45,609  |         |        |        |        |       
|                                                                               | Purchases of property and equipment                                                           |                                                         |                                           | (8,443  | )       |        |        | (3,740  | )     
|                                                                               |                                                                                               |                                                         |                                           |         |         |        |        |        
|                                                                               |                                                                                               | Net cash used in investing activities                   |                                           |         | (43,670 | )      |        |         | (3,740 | )     
|                                                                               |                                                                                               |                                                         |                                           |         |         |        |        |        
|Financing activities:                                                          |                                                                                               |                                                         |                                           |         |         |        |        |        
|                                                                               | Proceeds from line of credit                                                                  |                                                         |                                           |        |         |        |        | 2,800   |       
|                                                                               | Proceeds from issuance of long term debt                                                      |                                                         |                                           |        |         |        |        | 1,202   |       
|                                                                               | Proceeds from issuance of preferred stock                                                     |                                                         |                                           |        |         |        |        | 332     |       
|                                                                               | Proceeds from issuance of common stock                                                        |                                                         |                                           | 2,872   |         |        |        | 45      |       
|                                                                               |                                                                                               |                                                         |                                           |         |         |        |        |        
|                                                                               |                                                                                               | Net cash provided by financing activities               |                                           |         | 2,872   |        |        |         | 4,379  |       
|                                                                               |                                                                                               |                                                         |                                           |         |         |        |        |        
|Effect of exchange rate changes on cash and cash
    equivalents               |                                                                                               |                                                         | 54                                        |         |         |        | 24     |        
|                                                                               |                                                                                               |                                                         |                                           |         |         |        |        |        
|Net decrease in cash and cash equivalents                                      |                                                                                               |                                                         | (39,567                                   | )       |         |        | (7,630 | )      
|Cash and cash equivalents at beginning of period                               |                                                                                               |                                                         | 238,724                                   |         |         |        | 11,903 |        
|                                                                               |                                                                                               |                                                         |                                           |         |         |        |        |        
|Cash and cash equivalents at end of period                                     |                                                                                               | $                                                       | 199,157                                   |         |         | $      | 4,273  |        
|                                                                               |                                                                                               |                                                         |                                           |         |         |        |        |        
|Supplemental disclosure of non-cash activities:                                |                                                                                               |                                                         |                                           |         |         |        |        |        
|Preferred stock received in exchange for
    settlement of accounts receivable |                                                                                               | $                                                       | 1,500                                     |         |         | $      |       |        

See accompanying notes to condensed consolidated
financial statements.

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CLARENT CORPORATION






NOTES TO UNAUDITED CONDENSED
CONSOLIDATED


FINANCIAL STATEMENTS


1.     BASIS OF
PRESENTATION

The accompanying unaudited condensed consolidated
financial statements of the Company as of June 30, 2000
(restated) and for the three and six months ended June 30,
2000 (restated) and June 30, 1999 have been prepared in
accordance with generally accepted accounting principles for
interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. In
the opinion of management, the condensed consolidated financial
statements include all adjustments that management considers
necessary for a fair presentation of the results of operations
for the interim periods shown. The results of operations for
such periods are not necessarily indicative of the results
expected for the full fiscal year or for any future period. The
balance sheet at December 31, 1999 has been derived from
audited financial statements at that date but does not include
all of the information and footnotes required by generally
accepted accounting principles for complete financial
statements. These financial statements should be read in
conjunction with the consolidated financial statements and
related notes included in the Companys Annual Report on
Form 10-K for the year ended December 31, 1999, filed
with the Securities and Exchange Commission on March 28,
2000. Certain prior period balances have been reclassified to
conform to current period presentation.



| |                                        
| | ---------------------------------------
| | Restatement of Financial
    Statements

On August 26, 2001, the Companys Board
of Directors formed a special committee, comprised of three
outside directors, Messrs. Pape, Forman and Barker. The
special committee directed and instructed the Companys
outside counsel to investigate certain facts that had come to
the Boards attention and that the Board determined could
reflect potential accounting and financial irregularities. The
Companys outside counsel, at the direction of the special
committee, requested the Companys independent auditors to
assist in the investigation. On September 4, 2001, the
Company announced that it had discovered accounting and
financial irregularities that materially affected the
Companys previously reported financial results for the
first two quarters of the year 2001. Subsequently on
October 23, 2001, the Company announced that it also had
discovered accounting and financial irregularities that
materially affected the Companys previously reported
financial results for the year 2000.

To address the activities discovered in its
investigation, the Company has implemented remedial actions,
including the prompt termination of employees who appear to have
been involved in activities relating to the irregularities,
closure of the Companys Asia-Pacific regional
headquarters, and the adoption of new and more stringent
subsidiary cash control and expense approval policies, such as
new banking and internal reporting procedures, improved controls
over sales representatives and sales orders and hiring and
payroll procedures, and new and more stringent credit approval
policies.

In the course of the investigation, the Company
discovered accounting and financial irregularities arising from
activities that appear to have been initiated by a number of
parties no longer associated with the Company, resulting in,
among other things, an overstatement in revenue of an aggregate
amount of $129.4 million over the restated periods. The
circumstances necessitating the restatement, and the impact on
the Company, can be described in the following general
categories:



| |                     
| | --------------------
| | Revenue Restatement:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Company discovered that its revenue had been
    overstated for certain periods because revenue from sales in the
    Asia-Pacific region had been recognized in situations where
    customers had indirectly received Company funds from third
    parties, by means of arrangements effected through unauthorized
    acts of Company employees. These arrangements were entered into
    in violation of Company procedures and were not reported to the
    appropriate personnel within the Company.

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CLARENT CORPORATION


NOTES TO UNAUDITED CONDENSED
CONSOLIDATED

FINANCIAL
STATEMENTS  (Continued)




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Revenue also had been overstated for certain
    periods because revenue had been recognized from certain sales
    in the Asia-Pacific region where customers now claim to have
    return rights or that the Company has repurchase obligations.
    The Company now believes that certain Company personnel may have
    entered into agreements with customers in the Asia-Pacific
    region purporting to provide such return rights or repurchase
    obligations. These agreements were entered into in violation of
    Company procedures and were not reported to the appropriate
    personnel within the Company.
|
| |  | The Company has restated revenue for certain
    periods because, based on current information and actual payment
    history, it now appears that certain customers may not have been
    creditworthy at the time of purchase.                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | Revenue also had been overstated for certain
    periods because of transactions involving the sale of products
    over which the Company continued to have some control until a
    subsequent period.                                                                                                                                                                                                                                                                                                                                                                                                                      



| |                    
| | -------------------
| | Impact on Expenses:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In connection with the restatement, the Company
    has adjusted certain accruals and reserves related to accounts
    receivable, warranty and inventory and has made reclassification
    entries. The Company also recorded additional losses in the form
    of restructuring and asset impairments in the third quarter of
    2001. These losses resulted from what the Company now knows was
    an over-expansion of its operating capacity and operating
    expenses as well as the overall downturn in the
    telecommunications industry. The Company increased its operating
    capacity based on forecasts that included revenue levels that
    the Company now knows, based on the discovery of financial
    irregularities, were overstated, but which the Company believed
    at the time were appropriate.
|
| |  | The Company also determined that expenses were
    understated because certain payments or loans made from the
    Asia-Pacific regional office were effected in violation of
    Company procedures and were not reported to the appropriate
    personnel within the Company. The Company believes that such
    payments or loans are not recoverable.                                                                                                                                                                                                                                                                                                                                                                                                                                                                        



| |                     
| | --------------------
| | Financial Condition:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Companys cash position was overstated
    in the March 31, 2001 and June 30, 2001 financial
    statements because personnel in the Asia Pacific region
    transferred cash in violation of the Companys policies and
    procedures. These cash transfers were not reported to the
    appropriate personnel within the Company. As a result, the cash
    transfers were accounted for in improper periods. As of
    September 30, 2001, in the aggregate, there was no direct
    material impact on the cash position of the Company as a result
    of the improper recording of these transactions, including the
    cash transfers, although the Company had recorded liabilities of
    approximately $24 million associated with the
    irregularities giving rise to the restatement. As of the date of
    filing of this report, the Companys cash position has been
    materially impacted by several factors, as discussed below.
|
| |  | The unauthorized transactions with third parties
    that appear to have used Company funds to purchase the
    Companys products had a material impact on the
    Companys financial condition because of the expense of the
    inventory for which the Company will probably not be able to
    recover any value and the associated distribution costs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | The Companys primary source of liquidity is
    its operating cash flows, which have been disrupted by the
    activities giving rise to, and the impact of, the restatement as
    well as the downturn in demand for telecommunications equipment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

7



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##### Table of Contents



CLARENT CORPORATION


NOTES TO UNAUDITED CONDENSED
CONSOLIDATED

FINANCIAL
STATEMENTS  (Continued)




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Company suffered substantial operating losses
    due to the activities necessitating the restatement because it
    over-expanded its operating capacity and operating expenses in
    2000 and the first two quarters of 2001. The Company increased
    its operating capacity based on forecasts that included revenue
    levels that the Company now knows, based on the discovery of
    financial irregularities, were overstated, but which the Company
    believed at the time were appropriate.

As a result of the information discovered in the
investigation, the Company has determined that it is appropriate
to restate its financial statements for the quarters ended
March 31, 2000, June 30, 2000, September 30,
2000, December 31, 2000, March 31, 2001 and
June 30, 2001, as well as for the year ended
December 31, 2000. For more current information regarding
the restatements, please refer to the Companys Quarterly
Report on Form 10-Q for the quarterly period ended
September 30, 2001.

The following tables summarize the effects of the
restatement for the quarterly period ended June 30, 2000.

Condensed Consolidated Statements of Operations
Data (in thousands, except per share amounts):

|                                     |  |                    |        |                  |  |             |         |             |  |   |        |   |  |   |         |  
|------------------------------------ |  | ------------------ | ------ | ---------------- |  | ----------- | ------- | ----------- |  | - | ------ | - |  | - | ------- | -
|                                     |  |                    |        |                 
|                                     |  | Three Months Ended |        | Six Months Ended
|                                     |  | June 30, 2000      |        | June 30, 2000   
|                                     |  |                    |        |                 
|                                     |  | As Reported        |        | As Restated      |  | As Reported |         | As Restated
|                                     |  |                    |        |                  |  |             |         |            
|Total net revenue                    |  | $                  | 28,313 |                  |  | $           | 20,486  |             |  | $ | 52,896 |   |  | $ | 43,476  |  
|Gross profit                         |  |                    | 17,213 |                  |  |             | 9,792   |             |  |   | 31,847 |   |  |   | 23,745  |  
|Loss from operations                 |  |                    | (3,912 | )                |  |             | (11,616 | )           |  |   | (8,718 | ) |  |   | (17,103 | )
|Net income (loss)                    |  |                    | 228    |                  |  |             | (7,476  | )           |  |   | (488   | ) |  |   | (8,873  | )
|Basic and diluted net loss per share |  | $                  | 0.01   |                  |  | $           | (0.23   | )           |  | $ | (0.02  | ) |  | $ | (0.28   | )

Condensed Consolidated Balance Sheets Data (in
thousands):

|                                           |  |               |         |             |  |   |         | 
|------------------------------------------ |  | ------------- | ------- | ----------- |  | - | ------- | 
|                                           |  |              
|                                           |  | June 30, 2000
|                                           |  |              
|                                           |  | As Reported   |         | As Restated
|                                           |  |               |         |            
|Accounts receivable, net                   |  | $             | 29,102  |             |  | $ | 19,415  | 
|Inventories                                |  |               | 14,604  |             |  |   | 15,894  | 
|Total current assets                       |  |               | 322,768 |             |  |   | 314,371 | 
|Total assets                               |  |               | 349,726 |             |  |   | 341,329 | 
|Deferred revenue                           |  |               | 11,032  |             |  |   | 10,170  | 
|Other accrued liabilities                  |  |               | 9,806   |             |  |   | 10,656  | 
|Total current liabilities                  |  |               | 36,240  |             |  |   | 36,228  | 
|Total stockholders equity                 |  |               | 313,486 |             |  |   | 305,101 | 
|Total liabilities and stockholders equity |  |               | 349,726 |             |  |   | 341,329 | 



| |              
| | -------------
| | Recent Events

In January 2002, the Company engaged Regent
Pacific Management Corporation, an international firm that
specializes in the recovery and restructuring of
under-performing companies, and appointed Gary J. Sbona of
Regent Pacific as its chief executive officer. Mr. Sbona
has also joined the Companys board of directors and has
been appointed chairman of the board. On March 9, 2002, the
Company appointed James B. Weil of Regent Pacific as its
president.

At March 31, 2002, the Companys cash,
cash equivalents and short-term investments were approximately
$34 million, which may not be adequate to meet the
Companys operating cash needs through the end

8



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##### Table of Contents



CLARENT CORPORATION


NOTES TO UNAUDITED CONDENSED
CONSOLIDATED

FINANCIAL
STATEMENTS  (Continued)


of 2002, unless the Company achieves increased
revenues and further reduces its expenses. To reduce its
expenditures, the Company restructured in several areas,
including reducing staffing, implementing expense management and
curtailing capital spending. For example, since July 2001, the
Companys headcount decreased by approximately 82%, from
approximately 1,018 employees to approximately
180 employees currently. In addition, the Company has
sustained, and expects to continue to sustain, substantial
expenses arising from the restatement of its financial
statements and related litigation matters. Until the Company
resolves the claims against it and reduces its commitments, the
Company expects that its expenses will continue to exceed its
revenues for the foreseeable future. The Company plans to take
further measures to conserve cash, and to continue to evaluate
its strategic alternatives.

For the quarter ended September 30, 2001,
the Company reported revenues of $18.7 million. In quarters
subsequent to the quarter ended September 30, 2001,
revenues have declined substantially. The Companys
revenues have been, and the Company expects will continue to be,
materially affected by the downturn in demand for
telecommunications equipment and by events causing, and the
impact of, the restatement of its financial statements. The
Company does not expect demand for its products to recover for
the remainder of 2002, and the Company expects operating losses
and negative cash flows from operations to continue for the
foreseeable future.

If the Company is not able to achieve increased
revenues and resolve the claims against it, or if the Company
incurs unexpected expenditures, then it will need to reduce
expenses further and raise additional funds to continue as a
going concern. The Company continues to evaluate its strategic
alternatives, including financing transactions or a sale of
assets. Due to the unavailability of a public market for the
Companys stock as well as the Companys current stock
price, additional funding may not be available to the Company on
favorable terms or at all. If the Company raises additional
funds through the issuance of equity securities, the percentage
ownership of its stockholders could be significantly diluted.
Furthermore, these securities may have rights, preferences or
privileges senior to the Companys common stock. If
additional funding is not available when needed, the Company may
be unable to continue as a going concern and achieve its
intended business objectives.

2.     FINANCIAL
INSTRUMENTS

Estimated fair values of financial instruments
are based on quoted market prices. The following is a summary of
available-for-sale securities (in thousands) at June 30,
2000:

|                         |  |           |         |            |  |            |    |            |  |   |     |   |  |   |         | 
|------------------------ |  | --------- | ------- | ---------- |  | ---------- | -- | ---------- |  | - | --- | - |  | - | ------- | 
|                         |  |           |         | Gross      |  | Gross      |    |           
|                         |  | Amortized |         | Unrealized |  | Unrealized |    |           
|                         |  | Cost      |         | Gains      |  | Losses     |    | Fair Value
|                         |  |           |         |            |  |            |    |           
|Money market fund        |  | $         | 7,461   |            |  | $          |   |            |  | $ | (2  | ) |  | $ | 7,459   | 
|Commercial paper         |  |           | 155,178 |            |  |            |   |            |  |   | (25 | ) |  |   | 155,153 | 
|Government securities    |  |           | 66,669  |            |  |            | 15 |            |  |   | (36 | ) |  |   | 66,648  | 
|Market auction preferred |  |           | 37,450  |            |  |            |   |            |  |   |    |   |  |   | 37,450  | 
|                         |  |           |         |            |  |            |    |            |  |   |     |   |  |   |         | 
|                         |  | $         | 266,758 |            |  | $          | 15 |            |  | $ | (63 | ) |  | $ | 266,710 | 
|                         |  |           |         |            |  |            |    |            |  |   |     |   |  |   |         | 
|Classified as:           |  |           |         |            |  |            |    |            |  |   |     |   |  |   |         | 
|Cash equivalents         |  | $         | 189,720 |            |  | $          |   |            |  | $ | (27 | ) |  | $ | 189,693 | 
|Short-term investments   |  |           | 77,038  |            |  |            | 15 |            |  |   | (36 | ) |  |   | 77,017  | 
|                         |  |           |         |            |  |            |    |            |  |   |     |   |  |   |         | 
|                         |  | $         | 266,758 |            |  | $          | 15 |            |  | $ | (63 | ) |  | $ | 266,710 | 
|                         |  |           |         |            |  |            |    |            |  |   |     |   |  |   |         | 

9



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##### Table of Contents



CLARENT CORPORATION


NOTES TO UNAUDITED CONDENSED
CONSOLIDATED

FINANCIAL
STATEMENTS  (Continued)


Expected maturities may differ from contractual
maturities because the issuers of the securities may have the
right to prepay or call obligations without prepayment
penalties. Realized gains and losses on sales of
available-for-sale securities were immaterial for the six months
ended June 30, 2000.

3.     INVENTORIES

Inventories consist of the following (in
thousands):

|               |  |            |        |              |  |   |       | 
|-------------- |  | ---------- | ------ | ------------ |  | - | ----- | 
|               |  | June 30,   |        | December 31,
|               |  | 2000       |        | 1999        
|               |  |            |        |             
|               |  | (Restated) |        |             
|Raw materials  |  | $          | 12,676 |              |  | $ | 7,347 | 
|Finished goods |  |            | 3,218  |              |  |   | 1,057 | 
|               |  |            |        |              |  |   |       | 
|               |  | $          | 15,894 |              |  | $ | 8,404 | 
|               |  |            |        |              |  |   |       | 

Inventory charges totaling $3.4 million were
taken during the three months ended June 30, 2000,
reflecting product costs associated with products shipped to
certain customers in the Asia-Pacific region for which revenue
was not recognizable, and for which the inventory is not
expected to be recoverable.

4.     COMPREHENSIVE
LOSS

The Companys total comprehensive loss is as
follows (in thousands):

|                                   |                                         |                    |        |                  |   |            |         |      |   |   |        |     |   |   |         |    | 
|---------------------------------- | --------------------------------------- | ------------------ | ------ | ---------------- | - | ---------- | ------- | ---- | - | - | ------ | --- | - | - | ------- | -- | 
|                                   |                                         |                    |        |                 
|                                   |                                         | Three Months Ended |        | Six Months Ended
|                                   |                                         | June 30,           |        | June 30,        
|                                   |                                         |                    |        |                 
|                                   |                                         | 2000               |        | 1999             |   | 2000       |         | 1999
|                                   |                                         |                    |        |                  |   |            |         |     
|                                   |                                         | (Restated)         |        |                  |   | (Restated) |         |     
|Net loss                           |                                         | $                  | (7,476 | )                |   | $          | (17,564 | )    |   | $ | (8,873 | )   |   | $ | (23,043 | ) 
|Other comprehensive income (loss): |                                         |                    |        |                  |   |            |         |      |   |   |        |     |   |   |         |   
|                                   | Translation adjustments                 |                    |        | (114             | ) |            |         | (2   | ) |   |        | (21 | ) |   |         | 24 | 
|                                   | Unrealized income (loss) on investments |                    |        | 16               |   |            |         |     |   |   |        | (29 | ) |   |         |   | 
|                                   |                                         |                    |        |                  |   |            |         |      |   |   |        |     |   |   |         |   
|Comprehensive loss                 |                                         | $                  | (7,574 | )                |   | $          | (17,566 | )    |   | $ | (8,923 | )   |   | $ | (23,019 | ) 
|                                   |                                         |                    |        |                  |   |            |         |      |   |   |        |     |   |   |         |   

5.     INCOME
TAXES

The provision for income taxes of $259,000 and
$284,000 for the three and six months ended June 30, 2000
consist of foreign income tax provided on the profits
attributable to the Companys foreign operations.

6.     STOCKHOLDERS
EQUITY

On February 15, 2000, the Companys
stockholders authorized an amendment to the restated certificate
of incorporation to increase the authorized number of shares of
common stock to 200,000,000 from 50,000,000 shares.

On January 31, 2000, the Company increased
the aggregate number of shares of common stock authorized for
issuance under the 1999 Amended and Restated Equity Incentive
Plan (the 1999 Plan) by 792,465, or 2.5% of the
Companys outstanding shares, measured as of that date.
This increase was in accordance with the provisions of the 1999
Plan. At a special meeting of the Companys stockholders on
February 15, 2000, the Companys stockholders approved
an amendment to the 1999 Plan to increase the aggregate number
of shares of common stock authorized for issuance under the 1999
Plan by 2,641,830 shares. On June 7, 2000 at the
annual meeting of the Companys stockholders, the
Companys stockholders approved

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CLARENT CORPORATION


NOTES TO UNAUDITED CONDENSED
CONSOLIDATED

FINANCIAL
STATEMENTS  (Continued)


a further amendment to the 1999 Plan to increase
the shares of common stock authorized for issuance by 2,000,000
to a total of 16,792,465.

Also at the annual meeting of stockholders on
June 7, 2000, the Companys stockholders approved an
amendment to the 1999 Non-Employee Directors Stock Option
Plan (the Directors Plan) to increase the
aggregate number of shares of common stock authorized for
issuance under the Directors Plan by 200,000 shares
to 500,000 and authorized a change in the number of shares
granted under and the vesting provisions of grants available
under the Directors Plan.

7.     SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION

The Company operates in one industry segment. The
Company designs, develops and sells Internet protocol telephony,
or IP telephony, systems. Net revenue for
non-U.S. locations is substantially the result of export
sales from the U.S.

Net revenue by geographic region based on
customer location was as follows (in thousands):

|                              |                                |                    |   |                  |        |            |   |       |       |  |   |        |        |  |   |       |        | 
|----------------------------- | ------------------------------ | ------------------ | - | ---------------- | ------ | ---------- | - | ----- | ----- |  | - | ------ | ------ |  | - | ----- | ------ | 
|                              |                                |                    |   |                 
|                              |                                | Three Months Ended |   | Six Months Ended
|                              |                                | June 30,           |   | June 30,        
|                              |                                |                    |   |                 
|                              |                                | 2000               |   | 1999             |        | 2000       |   | 1999 
|                              |                                |                    |   |                  |        |            |   |      
|                              |                                | (Restated)         |   |                  |        | (Restated) |   |      
|Product and software revenue: |                                |                    |   |                  |        |            |   |       |       |  |   |        |        |  |   |      
|                              | United States                  |                    | $ | 4,016            |        |            | $ | 2,878 |       |  | $ | 12,368 |        |  | $ | 6,864 |       
|                              | Other Americas                 |                    |   | 2,043            |        |            |   | 42    |       |  |   | 2,639  |        |  |   | 101   |       
|                              | Europe, Middle East and Africa |                    |   | 3,846            |        |            |   | 579   |       |  |   | 9,305  |        |  |   | 764   |       
|                              | Asia Pacific                   |                    |   | 7,523            |        |            |   | 4,987 |       |  |   | 13,601 |        |  |   | 6,885 |       
|                              |                                |                    |   |                  |        |            |   |       |       |  |   |        |        |  |   |      
|                              |                                | Total              |   | $                | 17,428 |            |   | $     | 8,486 |  |   | $      | 37,913 |  |   | $     | 14,614 | 
|                              |                                |                    |   |                  |        |            |   |       |       |  |   |        |        |  |   |      
|Service revenue:              |                                |                    |   |                  |        |            |   |       |       |  |   |        |        |  |   |      
|                              | United States                  |                    | $ | 395              |        |            | $ | 460   |       |  | $ | 1,866  |        |  | $ | 803   |       
|                              | Other Americas                 |                    |   | 985              |        |            |   | 17    |       |  |   | 1,038  |        |  |   | 24    |       
|                              | Europe, Middle East and Africa |                    |   | 878              |        |            |   | 78    |       |  |   | 1,239  |        |  |   | 110   |       
|                              | Asia Pacific                   |                    |   | 800              |        |            |   | 263   |       |  |   | 1,420  |        |  |   | 467   |       
|                              |                                |                    |   |                  |        |            |   |       |       |  |   |        |        |  |   |      
|                              |                                | Total              |   | $                | 3,058  |            |   | $     | 818   |  |   | $      | 5,563  |  |   | $     | 1,404  | 
|                              |                                |                    |   |                  |        |            |   |       |       |  |   |        |        |  |   |      

8.     OTHER
ASSETS

During March 2000, the Company reduced its
accounts receivable by accepting Series A preferred stock
of one of its privately held customers with a value of
$1.5 million as an alternative to cash payment. At
June 30, 2000 the Companys investment was recorded at
cost. Revenues from this customer totaled $3.4 million in
the six months ended June 30, 2000 and were recorded at the
value of the products and services sold. During June 2000, the
Company invested $3.8 million in a venture capital
management fund and has committed to invest an additional
$11.2 million in this venture capital management fund over
the next three quarters. At June 30, 2000, this investment
is recorded at cost as the Company has no influence over the
operating and financial policies of the fund.

9.     NET LOSS PER
SHARE

Basic and diluted net loss per share is computed
by dividing net loss by the weighted average number of common
shares outstanding during the period less outstanding shares
subject to a right of repurchase by the

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CLARENT CORPORATION


NOTES TO UNAUDITED CONDENSED
CONSOLIDATED

FINANCIAL
STATEMENTS  (Continued)


Company. Outstanding shares subject to repurchase
are not included in the computations of basic and diluted net
loss per share until the time-based vesting restrictions have
lapsed.

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

|                                     |                                     |                                                          |       |                  |        |            |       |         |       |   |       |        |        |   |       |         |       | 
|------------------------------------ | ----------------------------------- | -------------------------------------------------------- | ----- | ---------------- | ------ | ---------- | ----- | ------- | ----- | - | ----- | ------ | ------ | - | ----- | ------- | ----- | 
|                                     |                                     |                                                          |       |                 
|                                     |                                     | Three Months Ended                                       |       | Six Months Ended
|                                     |                                     | June 30,                                                 |       | June 30,        
|                                     |                                     |                                                          |       |                 
|                                     |                                     | 2000                                                     |       | 1999             |        | 2000       |       | 1999   
|                                     |                                     |                                                          |       |                  |        |            |       |        
|                                     |                                     |                                                         
|                                     |                                     | (In thousands, except per share amounts)                
|                                     |                                     | (Restated)                                               |       |                  |        | (Restated) |       |        
|Numerator:                           |                                     |                                                          |       |                  |        |            |       |         |       |   |       |        |        |   |       |        
|                                     | Net loss                            |                                                          | $     | (7,476           | )      |            | $     | (17,564 | )     |   | $     | (8,873 | )      |   | $     | (23,043 | )    
|                                     |                                     |                                                          |       |                  |        |            |       |         |       |   |       |        |        |   |       |        
|Denominator:                         |                                     |                                                          |       |                  |        |            |       |         |       |   |       |        |        |   |       |        
|                                     | Weighted average shares outstanding |                                                          |       | 33,075           |        |            |       | 7,892   |       |   |       | 32,483 |        |   |       | 7,582   |      
|                                     | Less shares subject to repurchase   |                                                          |       | (141             | )      |            |       | (1,463  | )     |   |       | (309   | )      |   |       | (1,631  | )    
|                                     |                                     |                                                          |       |                  |        |            |       |         |       |   |       |        |        |   |       |        
|                                     |                                     | Denominator for basic and diluted net loss per
    share |       |                  | 32,934 |            |       |         | 6,429 |   |       |        | 32,174 |   |       |         | 5,951 | 
|                                     |                                     |                                                          |       |                  |        |            |       |         |       |   |       |        |        |   |       |        
|Basic and diluted net loss per share |                                     | $                                                        | (0.23 | )                |        | $          | (2.73 | )       |       | $ | (0.28 | )      |        | $ | (3.87 | )      
|                                     |                                     |                                                          |       |                  |        |            |       |         |       |   |       |        |        |   |       |        

In periods with a net loss, the Company excludes
all convertible preferred stock, warrants for convertible
preferred stock and common stock, outstanding stock options and
shares subject to repurchase from the calculation of diluted net
loss per common share because all such securities are
anti-dilutive. The total number of shares excluded from the
calculations of diluted net loss per share were 5,232,000 and
21,261,000 for the three months ended June 30, 2000 and
June 30, 1999, respectively, and 6,156,000 and 21,525,000
for the six months ended June 30, 2000 and June 30,
1999, respectively.

10.     RELATED PARTY
TRANSACTIONS

Transactions
with Management and Others

On April 25, 2000, AginfoLink USA, Inc.
(AginfoLink) borrowed $250,000, pursuant to a
promissory note, from Matthew Chiang, in his individual
capacity, who was a non-officer employee of the Company at the
time. Mr. Chiang served as President of the Companys
Asia-Pacific regional office from January 2001 to September
2001. The Company believes that William Pape, a director of the
Company, holds a minority equity interest in AginfoLink and
serves on the board of directors of AginfoLink. In the
promissory note, AginfoLink agreed to repay the loan principal,
as well as accrued and unpaid interest, on May 31, 2000.
AginfoLink has informed the Company that it has taken the
necessary steps to tender payment of the outstanding amount
under this loan.

Transactions
Related to Asia-Pacific Region

The Company entered into various transactions
with entities that, as a result of the investigation, the
Company now believes are controlled by Matthew Chiang or members
of his immediate family. Mr. Chiang was employed by the
Company as a Marketing Director of the Asia-Pacific region from
July 1997 to June 1999, a Director, Product and Market Strategy
from July 1999 to December 2000 and the Companys Vice
President and General Manager of the Asia Pacific region and
served as the President of its Asia-Pacific

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CLARENT CORPORATION


NOTES TO UNAUDITED CONDENSED
CONSOLIDATED

FINANCIAL
STATEMENTS  (Continued)


regional office from January 2001 to September
2001. The entities believed to be controlled by Mr. Chiang
or members of his immediate family are Great MinCom
Communication Corporation (which the Company believes is also
known as Great MinCom Products Corporation and collectively,
Great MinCom) and Articula Corporation
(Articula). The Company believes that
Mr. Chiang may have had a direct or indirect material
interest in each of the transactions between the Company, Great
MinCom and Articula. The Company believes that Jerry Chang, who
was a director of the Company from July 1996 to September 2001,
the Companys President from July 1996 to April 2001, Chief
Executive Officer from July 1996 to July 2001 and Chief
Strategist from July 2001 to September 2001, may have an
indirect financial interest in Articula.

During the year ended December 31, 2000, the
Company sold products with an aggregate value of approximately
$4.1 million to Great MinCom.

In December 2000 and March 2001, transfers of
Company funds of $6.0 million and $7.0 million,
respectively, were made to Great MinCom, with the funds intended
for use as bid deposits in connection with certain proposed
transactions in the Asia Pacific region (the Bid
Deposits). As a result of the investigation, the Company
has now determined that personnel in the Asia-Pacific region
improperly reported that the second transfer to Great MinCom
occurred in the second quarter of 2001 when the second transfer
actually occurred in the first quarter of 2001, resulting in a
$7.0 million overstatement of the Companys cash
balance at March 31, 2001.

In June 2001, the Company and Great MinCom
entered into a Confirmation Agreement pursuant to which Great
MinCom agreed to return the funds advanced as Bid Deposits to
the Company by December 31, 2001, unless Great MinCom
secured contracts for the proposed transactions relating to the
Bid Deposits, in which case Great MinCom agreed to return the
funds advanced as Bid Deposits after completion of the
transactions. As a result of the investigation, the Company now
believes that the funds advanced as Bid Deposits were not used
for their intended purpose and are not recoverable.

From April to July 2001, an additional
$43.0 million was transferred by the Asia-Pacific regional
office to Great MinCom and Articula in violation of the
Companys financial control procedures. After transfer of
these funds, the Company received promissory notes in exchange
for the cash. These promissory notes are: a promissory note from
Articula in the amount of $3.0 million (bearing interest of
4.15% per annum from May 3, 2001); a promissory note from
Great MinCom in the amount of $2.4 million (bearing
interest of 4.15% per annum from May 21, 2001); and a
convertible promissory note from Articula and Great MinCom in
the amount of $37.6 million (bearing interest of 5.0% per
annum from July 25, 2001 and due in January 2002). At the
same time as the execution of the $37.6 million convertible
promissory note, the Company entered into a Strategic Partner
Agreement with Articula and Great MinCom as of July 25,
2001, pursuant to which Articula and Great MinCom, among other
things, agreed to provide sales and marketing support to the
Company and to use the Company as their exclusive supplier of
VoIP products.

None of the amounts covered by the two promissory
notes executed in May 2001 and the promissory note executed in
July 2001 had been repaid as of the date of this filing. As a
result of the investigation, the Company has now determined that
$36.5 million had been transferred prior to the end of the
second quarter of 2001 but not reported to the appropriate
Company personnel, resulting in a $36.5 million
overstatement of the cash balance for the quarterly period ended
June 30, 2001.

An aggregate of $3.0 million of the funds
transferred to Articula and Great MinCom by the Companys
Asia-Pacific regional office was intended for use as partial
payment for the Companys obligations under: a Joint
Marketing Agreement dated as of April 4, 2001 between the
Company and Articula pursuant to which the Company agreed to pay
Articula $3.0 million; and a Consulting Services Agreement
dated as of May 10, 2001 between the Company and Great
MinCom pursuant to which the Company agreed to pay Great MinCom
$1.1 million. In connection with the Consulting Services
Agreement, Great MinCom agreed to assist

13



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##### Table of Contents



CLARENT CORPORATION


NOTES TO UNAUDITED CONDENSED
CONSOLIDATED

FINANCIAL
STATEMENTS  (Continued)


the Company with the development of channel
partner relationships for network design and system integration.

Principal of approximately $43.0 million
plus accrued interest is outstanding under the various
promissory notes as of September 30, 2001. As a result of
the investigation and restatement the Company has now determined
that a significant portion of the funds related to the
$43.0 million, as well as the $13.0 million in Bid
Deposits mentioned above and the $11.0 million from the
guaranty noted below, may have been used by third parties to
purchase the Companys products from the Companys
customers. As a result, the Company reversed all revenue
associated with the products original sale and expensed
the associated inventory in the same period that the revenue was
originally recognized because it is not believed to be
recoverable and, for accounting purposes only, recorded any
payment associated with the reversed revenue transactions as a
reduction in the notes receivable balances. Remaining notes
receivable balances of approximately $8.2 million were
provided for by charges to other expense during the third
quarter of 2001 due to the doubtful probability of collection.
Although accounted for as described above, as of the date of
this filing, the notes remain outstanding and unpaid. The
Company reserves its rights to pursue collection of the entire
principal balance plus accrued interest for each of the loans
and the Bid Deposit amounts, in addition to other remedies or
actions available to the Company.

D-Link Corporation (D-Link), a
distributor and supplier to the Company, claims that on
July 3, 2001 the Company executed a guaranty of
Articulas repayment of an $11.0 million loan from
D-Link to Articula. The purported guaranty was not reported to
the appropriate personnel in the Company by the executive who
signed the guaranty in violation of the Companys
procedures. The Company now believes that, as of the date of
this filing, Articula had repaid $2.0 million of the amount
purportedly guarantied by the Company. The Company has recorded
a liability of $9.0 million (in customer advances) in its
September 30, 2001 financials as a result of this purported
guaranty.

During May through July 2001, Mr. Chiang,
the President of the Companys Asia-Pacific regional
office, received from the Company cash advances or effected
loans in violation of the Companys policies in the amount
of approximately $1.1 million, all of which is outstanding,
but fully reserved for, as of September 30, 2001.
Mr. Chiang also effected loans and investments from the
Asia-Pacific regional office in violation of the Companys
financial control policies, in the amount of approximately
$703,000, some of which directly or indirectly benefited
Mr. Chiang. These transactions were not reported to the
appropriate personnel in the Company and the amounts remain
outstanding, but fully reserved for, as of September 30,
2001. The Company now believes that these loans and investments
resulted in the payments of Company funds to customers who used
Company funds for the purchase of Company products. The Company
has reversed all revenue associated with the original recording
of revenue of such products and expensed the associated
inventory in the same period that the revenue was originally
recognized.

Indebtedness
of Management

As described in Transactions Related to
Asia-Pacific Region, Mr. Chiang, a former executive
of the Company, and certain entities affiliated with
Mr. Chiang are currently indebted to the Company.

11.     RECENT
ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Financial
Instruments and for Hedging Activities
(SFAS 133) which provides a comprehensive and
consistent standard for the recognition and measurement of
derivatives and hedging activities. SFAS 133 is effective
for fiscal years beginning after June 15, 2000 and is not
anticipated to have an impact on the Companys results of
operations or financial condition when adopted as the Company
holds no derivative financial instruments and does not currently
engage in hedging activities.

14



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##### Table of Contents



CLARENT CORPORATION


NOTES TO UNAUDITED CONDENSED
CONSOLIDATED

FINANCIAL
STATEMENTS  (Continued)


In December 1998, the AICPA issued Statement of
Position 98-9, Modification of SOP 97-2,
Software Revenue Recognition, With Respect to Certain
Transactions (SOP 98-9). SOP 98-9
requires use of the residual method for recognition
of revenue when vendor-specific objective evidence (VSOE) exists
for undelivered elements but does not exist for delivered
elements of a software arrangement. The Company adopted the
provisions of SOP 98-9 for transactions entered into
beginning January 1, 2000. The adoption of SOP 98-9
did not have a material impact on the Companys
consolidated financial statements.

In December 1999, the Securities and Exchange
Commission issued Staff Accounting Bulletin No. 101
Revenue Recognition in Financial Statements
(SAB 101). SAB 101 provides guidance on the
recognition, presentation, and disclosure of revenue in
financial statements. The Company will be required to adopt
SAB 101 in the fourth quarter of 2000. The SEC has
indicated that they intend to issue additional written guidance
to further supplement SAB 101. The Company is currently
evaluating the impact of SAB 101 on its consolidated
results of operations, financial position, and cash flows.

12.     SUBSEQUENT
EVENT  ACQUISITIONS

On July 24, 2000 the Company completed the
acquisition of PEAK Software Solutions, Inc., (PEAK)
a leading software development firm specializing in building
IP-based, carrier class data and telecommunications
infrastructure software. Under the terms of the agreement, each
outstanding share of PEAK stock was exchanged for 0.8636 of a
share of the Companys common stock and cash of
approximately $25.00 per share, and the Company paid PEAK
approximately $1.5 million to retire certain PEAK
obligations. The Company issued approximately $44.5 million
in stock and paid $16.7 million in cash.

On August 10, 2000 the Company acquired ACT
Networks, Inc. (ACT Networks). ACT Networks is a
leading provider of multi-service access and voice/data
integration products that enable the convergence of voice, video
and data onto one managed network. Under the terms of the
agreement, each outstanding share of ACT Networks was exchanged
for 0.4198 of a share of the Companys common stock. The
exchange ratio was based upon an ACT Networks stock value of
$14.00 per share divided by the Companys five trading day
average closing price ending on and including August 9,
2000 of $33.35 per share. The Company issued approximately
$150.0 million of stock for the outstanding shares of ACT
Networks and assumed an estimated $27.0 million in ACT
Networks outstanding stock options.

13.     SUBSEQUENT
EVENT  LITIGATION

Beginning in July 2001, the Company and certain
of its current and former officers and directors were named as
defendants in several class action shareholder complaints filed
in the United States District Court for the Southern District of
New York, collectively captioned In re Clarent Corp. Initial
Public Offering Securities Litigation. These lawsuits
purport to bring suit on behalf of all purchasers of the
Companys common stock between July 1, 1999 and
December 6, 2000. In these actions, the plaintiffs allege
that the Company, certain of its officers and directors and the
underwriters of its initial public offering (IPO)
violated the federal securities laws because the Companys
IPO registration statement and prospectus purportedly contained
untrue statements of material fact or omitted material facts
regarding the compensation to be received by, and the stock
allocation practices of, the IPO underwriters. The plaintiffs
further allege that the prospectus relating to the
Companys secondary offering was false and misleading for
the same reasons. The plaintiffs seek unspecified monetary
damages and other relief. Similar complaints were filed in the
same Court against hundreds of other public companies that
conducted IPOs of their common stock since the late 1990s (the
IPO Lawsuits). On August 8, 2001, the IPO
Lawsuits were consolidated for pretrial purposes before United
States Judge Shira Scheindlin of the Southern District of New
York. Judge Scheindlin held an initial case management
conference on September 7, 2001, at which time she ordered,
among other things, that the time for all defendants to respond
to any complaint be postponed until further order of the Court.

15



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CLARENT CORPORATION


NOTES TO UNAUDITED CONDENSED
CONSOLIDATED

FINANCIAL
STATEMENTS  (Continued)


Thus, the Company has not been required to answer
any of the complaints, and no discovery has been served on the
Company. In accordance with Judge Scheindlins orders at
further status conferences in March and April, the appointed
lead plaintiffs counsel filed amended, consolidated
complaints in the IPO Lawsuits on April 19, 2002. However,
Judge Scheindlin does not expect any of the defendants to file
motions to dismiss the amended, consolidated complaints until at
least summer of 2002.

In September and October 2001, a series of
securities law class action complaints were filed in the United
States District Court for the Northern District of California
against the Company and certain of its current and former
executive officers and directors. The plaintiffs in each of
these actions allege, among other things, violations of the
Securities Exchange Act of 1934, as amended, due to the filing
with the SEC of allegedly false financial statements concerning
the Companys results of operations for the second, third
and fourth quarters of 2000, and the first and second quarters
of 2001. The original complaints seek unspecified monetary
damages and other relief. In November 2001, the court entered an
order consolidating these actions into a single action, and in
December 2001 appointed a lead class plaintiff. A consolidated
complaint has not yet been filed. No discovery has taken place
and no trial date has been set.

In October and November 2001, four shareholder
derivative actions were filed against the Company, three in the
Delaware Chancery Court and one in California Superior Court. In
November 2001, the three Delaware shareholder derivative actions
were consolidated into a single action. The plaintiffs in these
actions claim to be suing on the Companys behalf and name
various of the Companys current and former officers and
directors as defendants. The complaints assert several claims,
including breach of fiduciary duties, corporate waste, abuse of
control, unjust enrichment, usurpation of corporate
opportunities and mismanagement, resulting from, among other
things, the Companys reporting of allegedly false
financial statements concerning the Companys results of
operations for the second, third and fourth quarters of 2000 and
the first and second quarters of 2001, the Companys
alleged failure to disclose information regarding the
Companys operations and the defendants alleged
failure to implement and maintain adequate internal financial
controls. The complaints seek unspecified monetary damages and
other relief. The plaintiff in the California action has
commenced discovery against the defendants. However, the Company
is seeking a protective order relating to certain of the
discovery requests. Discovery has not commenced in the Delaware
action. On March 23, 2002, the Companys Board of
Directors formed a special litigation committee of the Board of
Directors to investigate the plaintiffs allegations. No
trial date has been set in either action.

On December 31, 2001, D-Link Corporation
(D-Link), a distributor and supplier to the Company,
filed two complaints in California Superior Court in which
D-Link asserted various breach of contract claims against the
Company. D-Link seeks damages of approximately
$19.0 million plus interest with respect to these alleged
breaches of contracts. On March 5, 2002 the court
consolidated the two actions. The Company has filed a
cross-complaint against D-Link alleging breach of contract and
breach of warranty. The Company has answered D-Links
complaints, denying all material allegations and asserting
various affirmative defenses. Discovery has commenced with
respect to both of the D-Link complaints, but a trial date has
not been set.

In December 2001, the Company received letters
from Bright Oceans Corporation (HK) Limited (Bright
Oceans) in which Bright Oceans asserted possible claims
against the Company. Bright Oceans claimed that it purchased
products from the Company on purchase orders subject to a right
of return. Bright Oceans seeks recovery of $4.6 million
plus interest and expenses based on its purported right of
return.

On April 12, 2002, a civil complaint for
violations of the federal securities laws was filed against the
Company and certain of its officers and directors in the United
States District Court for the District of Minnesota entitled
Ahlstrom, et al. v. Clarent Corporation, et al. The
plaintiffs in this action include Irwin L. Jacobs and a number
of investors apparently affiliated with him. Plaintiffs allege
that the defendants intentionally issued false financial reports
for the Company between March 2001 and August 2001 in violation
of Sections 10(b) and 20(a) of the Securities Exchange Act
of 1934 and similar provisions of Minnesota law.

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CLARENT CORPORATION


NOTES TO UNAUDITED CONDENSED
CONSOLIDATED

FINANCIAL
STATEMENTS  (Continued)


The Company currently believes that this
litigation will be coordinated or consolidated for most
pre-trial purposes with the other securities law class action
matters currently pending against the Company. This matter is at
an early stage. No response to the complaint has yet been filed,
and no discovery has taken place.

On April 26, 2002, certain former
shareholders of PEAK Software Solutions, Inc.
(PEAK), some of whom are current employees of the
Company, including a key employee of the Company, filed a
lawsuit against the Company in Colorado state court. The
complaint alleges claims for common law fraud, securities fraud
and breach of contract relating to the Companys
acquisition of PEAK in July 2000. The complaint does not specify
the damages sought. The complaint has not yet been served and no
response has been filed.

The Company intends to defend itself vigorously
against these allegations. However, the ultimate outcome of
these matters cannot presently be determined.

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|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF
    FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion in
conjunction with our Unaudited Condensed Consolidated Financial
Statements and related Notes. Certain statements contained in
this Quarterly Report on Form 10-Q/ A, including, without
limitation, statements containing the words believe,
anticipate, estimate,
expect, and words of similar import, constitute
forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. You should not
place undue reliance on these forward-looking statements. Our
actual results could differ materially from those anticipated in
these forward-looking statements for many reasons, including the
risks faced by us described below and elsewhere in this
Quarterly Report, and in other documents we file with the SEC,
including our Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 2001.

Overview

Clarent Corporation is a leading provider of
softswitch and Internet Protocol (IP) communications
solutions that take advantage of the flexibility and universal
reach of IP networks, the most prominent of which is the public
network known as the Internet. Our software platform and
softswitch solutions, in conjunction with our hardware, or
equipment provided by others, enable service providers to
deliver simultaneous transmission of voice, fax and data over IP
networks.

Our customers include service providers, system
integrators, resellers and enterprises. Service provider
customers include traditional local, international and wholesale
long distance telecommunication companies, as well as next
generation service providers, including Internet Service
Providers (ISPs), Application Service Providers
(ASPs), web-to-phone providers and others employing
Internet-based business models.

We sell our products both through distributors
and our direct sales force. We have sales and support personnel
based in a number of countries and locations throughout the
United States.

Our operations and prospects have been and we
expect will be significantly affected by the developments
leading to and relating to the restatement of our 2001 and 2000
financial statements. The circumstances necessitating the
restatement, and the impact on us, can be described in the
following general categories:

Revenue
Restatement:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We discovered that our revenue had been
    overstated for certain periods because revenue from sales in the
    Asia-Pacific region had been recognized in situations where
    customers had indirectly received our funds from third parties,
    by means of arrangements effected through unauthorized acts of
    our employees. These arrangements were entered into in violation
    of our procedures and were not reported to the appropriate
    personnel within the Company.                                                                                                              
|
| |  | Revenue also had been overstated for certain
    periods because revenue had been recognized from certain sales
    in the Asia-Pacific region where customers now claim to have
    return rights or that we have repurchase obligations. We now
    believe that certain of our personnel may have entered into
    agreements with customers in the Asia-Pacific region purporting
    to provide such return rights or repurchase obligations. These
    agreements were entered into in violation of our procedures and
    were not reported to the appropriate personnel within the
    Company.
|
| |  | We have restated revenue for certain periods
    because, based on current information and actual payment
    history, it now appears that certain customers may not have been
    creditworthy at the time of purchase.                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | Revenue also had been overstated for certain
    periods because of transactions involving the sale of products
    over which we continued to have some control until a subsequent
    period.                                                                                                                                                                                                                                                                                                                                                                                                        

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Impact on
Expenses:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In connection with the restatement, we have
    adjusted certain accruals and reserves related to accounts
    receivable, warranty and inventory and have made
    reclassification entries. We also recorded additional losses in
    the form of restructuring and asset impairments in the third
    quarter of 2001. These losses resulted from what we now know was
    an over-expansion of our operating capacity and operating
    expenses as well as the overall downturn in the
    telecommunications industry. We increased our operating capacity
    based on forecasts that included revenue levels that we now
    know, based on the discovery of financial irregularities, were
    overstated, but which we believed at the time were appropriate.
|
| |  | We also determined that expenses were understated
    because certain payments or loans made from the Asia-Pacific
    regional office were effected in violation of our procedures and
    were not reported to the appropriate personnel within the
    Company. We believe that such payments or loans are not
    recoverable.                                                                                                                                                                                                                                                                                                                                                                                                                                     

Financial
Condition:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Our cash position was overstated in the
    March 31, 2001 and June 30, 2001 financial statements
    because personnel in the Asia Pacific region transferred cash in
    violation of the our policies and procedures. These cash
    transfers were not reported to the appropriate personnel within
    the Company. As a result, the cash transfers were accounted for
    in improper periods. As of September 30, 2001, in the
    aggregate, there was no direct material impact on our cash
    position as a result of the improper recording of these
    transactions, including the cash transfers, although we had
    recorded liabilities of approximately $24 million
    associated with the irregularities giving rise to the
    restatement. As of the date of filing of this report, our cash
    position has been materially impacted by several factors, as
    discussed below.
|
| |  | The unauthorized transactions with third parties
    that appear to have used our funds to purchase our products had
    a material impact on our financial condition because of the
    expense of the inventory for which we will probably not be able
    to recover any value and the associated distribution costs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | Our primary source of liquidity is our operating
    cash flows, which have been disrupted by the activities giving
    rise to, and the impact of, the restatement as well as the
    downturn in demand for telecommunications equipment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | We suffered substantial operating losses due to
    the activities necessitating the restatement because we
    over-expanded our operating capacity and operating expenses in
    2000 and the first two quarters of 2001. We increased our
    operating capacity based on forecasts that included revenue
    levels that we now know, based on the discovery of financial
    irregularities, were overstated, but which we believed at the
    time were appropriate.                                                                                                                                                                                                                                                                                                                                                                                                                               

To address the activities discovered in our
investigation, we have implemented remedial actions, including
the prompt termination of employees who appear to have been
involved in activities relating to the irregularities, closure
of our regional headquarters, and the adoption of new and more
stringent subsidiary cash control and expense approval policies,
such as new banking and internal reporting procedures, improved
controls over sales representatives and sales orders and hiring
and payroll procedures, and new and more stringent credit
approval policies.

We direct you to refer to Note 1 of Notes to
Unaudited Condensed Consolidated Financial Statements and our
Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 2001 for more current information
regarding the restatement.

19



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##### Table of Contents



Results of Operations

The following table presents certain consolidated
statements of operations data for the periods indicated as a
percentage of total net revenue:

|                                       |                                       |                          |     |                  |     |            |      |      |      |    |     |     |     |    |      |      |      |   
|-------------------------------------- | ------------------------------------- | ------------------------ | --- | ---------------- | --- | ---------- | ---- | ---- | ---- | -- | --- | --- | --- | -- | ---- | ---- | ---- | --
|                                       |                                       |                          |     |                 
|                                       |                                       | Three Months Ended       |     | Six Months Ended
|                                       |                                       | June 30,                 |     | June 30,        
|                                       |                                       |                          |     |                 
|                                       |                                       | 2000                     |     | 1999             |     | 2000       |      | 1999
|                                       |                                       |                          |     |                  |     |            |      |     
|                                       |                                       | (Restated)               |     |                  |     | (Restated) |      |     
|As a percentage of net revenue:        |                                       |                          |     |                  |     |            |      |      |      |    |     |     |     |    |      |     
|                                       | Product and software                  |                          |     | 85               | %   |            |      | 91   | %    |    |     | 87  | %   |    |      | 91   | %   
|                                       | Service                               |                          |     | 15               |     |            |      | 9    |      |    |     | 13  |     |    |      | 9    |     
|                                       |                                       |                          |     |                  |     |            |      |      |      |    |     |     |     |    |      |     
|                                       |                                       | Total net revenue        |     |                  | 100 |            |      |      | 100  |    |     |     | 100 |    |      |      | 100  |   
|Cost of revenue:                       |                                       |                          |     |                  |     |            |      |      |      |    |     |     |     |    |      |     
|                                       | Product and software                  |                          |     | 42               |     |            |      | 37   |      |    |     | 37  |     |    |      | 39   |     
|                                       | Service                               |                          |     | 10               |     |            |      | 8    |      |    |     | 8   |     |    |      | 7    |     
|                                       |                                       |                          |     |                  |     |            |      |      |      |    |     |     |     |    |      |     
|                                       |                                       | Total cost of revenue    |     |                  | 52  |            |      |      | 45   |    |     |     | 45  |    |      |      | 46   |   
|                                       |                                       |                          |     |                  |     |            |      |      |      |    |     |     |     |    |      |     
|Gross profit                           |                                       |                          | 48  |                  |     |            | 55   |      |      |    | 55  |     |     |    | 54   |     
|Operating expenses:                    |                                       |                          |     |                  |     |            |      |      |      |    |     |     |     |    |      |     
|                                       | Research and development              |                          |     | 27               |     |            |      | 21   |      |    |     | 23  |     |    |      | 22   |     
|                                       | Sales and marketing                   |                          |     | 58               |     |            |      | 60   |      |    |     | 53  |     |    |      | 60   |     
|                                       | General and administrative            |                          |     | 14               |     |            |      | 14   |      |    |     | 12  |     |    |      | 17   |     
|                                       | Amortization of deferred compensation |                          |     | 5                |     |            |      | 147  |      |    |     | 5   |     |    |      | 98   |     
|                                       | Amortization of goodwill              |                          |     | 1                |     |            |      |     |      |    |     | 1   |     |    |      |     |     
|                                       |                                       |                          |     |                  |     |            |      |      |      |    |     |     |     |    |      |     
|                                       |                                       | Total operating expenses |     |                  | 105 |            |      |      | 242  |    |     |     | 94  |    |      |      | 197  |   
|                                       |                                       |                          |     |                  |     |            |      |      |      |    |     |     |     |    |      |     
|                                       | Loss from operations                  |                          |     | (57              | )   |            |      | (187 | )    |    |     | (39 | )   |    |      | (143 | )   
|Other income (expense), net            |                                       |                          | 22  |                  |     |            | (2   | )    |      |    | 20  |     |     |    | (1   | )   
|                                       |                                       |                          |     |                  |     |            |      |      |      |    |     |     |     |    |      |     
|Loss before provision for income taxes |                                       |                          | (35 | )                |     |            | (189 | )    |      |    | (19 | )   |     |    | (144 | )   
|Provision for income taxes             |                                       |                          | (1  | )                |     |            |     |      |      |    | (1  | )   |     |    |     |     
|                                       |                                       |                          |     |                  |     |            |      |      |      |    |     |     |     |    |      |     
|                                       |                                       | Net loss                 |     |                  | (36 | )%         |      |      | (189 | )% |     |     | (20 | )% |      |      | (144 | )%
|                                       |                                       |                          |     |                  |     |            |      |      |      |    |     |     |     |    |      |     

Net Revenue

Net revenue increased 120% to $20.5 million
in the three months ended June 30, 2000 from
$9.3 million in the three months ended June 30, 1999.
Net revenue for the six months ended June 30, 2000
increased 171% to $43.5 million as compared to
$16.0 million for the same period in 1999. The increase in
revenue was primarily attributable to an increase in product and
software sales of 105% to $17.4 million in the three months
ended June 30, 2000 from $8.5 million in the same
three-month period of 1999 and of 159% to $37.9 million in
the six months ended June 30, 2000 from $14.6 million
in the same six-month period of 1999. Service revenue from
maintenance and support increased by 274% to $3.1 million
in the three months ended June 30, 2000 from $818,000 for
the same three-month period of 1999 and by 296% to
$5.6 million in the six months ended June 30, 2000
from $1.4 million in the same six-month period of 1999. The
increase in service revenue is attributable to the increase in
product sales and a larger customer base. We have also decreased
dependency on key customers with no customer individually
contributing greater than 10% of revenue in the three months
ended June 30, 2000.

Cost of Revenue

Cost of revenue increased 158% to
$10.7 million in the three months ended June 30, 2000
from $4.1 million in the three months ended June 30,
1999. Cost of revenue for the six months ended June 30,
2000 increased by 166% to $19.7 million as compared to
$7.4 million for the same period in 1999. These increases

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were primarily attributable to increases in
product and software costs of 152% to $8.6 million in the
three months ended June 30, 2000 from $3.4 million in
the same period of 1999 and of 158% to $16.0 million in the
six months ended June 30, 2000 from $6.2 million in
the same six-month period of 1999. Service costs also increased
by 188% to $2.1 million in the three months ended
June 30, 2000 from $722,000 in the same period of 1999 and
by 206% to $3.7 million in the six months ended
June 30, 2000 from $1.2 million in the same six-month
period of 1999 due to the increases in technical support
personnel to service our increased customer base.


Gross margin was 48% for the three months ended
June 30, 2000 as compared to 55% for the same period in
1999. The decrease in gross margin largely resulted from the
$3.4 million of product costs associated with products
shipped to certain customers in the Asia-Pacific region for
which revenue was not recognizable, primarily because we now
believe that these customers indirectly used Company funds for
the purchase of these products. We also believe that such
products, once delivered to these customers, will probably not
be recoverable. Increased sales of hardware and software
products in the second quarter of 2000 positively impacted our
gross margin but were offset by significant erosion in the
average selling prices of our products due to a number of
factors, including competitive pricing pressures and rapid
technological change. Gross margin was 55% for the six months
ended June 30, 2000 as compared to 54% for the same period
in 1999.

Research and Development Expenses

Research and development expenses increased 180%
to $5.6 million in the three months ended June 30,
2000 from $2.0 million in the three months ended
June 30, 1999 and by 178% to $9.9 million in the six
months ended June 30, 2000 from $3.6 million in the
same six-month period of 1999. The absolute dollar increases in
research and development expenses from period to period were
attributable to increases in the number of research and
development personnel. Research and development expenses
increased as a percentage of revenue to 27% from 21% for the
three months ended June 30, 2000 and 1999, respectively,
and increased as a percentage of revenue to 23% from 22% for the
six months ended June 30, 2000 and 1999, respectively.
These changes in research and development costs as a percentage
of revenue are attributable to the significant increase in
research and development personnel in anticipation of higher
current period revenue and higher revenue growth. We expect
research and development expenses to increase as a percentage of
revenue with anticipated increases in the number of research and
development personnel as a result of acquisitions and slower
revenue growth.

Sales and Marketing Expenses

Sales and marketing expenses increased 110% to
$11.8 million in the three months ended June 30, 2000
from $5.6 million in the three months ended June 30,
1999 and by 137% to $22.9 million in the six months ended
June 30, 2000 from $9.6 million in the same six-month
period of 1999. The absolute dollar increase in sales and
marketing expenses was primarily attributable to an increase in
personnel and related expenses required to implement our sales
and marketing strategy and, to a lesser extent, increased public
relations and other promotional expenses. Sales and marketing
expenses as a percentage of revenue decreased to 58% from 60%
for the three months ended June 30, 2000 and 1999,
respectively and to 53% from 60% for the six months ended
June 30, 2000 and 1999, respectively. The decrease in sales
and marketing costs as a percentage of revenue is attributable
to the significant increase in revenue.

General and Administrative Expenses

General and administrative expenses increased
125% to $2.9 million in the three months ended
June 30, 2000 from $1.3 million in the three months
ended June 30, 1999 and by 102% to $5.3 million in the
six months ended June 30, 2000 from $2.6 million in
the same six-month period of 1999. The absolute dollar increase
in general and administrative expenses from period to period was
primarily attributable to an increase in personnel and related
expenses required to build the infrastructure to support a
larger organization based on anticipated higher current period
revenue and higher revenue growth. General and administrative
expenses as a percentage of revenue remained constant at 14% for
the three months ended June 30, 2000 and 1999, respectively
and decreased to 12% from 17% for the six months ended
June 30, 2000 and 1999,

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respectively. The six-month decrease in general
and administrative costs as a percentage of revenue is
attributable to the significant increase in revenue.


Amortization of Deferred
Compensation

For the three months ended June 30, 2000,
amortization of deferred compensation was $932,000 as compared
to $13.7 million in the three months ended June 30,
1999 and $2.3 million as compared to $15.6 million for
the six months ended June 30, 2000 and 1999, respectively.
Amortization of deferred compensation resulted from the granting
of stock options and warrants to purchase common stock at prices
below the deemed fair value of our common stock. The
compensation is being amortized using the graded method over the
vesting period of the stock options. Compensation charges
relative to a warrant provided for consulting services of
$11.6 million and $12.3 million were recognized in the
three and six months ended June 30, 1999. There were no
warrant compensation expenses recognized in 2000.

Amortization of Goodwill and Other
Intangibles

For the three and six months ended June 30,
2000, we recorded amortization of goodwill and other intangibles
of $225,000 and $451,000, respectively, resulting from a
purchase business combination completed in the fourth quarter of
1999. No amortization for goodwill and other intangibles was
recorded in the corresponding periods of 1999.

Other Income, Net

Other income, net was $4.4 million in the
three months ended June 30, 2000 as compared to a net
expense of $163,000 in the three months ended June 30, 1999
and $8.5 million in the six months ended June 30,
2000, as compared to a net expense of $147,000 in the same
six-month period of 1999. The other income was attributable to
the interest income earned on our cash, cash equivalents and
investments primarily as a result of the funds raised in our
initial and secondary public offerings.

Provision for Income Taxes

For the three and six months ended June 30,
2000 we recorded provisions for income taxes of $259,000 and
$284,000, respectively, related to current foreign income tax
provided on the profits attributable to our foreign operations.
For the three and six months ended June 30, 1999 the tax
provision of $11,000 was entirely related to current foreign
income taxes on foreign operations.

Liquidity and Capital Resources

From inception through June 1999, we financed our
operations primarily through private sales of convertible
preferred stock, which totaled $18.9 million in aggregate net
proceeds. During 1999, we completed both an initial and a
secondary public offering, which resulted in net proceeds of
approximately $302.6 million.

Net cash provided by operating activities was
$1.2 million in the six months ended June 30, 2000
compared to $8.3 million used in operating activities in
the same period of 1999. Net cash provided by operating
activities for the six months ended June 30, 2000 was
attributable to a net loss of $8.9 million, which was more
than fully offset by amortization of deferred compensation and
goodwill of $2.8 million, depreciation of
$3.5 million, a decrease in accounts receivable of
$3.3 million, and an increase in accounts payable and
accrued liabilities of $9.6 million. Cash used in operating
activities included cash used for increases in inventories of
$7.5 million and other assets of $1.6 million. The
increase in inventory during 2000 was primarily in anticipation
of expected growth in product revenue. The decrease in accounts
receivable resulted from the collection of aged receivable
balances. The increase in accounts payable and accrued
liabilities was primarily the result of increased inventories
and operating expense levels primarily associated with higher
anticipated revenue levels. The increase in other assets is
primarily related to an increase in lease deposits.

Net cash used in operating activities for the
first six months of 1999 was attributable primarily to a net
loss of $23.0 million and increases in accounts receivable
of $6.3 million and inventories of $2.0 million,

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partially offset by depreciation of $869,000,
amortization of deferred compensation of $15.6 million,
increases in accounts payable and accrued liabilities of
$3.9 million and increases in deferred revenue of
$3.2 million. The increase in inventory for 1999 was
primarily in anticipation of expected growth in product revenue.
The increase in accounts receivable was due to a significant
portion of our increased revenue occurring during the last month
of the period. Deferred revenue increased due to sales that had
contingencies which were not satisfied at June 30, 1999 as
well as increased sales of maintenance and support contracts.


Net cash used in investing activities was
approximately $43.7 million in the first six months of 2000
as compared to $3.7 million for the same period in 1999.
For 2000, a net $35.2 million of cash used in investing
activities was for the purchase of investment securities net of
sales and maturities. Included in the net cash used in investing
activities was a $3.8 million investment in a venture
capital management fund made in June 2000. The remaining cash
used in investing activities for each year was for purchases of
property and equipment.

Net cash provided by financing activities was
$2.9 million in the first quarter of 2000, as compared to
$4.4 million for the same period in 1999. For the period
ended June 30, 2000, cash provided by financing activities
was primarily the net proceeds from common stock issued upon
exercise of employee incentive stock options and purchases under
the employee stock purchase plan. For 1999, the cash provided by
financing activities was predominantly the proceeds from a bank
line of credit and long-term debt.

On July 24, 2000 we completed the
acquisition of PEAK Software Solutions, Inc., (PEAK)
a leading software development firm specializing in building
IP-based, carrier class data and telecommunications
infrastructure software. Under the terms of the agreement, each
outstanding share of PEAK stock was exchanged for 0.8636 of a
share of the Companys common stock and cash of
approximately $25.00 per share, and the Company paid PEAK
approximately $1.5 million to retire certain PEAK
obligations. The Company issued approximately $44.5 million
in stock and paid $16.7 million in cash.

On August 10, 2000 we acquired ACT Networks,
Inc., (ACT Networks) a leading provider of
multi-service access and voice/data integration products that
enable the convergence of voice, video and data onto one managed
network. Under the terms of the agreement, each outstanding
share of ACT Networks was exchanged for 0.4198 of a share of the
Companys common stock. The exchange ratio was based upon
an ACT Networks stock value of $14.00 per share divided by the
Companys five trading day average closing price ending on
and including August 9, 2000 of $33.35 per share. The
Company issued approximately $150.0 million of stock for
the outstanding shares of ACT Networks and assumed an estimated
$27.0 million in ACT Networks outstanding stock
options.

On June 30, 2000, our cash, cash equivalents
and short-term investment balance was $276.2 million, which
we believed would be sufficient to meet our anticipated cash
needs for working capital and capital expenditures for at least
the next 12 months.

At March 31, 2002, our cash, cash
equivalents and short-term investments were approximately
$34 million, which may not be adequate to meet our
operating cash needs through the end of 2002, unless we achieve
increased revenues and further reduce our expenses. To reduce
our expenditures, we restructured in several areas, including
reducing staffing, implementing expense management and
curtailing capital spending. For example, since July 2001, our
headcount decreased by approximately 82%, from approximately
1,018 employees to approximately 180 employees currently. In
addition, we have sustained, and expect to continue to sustain,
substantial expenses arising from the restatement of our
financial statements and related litigation matters. Until we
resolve the claims against us and reduce our commitments, we
expect that our expenses will continue to exceed our revenues
for the foreseeable future. We plan to take further measures to
conserve cash, and to continue to evaluate our strategic
alternatives.

For the quarter ended September 30, 2001, we
reported revenues of $18.7 million. In quarters subsequent
to the quarter ended September 30, 2001, revenues have
declined substantially. Our revenues have been, and we expect
will continue to be, materially affected by the downturn in
demand for telecommunications equipment and by events causing,
and the impact of, the restatement of our financial statements.
We do not

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expect demand for our products to recover for the
remainder of 2002, and we expect operating losses and negative
cash flows from operations to continue for the foreseeable
future.


If we are not able to achieve increased revenues
and resolve the claims against us, or if we incur unexpected
expenditures, then we will need to reduce expenses further and
raise additional funds to continue as a going concern. We
continue to evaluate our strategic alternatives, including
financing transactions or a sale of assets. Due to the
unavailability of a public market for our stock as well as our
current stock price, additional funding may not be available to
us on favorable terms or at all. If we raise additional funds
through the issuance of equity securities, the percentage
ownership of our stockholders could be significantly diluted.
Furthermore, these securities may have rights, preferences or
privileges senior to our common stock. If additional funding is
not available when needed, we may be unable to continue as a
going concern and achieve our intended business objectives.




ITEM 3.     QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Financial Market Risk

Our financial market risk includes risks
associated with international operations and related foreign
currencies. We anticipate that international sales will continue
to account for a significant portion of our consolidated
revenue. Our international sales are denominated in
U.S. dollars and therefore are not subject to foreign
currency exchange risk. Expenses of our international operations
are denominated in each countrys local currency and
therefore are subject to foreign currency exchange risk;
however, through June 30, 2000 we have not experienced any
significant negative impact on our operations as a result of
fluctuations in foreign currency exchange rates. We do not
engage in any hedging activities or use derivative financial
instruments.

We have an investment portfolio of fixed income
securities, including those classified as cash equivalents, of
approximately $266 million at June 30, 2000. These
securities are subject to interest rate fluctuations and will
decrease in market value if interest rates increase.

The primary objective of our investment
activities is to preserve principal while at the same time
maximizing yields without significantly increasing risk. We
invest primarily in high-quality, short-term debt instruments
such as U.S. government securities and instruments issued
by high quality financial institutions and companies including
money market instruments and debt issued by corporations. A
hypothetical 100 basis point increase in interest rates would
result in less than a $200,000 decrease (less than .1%) in the
fair market value of our available-for-sale securities.

We invest in equity securities of privately-held
companies for the promotion of business and strategic
objectives. These investments are generally in companies in the
telecommunications industry. We also have invested in a venture
capital management fund. These investments are included in
long-term investments and are accounted for using the cost
method. For investments in which no public market exists, our
policy is to regularly review the operating performance, recent
financing transactions and cash flow forecasts for such
companies in assessing the net realizable values of the
securities of these companies. Impairment losses on equity
investments are recorded when events and circumstances indicate
that such assets are impaired and the decline in value is other
than temporary. To date, we have not recorded any impairment
losses.

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PART II.     OTHER
INFORMATION






ITEM 6.     EXHIBITS
AND REPORTS ON FORM 8-K


(a) The following exhibits are filed as part
of this Form 10-Q/A:

|     |  |                                                                                                                                                                                                                                                                               
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.1  |  | Agreement and Plan of Merger and Reorganization,
    dated as of May 1, 2000, among Clarent Corporation, Copper
    Merger Sub, Inc. and ACT Networks, Inc.(1)                                                                                                                
|2.2  |  | Amendment No. 1, dated as of June 30,
    2000, to the Agreement and Plan of Merger and Reorganization.(1)                                                                                                                                                                    
|27.1 |  | Financial Data Schedule.                                                                                                                                                                                                                                                      
|99.1 |  | Press Release, dated July 25, 2000.(1)                                                                                                                                                                                                                                        
|99.2 |  | Agreement and Plan of Merger and Reorganization
    dated as of July 24, 2000, by and among Clarent, Cadmium
    Acquisition Corp., PEAK Software Solutions, Inc., certain
    shareholders of PEAK Software Solutions, Inc. and Larry Schwartz
    as Shareholders Agent.(1)
|99.3 |  | Shareholders Agreement dated as of
    July 24, 2000, by and among Clarent, Cadmium Acquisition
    Corp., certain shareholders of PEAK Software Solutions, Inc. and
    Larry Schwartz as Shareholders Agent and Purchaser
    Representative.(1)                          



---



| |     |                  
| | --- | -----------------
| | (1) | Previously Filed.

(b) Reports on Form 8-K.



| |                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------
| | There were no reports on Form 8-K filed by
    the registrant during the second quarter ended June 30,
    2000.

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CLARENT CORPORATION






SIGNATURES

Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned thereunto duly
authorized.



| |                    
| | -------------------
| | CLARENT CORPORATION





| |     |                   
| | --- | ------------------
| | By: | /s/ JOHN J. OSHEA

| |                                                 
| | ------------------------------------------------
| | ______________________________________          
| | John J. OShea                                  
| | Chief Financial Officer                         
| | (Principal Financial and Accounting
    Officer)

Date:     May 8,
2002

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