<PAGE>

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

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

                                   FORM 10-Q

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

   For the quarterly period ended June 30, 2001

                                       OR

[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
   ACT OF 1934

   For the transition period from          to

                        Commission File Number 000-26441

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

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

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

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

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

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

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

   The number of shares outstanding of the Registrant's Common Stock, $0.001
par value, was 40,685,480 at July 31, 2001.

   This report consists of 31 pages of which this page is number 1.

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

                              CLARENT CORPORATION

                                FORM 10-Q INDEX

<TABLE>
<CAPTION>
                                                                       Page No.
                                                                       --------
<S>                                                                    <C>
Part I: Financial Information

  Item 1: Financial Statements (Unaudited)

    Condensed Consolidated Balance Sheets as of June 30, 2001 and
     December 31, 2000................................................     3

    Condensed Consolidated Statements of Operations for the Three and
     Six Month Periods Ended June 30, 2001 and 2000...................     4

    Condensed Consolidated Statement of Cash Flows for the Six Month
     Periods Ended June 30, 2001 and 2000.............................     5

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

  Item 2: Management's Discussion and Analysis of Financial Condition
   and Results of Operations..........................................    12

  Item 3: Quantitative and Qualitative Disclosures About Market Risk..    27

Part II: Other Information............................................    29

  Item 1: Legal Proceedings...........................................    29

  Item 4: Submission of Matters to a Vote of Security Holders.........    29

  Item 5: Other Information...........................................    29

  Item 6: Exhibits and Reports on Form 8-K............................    30

  Signatures..........................................................    31
</TABLE>

                                       2
<PAGE>

                         PART I. FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS

                              CLARENT CORPORATION

                     CONDENSED CONSOLIDATED BALANCE SHEETS
                                 (In thousands)

<TABLE>
<CAPTION>
                                                         June 30,   December 31,
                                                           2001         2000
                                                        ----------- ------------
                                                        (Unaudited)  (Audited)
                        ASSETS
                        ------
<S>                                                     <C>         <C>
Current assets:
  Cash and cash equivalents............................  $158,109     $185,627
  Restricted cash......................................    10,000           --
  Short-term investments...............................    17,945       74,987
  Accounts receivable, net.............................    99,204       61,610
  Inventories..........................................    33,663       17,487
  Prepaid expenses and other current assets............    17,146       11,342
                                                         --------     --------
    Total current assets...............................   336,067      351,053
  Investments..........................................    12,370       14,479
  Property and equipment, net..........................    51,980       36,630
  Goodwill, net........................................    78,835       93,644
  Purchased intangible assets, net.....................    33,266       38,057
  Deferred tax assets..................................    16,306       15,988
  Other assets.........................................    13,359        4,517
                                                         --------     --------
                                                         $542,183     $554,368

<CAPTION>
         LIABILITIES AND STOCKHOLDERS' EQUITY
         ------------------------------------
<S>                                                     <C>         <C>
Current liabilities:
  Line of credit.......................................  $ 10,014     $     --
  Accounts payable.....................................    24,549       14,337
  Deferred revenue.....................................    23,844       13,947
  Accrued liabilities..................................    25,439       29,386
  Restructuring accrual................................     5,011           --
                                                         --------     --------
    Total current liabilities..........................    88,857       57,670
Deferred tax liabilities...............................    14,920       14,534
Restructuring accrual--long term.......................     6,795           --

Stockholders' equity:
  Common stock.........................................   586,963      585,281
  Deferred compensation................................    (5,795)      (9,740)
  Accumulated other comprehensive loss.................      (975)        (326)
  Accumulated deficit..................................  (148,582)     (93,051)
                                                         --------     --------
    Total stockholders' equity.........................   431,611      482,164
                                                         --------     --------
                                                         $542,183     $554,368
                                                         ========     ========
</TABLE>

     See accompanying notes to condensed consolidated financial statements.

                                       3
<PAGE>

                              CLARENT CORPORATION

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

<TABLE>
<CAPTION>
                                           Three Months     Six Months Ended
                                          Ended June 30,        June 30,
                                         -----------------  -----------------
                                           2001     2000      2001     2000
                                         --------  -------  --------  -------
<S>                                      <C>       <C>      <C>       <C>
Net revenue:
  Product and software.................. $ 56,158  $25,255  $111,693  $47,333
  Service...............................    6,994    3,058    12,651    5,563
                                         --------  -------  --------  -------
    Total revenue.......................   63,152   28,313   124,344   52,896
Cost of revenue:
  Product and software..................   27,501    9,020    42,738   17,331
  Service...............................    5,048    2,080     8,296    3,718
                                         --------  -------  --------  -------
    Total cost of revenue...............   32,549   11,100    51,034   21,049
                                         --------  -------  --------  -------
  Gross profit..........................   30,603   17,213    73,310   31,847
                                         --------  -------  --------  -------
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............    8,239    2,583    16,651    5,024
  Amortization of compensation..........    1,925      932     3,945    2,310
  Amortization of goodwill & other
   intangibles..........................    9,109      225    18,218      451
  Restructuring costs...................   14,141       --    14,141       --
                                         --------  -------  --------  -------
    Total operating expenses............   74,690   21,125   133,814   40,565
                                         --------  -------  --------  -------
Loss from operations....................  (44,087)  (3,912)  (60,504)  (8,718)
Other income, net.......................    2,841    4,399     5,609    8,514
                                         --------  -------  --------  -------
Net income (loss) before provision for
 income taxes...........................  (41,246)     487   (54,895)    (204)
Provision for income taxes..............     (321)    (259)     (636)    (284)
                                         --------  -------  --------  -------
Net income (loss)....................... $(41,567) $   228  $(55,531) $  (488)
                                         ========  =======  ========  =======
Basic and diluted net income (loss)
per share............................... $  (1.03) $  0.01  $  (1.39) $ (0.02)
                                         ========  =======  ========  =======
Shares used in computing basic net
 income (loss) per share................   40,258   32,934    39,941   32,174
                                         ========  =======  ========  =======
Shares used in computing diluted net
 income (loss) per share................   40,258   38,166    39,941   32,174
                                         ========  =======  ========  =======
</TABLE>

     See accompanying notes to condensed consolidated financial statements.

                                       4
<PAGE>

                              CLARENT CORPORATION

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

<TABLE>
<CAPTION>
                                                            Six Months Ended
                                                                June 30,
                                                            ------------------
                                                              2001      2000
                                                            --------  --------
<S>                                                         <C>       <C>
Operating activities:
  Net loss................................................. $(55,531) $   (488)
    Adjustments to reconcile net loss to net cash provided
     by (used in) operating activities:
    Depreciation...........................................    9,202     3,481
    Amortization...........................................   23,545     2,761
    Changes in operating assets and liabilities:
      Accounts receivable..................................  (37,594)   (6,384)
      Inventories..........................................  (16,176)   (6,200)
      Prepaid expenses and other current assets............   (5,804)      (62)
      Other assets.........................................   (2,760)   (1,645)
      Accounts payable and accrued liabilities.............    6,665     8,799
      Deferred revenue.....................................    9,897       915
      Restructuring accrual................................   11,806        --
                                                            --------  --------
        Net cash provided by (used in) operating
         activities........................................  (56,750)    1,177
                                                            --------  --------
Investing activities:
  Purchases of short-term investments......................  (27,100)  (80,836)
  Purchases of long-term investments.......................   (2,291)       --
  Sale and maturities of investments.......................   84,121    45,609
  Sale of long term investments............................    3,000        --
  Note receivable from a related party.....................   (5,000)       --
  Purchases of property and equipment......................  (24,504)   (8,443)
                                                            --------  --------
        Net cash provided by (used in) investing
         activities........................................   28,226   (43,670)
                                                            --------  --------
Financing activities:
  Proceeds from line of credit.............................   10,000        --
  Proceeds from issuance of common stock...................    1,682     2,872
  Restricted cash..........................................  (10,000)       --
                                                            --------  --------
        Net cash provided by financing activities..........    1,682     2,872
                                                            --------  --------
Effect of exchange rate changes on cash and cash
 equivalents...............................................     (676)       54
                                                            --------  --------
Net decrease in cash and cash equivalents..................  (27,518)  (39,567)
Cash and cash equivalents at beginning of period...........  185,627   238,724
                                                            --------  --------
Cash and cash equivalents at end of period................. $158,109  $199,157
                                                            ========  ========
Supplemental disclosure of non-cash investing activities:
  Common stock received in exchange for settlement of
   accounts receivable.....................................       --  $  1,500
</TABLE>

     See accompanying notes to condensed consolidated financial statements.

                                       5
<PAGE>

                              CLARENT CORPORATION

         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

   The accompanying unaudited condensed consolidated financial statements of
Clarent Corporation (the "Company") as of June 30, 2001 and for the three and
six month periods ended June 30, 2001 and 2000 have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the
opinion of management, the condensed consolidated financial statements include
all adjustments (consisting only of normal recurring accruals) that management
considers necessary for a fair presentation of the results of operations for
the interim periods shown. The results of operations for such periods are not
necessarily indicative of the results expected for the full fiscal year or for
any future period. These financial statements should be read in conjunction
with the consolidated financial statements and related notes included in the
Company's Annual Report on Form 10-K, filed with the Securities and Exchange
Commission for the fiscal year ended December 31, 2000 and those included in
the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March
31, 2001. Certain prior period balances have been reclassified to conform to
current period presentation.

2. Financial Instruments

   Available-for-sale securities are carried at fair value, with the unrealized
gains or losses reported as a separate component of stockholder's equity.
Realized gains and losses on sales of available-for-sale securities were not
material for the six months ended June 30, 2001.

3. Inventories

   Inventories are comprised of the following (in thousands):

<TABLE>
<CAPTION>
                                                             June
                                                              30,   December 31,
                                                             2001       2000
                                                            ------- ------------
      <S>                                                   <C>     <C>
      Raw materials........................................ $16,227   $10,901
      Work-in-process......................................     110        83
      Finished goods.......................................  17,326     6,503
                                                            -------   -------
                                                            $33,663   $17,487
                                                            =======   =======
</TABLE>

4. Long-Term Investments

   The Company invests in equity instruments of privately held companies for
the promotion of business and strategic objectives. The Company has also
invested in a venture capital management fund. Except for $1.5 million received
in settlement of accounts receivable, all of the Company's investments are
valued at the cash paid for the equity received, net of impairment losses.
Impairment losses are recorded when events and circumstances indicate that such
assets might be impaired and the decline in value is other than temporary.
During the first half of 2001, the Company recorded impairment losses of $1.4
million.

   Through June 30, 2001 the Company had invested $6.75 million in a venture
capital management fund. The Company is committed to invest an additional $8.25
million in the venture capital management fund 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.

                                       6
<PAGE>

                              CLARENT CORPORATION

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


5. Comprehensive Income (Loss)

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

<TABLE>
<CAPTION>
                                               Three Months
                                                ended June       Six Months
                                                    30,        ended June 30,
                                               --------------  ---------------
                                                 2001    2000    2001    2000
                                               --------  ----  --------  -----
   <S>                                         <C>       <C>   <C>       <C>
   Net income (loss).......................... $(41,567) $228  $(55,531) $(488)
   Other comprehensive income (loss):
     Translation adjustments..................     (372) (114)     (628)   (21)
     Unrealized gain (loss) on Investments....      (14)   16       (21)   (29)
                                               --------  ----  --------  -----
   Comprehensive income (loss)................ $(41,953) $130  $(56,180) $(538)
                                               ========  ====  ========  =====
</TABLE>

6. Stockholders' Equity

   On June 7, 2001, the Company's stockholders approved an amendment to the
1999 Amended and Restated Equity Incentive Plan (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 including the 987,966 shares resulting from the
evergreen provision of the 1999 Plan added on January 31, 2001.

   On February 14, 2001, the Company cancelled approximately 2.89 million
outstanding options under an Option Cancellation and Regrant program (the
"Program") for employees. Replacement options to purchase approximately 635,000
shares of common stock were granted to employees on February 15, 2001 at the
fair market value of $13.625 per share. These shares will vest in full on
August 15, 2001 and will expire if not exercised before November 15, 2001. The
options granted on February 15, 2001 are subject to variable accounting in
accordance with the requirements of Financial Interpretation No. 44,
"Accounting for Certain Transactions Involving Stock Compensation--an
Interpretation of APB 25" (FIN 44) until they are exercised or expire.
Additional options for approximately 938,000 shares are expected to be granted
to remaining participants under the Program on August 17, 2001, at the then
current fair market value. These additional options will vest ratably each
month over a 24 month period and will have a 10 year term. The August grants
will not be subject to variable accounting. In accordance with FIN 44, there
were no charges to earnings for the replacement stock options during the six
months ended June 30, 2001 as the option prices were greater than the fair
market value of the Company's stock as of June 30, 2001.

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

7. Segments of an Enterprise and Related Information

   The Company develops, manufactures and sells software based Internet
protocol (IP) communication solutions for IP networks. During the first quarter
of 2001, the Company implemented a Business Unit organizational structure and
has allocated the product and software revenue to the three different industry
segments. The industry segments are defined as: Carrier, Enterprise and Local
Access. These segments were established to enable increased focus on the
marketing, product development and operational strategies for each different
industry that the Company participates in. Service revenue was not allocated to
the segments. The Company previously reported revenue as being derived from a
single industry segment. In May and June 2001, the Company streamlined its
operations, initially consolidating two of the three Business Units and
subsequently reorganizing its workforce along functional lines. Notwithstanding
these changes, the Company continues to report and track revenue for the three
different industry segments: Carrier, Enterprise and Local Access.

                                       7
<PAGE>

                              CLARENT CORPORATION

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


   The prior year comparative information has been restated to reflect the
revised structure. Net revenue for non-U.S. locations were substantially the
result of export sales from the U.S. For the three and six months ended June
30, 2001, sales to customers in Taiwan contributed 48% and 53%, respectively,
of total net revenue.

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

<TABLE>
<CAPTION>
                                                Three Months   Six Months ended
                                               ended June 30,      June 30,
                                               --------------- ----------------
                                                2001    2000     2001    2000
                                               ------- ------- -------- -------
<S>                                            <C>     <C>     <C>      <C>
Net Revenue by Geographic Region:
  United States............................... $ 4,114 $ 8,635 $ 11,030 $17,606
  Other Americas..............................   1,401   1,324    3,117   2,825
  Europe, Middle East & Africa................   8,559   4,924   13,623  10,744
  Asia Pacific................................  49,078  13,430   96,574  21,721
                                               ------- ------- -------- -------
    Total..................................... $63,152 $28,313 $124,344 $52,896
                                               ------- ------- -------- -------
Net Revenue by Business Unit:
  Product and software revenue
   Local Access............................... $36,222 $    -- $ 68,740 $    --
   Carrier....................................  15,244  25,255   31,612  47,333
   Enterprise.................................   4,692      --   11,341      --
                                               ------- ------- -------- -------
                                                56,158  25,255  111,693  47,333
  Service.....................................   6,994   3,058   12,651   5,563
                                               ------- ------- -------- -------
                                               $63,152 $28,313 $124,344 $52,896
                                               ======= ======= ======== =======
</TABLE>

                                       8
<PAGE>

                              CLARENT CORPORATION

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


8. Net Income (Loss) Per Share

   Basic net income (loss) per share and diluted net loss per share are
computed by dividing net income (loss) by the weighted average number of shares
of common stock outstanding during the period less outstanding shares subject
to a right of repurchase by the Company. Diluted net income per share is
calculated using the weighted average number of outstanding shares of common
stock plus dilutive common stock equivalents. The following table sets forth
the computation of basic and diluted income (loss) per share:

<TABLE>
<CAPTION>
                                            Three Months     Six Months Ended
                                           Ended June 30,        June 30,
                                          -----------------  -----------------
                                            2001     2000      2001     2000
                                          --------  -------  --------  -------
                                           (in thousands, except per share
                                                      amounts)
   <S>                                    <C>       <C>      <C>       <C>
   Numerator:
     Net loss...........................  $(41,567) $   228  $(55,531) $  (488)
                                          --------  -------  --------  -------
   Denominator:
     Weighted average shares
      outstanding.......................    40,258   33,075    39,941   32,483
     Less shares subject to repurchase..        --     (141)       --     (309)
                                          --------  -------  --------  -------
   Denominator for basic net income
    (loss) and diluted net loss per
    share...............................    40,258   32,934    39,941   32,174
                                          --------           --------  -------
     Effect of Dilutive Securities:
     Option.............................              5,090
     Warrants...........................                  1
     Shares subject to repurchase.......                141
                                                    -------
   Denominator for diluted net income
    per share...........................             38,166
                                                    -------
   Net income (loss) per share--basic...  $  (1.03) $  0.01  $  (1.39) $ (0.02)
                                          ========  =======  ========  =======
   Net income (loss) per share--
    diluted.............................  $  (1.03) $  0.01  $  (1.39) $ (0.02)
                                          ========  =======  ========  =======
</TABLE>

   The Company has excluded all warrants for common stock, outstanding stock
options and shares subject to repurchase from the calculation of diluted loss
per share of common stock 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. Note receivable from a Related Party

   In January 2001, the Company advanced $5 million to Clarent Finance, L.L.C.,
a leasing company, for a six year eleven percent junior subordinated debenture.
The interest shall be accrued and will be repaid by November 30, 2006. The
principal will be repaid in 16 equal quarterly payments of $312,500 each,
commencing January 2003, to be repaid in full by November 30, 2006. The note is
valued at cost and there have been no indicators of permanent impairment.

10. Line of credit

   During June, 2001 the Company obtained a $10 million line of credit with a
financial institution. 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 one-half of one percentage point above the prime rate
(6.75% in total at June 30, 2001). Under the terms of this arrangement the
Company must maintain a restricted cash balance of $10 million. The line of
credit expires on June 30, 2002.

                                       9
<PAGE>

                              CLARENT CORPORATION

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


11. Income Taxes

   The provision for income taxes of $321,000 and $636,000 for the three and
six month periods ended June 30, 2001 consist of foreign income tax provided on
the profits attributable to the Company's foreign operations as well as U.S.
state taxes. Our effective tax rates differed from the combined federal and
state statutory rates due primarily to acquisition charges that were non-
deductible for tax purposes.

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" (FAS 133), as amended by FAS 138, which
provides a comprehensive and consistent standard for the recognition and
measurement of derivatives and hedging activities. The Company adopted FAS 133,
beginning January 1, 2001 and it did not have an impact on the Company's
results of operations or financial condition as the Company held no derivative
financial instruments and did not engage in hedging activities.

   In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, "Business Combination" (FAS 141) and
Statement of Financial Accounting Standards No. 142 "Goodwill and Other
Intangible Assets" (FAS 142). These standards become effective for fiscal years
beginning after December 15, 2001. 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 ($0.73 per
share) per year.

   The new rules also require business combinations initiated after June 30,
2001 to be accounted for using the purchase method of accounting and goodwill
acquired after June 30, 2001 will not be amortized. Goodwill existing at June
30, 2001 will continue to be amortized through the end of fiscal 2001. During
2002, the Company will test goodwill for impairment under the new rules
applying a fair value based test. Through the end of fiscal 2001, the Company
will test goodwill for impairment using the current method, which uses an
undiscounted cash flow test.

13. Restructuring Accruals and Inventory Write-Down

   On August 10, 2000 the Company acquired ACT Networks, Inc., a leading
provider of multi-service access and voice/data integration products that
enable the convergence of voice, video and data onto one managed network. In
accordance with a plan that existed at the time of the acquisition, the Company
established accruals for merger related restructuring costs. At June 30, 2001,
$7.8 million in accruals remained. These accruals are to provide $4.0 million
for the costs of exiting non-cancelable operating leases for the Calabasas,
California manufacturing facility, $2.6 million for excess inventory to be
scrapped upon discontinuation of certain product lines, $0.3 million for
involuntary employee termination costs related to duplicative management
personnel in the ACT organization and $0.9 million in fixed assets disposition
costs for disposal of manufacturing equipment and leasehold improvements in the
Calabasas facility. These costs relate to the plan to exit the manufacturing
activities 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. We are currently disposing of the remaining manufacturing equipment.
During the six months ended June 30, 2001, severance costs of $0.8 million were
charged against the accrual.

                                       10
<PAGE>

                              CLARENT CORPORATION

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


   On May 14, 2001, the Company announced a reduction in workforce by
approximately 10% and a streamlining of its business units to achieve cost
savings and operating efficiencies in accordance with previously stated goals.
The Company 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 $2.9 million of severance and other
employee related costs for approximately 90 employees and 20 contractors, an
accrual for excess facility space of $10.8 million for losses incurred to sub-
lease an excess facility and approximately $0.4 million of other exit costs. At
June 30, 2001, the remaining restructuring accrual was $11.8 million as
approximately $1.7 million in severance and other employee related costs had
been made. The entire $14.1 million charge is expected to be paid in cash
through July 2006.

   A charge for inventory write-downs totaling $6.1 million was taken during
the second quarter of 2001 reflecting the redirection of the Company's focus
towards different product lines.

14. 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 reducing of its workforce by approximately 27%. An
estimate of the costs associated with this restructuring has not been
determined.

 Convertible Bridge Note

   In July 2001, the Company advanced, pursuant to a convertible bridge note,
approximately $38 million to a value added service provider partner. The note
matures in six months, provides for interest at the rate of five percent (5%)
per annum and is convertible, at the holder's option, into securities of the
debtor at the price set forth in the debtor's next financing. In connection
with the bridge loan investment, the Company also entered into a partnership
agreement with the value added service provider. The Company may permit others
to assume a portion of this bridge loan investment.

15. Litigation (lawsuits)

   Beginning July 12, 2001, a number of purported stockholder class action
lawsuits were filed in the United States District Court for the Southern
District of New York against us, several of our officers and directors, and
certain underwriters of our initial public offering. These lawsuits are
essentially identical and purport to bring suit on behalf of all purchasers of
our common stock between July 1, 1999, the date of our initial public offering,
and December 6, 2000 or July 2, 2001. The plaintiffs allege that our
prospectus, incorporated in the Registration Statement on Form S-1 filed with
the Securities and Exchange Commission, was materially false and misleading
because it failed to disclose, among other things, that certain underwriters
(i) allegedly required several investors who wanted large allocations of public
offering securities to pay undisclosed and excessive underwriters' compensation
in the form of increased brokerage commissions and (ii) allegedly required
investors to agree to buy shares of our securities after the public offering
was completed at predetermined prices as a precondition to obtaining public
offering allocations. As a result of the alleged omissions in our prospectus,
the plaintiffs claim violations of Sections 11, 15 and 20 of the Securities Act
of 1933, as amended and Section 10(b) of the Securities Exchange Act of 1934,
as amended. We anticipate that these cases will be consolidated into a single
class action. We believe that we have meritorious defenses and intend to
vigorously defend ourselves against these allegations.

                                       11
<PAGE>

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

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

   You should read the following discussion in conjunction with Clarent
Corporation's Unaudited Condensed Consolidated Financial Statements and related
Notes. Certain statements contained in this Quarterly Report on Form 10-Q,
including, without limitation, statements containing the words "believes",
"anticipates", "estimates", "expects", and words of similar import, constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. You should not place undue reliance on these
forward-looking statements. Our actual results could differ materially from
those anticipated in these forward-looking statements for many reasons,
including the risks faced by us described below and elsewhere in this Quarterly
Report, and in other documents we file with the SEC.

Overview

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

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

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

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

                                       12
<PAGE>

Results of Operations

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

<TABLE>
<CAPTION>
                                                   Three
                                                  Months       Six Months
                                                Ended June     Ended June
                                                    30,            30,
                                                -------------  -------------
                                                2001    2000   2001    2000
                                                -----   -----  -----   -----
   <S>                                          <C>     <C>    <C>     <C>
   As a Percentage of Net Revenue:
     Product and software......................  88.9%   89.2%  89.8%   89.5%
     Service...................................  11.1    10.8   10.2    10.5
                                                -----   -----  -----   -----
       Total revenue........................... 100.0   100.0  100.0   100.0
     Product and software......................  43.5    31.9   34.3    32.8
     Service...................................   8.0     7.3    6.7     7.0
                                                -----   -----  -----   -----
       Total cost of revenue...................  51.5    39.2   41.0    39.8
                                                -----   -----  -----   -----
   Gross margin................................  48.5    60.8   59.0    60.2
                                                -----   -----  -----   -----
   Operating expenses:
     Research and development..................  26.1    19.7   25.1    18.7
     Sales and marketing.......................  39.3    41.7   39.9    43.2
     General and administrative................  13.0     9.1   13.4     9.5
     Amortization of compensation..............   3.1     3.3    3.2     4.4
     Amortization of goodwill & intangible
      assets...................................  14.4     0.8   14.7     0.9
     Restructuring costs.......................  22.4      --   11.4      --
                                                -----   -----  -----   -----
       Total operating expenses................ 118.3    74.6  107.7    76.7
                                                -----   -----  -----   -----
   Loss from operations........................ (69.8)  (13.8) (48.7)  (16.5)
   Other income, net...........................   4.5    15.5    4.5    16.1
                                                -----   -----  -----   -----
   Net income (loss) before provision for
    income taxes............................... (65.3)    1.7  (44.2)   (0.4)
   Provision for income taxes..................  (0.5)   (0.9)  (0.5)   (0.5)
                                                -----   -----  -----   -----
   Net income (loss)........................... (65.8)%   0.8% (44.7)%  (0.9)%
                                                =====   =====  =====   =====
</TABLE>

Net revenue

   Net revenue increased 123% to $63.2 million in the three months ended June
30, 2001 from $28.3 million in the three months ended June 30, 2000. Net
revenue for the six months ended June 30, 2001 increased by 135% to $124.3
million from $52.9 million for the same period in 2000. The increase in product
and software sales of 122% to $56.2 million in the three months ended June 30,
2001 from $25.3 million in the three month period ended June 30, 2000 and of
136% to $111.7 million in the six months ended June 30, 2001 from $47.3 million
in the six months ended June 30, 2000 was primarily attributable to sales of
new products. Sales to Local Access customers, predominately of the softswitch
for the Company's OpenAccess solution, contributed $36.2 million or
approximately 57% of net revenue for the first quarter of 2001 and $68.7
million or approximately 55% of net revenue for the six months ended June 30,
2001. Sales to the Enterprise market of products acquired as the result of the
ACT Networks Inc. acquisition in August 2000, including the NetPerformer
products, contributed $4.7 million and $11.3 million, approximately 7% and 9%
of net revenue during the three and six month periods ended June 30, 2001.
Sales to the Carrier market contributed $15.2 million and $31.6 million or 24%
and 25% of net revenue in the three and six month periods ended June 30, 2001
as compared to $25.3 million and $47.3 million or 89% and 89% of net revenue in
the three and six month periods ended June 30, 2000. Service revenue from
maintenance and support increased by 129% and 127% to $7.0 million and $12.7
million in the three and six month periods ended June 30, 2001 from $3.1
million and $5.6 million for the three and six month periods ended June 30,
2000. The increase in maintenance and support revenue is attributable to both
the increase in product sales and the renewal of support contracts

                                       13
<PAGE>

with existing customers. Two customers accounted for approximately 42% in
aggregate of our net revenue for the six months ended June 30, 2001. A
significant portion of our revenue was derived from sales to customers in
Taiwan (53%) during the six months ended June 30, 2001.

Cost of Revenue

   Cost of revenue increased approximately 193% and 142% to $32.5 million and
$51.0 million in the three and six months ended June 30, 2001 from $11.1
million and $21.0 million in the three and six months ended June 30, 2000. This
increase was primarily attributable to increased revenue. Product and software
costs increased by 205% and 147% to $27.5 million and $42.7 million in the
three and six months ended June 30, 2001 from $9.0 million and $17.3 million in
the same periods of 2000. Maintenance and support 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 as we
increased headcount to service the increased customer base. Gross margin
decreased to 48.5% and 59.0% for the three and six month periods ended June 30,
2001 compared to 60.8% and 60.2% for the corresponding periods in 2000. The
decrease in gross margin was largely due to a one time charge to write down
inventory during second quarter 2001 of $6.1 million or 10% and 5% of gross
margin for the three and six month periods ended June 30, 2001 as a result of
changes in forecasted demand which led to our decision to discontinue the sale
of certain products. Our gross margins have also been affected by significant
erosion in the average selling prices of our products due to a number of
factors, including competitive pricing pressures, rapid technological changes
and sales discounts and we expect these to continue in the future.

   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. In particular the new OpenAccess solution
contributed a significant proportion of hardware revenue at a lower margin than
we have historically experienced. We expect gross margin to be adversely
affected by increases in material or labor costs, costs related to maintaining
higher inventory balances, changes in the geographical mix of customers and
changes in the channels of distribution. We expect to continue to increase the
percentage of sales to distributors, which 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.
Research and development expenses increased as a percentage of revenue to 26.1%
and 25.1% for the three and six months ended June 30, 2001 from 19.7% and 18.7%
in the three months ended June 30, 2000. The increases in research and
development expenses from period to period were attributable primarily to
increases in the number of research and development employees, excluding
contractors, to 287 at June 30, 2001 from 104 at June 30, 2000.

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 decreased to 39.3% and 39.9% for the three and six months ended June
30, 2001 from 41.7% and 43.2%% in the three and six months ended June 30, 2000.
The decrease in sales and marketing costs as a percentage of revenue is
attributable to the significant increase in revenue.

                                       14
<PAGE>

General and Administrative Expenses

   General and administrative expenses increased 219% and 231% to $8.2 million
and $16.7 million in the three and six months ended June 30, 2001 from $2.6
million and $5.0 million in the three and six months ended June 30, 2000.
General and administrative expenses as a percentage of revenue increased to
13.0% and 13.4% for the three and six months ended June 30, 2001 from 9.1% and
9.5% 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 and an increase in
the reserve for doubtful accounts in connection with the higher sales and
accounts receivable balances. The general and administrative employee headcount
increased to 117 at June 30, 2001 as compared to 60 at June 30, 2000. The bad
debt expense was $2.0 million and $4.6 million during the three months and six
months ended June 30, 2001 as compared to $95,000 and $225,000 during the three
and six month periods ended June 30, 2000.

Amortization of Compensation

   For the three and six months ended June 30, 2001, amortization of
compensation was $1.9 million and $3.9 million as compared to $0.9 million and
$2.3 million in the three and six months ended June 30, 2000. Amortization of
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 acquisition at prices below the deemed fair value of our common
stock. The deferred compensation is being amortized using the graded method
over the vesting period of the stock options.

   On February 14, 2001, the Company cancelled approximately 2.89 million
outstanding options under an Option Cancellation and Regrant program (the
"program") for employees. Replacement options to purchase approximately 635,000
shares of common stock were granted to employees on February 15, 2001 at the
fair market value of $13.625 per share. These shares will vest in full on
August 15, 2001 and will expire if not exercised before November 15, 2001. The
options granted on February 15, 2001 are subject to variable accounting in
accordance with the requirements of FIN 44, as defined in Note 12, until they
are exercised or expire. Additional options for approximately 938,000 shares
are expected to be granted to remaining participants under the program on
August 17, 2001, at the then current fair market value. These additional
options will vest ratably each month over a 24 month period and will have a 10
year term. The August grants will not be subject to variable accounting. There
were no charges to earnings for the replacement stock options during the six
months ended June 30, 2001 as the option prices were greater than the fair
market value of the Company's stock as of June 30, 2001. The replacement
options could result in significant future charges to the Company, if the fair
market value of the Company's stock becomes higher than the grant price of
$13.625 per share.

Amortization of Goodwill and Other Intangibles

   Amortization of goodwill and purchased intangible assets for the three and
six months ended June 30, 2001 was $9.1 million and $18.2 million as compared
to $0.2 million and $0.5 million 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 and ACT Networks acquisitions in 2000. We are amortizing
the goodwill and purchased intangible assets using the straight-line method
over periods ranging from three to five years from the dates of acquisition.

Status of R&D projects acquired from ACT Networks

   We believe that the projections used in performing valuations with respect
to the research and development projects acquired from ACT Networks are still
materially valid, however, there can be no assurance that the projected results
will be achieved. We expect to continue the development of each project

                                       15
<PAGE>

not yet completed with the exception of the DynaStar project and believe that
there is a reasonable chance of successful completion. However, if we do not
successfully deploy commercially accepted technology or products based on the
IPRD, our operating results could be adversely affected in future periods.
Additionally, the value of other intangible assets could become impaired.
During July, 2001 we announced a restructuring 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. (in millions):

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

Other Income, net

   Other income, net was $2.8 million and $5.6 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 from the funds raised in our initial and secondary public
offerings. 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 $750,000 and $1.4 million for the three and six month periods
ended June 30, 2001. Management expects interest income to decrease in the
remaining quarters of 2001 as cash resources are invested in working capital
and capital expenditures.

Provision for Income Taxes

   The provisions for income taxes of $321,000 and $636,000 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 the Company's foreign operations and U.S. State taxes.
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

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

   Net cash used in operating activities was $56.8 million in the six months
ended June 30, 2001 compared to proceeds of $1.2 million from operating
activities in the same period of 2000. The net cash used in operating
activities in 2001 was principally the result of the net loss of $55.5 million,
the increase in trade accounts receivable of $37.6 million, the increase in
inventories of $16.2 million and increases in prepaid and other assets of $8.6
million partially offset by adjustments for amortization and depreciation of
$32.8 million, increases in accounts payable and accrued liabilities of $6.7
million, increases in deferred revenue of $9.9 million and the increase in the
restructuring accrual of $11.8 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. The increase in accounts receivable and deferred revenue are the result
of increased sales of new and existing products and services both through
growth and acquisitions and an

                                       16
<PAGE>

increase in the aging of receivables with DSO at approximately 143 days at June
30, 2001 as compared to 104 days at December 31, 2000. The increase in
inventory is largely due to a ramp up in purchasing to meet demand forecasts
for a sales mix of certain products that was not achieved.

   Net cash provided by operating activities of $1.2 million for the six months
ended June 30, 2000 was attributable primarily to the net loss of $0.5 million,
increases in accounts receivable of $6.4 million, increases in inventories of
$6.2 million and increases in prepaid and other current assets of $1.6 million
offset by amortization and depreciation of $6.2 million, increases in accounts
payable and accrued liabilities of $8.8 million and an increase in deferred
revenue of $0.9 million. The increase in inventories at June 30, 2000 was in
anticipation of expected growth in product revenue as well as to offset limited
supply issues. The increase in accounts receivable was directly attributable to
a significant portion of our increased revenue occurring during the last month
of the period.

   Net cash from investing activities was approximately $28.2 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
a note receivable from a related party of $5.0 million and purchases of
property and equipment and expenditures on leasehold improvements totaling
$24.5 million. Cash used in investing activities for the three months ended
June 30, 2000 included purchases of property and equipment totaling $8.4
million.

   Net cash from financing activities was $1.7 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 million, restricted cash of $10
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.

   We believe that our current cash, cash equivalents, restricted cash and
short-term investment balances of $168.1 million at June 30, 2001 will be
sufficient to meet our anticipated cash needs for working capital and capital
expenditures for at least the next 12 months. If our current cash, cash
equivalents and short-term investment balances are insufficient to satisfy our
liquidity requirements, we may seek to sell additional equity or debt
securities or obtain additional borrowings through our line of credit. If
additional funds are raised through the issuance of debt securities, these
securities could have rights, preferences and privileges senior to holders of
common stock, and the terms of this debt could impose restrictions on our
operations. The sale of additional equity or convertible debt securities could
result in additional dilution to our stockholders, and we cannot be certain
that additional financing will be available in amounts or on terms acceptable
to us, if at all. If we are unable to obtain this additional financing, we may
be required to reduce the scope of our planned product development and
marketing efforts, which could harm our business, financial condition and
operating results.

             RISK FACTORS THAT MAY IMPACT FUTURE OPERATING RESULTS

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

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

   We are an early-stage company in the emerging IP telephony market. Because
of our limited operating history, we have limited insight into trends that may
emerge in our market and affect our business. The revenue

                                       17
<PAGE>

and income potential of the IP telephony market, and our business in
particular, are unproven. As a result of our limited operating history, we have
limited financial data that you can use to evaluate our business. You must
consider our prospects in light of the risks, expenses and challenges we might
encounter because we are at an early stage of development in a new and rapidly
evolving market. Unless we generate significant revenue growth, our increasing
expenses will significantly harm our financial position.

   As of June 30, 2001, we had an accumulated deficit of $148.6 million. We
expect to incur operating losses for the foreseeable future, and these losses
may be substantial. Further, we expect to incur negative operating cash flow in
the future. Generally, in the long term, we expect to continue to increase
capital expenditures and our research and development, sales and marketing and
general and administrative expenses. We will need to generate significant
revenue growth to achieve profitability and positive operating cash flows. Even
if we do achieve profitability and positive operating cash flows, we may not be
able to sustain or increase profitability or positive operating cash flows on a
quarterly or annual basis.

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

<TABLE>
<CAPTION>
         Operating Loss Period
            (in thousands)                                  Period
         ---------------------                  ------------------------------
         <S>                                    <C>
               $(60,504)                        Six months ended June 30, 2001
                (70,274)                        Year ended December 31, 2000
                (33,163)                        Year ended December 31, 1999
                 (5,824)                        Year ended December 31, 1998
                 (2,129)                        Year ended December 31, 1997
</TABLE>

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

   Our quarterly and annual operating results have varied significantly in the
past and will likely vary significantly in the future. As a result, our future
operating results are difficult to predict. Further, we incur expenses relying
in significant part on our expectations of our future revenue. As a result of
this and as a result of continued integration of acquired operations, our
expense levels may increase in the short term. Therefore, an unanticipated
decline in revenue for a particular quarter may disproportionately affect our
net income or loss in that quarter.

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

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

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

                                       18
<PAGE>

connection with this sharpened focus, adopted a functional organizational
structure, resulting in a reduction of our workforce. If management is unable
to utilize our reduced workforce effectively, our financial results may suffer.

If the strategic restructuring of our organization is not effective, our
financial results and business could suffer.

   In response to changes in industry and market conditions we are
restructuring, and may continue to restructure, our activities to more
strategically realign our resources and improve our operational efficiency. Our
restructuring plan is based on certain assumptions regarding the cost structure
of our business and the nature and severity of the current industry adjustment
which my not prove to be accurate. Our restructuring plan has involved the
implementation of a number of initiatives to streamline our business, improve
operational efficiency and refine our focus on the local access or "last mile"
markets. We cannot assure you that our restructuring plan will result in
sufficient cost reduction or greater operational efficiency in light of current
or future capital markets and telecommunications industry conditions. As well,
we cannot assure you that we will not be required to refine, expand or extend
our restructuring plan, or that we will improve our operational efficiency as a
result of our restructuring plan. In addition, we cannot assure you that we
will be able to successfully utilize our reduced workforce resources
effectively or that our management will be effective during our restructuring.
Current and additional restructuring actions may result in further cash and/or
non-cash charges, which could adversely affect our business, results of
operations and financial condition.

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

   We compete in a new, rapidly evolving and highly competitive and fragmented
market. We expect competition to intensify in the future. We cannot assure you
that we will be able to compete effectively. We believe that the main
competitive factors in our market are product quality, features, cost and
customer relationships. Our current principal competitors include Cisco
Systems, Inc., Lucent Technologies Inc., Nortel Networks Corporation, Sonus
Networks, Nuera Communications Inc. and Vocal Tec Communications. Many of our
large competitors have significantly larger market shares (as measured by ports
shipped) and stronger relationships with service providers than we do. In
addition, they may be able to compete more effectively because they will be
able to add IP telephony features to their existing equipment or bundle these
features as part of a broader solution. We also expect that other companies may
enter our market with better products and technologies.

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

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

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

                                       19
<PAGE>

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

   Competition for technical personnel in the high-technology industry is
intense, despite current economic conditions. Our future success depends, in
large part, on our ability to attract and retain highly skilled personnel. The
loss of the services of any of our key personnel, the inability to attract or
retain qualified personnel in the future or delays in hiring required
personnel, particularly engineers, sales personnel and marketing personnel, may
seriously harm our business, financial condition and results of operations. We
may find it more difficult to attract or retain qualified personnel as a result
of our recent reduction in workforce and restructuring. In addition, if
management is unable to utilize reduced resources effectively, our ability to
compete effectively may be impaired. We will need to expand our sales
operations and marketing operations in order to increase market awareness of
our products and generate increased revenue. New sales personnel and marketing
personnel will require training and take time to achieve full productivity. In
addition, the design and installation of IP telephony solutions can be complex.
Accordingly, we need highly trained professional services and customer support
personnel. We will need to continue to increase the number of service and
support staff to support new customers and the expanding needs of existing
customers. Competition for personnel is intense, especially in the San
Francisco Bay Area where we maintain our headquarters. We cannot be certain
that we will successfully attract and retain additional qualified personnel. In
addition, our key person life insurance policy, covering some of our key
employees, may be insufficient to cover the costs associated with the loss of
one of these employees.

Our failure to integrate successfully our acquired companies could prevent us
from operating efficiently.

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

Our failure to effectively manage our rapid growth and recent strategic
restructuring could negatively affect our results of operations.

   Since we began commercial shipment of our products in March 1997, we have
experienced a period of rapid growth and expansion that is significantly
straining all of our resources. From December 31, 2000 to June 30, 2001, the
total number of our employees increased from approximately 800 to 927. Despite
our recent reduction in force, we expect our anticipated growth and
implementation of organizational restructuring will place strain on our
management, and operational and financial resources. The success of our
organizational restructuring depends on the ability of management to utilize
reduced resources effectively. We may not be able to implement our strategic
focus on the local access or our "last mile" market in an efficient and timely
manner. Delays in streamlining our operations during our transition to the
local access market focus may impair our ability to accurately forecast sales
demand, manage our product inventory, and record and provide support services
to our customers. Our inability to manage growth and organizational
restructuring effectively could seriously harm our business, financial
condition and results of operations.

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

   The IP telephony market is relatively new and evolving rapidly. Less than 1%
of all voice calls worldwide are currently transmitted over IP-based data
networks. Our ability to increase revenue in the future depends on

                                       20
<PAGE>

some of both existing and future circuit-switched telephone network calls
moving to IP-based data networks. The use of IP telephony for voice calls might
be hindered by the:

  .   reluctance of service providers that have invested substantial
      resources in the existing telephone network infrastructure to replace
      or expand their current networks with this new technology; and

  .   lack of partnerships between service providers, keeping them from
      having global IP telephony network coverage.

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

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

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

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

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

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

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

                                       21
<PAGE>

our operations in the future. The failure of these companies to achieve
commercial viability or pay their obligations to us would, in turn, seriously
harm our business, financial condition and results of operations.

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

   We have historically derived the majority of our revenue from a small number
of customers. Two customers, Triumph Technologies and Cradle Technology
Corporation individually accounted for 34% and 13% of our revenue for the
quarter ended June 30, 2001 and 31% and 11% for the six months ended June 30,
2001. In the fiscal year 2000, Triumph Technologies at 10% was the only
customer that accounted for 10% or more of our net revenues. In 1999, entities
affiliated with AT&T Corporation accounted for 15% of net revenue and entities
affiliated with Ji Tong Communications accounted for 10% of net revenue. None
of our customers is obligated to purchase additional products or services.
Accordingly, we cannot be certain that present or future customers will not
terminate their purchasing arrangements with us or significantly reduce or
delay their orders. Any termination, change, reduction or delay in orders could
seriously harm our business, financial condition and results of operations.

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

   We believe that our future success is dependent upon our ability to
establish and manage successful relationships with a variety of domestic and
international distribution partners and key personnel with our direct sales
force. To date, we have entered into agreements with more than 30 distribution
partners that accounted for approximately 60% and 68% of net revenue for the
three and six month periods ended June 30 2001, 46% of revenue in the fiscal
year 2000 and 16% of revenue in 1999. These distribution agreements typically
may be terminated without cause upon 90 days notice. We cannot be certain that
we will be able to reach agreement with additional distribution partners on a
timely basis or at all, or that these distribution partners will devote
adequate resources to marketing, selling and supporting our products. To
generate greater revenue from distributors, we must successfully manage our
distributor relationships, which we cannot guarantee that we will be able to do
in the future. Our inability to generate revenue from distribution partners may
harm our business, financial condition and results of operations.

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

   International sales represented approximately 91% of revenue for the six
months ended June 30, 2001, 73% of total revenue in 2000 and 54% of total
revenue in 1999. Our international operations are subject to a variety of risks
associated with conducting business internationally any of which could
seriously harm our business, financial condition and results of operations.

   These risks include:

  .   greater difficulty in accounts receivable collections;

  .   import or export licensing and product certification requirements;

  .   tariffs, duties, price controls or other restrictions on foreign
      currencies or trade barriers imposed by foreign countries;

  .   potential adverse tax consequences, including restrictions on
      repatriation of earnings;

  .   fluctuations in currency exchange rates;

  .   seasonal reductions in business activity in some parts of the world;

  .   unexpected changes in regulatory requirements;

                                       22
<PAGE>

  .   burdens of complying with a wide variety of foreign laws, particularly
      with respect to intellectual property and license requirements;

  .   difficulties and costs of staffing and managing foreign operations;

  .   political instability;

  .   the impact of recessions in economies outside of the United States; and

  .   limited ability to enforce agreements, intellectual property and other
      rights in some foreign countries.

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

   We currently have sales and support personnel based in may countries,
including: Argentina, Australia, Belgium, Brazil, Canada, Colombia, Dubai,
France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, Mexico, New Zealand,
Peru, the People's Republic of China, Russia, Singapore, South Africa, South
Korea, Spain, Sweden, Taiwan, the United Kingdom and the United States. We
intend to expand the scope of our international operations, which will require
us to enhance our communications infrastructure and may include the
establishment of overseas assembly operations. If we are unable to expand our
international operations effectively and quickly, we may be unable to
successfully market, sell, deliver and support our products internationally.

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

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

  .   a customer's experience with sophisticated telecommunications
      equipment, such as our product;

  .   the particular telecommunications market that the customer serves; and

  .   the cost of purchasing our product, including the cost of converting
      from installed equipment, which may be significant.

Before we receive orders, our customers typically test and evaluate our
products for a period of many months.

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

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

   We have historically received a significant portion of our product orders
near the end of a quarter. Accordingly, a delay in an anticipated receipt or
delivery of a given order past the end of a particular quarter may negatively
impact our results of operations for that quarter. These delays may become more
likely given that we expect that the average size of our customer orders may
increase. As a result, a delay in the recognition of revenue, even from just
one customer, may have a significant negative impact on our results of
operations for a given period. Additionally, the volatility in capital markets
and in the U.S. economy may cause some

                                       23
<PAGE>

customers to postpone or terminate significant capital expenditures, such as
expenditures on our products. Any delay in sales of our products could result
in a significant decrease in cash flow, which, in turn, could severely affect
our ability to make payments as they come due and could cause our operating
results to vary significantly from quarter to quarter.

Our dependence on third party manufacturers may result in product delivery
delays.

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

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

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

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

   We assemble and test our products at our facilities in Redwood City,
California and in Manassas, Virginia. We have outsourced some of our assembly
and test functions.

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

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

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

Our operations may be adversely affected by the California energy crisis.

   We have various facilities located in California, including our principal
facilities in Redwood City. Some of our suppliers are also located in
California. The energy crisis that has resulted in disruptions in power supply
and increases in utility costs could disrupt our operations and the operations
of our suppliers. We, or our suppliers, may experience additional power
disruptions, power rationing and significantly higher costs of energy in
California and be unable to continue operations. Any such interruption in
operations could harm our

                                       24
<PAGE>

ability to service and retain existing customers and may inhibit our ability to
obtain new customers, and could result in lost revenue, any of which could
adversely affect our financial condition.

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

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

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

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

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

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

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

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

                                       25
<PAGE>

countries in which we have sold and continue to sell products. If we fail to
protect our intellectual property rights adequately, it would be easier for our
competitors to sell competing products.

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

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

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

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

Our stock price is highly volatile.

   The trading price of our common stock has fluctuated significantly since our
initial public offering in July 1999. In addition, the trading price of our
common stock could be subject to wide fluctuations in response to quarterly
variations in operating results, announcements of technological innovations or
new products by us or our competitors, developments with respect to patents or
proprietary rights, announcements of strategic partnerships or new customers by
us or our competitors, changes in financial estimates by securities analysts
and other events or factors. Also, the stock market has experienced volatility
that has particularly affected the market prices of equity securities of many
high technology companies and that often has been unrelated or disproportionate
to the operating performance of these companies. These broad market
fluctuations may adversely affect the market price of our common stock, as
evidenced by a fluctuation in our per share sale price on the Nasdaq National
Market from a low of $10.00 to a high of $178.75 during the year ended December
31, 2000 and from a low of $6.62 to a high of $18.81 during the six months
ended June 30, 2001.

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

   In the past, securities class action litigation has often been brought
against a company following a decline in the market price of its securities.
This risk is especially acute for us because technology companies have
experienced greater than average stock price volatility in recent years and, as
a result, have been subject to, on average, a greater number of securities
class action claims than companies in other industries. We currently are the
target of several securities class action claims and may in the future be the
target of similar litigation. In

                                       26
<PAGE>

addition, our acquisition activity may involve us in disputes from time to
time. Further, we may be the target of employment litigation in connection with
our recent reduction in workforce. Litigation that may arise from these
disputes may lead to further volatility in our stock price and/or may result in
our being the target of additional securities class action litigation.
Securities litigation and other litigation may result in substantial costs and
divert management's attention and resources, which may seriously harm our
business, financial condition and results of operations.

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

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

  .   authorizing the board of directors to issue preferred stock;

  .   prohibiting cumulative voting in the election of directors;

  .   limiting the persons who may call special meetings of stockholders;

  .   prohibiting stockholder action by written consent;

  .   establishing advance notice requirements for nominations for election
      of the board of directors or for proposing matters that can be acted on
      by stockholders at stockholder meetings; and

  .   establishing a classified board of directors requiring that members of
      the board of directors be elected in different years.

   In addition, in February 2001, we adopted a shareholder rights plan which
may discourage, delay or prevent a merger that a stockholder may consider
favorable. We are also subject to certain provisions of Delaware law that could
delay, deter or prevent us from entering into an acquisition, including Section
203 of the Delaware General Corporation Law, which prohibits a Delaware
corporation from engaging in a business combination with an interested
stockholder unless specific conditions are met.

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

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

We do not intend to pay dividends.

   We have never declared or paid any cash dividends on our capital stock. We
currently intend to retain any future earnings for funding growth. Therefore,
we do not expect to pay any dividends in the foreseeable future.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Financial Market Risk

   Our financial market risk includes risks associated with international
operations and related foreign currencies. We anticipate that international
sales will continue to account for a significant portion of our consolidated
revenue. Our international sales are largely denominated in U.S. dollars and
therefore are not subject to material foreign currency exchange risk. Expenses
of our international operations are denominated in each country's local
currency and therefore are subject to foreign currency exchange risk; however,
through June 30, 2001 we have not experienced any significant negative impact
on our operations as a result of

                                       27
<PAGE>

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 $90.2 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 $0.2 million decrease (less than 0.2%) in the fair market value of our
available-for-sale securities.

   We have investments in equity securities of privately held companies for the
promotion of business and strategic objectives of $12.4 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 $1.4
million on investments.

                                       28
<PAGE>

                           PART II--OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

   Beginning July 12, 2001, a number of purported stockholder class action
lawsuits were filed in the United States District Court for the Southern
District of New York against us, several of our officers and directors, and
certain underwriters of our initial public offering. These lawsuits are
essentially identical and purport to bring suit on behalf of all purchasers of
our common stock between July 1, 1999, the date of our initial public offering,
and December 6, 2000 or July 2, 2001. The plaintiffs allege that our
prospectus, incorporated in the Registration Statement on Form S-1 filed with
the Securities and Exchange Commission, was materially false and misleading
because it failed to disclose, among other things, that certain underwriters
(i) allegedly required several investors who wanted large allocations of public
offering securities to pay undisclosed and excessive underwriters' compensation
in the form of increased brokerage commissions and (ii) allegedly required
investors to agree to buy shares of our securities after the public offering
was completed at predetermined prices as a precondition to obtaining public
offering allocations. As a result of the alleged omissions in our prospectus,
the plaintiffs claim violations of Sections 11, 15 and 20 of the Securities Act
of 1933, as amended and Section 10(b) of the Securities Exchange Act of 1934,
as amended. We anticipate that these cases will be consolidated into a single
class action. We believe that we have meritorious defenses and intend to
vigorously defend ourselves against these allegations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

   On June 7, 2001, we held our Annual Meeting of Stockholders (the "Meeting")
in Redwood City, California. At the Meeting, the stockholders approved three
proposals. The first proposal related to the election of two directors, Messrs
Michael F. Vargo and William E. Barker, to hold office until the 2004 annual
meeting of stockholders. The votes cast and withheld for such nominees were as
follows:

<TABLE>
<CAPTION>
                                                                       Authority
                              Name                             For     Withheld
                              ----                          ---------- ---------
      <S>                                                   <C>        <C>
      Michael F. Vargo..................................... 28,956,602 2,399,855
      William E. Barker.................................... 31,250,296   106,161
</TABLE>

   The second proposal related to the approval of an amendment to our 1999
Amended and Restated Equity Incentive Plan to increase the aggregate number of
shares of Common Stock authorized for issuance under such plan by 1,000,000
shares, from 17,780,431 shares to 18,780,431 shares including the 987,966
shares resulting from the evergreen provision of the plan. The third proposal
related to the ratification of the selection of Ernst & Young LLP as our
independent auditors for the fiscal year ending December 31, 2001. At the
Meeting, our stockholders approved each proposal. The following table contains
the tabulation for or against each proposal as well as the abstentions and
broker non-votes with respect to each proposal.

<TABLE>
<CAPTION>
                                                                          Broker
                                                                           Non-
                     Proposal                   For      Against  Abstain Votes
                     --------                ---------- --------- ------- ------
      <S>                                    <C>        <C>       <C>     <C>
      Proposal 2............................ 26,657,425 6,728,487  91,382    0
      Proposal 3............................ 32,706,467    55,626 715,201    0
</TABLE>

ITEM 5. OTHER INFORMATION

   We have revised our Insider Trading Policy to allow directors, officers and
other employees covered under the policy to establish, under limited
circumstances contemplated by Rule 10b5-1 under the Securities Exchange Act of
1934, as amended, written programs that permit automatic trading of our stock
or trading of our stock by an independent person (such as an investment bank)
who is not aware of material inside information at the time of the trade.
Certain of our directors, officers and employees, including Jerry Shaw-Yau
Chang and Michael F. Vargo, have established or may in the future establish
such programs.

                                       29
<PAGE>

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

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

<TABLE>
 <C>      <S>
    10.29 Separation and Consulting Agreement, dated July 19, 2001, by and
          between the registrant and
          Barry Forman.

    10.30 Offer Letter, dated May 31, 2001, by and between the registrant and
          Steven D'Alencon.

    10.31 Separation Agreement, dated May 10, 2001, by and between the
          registrant and Mark McIlvane.
</TABLE>

   (b) Reports on Form 8-K.

   There were no reports on Form 8-K filed by the registrant during the fiscal
quarter ended June 30, 2001.


                                      30
<PAGE>

                              CLARENT CORPORATION

                                   SIGNATURES

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

                                          Clarent Corporation

                                                  /s/ Michael F. Vargo
                                          By: _________________________________
                                                     Michael F. Vargo
                                                  Chief Executive Officer

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

Date: August 14, 2001

                                       31