<PAGE>

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

                                 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 March 31, 2001

                                       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 000-26441

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

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

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

                              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 40,074,347 at April 30, 2001.

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

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>

                              CLARENT CORPORATION

                                FORM 10-Q INDEX

<TABLE>
<CAPTION>
                                                                       Page No.
                                                                       --------
<S>                                                                    <C>
                    PART I: FINANCIAL INFORMATION

Item 1: Financial Statements (Unaudited)..............................     3

  Condensed Consolidated Balance Sheets as of March 31, 2001 and
   December 31, 2000..................................................     3

  Condensed Consolidated Statements of Operations for the Three Month
   Periods Ended March 31, 2001 and 2000..............................     4

  Condensed Consolidated Statement of Cash Flows for the Three Month
   Periods Ended March 31, 2001 and 2000..............................     5

  Notes to Unaudited Condensed Consolidated Financial Statements......     6

Item 2: Management's Discussion and Analysis of Financial Condition
 and Results of Operations............................................    11

Item 3: Quantitative and Qualitative Disclosures About Market Risk....    25

                      PART II: OTHER INFORMATION

Item 6: Exhibits and Reports on Form 8-K..............................    26

Signatures............................................................    27
</TABLE>

                                       2
<PAGE>

                         PART I. FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS

                              CLARENT CORPORATION

                     CONDENSED CONSOLIDATED BALANCE SHEETS
                                 (In thousands)

<TABLE>
<CAPTION>
                                                         March 31,  December 31,
                                                           2001         2000
                                                        ----------- ------------
                                                        (Unaudited)   (Audited)
<S>                                                     <C>         <C>
                        ASSETS
                        ------

Current assets:
  Cash and cash equivalents............................  $ 195,095   $ 185,627
  Short-term investments...............................     33,043      74,987
  Accounts receivable, net.............................     72,398      61,610
  Inventories..........................................     27,370      17,487
  Prepaid expenses and other current assets............     11,956      11,342
                                                         ---------   ---------
    Total current assets...............................    339,862     351,053
  Investments..........................................     13,829      14,479
  Property and equipment, net..........................     46,173      36,630
  Goodwill, net........................................     86,237      93,644
  Purchased intangible assets, net.....................     35,662      38,057
  Deferred tax assets..................................     16,117      15,988
  Other assets.........................................      9,446       4,517
                                                         ---------   ---------
                                                         $ 547,326   $ 554,368
                                                         =========   =========

         LIABILITIES AND STOCKHOLDERS' EQUITY
         ------------------------------------

Current liabilities:
  Accounts payable.....................................  $  23,757   $  14,337
  Deferred revenue.....................................     13,242      13,947
  Accrued liabilities..................................     25,265      29,386
                                                         ---------   ---------
    Total current liabilities..........................     62,264      57,670
Deferred tax liabilities...............................     14,853      14,534
Stockholders' equity:
  Common stock.........................................    585,533     585,281
  Deferred compensation................................     (7,720)     (9,740)
  Accumulated other comprehensive loss.................       (589)       (326)
  Accumulated deficit..................................   (107,015)    (93,051)
                                                         ---------   ---------
    Total stockholders' equity.........................    470,209     482,164
                                                         ---------   ---------
                                                         $ 547,326   $ 554,368
                                                         =========   =========
</TABLE>

     See accompanying notes to condensed consolidated financial statements.

                                       3
<PAGE>

                              CLARENT CORPORATION

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

<TABLE>
<CAPTION>
                                                              Three Months
                                                            Ended March 31,
                                                            -----------------
                                                              2001     2000
                                                            --------  -------
<S>                                                         <C>       <C>
Net revenue:
  Product and software..................................... $ 55,535  $22,078
  Service..................................................    5,657    2,505
                                                            --------  -------
    Total revenue..........................................   61,192   24,583
Cost of revenue:
  Product and software.....................................   15,237    8,311
  Service..................................................    3,248    1,638
                                                            --------  -------
    Total cost of revenue..................................   18,485    9,949
                                                            --------  -------
  Gross profit.............................................   42,707   14,634
                                                            --------  -------
Operating expenses:
  Research and development.................................   14,758    4,340
  Sales and marketing......................................   24,825   11,055
  General and administrative...............................    8,412    2,441
  Amortization of compensation.............................    2,020    1,378
  Amortization of goodwill & other intangibles.............    9,109      226
                                                            --------  -------
    Total operating expenses...............................   59,124   19,440
                                                            --------  -------
Loss from operations.......................................  (16,417)  (4,806)
Other income, net..........................................    2,768    4,115
                                                            --------  -------
Loss before provision for income taxes.....................  (13,649)    (691)
Provision for income taxes.................................     (315)     (25)
                                                            --------  -------
Net loss................................................... $(13,964) $  (716)
                                                            ========  =======
Basic and diluted net loss per share....................... $  (0.35) $ (0.02)
                                                            ========  =======
Shares used in computing basic and diluted net loss per
 share.....................................................   39,621   31,448
                                                            ========  =======
</TABLE>

     See accompanying ntes to condensed consolidated financial statements.

                                       4
<PAGE>

                              CLARENT CORPORATION

                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)
                                  (Unaudited)

<TABLE>
<CAPTION>
                                                              Three Months
                                                             Ended March 31,
                                                            ------------------
                                                              2001      2000
                                                            --------  --------
<S>                                                         <C>       <C>
Operating activities:
  Net loss................................................. $(13,964) $   (716)
    Adjustments to reconcile net loss to net cash used in
     operating activities:
    Depreciation and amortization..........................   15,543     3,288
    Changes in operating assets and liabilities:
      Accounts receivable..................................  (10,788)      136
      Inventories..........................................   (9,883)     (600)
      Prepaid expenses and other current assets............     (614)      624
      Other assets.........................................      592       --
      Accounts payable and accrued liabilities.............    5,618      (957)
      Deferred revenue.....................................     (705)     (216)
                                                            --------  --------
        Net cash (used in) provided by operating
         activities........................................  (14,201)    1,559
                                                            --------  --------
Investing activities :
  Purchases of short-term investments......................  (15,000)  (41,808)
  Sale and maturities of short-term investments............   56,937    30,355
  Note receivable from a related party.....................   (5,000)      --
  Purchases of property and equipment......................  (13,216)   (3,478)
                                                            --------  --------
        Net cash (used in) provided by investing
         activities........................................   23,721   (14,931)
                                                            --------  --------
Financing activities:
  Proceeds from issuance of common stock...................      252     1,016
                                                            --------  --------
        Net cash provided by financing activities..........      252     1,016
                                                            --------  --------
Effect of exchange rate changes on cash and cash
 equivalents...............................................     (304)       95
                                                            --------  --------
Net (decrease) increase in cash and cash equivalents.......    9,468   (12,261)
Cash and cash equivalents at beginning of period...........  185,627   238,724
                                                            --------  --------
Cash and cash equivalents at end of period................. $195,095  $226,463
                                                            ========  ========
Supplemental disclosure of non-cash investing activities:
  Common stock received in exchange for settlement of
   accounts receivable.....................................      --   $  1,500
</TABLE>

     See accompanying notes to condensed consolidated financial statements.

                                       5
<PAGE>

                              CLARENT CORPORATION

         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


1. Basis of Presentation

   The accompanying unaudited condensed consolidated financial statements of
Clarent Corporation (the Company) as of March 31, 2001 and for the three month
periods ended March 31, 2001 and 2000 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 Annual Report on Form 10-K, filed with the Securities and Exchange
Commission on March 30, 2001. Certain prior period balances have been
reclassified to conform to current period presentation.

2. Financial Instruments

   Available-for-sale securities are carried at fair value, with the unrealized
gains or losses reported as a separate component of stockholder's equity.
Realized gains and losses on sales of available-for-sale securities were not
material for the three months ended March 31, 2001.

3. Inventories

   Inventories are comprised of the following (in thousands):

<TABLE>
<CAPTION>
                                                          March 31, December 31,
                                                            2001        2000
                                                          --------- ------------
   <S>                                                    <C>       <C>
   Raw materials.........................................  $14,968    $10,901
   Work-in-process.......................................      478         83
   Finished goods........................................   11,924      6,503
                                                           -------    -------
                                                           $27,370    $17,487
                                                           =======    =======
</TABLE>

4. Long-Term Investments

   The Company invests in equity instruments of privately held companies for
the promotion of business and strategic objectives. The Company has also
invested in a venture capital management fund. Except for $1.5 million received
in settlement of accounts receivable, all of the Company's investments are
valued at the cash paid for the equity received, net of impairment losses.
Impairment losses are recorded when events and circumstances indicate that such
assets might be impaired and the decline in value is other than temporary.
During the first quarter of 2001, the Company recorded impairment losses of
$650,000.

   Through March 31, 2001 the Company had invested $6.75 million in a venture
capital management fund. The Company is committed to invest an additional $8.25
million in the venture capital management fund during 2001. This investment is
recorded at cost as the Company has virtually no influence over the operating
and financial policies of the fund.


                                       6
<PAGE>

                              CLARENT CORPORATION

  NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


5. Comprehensive Loss

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

<TABLE>
<CAPTION>
                                                                Three Months
                                                                Ended March
                                                                    31,
                                                               ---------------
                                                                 2001    2000
                                                               --------  -----
   <S>                                                         <C>       <C>
   Net loss................................................... $(13,964) $(716)
   Other comprehensive income (loss):
     Translation adjustments..................................     (256)    93
     Unrealized loss on investments...........................       (7)   (45)
                                                               --------  -----
   Comprehensive loss......................................... $(14,227) $(668)
                                                               ========  =====
</TABLE>

6. Stockholders' Equity

   On January 31, 2001, the Company increased the aggregate number of shares of
common stock authorized for issuance under the 1999 Amended and Restated Equity
Incentive Plan (the 1999 Plan) by 987,966 or 2.5% of the Company's outstanding
shares, measured as of that date. This increase was in accordance with the
provisions of the 1999 Plan.

   On February 14, 2001, the Company cancelled approximately 2.89 million
outstanding options under a cancellation and re-grant program for employees.
Replacement options to purchase approximately 635,000 shares of common stock
were granted to employees on February 15, 2001 at the fair market value of
$13.625 per share. These shares will vest in full on August 15, 2001 and will
expire if not exercised before November 15, 2001. The options granted on
February 15, 2001 are subject to variable accounting in accordance with the
requirements of FIN 44 until they are exercised or expire. Additional options
for approximately 1.13 million shares are expected to be granted under the
program on August 16, 2001, at the then current fair market value. These
additional options will vest monthly over a 24 month period and will have a 10
year term. The August grants will not be subject to variable accounting. There
were no charges to earnings for the replacement stock options during the three
months ended March 31, 2001 as the option prices were greater than the fair
market value of the Company's stock as of March 31, 2001.

   On February 7, 2001, the Company adopted a Share Purchase Rights Plan
designed to guard against abusive takeover tactics.

7. Segments of an Enterprise and Related Information

   The Company develops, manufactures and sells software based Internet
protocol (IP) communication solutions for IP networks. During the first quarter
of 2001, the Company implemented a Business Unit organizational structure and
has allocated the product and software revenue to the three different industry
segments. The industry segments are defined as: Carrier, Enterprise and Local
Access. These segments were established to enable increased focus on the
marketing, product development and operational strategies for each different
industry that Clarent participates in. Service revenue was not allocated to the
segments. The Company previously reported revenue as being derived from a
single industry segment.

   The prior year comparative information has been restated to reflect the
revised structure. Net revenue for non-U.S. locations were substantially the
result of export sales from the U.S. For the three months ended March 31, 2001,
sales in three countries accounted for a significant portion of our net
revenue. Customers in the United States contributed 11%, customers based in
Taiwan contributed 59% and customers in China contributed 10% of total net
revenue for the three months ended March 31, 2001.

                                       7
<PAGE>

                              CLARENT CORPORATION

  NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   Net revenue by geographic region and by Business Unit were as follows (in
thousands):

<TABLE>
<CAPTION>
                                                                 Three Months
                                                                Ended March 31,
                                                                ---------------
                                                                 2001    2000
                                                                ------- -------
   <S>                                                          <C>     <C>
   Net Revenue by Geographic Region:
       United States........................................... $ 6,916 $ 7,519
       Other Americas..........................................   1,716   2,953
       Europe, Middle East & Africa............................   5,064   5,820
       Asia Pacific............................................  47,496   8,291
                                                                ------- -------
         Total................................................. $61,192 $24,583
                                                                ======= =======
   Net Revenue by Business Unit:
     Product and software revenue
       Local Access............................................ $32,518 $   --
       Carrier.................................................  16,368  22,078
       Enterprise..............................................   6,649     --
                                                                ------- -------
                                                                 55,535  22,078
     Service revenue...........................................   5,657   2,505
                                                                ------- -------
                                                                $61,192 $24,583
                                                                ======= =======
</TABLE>

8. Net Loss Per Share

   Basic net loss per share is computed by dividing net loss by the weighted
average number of common shares outstanding during the period less outstanding
shares subject to a right of repurchase by the Company. Outstanding shares
subject to repurchase are not included in the computations of basic and diluted
net loss per share until the time-based vesting restrictions have lapsed.

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

<TABLE>
<CAPTION>
                                                               Three Months
                                                             Ended March 31,
                                                             -----------------
                                                               2001     2000
                                                             --------  -------
                                                              (in thousands,
                                                             except per share
                                                                 amounts)
   <S>                                                       <C>       <C>
   Numerator:
   Net loss................................................. $(13,964) $  (716)
                                                             ========  =======
   Denominator:
   Weighted average shares outstanding......................   39,621   31,898
   Less shares subject to repurchase........................      --      (450)
                                                             --------  -------
   Denominator for basic and diluted net loss per share.....   39,621   31,448
                                                             ========  =======
   Net loss per share--basic and diluted.................... $  (0.35) $ (0.02)
                                                             ========  =======
</TABLE>

   The Company has excluded all warrants for common stock, outstanding stock
options and shares subject to repurchase from the calculation of diluted loss
per common share because all such securities are anti-dilutive. The total
number of shares excluded from the calculations of diluted net loss per share
were 2,806,000, for the three months ended March 31, 2001 and 6,827,000 for the
three months ended March 31, 2000.

                                       8
<PAGE>

                              CLARENT CORPORATION

  NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


9. Note receivable from a Related Party

   In January 2001, the Company advanced $5 million to Clarent Finance, L.L.C.
a leasing company, for a six year eleven percent junior subordinated debenture.
The interest shall be accrued and will be repaid by November 30, 2006. The
principal will be repaid in 16 equal quarterly payments of $312,500 each,
commencing January 2003, to be repaid in full by November 30, 2006.

10.  Income Taxes

   The provision for income taxes of $315,000 for the three month period ending
March 31, 2001 consists of foreign income tax provided on the profits
attributable to the Company's foreign operations and U.S. state taxes. Our
effective tax rates differed from the combined federal and state statutory
rates due primarily to acquisition charges that were non-deductible for tax
purposes.

11.  Recent Accounting Pronouncements

   In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Financial
Instruments and for Hedging Activities" ("FAS 133") as amended by FAS 138 which
provides a comprehensive and consistent standard for the recognition and
measurement of derivatives and hedging activities. The Company adopted FAS 133,
beginning January 1, 2001 and it did not have an impact on the Company's
results of operations or financial condition as the Company held no derivative
financial instruments and did not engage in hedging activities.

   In March 2000, the Financial Accounting Standards Board issued
Interpretation NO. 44, "Accounting for Certain Transactions Involving Stock
Compensation--an Interpretation of APB 25" ("FIN 44"). FIN 44 clarifies (a) the
definition of "employee" for purposes of applying Opinion 25, (b) the criteria
for determining whether a plan qualifies as a non compensatory plan, (c) the
accounting consequence of various modifications to the terms of a previously
fixed stock option or award, and (d) the accounting for an exchange of stock
compensation awards in a business combination. FIN 44 became effective July 1,
2000, but certain conclusions cover specific events that occur after either
December 15, 1998, or January 12, 2000. To the extent that this Interpretation
covers events occurring during the period after December 15, 1998, or
January 12, 2000 but before the effective date of July 1, 2000. The effects of
applying FIN 44 are recognized on a prospective basis from July 1, 2000. There
was no material effect resulting from the adoption of FIN 44.

12.  Restructuring Accruals

   On August 10, 2000 the Company acquired ACT Networks, Inc., a leading
provider of multi-service access and voice/data integration products that
enable the convergence of voice, video and data onto one managed network. In
accordance with a plan that existed at the time of the acquisition, the Company
established accruals for merger related restructuring costs. At March 31, 2001,
$8.4 million in accruals remained. These accruals are to provide $4.0 million
for the costs of exiting non-cancelable operating leases for the Calabasas CA.
manufacturing facility, $2.6 million for excess inventory to be scrapped upon
discontinuation of certain product lines, $0.9 million for involuntary employee
termination costs related to approximately twenty-three duplicative management
personnel and manufacturing employees in the ACT organization and $0.9 million
in fixed assets disposition costs for disposal of manufacturing equipment and
leasehold improvements in the Calabasas facility. These costs relate to the
plan to exit the manufacturing activities currently performed at the Calabasas
facility through discontinuation of certain product lines and outsourcing the
manufacturing of the remaining products. The Company has started working with a
contract manufacturer and expects to be ceasing production at the Calabasas
facility by June 30, 2001. During the three months ended March 31, 2001,
severance costs of $0.3 million were charged against the accrual.

                                       9
<PAGE>

                              CLARENT CORPORATION

  NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


13.  Subsequent Events

 Amendment to Employee Option Plan

   In April, 2001, the Board of Directors approved an amendment to the 1999
Amended and Restated Equity Incentive Plan to increase the number of shares
authorized for issuance by 1,000,000 to a total of 18,780,431.

 Restructuring

   On May 14, 2001, the Company announced a reduction in workforce by
approximately 10% and a streamlining of its business units to achieve cost
savings and operating efficiencies in accordance with previously stated goals.
The Company expects to take a one-time restructuring charge relating to the
reduction in workforce, assets and excess facilities of approximately $20
million in the second quarter 2001.

                                       10
<PAGE>

                      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 related
Notes. 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

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

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

   Our focus is on reinforcing our worldwide position in providing the
technology and intelligent product foundation for IP-based communication
networks. These activities include developing new products and technologies and
enhancing existing products, expanding our customer base, developing customer
relationships, marketing the Clarent IP communication solution and expanding
our domestic and international distribution channels.

   We sell our products both through distributors and our direct sales force.
We have sales and support personnel based in Argentina, Australia, Belgium,
Brazil, Canada, Columbia, France, Germany, Greece, Hong Kong, Ireland, Italy,
Japan, Mexico, New Zealand, the People's Republic of China, Peru, Poland,
Russia, Singapore, South Korea, Spain, Sweden, Taiwan, the United Kingdom and
in many locations throughout the United States.

                                       11
<PAGE>

Results of Operations

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

<TABLE>
<CAPTION>
                                                                    Three
                                                                   Months
                                                                    Ended
                                                                  March 31,
                                                                 -------------
                                                                 2001    2000
                                                                 -----   -----
   <S>                                                           <C>     <C>
   As a Percentage of Net Revenue:
     Product and software.......................................  90.8 %  89.8 %
     Service....................................................   9.2    10.2
                                                                 -----   -----
       Total revenue............................................ 100.0   100.0
     Product and software.......................................  24.9    33.8
     Service....................................................   5.3     6.7
                                                                 -----   -----
       Total cost of revenue....................................  30.2    40.5
                                                                 -----   -----
   Gross margin.................................................  69.8    59.5
                                                                 -----   -----
   Operating expenses:
     Research and development...................................  24.1    17.7
     Sales and marketing........................................  40.6    45.0
     General and administrative.................................  13.7     9.9
     Amortization of compensation...............................   3.3     5.6
     Amortization of goodwill & intangible assets...............  14.9     0.9
                                                                 -----   -----
       Total operating expenses.................................  96.6    79.1
                                                                 -----   -----
   Loss from operations......................................... (26.8)  (19.6)
   Other income, net............................................   4.5    16.7
                                                                 -----   -----
   Loss before provision for income taxes....................... (22.3)   (2.9)
   Provision for income taxes...................................  (0.5)    --
                                                                 -----   -----
   Net loss..................................................... (22.8)%  (2.9)%
                                                                 =====   =====
</TABLE>

Net revenue

   Net revenue increased 148.9% to $61.2 million in the three months ended
March 31, 2001 from $24.6 million in the three months ended March 31, 2000. The
increase in product and software sales of 151.5% to $55.5 million in the three
months ended March 31, 2001 from $22.1 million in the same three month period
of 2000 was primarily attributable to sales of new products. Sales to Local
Access customers, predominately of the softswitch for the Company's OpenAccess
solution, contributed $32.5 million or approximately 53% of net revenue for the
first quarter of 2001. Sales to the Enterprise market of products acquired as
the result of the ACT Networks Inc. acquisition during the third quarter of
2000 including the NetPerformer products contributed $6.6 million,
approximately 11% of net revenue during the first quarter of 2001. Sales to the
Carrier market contributed $16.4 million or 27% of net revenue in the first
quarter of 2001 as compared to $22.1 million or 90% of net revenue in the first
quarter of 2000. Service revenue from maintenance and support increased by
125.8% to $5.7 million in the three months ended March 31, 2001 from $2.5
million for the same three month period of 2000. The increase in maintenance
and support revenue is attributable to both the increase in product sales and
the renewal of support contracts with existing customers.

Cost of Revenue

   Cost of revenue increased 86% to $18.5 million in the three months ended
March 31, 2001 from $9.9 million in the three months ended March 31, 2000. This
increase was primarily attributable to increased revenue. Product and software
costs increased by 83% to $15.2 million in the three months ended March 31,

                                       12
<PAGE>

2001 from $8.3 million in the same period of 2000. Maintenance and support
costs, increased by 98% to $3.2 million in the three months ended March 31,
2001 from $1.6 million in the same period of 2000 as we increased headcount to
service the increased customer base. Gross margin increased to 70% for the
first quarter of 2001, compared to 60% for the corresponding period in 2000 and
65% for the fourth quarter of 2000. The increase in gross margin was the result
of a change in sales mix with approximately 50% of revenue attributable to
software sales in the first quarter of 2001 as compared to 28% in the same
period of 2000 and 41% in the fourth quarter of 2000.

   The mix of products we sell significantly impacts our gross margin. The
sequential increase in sales of our software products both in absolute dollars
and as a percentage of revenue has positively impacted our gross margin but we
do not expect this trend to continue. We expect a significant negative impact
on gross margin from the introduction of new hardware products and new versions
of existing products. In particular the new OpenAccess solution is expected to
generate a greater proportion of hardware revenue as the Local Access market
moves into the next phase generating increased unit sales of the OpenAccess
customer premises gateway (CPG) hardware devices. Our gross margins have also
been affected by significant erosion in the average selling prices of our
products due to a number of factors, including competitive pricing pressures,
rapid technological changes and sales discounts and we expect these to
continue. We expect gross margin to be adversely affected by increases in
material or labor costs, costs related to maintaining higher inventory
balances, changes in the geographical mix of customers and changes in the
channels of distribution. We expect to continue to increase the percentage of
sales to distributors, which generally results in lower gross margins.

Research and Development Expenses

   Research and development expenses increased 240% to $14.8 million in the
three months ended March 31, 2001 from $4.3 million in the three months ended
March 31, 2000. Research and development expenses increased as a percentage of
revenue to 24% for the three months ended March 31, 2001 from 18% in the three
months ended March 31, 2000. The increases in research and development expenses
from period to period were attributable to increases in the number of research
and development personnel to 278 at March 31, 2001 from 76 at March 31, 2000.
Management expects research and development expenses to remain relatively the
same as a percentage of revenue for the next quarter and then to decrease in
the second half of 2001.

Sales and Marketing Expenses

   Sales and marketing expenses increased 125% to $24.8 million in the three
months ended March 31, 2001 from $11.1 million in the three months ended March
31, 2000. 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 increased public
relations and other promotional expenses including increased participation in
our annual customer summit held in Hawaii during January 2001. Sales and
marketing expenses as a percentage of revenue decreased to 41% for the three
months ended March 31, 2001 from 45% in the three months ended March 31, 2000.
The decrease in sales and marketing costs as a percentage of revenue is
attributable to the significant increase in revenue. We currently expect that
sales and marketing expenses will decrease as a percentage of revenue during
the remainder of 2001.


General and Administrative Expenses

   General and administrative expenses increased 245% to $8.4 million in the
three months ended March 31, 2001 from $2.4 million in the three months ended
March 31, 2000. General and administrative expenses as a percentage of revenue
increased to 14% for the three months ended March 31, 2001 from 10% for the
three months ended March 31, 2000. The absolute dollar increase in general and
administrative expenses from period to period was largely attributable to an
increase in personnel and related expenses required to build the infrastructure
to support a larger organization and bad debt write offs and increases in
reserves for doubtful accounts. The general and administrative headcount
increased to 155 at March 31, 2001 as compared to 56 at

                                       13
<PAGE>

March 31, 2000. The bad debt write-offs were $1.8 million and increases in
reserve for doubtful accounts were $0.8 million during the three months ended
March 31, 2001. We expect general and administrative expenses to decrease as a
percentage of net revenue during the remainder of 2001.

Amortization of Compensation

   For the three months ended March 31, 2001, amortization of compensation was
$2.0 million as compared to $1.4 million in the three months ended March 31,
2000. Amortization of compensation resulted from the granting of stock options
to purchase common stock at prices below the deemed fair value of our common
stock as well as the assumption of stock options through acquisition at prices
below the deemed fair value of our common stock. The deferred compensation is
being amortized using the graded method over the vesting period of the stock
options.

   On February 14, 2001, the Company cancelled approximately 2.89 million
outstanding options under a cancellation and re-grant program for employees.
Replacement options to purchase approximately 635,000 shares of common stock
were granted to employees on February 15, 2001 at the fair market value of
$13.625 per share. These shares will vest in full on August 15, 2001 and will
expire if not exercised before November 15, 2001. The options granted on
February 15, 2001 are subject to variable accounting in accordance with the
requirements of FIN 44 until they are exercised or expire. Additional options
for approximately 1.13 million shares are expected to be granted under the
program on August 16, 2001, at the then current fair market value. These
additional options will vest monthly over a 24 month period and will have a 10
year term. The August grants will not be subject to variable accounting. There
were no charges to earnings for the replacement stock options during the three
months ended March 31, 2001 as the option prices were greater than the fair
market value of the Company's stock on March 31, 2001. The replacement options
could result in significant future charges to the Company.

Amortization of Goodwill and Other Intangibles

   Amortization of goodwill and purchased intangible assets for the three
months ended March 31, 2001 was $9.8 million as compared to $0.2 million for
the three months ended March 31, 2000. The goodwill and purchased intangible
assets were the result of three purchase business combinations. One purchase
was completed in the fourth quarter of 1999 and two in the third quarter of
2000. The value of the purchased intangible assets was determined using
independent valuations for both the Peak Software and ACT Networks acquisitions
in 2000. We are amortizing the goodwill and purchased intangible assets using
the straight-line method over periods ranging from three to five years from the
dates of acquisition.

Status of R&D projects acquired from ACT Networks

   We believe that the projections used in performing valuations with respect
to the research and development projects acquired from ACT Networks are still
materially valid, however, there can be no assurance that the projected results
will be achieved. We expect to continue the development of each project not yet
completed and believe that there is a reasonable chance of successful
completion. However, if we do not successfully deploy commercially accepted
technology or products based on the IPRD, our operating results could be
adversely affected in future periods. Additionally, the value of other
intangible assets could become impaired. There has been no change in expected
costs through March 31, 2001. The following list provides the information
regarding the status of research and development projects at the date of
acquisition. (in millions):

<TABLE>
<CAPTION>
                                           Estimated costs
                                             to complete    Expected   Expected
                                             at time of     Costs at   Date of
                                             acquisition   Completion Completion
                                           --------------- ---------- ----------
   <S>                                     <C>             <C>        <C>
   NetPerformer...........................      $3.9          $3.9     Q3 2001
   SX-10..................................      $0.8          $0.8     Q4 2001
   DynaStar...............................      $0.8          $0.8     Q2 2001
</TABLE>

                                       14
<PAGE>

Other Income, net

   Other income, net was $2.8 million in the three months ended March 31, 2001
as compared to $4.1 million in the three months ended March 31, 2000. The other
income was primarily attributable to interest income earned on our cash, cash
equivalents and other investments from the funds raised in our initial and
secondary public offerings. Interest income in the first quarter of 2001
reflects lower cash and investment balances compared to the three months ended
March 31, 2000 as well as a charge for impaired investments of $650,000.
Management expects interest income to decrease in the remaining quarters of
2001 as cash resources are invested in working capital and capital
expenditures.

Provision for Income Taxes

   The provision for income taxes of $315,000 for the three months ended March
31, 2001 and $25,000 for the three months ended March 31, 2000, consist of
foreign income tax provided on the profits attributable to the Company's
foreign operations and U.S. State taxes. Our effective tax rates differed from
the combined federal and state statutory rates due primarily to acquisition
charges that were non-deductible for tax purposes.

Liquidity and Capital Resources

   In July 1999 we completed an initial public offering of our common stock and
in November 1999 we completed a secondary public offering. These public
offerings raised aggregate net proceeds of approximately $303 million.

   Net cash used in operating activities was $14.2 million in the three months
ended March 31, 2001 compared to proceeds of $1.6 million from operating
activities in the same period of 2000. The net cash used in operating
activities in 2001 was principally the result of the net loss of $14 million,
the increase in trade accounts receivable of $10.8 million and the increase in
inventories of $9.9 million, partially offset by adjustments for amortization
and depreciation of $15.5 million and increases in accounts payable and accrued
liabilities of $5.6 million. Amortization expense has increased significantly
as a result of the deferred compensation, goodwill and intangibles related to
two acquisitions completed during the third quarter of 2000. The increase in
accounts receivable is the result of increased sales of new and existing
products both through growth and acquisition. During the three month period
ended March 31, 2001, we increased our allowance for doubtful accounts by $2.6
million to address potential exposures related to the slowdown in the economy
and recognized bad debt write-offs totaling $1.8 million for a net change of
$0.8 million. We had five customers individually contribute 10% or more of our
net revenue for the three months ended March 31, 2001. In aggregate, these
customers accounted for approximately 69% of net revenue during the three
months ended March 31, 2001.

   Net cash provided by operating activities of $1.6 million for the first
quarter of 2000 was attributable primarily to the net loss of $0.7 million,
increases in inventories of $0.6 million, increases in accounts payable and
accrued liabilities of $1.0 million and increases in deferred revenue of $0.2
million being offset by amortization and depreciation of $3.3 million,
decreases in trade accounts receivable of $0.1 million and prepaid and other
assets of $0.6 million. The increase in inventories at March 31, 2000 was in
anticipation of expected growth in product revenue as well as a greater need
for evaluation units. The decrease in accounts receivable was primarily the
result of improved collections as well as the conversion of $1.5 million into
an equity investment.

   Net cash from investing activities was approximately $23.7 million in the
first three months of 2001 as compared to $14.9 million used in investing
activities for the same period in 2000. For 2001, $41.9 million of cash from
investing activities resulted from the sale and maturity of investments, net of
purchases as compared to $11.4 million invested in the purchase of investment
securities net of sales and maturities during the same period in 2000. Cash
used in investing activities during the first quarter of 2001 included a note
receivable from a related party of $5.0 million and purchases of property and
equipment and expenditures on leasehold improvements totaling $13.2 million.
Cash used in investing activities for the three months ended March 31, 2000 was
for purchase of property and equipment of $3.5 million.

                                       15
<PAGE>

   Net cash from financing activities was $0.3 million in the three months
ended March 31, 2001 as compared to $1.0 million for the same period in 2000.
The cash provided by financing activities was solely the proceeds from the
exercise of employee stock options.

   As of March 31, 2001, our principal commitments consisted of obligations
outstanding under operating leases. Although we have no material commitments
for capital expenditures, we anticipate continued spending on capital
expenditures and lease commitments during the remainder of 2001 at rates
consistent with expenditures during the first quarter of 2001. We may also
establish additional operations as we continue to expend globally.

   We believe that our current cash, cash equivalents and short-term investment
balances of $228.1 million at March 31, 2001 will be sufficient to meet our
anticipated cash needs for working capital and capital expenditures for at
least the next 12 months. If our current cash, cash equivalents and short-term
investment balances are insufficient to satisfy our liquidity requirements, we
may seek to sell additional equity or debt securities or obtain borrowings
through a 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. If we are unable
to obtain this additional financing, we may be required to reduce the scope of
our planned product development and marketing efforts, which could harm our
business, financial condition and operating results.

Risk Factors That 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. 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 will significantly
harm our financial position.

   As of March 31, 2001, we had an accumulated deficit of $107 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. Generally, 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 flows. Even if we do achieve
profitability and positive operating cash flows, we may not be able to sustain
or increase profitability or positive operating cash flows on a quarterly or
annual basis.

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

<TABLE>
<CAPTION>
      Year ended
      December 31,                                                Operating Loss
      ------------                                                --------------
                                                                  (in thousands)
      <S>                                                         <C>
      2000.......................................................    $(70,274)
      1999.......................................................     (33,163)
      1998.......................................................      (5,824)
      1997.......................................................      (2,129)
</TABLE>

                                       16
<PAGE>

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 of this
and as a result of integration of acquired operations, we expect our expense
levels to increase in the short term. Therefore, an unanticipated decline in
revenue for a particular quarter may disproportionately affect our net income
or 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 effect 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 Cisco
Systems, Inc., Lucent Technologies Inc., Nortel Networks Corporation, Sonus
Networks, Nuera Communications Inc. and Vocal Tec Communications. Many of our
large competitors have significantly larger market shares (as measured by ports
shipped) and 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. 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

                                       17
<PAGE>

from other vendors. The interoperability standards for IP telephony equipment
are evolving. We have developed only initial interoperable solutions, but 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 operate our business
successfully.

   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
will need to continue to increase the number of service and support 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 integrate successfully our acquired companies could prevent us
from operating efficiently.

   We have been involved in, and may in the future be involved in, a number of
acquisition transactions. These transactions have been motivated by many
factors, including our desire to acquire skilled personnel, our desire to
obtain new technologies and our desire to expand and enhance our product and
services lines. Growth through acquisition has several identifiable risks,
including difficulties associated with successfully integrating the previously
distinct businesses into a single unit, the substantial management time devoted
to integrating the companies, the possibility that we might not be successful
in retaining the employees of the acquired companies, undisclosed liabilities,
the failure to realize anticipated benefits (such as cost savings and
synergies) and issues related to product transition (such as distribution,
engineering and customer support). Realization of any of these risks in
connection with our acquisitions could have a material adverse effect on our
business, operating results, and financial condition.

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 December 31, 2000 to March 31, 2001, the
total number of our employees increased from approximately 850 to 1000. We
expect our anticipated growth and expansion to continue to place strain on our
management and operational and financial resources. 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. Our inability to manage growth effectively could
seriously harm our business, financial condition and results of operations.

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

                                       18
<PAGE>

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 be sure 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.

                                       19
<PAGE>

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. Five customers, Triumph Technologies, D-Link, Legend Networks
(HK) Ltd., Sun Moon Star and Cradle Technology Corp. each individually
accounted for a significant portion of our revenue for the first quarter of
2001 at 28%, 11%, 10%, 10% and 10%, respectively. In the fiscal year 2000,
Triumph Technologies at 10% was the only customer that accounted for 10% or
more of our net revenues. In 1999, entities affiliated with AT&T Corporation
accounted for 15% of net revenue and entities affiliated with Ji Tong
Communications accounted for 10% of 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 and manage successful relationships with a
variety of international distribution partners. To date, we have entered into
agreements with more than 30 distribution partners that accounted for
approximately 76% of net revenue for the first quarter of 2001, 46% of revenue
in the fiscal year 2000 and 16% of revenue in 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. To generate greater revenue from distributors, we must
successfully manage our distributor relationships, which we cannot guarantee
that we will be able to do 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 89% of revenue for the three
months ended March 31, 2001, 73% of total revenue in 2000 and 54% of total
revenue in 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;

                                       20
<PAGE>

  .  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 employees based in Argentina, Australia, Belgium, Brazil,
Canada, Colombia, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan,
Mexico, New Zealand, Peru, the People's Republic of China, Poland, Russia,
Singapore, South Korea, Spain, Sweden, Taiwan, the 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 many months.
   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 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. Additionally, the volatility in capital markets
and in the U.S. economy may cause some customers to postpone or terminate
significant capital expenditures, such as expenditures on our products. 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

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<PAGE>

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 facilities in Redwood City,
California, Calabasas, California and in Manassas, Virginia. 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 was 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.

   Some of our assembly facilities are located on or near known earthquake
fault zones and all 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.

Our operations may be adversely affected by the California energy crisis

   We have various facilities located in California, including our principal
facilities in Redwood City. Some of our suppliers are also located in
California. The energy crisis that has resulted in disruptions in power supply
and increases in utility costs could disrupt the operations of Clarent and its
suppliers. We, or our suppliers, may experience additional power disruptions,
power rationing and significantly higher costs of energy in California and be
unable to continue operations. Any such interruption in operations could harm
our ability to service and retain existing customers and may inhibit our
ability to obtain new customers, and could result in lost revenue, any of which
could adversely affect our financial condition.

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.

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<PAGE>

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 effect on
our results of operations. However, we cannot be certain that product defects
will not have a material negative effect 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 protect our intellectual property rights
adequately, 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

                                       23
<PAGE>

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.

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 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. Also, 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, as
evidenced by a fluctuation in our per share price on the Nasdaq National Market
from a low of $10.00 to a high of $178.75 during the year ended December 31,
2000 and from a low of $6.75 to a high of $18.81 during the three months ended
March 31, 2001.

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 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

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<PAGE>

  .  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.

   In addition, in February 2001, we adopted a shareholder rights plan which
may also discourage, delay or prevent a merger that a stockholder may consider
favorable. We are also subject to certain provisions of Delaware law that 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. Therefore,
we do not expect to pay any dividends in the foreseeable future.

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 largely denominated in U.S. dollars and
therefore are not subject to material 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 March 31, 2001 we have not experienced any significant negative impact
on our operations as a result of fluctuations in foreign currency exchange
rates. We do not currently engage in any hedging activities or use derivative
financial instruments.

   We have an investment portfolio of fixed income securities, including those
classified as cash equivalents, of $137 million at March 31, 2001. These
securities are subject to interest rate fluctuations and will decrease in
market value if interest rates increase.

   The primary objective of our investment activities is to preserve principal
while at the same time maximizing yields without significantly increasing risk.
We invest primarily in high-quality, short-term debt instruments such as U.S.
government securities and instruments issued by high quality financial
institutions and companies including money market instruments and debt issued
by corporations. A hypothetical 100 basis point increase in interest rates
would result in less than a $0.2 million decrease (less than 0.2%) in the fair
market value of our available-for-sale securities.

   We have investments in equity securities of privately held companies for the
promotion of business and strategic objectives of $13.8 million at March 31,
2001. These investments are generally in companies in the telecommunications
industry. We also have invested in a venture capital management fund. These
investments are included in long-term investments and are accounted for using
the cost method. For investments in which no public market exists, our policy
is to regularly review the operating performance, recent financing transactions
and cash flow forecasts for such companies in assessing the net realizable
values of the securities of these companies. Impairment losses on equity
investments are recorded when events and circumstances indicate that such
assets are impaired and the decline in value is other than temporary. During
the three months ended March 31, 2001 we recorded impairment losses of $650,000
on investments.

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<PAGE>

                           PART II--OTHER INFORMATION

ITEM 5. OTHER INFORMATION.

   In April 2001, the Company adopted a three-tiered system of employee
severance and change in control benefit plans covering non-executive employees
(the "Employee Severance Plan"), executive officers (the "Executive Severance
Plan") and senior executive officers (the "Senior Executive Severance Plan") of
the Company. The Employee Severance Plan and the Executive Severance Plan
provide for certain benefits if an eligible individual's employment with the
Company is involuntarily terminated without cause within 13 months after a
change in control of the Company. Under the Employee Severance Plan and
Executive Severance Plan, specified employees are eligible to receive cash
payments, continuation of health coverage and acceleration of vesting of stock
options. The Senior Executive Severance Plan provides for certain benefits if
an eligible individual's employment with the Company is involuntarily
terminated without cause or constructively terminated within 13 months after a
change in control of the Company. Under the Senior Executive Severance Plan,
specified employees are eligible to receive cash payments equal to 24 months of
base salary, continuation of health insurance for up to 24 months and 36 months
acceleration of vesting of stock options.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

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

<TABLE>
 <C>   <S>
 10.3  1999 Non-Employee Directors' Stock Option Plan, as amended, and Form of
       Nonstatutory Stock Option.

 10.23 Employment Agreement, dated March 5, 2001, by and between the registrant
       and Barry Forman.

 10.24 Employment Agreement, dated March 5, 2001, by and between the registrant
       and Simon Wong.

 10.25 Separation and Consulting Agreement, dated March 2, 2001, by and between
       the registrant and Richard J. Heaps.

 10.26 Senior Executive Change in Control Severance Benefit Plan, effective
       April 12, 2001.

 10.27 Executive Change in Control Severance Benefit Plan, effective April 12,
       2001.

 10.28 Stock Option Agreement by and between the registrant and Barry Forman.
</TABLE>

   (b) Reports on Form 8-K. On February 15, 2001, the Company filed a Current
Report on Form 8-K, dated February 7, 2001, announcing the adoption of a Share
Purchase Rights Plan designed to guard against abusive takeover tactics.

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<PAGE>

                              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

                                                /s/ Jerry Shaw-Yau Chang
                                          By: _________________________________
                                                   Jerry Shaw-Yau Chang
                                                  Chief Executive Officer

                                                   /s/ Simon W. Wong
                                          By: _________________________________
                                                       Simon W. Wong
                                            Chief Financial Officer (Principal
                                             Financial and Accounting Officer)

Date: May 15, 2001

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