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UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, DC 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
    September 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) |  | (IRS 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 38,916,795
at September 30, 2000.

This report consists of 29 pages of which
this page is number 1.



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1



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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 September 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
September 30, 2000 are more fully described in Notes 1
and 12 of Notes to Unaudited Condensed Consolidated Financial
Statements. In addition, the Companys current litigation
proceedings are described in Note 14 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.


TABLE OF CONTENTS



|                              |                                                                                               |                                                                     |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | ------------------------------------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION
|                              | ITEM 1. FINANCIAL STATEMENTS                                                                 
|                              |                                                                                               | CLARENT CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS          
|                              |                                                                                               | CLARENT CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
|                              |                                                                                               | CLARENT CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|                              |                                                                                               | 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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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
    September 30, 2000 (restated) and December 31,
    1999.                            |  |          | 3  | 
|                                   |  |            |  | Condensed Consolidated Statements of Operations
    for the Three and Nine Months Ended September 30, 2000
    (restated) and 1999. |  |          | 4  | 
|                                   |  |            |  | Condensed Consolidated Statements of Cash Flows
    for the Nine Months Ended September 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                                           |  |          | 20 | 
|                                   |  | Item 3.    |  | Quantitative and Qualitative Disclosures about
    Market Risk                                                                      |  |          | 27 | 
|PART II:  OTHER
    INFORMATION   
|                                   |  | Item 6.    |  | Exhibits and Reports on Form 8-K                                                                                                    |  |          | 28 | 
|                                   |  | Signatures |  |                                                                                                                                     |  |          | 29 | 

2



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PART I.

FINANCIAL INFORMATION




ITEM 1.     FINANCIAL
STATEMENTS




CLARENT CORPORATION

CONDENSED CONSOLIDATED BALANCE
SHEETS

(In thousands)


|                                         |                                           |                            |                                            |              |         |         |        |         |         |         | 
|---------------------------------------- | ----------------------------------------- | -------------------------- | ------------------------------------------ | ------------ | ------- | ------- | ------ | ------- | ------- | ------- | 
|                                         |                                           | September 30,              |                                            | December 31,
|                                         |                                           | 2000                       |                                            | 1999        
|                                         |                                           |                            |                                            |             
|                                         |                                           | (Unaudited)                |                                            |             
|                                         |                                           | (Restated)                 |                                            |             
|ASSETS                                  
|Current assets:                          |                                           |                            |                                            |              |         |         |        |        
|                                         | Cash and cash equivalents                 |                            | $                                          | 206,975      |         |         | $      | 238,724 |        
|                                         | Short-term investments                    |                            |                                            | 79,660       |         |         |        | 42,581  |        
|                                         | Accounts receivable, gross                |                            |                                            | 28,126       |         |         |        | 26,532  |        
|                                         | Receivables allowance                     |                            |                                            | (5,774       | )       |         |        | (2,314  | )      
|                                         |                                           |                            |                                            |              |         |         |        |        
|                                         | Accounts receivables, net                 |                            |                                            | 22,352       |         |         |        | 24,218  |        
|                                         | Inventories                               |                            |                                            | 17,700       |         |         |        | 8,404   |        
|                                         | Prepaid expenses and other current assets |                            |                                            | 4,100        |         |         |        | 2,826   |        
|                                         |                                           |                            |                                            |              |         |         |        |        
|                                         |                                           | Total current assets       |                                            |              | 330,787 |         |        |         | 316,753 |        
|Property and equipment, net              |                                           |                            | 29,179                                     |              |         |         | 12,696 |        
|Investments                              |                                           |                            | 16,750                                     |              |         |         | 2,988  |        
|Goodwill, net                            |                                           |                            | 100,863                                    |              |         |         | 2,558  |        
|Other intangible assets, net             |                                           |                            | 40,701                                     |              |         |         |       |        
|Deferred tax assets                      |                                           |                            | 15,911                                     |              |         |         |       |        
|Other assets                             |                                           |                            | 1,964                                      |              |         |         | 373    |        
|                                         |                                           |                            |                                            |              |         |         |        |        
|                                         |                                           |                            | Total assets                               |              | $       | 536,155 |        |         | $       | 335,368 | 
|                                         |                                           |                            |                                            |              |         |         |        |        
|LIABILITIES AND STOCKHOLDERS
    EQUITY
|Current liabilities:                     |                                           |                            |                                            |              |         |         |        |        
|                                         | Accounts payable                          |                            | $                                          | 10,611       |         |         | $      | 8,552   |        
|                                         | Compensation related accruals             |                            |                                            | 7,176        |         |         |        | 2,991   |        
|                                         | Deferred revenue                          |                            |                                            | 9,783        |         |         |        | 10,117  |        
|                                         | Accrued liabilities                       |                            |                                            | 12,041       |         |         |        | 4,866   |        
|                                         | Customer advances                         |                            |                                            | 7,164        |         |         |        |        |        
|                                         | Merger related restructuring accrual      |                            |                                            | 6,354        |         |         |        |        |        
|                                         |                                           |                            |                                            |              |         |         |        |        
|                                         |                                           | Total current liabilities  |                                            |              | 53,129  |         |        |         | 26,526  |        
|Deferred tax liabilities                 |                                           |                            | 15,910                                     |              |         |         |       |        
|Stockholders equity:                    |                                           |                            |                                            |              |         |         |        |        
|                                         | Common stock                              |                            |                                            | 580,584      |         |         |        | 353,894 |        
|                                         | Deferred compensation                     |                            |                                            | (11,868      | )       |         |        | (5,990  | )      
|                                         | Accumulated other comprehensive loss      |                            |                                            | (269         | )       |         |        | (112    | )      
|                                         | Accumulated deficit                       |                            |                                            | (101,331     | )       |         |        | (38,950 | )      
|                                         |                                           |                            |                                            |              |         |         |        |        
|                                         |                                           | Total stockholders equity |                                            |              | 467,116 |         |        |         | 308,842 |        
|                                         |                                           |                            |                                            |              |         |         |        |        
|                                         |                                           |                            | Total liabilities and stockholders equity |              | $       | 536,155 |        |         | $       | 335,368 | 
|                                         |                                           |                            |                                            |              |         |         |        |        

See accompanying notes to condensed consolidated
financial statements.

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CLARENT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS

(In thousands, except per share
amounts)


(Unaudited)


|                                                                |                                                |                          |         |                   |        |            |        |        |        |   |         |        |         |   |         |        |        | 
|--------------------------------------------------------------- | ---------------------------------------------- | ------------------------ | ------- | ----------------- | ------ | ---------- | ------ | ------ | ------ | - | ------- | ------ | ------- | - | ------- | ------ | ------ | 
|                                                                |                                                |                          |         |                  
|                                                                |                                                | Three Months Ended       |         | Nine Months Ended
|                                                                |                                                | September 30,            |         | September 30,    
|                                                                |                                                |                          |         |                  
|                                                                |                                                | 2000                     |         | 1999              |        | 2000       |        | 1999  
|                                                                |                                                |                          |         |                   |        |            |        |       
|                                                                |                                                | (Restated)               |         |                   |        | (Restated) |        |       
|Net revenue:                                                    |                                                |                          |         |                   |        |            |        |        |        |   |         |        |         |   |         |       
|                                                                | Product and software                           |                          | $       | 23,218            |        |            | $      | 12,363 |        |   | $       | 61,131 |         |   | $       | 26,978 |       
|                                                                | Service                                        |                          |         | 4,003             |        |            |        | 864    |        |   |         | 9,566  |         |   |         | 2,267  |       
|                                                                |                                                |                          |         |                   |        |            |        |        |        |   |         |        |         |   |         |       
|                                                                |                                                | Total net revenue        |         |                   | 27,221 |            |        |        | 13,227 |   |         |        | 70,697  |   |         |        | 29,245 | 
|Cost of revenue:                                                |                                                |                          |         |                   |        |            |        |        |        |   |         |        |         |   |         |       
|                                                                | Product and software                           |                          |         | 14,210            |        |            |        | 4,488  |        |   |         | 30,223 |         |   |         | 10,698 |       
|                                                                | Service                                        |                          |         | 2,176             |        |            |        | 947    |        |   |         | 5,894  |         |   |         | 2,164  |       
|                                                                |                                                |                          |         |                   |        |            |        |        |        |   |         |        |         |   |         |       
|                                                                |                                                | Total cost of revenue    |         |                   | 16,386 |            |        |        | 5,435  |   |         |        | 36,117  |   |         |        | 12,862 | 
|                                                                |                                                |                          |         |                   |        |            |        |        |        |   |         |        |         |   |         |       
|Gross profit                                                    |                                                |                          | 10,835  |                   |        |            | 7,792  |        |        |   | 34,580  |        |         |   | 16,383  |       
|Operating expenses:                                             |                                                |                          |         |                   |        |            |        |        |        |   |         |        |         |   |         |       
|                                                                | Research and development                       |                          |         | 8,414             |        |            |        | 2,466  |        |   |         | 18,320 |         |   |         | 6,023  |       
|                                                                | Sales and marketing                            |                          |         | 15,255            |        |            |        | 6,518  |        |   |         | 38,129 |         |   |         | 16,166 |       
|                                                                | General and administrative                     |                          |         | 5,092             |        |            |        | 1,773  |        |   |         | 10,399 |         |   |         | 4,402  |       
|                                                                | Amortization of deferred compensation          |                          |         | 1,763             |        |            |        | 1,901  |        |   |         | 4,073  |         |   |         | 17,543 |       
|                                                                | Amortization of goodwill and other intangibles |                          |         | 6,023             |        |            |        |       |        |   |         | 6,474  |         |   |         |       |       
|                                                                | Purchased in-process research and development  |                          |         | 31,496            |        |            |        |       |        |   |         | 31,496 |         |   |         |       |       
|                                                                | Merger related costs                           |                          |         | 1,386             |        |            |        |       |        |   |         | 1,386  |         |   |         |       |       
|                                                                |                                                |                          |         |                   |        |            |        |        |        |   |         |        |         |   |         |       
|                                                                |                                                | Total operating expenses |         |                   | 69,429 |            |        |        | 12,658 |   |         |        | 110,277 |   |         |        | 44,134 | 
|                                                                |                                                |                          |         |                   |        |            |        |        |        |   |         |        |         |   |         |       
|Loss from operations                                            |                                                |                          | (58,594 | )                 |        |            | (4,866 | )      |        |   | (75,697 | )      |         |   | (27,751 | )     
|Other income, net                                               |                                                |                          | 5,088   |                   |        |            | 716    |        |        |   | 13,602  |        |         |   | 569     |       
|                                                                |                                                |                          |         |                   |        |            |        |        |        |   |         |        |         |   |         |       
|Loss before provision for income taxes                          |                                                |                          | (53,506 | )                 |        |            | (4,150 | )      |        |   | (62,095 | )      |         |   | (27,182 | )     
|Provision for income taxes                                      |                                                |                          | (2      | )                 |        |            | (72    | )      |        |   | (286    | )      |         |   | (83     | )     
|                                                                |                                                |                          |         |                   |        |            |        |        |        |   |         |        |         |   |         |       
|Net loss                                                        |                                                | $                        | (53,508 | )                 |        | $          | (4,222 | )      |        | $ | (62,381 | )      |         | $ | (27,265 | )     
|                                                                |                                                |                          |         |                   |        |            |        |        |        |   |         |        |         |   |         |       
|Basic and diluted net loss per share                            |                                                | $                        | (1.47   | )                 |        | $          | (0.17  | )      |        | $ | (1.85   | )      |         | $ | (2.17   | )     
|                                                                |                                                |                          |         |                   |        |            |        |        |        |   |         |        |         |   |         |       
|Shares used to compute basic and diluted net loss
    per share |                                                |                          | 36,482  |                   |        |            | 25,526 |        |        |   | 33,763  |        |         |   | 12,543  |       
|                                                                |                                                |                          |         |                   |        |            |        |        |        |   |         |        |         |   |         |       

See accompanying notes to condensed consolidated
financial statements.

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CLARENT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS

(In thousands)


(Unaudited)


|                                                                               |                                                                                 |                                                                                        |                                                                             |          |         |        |        |         |         |        |  
|------------------------------------------------------------------------------ | ------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------- | --------------------------------------------------------------------------- | -------- | ------- | ------ | ------ | ------- | ------- | ------ | -
|                                                                               |                                                                                 |                                                                                       
|                                                                               |                                                                                 | Nine Months Ended                                                                     
|                                                                               |                                                                                 | September 30,                                                                         
|                                                                               |                                                                                 |                                                                                       
|                                                                               |                                                                                 | 2000                                                                                   |                                                                             | 1999    
|                                                                               |                                                                                 |                                                                                        |                                                                             |         
|                                                                               |                                                                                 | (Restated)                                                                             |                                                                             |         
|Operating activities:                                                          |                                                                                 |                                                                                        |                                                                             |          |         |        |        |        
|                                                                               | Net loss                                                                        |                                                                                        | $                                                                           | (62,381  | )       |        | $      | (27,265 | )      
|                                                                               | Adjustments to reconcile net loss to net cash
    used in operating activities: |                                                                                        |                                                                             |          |         |        |        |         |        
|                                                                               |                                                                                 | Depreciation                                                                           |                                                                             |          | 6,081   |        |        |         | 1,609   |       
|                                                                               |                                                                                 | Amortization of deferred compensation                                                  |                                                                             |          | 4,073   |        |        |         | 17,543  |       
|                                                                               |                                                                                 | Purchased in-process research and development                                          |                                                                             |          | 31,496  |        |        |         |        |       
|                                                                               |                                                                                 | Amortization of goodwill and other intangibles                                         |                                                                             |          | 6,860   |        |        |         |        |       
|                                                                               |                                                                                 | Changes in operating assets and liabilities, net
    of effect of acquired businesses: |                                                                             |          |         |        |        |         |         |       
|                                                                               |                                                                                 |                                                                                        | Accounts receivable                                                         |          |         | 8,234  |        |         |         | (8,251 | )
|                                                                               |                                                                                 |                                                                                        | Inventories                                                                 |          |         | (4,801 | )      |         |         | (1,848 | )
|                                                                               |                                                                                 |                                                                                        | Prepaid expenses and other current assets                                   |          |         | (84    | )      |         |         | (1,186 | )
|                                                                               |                                                                                 |                                                                                        | Other assets                                                                |          |         | (1,339 | )      |         |         | (425   | )
|                                                                               |                                                                                 |                                                                                        | Accounts payable, compensation related accruals
    and accrued liabilities |          |         | (4,917 | )      |         |         | 5,430  |  
|                                                                               |                                                                                 |                                                                                        | Deferred revenue                                                            |          |         | (740   | )      |         |         | 4,997  |  
|                                                                               |                                                                                 |                                                                                        | Merger related restructuring accrual                                        |          |         | 6,354  |        |         |         |       |  
|                                                                               |                                                                                 |                                                                                        | Customer advances                                                           |          |         | 7,164  |        |         |         |       |  
|                                                                               |                                                                                 |                                                                                        |                                                                             |          |         |        |        |        
|                                                                               |                                                                                 | Net cash used in operating activities                                                  |                                                                             |          | (4,000  | )      |        |         | (9,396  | )     
|                                                                               |                                                                                 |                                                                                        |                                                                             |          |         |        |        |        
|Investing activities:                                                          |                                                                                 |                                                                                        |                                                                             |          |         |        |        |        
|                                                                               | Purchases of short-term investments                                             |                                                                                        |                                                                             | (120,519 | )       |        |        | (23,728 | )      
|                                                                               | Purchases of long-term investments                                              |                                                                                        |                                                                             | (15,250  | )       |        |        | (3,000  | )      
|                                                                               | Sales and maturities of investments                                             |                                                                                        |                                                                             | 88,450   |         |        |        |        |        
|                                                                               | Purchases of property and equipment                                             |                                                                                        |                                                                             | (19,026  | )       |        |        | (6,902  | )      
|                                                                               | Acquisition of businesses, net cash acquired                                    |                                                                                        |                                                                             | 33,316   |         |        |        |        |        
|                                                                               |                                                                                 |                                                                                        |                                                                             |          |         |        |        |        
|                                                                               |                                                                                 | Net cash used in investing activities                                                  |                                                                             |          | (33,029 | )      |        |         | (33,630 | )     
|                                                                               |                                                                                 |                                                                                        |                                                                             |          |         |        |        |        
|Financing activities:                                                          |                                                                                 |                                                                                        |                                                                             |          |         |        |        |        
|                                                                               | Proceeds from line of credit                                                    |                                                                                        |                                                                             |         |         |        |        | 1,628   |        
|                                                                               | Proceeds from long term debt                                                    |                                                                                        |                                                                             |         |         |        |        | 182     |        
|                                                                               | Proceeds from issuance of preferred stock                                       |                                                                                        |                                                                             |         |         |        |        | 332     |        
|                                                                               | Proceeds from issuance of common stock                                          |                                                                                        |                                                                             | 5,369    |         |        |        | 62,784  |        
|                                                                               |                                                                                 |                                                                                        |                                                                             |          |         |        |        |        
|                                                                               |                                                                                 | Net cash provided by financing activities                                              |                                                                             |          | 5,369   |        |        |         | 64,926  |       
|                                                                               |                                                                                 |                                                                                        |                                                                             |          |         |        |        |        
|Effect of exchange rate changes on cash and cash
    equivalents               |                                                                                 |                                                                                        | (89                                                                         | )        |         |        | 67     |        
|                                                                               |                                                                                 |                                                                                        |                                                                             |          |         |        |        |        
|Net increase (decrease) in cash and cash
    equivalents                       |                                                                                 |                                                                                        | (31,749                                                                     | )        |         |        | 21,967 |        
|Cash and cash equivalents at beginning of period                               |                                                                                 |                                                                                        | 238,724                                                                     |          |         |        | 11,903 |        
|                                                                               |                                                                                 |                                                                                        |                                                                             |          |         |        |        |        
|Cash and cash equivalents at end of period                                     |                                                                                 | $                                                                                      | 206,975                                                                     |          |         | $      | 33,870 |        
|                                                                               |                                                                                 |                                                                                        |                                                                             |          |         |        |        |        
|Supplemental disclosure of non-cash activities:                                |                                                                                 |                                                                                        |                                                                             |          |         |        |        |        
|Preferred stock received in exchange for
    settlement of accounts receivable |                                                                                 | $                                                                                      | 1,500                                                                       |          |         | $      |       |        
|Issuance of common stock in connection with
    business acquisitions          |                                                                                 | $                                                                                      | 194,412                                                                     |          |         | $      |       |        

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 September 30,
2000 (restated) and for the three and nine months ended
September 30, 2000 (restated) and September 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.

6



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##### Table of Contents



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 effect of the
restatement for the quarterly period ended September 30,
2000.

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

|                                     |  |                    |         |                    |  |             |         |             |  |   |         |   |  |   |         |  
|------------------------------------ |  | ------------------ | ------- | ------------------ |  | ----------- | ------- | ----------- |  | - | ------- | - |  | - | ------- | -
|                                     |  |                    |         |                   
|                                     |  | Three Months Ended |         | Nine Months Ended 
|                                     |  | September 30, 2000 |         | September 30, 2000
|                                     |  |                    |         |                   
|                                     |  | As Reported        |         | As Restated        |  | As Reported |         | As Restated
|                                     |  |                    |         |                    |  |             |         |            
|Total net revenue                    |  | $                  | 45,523  |                    |  | $           | 27,221  |             |  | $ | 98,419  |   |  | $ | 70,697  |  
|Gross profit                         |  |                    | 25,257  |                    |  |             | 10,835  |             |  |   | 57,104  |   |  |   | 34,580  |  
|Loss from operations                 |  |                    | (44,089 | )                  |  |             | (58,594 | )           |  |   | (52,807 | ) |  |   | (75,697 | )
|Net loss                             |  |                    | (39,503 | )                  |  |             | (53,508 | )           |  |   | (39,991 | ) |  |   | (62,381 | )
|Basic and diluted net loss per share |  | $                  | (1.08   | )                  |  | $           | (1.47   | )           |  | $ | (1.18   | ) |  | $ | (1.85   | )

Condensed Consolidated Balance Sheets Data (in
thousands):

|                                                                                                                         |  |                    |         |             |  |   |         | 
|------------------------------------------------------------------------------------------------------------------------ |  | ------------------ | ------- | ----------- |  | - | ------- | 
|                                                                                                                         |  |                   
|                                                                                                                         |  | September 30, 2000
|                                                                                                                         |  |                   
|                                                                                                                         |  | As Reported        |         | As Restated
|                                                                                                                         |  |                    |         |            
|Accounts receivable, net                                                                                                 |  | $                  | 46,617  |             |  | $ | 22,352  | 
|Inventories                                                                                                              |  |                    | 12,960  |             |  |   | 17,700  | 
|Total current assets                                                                                                     |  |                    | 350,312 |             |  |   | 330,787 | 
|Property and equipment, net                                                                                              |  |                    | 28,871  |             |  |   | 29,179  | 
|Total assets                                                                                                             |  |                    | 555,372 |             |  |   | 536,155 | 
|Deferred revenue                                                                                                         |  |                    | 13,125  |             |  |   | 9,783   | 
|Accrued liabilities, compensation related
    accruals, customer advances, and merger related restructuring
    accruals |  |                    | 26,220  |             |  |   | 32,735  | 
|Total current liabilities                                                                                                |  |                    | 49,956  |             |  |   | 53,129  | 
|Total stockholders equity                                                                                               |  |                    | 489,506 |             |  |   | 467,116 | 
|Total liabilities and stockholders equity                                                                               |  |                    | 555,372 |             |  |   | 536,155 | 

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.

8



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##### Table of Contents



CLARENT CORPORATION


NOTES TO UNAUDITED CONDENSED
CONSOLIDATED

FINANCIAL
STATEMENTS  (Continued)


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 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

Available-for-sale securities are carried at fair
value, with the unrealized gains or losses reported as a
separate component of stockholders equity. 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 nine months ended September 30, 2000.

9



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##### Table of Contents



CLARENT CORPORATION


NOTES TO UNAUDITED CONDENSED
CONSOLIDATED

FINANCIAL
STATEMENTS  (Continued)


3.     INVENTORIES

Inventories consist of the following (in
thousands):

|                |  |               |        |              |  |   |       | 
|--------------- |  | ------------- | ------ | ------------ |  | - | ----- | 
|                |  | September 30, |        | December 31,
|                |  | 2000          |        | 1999        
|                |  |               |        |             
|                |  | (Restated)    |        |             
|Raw materials   |  | $             | 9,577  |              |  | $ | 7,347 | 
|Work-in-process |  |               | 304    |              |  |   |      | 
|Finished goods  |  |               | 7,819  |              |  |   | 1,057 | 
|                |  |               |        |              |  |   |       | 
|                |  | $             | 17,700 |              |  | $ | 8,404 | 
|                |  |               |        |              |  |   |       | 

Inventory charges totaling $3.1 million and
$6.5 million were taken during the three and nine months
ended September 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.     INVESTMENTS

The Company invests in equity instruments of
privately-held companies for the promotion of business and
strategic objectives. The Company has also invested in a venture
capital management fund. Except for the $1.5 million
investment noted below, all of the Companys investments
are valued at the cash paid for the equity received. These
investments are included as long-term investments in the balance
sheet and are accounted for under the cost method when ownership
is less than 20% and there are no indicators of control. For
these non-quoted investments, the Company regularly reviews
operating performance, financing status, liquidity prospects and
cash flow forecasts in assessing carrying values. Impairment
losses are recorded when events and circumstances indicate that
such assets might be impaired and the decline in value is other
than temporary. As of September 30, 2000, no such losses
have been recorded.

During the nine months ended September 30,
2000, the Company invested $8.5 million in various
privately-held companies and $6.8 million in a venture
capital management fund. As of September 30, 2000, the
Company was committed to invest an additional $8.2 million
in the venture capital management fund over the next two
quarters.

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. The
investment is recorded at cost.

During the nine months ended September 30,
2000, the Company recorded revenues of $4.3 million from
certain customers in which the Company had an investment.
Revenues from these customers have been recorded at the value of
the products and services sold.

10



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##### Table of Contents



CLARENT CORPORATION


NOTES TO UNAUDITED CONDENSED
CONSOLIDATED

FINANCIAL
STATEMENTS  (Continued)


5.     COMPREHENSIVE
LOSS

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

|                                   |                                         |                    |         |                   |   |            |        |      |   |   |         |      |   |   |         |     |  
|---------------------------------- | --------------------------------------- | ------------------ | ------- | ----------------- | - | ---------- | ------ | ---- | - | - | ------- | ---- | - | - | ------- | --- | -
|                                   |                                         |                    |         |                  
|                                   |                                         | Three Months Ended |         | Nine Months Ended
|                                   |                                         | September 30,      |         | September 30,    
|                                   |                                         |                    |         |                  
|                                   |                                         | 2000               |         | 1999              |   | 2000       |        | 1999
|                                   |                                         |                    |         |                   |   |            |        |     
|                                   |                                         | (Restated)         |         |                   |   | (Restated) |        |     
|Net loss                           |                                         | $                  | (53,508 | )                 |   | $          | (4,222 | )    |   | $ | (62,381 | )    |   | $ | (27,265 | )  
|Other comprehensive income (loss): |                                         |                    |         |                   |   |            |        |      |   |   |         |      |   |   |         |    
|                                   | Translation adjustments                 |                    |         | (116              | ) |            |        | 24   |   |   |         | (137 | ) |   |         | 48  |  
|                                   | Unrealized income (loss) on investments |                    |         | 9                 |   |            |        | (27  | ) |   |         | (20  | ) |   |         | (27 | )
|                                   |                                         |                    |         |                   |   |            |        |      |   |   |         |      |   |   |         |    
|Comprehensive loss                 |                                         | $                  | (53,615 | )                 |   | $          | (4,225 | )    |   | $ | (62,538 | )    |   | $ | (27,244 | )  
|                                   |                                         |                    |         |                   |   |            |        |      |   |   |         |      |   |   |         |    

6.     INCOME
TAXES

The provisions for income taxes of $2,000 and
$286,000 for the three and nine months ended September 30,
2000 consist of foreign income tax provided on the profits
attributable to the Companys foreign operations.

7.     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 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
and the vesting provisions of grants available under the
Directors Plan.

On July 24, 2000, the Company issued 528,761
shares of common stock to acquire PEAK Software Solutions, Inc.
On August 10, 2000, the Company issued 4,444,832 shares of
common stock to acquire ACT Networks, Inc. (ACT
Networks) and assumed all outstanding stock option
agreements. At September 30, 2000, the aggregate number of
shares authorized for issuance under the ACT Networks stock
option plans and agreements was 1,235,795 shares of the
Companys common stock.

11



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##### Table of Contents



CLARENT CORPORATION


NOTES TO UNAUDITED CONDENSED
CONSOLIDATED

FINANCIAL
STATEMENTS  (Continued)


8.     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 |   | Nine Months Ended
|                              |                                | September 30,      |   | September 30,    
|                              |                                |                    |   |                  
|                              |                                | 2000               |   | 1999              |        | 2000       |   | 1999 
|                              |                                |                    |   |                   |        |            |   |      
|                              |                                | (Restated)         |   |                   |        | (Restated) |   |      
|Product and software revenue: |                                |                    |   |                   |        |            |   |       |        |  |   |        |        |  |   |       
|                              | United States                  |                    | $ | 8,544             |        |            | $ | 6,175 |        |  | $ | 20,912 |        |  | $ | 13,039 |       
|                              | Other Americas                 |                    |   | 4,028             |        |            |   | 21    |        |  |   | 6,667  |        |  |   | 123    |       
|                              | Europe, Middle East and Africa |                    |   | 5,161             |        |            |   | 2,989 |        |  |   | 14,466 |        |  |   | 3,754  |       
|                              | Asia Pacific                   |                    |   | 5,485             |        |            |   | 3,178 |        |  |   | 19,086 |        |  |   | 10,062 |       
|                              |                                |                    |   |                   |        |            |   |       |        |  |   |        |        |  |   |       
|                              |                                | Total              |   | $                 | 23,218 |            |   | $     | 12,363 |  |   | $      | 61,131 |  |   | $      | 26,978 | 
|                              |                                |                    |   |                   |        |            |   |       |        |  |   |        |        |  |   |       
|Service revenue:              |                                |                    |   |                   |        |            |   |       |        |  |   |        |        |  |   |       
|                              | United States                  |                    | $ | 2,066             |        |            | $ | 327   |        |  | $ | 3,932  |        |  | $ | 1,122  |       
|                              | Other Americas                 |                    |   | 291               |        |            |   | 18    |        |  |   | 1,329  |        |  |   | 49     |       
|                              | Europe, Middle East and Africa |                    |   | 857               |        |            |   | 85    |        |  |   | 2,096  |        |  |   | 195    |       
|                              | Asia Pacific                   |                    |   | 789               |        |            |   | 434   |        |  |   | 2,209  |        |  |   | 901    |       
|                              |                                |                    |   |                   |        |            |   |       |        |  |   |        |        |  |   |       
|                              |                                | Total              |   | $                 | 4,003  |            |   | $     | 864    |  |   | $      | 9,566  |  |   | $      | 2,267  | 
|                              |                                |                    |   |                   |        |            |   |       |        |  |   |        |        |  |   |       

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 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 (in thousands, except per
share amounts):

|                                     |                                     |                                                          |       |                   |        |            |       |        |        |   |       |         |        |   |       |         |        | 
|------------------------------------ | ----------------------------------- | -------------------------------------------------------- | ----- | ----------------- | ------ | ---------- | ----- | ------ | ------ | - | ----- | ------- | ------ | - | ----- | ------- | ------ | 
|                                     |                                     |                                                          |       |                  
|                                     |                                     | Three Months Ended                                       |       | Nine Months Ended
|                                     |                                     | September 30,                                            |       | September 30,    
|                                     |                                     |                                                          |       |                  
|                                     |                                     | 2000                                                     |       | 1999              |        | 2000       |       | 1999  
|                                     |                                     |                                                          |       |                   |        |            |       |       
|                                     |                                     | (Restated)                                               |       |                   |        | (Restated) |       |       
|Numerator:                           |                                     |                                                          |       |                   |        |            |       |        |        |   |       |         |        |   |       |        
|                                     | Net loss                            |                                                          | $     | (53,508           | )      |            | $     | (4,222 | )      |   | $     | (62,381 | )      |   | $     | (27,265 | )     
|                                     |                                     |                                                          |       |                   |        |            |       |        |        |   |       |         |        |   |       |        
|Denominator:                         |                                     |                                                          |       |                   |        |            |       |        |        |   |       |         |        |   |       |        
|                                     | Weighted average shares outstanding |                                                          |       | 36,482            |        |            |       | 26,651 |        |   |       | 33,826  |        |   |       | 14,005  |       
|                                     | Less shares subject to repurchase   |                                                          |       |                  |        |            |       | (1,125 | )      |   |       | (63     | )      |   |       | (1,462  | )     
|                                     |                                     |                                                          |       |                   |        |            |       |        |        |   |       |         |        |   |       |        
|                                     |                                     | Denominator for basic and diluted net loss per
    share |       |                   | 36,482 |            |       |        | 25,526 |   |       |         | 33,763 |   |       |         | 12,543 | 
|                                     |                                     |                                                          |       |                   |        |            |       |        |        |   |       |         |        |   |       |        
|Basic and diluted net loss per share |                                     | $                                                        | (1.47 | )                 |        | $          | (0.17 | )      |        | $ | (1.85 | )       |        | $ | (2.17 | )      
|                                     |                                     |                                                          |       |                   |        |            |       |        |        |   |       |         |        |   |       |        

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CLARENT CORPORATION


NOTES TO UNAUDITED CONDENSED
CONSOLIDATED

FINANCIAL
STATEMENTS  (Continued)


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 5,121,000 and
10,012,000 for the three months ended September 30, 2000
and 1999, respectively, and 5,921,000 and 19,511,000 for the
nine months ended September 30, 2000 and 1999, respectively.

10.     CUSTOMER
ADVANCES

As of September 30, 2000, the Company
received funds totaling $7.2 million from certain customers
in the Asia-Pacific region. These payments are currently
recorded as customer advances. These advances consist of funds
received from customers, and the Company now believes that these
funds may be subject to refund, because (i) the Company is
aware of a purported return right with respect to certain
products or (ii) the customer has not accepted possession
of certain products.

11.     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. This acquisition
was accounted for using the purchase method and was not included
in the calculation of pro forma results, as it is not considered
to be material to the operating results of the Company. The
operating results of PEAK have been included in the condensed
consolidated statements of operations from the date of
acquisition.

On August 10, 2000, the Company 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 stock 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 stock options
to purchase approximately 1.1 million shares of the
Companys common stock with an aggregate fair value of
$27.0 million. The ACT Networks acquisition has been
accounted for as a purchase and accordingly, results of
operations and the estimated fair value of the assets acquired
and liabilities assumed are included in the Companys
condensed consolidated financial statements from the date of
acquisition.

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CLARENT CORPORATION


NOTES TO UNAUDITED CONDENSED
CONSOLIDATED

FINANCIAL
STATEMENTS  (Continued)


The ACT Networks acquisition cost, allocation of
excess purchased cost over the fair value of net assets acquired
to goodwill and other intangible assets acquired and the related
life of the intangible assets (in thousands, except for asset
life) are:

|                                                                             |  |             |         |            |  |  |   | 
|---------------------------------------------------------------------------- |  | ----------- | ------- | ---------- |  |  | - | 
|                                                                             |  | Acquisition |         |           
|                                                                             |  | Cost        |         | Asset Life
|                                                                             |  |             |         |           
|                                                                             |  |             |         | (in years)
|Value of common stock and stock options issued                               |  | $           | 176,789 |            |  |  |   | 
|Transaction costs                                                            |  |             | 7,008   |            |  |  |   | 
|Merger related restructuring costs                                           |  |             | 8,885   |            |  |  |   | 
|                                                                             |  |             |         |            |  |  |   | 
|                                                                             |  |             | 192,682 |            |  |  |   | 
|Less net tangible assets acquired                                            |  |             | (68,950 | )          |  |  |   | 
|                                                                             |  |             |         |            |  |  |   | 
|Excess purchase cost over the fair value of net
    tangible assets acquired |  | $           | 123,732 |            |  |  |   | 
|                                                                             |  |             |         |            |  |  |   | 
|Excess purchase cost was allocated to the
    following:                     |  |             |         |            |  |  |   | 
|Assembled workforce                                                          |  | $           | 6,642   |            |  |  | 3 | 
|Customer base                                                                |  |             | 19,276  |            |  |  | 5 | 
|Developed technology                                                         |  |             | 13,860  |            |  |  | 5 | 
|In-process research and development                                          |  |             | 31,496  |            |  |  |  | 
|Goodwill                                                                     |  |             | 42,506  |            |  |  | 5 | 
|Deferred compensation                                                        |  |             | 9,952   |            |  |  | 4 | 
|                                                                             |  |             |         |            |  |  |   | 
|                                                                             |  | $           | 123,732 |            |  |  |   | 
|                                                                             |  |             |         |            |  |  |   | 

The fair value assigned to purchased in-process
research and development in the allocation of purchase cost
included research and development projects for which
technological feasibility had not been achieved and no future
alternative uses had been established. The Company computed its
valuations of in-process research and development using a
discounted cash flow analysis on the anticipated income stream
to be generated by the purchased technology. This allocation of
fair value is charged to operations at the date of acquisition
and totaled $31.5 million for the nine months ended
September 30, 2000.

In valuing in-process research and development of
$31.5 million, the Company considered, among other factors,
the stage of completion of the development efforts and the
estimated net present value of cash flows expected to result
from the successful deployment of the new products. The stage of
completion was determined by estimating the costs and time
incurred as of the acquisition date relative to the costs and
time to be incurred to develop the in-process technology into
commercially viable products. The estimated net present value of
cash flows was based on incremental future cash flows from
revenues expected to be generated by the products being
developed, taking into account the characteristics and
applications of the technology, the size and growth rate of
existing and future markets and an evaluation of past and
anticipated product life cycles. Estimated future cash flows
were discounted to arrive at a net present value and were
allocated to in-process research and development based on the
percentage of completion at the date of acquisition.

In valuing the developed technology of
$13.9 million, the expected future cash flows of the
existing developed technologies were discounted taking into
account the characteristics and applications of the products,
the size of existing markets, growth rates of existing and
future markets, as well as an evaluation of past and anticipated
product-life cycles.

To determine the value of the assembled work
force of $6.6 million, the Company evaluated the work force
in place at the acquisition date and utilized the cost approach
to estimate the value of replacing the work

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CLARENT CORPORATION


NOTES TO UNAUDITED CONDENSED
CONSOLIDATED

FINANCIAL
STATEMENTS  (Continued)


force. Costs considered in replacing the work
force included costs of identifying, recruiting and interviewing
candidates, as well as the cost of training new employees. These
costs were then summed up and tax-effected to estimate the value
of the assembled workforce.

To determine the value of the customer base of
$19.3 million, the Company utilized the avoided cost
approach. Under this approach, the fair value of the acquired
customer relationships is equal to the costs that the acquirer
would incur recreating similar functional customer
relationships. Costs considered in recreating the customer base
include the amount of costs and time sales, marketing,
development and corporate personnel would have to spend in order
to acquire the customer base.

Total merger related restructuring costs (in
thousands):

|                           |                                          |               |       |       | 
|-------------------------- | ---------------------------------------- | ------------- | ----- | ----- | 
|                           |                                          | September 30,
|                           |                                          | 2000         
|                           |                                          |              
|                           |                                          | (Restated)   
|Termination of leases      |                                          | $             | 3,972 |      
|Employee related severance |                                          |               | 1,449 |      
|Fixed asset disposition    |                                          |               | 933   |      
|                           |                                          |               |       |      
|                           | Total merger related restructuring costs |               | $     | 6,354 | 
|                           |                                          |               |       |      

The following summary prepared on an unaudited
pro forma basis reflects the condensed consolidated results of
operations of the Company, excluding the charge for acquired
in-process research and development, as if the acquisition of
ACT Networks had occurred at the beginning of 1999 and does not
purport to be indicative of what would have occurred had the
acquisition been made as of the beginning of 1999 or of results
which may occur in the future.

The pro forma results of operations combine the
consolidated results of operations of the Company, excluding the
charge for acquired in-process research and development, and the
historical results for ACT Networks for the nine months ended
September 30, 2000 and for the nine months ended September
30, 1999 (in thousands, except per share data):

|                                                                   |  |                   |         |      |  |   |         |  
|------------------------------------------------------------------ |  | ----------------- | ------- | ---- |  | - | ------- | -
|                                                                   |  |                  
|                                                                   |  | Nine Months Ended
|                                                                   |  | September 30,    
|                                                                   |  |                  
|                                                                   |  | 2000              |         | 1999
|                                                                   |  |                   |         |     
|                                                                   |  | (Restated)        |         |     
|Pro forma net revenue                                              |  | $                 | 99,307  |      |  | $ | 69,955  |  
|Pro forma net loss                                                 |  | $                 | (49,098 | )    |  | $ | (32,981 | )
|Pro forma basic and diluted net loss per share                     |  | $                 | (1.31   | )    |  | $ | (1.94   | )
|Denominator for pro forma basic and diluted net
    loss per share |  |                   | 37,381  |      |  |   | 16,988  |  

12.     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.

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CLARENT CORPORATION


NOTES TO UNAUDITED CONDENSED
CONSOLIDATED

FINANCIAL
STATEMENTS  (Continued)


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 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.

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CLARENT CORPORATION


NOTES TO UNAUDITED CONDENSED
CONSOLIDATED

FINANCIAL
STATEMENTS  (Continued)


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 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
receivables 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 of 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.

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CLARENT CORPORATION


NOTES TO UNAUDITED CONDENSED
CONSOLIDATED

FINANCIAL
STATEMENTS  (Continued)


13.     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 a material 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.

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 applicable 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. In October 2000, the SEC issued additional
written guidance to further supplement SAB 101. The Company
will be required to adopt SAB 101 in the fourth quarter of 2000.
The Company is currently evaluating the impact of SAB 101
on its consolidated results of operations, financial position
and cash flows.

14.     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.
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

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CLARENT CORPORATION


NOTES TO UNAUDITED CONDENSED
CONSOLIDATED

FINANCIAL
STATEMENTS  (Continued)


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. 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 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.

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.

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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       |      | Nine Months Ended
|                                       |                                                | September 30,            |      | September 30,    
|                                       |                                                |                          |      |                  
|                                       |                                                | 2000                     |      | 1999              |      | 2000       |     | 1999
|                                       |                                                |                          |      |                   |      |            |     |     
|                                       |                                                | (Restated)               |      |                   |      | (Restated) |     |     
|As a percentage of net revenue:        |                                                |                          |      |                   |      |            |     |      |     |    |     |      |     |    |     |    
|                                       | Product and software                           |                          |      | 85                | %    |            |     | 93   | %   |    |     | 86   | %   |    |     | 92  | %  
|                                       | Service                                        |                          |      | 15                |      |            |     | 7    |     |    |     | 14   |     |    |     | 8   |    
|                                       |                                                |                          |      |                   |      |            |     |      |     |    |     |      |     |    |     |    
|                                       |                                                | Total net revenue        |      |                   | 100  |            |     |      | 100 |    |     |      | 100 |    |     |     | 100 |   
|Cost of revenue:                       |                                                |                          |      |                   |      |            |     |      |     |    |     |      |     |    |     |    
|                                       | Product and software                           |                          |      | 52                |      |            |     | 34   |     |    |     | 43   |     |    |     | 37  |    
|                                       | Service                                        |                          |      | 8                 |      |            |     | 7    |     |    |     | 8    |     |    |     | 7   |    
|                                       |                                                |                          |      |                   |      |            |     |      |     |    |     |      |     |    |     |    
|                                       |                                                | Total cost of revenue    |      |                   | 60   |            |     |      | 41  |    |     |      | 51  |    |     |     | 44  |   
|                                       |                                                |                          |      |                   |      |            |     |      |     |    |     |      |     |    |     |    
|Gross profit                           |                                                |                          | 40   |                   |      |            | 59  |      |     |    | 49  |      |     |    | 56  |    
|Operating expenses:                    |                                                |                          |      |                   |      |            |     |      |     |    |     |      |     |    |     |    
|                                       | Research and development                       |                          |      | 31                |      |            |     | 19   |     |    |     | 26   |     |    |     | 21  |    
|                                       | Sales and marketing                            |                          |      | 56                |      |            |     | 49   |     |    |     | 54   |     |    |     | 55  |    
|                                       | General and administrative                     |                          |      | 19                |      |            |     | 13   |     |    |     | 15   |     |    |     | 15  |    
|                                       | Amortization of deferred compensation          |                          |      | 6                 |      |            |     | 14   |     |    |     | 6    |     |    |     | 60  |    
|                                       | Amortization of goodwill and other intangibles |                          |      | 22                |      |            |     |     |     |    |     | 9    |     |    |     |    |    
|                                       | Purchased in-process research & development    |                          |      | 116               |      |            |     |     |     |    |     | 44   |     |    |     |    |    
|                                       | Merger related costs                           |                          |      | 5                 |      |            |     |     |     |    |     | 2    |     |    |     |    |    
|                                       |                                                |                          |      |                   |      |            |     |      |     |    |     |      |     |    |     |    
|                                       |                                                | Total operating expenses |      |                   | 255  |            |     |      | 95  |    |     |      | 156 |    |     |     | 151 |   
|                                       |                                                |                          |      |                   |      |            |     |      |     |    |     |      |     |    |     |    
|                                       | Loss from operations                           |                          |      | (215              | )    |            |     | (36  | )   |    |     | (107 | )   |    |     | (95 | )  
|Other income, net                      |                                                |                          | 18   |                   |      |            | 5   |      |     |    | 19  |      |     |    | 2   |    
|                                       |                                                |                          |      |                   |      |            |     |      |     |    |     |      |     |    |     |    
|Loss before provision for income taxes |                                                |                          | (197 | )                 |      |            | (31 | )    |     |    | (88 | )    |     |    | (93 | )  
|Provision for income taxes             |                                                |                          |     |                   |      |            | (1  | )    |     |    |    |      |     |    |    |    
|                                       |                                                |                          |      |                   |      |            |     |      |     |    |     |      |     |    |     |    
|                                       |                                                | Net loss                 |      |                   | (197 | )%         |     |      | (32 | )% |     |      | (88 | )% |     |     | (93 | )%
|                                       |                                                |                          |      |                   |      |            |     |      |     |    |     |      |     |    |     |    

Net Revenue

Net revenue increased 106% to $27.2 million
in the three months ended September 30, 2000 from
$13.2 million in the three months ended September 30,
1999. Net revenue for the nine months ended September 30,
2000 increased 142% to $70.7 million, as compared to
$29.2 million for the same period in 1999. The increase in
revenue was primarily attributable to an increase in product and
software sales of 88% to $23.2 million in the three months
ended September 30, 2000 from $12.4 million in the
same three-month period of 1999 and of 127% to
$61.1 million in the nine months ended September 30,
2000 from $27.0 million in the same nine-month period of
1999. The increased demand for Clarents IP based
communication solution was from both existing and new customers
on a worldwide basis. Service revenue from maintenance and
support increased by 363% to $4.0 million in the three
months ended September 30, 2000 from $864,000 for the same
three-month period of 1999 and by 322% to $9.6 million in
the nine months ended September 30, 2000 from
$2.3 million in the same nine-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 first nine
months of 2000.

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Cost of Revenue

Cost of revenue increased 201% to
$16.4 million in the three months ended September 30,
2000 from $5.4 million in the three months ended
September 30, 1999. Cost of revenue for the nine months
ended September 30, 2000 increased by 181% to
$36.1 million, as compared to $12.9 million for the
same period in 1999. These increases were primarily attributable
to increases in product and software costs of 217% to
$14.2 million in the three months ended September 30,
2000 from $4.5 million in the same period of 1999 and of
183% to $30.2 million in the nine months ended
September 30, 2000 from $10.7 million in the same
nine-month period of 1999. Service costs also increased by 130%
to $2.2 million in the three months ended
September 30, 2000 from $947,000 in the same period of 1999
and by 172% to $5.9 million in the nine months ended
September 30, 2000 from $2.2 million in the same
nine-month period of 1999 due to the increases in technical
support personnel to service our increased customer base.

Gross margin was 40% for the third quarter of
2000, compared to 59% for the corresponding period in 1999.
Gross margin decreased to 49% for the nine months ended
September 30, 2000 as compared to 56% for the same
nine-month period in 1999. The decrease in gross margin for the
three and nine months ended September 30, 2001 largely
resulted from $3.1 million and $6.5 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 the customers indirectly
used Company funds for the purchase of these products. We also
believe that such product, once delivered to these customers,
will probably not be recoverable. Increased sales of our
software products, both in absolute dollars and as a percentage
of revenue, positively impacted our gross margin in 2000, but
were offset by significant erosion in the average selling prices
of our products due to a number of factors, including
competitive pricing pressures from rapid technological change.

Research and Development Expenses

Research and development expenses increased 241%
to $8.4 million in the three months ended
September 30, 2000 from $2.5 million in the three
months ended September 30, 1999 and 204% to
$18.3 million in the nine months ended September 30,
2000 from $6.0 million in the same nine-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 as a percentage of revenue increased to 31%
from 19% for the three months ended September 30, 2000 and
1999, respectively, and increased to 26% from 21% for the nine
months ended September 30, 2000 and 1999, respectively. The
increase in research and development expenses as a percentage of
revenue is 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
increases in the number of research and development personnel as
a result of acquisitions during the third quarter of 2000.

Sales and Marketing Expenses

Sales and marketing expenses increased 134% to
$15.3 million in the three months ended September 30,
2000 from $6.5 million in the three months ended
September 30, 1999 and 136% to $38.1 million in the
nine months ended September 30, 2000 from
$16.2 million in the same nine-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 increased to 56% from 49% for the three
months ended September 30, 2000 and 1999, respectively, as
we added sales and marketing personnel and spending on
promotional activities in anticipation of higher current period
revenue and higher revenue growth. Sales and marketing as a
percentage of revenue decreased to 54% from 55% for the nine
months ended September 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 for the
year to date.

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General and Administrative Expenses

General and administrative expenses increased
187% to $5.1 million in the three months ended
September 30, 2000 from $1.8 million in the three
months ended September 30, 1999 and 136% to
$10.4 million in the nine months ended September 30,
2000 from $4.4 million in the same nine-month period of
1999. The absolute dollar increases in general and
administrative expenses from period to period were 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 increased to 19% from 13% for the
three months ended September 30, 2000 and 1999,
respectively, and remained flat at 15% for the nine months ended
September 30, 2000 and 1999, respectively.

Amortization of Deferred
Compensation

For the three months ended September 30,
2000, amortization of deferred compensation was
$1.8 million as compared to $1.9 million in the three
months ended September 30, 1999 and $4.1 million as
compared to $17.5 million for the nine months ended
September 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 $12.3 million were
recognized in the nine months ended September 30, 1999.
There were no warrant compensation expenses recognized in the
nine months ended September 30, 2000.

Amortization of Goodwill and Other
Intangibles

Amortization of goodwill and other intangibles
for the three and nine months ended September 30, 2000 was
$6.0 million and $6.5 million, respectively. The
goodwill and other intangibles resulted from a purchase business
combination completed in the fourth quarter of 1999 and from the
two purchase business combinations that were completed in the
third quarter of 2000. The value of the other intangibles was
determined using independent valuations for both the PEAK and
ACT Networks acquisitions. No amortization for goodwill and
other intangibles was recorded in the corresponding periods of
1999.

Purchased In-Process Research and
Development

Purchased in-process research and development of
$31.5 million represents the write-off of in-process
technology associated with our acquisition of ACT Networks.

The cost of in-process research and development
is based on a fair value allocation of the purchase price we
paid to acquire ACT Networks. The fair value allocation to
in-process research and development was determined by
identifying projects underway at the time of the ACT Networks
merger that required additional efforts to establish
technological feasibility after consummation of the ACT Networks
merger. These projects have identifiable technological risk
factors, which indicate that even though successful completion
is expected, it is not assured. If an identified project is not
successfully completed, there is no alternative future use for
the project and the expected future income will not be realized.

In valuing in-process research and development of
$31.5 million, we considered, among other factors, the
stage of completion of the development efforts and the estimated
net present value of cash flows expected to result from the
successful deployment of the new products. The stage of
completion was determined by estimating the costs and time
incurred as of the acquisition date relative to the costs and
time to be incurred to develop the in-process technology into
commercially viable products. The estimated net present value of
cash flows was based on incremental future cash flows from
revenues expected to be generated by the products being
developed, taking into account the characteristics and
applications of the technology, the size and growth rate of
existing and future markets and an evaluation of past and
anticipated product life cycles. Estimated future cash flows
were discounted to arrive at a net present value and were
allocated to in-process research and development based on the
percentage of completion at the date of acquisition.

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If we do not successfully deploy commercially
accepted technology or products based on the purchased
in-process research and development, our operating results could
be adversely affected in future periods.

Merger Related Costs

Merger related costs are costs of integration of
$1.4 million from the acquisition of ACT Networks that were
immediately charged to operations.

Other Income, Net

Other income was $5.1 million in the three
months ended September 30, 2000 as compared to $716,000 in
the three months ended September 30, 1999 and
$13.6 million in the nine months ended September 30,
2000 as compared to $569,000 in the same 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 and acquisitions.

Provision for Income Taxes

For the three and nine months ended
September 30, 2000, we recorded provisions for income taxes
of $2,000 and $286,000, respectively, related to current foreign
income tax provided on the profits attributable to our foreign
operations. For the three and nine months ended
September 30, 1999, the tax provisions of $72,000 and
$83,000 were 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. In addition, we
received net proceeds of $33.3 million from our
acquisitions during the third quarter of 2000.

Net cash used in operating activities was
$4.0 million in the nine months ended September 30,
2000, compared to $9.4 million used in operating activities
in the same period of 1999. The net cash used in operating
activities in 2000 was principally the result of a net loss of
$62.4 million, an increase in other assets of
$1.3 million, an increase in inventories of
$4.8 million, a decrease in accounts payable, compensation
related accruals and accrued liabilities of $4.9 million
and a decrease in deferred revenue of $740,000. These amounts
were partially offset by adjustments for amortization of
deferred compensation, goodwill and intangibles of
$10.9 million, depreciation of $6.1 million, a charge
for purchased in-process research and development of
$31.5 million, a decrease in accounts receivable of
$8.2 million, an increase in merger related restructuring
accrual of $6.4 million and an increase in customer
advances of $7.2 million. The increase in other assets was
primarily the result of deposits related to property leases. The
increase in inventories was in anticipation of expected growth
in product revenues. The decrease in deferred revenue was the
result of our receipt of payment on previously deferred product
revenue transactions. The decrease in accounts payable,
compensation related accruals and accrued liabilities resulted
from payment of transaction costs and certain liabilities
associated with acquisitions. The increase in the merger related
restructuring accrual resulted from the Act Networks acquisition
during the third quarter of 2000. Customer advances represented
funds received from customers that we now believe may be subject
to refund, because (i) of a purported return right or
(ii) the customer has not accepted possession of certain
products. Amortization of deferred compensation, goodwill and
intangibles increased significantly as a result of the two
acquisitions completed during the third quarter of 2000.
Accounts receivable decreased primarily because of an increase
in the number of customers whose purchases are recognized on a
cash basis.

Net cash used in operating activities for the
first nine months of 1999 was attributable primarily to a net
loss of $27.3 million and increases in accounts receivable
of $8.3 million, inventories of $1.8 million and
prepaid expenses and other assets of $1.6 million,
partially offset by depreciation of $1.6 million,
amortization of deferred compensation of $17.5 million, and
increases in accounts payable, compensation related accruals and
accrued liabilities of $5.4 million and deferred revenue of
$5.0 million. The increase in inventory for 1999

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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 with contingencies that were not satisfied at
September 30, 1999, as well as increased sales of
maintenance and support contracts.


Net cash used in investing activities was
$33.0 million in the first nine months of 2000 as compared
to $33.6 million for the same period in 1999. For 2000, a
net $47.3 million of cash used in investing activities was
for the purchase of investment securities net of sales and
maturities as compared to $26.7 million invested during the
same period in 1999. Included in the net cash used in investing
activities during 2000 was $15.3 million invested in
long-term investments represented by interests in various
privately held companies and a venture capital management fund.
During the nine months ended September 30, 2000 we acquired
net cash of $33.3 million from business combinations. The
remaining cash used in investing activities for each year was
for purchases of property and equipment totaling
$19.0 million for the nine months ended September 30,
2000 and $6.9 million for the same period of 1999.

Net cash provided by financing activities was
$5.4 million in the nine months ended September 30,
2000 as opposed to $64.9 million for the same period in
1999. During 2000, cash provided by financing activities was
primarily 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 our
public offering in July 1999 and a bank line of credit.

On September 30, 2000, our cash, cash
equivalents and short-term investment balance was
$286.6 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 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.

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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 currently 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 September 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
currently 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 $226 million at September 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 0.2%)
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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##### Table of Contents






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 |  | 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)
|99.2 |  | 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.

On August 10, 2000, the Company filed a
Current Report on Form 8-K announcing completion of its
acquisition of ACT Networks, Inc. on August 10, 2000. The
required financial statements and pro forma financial
information were subsequently filed by amendment on
Form 8-K/ A filed with the SEC on October 24, 2000.

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##### Table of Contents



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

29