##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549


Form 10-Q/ A

Amendment No. 1




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

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



| |                                                 
| | ------------------------------------------------
| | For the quarterly period ended June 30,
    2001
|
| | or                                              



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

For the transition period
from                     to

Commission File Number 000-26441

CLARENT CORPORATION

(Exact name of registrant as specified in its
charter)


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

700 Chesapeake Drive

Redwood City, California 94063


(Address of principal executive offices and
zip code)


(650) 306-7511

(Registrants telephone number, including
area code)


Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the
past 90 days.

Yes þ          No o


The number of shares outstanding of the
registrants common stock, $0.001 par value, was 40,685,480
at July 31, 2001.

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



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1



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TABLE OF CONTENTS



|                              |                                                                                               |  |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION
|                              | ITEM 1. FINANCIAL STATEMENTS                                                                 
|                              | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                              | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           
|PART II. OTHER INFORMATION   
|                              | ITEM 1. LEGAL PROCEEDINGS                                                                    
|SIGNATURES                   



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##### Table of Contents



EXPLANATORY NOTE

This amendment on Form 10-Q/ A amends Items
1, 2 and 3 of Part I and Item 1 of Part II of the Quarterly
Report of Clarent Corporation (the Company) on
Form 10-Q previously filed for the quarter ended
June 30, 2001 (the Prior Report). Subsequent to
the issuance of the Companys financial statements on the
Prior Report, the Company discovered accounting and financial
irregularities affecting such financial statements. Many of
these irregularities related to revenue recognition and cash
reporting arising primarily from operations in the
Companys Asia-Pacific regional office. The Company has
determined that these irregularities require the restatement of
certain of its previously issued financial statements. This
amendment is filed in connection with the Companys
restatement of its financial statements for the quarters ended
March 31, 2000, June 30, 2000, September 30,
2000, December 31, 2000, March 31, 2001 and June 30,
2001, as well as for the year ended December 31, 2000. The
circumstances necessitating the restatement and their effects
for the quarter ended June 30, 2001 are more fully
described in Notes 1 and 9 of Notes to Unaudited Condensed
Consolidated Financial Statements. In addition, the
Companys current litigation proceedings are described in
Notes 15 and 16 of Notes to Unaudited Condensed Consolidated
Financial Statements.

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

CLARENT CORPORATION

FORM 10-Q/ A INDEX

|                              |  |                                                                                                                                        |    |          |    | 
|----------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------- | -- | -------- | -- | 
|                              |  |                                                                                                                                        |    | Page No.
|                              |  |                                                                                                                                        |    |         
|PART I: FINANCIAL INFORMATION
|Item 1.                       |  | Financial Statements (Unaudited)                                                                                                       |    |          | 3  | 
|                              |  | Condensed Consolidated Balance Sheets as of
    June 30, 2001 (restated) and December 31, 2000
    (restated)                          |    |          | 3  | 
|                              |  | Condensed Consolidated Statements of Operations
    for the Three and Six Months ended June 30, 2001(restated)
    and 2000 (restated) |    |          | 4  | 
|                              |  | Condensed Consolidated Statements of Cash Flows
    for the Six Months ended June 30, 2001 (restated) and
    2000 (restated)          |    |          | 5  | 
|                              |  | Notes to Unaudited Condensed Consolidated
    Financial Statements                                                                     |    |          | 6  | 
|Item 2.                       |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations                                              |    |          | 20 | 
|Item 3.                       |  | Quantitative and Qualitative Disclosures about
    Market Risk                                                                         |    |          | 27 | 
|PART II: OTHER INFORMATION   
|Item 1.                       |  | Legal Proceedings                                                                                                                      |    |          | 27 | 
|Signatures                    |  |                                                                                                                                        | 29 |         

2



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##### Table of Contents






PART I.     FINANCIAL
INFORMATION




ITEM 1.     FINANCIAL
STATEMENTS

CLARENT CORPORATION

CONDENSED CONSOLIDATED BALANCE
SHEETS

(In thousands)


|                                         |                                           |                            |                                            |              |         |         |         |          |         |         | 
|---------------------------------------- | ----------------------------------------- | -------------------------- | ------------------------------------------ | ------------ | ------- | ------- | ------- | -------- | ------- | ------- | 
|                                         |                                           | June 30,                   |                                            | December 31,
|                                         |                                           | 2001                       |                                            | 2000        
|                                         |                                           |                            |                                            |             
|                                         |                                           | (Unaudited)                |                                            | (Restated)  
|                                         |                                           | (Restated)                 |                                            |             
|ASSETS                                  
|Current assets:                          |                                           |                            |                                            |              |         |         |         |         
|                                         | Cash and cash equivalents                 |                            | $                                          | 121,620      |         |         | $       | 185,627  |        
|                                         | Restricted cash                           |                            |                                            | 10,000       |         |         |         |         |        
|                                         | Short-term investments                    |                            |                                            | 17,945       |         |         |         | 74,987   |        
|                                         | Accounts receivable, gross                |                            |                                            | 16,527       |         |         |         | 28,142   |        
|                                         | Receivables allowance                     |                            |                                            | (5,548       | )       |         |         | (6,973   | )      
|                                         |                                           |                            |                                            |              |         |         |         |         
|                                         | Accounts receivable, net                  |                            |                                            | 10,979       |         |         |         | 21,169   |        
|                                         | Inventories                               |                            |                                            | 28,706       |         |         |         | 17,662   |        
|                                         | Prepaid expenses and other current assets |                            |                                            | 13,173       |         |         |         | 5,942    |        
|                                         |                                           |                            |                                            |              |         |         |         |         
|                                         |                                           | Total current assets       |                                            |              | 202,423 |         |         |          | 305,387 |        
|Investments                              |                                           |                            | 11,002                                     |              |         |         | 14,479  |         
|Property and equipment, net              |                                           |                            | 52,288                                     |              |         |         | 36,938  |         
|Goodwill, net                            |                                           |                            | 78,836                                     |              |         |         | 93,644  |         
|Purchased intangible assets, net         |                                           |                            | 33,266                                     |              |         |         | 38,057  |         
|Deferred tax assets                      |                                           |                            | 14,852                                     |              |         |         | 14,534  |         
|Other assets                             |                                           |                            | 4,726                                      |              |         |         | 4,517   |         
|Note receivable from a leasing company   |                                           |                            | 5,000                                      |              |         |         |        |         
|                                         |                                           |                            |                                            |              |         |         |         |         
|Total assets                             |                                           | $                          | 402,393                                    |              |         | $       | 507,556 |         
|                                         |                                           |                            |                                            |              |         |         |         |         
|LIABILITIES AND STOCKHOLDERS
    EQUITY
|Current liabilities:                     |                                           |                            |                                            |              |         |         |         |         
|                                         | Line of credit                            |                            | $                                          | 10,014       |         |         | $       |         |        
|                                         | Accounts payable                          |                            |                                            | 24,549       |         |         |         | 14,337   |        
|                                         | Deferred revenue                          |                            |                                            | 5,510        |         |         |         | 8,528    |        
|                                         | Accrued liabilities                       |                            |                                            | 12,480       |         |         |         | 14,827   |        
|                                         | Compensation related accruals             |                            |                                            | 7,159        |         |         |         | 7,948    |        
|                                         | Customer advances                         |                            |                                            | 9,211        |         |         |         | 2,551    |        
|                                         | Restructuring and merger related accrual  |                            |                                            | 10,901       |         |         |         | 6,248    |        
|                                         |                                           |                            |                                            |              |         |         |         |         
|                                         |                                           | Total current liabilities  |                                            |              | 79,824  |         |         |          | 54,439  |        
|Deferred tax liabilities                 |                                           |                            | 14,920                                     |              |         |         | 14,534  |         
|Restructuring accrual  long term        |                                           |                            | 6,795                                      |              |         |         |        |         
|Stockholders equity:                    |                                           |                            |                                            |              |         |         |         |         
|                                         | Common stock                              |                            |                                            | 585,247      |         |         |         | 583,328  |        
|                                         | Deferred compensation                     |                            |                                            | (5,795       | )       |         |         | (9,740   | )      
|                                         | Accumulated other comprehensive loss      |                            |                                            | (981         | )       |         |         | (326     | )      
|                                         | Accumulated deficit                       |                            |                                            | (277,617     | )       |         |         | (134,679 | )      
|                                         |                                           |                            |                                            |              |         |         |         |         
|                                         |                                           | Total stockholders equity |                                            |              | 300,854 |         |         |          | 438,583 |        
|                                         |                                           |                            |                                            |              |         |         |         |         
|                                         |                                           |                            | Total liabilities and stockholders equity |              | $       | 402,393 |         |          | $       | 507,556 | 
|                                         |                                           |                            |                                            |              |         |         |         |         

See accompanying notes to condensed consolidated
financial statements.

3



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CLARENT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS

(In thousands, except per share
amounts)


(Unaudited)


|                                                                |                                                                                |                          |         |                  |        |            |         |            |        |   |          |        |         |   |         |        |        | 
|--------------------------------------------------------------- | ------------------------------------------------------------------------------ | ------------------------ | ------- | ---------------- | ------ | ---------- | ------- | ---------- | ------ | - | -------- | ------ | ------- | - | ------- | ------ | ------ | 
|                                                                |                                                                                |                          |         |                 
|                                                                |                                                                                | Three Months Ended       |         | Six Months Ended
|                                                                |                                                                                | June 30,                 |         | June 30,        
|                                                                |                                                                                |                          |         |                 
|                                                                |                                                                                | 2001                     |         | 2000             |        | 2001       |         | 2000      
|                                                                |                                                                                |                          |         |                  |        |            |         |           
|                                                                |                                                                                | (Restated)               |         | (Restated)       |        | (Restated) |         | (Restated)
|Net revenue:                                                    |                                                                                |                          |         |                  |        |            |         |            |        |   |          |        |         |   |         |       
|                                                                | Product and software                                                           |                          | $       | 12,971           |        |            | $       | 17,428     |        |   | $        | 29,595 |         |   | $       | 37,913 |       
|                                                                | Service                                                                        |                          |         | 4,641            |        |            |         | 3,058      |        |   |          | 9,023  |         |   |         | 5,563  |       
|                                                                |                                                                                |                          |         |                  |        |            |         |            |        |   |          |        |         |   |         |       
|                                                                |                                                                                | Total net revenue        |         |                  | 17,612 |            |         |            | 20,486 |   |          |        | 38,618  |   |         |        | 43,476 | 
|Cost of revenue:                                                |                                                                                |                          |         |                  |        |            |         |            |        |   |          |        |         |   |         |       
|                                                                | Product and software                                                           |                          |         | 31,841           |        |            |         | 8,614      |        |   |          | 47,262 |         |   |         | 16,013 |       
|                                                                | Service                                                                        |                          |         | 5,048            |        |            |         | 2,080      |        |   |          | 8,296  |         |   |         | 3,718  |       
|                                                                |                                                                                |                          |         |                  |        |            |         |            |        |   |          |        |         |   |         |       
|                                                                |                                                                                | Total cost of revenue    |         |                  | 36,889 |            |         |            | 10,694 |   |          |        | 55,558  |   |         |        | 19,731 | 
|                                                                |                                                                                |                          |         |                  |        |            |         |            |        |   |          |        |         |   |         |       
|Gross profit (loss)                                             |                                                                                |                          | (19,277 | )                |        |            | 9,792   |            |        |   | (16,940  | )      |         |   | 23,745  |       
|Operating expenses:                                             |                                                                                |                          |         |                  |        |            |         |            |        |   |          |        |         |   |         |       
|                                                                | Research and development                                                       |                          |         | 16,475           |        |            |         | 5,566      |        |   |          | 31,233 |         |   |         | 9,906  |       
|                                                                | Sales and marketing                                                            |                          |         | 24,801           |        |            |         | 11,819     |        |   |          | 49,626 |         |   |         | 22,874 |       
|                                                                | General and administrative                                                     |                          |         | 5,739            |        |            |         | 2,866      |        |   |          | 12,262 |         |   |         | 5,307  |       
|                                                                | Amortization of deferred compensation and other
    stock compensation charges |                          |         | 2,162            |        |            |         | 932        |        |   |          | 4,182  |         |   |         | 2,310  |       
|                                                                | Amortization of goodwill and other intangibles                                 |                          |         | 9,108            |        |            |         | 225        |        |   |          | 18,217 |         |   |         | 451    |       
|                                                                | Restructuring costs                                                            |                          |         | 14,141           |        |            |         |           |        |   |          | 14,141 |         |   |         |       |       
|                                                                |                                                                                |                          |         |                  |        |            |         |            |        |   |          |        |         |   |         |       
|                                                                |                                                                                | Total operating expenses |         |                  | 72,426 |            |         |            | 21,408 |   |          |        | 129,661 |   |         |        | 40,848 | 
|                                                                |                                                                                |                          |         |                  |        |            |         |            |        |   |          |        |         |   |         |       
|Loss from operations                                            |                                                                                |                          | (91,703 | )                |        |            | (11,616 | )          |        |   | (146,601 | )      |         |   | (17,103 | )     
|Other income, net                                               |                                                                                |                          | 1,214   |                  |        |            | 4,399   |            |        |   | 3,988    |        |         |   | 8,514   |       
|                                                                |                                                                                |                          |         |                  |        |            |         |            |        |   |          |        |         |   |         |       
|Loss before provision for income taxes                          |                                                                                |                          | (90,489 | )                |        |            | (7,217  | )          |        |   | (142,613 | )      |         |   | (8,589  | )     
|Provision for income taxes                                      |                                                                                |                          | (160    | )                |        |            | (259    | )          |        |   | (325     | )      |         |   | (284    | )     
|                                                                |                                                                                |                          |         |                  |        |            |         |            |        |   |          |        |         |   |         |       
|Net loss                                                        |                                                                                | $                        | (90,649 | )                |        | $          | (7,476  | )          |        | $ | (142,938 | )      |         | $ | (8,873  | )     
|                                                                |                                                                                |                          |         |                  |        |            |         |            |        |   |          |        |         |   |         |       
|Basic and diluted net loss per share                            |                                                                                | $                        | (2.25   | )                |        | $          | (0.23   | )          |        | $ | (3.58    | )      |         | $ | (0.28   | )     
|                                                                |                                                                                |                          |         |                  |        |            |         |            |        |   |          |        |         |   |         |       
|Shares used to compute basic and diluted net loss
    per share |                                                                                |                          | 40,258  |                  |        |            | 32,934  |            |        |   | 39,941   |        |         |   | 32,174  |       
|                                                                |                                                                                |                          |         |                  |        |            |         |            |        |   |          |        |         |   |         |       

See accompanying notes to condensed consolidated
financial statements.

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CLARENT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS

(In thousands)


(Unaudited)


|                                                                 |                                                                                               |                                                                                |                                                                             |            |         |         |         |         |         |        |  
|---------------------------------------------------------------- | --------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------ | --------------------------------------------------------------------------- | ---------- | ------- | ------- | ------- | ------- | ------- | ------ | -
|                                                                 |                                                                                               |                                                                               
|                                                                 |                                                                                               | Six Months Ended                                                              
|                                                                 |                                                                                               | June 30,                                                                      
|                                                                 |                                                                                               |                                                                               
|                                                                 |                                                                                               | 2001                                                                           |                                                                             | 2000      
|                                                                 |                                                                                               |                                                                                |                                                                             |           
|                                                                 |                                                                                               | (Restated)                                                                     |                                                                             | (Restated)
|Operating activities:                                            |                                                                                               |                                                                                |                                                                             |            |         |         |         |        
|                                                                 | Net loss                                                                                      |                                                                                | $                                                                           | (142,938   | )       |         | $       | (8,873  | )      
|                                                                 | Adjustments to reconcile net loss to net cash
    provided by (used in) operating activities: |                                                                                |                                                                             |            |         |         |         |         |        
|                                                                 |                                                                                               | Depreciation                                                                   |                                                                             |            | 10,139  |         |         |         | 3,481   |       
|                                                                 |                                                                                               | Amortization of goodwill and other intangibles                                 |                                                                             |            | 19,599  |         |         |         | 451     |       
|                                                                 |                                                                                               | Amortization of deferred compensation and other
    stock compensation charges |                                                                             |            | 4,182   |         |         |         | 2,310   |       
|                                                                 |                                                                                               | Impairment of investments                                                      |                                                                             |            | 2,768   |         |         |         |        |       
|                                                                 |                                                                                               | Changes in operating assets and liabilities:                                   |                                                                             |            |         |         |         |         |         |       
|                                                                 |                                                                                               |                                                                                | Accounts receivable                                                         |            |         | 10,154  |         |         |         | 3,303  |  
|                                                                 |                                                                                               |                                                                                | Inventories                                                                 |            |         | (11,140 | )       |         |         | (7,490 | )
|                                                                 |                                                                                               |                                                                                | Prepaid expenses and other current assets                                   |            |         | (7,232  | )       |         |         | (62    | )
|                                                                 |                                                                                               |                                                                                | Other assets                                                                |            |         | (208    | )       |         |         | (1,645 | )
|                                                                 |                                                                                               |                                                                                | Accounts payable, compensation related accruals
    and accrued liabilities |            |         | 7,090   |         |         |         | 8,772  |  
|                                                                 |                                                                                               |                                                                                | Customer advances                                                           |            |         | 6,660   |         |         |         | 877    |  
|                                                                 |                                                                                               |                                                                                | Deferred taxes                                                              |            |         | 68      |         |         |         |       |  
|                                                                 |                                                                                               |                                                                                | Deferred revenue                                                            |            |         | (3,018  | )       |         |         | 53     |  
|                                                                 |                                                                                               |                                                                                | Restructuring and merger related accrual                                    |            |         | 11,448  |         |         |         |       |  
|                                                                 |                                                                                               |                                                                                |                                                                             |            |         |         |         |        
|                                                                 |                                                                                               | Net cash provided by (used in) operating
    activities                        |                                                                             |            | (92,428 | )       |         |         | 1,177   |       
|                                                                 |                                                                                               |                                                                                |                                                                             |            |         |         |         |        
|Investing activities:                                            |                                                                                               |                                                                                |                                                                             |            |         |         |         |        
|                                                                 | Purchases of short-term investments                                                           |                                                                                |                                                                             | (30,971    | )       |         |         | (80,836 | )      
|                                                                 | Purchases of long-term investments                                                            |                                                                                |                                                                             | (2,291     | )       |         |         |        |        
|                                                                 | Restricted cash                                                                               |                                                                                |                                                                             | (10,000    | )       |         |         |        |        
|                                                                 | Sale and maturities of investments                                                            |                                                                                |                                                                             | 87,992     |         |         |         | 45,609  |        
|                                                                 | Sale of long term investments                                                                 |                                                                                |                                                                             | 3,000      |         |         |         |        |        
|                                                                 | Note receivable from a leasing company                                                        |                                                                                |                                                                             | (5,000     | )       |         |         |        |        
|                                                                 | Purchases of property and equipment                                                           |                                                                                |                                                                             | (25,771    | )       |         |         | (8,443  | )      
|                                                                 |                                                                                               |                                                                                |                                                                             |            |         |         |         |        
|                                                                 |                                                                                               | Net cash provided by (used in) investing
    activities                        |                                                                             |            | 16,959  |         |         |         | (43,670 | )     
|                                                                 |                                                                                               |                                                                                |                                                                             |            |         |         |         |        
|Financing activities:                                            |                                                                                               |                                                                                |                                                                             |            |         |         |         |        
|                                                                 | Proceeds from line of credit                                                                  |                                                                                |                                                                             | 10,000     |         |         |         |        |        
|                                                                 | Proceeds from issuance of common stock                                                        |                                                                                |                                                                             | 1,682      |         |         |         | 2,872   |        
|                                                                 |                                                                                               |                                                                                |                                                                             |            |         |         |         |        
|                                                                 |                                                                                               | Net cash provided by financing activities                                      |                                                                             |            | 11,682  |         |         |         | 2,872   |       
|                                                                 |                                                                                               |                                                                                |                                                                             |            |         |         |         |        
|Effect of exchange rate changes on cash and cash
    equivalents |                                                                                               |                                                                                | (220                                                                        | )          |         |         | 54      |        
|                                                                 |                                                                                               |                                                                                |                                                                             |            |         |         |         |        
|Net decrease in cash and cash equivalents                        |                                                                                               |                                                                                | (64,007                                                                     | )          |         |         | (39,567 | )      
|Cash and cash equivalents at beginning of period                 |                                                                                               |                                                                                | 185,627                                                                     |            |         |         | 238,724 |        
|                                                                 |                                                                                               |                                                                                |                                                                             |            |         |         |         |        
|Cash and cash equivalents at end of period                       |                                                                                               | $                                                                              | 121,620                                                                     |            |         | $       | 199,157 |        
|                                                                 |                                                                                               |                                                                                |                                                                             |            |         |         |         |        
|Supplemental disclosure of non-cash activities:                  |                                                                                               |                                                                                |                                                                             |            |         |         |         |        
|                                                                 | Preferred stock received in exchange for
    settlement of accounts receivable                |                                                                                | $                                                                           |           |         |         | $       | 1,500   |        

See accompanying notes to condensed consolidated
financial statements.

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CLARENT CORPORATION

NOTES TO UNAUDITED CONDENSED
CONSOLIDATED

FINANCIAL STATEMENTS


1.     BASIS OF
PRESENTATION

The accompanying unaudited condensed consolidated
financial statements of the Company as of June 30, 2001
(restated) and for the three and six months ended June 30,
2001 (restated) and June 30, 2000 (restated) have been
prepared in accordance with generally accepted accounting
principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of
Regulation S-X. In the opinion of management, the condensed
consolidated financial statements include all adjustments that
management considers necessary for a fair presentation of the
results of operations for the interim periods shown. The results
of operations for such periods are not necessarily indicative of
the results expected for the full fiscal year or for any future
period. The balance sheet at December 31, 2000 has been
derived from the audited financial statements at that date but
does not include all of the information and footnotes required
by generally accepted accounting principles for complete
financial statements. These financial statements should be read
in conjunction with the consolidated financial statements and
related notes included in the Companys Annual Report on
Form 10-K/A for the year ended December 31, 2000, as
amended in connection with the restatement of the Companys
financial statements. Certain prior period balances have been
reclassified to conform to current period presentation.

Restatement
of Financial Statements

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

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

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

Revenue
Restatement:



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

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CLARENT CORPORATION


NOTES TO UNAUDITED CONDENSED
CONSOLIDATED

FINANCIAL STATEMENTS 
(Continued)




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

Impact on
Expenses:



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

Financial
Condition:



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

7



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##### Table of Contents



CLARENT CORPORATION


NOTES TO UNAUDITED CONDENSED
CONSOLIDATED

FINANCIAL STATEMENTS 
(Continued)




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

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

The following tables summarize the effects of the
restatement for the quarterly period ended June 30, 2001.

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

|                                 |  |                    |         |                  |  |             |         |             |  |   |         |   |  |   |          |  
|-------------------------------- |  | ------------------ | ------- | ---------------- |  | ----------- | ------- | ----------- |  | - | ------- | - |  | - | -------- | -
|                                 |  |                    |         |                 
|                                 |  | Three Months Ended |         | Six Months Ended
|                                 |  | June 30, 2001      |         | June 30, 2001   
|                                 |  |                    |         |                 
|                                 |  | As Reported        |         | As Restated      |  | As Reported |         | As Restated
|                                 |  |                    |         |                  |  |             |         |            
|Total revenue                    |  | $                  | 63,152  |                  |  | $           | 17,612  |             |  | $ | 124,344 |   |  | $ | 38,618   |  
|Gross profit (loss)              |  |                    | 30,603  |                  |  |             | (19,277 | )           |  |   | 73,310  |   |  |   | (16,940  | )
|Loss from operations             |  |                    | (44,087 | )                |  |             | (91,703 | )           |  |   | (60,504 | ) |  |   | (146,601 | )
|Net loss                         |  |                    | (41,567 | )                |  |             | (90,649 | )           |  |   | (55,531 | ) |  |   | (142,938 | )
|Basic and diluted loss per share |  | $                  | (1.03   | )                |  | $           | (2.25   | )           |  | $ | (1.39   | ) |  | $ | (3.58    | )

Condensed Consolidated Balance Sheets Data (in
thousands):

|                                                                             |  |               |         |             |  |   |         | 
|---------------------------------------------------------------------------- |  | ------------- | ------- | ----------- |  | - | ------- | 
|                                                                             |  |              
|                                                                             |  | June 30, 2001
|                                                                             |  |              
|                                                                             |  | As Reported   |         | As Restated
|                                                                             |  |               |         |            
|Cash and cash equivalents                                                    |  | $             | 158,109 |             |  | $ | 121,620 | 
|Accounts receivable, net                                                     |  |               | 99,204  |             |  |   | 10,979  | 
|Inventories                                                                  |  |               | 33,663  |             |  |   | 28,706  | 
|Prepaid expenses and other current assets                                    |  |               | 17,146  |             |  |   | 13,173  | 
|Total current assets                                                         |  |               | 336,067 |             |  |   | 202,423 | 
|Investments                                                                  |  |               | 12,370  |             |  |   | 11,002  | 
|Property and equipment, net                                                  |  |               | 51,980  |             |  |   | 52,288  | 
|Deferred tax assets                                                          |  |               | 16,306  |             |  |   | 14,852  | 
|Other assets and note receivable from leasing
    company                    |  |               | 13,359  |             |  |   | 9,726   | 
|Total assets                                                                 |  |               | 542,183 |             |  |   | 402,393 | 
|Deferred revenue                                                             |  |               | 23,844  |             |  |   | 5,510   | 
|Accrued liabilities, compensation related
    accruals and customer advances |  |               | 25,439  |             |  |   | 28,850  | 
|Restructuring and merger related accrual                                     |  |               | 5,011   |             |  |   | 10,901  | 
|Total current liabilities                                                    |  |               | 88,857  |             |  |   | 79,824  | 
|Total stockholders equity                                                   |  |               | 431,611 |             |  |   | 300,854 | 
|Total liabilities and stockholders equity                                   |  |               | 542,183 |             |  |   | 402,393 | 

8



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##### Table of Contents



CLARENT CORPORATION


NOTES TO UNAUDITED CONDENSED
CONSOLIDATED

FINANCIAL STATEMENTS 
(Continued)


Recent
Events

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

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

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

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

2.     FINANCIAL
INSTRUMENTS

Available-for-sale securities are carried at fair
value, with the unrealized gains or losses reported as a
separate component of stockholders equity. Expected
maturities may differ from contractual maturities because the
issuers of the securities may have the right to prepay or call
obligations without prepayment penalties. Realized gains and
losses on sales of available-for-sale securities were immaterial
for the six months ended June 30, 2001.

9



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##### Table of Contents



CLARENT CORPORATION


NOTES TO UNAUDITED CONDENSED
CONSOLIDATED

FINANCIAL STATEMENTS 
(Continued)


3.     INVENTORIES

Inventories consist of the following (in
thousands):

|                |  |            |        |              |  |   |        | 
|--------------- |  | ---------- | ------ | ------------ |  | - | ------ | 
|                |  | June 30,   |        | December 31,
|                |  | 2001       |        | 2000        
|                |  |            |        |             
|                |  | (Restated) |        | (Restated)  
|Raw materials   |  | $          | 16,227 |              |  | $ | 10,901 | 
|Work-in-process |  |            | 110    |              |  |   | 83     | 
|Finished goods  |  |            | 12,369 |              |  |   | 6,678  | 
|                |  |            |        |              |  |   |        | 
|                |  | $          | 28,706 |              |  | $ | 17,662 | 
|                |  |            |        |              |  |   |        | 

Inventory charges totaling $21.9 million and
$29.3 million were taken during the three and six months
ended June 30, 2001, respectively, reflecting excess
inventories resulting from changes in forecasted demand, the
Companys decision to discontinue certain products, the
write-down of leased inventory and product costs associated with
products shipped to certain customers in the Asia-Pacific region
for which revenue was not recognizable, and for which the
inventory is not expected to be recoverable.

4.     INVESTMENTS

The Company invests in equity instruments of
privately held companies for the promotion of business and
strategic objectives. The Company has also invested in a venture
capital management fund. Except for a $1.5 million
investment received in settlement of accounts receivable during
2000, 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 half of 2001,
the Company recorded impairment losses of $2.8 million.

Through June 30, 2001, the Company had
invested $6.8 million in a venture capital management fund.
The Company is committed to invest an additional
$8.2 million in the venture capital management fund in
future periods as to be determined by the fund manager. This
investment is recorded at cost as the Company has virtually no
influence over the operating and financial policies of the fund.

5.     COMPREHENSIVE
LOSS

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

|                                   |                                       |                    |         |                  |   |            |        |            |   |   |          |      |   |   |        |     |  
|---------------------------------- | ------------------------------------- | ------------------ | ------- | ---------------- | - | ---------- | ------ | ---------- | - | - | -------- | ---- | - | - | ------ | --- | -
|                                   |                                       |                    |         |                 
|                                   |                                       | Three Months Ended |         | Six Months Ended
|                                   |                                       | June 30,           |         | June 30,        
|                                   |                                       |                    |         |                 
|                                   |                                       | 2001               |         | 2000             |   | 2001       |        | 2000      
|                                   |                                       |                    |         |                  |   |            |        |           
|                                   |                                       | (Restated)         |         | (Restated)       |   | (Restated) |        | (Restated)
|Net loss                           |                                       | $                  | (90,649 | )                |   | $          | (7,476 | )          |   | $ | (142,938 | )    |   | $ | (8,873 | )  
|Other comprehensive income (loss): |                                       |                    |         |                  |   |            |        |            |   |   |          |      |   |   |        |    
|                                   | Translation adjustments               |                    |         | (373             | ) |            |        | (114       | ) |   |          | (634 | ) |   |        | (21 | )
|                                   | Unrealized gain (loss) on investments |                    |         | (14              | ) |            |        | 16         |   |   |          | (21  | ) |   |        | (29 | )
|                                   |                                       |                    |         |                  |   |            |        |            |   |   |          |      |   |   |        |    
|Comprehensive loss                 |                                       | $                  | (91,036 | )                |   | $          | (7,574 | )          |   | $ | (143,593 | )    |   | $ | (8,923 | )  
|                                   |                                       |                    |         |                  |   |            |        |            |   |   |          |      |   |   |        |    

10



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##### Table of Contents



CLARENT CORPORATION


NOTES TO UNAUDITED CONDENSED
CONSOLIDATED

FINANCIAL STATEMENTS 
(Continued)


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 June 7, 2001, the Companys stockholders approved
an amendment to the 1999 Plan to increase the number of shares
authorized for issuance by 1,000,000 shares from 17,780,431
shares to 18,780,431.

On February 14, 2001, the Company cancelled
outstanding options for approximately 2.9 million shares of
common stock under an Option Cancellation and Regrant 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 unexercised on November 15, 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 operates in one industry segment. The
Company designs, develops and sells Internet protocol telephony,
or IP telephony, systems. Net revenue for
non-U.S. locations is substantially the result of export
sales from the U.S. Net revenue by geographic region based on
customer location was as follows (in thousands):

|                                  |                                |                    |   |                  |        |            |   |            |        |  |   |        |        |  |   |        |        | 
|--------------------------------- | ------------------------------ | ------------------ | - | ---------------- | ------ | ---------- | - | ---------- | ------ |  | - | ------ | ------ |  | - | ------ | ------ | 
|                                  |                                |                    |   |                 
|                                  |                                | Three Months Ended |   | Six Months Ended
|                                  |                                | June 30,           |   | June 30,        
|                                  |                                |                    |   |                 
|                                  |                                | 2001               |   | 2000             |        | 2001       |   | 2000      
|                                  |                                |                    |   |                  |        |            |   |           
|                                  |                                | (Restated)         |   | (Restated)       |        | (Restated) |   | (Restated)
|Net revenue by geographic region: |                                |                    |   |                  |        |            |   |            |        |  |   |        |        |  |   |       
|                                  | United States                  |                    | $ | 4,066            |        |            | $ | 4,411      |        |  | $ | 11,999 |        |  | $ | 14,234 |       
|                                  | Other Americas                 |                    |   | 1,571            |        |            |   | 3,028      |        |  |   | 2,724  |        |  |   | 3,677  |       
|                                  | Europe, Middle East and Africa |                    |   | 7,823            |        |            |   | 4,724      |        |  |   | 13,116 |        |  |   | 10,544 |       
|                                  | Asia Pacific                   |                    |   | 4,152            |        |            |   | 8,323      |        |  |   | 10,779 |        |  |   | 15,021 |       
|                                  |                                |                    |   |                  |        |            |   |            |        |  |   |        |        |  |   |       
|                                  |                                | Total              |   | $                | 17,612 |            |   | $          | 20,486 |  |   | $      | 38,618 |  |   | $      | 43,476 | 
|                                  |                                |                    |   |                  |        |            |   |            |        |  |   |        |        |  |   |       

8.     NET LOSS PER
SHARE

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

11



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##### Table of Contents



CLARENT CORPORATION


NOTES TO UNAUDITED CONDENSED
CONSOLIDATED

FINANCIAL STATEMENTS 
(Continued)


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

|                                     |                                     |                                                                   |       |                  |        |            |       |            |        |   |       |          |        |   |       |        |        | 
|------------------------------------ | ----------------------------------- | ----------------------------------------------------------------- | ----- | ---------------- | ------ | ---------- | ----- | ---------- | ------ | - | ----- | -------- | ------ | - | ----- | ------ | ------ | 
|                                     |                                     |                                                                   |       |                 
|                                     |                                     | Three Months Ended                                                |       | Six Months Ended
|                                     |                                     | June 30,                                                          |       | June 30,        
|                                     |                                     |                                                                   |       |                 
|                                     |                                     | 2001                                                              |       | 2000             |        | 2001       |       | 2000      
|                                     |                                     |                                                                   |       |                  |        |            |       |           
|                                     |                                     |                                                                  
|                                     |                                     | (In thousands, except per share amounts)                         
|                                     |                                     | (Restated)                                                        |       | (Restated)       |        | (Restated) |       | (Restated)
|Numerator:                           |                                     |                                                                   |       |                  |        |            |       |            |        |   |       |          |        |   |       |       
|                                     | Net loss                            |                                                                   | $     | (90,649          | )      |            | $     | (7,476     | )      |   | $     | (142,938 | )      |   | $     | (8,873 | )     
|                                     |                                     |                                                                   |       |                  |        |            |       |            |        |   |       |          |        |   |       |       
|Denominator:                         |                                     |                                                                   |       |                  |        |            |       |            |        |   |       |          |        |   |       |       
|                                     | Weighted average shares outstanding |                                                                   |       | 40,258           |        |            |       | 33,075     |        |   |       | 39,941   |        |   |       | 32,483 |       
|                                     | Less shares subject to repurchase   |                                                                   |       |                 |        |            |       | (141       | )      |   |       |         |        |   |       | (309   | )     
|                                     |                                     |                                                                   |       |                  |        |            |       |            |        |   |       |          |        |   |       |       
|                                     |                                     | Denominator for basic net loss and diluted net
    loss per share |       |                  | 40,258 |            |       |            | 32,934 |   |       |          | 39,941 |   |       |        | 32,174 | 
|                                     |                                     |                                                                   |       |                  |        |            |       |            |        |   |       |          |        |   |       |       
|Basic and diluted net loss per share |                                     | $                                                                 | (2.25 | )                |        | $          | (0.23 | )          |        | $ | (3.58 | )        |        | $ | (0.28 | )     
|                                     |                                     |                                                                   |       |                  |        |            |       |            |        |   |       |          |        |   |       |       

In periods with a net loss, the Company excludes
all convertible preferred stock, warrants for convertible
preferred stock and common stock, outstanding stock options and
shares subject to repurchase from the calculation of diluted net
loss per common share because all such securities are
anti-dilutive. The total number of shares excluded from the
calculations of diluted net loss per share were 2,091,000 and
2,478,000 for the three and six months ended June 30, 2001
and 5,232,000 and 6,156,000 for the three and six months ended
June 30, 2000.

9.     RELATED PARTY
TRANSACTIONS

Transactions
with Management and Others

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

Note
Receivable from a Leasing Company

In January 2001, the Company advanced
$5.0 million to Clarent Finance, LLC (Clarent
Finance), a leasing company, for a six-year, eleven
percent junior subordinated debenture. The interest shall be
accrued and due by November 30, 2008. The principal is
repayable in 16 equal quarterly payments of $312,500 each,
commencing January 2005, and is due in full by
November 30, 2008.

The Company entered into a remarketing agreement
with Clarent Finance in January 2001 to provide for the
remarketing of certain equipment manufactured by the Company,
purchased by Clarent Finance and leased to the Companys
customers. Under the terms of the remarketing agreement, if
remarketing proceeds are insufficient to equal the remaining
defaulted lessee obligation, the Company is obligated to either
pay the remaining lessee obligation to Clarent Finance or apply
the shortage as a credit on the next equipment lease purchase in
the program.

12



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CLARENT CORPORATION


NOTES TO UNAUDITED CONDENSED
CONSOLIDATED

FINANCIAL STATEMENTS 
(Continued)


As a result of its remarketing obligations to
Clarent Finance, the Company defers the recognition of all
revenue and thereby establishes a liability for all amounts to
be earned from leasing arrangements with Clarent Finance. At
September 30, 2001, the Companys recorded liability
approximated its obligation under the remarketing agreement. As
of September 30, 2001 operating expenses for Clarent
Finance had been immaterial.

On March 29, 2002 the Company purchased
Clarent Finance for $275,000 in the form of forgiveness of a
receivable. The Company received approximately $3.4 million
in cash and a lease portfolio of $1.8 million (of which the
Company had previously reported a liability under the
remarketing agreement of $1.5 million as of
September 30, 2001) and extinguished a note owed to the
Company of $5.0 million.

Transactions
Related to Asia-Pacific Region

The Company entered into various transactions
with entities that, as a result of the investigation, the
Company now believes are controlled by Matthew Chiang or members
of his immediate family. Mr. Chiang was employed by the
Company as a Marketing Director of the Asia-Pacific region from
July 1997 to June 1999, a Director, Product and Market
Strategy from July 1999 to December 2000 and the
Companys Vice President and General Manager of the Asia
Pacific region and served as the President of its Asia-Pacific
regional office from January 2001 to September 2001.
The entities believed to be controlled by Mr. Chiang or
members of his immediate family are Great MinCom Communication
Corporation (which the Company believes is also known as Great
MinCom Products Corporation and collectively, Great
MinCom) and Articula Corporation (Articula).
The Company believes that Mr. Chiang may have had a direct
or indirect material interest in each of the transactions
between the Company, Great MinCom and Articula. The Company
believes that Jerry Chang, who was a director of the Company
from July 1996 to September 2001, the Companys
President from July 1996 to April 2001, Chief
Executive Officer from July 1996 to July 2001 and
Chief Strategist from July 2001 to September 2001, may
have an indirect financial interest in Articula.

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

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

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

From April to July 2001, an additional
$43.0 million was transferred by the Asia-Pacific regional
office to Great MinCom and Articula in violation of the
Companys financial control procedures. After transfer of
these funds, the Company received promissory notes in exchange
for the cash. These promissory notes are: a promissory note from
Articula in the amount of $3.0 million (bearing interest of
4.15% per annum from May 3, 2001); a promissory note from
Great MinCom in the amount of $2.4 million (bearing
interest of 4.15% per annum from May 21, 2001); and a
convertible promissory note from Articula and Great MinCom in the

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CLARENT CORPORATION


NOTES TO UNAUDITED CONDENSED
CONSOLIDATED

FINANCIAL STATEMENTS 
(Continued)


amount of $37.6 million (bearing interest of
5.0% per annum from July 25, 2001 and due in
January 2002). At the same time as the execution of the
$37.6 million convertible promissory note, the Company
entered into a Strategic Partner Agreement with Articula and
Great MinCom as of July 25, 2001, pursuant to which
Articula and Great MinCom, among other things, agreed to provide
sales and marketing support to the Company and to use the
Company as their exclusive supplier of VoIP products.

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

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

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

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

During May through July 2001, Mr. Chiang,
the President of the Companys Asia-Pacific regional
office, received from the Company cash advances or effected
loans in violation of the Companys policies in the amount
of approximately $1.1 million, all of which is outstanding,
but fully reserved for, as of September 30, 2001.
Mr. Chiang also effected loans and investments from the
Asia-Pacific regional office in violation of the Companys
financial control policies, in the amount of approximately
$703,000, some of which directly or indirectly benefited
Mr. Chiang. These transactions were not reported to the
appropriate personnel in the Company and the amounts remain
outstanding, but fully reserved for, as of September 30,
2001. The

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CLARENT CORPORATION


NOTES TO UNAUDITED CONDENSED
CONSOLIDATED

FINANCIAL STATEMENTS 
(Continued)


Company now believes that these loans and
investments resulted in the payments of Company funds to
customers who used Company funds for the purchase of Company
products. The Company has reversed all revenue associated with
the original recording of revenue of such products and expensed
the associated inventory in the same period that the revenue was
originally recognized.

Indebtedness
of Management

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

10.     LINE OF
CREDIT

During June 2001, the Company obtained a
$10.0 million line of credit with a financial institution
to provide working capital for the Company. The entire balance
had been borrowed and remained outstanding at June 30,
2001. The interest rate on this credit facility is variable and
is equal to the prime rate (6.75% at June 30, 2001). Under
the terms of this arrangement, the Company must maintain a
restricted cash balance of $10.0 million until the line is
converted to a receivables backed facility. The line of credit
expires on June 30, 2002.

11.     INCOME
TAXES

The provision for income taxes of $160,000 and
$325,000 for the three and six months ended June 30, 2001,
respectively, consist of foreign income tax provided on the
profits attributable to the Companys foreign operations.
The Companys effective tax rates differed from the
combined federal and state statutory rates due primarily to
acquisition charges that were non-deductible for tax purposes.

12.     RECENT
ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting
Standards No. 133, Accounting for Derivative
Financial Instruments and for Hedging Activities
(SFAS 133), as amended by SFAS 138, which
provides a comprehensive and consistent standard for the
recognition and measurement of derivatives and hedging
activities. The Company adopted SFAS 133, beginning
January 1, 2001, which 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 July 2001, the Financial Accounting
Standards Board (FASB) issued Statement of Financial
Accounting Standards No. 141, Business
Combinations (SFAS 141). SFAS 141
requires the purchase method of accounting for all business
combinations and eliminates the pooling-of-interests method for
business combinations initiated after June 30, 2001.
SFAS 141 also includes guidance on the initial recognition
and measurement of goodwill and other intangible assets arising
from business combinations completed after June 30, 2001.
The Company does not expect the adoption of SFAS 141 to
have a material effect on its financial conditions or results of
operations.

In July 2001, the FASB issued SFAS 142,
Goodwill and Other Intangible Assets
(SFAS 142). SFAS 142 discontinues
amortization of goodwill and intangible assets deemed to have
indefinite lives and requires such assets to be reviewed at
least annually for impairment. SFAS 142 also includes
provisions on the identification of intangible assets,
reclassification of certain intangibles from previously reported
goodwill, and reassessment of the useful lives of existing
intangibles. The Company will apply SFAS 142 beginning in
the first quarter of 2002. The Company does not expect the
adoption of SFAS 142 to have a material effect on its
financial conditions or results of operations.

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CLARENT CORPORATION


NOTES TO UNAUDITED CONDENSED
CONSOLIDATED

FINANCIAL STATEMENTS 
(Continued)


In July 2001, the FASB issued SFAS 143,
Accounting for Asset Retirement Obligations
(SFAS 143) which addresses accounting and
reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement
costs. SFAS 143 is effective for fiscal years beginning
after June 15, 2002. The Company is currently assessing the
impact of this new standard, and as such, it is possible that
its adoption could have a material effect on its financial
condition or results of operations.

In August 2001, the FASB issued
SFAS 144, Impairment or Disposal of Long-Lived
Assets (SFAS 144) which is effective for
fiscal years beginning after December 15, 2001.
SFAS 144 supersedes SFAS 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of and provides a single accounting model for
impairment of long-lived assets. The Company is currently
assessing the impact of this new standard, and as such, it is
possible that its adoption could have a material effect on its
financial condition or results of operations.

13.     RESTRUCTURING
AND MERGER RELATED ACCRUALS

On August 10, 2000, the Company acquired ACT
Networks, Inc. (ACT Networks), a leading provider of
multi-service access and voice/data integration products that
enable the convergence of voice, video and data onto one managed
network. In accordance with a plan that existed at the time of
the acquisition, the Company established $6.2 million in
accruals for merger related restructuring costs. At
June 30, 2001, $5.9 million in accruals related to the
ACT Networks acquisition remained. These accruals include
$4.0 million for the costs of exiting non-cancelable
operating leases for the Calabasas, California manufacturing
facility, $1.3 million for involuntary employee termination
costs related to duplicative management personnel in the ACT
Network organization, $933,000 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 at the Calabasas
facility through discontinuation of certain product lines and
the outsourcing of manufacturing for the remaining products. The
Company has outsourced the enterprise products to a contract
manufacturer and ceased production at the Calabasas facility at
the end of the second quarter of 2001. The Company is disposing
of the remaining manufacturing equipment.

On May 14, 2001, the Company announced a
reduction in workforce of approximately 10% and a streamlining
of its operations to achieve cost savings and operating
efficiencies in accordance with previously stated goals. The
Company recorded a restructuring charge related to the reduction
in workforce and excess facilities of approximately
$14.1 million in the second quarter of 2001. This charge
includes $3.3 million of severance and other employee
related costs for approximately 90 employees and 20 contractors
and an accrual of $10.8 million for losses associated with
an excess facility space. At June 30, 2001, the remaining
restructuring accrual was $11.8 million. During the quarter
ended June 30, 2001, approximately $1.7 million in
severance and other employee related costs and $560,000 in
excess facility costs had been paid. The entire
$14.1 million charge is expected to be paid in cash through
July 2006.

14.     CUSTOMER
ADVANCES

As of June 30, 2001, the Company received
funds totaling $9.2 million from certain customers in the
Asia-Pacific region. These payments are currently recorded as
customer advances. These advances consist of funds received from
customers, and the Company now believes that these funds may be
subject to refund, because (i) the Company is aware of a
purported return right with respect to certain products or
(ii) the customer has not accepted possession of certain
products.

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CLARENT CORPORATION


NOTES TO UNAUDITED CONDENSED
CONSOLIDATED

FINANCIAL STATEMENTS 
(Continued)


15.     LITIGATION

Beginning in July 2001, the Company and
certain of its current and former officers and directors were
named as defendants in several class action shareholder
complaints filed in the United States District Court for the
Southern District of New York, collectively captioned In re
Clarent Corp. Initial Public Offering Securities Litigation.
These lawsuits purport to bring suit on behalf of all purchasers
of the Companys common stock between July 1, 1999 and
December 6, 2000. In these actions, the plaintiffs allege
that the Company, certain of its officers and directors and the
underwriters of its initial public offering (IPO)
violated the federal securities laws because the Companys
IPO registration statement and prospectus purportedly contained
untrue statements of material fact or omitted material facts
regarding the compensation to be received by, and the stock
allocation practices of, the IPO underwriters. The plaintiffs
further allege that the prospectus relating to the
Companys secondary offering was false and misleading for
the same reasons. The plaintiffs seek unspecified monetary
damages and other relief. Similar complaints were filed in the
same Court against hundreds of other public companies that
conducted IPOs of their common stock since the late 1990s (the
IPO Lawsuits). On August 8, 2001, the IPO
Lawsuits were consolidated for pretrial purposes before United
States Judge Shira Scheindlin of the Southern District of New
York. Judge Scheindlin held an initial case management
conference on September 7, 2001, at which time she ordered,
among other things, that the time for all defendants to respond
to any complaint be postponed until further order of the Court.
Thus, the Company has not been required to answer any of the
complaints, and no discovery has been served on the Company. In
accordance with Judge Scheindlins orders at further status
conferences in March and April, the appointed lead
plaintiffs counsel filed amended, consolidated complaints
in the IPO Lawsuits on April 19, 2002. However, Judge
Scheindlin does not expect any of the defendants to file motions
to dismiss the amended, consolidated complaints until at least
summer of 2002.

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

16.     SUBSEQUENT
EVENTS

Restructuring

On July 19, 2001, the Company announced that
it will refine its focus on the last mile or local
access market, and that in connection with this sharpened focus,
the Company adopted a functional organizational structure. As a
result, the Company announced the reduction of its workforce by
approximately 27%. As of the date of the Prior Report, an
estimate of the costs associated with this restructuring had not
been determined.

Convertible
Promissory Note

In June and July 2001, the Company
transferred approximately $37.6 million to two value-added
service provider partners in the Asia-Pacific region. This
transfer was in violation of the Companys financial
control procedures and was not reported to appropriate personnel
within the Company. After transfer of these funds, the Company
received a convertible promissory note from Articula and Great
MinCom in the amount of $37.6 million (bearing interest of
5.0% per annum from July 25, 2001 and due in
January 2002). At the same time as the execution of the
$37.6 million convertible promissory note, the Company
entered into a Strategic Partner Agreement with Articula and
Great MinCom as of July 25, 2001, pursuant to which
Articula and Great MinCom, among other things, agreed to provide
sales and marketing support to the Company and to use the
Company as their exclusive supplier of VoIP products.

As a result of its investigation, the Company now
believes the two service providers used the transfers to provide
cash to certain customers which the Company now believes may
have been used to allow the customers to purchase Company
products. As a result, the Company reversed all revenue
associated with the

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CLARENT CORPORATION


NOTES TO UNAUDITED CONDENSED
CONSOLIDATED

FINANCIAL STATEMENTS 
(Continued)


products original sale and expensed the
associated inventory in the same period that the revenue was
originally recognized because it is not believed to be
recoverable and, for accounting purposes only, recorded any
payment associated with the reversed revenue transactions as a
reduction in the notes receivable balances. Remaining notes
receivable balances of approximately $8.2 million were
provided for by charges to other expense during the third
quarter of 2001 due to the doubtful probability of collection.
Although accounted for as described above, as of the date of
this filing, the notes remain outstanding and unpaid. The
Company reserves its rights to pursue collection of the entire
principal balance plus accrued interest for each of the loans
and the Bid Deposit amounts, in addition to other remedies or
actions available to the Company.

Litigation

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

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

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

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

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CLARENT CORPORATION


NOTES TO UNAUDITED CONDENSED
CONSOLIDATED

FINANCIAL STATEMENTS 
(Continued)


On April 12, 2002, a civil complaint for
violations of the federal securities laws was filed against the
Company and certain of its officers and directors in the United
States District Court for the District of Minnesota entitled
Ahlstrom, et al. v. Clarent Corporation, et al.The
plaintiffs in this action include Irwin L. Jacobs and a number
of investors apparently affiliated with him. Plaintiffs allege
that the defendants intentionally issued false financial reports
for the Company between March 2001 and August 2001 in
violation of Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934 and similar provisions of Minnesota law.
The Company currently believes that this litigation will be
coordinated or consolidated for most pre-trial purposes with the
other securities law class action matters currently pending
against the Company. This matter is at an early stage. No
response to the complaint has yet been filed, and no discovery
has taken place.

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

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

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

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

Overview

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

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

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

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

Revenue
Restatement:



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

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Impact
on Expenses:



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

Financial
Condition:



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

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

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

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Results of Operations

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

|                                       |                                                |                          |      |                  |     |            |     |            |     |  |      |      |     |  |     |     |     | 
|-------------------------------------- | ---------------------------------------------- | ------------------------ | ---- | ---------------- | --- | ---------- | --- | ---------- | --- |  | ---- | ---- | --- |  | --- | --- | --- | 
|                                       |                                                |                          |      |                 
|                                       |                                                | Three Months Ended       |      | Six Months Ended
|                                       |                                                | June 30,                 |      | June 30,        
|                                       |                                                |                          |      |                 
|                                       |                                                | 2001                     |      | 2000             |     | 2001       |     | 2000      
|                                       |                                                |                          |      |                  |     |            |     |           
|                                       |                                                | (Restated)               |      | (Restated)       |     | (Restated) |     | (Restated)
|As a percentage of net revenue:        |                                                |                          |      |                  |     |            |     |            |     |  |      |      |     |  |     |    
|                                       | Product and software                           |                          |      | 74               | %   |            |     | 85         | %   |  |      | 77   | %   |  |     | 87  | %  
|                                       | Service                                        |                          |      | 26               |     |            |     | 15         |     |  |      | 23   |     |  |     | 13  |    
|                                       |                                                |                          |      |                  |     |            |     |            |     |  |      |      |     |  |     |    
|                                       |                                                | Total net revenue        |      |                  | 100 |            |     |            | 100 |  |      |      | 100 |  |     |     | 100 | 
|Cost of revenue:                       |                                                |                          |      |                  |     |            |     |            |     |  |      |      |     |  |     |    
|                                       | Product and software                           |                          |      | 181              |     |            |     | 42         |     |  |      | 122  |     |  |     | 37  |    
|                                       | Service                                        |                          |      | 28               |     |            |     | 10         |     |  |      | 22   |     |  |     | 8   |    
|                                       |                                                |                          |      |                  |     |            |     |            |     |  |      |      |     |  |     |    
|                                       |                                                | Total cost of revenue    |      |                  | 209 |            |     |            | 52  |  |      |      | 144 |  |     |     | 45  | 
|                                       |                                                |                          |      |                  |     |            |     |            |     |  |      |      |     |  |     |    
|Gross profit (loss)                    |                                                |                          | (109 | )                |     |            | 48  |            |     |  | (44  | )    |     |  | 55  |    
|Operating expenses:                    |                                                |                          |      |                  |     |            |     |            |     |  |      |      |     |  |     |    
|                                       | Research and development                       |                          |      | 94               |     |            |     | 27         |     |  |      | 81   |     |  |     | 23  |    
|                                       | Sales and marketing                            |                          |      | 141              |     |            |     | 58         |     |  |      | 128  |     |  |     | 53  |    
|                                       | General and administrative                     |                          |      | 33               |     |            |     | 14         |     |  |      | 31   |     |  |     | 12  |    
|                                       | Amortization of deferred compensation          |                          |      | 12               |     |            |     | 5          |     |  |      | 11   |     |  |     | 5   |    
|                                       | Amortization of goodwill and other intangibles |                          |      | 52               |     |            |     | 1          |     |  |      | 47   |     |  |     | 1   |    
|                                       | Restructuring costs                            |                          |      | 80               |     |            |     |           |     |  |      | 37   |     |  |     |    |    
|                                       |                                                |                          |      |                  |     |            |     |            |     |  |      |      |     |  |     |    
|                                       |                                                | Total operating expenses |      |                  | 412 |            |     |            | 105 |  |      |      | 335 |  |     |     | 94  | 
|                                       |                                                |                          |      |                  |     |            |     |            |     |  |      |      |     |  |     |    
|                                       | Loss from operations                           |                          |      | (521             | )   |            |     | (57        | )   |  |      | (379 | )   |  |     | (39 | )  
|Other income, net                      |                                                |                          | 7    |                  |     |            | 22  |            |     |  | 10   |      |     |  | 20  |    
|                                       |                                                |                          |      |                  |     |            |     |            |     |  |      |      |     |  |     |    
|Loss before provision for income taxes |                                                |                          | (514 | )                |     |            | (35 | )          |     |  | (369 | )    |     |  | (19 | )  
|Provision for income taxes             |                                                |                          | (1   | )                |     |            | (1  | )          |     |  | (1   | )    |     |  | (1  | )  
|                                       |                                                |                          |      |                  |     |            |     |            |     |  |      |      |     |  |     |    
|Net loss                               |                                                |                          | (515 | )%               |     |            | (36 | )%         |     |  | (370 | )%   |     |  | (20 | )% 
|                                       |                                                |                          |      |                  |     |            |     |            |     |  |      |      |     |  |     |    

Net Revenue

Net revenue decreased 14% to $17.6 million
in the three months ended June 30, 2001 from
$20.5 million in the three months ended June 30, 2000.
Net revenue for the six months ended June 30, 2001
decreased by 11% to $38.6 million from $43.5 million
for the same period in 2000. The decrease in product and
software sales of 26% to $13.0 million in the three months
ended June 30, 2001, from $17.4 million in the three
months ended June 30, 2000, and the decrease of 22% to
$29.6 million in the six months ended June 30, 2001,
from $37.9 million in the six months ended June 30,
2000, was primarily attributable to a decrease in sales in the
Asia-Pacific region and to a lesser degree, domestically. The
decrease in product and software sales is attributable to the
continuing weakness of global economic conditions, including, in
particular, the downturn of the telecommunications market,
resulting in a significant decline in capital expenditures by
our customers offset in part by revenues from a suite of
products acquired from ACT Networks in August 2000. Service
revenue from maintenance and support increased by 52% and 62% to
$4.6 million and $9.0 million in the three and six
months ended June 30, 2001, from $3.1 million and
$5.6 million for the three and six months ended
June 30, 2000. The increase in service revenue is
attributable to an increase in the customer base utilizing
support contracts. Grintek Telecom accounted for 10% or more of
net revenue in the six months ended June 30, 2001.

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Cost of Revenue

Cost of revenue increased approximately 245% and
182% to $36.9 million and $55.6 million in the three
and six months ended June 30, 2001, from $10.7 million
and $19.7 million in the three and six months ended
June 30, 2000. Product and software costs increased by 270%
and 195% to $31.8 million and $47.3 million in the
three and six months ended June 30, 2001, from
$8.6 million and $16.0 million in the same periods of
2000. Service costs increased by 143% and 123% to
$5.0 million and $8.3 million in the three and six
months ended June 30, 2001, from $2.1 million and
$3.7 million in the same periods of 2000, due to the
increases in technical support personnel to service an
anticipated increased customer base.

Gross margin decreased to a negative 109% and a
negative 44% for the three and six months ended June 30,
2001, compared to 48% and 55% for the corresponding periods in
2000. For the three and six months ended June 30, 2001, the
decrease in gross margin resulted largely from the $11.4 and
$18.8 million of product cost associated with products
shipped to certain customers in the Asia-Pacific region for
which revenue was not recognizable because we now believe that
these customers indirectly used Company funds for the purchase
of our products and, to a lesser degree, because certain
customers purportedly had return rights for such products. We
now believe such products, once delivered to the customer, will
probably not be recoverable. In addition, a significant part of
the drop in gross margin was attributable to $6.1 million
of inventory write-downs for the discontinuance of a product
line and for the write-down of excess requirements for certain
products. The decrease in gross margin was also the result of a
higher rate of increase in costs associated with increased
headcount as compared to the rate of increase of revenue for the
period. Our gross margin has also been affected by significant
erosion in the average selling prices of our products due to a
number of factors, including competitive pricing pressures and
rapid technological changes that we expect to continue.

We also experienced a negative impact on gross
margin as compared to prior periods from the introduction of new
hardware and software products and new versions of existing
products. We expect gross margin to be positively affected by a
decrease in expenses, expected to result from reductions in our
headcount, but 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 may
result in lower gross margins.

Research and Development Expenses

Research and development expenses increased 196%
and 215% to $16.5 million and $31.2 million in the
three and six months ended June 30, 2001, from
$5.6 million and $9.9 million in the three and six
months ended June 30, 2000, respectively. Research and
development expenses increased as a percentage of revenue to 94%
and 81% for the three and six months ended June 30, 2001,
from 27% and 23% in the three and six months ended June 30,
2000, respectively. The increases in research and development
expenses both in absolute dollars and as a percentage of revenue
from period to period, were attributable primarily to increases
in the number of research and development employees to 319 at
June 30, 2001 from 113 at June 30, 2000 in
anticipation of higher current period revenue and higher revenue
growth.

Sales and Marketing Expenses

Sales and marketing expenses increased 110% and
117% to $24.8 million and $49.6 million in the three
and six months ended June 30, 2001 from $11.8 million
and $22.9 million in the three and six months ended
June 30, 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. Sales and marketing expenses as a
percentage of revenue increased to 141% and 129% for the three
and six months ended June 30, 2001 from 58% and 53% in the
three and six months ended June 30, 2000. The increase in
sales and marketing costs as a percentage of revenue is
attributable to the growth rate of sales and marketing expenses
compared to a decrease in net revenue for the period as we added
sales and marketing personnel and spending on promotional
activities in anticipation of higher current period revenue and
higher revenue growth.

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General and Administrative Expenses

General and administrative expenses increased
100% and 131% to $5.7 million and $12.3 million in the
three and six months ended June 30, 2001, from
$2.9 million and $5.3 million in the three and six
months ended June 30, 2000. General and administrative
expenses as a percentage of revenue increased to 33% and 31% for
the three and six months ended June 30, 2001, from 14% and
12% for the three and six months ended June 30, 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 based on
anticipated higher current period revenue and higher revenue
growth. The general and administrative employee headcount
increased to 148 at June 30, 2001, as compared to 79 at
June 30, 2000.

Amortization of Deferred
Compensation

For the three and six months ended June 30,
2001, amortization of deferred compensation was
$2.2 million and $4.2 million as compared to $932,000
and $2.3 million in the three and six months ended
June 30, 2000. Amortization of deferred compensation
resulted from the grant of stock options to purchase common
stock at prices below the deemed fair value as well as the
assumption of stock options through acquisitions at prices below
the deemed fair value of our common stock. The increase in
amortization of deferred compensation for the three and six
months periods of 2001, as compared to the same periods of 2000,
was a result of our business acquisitions in the third quarter
of 2000. The deferred compensation is being amortized using the
graded method over the vesting period of the stock options.

On February 14, 2001, we cancelled
outstanding options for approximately 2.9 million shares of
common stock under an Option Cancellation and Regrant 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 unexercised on November 15, 2001.

Amortization of Goodwill and Other
Intangibles

Amortization of goodwill and purchased other
intangible assets for the three and six months ended
June 30, 2001 was $9.1 million and $18.2 million
as compared to $225,000 and $451,000 for the three and six
months ended June 30, 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 Solutions, Inc. and ACT
Networks, Inc. (ACT Networks, Inc.) 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. Beginning in
the first quarter of 2002, goodwill will no longer be amortized
but will be subject to annual impairment tests. All other
intangible assets will continue to be amortized over their
estimated useful lives. Based on acquisitions completed as of
June 30, 2001, application of the non-amortization
provisions of these rules is expected to result in an increase
in net income of approximately $29.7 million ($0.74 per
share) per year.

Status of R&D Projects Acquired From ACT
Networks

As of the date of the Prior Report, we believed
that the projections used in performing valuations with respect
to the research and development projects acquired from ACT
Networks remained materially valid, however, there can be no
assurance that the projected results will be achieved. As of the
date of the Prior Report, we expected to continue the
development of each project not then completed with the
exception of the DynaStar project and believed that there was a
reasonable chance of successful completion. However, if we do
not successfully deploy commercially accepted technology or
products based on the Intellectual Property Research and
Development, our operating results could be adversely affected
in future periods. Additionally, the value of other intangible
assets could become impaired. During July 2001, we
announced a restructuring

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and as part of this restructuring plan the
DynaStar project has been discontinued. The impairment of the
intangible assets will be recognized in the third quarter of
2001.


The following list provides the information
regarding the status of research and development projects at the
date of acquisition. There has been no change in expected costs
through June 30, 2001 with the exception of the DynaStar
project, which has been discontinued:

|             |  |                 |     |            |  |                  |     |  |  |  |              | 
|------------ |  | --------------- | --- | ---------- |  | ---------------- | --- |  |  |  | ------------ | 
|             |  | Estimated Costs |     |            |  |                 
|             |  | to Complete at  |     | Expected   |  |                 
|             |  | Time of         |     | Costs at   |  | Expected Date of
|             |  | Acquisition     |     | Completion |  | Completion      
|             |  |                 |     |            |  |                 
|             |  |                 |     |           
|             |  | (in millions)   |     |           
|NetPerformer |  | $               | 3.9 |            |  | $                | 3.9 |  |  |  | Q3 2001      | 
|SX-10        |  | $               | 0.8 |            |  | $                | 0.8 |  |  |  | Q4 2001      | 
|DynaStar     |  | $               | 0.8 |            |  |                  | n/a |  |  |  | Discontinued | 

Other Income, Net

Other income, net was $1.2 million and
$4.0 million in the three and six months ended
June 30, 2001 as compared to $4.4 million and
$8.5 million in the three and six months ended
June 30, 2000. The other income was primarily attributable
to interest income earned on our cash, cash equivalents and
other investments and a realized gain of $1.4 million on
the sale of an equity investment. Interest income in the first
half of 2001 reflects lower cash and investment balances as
compared to 2000, as well as charges for impaired investments of
$2.1 million and $2.8 million for the three and six
months ended June 30, 2001. We expect 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 provisions for income taxes of $160,000 and
$325,000 for the three and six months ended June 30, 2001
and $259,000 and $284,000 for the three and six months ended
June 30, 2000 consist of foreign income tax provided on the
profits attributable to our foreign operations. Our effective
tax rates differed from the combined federal and state statutory
rates predominantly as a result of acquisition charges that were
non-deductible for tax purposes.

Liquidity and Capital Resources

From inception through June 1999, we
financed our operations primarily through private sales of
convertible preferred stock, which totaled $18.9 million in
aggregate net proceeds. During 1999, we completed both an
initial and a secondary public offering, which resulted in net
proceeds of approximately $302.6 million. In addition, we
received net proceeds of $33.3 million from our acquisitions
during the third quarter of 2000.

Net cash used in operating activities was
$92.4 million in the six months ended June 30, 2001,
compared to net cash of $1.2 million provided by operating
activities in the same period of 2000. Net cash used in
operating activities in 2001 was principally the result of a net
loss of $142.9 million, an increase in inventories of
$11.1 million, an increase in prepaid expenses and other
current assets of $7.2 million, and a decrease in deferred
revenue of $3.0 million, which was partially offset by
adjustments for amortization and depreciation of
$33.9 million, a decrease in accounts receivable of
$10.2 million, an increase in accounts payable,
compensation related accruals and accrued liabilities of
$7.1 million, an increase in customer advances of
$6.7 million, an increase in restructuring and merger
related accruals of $11.4 million, and the non-cash
impairment of investments of $2.8 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.
Accounts receivable decreased as a result of a decrease in
revenue during 2001. The increase in inventory is primarily due
to the anticipation of expected growth in product revenue. The
increase in prepaid expenses and other current assets primarily
resulted from loans to strategic partners that we now believe
was used to pay us cash to purchase our products in a later
period. The decrease in deferred product revenue was

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the result of decrease in revenue. The increase
in accounts payable, compensation related accruals and accrued
liabilities primarily resulted from increases in inventory and,
to a lesser extent, increases in operating expenses, in both
cases associated with the higher anticipated revenue levels. The
increase in customer advances resulted from our receipt of funds
from customers that we now believe may be subject to refund,
because of (i) a purported return right or (ii) the
customer has not accepted possession of certain products.


Net cash provided by operating activities was
$1.2 million in the six months ended June 30, 2000
compared to $8.3 million used in operating activities in
the same period of 1999. Net cash provided by operating
activities for the six months ended June 30, 2000 was
attributable to a net loss of $8.9 million which was more
than fully offset by amortization of deferred compensation and
goodwill of $2.8 million, depreciation of $3.5 million, a
decrease in accounts receivable of $3.3 million, and
increases in accounts payable, compensation related accruals and
accrued liabilities of $8.8 million. Cash used in operating
activities included cash used for increases in inventory of
$7.5 million and other assets of $1.6 million. The
increase in inventory during 2000 was primarily in anticipation
of expected growth in product revenue. The increase in other
assets in 2000 was primarily due to building lease deposits.

Net cash from investing activities was
approximately $17.0 million in the first six months of 2001
as compared to $43.7 million used in investing activities
for the same period in 2000. For 2001, $57.7 million of
cash from investing activities resulted from the sale and
maturity of investments, net of purchases, as compared to
$35.2 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 six months
ended June 30, 2001 included $10.0 million of
restricted cash related to the Companys line of credit and
a note receivable of $5.0 million from a leasing company
that, as of the date of this filing, we have acquired. Cash used
in investing activities also includes purchases of property and
equipment totaling $25.8 million, which was based on
anticipated higher current period revenue and higher revenue
growth. Cash used in investing activities for the six months
ended June 30, 2000 included purchases of property and
equipment totaling $8.4 million. In addition, in the first
six months of 2001 $10.0 million in cash became restricted
under a fully drawn line of credit.

Net cash from financing activities was
$11.7 million in the six months ended June 30, 2001,
as compared to $2.9 million for the same period in 2000.
The cash provided by financing activities during the six months
ended June 30, 2001 included proceeds from a line of credit
of $10.0 million and $1.7 million in proceeds from the
exercise of employee stock options and employee stock purchase
plans. The proceeds from employee stock plans accounted for $2.9
million from financing activities during the first six months of
2000.

As of June 30, 2001, our principal
commitments consisted of a secured line of credit and
obligations outstanding under operating leases. We currently
have no material commitments for capital expenditures.

On June 30, 2001, our cash, cash
equivalents, restricted cash and short-term investment balance
exclusive of restricted cash was $139.6 million, which we
believed would have been sufficient to meet our anticipated cash
needs for working capital and capital expenditures for at least
the next 12 months.

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

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

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


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




ITEM 3.     QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Financial Market Risk

Our financial market risk includes risks
associated with international operations and related foreign
currencies. We anticipate that international sales will continue
to account for a significant portion of our consolidated
revenue. Our international sales are 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 June 30, 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
approximately $100 million at June 30, 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 $200,000 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 $11.0 million at June 30,
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 six months ended June 30, 2001,
we recorded impairment losses of $2.8 million on investments.




PART II.     OTHER
INFORMATION




ITEM 1.     LEGAL
PROCEEDINGS

Beginning in July 2001, the Company and certain
of its current and former officers and directors were named as
defendants in several class action shareholder complaints filed
in the United States District Court for the Southern District of
New York, collectively captioned In re Clarent Corp. Initial
Public Offering Securities Litigation. These lawsuits
purport to bring suit on behalf of all purchasers of the
Companys common stock between July 1, 1999 and
December 6, 2000. In these actions, the plaintiffs allege
that the

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Company, certain of its officers and directors
and the underwriters of its initial public offering
(IPO) violated the federal securities laws because
the Companys IPO registration statement and prospectus
purportedly contained untrue statements of material fact or
omitted material facts regarding the compensation to be received
by, and the stock allocation practices of, the IPO underwriters.
The plaintiffs further allege that the prospectus relating to
the Companys secondary offering was false and misleading
for the same reasons. The plaintiffs seek unspecified monetary
damages and other relief. Similar complaints were filed in the
same Court against hundreds of other public companies that
conducted IPOs of their common stock since the late 1990s (the
IPO Lawsuits). On August 8, 2001, the IPO
Lawsuits were consolidated for pretrial purposes before United
States Judge Shira Scheindlin of the Southern District of New
York. Judge Scheindlin held an initial case management
conference on September 7, 2001, at which time she ordered,
among other things, that the time for all defendants to respond
to any complaint be postponed until further order of the Court.
Thus, the Company has not been required to answer any of the
complaints, and no discovery has been served on the Company. In
accordance with Judge Scheindlins orders at further status
conferences in March and April, the appointed lead
plaintiffs counsel filed amended, consolidated complaints
in the IPO Lawsuits on April 19, 2002. However, Judge
Scheindlin does not expect any of the defendants to file motions
to dismiss the amended, consolidated complaints until at least
summer of 2002.


Our current litigation proceedings are described
in Notes 15 and 16 of Notes to Unaudited Condensed Consolidated
Financial Statements and in our Quarterly Report on
Form 10-Q for the quarterly period ended September 30,
2001.

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CLARENT CORPORATION






SIGNATURES


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



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



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

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

Date:     May 8,
2002

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