UNITED STATES
 
 SECURITIES AND EXCHANGE COMMISSION
 
 Washington, D.C. 20549

FORM 10-Q

(Mark One)
 [X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
   THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 1999

OR

[_] 
    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

CLARENT
   CORPORATION
 (Exact name of registrant as specified in its charter)

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

700 Chesapeake Drive
 
 Redwood City, California 94063
 
 (Address of principal executive offices and zip code)

Registrant's telephone number: (650) 306-7511

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 X  
     No

The number of
   shares outstanding of the Registrant's Common Stock, $0.001 par
   value, was 27,620,159 at September 30, 1999.

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



CLARENT CORPORATION

FORM 10-Q

INDEX



|                                   |                                                                     |                                                                              |                                                                     |                                                           |   | Page No.
|---------------------------------- | ------------------------------------------------------------------- | ---------------------------------------------------------------------------- | ------------------------------------------------------------------- | --------------------------------------------------------- | - | --------
|                                   |                                                                     |                                                                              |                                                                     |                                                           |   |         
|Part I:
     Financial Information |                                                                     |                                                                             
|                                   |                                                                    
|                                   | Item 1:
     Financial Statements (Unaudited)                       |                                                                              |                                                                    
|                                  
|                                   | Condensed Consolidated
     Balance Sheets as of September 30, 1999 |                                                                              |                                                                    
|                                   |                                                                     | and December 31, 1998                                                        |                                                                     | 3                                                        
|                                  
|                                   |                                                                     |                                                                              | Condensed Consolidated
     Statements of Operations for the Three  |                                                           |  
|                                   |                                                                     | and Nine Month Periods
     Ended September 30, 1999 and 1998                |                                                                     | 4                                                        
|                                  
|                                   |                                                                     |                                                                              | Condensed Consolidated
     Statement of Cash Flows for the         |                                                           |  
|                                   |                                                                     |                                                                              |                                                                     | Nine Month Periods
     Ended September 30, 1999 and 1998 |   | 5       
|                                  
|                                   |                                                                     |                                                                              | Notes to Unaudited
     Condensed Consolidated Financial Statements |                                                           | 6
|                                   |                                                                    
|                                   |                                                                     | Item 2: Management's
     Discussion and Analysis of Financial Condition and |                                                                     |                                                          
|                                   |                                                                     |                                                                              |                                                                     | Results of Operations                                     |   | 9       
|                                  
|                                   |                                                                     | Item 3: Quantitative
     and Qualitative Disclosures About Market Risk      |                                                                     | 14                                                       
|                                  
|Part II:
     Other Information    |                                                                     |                                                                             
|                                  
|                                   |                                                                     | Item 6: Exhibits and
     Reports on Form 8-K                                |                                                                     | 25                                                       
|                                  
|                                   |                                                                     | Signatures                                                                   |                                                                     | 26                                                       
|                                  





PART I. FINANCIAL
   INFORMATION

ITEM 1: FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED
   BALANCE SHEETS(In thousands)(Audited)

|                                          | September 30,                                  |               | December 31,
|----------------------------------------- | ---------------------------------------------- | ------------- | ------------
|                                          | 1999                                           |               | 1998        
|                                          |                                                |               |             
|ASSETS                                   
|Current assets:                          
|                                          | Cash and cash
     equivalents                 | $
     33,870 |             
|                                          | Short-term
     investments                    | 23,705        |             
|                                          | Accounts receivable,
     net                  | 15,194        |             
|                                          | Inventories                                    | 5,468         |             
|                                          | Prepaid expenses and
     other current assets | 1,664         |             
|                                          |                                                |               |             
|                                          | Total current assets                           |               | 79,901      
|                                          | Property and equipment,
     net               | 7,507         |             
|                                          | Investments                                    | 2,996         |             
|                                          | Other assets                                   | 425           |             
|                                          |                                                |               |             
|                                          |                                                | $
     90,829 |             
|                                          |                                                |               |             
|                                         
|LIABILITIES AND
     STOCKHOLDERS' EQUITY
|Current liabilities:                     
|                                          | Accounts payable                               | $ 4,662       |             
|                                          | Line of credit                                 | 4,128         |             
|                                          | Deferred revenue                               | 9,411         |             
|                                          | Other accrued
     liabilities                 | 5,267         |             
|                                          | Long term debt, current
     portion           | 91            |             
|                                          |                                                |               |             
|                                          | Total current
     liabilities                 | 23,559        |             
|Long term debt                            | 91                                             |               | -           
|Stockholders' equity:                    
|                                          | Convertible preferred stock                    | -             |             
|                                          | Common stock                                   | 110,476       |             
|                                          | Deferred compensation                          | (7,818)       |             
|                                          | Accumulated other
     comprehensive loss      | (47)          |             
|                                          | Accumulated deficit                            | (35,432)      |             
|                                          |                                                |               |             
|                                          | Total stockholders'
     equity                | 67,179        |             
|                                          |                                                |               |             
|                                          |                                                | $
     90,829 |             
|                                          |                                                |               |             



See accompanying notes
   to condensed consolidated financial statements.





CONDENSED CONSOLIDATED
   STATEMENTS OF OPERATIONS(In thousands, except per
   share amounts)



|                                                      |                                   |         |           | Three Months Ended | Nine Months Ended
|----------------------------------------------------- | --------------------------------- | ------- | --------- | ------------------ | -----------------
|                                                      |                                   |         |           | Sept. 30,          | Sept. 30,        
|                                                      |                                   |         |           | 1999               | 1998             
|                                                      |                                   |         |           |                    |                  
|                                                      |                                   |         |           | (unaudited)        | (unaudited)      
|Net revenue                                           | $ 13,227                          | $ 3,269 | $ 29,245  | $ 8,748           
|Cost of revenue                                       | 5,435                             | 1,469   | 12,862    | 3,645             
|                                                      |                                   |         |           |                   
|                                                      | Gross profit                      | 7,792   | 1,800     | 16,383             | 5,103            
|                                                      |                                   |         |           |                    |                  
|                                                     
|Operating expenses:                                   |                                   |         |          
|                                                      | Research and
     development     | 2,466   | 843       | 6,023              | 2,081            
|                                                      | Sales and marketing               | 6,518   | 1,970     | 16,166             | 4,705            
|                                                      | General and
     administrative   | 1,773   | 770       | 4,402              | 1,500            
|                                                      | Amortization of
     compensation | 1,901   | 335       | 17,543             | 421              
|                                                      |                                   |         |           |                    |                  
|                                                      | Total operating expenses          | 12,658  | 3,918     | 44,134             | 8,707            
|                                                      |                                   |         |           |                    |                  
|Loss from operations                                  | (4,866)                           | (2,118) | (27,751)  | (3,604)           
|                                                      |                                   |         |           |                   
|Other income (expense)                                | 716                               | 92      | 569       | (49)              
|                                                      |                                   |         |           |                   
|                                                      |                                   |         |           |                   
|Loss before provision
     (benefit) for income taxes |                                   |         | (4,150)   | (2,026)            | (27,182)         
|Provision (benefit) for
     income taxes             |                                   |         | 72        | (2)                | 83               
|                                                      |                                   |         |           |                    |                  
|Net loss                                              |                                   |         | $ (4,222) | $ (2,024)          | $ (27,265)       
|                                                      |                                   |         |           |                    |                  
|Basic and diluted net
     loss per share             |                                   |         | $ (0.17)  | $ (0.50)           | $ (2.17)         
|                                                      |                                   |         |           |                    |                  
|Shares used in
     computing basic and diluted       |                                   |         |           |                    |                  
|                                                      | net loss per share                |         |           | 25,526             | 4,036            
|                                                      |                                   |         |           |                    |                  





See accompanying notes to
   condensed consolidated financial statements.





CONDENSED CONSOLIDATED
   STATEMENTS OF CASH FLOWS(In thousands)







|                                                                  |                                                      |                                                     |            | Nine
     Months Ended
|----------------------------------------------------------------- | ---------------------------------------------------- | --------------------------------------------------- | ---------- | ----------------------
|                                                                  |                                                      |                                                     |            | September 30,         
|                                                                  |                                                      |                                                     |            | 1999                  
|                                                                  |                                                      |                                                     |            |                       
|Operating activities:                                             |                                                      |                                                     |            |                       
|                                                                  | Net loss                                             |                                                     | $ (27,265) |                       
|                                                                  | Adjustments to
     reconcile net loss to net cash   |                                                     |            |                       
|                                                                  | used in operating
     activities:                   |                                                     |            |                       
|                                                                  | Depreciation                                         |                                                     | 1,609      |                       
|                                                                  | Amortization
     of compensation                    |                                                     | 17,543     |                       
|                                                                  | Interest expense from
     Series C warrant          |                                                     | -          |                       
|                                                                  | Preferred stock issued
     for interest payable     |                                                     | -          |                       
|                                                                  | Forgiveness of
     stockholder notes receivable     |                                                     | -          |                       
|                                                                  | Changes in operating
     assets and liabilities:    |                                                     |            |                       
|                                                                  |                                                      | Accounts
     receivable                            |            | (8,251)               
|                                                                  |                                                      | Inventories                                         |            | (1,848)               
|                                                                  |                                                      | Prepaid expenses and
     other current assets      |            | (1,186)               
|                                                                  |                                                      | Other assets                                        |            | (425)                 
|                                                                  |                                                      | Accounts payable and
     other accrued liabilities |            | 5,430                 
|                                                                  |                                                      | Deferred revenue                                    |            | 4,997                 
|                                                                  |                                                      |                                                     |            |                       
|                                                                  | Net cash
     used in operating activities           |                                                     | (9,396)    |                       
|                                                                  |                                                      |                                                     |            |                       
|                                                                  |                                                      |                                                     |            |                       
|Investing activities:                                             |                                                      |                                                     |            |                       
|                                                                  | Purchases of short-term
     investments             |                                                     | (23,728)   |                       
|                                                                  | Purchases of
     investments                        |                                                     | (3,000)    |                       
|                                                                  | Purchases of property
     and equipment             |                                                     | (6,902)    |                       
|                                                                  |                                                      |                                                     |            |                       
|Net cash used in
     investing activities                        |                                                      | (33,630)                                            |            | (1,425)               
|                                                                  |                                                      |                                                     |            |                       
|                                                                  |                                                      |                                                     |            |                       
|Financing activities:                                             |                                                      |                                                     |            |                       
|                                                                  | Proceeds
     from line of credit                    |                                                     | 1,628      |                       
|                                                                  | Proceeds from issuance
     of long term debt        |                                                     | 182        |                       
|                                                                  | Proceeds from issuance
     of Series C bridge notes |                                                     | -          |                       
|                                                                  | Principal repayment on
     Series C bridge notes    |                                                     | -          |                       
|                                                                  | Proceeds from issuance
     of preferred stock       |                                                     | 332        |                       
|                                                                  | Proceeds from issuance
     of common stock          |                                                     | 62,784     |                       
|                                                                  |                                                      |                                                     |            |                       
|Net cash
     provided by financing activities                    |                                                      | 64,926                                              |            | 11,987                
|                                                                  |                                                      |                                                     |            |                       
|Effect of exchange rate
     changes on cash and cash equivalents |                                                      | 67                                                  |            | (11)                  
|                                                                  |                                                      |                                                     |            |                       
|Net increase in cash
     and cash equivalents                    |                                                      | 21,967                                              |            | 6,298                 
|Cash and cash
     equivalents at beginning of period             |                                                      | 11,903                                              |            | 474                   
|                                                                  |                                                      |                                                     |            |                       
|Cash and cash
     equivalents at end of period                   |                                                      | $ 33,870                                            |            | $ 6,772               
|                                                                  |                                                      |                                                     |            |                       

See accompanying notes to
   condensed consolidated financial statements.





NOTES TO CONDENSED
   CONSOLIDATED FINANCIAL STATEMENTS

1.   Basis of
   Presentation

The
   accompanying condensed consolidated financial statements of Clarent
   Corporation (the Company) as of September 30, 1999 and for the three
   month and nine month periods ended September 30, 1999 and 1998
   (unaudited) 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 (consisting only of normal
   recurring accruals) 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. These financial statements should be
   read in conjunction with the consolidated financial statements and
   related notes included in the Company's Registration Statement on
   Form S-1, filed with the Securities and Exchange Commission on
   November 1, 1999. Certain prior period balances have been
   reclassified to conform to current period presentation.

2.  Inventories

Inventories
   consist of the following (in thousands):

|               | September 30,
   
   1999 | December 31,
   
   1998
|-------------- | ------------------------- | ------------------------
|               |                           |                         
|Raw materials  | $
     3,735              | $
     2,529            
|Finished goods | 1,733                     | 1,091                   
|               |                           |                         
|               | $
     5,468              | $
     3,620            
|               |                           |                         

3.  Comprehensive Income
   (Loss)

Effective
   January 1, 1998, the Company adopted Statement of Financial
   Accounting Standards No. 130, "Reporting Comprehensive Income
   " (FAS 130). FAS 130 establishes new rules for the reporting
   and display of comprehensive income and its components, requiring
   foreign currency translation adjustments, and unrealized gains and
   losses on short and long-term investments which currently are
   reported in stockholders' equity, to be included in other
   comprehensive income/loss. Prior year financial statements have been
   reclassified to conform to the requirements of FAS 130. At September
   30, 1999, the Company's accumulated other comprehensive loss
   included cummulative translation losses of $20,000 and unrealized
   losses on investments of $27,000.
 
 The Company's total comprehensive income (loss) is as follows (in
   thousands):





|                                        | Three Months Ended
   
   Sept. 30, | Nine Months Ended
   
   Sept. 30,
|--------------------------------------- | ----------------------------------- | ----------------------------------
|                                        |                                     |                                   
|                                        | 1999                                | 1998                              
|Net loss, as reported                   | $ (4,222)                           | $ (2,024)                         
|Other comprehensive
     income (loss): |                                     |                                   
|Translation adjustments                 | 24                                  | (7)                               
|Unrealized losses on
     investments   | (27)                                | -                                 
|                                        |                                     |                                   
|Comprehensive loss                      | $ (4,225)                           | $ (2,031)                         
|                                        |                                     |                                   

4. Income Taxes







The provision
   for income taxes of approximately $72,000 for the three month and
   $83,000 for the nine month periods ending September 30, 1999
   consists entirely of foreign income tax provided on the profits
   attributable to the Company's foreign operations.

5.  Short Term Borrowings

In February
   1998, the Company obtained $2,600,000 in bridge financing from
   certain investors and other parties. In conjunction with this bridge
   financing, the Company issued to the bridge financing investors
   warrants to purchase 59,266 shares of the Company's Series C
   preferred stock at an exercise price of $5.593 per share. In May and
   June 1999, investors purchased 59,266 shares of Series C preferred
   stock under these warrants.

In May 1998,
   the Company established a $5,000,000 line of credit with a financial
   institution. The interest rate on this credit facility was variable
   and was equal to one-half of one percentage point above the prime
   rate. Under the terms of this arrangement, the Company is to pay an
   additional, pro-rated fee of 0.4% of all advances drawn in excess of
   $3,000,000. In addition, borrowings under this arrangement are
   limited to the Company's eligible receivable base. The terms of the
   line of credit establish certain affirmative and negative covenants,
   under which the Company must maintain certain financial ratios and
   corporate reporting practices, respectively. In February 1999, the
   financial institution increased the line of credit to $7,000,000 and
   revised the ratios. In June 1999, the financial institution revised
   the line of credit to include eligible inventory, and further revise
   the ratios, in consideration for a fully vested warrant for 3,000
   shares of common stock at an exercise price equal to the fair value
   of $15.00 per share. Borrowings under the line of credit are secured
   by substantially all of the assets of the Company. At September 30,
   1999, $4,128,000 was outstanding under this line of credit. The line
   of credit agreement expires February 16, 2000.

6.  Long Term Debt

In February
   1999, the Company entered into a $3,000,000 equipment term loan
   facility. The loan bears interest at the bank's prime rate plus
   .75%. Under the terms of the agreement, the Company grants a
   security interest in certain assets of the Company and must maintain
   financial covenants with which the Company was in compliance as of
   September 30, 1999. Borrowings and interest are repayable in
   installments over 24-27 months. As of September 30, 1999, there was
   approximately $182,000 outstanding against the term loan facility.

Maturities
   under this agreement are as follows:

|                    | As of
   
   September 30,
   
   1999
|------------------- | --------------------------------------
|                    | (In thousands)                        
|1999 (three months) | $  23                                 
|2000                | 91                                    
|2001                | 68                                    
|                    |                                       
|                    | $182                                  
|                    |                                       



7.  Stock Split

In April 1999,
   the Company's board of directors approved a two-for-one split of the
   Company's common stock. The stock split became effective on June 28,
   1999. In addition, each share of the Company's convertible preferred
   stock converted into two shares of common stock upon the closing of
   the initial public offering on July 7, 1999. All share and per share
   amounts in the accompanying condensed consolidated financial
   statements have been adjusted retroactively.

On April 8,
   1999, the Company's board of directors authorized the
   reincorporation of the Company in Delaware. The par value of the
   preferred and common stock is $0.001 per share. On the closing of
   the Company's initial public offering, the Amended and Restated
   Certificate of Incorporation was amended to authorize 5,000,000
   shares of preferred stock and 50,000,000 shares of common stock. The
   board of directors has the authority to fix or alter the
   designations, powers, preferences, and rights of the preferred stock
   without the approval of the Company's stockholders.

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 are substantially the result of
   export sales from the U.S. Net revenue by geographic region based on
   customer location were as follows (in thousands):







|                   | Three Months Ended
   
   September 30, | Nine Months Ended
   
   September 30,
|------------------ | --------------------------------------- | --------------------------------------
|                   | 1999                                    | 1998                                  
|                   |                                         |                                       
|                   |                                         |                                       
|United
     States | $ 6,508                                 | $ 1,808                               
|Other Americas     | 36                                      | 1                                     
|Europe             | 3,072                                   | 19                                    
|Asia               | 3,611                                   | 1,441                                 
|                   |                                         |                                       
|Total              | $
     13,227                           | $
     3,269                          
|                   |                                         |                                       

9.  Net Loss Per Share

The Company
   follows the provisions of Statement of Financial Accounting
   Standards No. 128, "Earnings 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. Common equivalent
   shares from stock options and warrants (using the treasury stock
   method) are excluded from the computation of diluted net loss per
   share as their effect is anti-dilutive.

10.  Related Party
   Transactions

In June 1997,
   the Company entered into an agreement for advisory services with WK
   Technology Fund, a Taiwanese corporation, one of whose principals is
   a member of the Company's board of directors. The advisory services
   primarily related to business strategy for the Company and were to
   be performed over a four-year term. As consideration for the
   advisory services, the Company granted to WK Technology Fund a
   warrant to purchase up to 1,400,000 shares of the Company's common
   stock at an exercise price of $0.05 per share. On the 6-month
   anniversary of the warrant effective date, 175,000 of the warrants
   vested with the remaining warrants scheduled to vest ratably over
   the subsequent 42 months or immediately 30 days prior to the closing
   of the Company's public offering. The warrant had a life of five
   years. The Company valued the warrant using the guidance in the
   Financial Accounting Standards Board's Emerging Issues Task Force
   Issue 96-18. The value of the warrant was determined using the
   Black-Scholes valuation method. The inputs used included the
   exercise price of the warrant of $0.05, the value of the Company's
   common stock at each vesting date, expected dividend yield of 0%,
   risk free interest rate of 6.0%, expected volatility of 0.3 and the
   contractual life of the warrant of five years. The Company has
   recorded compensation charges totaling $0 (amount was $3,000),
   $357,000 and $12,272,000 for the years ended December 31, 1997
   and1998 and the nine months ended September 30, 1999. These amounts
   are included in amortization of compensation in the consolidated
   statement of operations. The Board of Directors terminated the
   advisory services arrangement in June 1999 and elected to have the
   unvested portion of the warrants become fully vested. WK Technology
   Fund purchased 408,328 shares of the Company's common stock under
   this warrant in August 1998 and the remaining 991,672 shares in July
   1999.

Also in June
   1997, the Company entered into another agreement for certain
   services with WK Technology Fund. These services were to assist the
   Company in identifying, evaluating, and recommending an outside
   director for the Company. Under the terms of this agreement, the
   Company granted WK Technology Fund a fully vested warrant to
   purchase up to 360,000 shares of the Company's common stock at $0.05
   per share upon successfully obtaining an outside director in
   February 1998. The fair market value of the Company's common stock
   on the date of this grant was $0.05 per share. During 1998, WK
   Technology Fund exercised the option to purchase 360,000 shares of
   the Company's common stock under this warrant.

In December
   1998, the Company issued a warrant to purchase up to 101,000 shares
   of the Company's Series C preferred stock to both WK Technology Fund
   and another Series C investor. As of December 31, 1998, no value was
   ascribed to these warrants as they were only exercisable based on
   future events which were not deemed probable. These warrants expired
   unexercised upon the closing of the Company's Initial Public
   Offering in July 1999.

11.  Stockholders' Equity

In July 1999, the Company completed an
   initial public offering of 4.6 million shares, including 600,000
   over-allotment shares, at $15.00 per share. Net proceeds from the
   offering were $62.7 million. Upon the closing of the initial public
   offering 6,923,507 shares of the Company's convertible preferred
   stock were automatically converted into 13,847,014 shares of common
   stock.

12.  Subsequent Event

On October 25, 1999 the Company issued
   43,487 shares of common stock to three private investors in
   connection with the acquisition of all outstanding stock of Global
   Media Concept, N.V. This business combination will be accounted for
   using the purchase method.

13.  Recent Accounting
   Pronouncements

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 will be required to comply with
   the provisions of SOP 98-9 for transactions entered into beginning
   January 1, 2000. The adoption of SOP 98-9 is not expected to have a
   material impact on our consolidated financial statements.

MANAGEMENT'S DISCUSSION AND ANALYSIS
 
 OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



ITEM 2:  
   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
   RESULTS OF OPERATIONS

You should
   read the following discussion in conjunction with CLARENT
   CORPORATION's unaudited condensed consolidated financial statements
   and notes thereto. Certain statements contained in this Quarterly
   Report on Form 10-Q, including, without limitation, statements
   containing the words "believes", "anticipates",
   "estimates", "expects", 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.

Overview

We are a
   leading provider of Internet Protocol (IP) telephony systems. We
   were incorporated in July 1996 and commenced sales of our products
   in March 1997. In July 1999, we reincorporated in the state of
   Delaware. Prior to March 1997, we had no sales and our operations
   consisted primarily of various start-up activities, such as research
   and development, recruiting personnel and raising capital. Since
   March 1997 we have expanded our research and development, sales and
   marketing and customer support activities. These activities include
   developing new products and technologies and enhancing existing
   products, hiring sales and marketing personnel, expanding our
   customer base, developing customer relationships, marketing the
   Clarent IP telephony solution, expansion of our domestic and
   international distribution channels and hiring customer support
   personnel.

Results of Operations

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

|                                            | Three Months Ended
   
   Sept. 30, | Nine Months Ended
   
   Sept. 30,
|------------------------------------------- | ----------------------------------- | ----------------------------------
|                                            | 1999                                | 1998                              
|                                            |                                     |                                   
|As a Percentage of
     Net Revenue:        |                                     |                                   
|Net revenue                                 | 100.0%                              | 100.0%                            
|Cost of revenue                             | 41.1                                | 44.9                              
|                                            |                                     |                                   
|Gross margin                                | 58.9                                | 55.1                              
|                                            |                                     |                                   
|Operating expenses:                         |                                     |                                   
|Research and
     development               | 18.6                                | 25.8                              
|Sales and marketing                         | 49.3                                | 60.3                              
|General and
     administrative             | 13.4                                | 23.6                              
|Amortization of
     compensation           | 14.4                                | 10.2                              
|                                            |                                     |                                   
|Total operating
     expenses               | 95.7                                | 119.9                             
|                                            |                                     |                                   
|Loss from operations                        | (37.0)                              | (65.0)                            
|Interest expense, net                       | 5.0                                 | 3.0                               
|                                            |                                     |                                   
|Loss before provision
     for income taxes | (31.0)                              | (62.0)                            
|Provision for income
     taxes             | (1.0)                               | --                                
|                                            |                                     |                                   
|Net loss                                    | (32.0)%                             | (62.0)%                           
|                                            |                                     |                                   



Net revenue
   increased 305% to $13.2 million in the three months ended September
   30, 1999 from $3.3 million in the three months ended September 30,
   1998, an increase of 42% sequentially. Net revenue for the nine
   months ended September 30, 1999 increased to $29.2 million as
   compared to $8.7 for the same period in 1998. The increase in net
   revenue is primarily attributed to increased sales of Clarent
   Command Center and Clarent Fax software as well as an increase in
   port volume of our Clarent Gateway products sold, partially offset
   by a decrease in our average per port selling prices for those
   products.

Cost of Revenue

Cost of
   revenue increased 270% to $5.4 million in the three months ended
   September 30, 1999 from $1.5 million in the three months ended
   September 30, 1998. Cost of revenue for the nine months ended
   September 30, 1999 increased to $12.9 million compared to $3.6
   million for the same period in 1998. Gross margin was 59% for the
   quarter and 56% for the nine-month period in 1999, compared to 55%
   and 58% for the corresponding periods in 1998. The decline in gross
   margin for the nine months ended September 30, 1999 compared to 1998
   is primarily attributable to a decline in the average selling prices
   of our products. Increased sales of our software products both in
   absolute dollars and as a percentage of net revenue positively
   impacted our gross margin in the three months ended September 30,
   1999.

Research and Development Expenses

Research and
   development expenses increased 193% to $2.5 million in the three
   months ended September 30, 1999 from $843,000 in the three months
   ended September 30, 1998. Research and development expenses for the
   nine months ended September 30, 1999 increased to $6.0 million as
   compared to $2.1 million for the same period in 1998. 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 decreased
   as a percentage of net revenue from 26% and 24% for the three and
   nine month periods ended September 30, 1998 to 19% and 21% for the
   comparable three and nine months ended September 30, 1999.

Sales and Marketing Expenses

Sales and
   marketing expenses increased 231% to $6.5 million in the three
   months ended September 30, 1999 from $2.0 million in the three
   months ended September 30, 1998. Sales and marketing expenses for
   the nine months ended September 30, 1999 increased to $16.2 million
   as compared to $4.7 million for the same period in 1998. 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 increased as a percentage of
   net revenue from 54% for the nine months ended September 30, 1998 to
   55% for the nine months ended September 30, 1999. The growth rate of
   sales and marketing expenses exceeded the growth rate of net revenue
   for the period because we were adding sales and marketing personnel
   and spending on promotional activities in anticipation of increased
   future sales. Sales and marketing expenses decreased as a percentage
   of revenue from 60% for the three months ended September 30, 1998 to
   49% for the corresponding period in 1999, due to the increase in
   revenue in 1999.

General and Administrative Expenses

General and
   administrative expenses increased 130% to $1.8 million in the three
   months ended September 30, 1999 from $770,000 in the three months
   ended September 30, 1998. General and administrative expenses for
   the nine months ended September 30, 1999 increased to $4.4 million
   as compared to $1.5 million for the same period in 1998. The
   absolute dollar increase in general and administrative expenses from
   period to period was primarily attributable to an increase in
   personnel and related expenses required to build the infrastructure
   to support a larger organization.



We incurred $1.9 million in the three
   months ended September 30, 1999 in amortization of compensation
   associated with the granting of stock options and warrants to
   purchase common stock as compared to $335,000 in the three months
   ended September 30, 1998. Amortization of compensation was $17.5
   million and $421,000 for the nine months ended September 30, 1999
   and 1998, respectively.

Amortization
   of compensation expense includes the amortization of stock
   compensation charges resulting from the granting of stock options at
   prices below the deemed fair value of our common stock. Amortization
   of stock compensation was approximately $1.9 million and $5.3
   million for the three months and nine months ended September 30,
   1999, and $199,000 and $202,000 for the three and nine months ended
   September 30, 1998.

Amortization
   of compensation also includes compensation charges associated with
   the granting of a warrant for advisory services to an investor, WK
   Technology Fund. Amortization of compensation totaled $0 in the
   quarter ending September 30, 1999 and $12.3 million for the nine
   months ended September 30, 1999 as compared to $136,000 and $219,000
   for the three and nine months ended September 30, 1998. We
   terminated the advisory services arrangement in June 1999 which
   caused the unvested portion of the warrant to become fully vested
   and all unamortized compensation charges relative to the associated
   warrant were recognized.

Other Income (Expense), net

Other income,
   net increased 677% to $716,000 in the three months ended September
   30, 1999 from $92,000 in the three months ended September 30, 1998.
   Other income (expense), net for the nine months ended September 30,
   1999 increased to $569,000 as compared to $(49,000) for the same
   period in 1998. The increase was attributable to the interest income
   earned on our cash, cash equivalents and investments.

Provision for Income Taxes

For the three
   and nine months ended September 30, 1999 we recorded provisions for
   income taxes of $72,000 and $83,000, respectively, related to
   current foreign income tax provided on the profits attributable to
   our foreign operations.

Liquidity and Capital Resources

Since
   inception, we have financed our operations primarily through private
   sales of convertible preferred stock, which totaled $18.9 million in
   aggregate net proceeds through September 30, 1999. We have also
   financed our operations through lines of credit, of which $4.1
   million had been borrowed and was outstanding as of September 30,
   1999. In July 1999, Clarent completed an initial public offering
   from which net proceeds approximated $62.7 million.

Net cash used
   in operating activities was $9.4 million for the nine months ended
   September 30, 1999 as compared to $4.3 million for the nine months
   ended September 30, 1998.

Net cash used
   in operating activities for the nine months ended September 30, 1999
   was attributable primarily to our net loss of approximately $27.3
   million, increases in trade accounts receivable of $8.3 million and
   inventories of $1.8 million partially offset by amortization of
   compensation of $17.5 million, increases in deferred revenue of $5.0
   million and increases in accounts payable and accrued liabilities of
   $5.4 million. The increase in inventory was primarily in
   anticipation of expected growth in product revenue as well as a
   greater need for evaluation units. The increase in accounts
   receivable was primarily the result of increased sales of which a
   significant portion occurred during the last month of the period.
   Deferred revenue increased due to increased sales of maintenance and
   support contracts as well as to account for product shipments with
   contingencies that have yet to be satisfied.



For 1998, cash used in operating activities
   was attributable primarily to a net loss of approximately $3.7
   million, and increases in trade accounts receivable of $4.5 million
   and inventories of $1.7 million. The cash used in operating
   activities was offset in part by increases in accounts payable and
   accrued liabilities of approximately $726,000 and an increase in
   deferred revenue of approximately $4.3 million. All of these
   increases were primarily the result of higher sales as compared to
   1997. The increase in inventory was in anticipation of continued
   growth in product revenue.

Net cash used
   in investing activities was $33.6 million for the nine months ended
   September 30, 1999 and $1.4 million for the nine months ended
   September 30, 1998. For the nine months ended September 30, 1999,
   $26.7 million of cash was used in investing activities for the
   purchase of short and long term investment securities. For each of
   these periods, cash used in investing activities was also
   attributable to purchases of property and equipment of $1.4 million
   and $6.9 million for the corresponding nine month periods of
   September 30, 1998 and 1999.

Net cash
   provided by financing activities was $64.9 million for the nine
   months ended September 30, 1999 and $12.0 million for the nine
   months ended September 30, 1998. For 1999, cash provided by
   financing activities was attributable primarily to $1.6 million from
   our line of credit and $62.8 million from the issuance of our common
   stock. In 1998, cash provided by financing activities included $9.9
   million in proceeds from the issuance of preferred stock and $2.6
   million received from the issuance of bridge notes convertible into
   Series C preferred stock partially offset by $550,000 in repayment
   of those bridge notes.

As of
   September 30, 1999, our principal commitments consisted of
   obligations outstanding under operating leases. Although we have no
   material commitments for capital expenditures, we anticipate a
   substantial increase in capital expenditures and lease commitments
   consistent with our anticipated growth in operations, infrastructure
   and personnel. We also may establish additional operations as we
   expand globally.

At September
   30, 1999 we had a line of credit for $7.0 million with a financial
   institution and an additional $3.0 million equipment term loan
   facility. Borrowings under this agreement are limited to our
   eligible receivable base and eligible inventory. The terms of the
   line of credit agreement establish affirmative and negative
   covenants, under which we must maintain certain financial ratios and
   reporting practices. As of September 30, 1999, $4.1 million was
   outstanding under this line of credit and $182,000 was outstanding
   under the equipment term loan facility. At September 30, 1999, we
   had $2.9 million unused under our line of credit and $2.8 million
   unused under our equipment term loan facility.

We believe
   that our current cash, cash equivalents, short and long term
   investments and borrowing capacity will be sufficient to meet our
   anticipated cash needs for working capital and capital expenditures
   for at least the next 12 months. Thereafter, if cash generated from
   operations is insufficient to satisfy our liquidity requirements, we
   may seek to sell additional equity or debt securities or increase
   the available borrowings under our line of credit. If additional
   funds are raised through the issuance of debt securities, these
   securities could have rights, preferences and privileges senior to
   holders of common stock, and the term of this debt could impose
   restrictions on our operations. The sale of additional equity or
   convertible debt securities could result in additional dilution to
   our stockholders, and we cannot be certain that additional financing
   will be available in amounts or on terms acceptable to us, if at
   all.



Year 2000 Compliance

Many currently
   installed computer systems and software products are coded to accept
   only two digit entries in the date code field. As a result, software
   that records only the last two digits of the calendar year may not
   be able to distinguish between 20th and 21st century dates. This may
   result in software failures or the creation of erroneous results.

We have
   conducted a Year 2000 readiness review for the prior and current
   versions of our products. The review includes assessment,
   implementation, including remediation, modifications, where
   necessary, of current product versions, validation testing and
   contingency planning. We continue to respond to customer questions
   about prior versions of our products on a case-by-case basis.

We have
   largely completed all phases of this plan for the prior and current
   versions of our products. As a result, all current versions of our
   products are "Year 2000 compliant," as defined below, when
   configured and used in accordance with the related documentation,
   and provided that the underlying operating system of the computer on
   which our products run and any other software used with or in the
   computer on which our products run, prior versions of our products
   are also Year 2000 compliant. We are also supplying our customers
   who use prior versions of our products with software updates for the
   third party supplied software components of our products to make
   those versions Year 2000 compliant. We have tested our products on
   all platforms and all versions of operating systems that we
   currently support.

We define
   "Year 2000 compliant" as the ability to:

- correctly handle date information needed for the December 31,
   1999 to January 1, 2000 date change;
- function according to the product documentation provided for this
   date change, without changes in operation resulting from the advent
   of a new century, assuming correct configuration;
- where appropriate, respond to two-digit date input in a way that
   resolves the ambiguity as to century in a disclosed, defined and
   predetermined manner;
- if the date elements in interfaces and data storage specify the
   century, store and provide output of date information in ways that
   are unambiguous as to century; and
- recognize the Year 2000 as a leap year.

We have tested
   software obtained from third parties that is incorporated into our
   products, and we have received assurances from our primary vendors
   that licensed software is Year 2000 compliant. We re-verified the
   assurances from primary vendors during October 1999.

Our internal
   systems include both our information technology, or IT, and non-IT
   systems. We have an assessment of our material internal IT systems,
   including both our own software products and third-party software
   and hardware technology. We completed our initial
   inventory/assessments of our non-IT systems as of September 30,
   1999. We have completed the inventory/assessment of licensed
   software included in our products and have confirmed that the
   licensed software that we incorporate in our products is Year 2000
   compliant. We have not initiated an assessment of our non-material
   internal IT systems. This confirmation has been achieved through a
   combination of internal testing, vendors' Year 2000 Readiness
   Disclosures, and an ongoing certification program addressing all of
   our suppliers and vendors.

Despite
   testing by us and by current and potential clients, and assurances
   from developers of products incorporated into our products, our
   products, or IT systems, and non-IT systems may contain undetected
   errors or defects associated with Year 2000 date functions. Known or
   unknown errors or defects in our products could result in delay or
   loss of revenue, diversion of development resources, damage to our
   reputation, or increased service and warranty costs, any of which
   could materially adversely affect our business, operating results or
   financial condition. Some industry analysts have predicted
   significant litigation regarding Year 2000 compliance issues, and we
   are aware of such lawsuits against other software vendors. Because
   of the unprecedented nature of such litigation, it is uncertain
   whether or to what extent we may be affected by it.

Our total
   costs incurred through September 30, 1999 are approximately
   $500,000. We expect that we could incur additional costs with
   respect to our Year 2000 compliance efforts. In addition, we may
   experience material unanticipated problems and costs caused by
   undetected errors or defects in the technology used in our internal
   IT and non-IT systems.

We do not
   currently have any information concerning the Year 2000 compliance
   status of our customers. If our current or future customers fail to
   achieve Year 2000 compliance or if they divert technology
   expenditures to address Year 2000 compliance problems, our business
   could suffer.

We have funded
   our Year 2000 plan from available cash and have not separately
   accounted for these costs in the past. We may incur additional costs
   related to the Year 2000 plan for administrative personnel to manage
   the project, outside contractor assistance, technical support for
   our products, product engineering and customer satisfaction. In
   addition, we may experience material problems and costs with Year
   2000 compliance that could adversely affect our business, results of
   operations, and financial condition.

We have
   developed a contingency plan to address situations that may result
   if we are unable to achieve Year 2000 readiness of our critical
   operations. We are also subject to external forces that might
   generally affect industry and commerce, such as utility or
   transportation company Year 2000 compliance failures and related
   service interruptions.







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, 1999, we have not experienced any significant negative
   impact on our operations as a result of fluctuations in foreign
   currency exchange rates.

We have an investment portfolio of fixed
   income securities, including those classified as cash equivalents,
   of $53.6 million at September 30, 1999. These securities are subject
   to interest rate fluctuations and will decrease in market value if
   interest rates increase.

We also have
   financial market risk on the interest rate associated with our short
   term debt. At September 30, 1999, we believe that our financial
   market risk related to this debt was immaterial.







RISK FACTORS WHICH MAY IMPACT
   FUTURE OPERATING RESULTS

Factors
   that have affected our results of operations in the past, and are
   likely to affect our results of operations in the future, include
   the following:

We have a limited operating
   history, which makes it difficult to evaluate our prospects.

We are an
   early-stage company in the emerging IP telephony market. We were
   founded in July 1996 and have not generated significant revenue to
   date. Because of our limited operating history, we have limited
   insight into trends that may emerge in our market and affect our
   business. The revenue and income potential of the IP telephony
   market, and our business in particular, are unproven. As a result of
   our limited operating history, we have limited financial data that
   you can use to evaluate our business. You must consider our
   prospects in light of the risks, expenses and challenges we might
   encounter because we are at an early stage of development in a new
   and rapidly evolving market.

Unless we generate significant
   revenue growth, our increasing expenses and negative cash flow will
   significantly harm our financial position.

As of
   September 30, 1999, we had an accumulated deficit of $35.4 million.
   We expect to incur operating losses for the foreseeable future, and
   these losses may be substantial. Further, we expect to incur
   negative operating cash flow in the future. We expect to continue to
   increase capital expenditures and our research and development,
   sales and marketing and general and administrative expenses. We will
   need to generate significant revenue growth to achieve profitability
   and positive operating cash flow. Even if we do achieve
   profitability and positive operating cash flow, we may not be able
   to sustain or increase profitability or positive operating cash flow
   on a quarterly or annual basis.

We have
   experienced operating losses in each quarterly and annual period
   since inception. The following table shows our operating losses for
   the periods indicated:

|Period                                             | Operating Loss       
|-------------------------------------------------- | ---------------------
|                                                   |                      
|July 2, 1996
     (inception) to December 31, 1996 | $
          (276,000)
|Year ended December 31,
     1997                  | (2,129,000)          
|Year ended December 31,
     1998                  | (5,824,000)          
|Nine months ended
     September 30, 1999          | (27,751,000)         

Our operating results are volatile,
   and an unanticipated decline in revenue may disproportionately
   affect our net income or loss in a quarter.

Our quarterly
   and annual operating results have varied significantly in the past
   and will likely vary significantly in the future. As a result, our
   future operating results are difficult to predict. Further, we incur
   expenses in significant part on our expectations of our future
   revenue. As a result, we expect our expense levels to be relatively
   fixed in the short run. Therefore, an unanticipated decline in
   revenue for a particular quarter may disproportionately affect our
   net income (loss) in that quarter.

Any of the
   above factors could harm our business, financial condition and
   results of operations. We believe that period-to-period comparisons
   of our results of operations are not meaningful, and you should not
   rely upon them as indicators of our future performance.







If we do not reduce costs,
   introduce new products or increase sales volume, our gross margin
   may decline.

We have
   experienced significant erosion in the average selling prices of our
   products due to a number of factors, including competitive pricing
   pressures, rapid technological change and sales discounts. We
   anticipate that the average selling prices of our products will
   decrease and fluctuate in the future in response to the same
   factors. Therefore, to maintain or increase our gross margin, we
   must develop and introduce new products and product enhancements on
   a timely basis. We must also continually reduce our costs of
   production. As our average selling prices decline, we must increase
   our unit sales volume to maintain or increase our revenue. To date,
   the erosion in the average selling prices has not had a material
   affect on our business. However, we cannot be certain that the
   erosion in the average selling prices will not affect our business
   in the future. If our average selling prices decline more rapidly
   than our costs of production, our gross margin will decline, which
   could seriously harm our business, financial condition and results
   of operations.

Our markets are highly competitive,
   and we cannot assure you that we will be able to compete
   effectively.

We compete in
   a new, rapidly evolving and highly competitive and fragmented
   market. We expect competition to intensify in the future. We cannot
   assure you that we will be able to compete effectively. We believe
   that the main competitive factors in our market are product quality,
   features, cost and customer relationships. Our current principal
   competitors include 3Com Corporation, Cisco Systems, Inc., Lucent
   Technologies Inc., Nortel Networks Corporation and VocalTec
   Communications, Ltd. Many of our large competitors have stronger
   relationships with service providers than we do. In addition, they
   may be able to compete more effectively because they will be able to
   add IP telephony features to their existing equipment or bundle
   these features as part of a broader solution. According to one
   industry source, our market share in IP telephony equipment, as
   measured by ports shipped, fell from 16.7% in 1998 to 40.0% in the
   first half of 1999. We also expect that other companies may enter
   our market with better products and technologies.

We expect our
   competitors to continue to improve the performance of their current
   products and introduce new products or new technologies. To be
   competitive, we must continue to invest significant resources in
   research and development, sales, marketing and customer support. We
   cannot be sure that we will have sufficient resources to make these
   investments or that we will be able to make the technological
   advances necessary to be competitive. Increased competition is
   likely to result in price reductions, reduced gross margin and loss
   of market share. Our failure to compete successfully against current
   or future competitors could seriously harm our business, financial
   condition and results of operations.

Our future ability to generate
   sales depends on the interoperability of our products with those of
   other vendors.

While our
   products currently connect to the traditional system using standard
   interfaces, an increasing number of our customers have requested
   that our products interoperate with competing IP telephony products
   from other vendors. The interoperability standards for IP telephony
   equipment are evolving. We have initial interoperable solutions. If
   we are unable to provide or maintain our customers' interoperable
   solutions with other vendors' products, they may seek vendors who
   provide greater product interoperability. This could seriously harm
   our business, financial condition and results of operations.

If we lose key personnel, we may
   not be able to successfully operate our business.

Our future
   success depends, in large part, on our ability to attract and retain
   highly skilled personnel. The loss of the services of any of our key
   personnel, the inability to attract or retain qualified personnel in
   the future or delays in hiring required personnel, particularly
   engineers, sales personnel and marketing personnel, may seriously
   harm our business, financial condition and results of operations. We
   will need to expand our sales operations and marketing operations in
   order to increase market awareness of our products and generate
   increased revenue. New sales personnel and marketing personnel will
   require training and take time to achieve full productivity. In
   addition, the design and installation of IP telephony solutions can
   be complex. Accordingly, we need highly trained professional
   services and customer support personnel. We currently have a small
   professional services and customer support organization and will
   need to increase our staff to support new customers and the
   expanding needs of existing customers. Competition for personnel is
   intense, especially in the San Francisco Bay Area where we maintain
   our headquarters. We cannot be certain that we will successfully
   attract and retain additional qualified personnel. In addition, our
   key person life insurance policy, covering some of our key
   employees, may be insufficient to cover the costs associated with
   the loss of one of these employees.









Our failure to manage our rapid
   growth effectively could negatively affect our results of
   operations.

Since we began
   commercial shipment of our products in March 1997, we have
   experienced a period of rapid growth and expansion that is
   significantly straining all of our resources. From September 30,
   1998 to September 30, 1999, the number of our employees increased
   from approximately 70 to 230. We expect our anticipated growth and
   expansion to continue to place strain on our management, operational
   and financial resources. Our inability to manage growth effectively
   could seriously harm our business, financial condition and results
   of operations. We may not be able to install adequate control
   systems in an efficient and timely manner, and our current or
   planned operational systems, procedures and controls may not be
   adequate to support our future operations. Delays in the
   implementation of new systems or operational disruptions when we
   transition to new systems would impair our ability to accurately
   forecast sales demand, manage our product inventory and record and
   report financial and management information on a timely and accurate
   basis.

The IP telephony alternative may
   not achieve widespread acceptance, which could cause our business to
   fail.

The IP
   telephony market is relatively new and evolving rapidly. Less than
   1% of all voice calls worldwide are currently transmitted over
   IP-based data networks. Our ability to increase revenue in the
   future depends on some of both existing and future circuit-switched
   telephone network calls moving to IP-based data networks. The use of
   IP telephony for voice calls might be hindered by the:

| |  | reluctance
     of service providers that have invested substantial resources in
     the existing telephone network infrastructure to replace or expand
     their current networks with this new technology; and
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | lack of
     partnerships between service providers, keeping them from having
     global IP telephony network coverage.                                                                                          

Accordingly,
   in order to achieve commercial acceptance, we will have to educate
   prospective customers, including large, established
   telecommunications companies, about the benefits and uses of IP
   telephony solutions in general, our products in particular, and the
   need to partner with other IP telephony service providers to extend
   the coverage of their networks. If these efforts fail or if IP
   telephony does not achieve commercial acceptance, our business,
   financial condition and results of operations could be seriously
   harmed.

Our inability to introduce new
   products and product enhancements could prevent us from increasing
   revenue.

We expect that
   the IP telephony market will be characterized by rapid technological
   change. We also expect that the increased use of IP telephony will
   require us to rapidly evolve and adapt our products to remain
   competitive. The successful operation of our business depends on our
   ability to develop and introduce new products and product
   enhancements that respond to technological changes or evolving
   industry standards on a timely and cost-effective basis. We cannot
   be certain that we will successfully develop and market these types
   of products and product enhancements. Our failure to produce
   technologically competitive products in a cost-effective manner and
   on a timely basis will seriously harm our business, financial
   condition and results of operations.



Future regulation or legislation
   could restrict our business or increase our cost of doing business.

At present
   there are few laws or regulations that specifically address access
   to or commerce on the Internet, including IP telephony. We are
   unable to predict the impact, if any, that future legislation, legal
   decisions or regulations concerning the Internet may have on our
   business, financial condition and results of operations. Regulation
   may be targeted towards, among other things, assessing access or
   settlement charges, imposing tariffs or imposing regulations based
   on encryption concerns or the characteristics and quality of
   products and services, which could restrict our business or increase
   our cost of doing business. The increasing growth of the IP
   telephony market and popularity of IP telephony products and
   services heighten the risk that governments will seek to regulate IP
   telephony and the Internet. In addition, large, established
   telecommunications companies may devote substantial lobbying efforts
   to influence the regulation of the IP telephony market, which may be
   contrary to our interests.

We depend on new entrants in the
   service provider market to generate a portion of our revenue and our
   operating results may be harmed if these new entrants are not
   commercially viable.

We expect to
   generate a portion of our revenue from new entrants in the
   telecommunications service provider market. Failure to generate
   revenue from these new entrants could have a negative impact on our
   business. Examples of these service providers include traditional,
   local, international and wholesale long distance companies,
   competitive local exchange carriers and Internet telephony service
   providers. Many of these new entrants are still building their
   infrastructures and rolling out their services. We cannot guarantee
   that any of these companies will achieve commercial viability. Given
   that these new entrants may be start-up operations with uncertain
   financial resources, we cannot be sure that these new entrants will
   be able to pay their obligations to us for purchase of our products
   on a timely basis, or at all. Some of our new entrant customers have
   been late in making payments to us. To date, late payments from our
   customers have not significantly impacted our operations. However,
   we cannot be certain that late payments from our customers will not
   impact our operations in the future. The failure of these companies
   to achieve commercial viability or pay their obligations to us
   would, in turn, seriously harm our business, financial condition and
   results of operations.

A loss of one or more of our key
   customers could cause a significant decrease in our net revenue.

We have historically derived the
   majority of our revenue from a small number of customers,
   particularly various entities within AT&T. In 1998 entities
   affiliated with AT&T Corporation accounted for 36% of our
   revenue and Technet International accounted for 12% of our net
   revenue. For the nine months ended September 30, 1999, entities
   affiliated with AT&T Corporation accounted for 16% of our
   revenue, and entities affiliated with Ji Tong Communications
   accounted for 15% of our net revenue. None of our customers is
   obligated to purchase additional products or services. Accordingly,
   we cannot be certain that present or future customers will not
   terminate their purchasing arrangements with us or significantly
   reduce or delay their orders. Any termination, change, reduction or
   delay in orders could seriously harm our business, financial
   condition and results of operations.

We may not be able to expand our
   direct sales and distribution channels, which would harm our ability
   to generate revenue.

We believe that our
   future success is dependent upon our ability to expand our direct
   sales force and establish successful relationships with a variety of
   international distribution partners. To date, we have entered into
   agreements with only a small number of distribution partners that
   accounted for approximately 18% of net revenue for 1998 and 17% of
   net revenue in the nine months ended September 30, 1999. These
   distribution agreements typically may be terminated without cause
   upon 90 days notice. We cannot be certain that we will be able to
   reach agreement with additional distribution partners on a timely
   basis or at all, or that these distribution partners will devote
   adequate resources to marketing, selling and supporting our
   products. We must successfully manage our distributor relationships.
   In 1997, we settled a dispute with one of our distributors at a cost
   of $570,000, plus future specified discounts. We cannot guarantee
   that we will successfully manage our distributor relationships in
   the future. Our inability to generate revenue from distribution
   partners may harm our business, financial condition and results of
   operations.







Sales to customers based outside
   the United States have historically accounted for a significant
   portion of our revenue, which exposes us to risks inherent in
   international operations.

International
   sales represented approximately 94% of net revenue in 1997, 48% in
   1998 and 52% for the nine months ended September 30, 1999. Our
   international operations are subject to a variety of risks
   associated with conducting business internationally any of which
   could seriously harm our business, financial condition and results
   of operations. These risks include:

| |  | greater
     difficulty in accounts receivable collections;                                                                                     
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------
| |  | import or
     export licensing and product certification requirements;                                                                         
| |  | tariffs,
     duties, price controls or other restrictions on foreign currencies
     or trade barriers imposed by foreign countries;           
| |  | potential
     adverse tax consequences, including restrictions on repatriation
     of earnings;                                               
| |  | fluctuations in currency exchange rates;                                                                                                        
| |  | seasonal
     reductions in business activity in some parts of the world;                                                                       
| |  | unexpected
     changes in regulatory requirements;                                                                                             
| |  | burdens of
     complying with a wide variety of foreign laws, particularly with
     respect to intellectual property and license requirements;
| |  | difficulties and costs of staffing and managing foreign operations;                                                                             
| |  | political
     instability;                                                                                                                     
| |  | the impact
     of recessions in economies outside of the United States; and                                                                    
| |  | limited
     ability to enforce agreements, intellectual property and other
     rights in some foreign countries.                              

We may not be able to expand our
   international operations, which would reduce our ability to increase
   revenue.

We currently
   have offices in Belgium, Germany, Japan, the People's Republic of
   China, South Korea, France, Spain, Taiwan, United Kingdom and the
   United States. We intend to expand the scope of our international
   operations, which will require us to enhance our communications
   infrastructure and may include the establishment of overseas
   assembly operations. If we are unable to expand our international
   operations effectively and quickly, we may be unable to successfully
   market, sell, deliver and support our products internationally.

Our sales cycle is typically long
   and unpredictable, causing us to incur expenditures prior to the
   receipt of orders.

We incur
   research and development, and sales and marketing, including
   customer support, expenditures prior to receiving orders for our
   products from any given customer. The length of the sales cycle with
   a particular customer is influenced by a number of factors,
   including:

| |  | a
     customer's experience with sophisticated telecommunications
     equipment, such as our product;                           
| |  | ----------------------------------------------------------------------------------------------------------------------------------
| |  | the
     particular telecommunications market that the customer serves; and                                                       
| |  | the cost
     of purchasing our product, including the cost of converting from
     installed equipment, which may be significant.







Before we receive orders, our
   customers typically test and evaluate our products for a period of
   months or, in some cases, over a year.

We cannot be
   certain that the sales cycle for our products will not lengthen in
   the future. In addition, the emerging and evolving nature of the IP
   telephony market may cause prospective customers to delay their
   purchase decisions as they evaluate new technologies and develop and
   implement new systems. As the average order size for our products
   grows, the process for approving purchases is likely to become more
   complex, leading to potential delays in receipt of these orders. As
   a result, our long and unpredictable sales cycle contributes to the
   uncertainty of our future operating results.

Delays in customer orders could
   have a negative impact on our results of operations for any given
   quarter.

We have
   historically received a significant portion of our product orders
   near the end of a quarter. Accordingly, a delay in an anticipated
   receipt or delivery of a given order past the end of a particular
   quarter may negatively impact our results of operations for that
   quarter. These delays may become more likely given that we expect
   that the average size of our customer orders may increase. As a
   result, a delay in the recognition of revenue, even from just one
   customer, may have a significant negative impact on our results of
   operations for a given period. Any delay in sales of our products
   could result in a significant decrease in cash flow, which, in turn,
   could severely affect our ability to make payments as they come due
   and could cause our operating results to vary significantly from
   quarter to quarter.

Our dependence on independent
   manufacturers may result in product delivery delays.

We license
   technology that is incorporated into our products from independent
   manufacturers, including AudioCodes, Ltd. and Natural Microsystems.
   If these vendors fail to supply us with their components on a timely
   basis, we could experience significant delays in shipping our
   products. Although we believe there are other sources for this
   licensed technology, any significant interruption in the supply or
   support of any licensed technology could seriously harm our sales,
   unless and until we can replace the functionality provided by this
   licensed technology. Also, because our products incorporate software
   developed and maintained by third parties, we depend on these third
   parties to deliver reliable products, support these products,
   enhance their current products, develop new products on a timely and
   cost-effective basis, and respond to emerging industry standards and
   other technological changes. The failure of these third parties to
   meet these criteria could seriously harm our business, financial
   condition and results of operations.

Our business could be harmed if we
   are unable to forecast our inventory needs accurately.







Lead times for
   materials and components used in the assembly of our products vary
   significantly. If orders do not match forecasts, we may have excess
   or inadequate inventory of some materials and components.

Our strategy to outsource assembly
   and test functions in the future could delay our ability to deliver
   our products on a timely basis.

We assemble
   and test our products at our facility in Redwood City, California.
   Based on volume or customer requirements, we may begin outsourcing
   some of our assembly and test functions. This outsourcing strategy
   involves risks, including the potential absence of adequate capacity
   and reduced control over delivery schedules, manufacturing yields,
   quality and costs. In the event that any significant subcontractor
   were to become unable or unwilling to continue to manufacture and/or
   test our products in the required volumes, we would have to identify
   and qualify acceptable replacements. This process could be lengthy,
   and we cannot be sure that additional sources would be available to
   us on a timely basis. Any delay or increase in costs in the assembly
   and testing of products by third-party subcontractors, could
   seriously harm our business, financial condition and results of
   operations.

Our facilities are vulnerable to
   damage from earthquakes and other natural disasters.

Our assembly
   facilities are located on or near known earthquake fault zones and
   are vulnerable to damage from fire, floods, earthquakes, power loss,
   telecommunications failures and similar events. If such a disaster
   occurs while we still assemble our products in-house, our ability to
   assemble, test and ship our products would be seriously, if not
   completely, impaired, which would seriously harm our business,
   financial condition and results of operations. We cannot be sure
   that the insurance we maintain against fires, floods, earthquakes
   and general business interruptions will be adequate to cover our
   losses in any particular case.

Fluctuations in the values of
   foreign currencies could have a negative impact on our
   profitability.

Due to our
   international operations, we incur expenses in a number of
   currencies. We do not currently engage in currency hedging
   activities to limit the risks of exchange rate fluctuations.
   Therefore, fluctuations in the value of foreign currencies could
   have a negative impact on the profitability of our global
   operations, which would seriously harm our business, financial
   condition and results of operations. All of our sales, including
   international sales are currently denominated in U.S. dollars.
   However, we do not expect that future international sales will
   continue to be denominated in U.S. dollars. Fluctuations in the
   value of the U.S. dollar and foreign currencies may make our
   products more expensive than local product offerings.

Defects in our products may
   seriously harm our credibility and harm our business.

We have
   detected and may continue to detect errors and product defects in
   connection with new product releases and product upgrades. These
   problems may affect network uptime and cause us to incur significant
   warranty and repair costs and cause significant customer relations
   problems. Service providers require a strict level of quality and
   reliability from telecommunications equipment suppliers. Traditional
   telecommunications equipment is expected to provide a 99.999% level
   of reliability. IP telephony products are inherently complex and
   frequently contain undetected software or hardware errors when first
   introduced or as new versions are released. In addition, the
   detection of errors in software products requires an unknown level
   of effort to correct and may delay the release of new products or
   upgrades or revisions to existing products, which could materially
   affect the market acceptance and sales of our products. If we
   deliver products or upgrades with undetected material software
   errors or product defects, our credibility and market acceptance and
   sales of our products may be harmed. In some of our contracts, we
   have agreed to indemnify our customers against certain liabilities
   arising from defects in our products. While we carry insurance
   policies covering this type of liability, these policies may not
   provide sufficient protection should a claim be asserted. To date,
   product defects have not had a material negative affect on our
   results of operations. However, we cannot be certain that product
   defects will not have a material negative affect on our results of
   operations in the future. A material product liability claim may
   have significant consequences on our ability to compete effectively
   and generate positive cash flow and may seriously harm our business,
   financial condition and results of operations.





We may have difficulty identifying
   the source of the problem when there is a problem in a network.

Our products
   must successfully integrate with products from other vendors, such
   as traditional telephone systems. As a result, when problems occur
   in a network, it may be difficult to identify the source of the
   problem. The occurrence of hardware and software errors, whether
   caused by our products or another vendor's products, may result in
   the delay or loss of market acceptance of our products and any
   necessary revisions may force us to incur significant expenses. The
   occurrence of some of these types of problems may seriously harm our
   business, financial condition and results of operations.

We may not have adequate protection
   for our intellectual property, which may make it easier for others
   to sell competing products.

We rely on a
   combination of copyright, trademark and trade secret laws and
   restrictions on disclosure to protect our intellectual property
   rights. Despite our efforts to protect our proprietary rights,
   unauthorized parties may attempt to copy or otherwise obtain and use
   our products or technology. Monitoring unauthorized use of our
   products is difficult, and we cannot be certain that the steps we
   have taken will prevent misappropriation of our technology. The laws
   of some foreign countries do not protect our proprietary rights to
   as great an extent as the laws of the United States, and many United
   States companies have encountered substantial infringement problems
   in these countries, some of which are countries in which we have
   sold and continue to sell products. If we fail to adequately protect
   our intellectual property rights, it would be easier for our
   competitors to sell competing products.

Our products may infringe on the
   intellectual property rights of third parties, which may result in
   lawsuits and prohibit us from selling our products.

We believe
   there is a risk that third parties have filed, or will file
   applications for, or have received or will receive, patents or
   obtain additional intellectual property rights relating to materials
   or processes that we use or propose to use. As a result, from time
   to time, third parties may assert exclusive patent, copyright,
   trademark and other intellectual property rights to technologies
   that are important to us. In addition, third parties may assert
   claims or initiate litigation against us or our manufacturers,
   suppliers or customers with respect to existing or future products,
   trademarks or other proprietary rights. Any claims against us or
   customers that we indemnify against intellectual property claims,
   with or without merit, may be time- consuming, result in costly
   litigation and diversion of technical and management personnel or
   require us to develop non-infringing technology. If a claim is
   successful, we may be required to obtain a license or royalty
   agreement under the intellectual property rights of those parties
   claiming the infringement. If we are unable to obtain the license,
   we may be unable to market our products. Limitations on our ability
   to market our products and delays and costs associated with monetary
   damages and redesigns in compliance with an adverse judgment or
   settlement could harm our business, financial condition and results
   of operations.

Our failure and the failure of our
   key suppliers and customers to be Year 2000 compliant may negatively
   impact our business and results of operations.

The Year 2000 computer issue creates a
   significant risk for us in at least four areas:

| |  | potential
     warranty or other claims arising from our products for failure to
     be Year 2000 compliant;
| |  | -------------------------------------------------------------------------------------------------------------

| |  | systems we
     use to run our business may fail or produce inaccurate results;                                                                                                                                                                
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | systems
     used by our suppliers may fail or produce inaccurate results,
     causing operational difficulties for us; and                                                                                                                   
| |  | potential
     customers may reduce spending on IP telephony products as a result
     of significant information systems spending on Year 2000
     remediation or to limit additional changes to their networks
     during the current year.

If any of
   these risks materialize, it may seriously harm our business,
   financial condition and results of operations.

We may not be able to raise capital
   as needed to maintain our operations.

We may need to
   raise additional funds, and additional financing may not be
   available on favorable terms, if at all. We may also require
   additional capital to acquire or invest in complementary businesses
   or products or obtain the right to use complementary technologies.
   If we cannot raise needed funds on acceptable terms, we may not be
   able to develop or enhance our products, take advantage of future
   opportunities or respond to competitive pressures or unanticipated
   requirements, which could seriously harm our business, financial
   condition and results of operations. If we issue additional equity
   securities to raise funds, the ownership percentage of our existing
   stockholders would be reduced. New investors may demand rights,
   preferences or privileges senior to those of existing holders of our
   common stock.

Our existing stockholders have
   voting control over Clarent.

Our executive
   officers and directors and their affiliates beneficially own, in the
   aggregate, approximately, 56.23% of our outstanding common stock. As
   a result, these stockholders will be able to exercise significant
   control over all matters requiring stockholder approval, including
   the election of directors and approval of significant corporate
   transactions, which may have the effect of delaying or preventing a
   third party from acquiring control over us.

Our stock price is highly volatile.

The trading
   price of our common stock has fluctuated significantly since our
   initial public offering in July 1999. In addition, the trading price
   of our common stock could be subject to wide fluctuations in
   response to quarterly variations in operating results, announcements
   of technological innovations or new products by us or our
   competitors, developments with respect to patents or proprietary
   rights, announcements of strategic partnerships or new customers by
   us or our competitors, changes in financial estimates by securities
   analysts and other events or factors. In addition, the stock market
   has experienced volatility that has particularly affected the market
   prices of equity securities of many high technology companies and
   that often has been unrelated or disproportionate to the operating
   performance of these companies. These broad market fluctuations may
   adversely affect the market price of our common stock.

We may in the future be the target
   of securities class action or other litigation, which could be
   costly and time consuming to defend.

In the past,
   securities class action litigation has often been brought against a
   company following periods of volatility in the market price of its
   securities. We may in the future be the target of similar
   litigation. Our acquisition activity may involve us in disputes from
   time to time. Litigation that may arise from these disputes may lead
   to volatility in our stock price and/or may result in our being the
   target of securities class action litigation. Securities litigation
   may result in substantial costs and divert management's attention
   and resources, which may seriously harm our business, financial
   condition and results of operations.

Our certificate of incorporation
   and bylaws and Delaware law contain provisions that could delay or
   prevent a change of control of Clarent.

Certain
   provisions of our certificate of incorporation and bylaws and
   Delaware law may discourage, delay or prevent a merger or
   acquisition that a stockholder may consider favorable. These
   provisions include:

| |  | authorizing the board of directors to issue additional preferred
     stock;                                                                                                                    
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | prohibiting cumulative voting in the election of directors;                                                                                                                                     
| |  | limiting
     the persons who may call special meetings of stockholders;                                                                                                                        
| |  | prohibiting stockholder action by written consent; and                                                                                                                                          
| |  | establishing advance notice requirements for nominations for
     election of the board of directors or for proposing matters that
     can be acted on by stockholders at stockholder meetings.





We are also
   subject to certain provisions of Delaware law which could delay,
   deter or prevent us from entering into an acquisition, including
   Section 203 of the Delaware General Corporation Law, which prohibits
   a Delaware corporation from engaging in a business combination with
   an interested stockholder unless specific conditions are met.

Substantial future sales of our
   shares in the public market may cause our stock price to fall.

If our
   stockholders sell substantial amounts of our common stock, including
   shares issued upon exercise of outstanding options and warrants, in
   the public market during a short period of time, our stock price may
   decline significantly. These sales also might make it more difficult
   for us to sell equity or equity-related securities in the future at
   a time and price that we deem appropriate.

We do not intend to pay dividends.

We have never
   declared or paid any cash dividends on our capital stock. We
   currently intend to retain any future earnings for funding growth.
   In addition, pursuant to our bank credit facility, we cannot pay
   dividends without our bank's consent, with limited exceptions.
   Therefore, we do not expect to pay any dividends in the foreseeable
   future.



CLARENT CORPORATION



PART II - OTHER
   INFORMATION



ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

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



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/ Jerry
     Shaw-Yau Chang                               
|                       | Jerry Shaw-Yau Chang                                           
|                       | Chief Executive
     Officer,
   
   President and Director    
|                       |                                                                
|                       | By /s/ Richard J.
     Heaps                                   
|                       | Richard J. Heaps                                               
|                       | Chief Operating Officer
     and
   
   Chief Financial Officer
|                       | (Principal Financial
     and Accounting Officer)              
|                       |                                                                
|Date: November 1, 1999 |